Auditing Problems.pdf

Technological Institute of the Philippines College of Business Education

Accounting Integration Auditing Problems (ACCTG 502)

Prof. U. C. Valladolid 2nd Semester, S.Y. 2019-2020

TABLE OF CONTENTS

AUDITING PROBLEMS (ACCTG 502) Correction of Errors……………………………………………………………………... Cash & Cash Equivalents……………………………………..………………………... Receivables……………………………………………………...………………………... Inventories……………………………………………………….………………………... Investment……………………………………………………….………………………... PPE & Intangibles………………………………………………………………………... Liabilities…………………………………………………………………………………... Shareholder’s Equity…………………………………………..………………………... Financial Statements…………………………………………..………………………... Financial Statements & Reporting (STA)…………………..………………………... Financial Statements & Reporting (MC)…………………….………………………...

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2 7 19 29 37 45 61 71 80 92 99

APPLIED AUDITING

CORRECTION OF ERRORS Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

John Paul ‘s December 31 yearend financial statements had the following errors: December 31, 2018 December31, 2019 Ending inventory P13,500 understated P19,800 overstated Depreciation expense 3,600 understated Unearned rental 5,000 understated Prepaid insurance 8,000 understated There were no other errors during the years 2018 or 2019 and no connections have been made for any of the errors. (ignore income tax considerations). 1. What is the net effect of the errors on John Paul’s 2019 net income? a. understated by P13,000 c. overstated by P20,300 b. overstated by P14,800 d. overstated by P25,300 2. What is the net effect of the errors in John Paul’s December 31, 2019 accumulated profits balance? a. overstated by P11,800 c. understated by P20,300 b. overstated by P15,400 d. overstated by 25,300 3. What is the net effect of the errors in John Paul’s December 31, 2019 working capital? a. understated by P4,900 c. overstated by P11,800 b. understated by P8,000 d. understated by P20,300

2.

The December 31 yearend financial statement of Ana co. contained the following errors: Ending inventory Depreciation expense

December 31, 2018 P48,000 understated P11,500 understated

December 31, 2019 P40,500 overstated -

An insurance premium of P330,000 was prepaid in 2018 covering the years 2018, 2019, and 2020. The entire amount was charged to expense in 2018. In addition, on December 31, 2019, a fully depreciated machinery was sold for P75,000 cash, but the sale was not recorded in 2019. There were no other errors during 2018 and 2019, and no corrections have been made for any of the errors. Ignore income tax effects. 1. What is the total effects of the errors on Ana’s 2019 net income? a. P123,500 overstatement c. P192,500 understatement b. P27,500 overstatement d. P177,500 understatement 2. What is the total effect of the errors on the amount of Ana’s working capital at December 31, 2019? a. P75,500 overstatement c. P225,500 understatement b. P40,500 overstatement d. P144,500 understatement 3. What is the total effect of the errors on the balance of Ana’s retained earnings at December 31, 2019? a. P156,000 understatement c. P133,000 understatement b. P87,000 overstatement d. P85,000 understatement

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3.

Steven Inc. has been using the accrual basis of accounting. However, an examination of the records reveals that some expenses and revenues have been handled on a cash basis by the inexperienced bookkeeper of the company. Income statements prepared by the bookkeeper reported P145,000 net income for 2018 and P185,000 for 2019. Further review of the records reveals that the following items were handled improperly. • Rent of P6,500 was received from a lessee on December 31,2018. It was recorded as income at that time even though the rentals pertain to 2019. • Salaries payables on December 31 have been consistently omitted from the records of the date and have been recorded as expenses when paid in the following year. The salary accruals recorded in this manner were: December 31, 2017 P5,500 December 31, 2018 7,500 December 31, 2019 4,700 • Invoices for office supplies purchased have been charged to expense accounts when received. Inventories of supplies on hand at the end of each year have been ignored and no entry has been made to them. December 31, 2017 P6,500 December 31, 2018 3,700 December 31, 2019 7,100 What is the corrected net income for 2018? a. P133,700 b. P144,200 c. P146,700 d. P139,300 What is the corrected net income for 2019? a. P184,700 b. P197,700

4.

c. P185,600

d. P190,900

Allisson corp. reported the following amounts of net income for the years ended December 31, 2017, 2018, and 2019: 2017 2018 2019

P127,000 150,000 128,500

You are performing the audit for the year ended December 31, 2019. During your examination, you discover the following errors: • • •

• •

As a result of errors in the physical count, ending inventories were misstated as follows: December31, 2018 P14,000 understated December 31, 2019 23,000 overstated On December 29, 2019 Allisson recorded as a purchase, merchandise in transit which cost P15,000. The merchandise was shipped FOB Destination and had not arrived by December 31. The merchandise was not included in the ending inventory. Allisson records sales on the accrual basis but failed to record sales account made near the end of each year as follows: 2017 P4,000 2018 5,000 2019 3,500 The Company failed to record accrued office salaries as follows: December 31, 2017 P10,000 December 31, 2018 14,000 On March 1, 2018, a 10% stock dividend was declared and distributed. The par value of the

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• •

shares amounted to P10,000 and market value was P13,000. The stock dividend was recorded as follows: Miscellaneous expense 13,000 Common stock 10,000 Retained earnings 3,000 On July 1 2018, Allisson acquired a three-year insurance policy. The three-year premium of P6,000 was paid on that date, and the entire premium was recorded as insurance expense. On Jan.1, 2019, Allisson retired bonds with a book value of P120,000 for P106,000. The gain was incorrectly deferred and is being amortized over 10 years as a reduction of interest expense on other outstanding obligations.

What is the adjusted net income for the year ended December 31, 2017? a. 133,000 b. 117,000 c. 121,000

d. 113,000

What is the adjusted net income for the year ended December 31, 2018? a. 159,000 b. 187,000 c. 178,000

d. 179,000

What is the adjusted net income for the year ended December 31, 2019? a. 129,600 b. 131,000 c. 104,400

d. 139,600

What adjusting entry should be made on December 31, 2019 to correct the error describe in 2nd transaction? a. Accounts payable 15,000 Purchases 15,000 b. Purchases 15,000 Accounts Payable 15,000 c. Accounts Payable 15,000 Cash 15,000 d. No adjusting journal entry is necessary The adjusting entry on December 31, 2018 to correct the error described in the 5th transactions should include a debit to a. Common stock for P10,000 c. Additional paid in capital for P3,000 b. Retained Earnings for P16,000 d. Miscellaneous expenses for P3,000

5.

Allisson corp. reported pretax incomes of P505,000 and P387,000 for the years ended December 31, 2018 and 2019, respectively. However, the auditor noted that the following errors had been made: • • •

•

Sales for 2018 included amounts of P191,000 which had been received in cash during 2018, but for which the related goods were shipped in 2019. Title did not pass to the buyer until 2019. The inventory on December 31, 2018 was understated by P43,200 The company’s accountant, in recording interest expense entry on an annual basis: Interest expense 75,000 Cash 75,000 The bonds have a face value of P1,250,000 and pay a nominal interest rate of 6%. They were issued at a discount of P75,000 on January 1, 2018 to yield an effective interest rate of 7%. Ordinary repairs to equipment had been erroneously charged to the Equipment account during 2018 and 2019. Repairs of P42,500 and P47,000 had been incurred in 2018 and 2019, respectively. In determining depreciation charges, Allisson applies a rate of 10% to the balance in the Equipment account at the end of the year.

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6.

What is the corrected pretax income for 2018? a. 303,200 b. 225,300

c. 311,700

d. 307,450

What is the corrected pretax income for 2019? a. 488,992 b. 480,042

c. 484,292

d. 575,392

The following information pertains to Ana co.’s depreciable assets: • •

•

Machine X was purchased for P150,000 on January 1, 2014. The entire cost was expensed in the year of acquisition. The estimated useful life of this machine is 15 years with no residual value. Machine Y cost P525,000 and was acquired on January 1, 2015. On the acquisition date, the expected useful life was 12 years with no residual value. The straight-line depreciation method was used. On January 2, 2019, it was estimated that the remaining life of the asset would be 4 years and that there would be a P25,000 residual value. A building was purchased on January 3, 2016, for P3,000,000. The building was expected to have a useful life of 20 years with no residual value. The straight-line depreciation method was used. On January 1, 2019, a change was made to the sum of the years digit of depreciation. No change was made to the estimated useful life and residual value of the building.

1. The adjusting entry on January 1, 2019 relative to machine X should include a credit to a. accumulated depreciation of P60,000 c. machinery for P150,000 b. retained earnings for P100,000 d. no adjusting entry is necessary

7.

2. What is the carrying value of machine Y on January 1, 2019? a. P350,000 b. P325,000 c. P306,250

d. P525,000

3. What is the depreciation expense on machine Y for 2019? a. P87,500 b. P77,083 c. P81,250

d. P41,667

4. What is the book value of the building at December 31, 2018? a. P2,185,714 b. P2,550,000 c. P1,942,857

d. P2,266,667

5. What is the book value of the building at December 31, 2019? a. P2,185,714 b. P2,550,000 c. P1,942,857

d. P2,266,667

Robi Corporation reported profit for the years 2018 and 2019 at P550, 000 and P700.000, respectively. Your audit of the company’s accounts disclosed the need for adjustments as follows: 2018 2019 Overstatement of ending inventories due to error in pricing P 29,000 P 33,000 Omission of depreciation on newly-acquired equipment 15,000 15,000 Understatement of commission receivable 22,000 18,000 A purchase of merchandise was recorded the following year, and also was not included in the ending inventory 60,000 1. The adjusted profit for 2019 was a. P677,000 b. P700,000

c. P710,000 d. P737,000

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2. What is the effect of the foregoing errors on total assets at December 31, 2019? a. P30,000 overstated c. P45,000 overstated b. P36,000 overstated d. P66,000 overstated 3. What is the effect of the foregoing errors on retained earnings at December 31, 2018? a. P22,000 overstated c. P67,000 overstated b. P38,000 understated d. P82,000 overstated

8.

Ventura Corporation purchased machinery on January 1, 2018 for 630,000. The company used the sum-of-the-years’-digits method and no salvage value to depreciate the asset for the first two years of its estimated six-year life. In 2020, Ventura changed to the straight-line depreciation method for this asset. The following facts pertain: 2018 2019 Straight-line 105,000 105,000 Sum-of-the-years’-digits 180,000 150,000 1. Ventura is subject to a 40% tax rate. The cumulative effect of this accounting change on beginning retained earnings is a. 135,000 b. 120,000. c. 72,000. d. 0. 2. The amount that Ventura should report for depreciation expense on its 2020 income statement is a. 120,000. b. 105,000. c. 75,000. d. none of the above.

9.

On December 31, 2019 Dean Company changed its method of accounting for inventory from the average cost method to the FIFO method. This change caused the 2019 beginning inventory to increase by 420,000. The cumulative effect of this accounting change to be reported for the year ended 12/31/2019, assuming a 40% tax rate, is a. 420,000. b. 252,000. c. 168,000. d. 0.

10.

Oak Co. offers a three-year warranty on its products. Oak previously estimated warranty costs to be 2% of sales. Due to a technological advance in production at the beginning of year 3, Oak now believes 1% of sales to be a better estimate of warranty costs. Warranty costs of 80,000 and 96,000 were reported in year 1 and year 2, respectively. Sales for year 3 were 5,000,000. What amount should be presented in Oak’s year 3 financial statements as warranty expense? a. 50,000 b. 88,000 c. 100,000 d. 138,000

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APPLIED AUDITING

CASH & CASH EQUIVALENTS Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

The “CASH” account of Angel Corporation’s ledger on December 31, 2020 showed the following: a. Petty cash fund (including P7,500 unreplenished voucher of which P2,400 is dated January 3, 2021)

P15,000

b. Redemption Fund Account – PNB

500,000

c. Traveler’s check

100,000

d. Money order

10,000

e. Treasury bill, purchased December 1, 2020 (due on Feb. 1, 2021)

50,000

f.

50,000

Time deposit acquired December 31 due on March 31, 2021

g. 180-day Treasury bill, due March 15, 2021 h. Note receivable in the possession of a collecting agency i.

PNB – Checking Account #211-009-091

j.

Cash on hand, including customer postdated check of P15,000

k. Savings deposit, earmarked for acquisition of equipment l.

120,000 20,000 325,900 23,000 210,000

A check payable to San Ignacio Incorporated, dated January 5, 2021, that was included in the December 31 PNB Checking Account #211-009-091

50,000

m. Bond Sinking Fund (used to finance the maturing long-term obligation on March 31, 2021)

150,000

n. Overdraft in PNB Checking Account #211-099-085

( 50,000)

o. Check #801 in payment to Accounts Payable, dated Dec. 31, 2020 not mailed until January 5, 2021

20,000

p. Advances to Officers/Employees for Seminars (no liquidation is required)

80,000

q. Money market placement (due June 30, 2021)

600,000

r.

100,000

Listed stock held as temporary investment

s. Check #789 in payment to Suppliers, dated January 5, 2021 and recorded December 31, 2020.

35,000

t.

Customers’ certified checks

10,000

u.

Pension Fund

150,000

TOTAL

P 2,568,900

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What Angel Corporation’s adjusted cash and cash equivalents balance at December 31, 2020 is: a. 618,800

2.

b.767,900

c. 673,800

d. 723,800

e. 768,800

The cash account of the Christine Corporation as of December 31, 2020 consists of the following: On deposit in current account with Real Bank P 900,000 Cash collection not yet deposited to the bank 350,000 A customer’s check returned by the bank for insufficient fund 150,000 A check drawn by the Vice-President of the Corporation dated January 15, 2021 70,000 A check drawn by a supplier dated December 28, 2020 for goods returned by the Corporation 60,000 A check dated May 31,2020 drawn by the Corporation against the Scotia Bank in payment of customs duties. Since the importation did not materialize, the check was returned by the customs broker. This check was an outstanding check in the reconciliation of the Scotia Bank account 410,000 Petty Cash fund of which P5,000 is in currency; P3,600 in form of employees’ I.O.U. s; and P1,400 is supported by approved petty cash vouchers for expenses all dated prior to closing of the books on December 31, 2020 10,000 Total 1,950,000 Less: Overdraft with Scotia Bank secured by a Chattel mortgage on the inventories 300,000 Balance per ledger P1,650,000

At what amount will the account “Cash” appear on the December 31, 2020 balance sheet? a) 1,315,000 c) 1,425,000 b) 1,495,000 d) 1,725,000

3.

An examination on the morning of January 2, 2021 by the auditor for the Kaila Company discloses the following items in the petty cash drawer: Postage stamps P 220.00 Currency and coins 1,156.60 IOUS from members of the office staff 1,210.00 An envelope containing collections for a gift for a departing employee, with office names attached 350.00 Petty cash vouchers for miscellaneous expenses (including a PCV for stamps purchased for 450.00) 985.00 Employee's check postdated January 15, 2021 1,500.00 Employee's check marked "DAIF" 1,890.00 Check drawn by Kaila Company to Petty Cash 3,450.00 P 10,761.60 The ledger account discloses a P10,500 balance for Petty Cash. 1. How much is the cash shortage or overage as of December 31, 2020? a. P 308.40 c. P 88.40 b. P 41.60 d. P 658.40

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2. How much petty cash fund shall be shown as part of "Cash" balance as of December 31, 2020? a. P 10,761.60 c. P 4,606.60 b. P 1,156.60 d. P 5,141.60

4.

You are making an audit of Joseph Company for the year ended December 31, 2020. The balance of the petty cash account on December 31, 2020 was P15,000. Your count of the imprest cash fund, made at 9:00 a.m. on January 3, 2021, in the presence of Ms. G. Gonzaga revealed: Bills and Coins: Denomination 1,000 500 100 50 20 10 5 1 0.50 0.25 Checks:

Date 12-28-2020 12-29-2020 12-31-2020

Quantity 2 4 14 16 10 19 17 25 21 28 Maker Urquiola, employee Sta. Maria, employee L. Chua, customer

Bank PNB Security Bank Asia Trust

Amount 3,0001,5002,500-

01-02-2021 A. Bobadilla, customer FEBTC 3,20001-12-2021 C. German, employee Union Bank (check received 12-28-2020) 1,500(These checks were all considered good when deposited after dates shown on the checks. The first four checks were actually deposited January 3; the German check was deposited January 13; all five checks proved to be good.) Vouchers: Date 12-13-2020 12-28-2020 12-29-2020 12-31-2020 01-02-2021 IOUs: 12-21-2020

Voucher No. 151 183 184 189 001

Particulars Freight out Supplies Freight In Freight on cabinet Freight in

S. Dechavez, employee

Sales Invoices (for cash sales; collections handled by Ms. G. Gonzaga) Inv. # 118 December 30 # 129 December 31 # 133 January 2

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Amount P 500300394.20 741.10 244.70 300-

P 1,000.40 2,5003,200-

(As a general rule, the petty cashier turns over the proceeds of cash sales to the general cashier every Friday. Proceeds on these sales were recorded and deposited by the general cashier.) Unused office supplies

? 40-

1. What is the cash shortage? a. 750.40 b. 802.90

c. 910.40

2. Adjusting entries for the petty cash fund includes a credit to: a. Cash Shortage 802.90 b. Petty Cash Fund c. Petty Cash Fund 4,538.20 d. Cash Shortage 5.

d. 850.90 4,738.20 850.90

You are making an audit of the Angel Corporation for the past calendar year. The balance of the Petty Cash account at December 31, 2018 was P1,300. Your count of the imprest cash count made at 8:30 am on January 3, 2019, in the presence of the petty cash custodian, revealed: Currency and coins Checks:

571.38

Date 12/28/2018 12/29/2018 12/31/2018 01/02/2019 01/10/2019

Maker Bank Macky, vice-president PNB 360.00 Andy, employee DBP 60.00 Bobot, customer RCBC 153.80 Neil, customer PNB 121.36 Jeff, employee PNB 60.00 (check received Dec. 29) (These checks were all considered good when deposited after dates shown on the checks. The first four checks were actually deposited Jan. 3; the last check was deposited Jan. 11; all five checks proved to be good.)

Vouchers: Dec. 11 Dec. 28 Dec. 29 Dec. 31 Jan. 2 IOU

#261 Richard, shipping clerk – temporary advance for the use of the receiving department. Your count of Mr. Richard’s fund revealed: currency – P28.80; merchandise freight bills, P31.20. P 60.00 # 301 Postage 12.00 # 302 Freight bill on merchandise purchases 47.30 # 305 Freight bill on office supplies 88.93 # 500 Freight bill on merchandise purchases 29.36

Dec. 21 Mabel, employee

36.00

Sales Invoices (for cash sales, collections handled by the petty cashier): Invoice # 315 Dec. 30 P 120.00 328 Dec. 31 153.80 334 Jan. 2 121.36 (As a general rule, the petty cashier turn over the proceeds of cash sales to the general cashier on the 10th, 20th and last days of each month. Proceeds on these sales were recorded and deposited by the general cashier.) Postage Stamps: Three one-peso stamps. The petty cashier handled postage stamps. These stamps represent the unused stamps purchased on Voucher # 301.

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1. How much is the petty cash fund shortage at December 31, 2018? a. P 216.39 b. P 123.83 c. P 98.03

d. P 95.03

2. The adjusted petty cash fund balance of Angel Corporation at December 31, 2018 is: a. P 900.74 b. P 960.74 c. P 1,174.54 d. P 1,234.54 3. What is the amount of operating expenses found in the petty cash fund of Angel Corporation? a. P 208.23 b. P 205.75 c. P 174.03 d. P 97.93 4. Excluding petty cash fund, the cash account of Angel Corporation is understated at December 31, 2018 by: a. P 395.16 b. P 273.80 c. P 153.80 d. P 120.00

6.

The cash in bank account of Happy Company disclosed a balance of P201, 000 as of December 31. The bank statement as of December 31 showed a balance 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. 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. 1 142 for P12,425 was entered 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 collection). g. Receipts on December 31 for P24,000 were deposited on January 2 h. The following checks were outstanding on Dec. 31: No 123 P3,000 No 154 P4,000 143 2,000 157 6,000 144 7,000 159 7,000 147 3,000 169 5,000 i. A deposit of P20,000 was recorded by the bank on December 5, but it should have been recorded for Happi Company rather than Happy Company j. Petty cash of P10,000 was included in the Cash in Bank balance. k. Proceed from cash sales of P60,000 for December 18 were stolen. The company expects to recover this amount from the 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. Happy 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 Happy Company as a collection on account. What is the total amount of cash should Happy Company report at year-end? a. P73,000 c. P42, 670 b. P93, 000 d. P83, 000

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7.

The Joshtin Company had a weak internal control structure over its cash transactions. Facts about its cash position at November 30, 2020 were as follows: The cash books showed a balance of P 1,890,162, which included undeposited receipts. A credit of P 10,000 on the bank’s records did not appear on the books of the company. The balance per bank statement was P 1,555,000. Outstanding checks were No. 62 for P 11,625, No. 183 for P 15,000, No. 284 for P25,325, No. 8621 for P19,071, No. 8622 for P20,680, and No. 8632 for P14,528. The cashier stole all undeposited receipts in excess of P 379,441 and prepared the following reconciliation: Balance per books, November 30, 2020 Add: outstanding checks 8621 8622 8632

P 1,890,162 P 19,071 20,680 14,528

Less: Undeposited receipts Balance per bank, November 30, 2020 Deduct: Unrecorded credit memo True cash, November 30, 2020

44,279 P 1,934,441 379,441 P 1,555,000 10,000 P 1,545,000

Questions: 1. How much did the cashier steal? a. 81,590 b. 71,950

c. 61,950

d. 71,590

2. What is the correct amount of cash to be shown on the statement of financial position on November 30, 2020? a. 1,828,212 b. 1,448,771 c. 1,900,162 d. 1,934,441

8.

The Sunshine Corporation engaged your services to audit its accounts. In your examination of cash, you find that the Cash account represents both cash on hand and cash in bank. You further noted that there is very poor internal control over cash. Your audit covers the period ended December 31, 2020. You made a cash count on January 15, 2021, and cash on hand on this date was determined to be P52,000. Examination of the cashbooks and other evidences of transaction disclosed the following: 1. January 1 through 15, 2021 collections per duplicate receipts, P199,000. 2. Total of duplicate deposit slips, all dated January 2 through 15, P110,000, includes a deposit representing collections of December 31. 3. Cash book balance on December 31, 2020 is P465,000, representing both cash on hand and cash in bank. 4. Bank statement for December shows a balance of P424,000. 5. Outstanding checks at December 31:

12

November checks:

December check:

Number

Number

183

P 4,500

198

12,500

252

6,000

254

4,000

280

52,000

301

9,000

319

25,000

6. Undeposited collections at December 31, P48,000. 7. An amount of P19,000 representing proceeds of a customer’s note was credited by bank, but is not yet taken up in the company’s books. 8. Bank service charge for December, P1,500. The company cashier presented to you the following reconciliation statement at December 2020, which he prepared: Balance per books, December 31, 2020 Add: outstanding checks Number

P

252

P 6,000

254

4,000

280

25,000

301

900

319

15,000

Total

50,900 P

Bank charges

506,900 (1,500)

Undeposited collections

(51,000)

Balance per bank

P

454,400

1. How much is the amount of Cash shortage as of December 31, 2020? a) 121,500 b) 123,500 c) 132,500

d) none of the above

2. How much is the additional shortage in January 2021? a) 102,400 b) 85,000 c) 58,000

d) none of the above

3. Which is to be included in the audit adjusting entries at December 31, 2020? a) Dr: Cash 1,600 b) Cr: Cash 106,000 c) Dr: Loss 123,500

9.

456,000

Your client, Ozz Company, presented you with the following data: Bank balances November 30 December 31

13

d) none of the above

P 2,500,000 3,100,000

Bank receipts in December 2,300,000 Book balances November 30 P 2,390,000 December 31 3,047,000 Book receipts in December 2,206,000 Deposits in transit November 30 58,000 December 31 47,000 Outstanding checks November 30 97,000 December 31 46,000 NSF checks returned by bank (recorded by client in the month following the return) November 15,000 December 25,000 Bank service charges (recorded by client in the month following the month the charge) November 10,000 December 18,000 Note collected by bank (recorded by the client in the following month) November 76,000 December 84,000 Erroneous bank charges (corrected by the bank in the following month) November 30 25,000 December 31 37,000 Erroneous bank credits (corrected by the bank in the following month) November 45,000 December 50,000 1) How much is the audit adjusted balance of receipts as of December 31? a) 2,241,000 b) 2,214,000 c) 2,421,000 d) 2,124,000 e) none of the above 2) How much is the audit adjusted balance of disbursements as of December 31? a) 1,576,000 b) 1,657,000 c) 1,765,000 d) 1,567,000 e) none of the above 3) Which is to be included in the audit adjusting entries for December 31? a) Cr: Cash in Bank 19,000 b) Dr: Cash in Bank 83,000 c) Dr: Accounts Receivable 19,000 d) none of the above

10.

The accountant for the Joshtine Company assembled the following data: Cash account balance Bank statement balance Deposits in transit Outstanding checks Bank service charge Customer's check deposited July 10, returned by bank on July 16 marked NSF, and redeposited immediately; no entry made on books for return or redeposit Collection by bank of company's notes receivable

14

June 30 P 15,822 107,082 8,201 27,718 72

July 31 P 39,745 137,817 12,880 30,112 60

71,815

8,250 80,900

The bank statements and the company's cash records show these totals: Disbursements in July per bank statement Cash receipts in July per Joshtine's books

P218,373 236,452

Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 1. How much is the adjusted cash balance as of June 30? a. P87,565 c. P107,082 b. (P3,695) d. P 15,822 2. How much is the adjusted bank receipts for July? a. P253,787 c. P245,537 b. P214,802 d. P232,881 3. How much is the adjusted book disbursements for July? a. P220,767 c. P181,782 b. P212,517 d. P206,673 4. How much is the adjusted cash balance as of July 31? a. P137,817 c. P22,513 b. P112,335 d. P120,585 5. How much is the cash shortage as of July 31? a. P 8,250 b. P71,815

11.

c. P196,144 d. P 0

You are auditing the cash in bank account of Pamela Manufacturing Company as of December 31, 2020. Your examination revealed the following: From the bank statement: Balance, December 1, 2020

P

Deposits (20)

876,750 9,153,760

Check (64) plus debit memos

(8,524,300)

Service charges for new checks Balance, December 31, 2020 From the company’s records:

CASH 652,070 6,824,290 9,198,720

Nov. 1 Nov. 30 CR Dec. 31 CR CD – Cash disbursements CR – Cash receipts

(2,250) P

1,503,960

Nov. 30 CD 6,654,410 Dec. 1 – Bank reconciliation 38,400 Dec. 31 CD 8,574,610

Your review of last month’s bank reconciliation and the current bank statement reveals the following.

15

1. Outstanding checks: November 30, 2020

P254,720

December 31, 2020 2. Deposit in transit:

335,610

November 30, 2020

164,220

December 31, 2020

209,180

3. Check no 359 for Office Repairs was written for P6,950 but recorded in the cash disbursements journal as P9,650. The bank deducted the check as P6,950. The error happened in November and is not yet recorded as of December 31. 4. A check written on the account of the Pamplona Company for P5,830 was deducted by the bank from the Pamela’s account. 5. Included with the bank statement was debit memorandum dated December 31 for P24,750 for interest on a note taken out by the Pamela Manufacturing Company on November 30. 6. The service charge for the new checks has not been recorded. 7. The November 30 bank reconciliation showed as reconciling items a service charge of P3,500 and a customer’s DAIF check for P34,900. 1. How much is the audit adjusted balance of Receipts as of December 31? a) 9,198,720

b) 9,918,270

c) 9,891,720

d) 9,189,270

e) none of the above

2. How much is the audit adjusted balance of Disbursements as of December 31? a) 8,601,610

b) 8,610,601

c) 8,601,601

d) 8,610,610

e) none of the above

3. Which is to be included in the audit adjusting entries? a) Dr: Cash in Bank 2,700 b) Cr: Cash in bank 2,200

12.

c) Dr: Interest expense 24,750 d) None of the above

Your audit senior instructed you to prepare a four-column proof of cash receipts and disbursements for the month of December, 2020. The bank reconciliation prepared by Joshtine Company at November 30 is reproduced below: Unadjusted bank balance Add: deposit in transit Total Less outstanding checks: No. 276 282 284 285 Adjusted balance

P2,400 7,200 4,800 1,600

P96,800 18,000 114,800

16,000 P98,800

Unadjusted book balance Add: CM - Note collected Total Less: DM bank charges

Adjusted balance

P58,640 40,320 98,960 160

. P98,800

The December bank statement, which has a beginning balance of P96,800, is reproduced below:

16

May Bank Account Name: Joshtine Company Date Debits Credits December 01 P18,000 December 02 P7,200 40,000 December 04 24,000 December 06 48,000 December 08 400,000 CM83 December 10 40,000 DM97 December 11 56,000 December 16 20,000 December 18 64,000 December 21 72,400 December 28 36,000 80,000 December 31 4,000 DM98 64,000 CM84 Totals P131,200 P842,400 DM97 – Customer’s DAIF check CM83 – Note collected by the bank DM98 – Service Charges CM84 – Account collected by the bank The company’s cash receipts and cash disbursements journals for the month of December 2020 are provided below: Date Dec. 01 05 10 17 20 27 31 Total

Cash Receipts Journal Cash Disbursements Journal OR No. Amount Date Check No. Amount 415 P40,000 Dec. 01 286 P16,000 416 48,000 03 287 24,000 417 56,000 10 288 32,000 418 64,000 14 289 20,000 419 72,000 20 290 28,000 420 80,000 23 291 36,000 421 88,800 26 292 40,000 28 293 44,000 . 31 294 48,000 P440,800 Total P304,000

The company’s Cash in Bank ledger appears below:

12/01/2020 12/2020/2020 12/31/2020

Balance GJ GJ (CM83) CRJ

Cash in Bank P58,640 12/31/2020 40,320 400,000

CDJ

P304,000

440,800

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: 1. How much is the outstanding checks as of December 31, 2020? a. P208,000 c. P216,800 b. P232,800 d. P224,000

17

2. How much is the adjusted book receipts for December, 2020? a. P913,200 c. P904,800 b. P985,200 d. P771,600 3. How much is the adjusted book disbursements for December, 2020? a. P347,840 c. P348,000 b P332,000 d. P339,200 4. How much is the adjusted cash balance as of December 31, 2020 a. P664,000 c. P688,800 b. P680,000 d. P672,800 5. How much is the cash shortage as of December 31, 2020? a. P24,240 c. P23,840 b. P15,840 d. P 0

18

APPLIED AUDITING

RECEIVABLES Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

Your audit of Kaila Corporation for the year ended December 31, 2020 revealed that the Accounts Receivable account consists of the following: Trade accounts receivable (current) Past due trade accounts Uncollectible accounts Credit balances in customers’ accounts Notes receivable dishonored Consignment shipments – at cost The consignee sold goods costing P96,000 for P160,000. A 10% commission was charged by the consignee and remitted the balance to Kaila. The cash was received in January, 2021. Total

P3,440,000 640,000 128,000 (80,000) 240,000

320,000 P4,688,000

The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The company has not provided yet for the 2020 bad debt expense. Based on the above and the result of your audit, determine the adjusted balance of following:

2.

1. Trade accounts receivable a. P4,080,000 b. P3,440,000

c. P4,464,000 d. P3,584,000

2. Allowance for doubtful accounts a. P204,000 b. P216,000

c. P172,000 d. P179,200

3. Doubtful accounts expense a. P264,000 b. P220,000

c. P252,000 d. P227,200

The accounts receivable subsidiary ledger of Jerome Corporation shows the following information: Dec. 31, 2020 Invoice Customer Account balance Date Amount Maybe, Inc. P140,720 12/06/2020 P56,000 11/29/2020 84,720 Perhaps Co. 83,680 09/27/2020 48,000 08/20/2020 35,680 Pwede Corp. 122,400 12/08/2020 80,000 10/25/2020 42,400 Perchance Co. 180,560 11/17/2020 92,560

19

Possibly Co. Luck, Inc.

126,400 69,600 P723,360

Total

10/09/2020 12/12/2020 12/02/2020 09/12/2020

88,000 76,800 49,600 69,600 P723,360

The estimated bad debt rates below are based on the Corporation’s receivable collection experience. Age of accounts Rate 0 – 30 days 1% 31 – 60 days 1.5% 61 – 90 days 3% 91 – 120 days 10% Over 120 days 50% The Allowance for Doubtful Accounts had a credit balance of P14,000 on December 31, 2020, before adjustment. Based on the foregoing, answer the following:

3.

1.

How much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2020? a. P52,795 b. P24,795 c. P38,795 d. P14,000

2.

The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2020 would include: a. No adjusting journal entry is necessary. b. A debit to retained earnings of P24,795. c. A debit to doubtful accounts expense P38,795. d. A credit to allowance for doubtful accounts of P24,795.

In your audit of Joseph Co., you noted that the company’s statement of financial position shows the accounts receivable balance at December 31, 2019 as follows: Accounts receivable Allowance for doubtful accounts

P3,600,000 72,000 P3,528,000

During 2020, transactions relating to the accounts were as follows: •

Sales on account, P38,400,000.

•

Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000 were allowed for prompt payment.

•

Customers’ accounts of P160,000 were ascertained to be worthless and were written off.

•

Bad accounts previously written off prior to 2020 amounting to P40,000 were recovered.

•

The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the year.

20

•

Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000. Collections of P1,200,000 were made on these receivables (not included in the collections previously given) and applied as partial payment to the loan.

Based on the above and the result of your audit, answer the following: 1. The accounts receivable as of December 31, 2020 is a. P8,680,000 c. P4,240,000 b. P9,840,000 d. P8,640,000 2. The allowance for doubtful accounts as of December 31, 2020 is a. P 8,000 c. P184,000 b. P136,000 d. P176,000 3. The net realizable value of accounts receivable as of December 31, 2020 is a. P8,544,000 c. P8,504,000 b. P8,456,000 d. P4,104,000 4. If receivables are hypothecated against borrowings, the amount of receivables involved should be a. Disclosed in the statements or notes b. Excluded from the total receivables, with disclosure c. Excluded from the total receivables, with no disclosure d. Excluded from the total receivables and a gain or loss is recognized between the face value and the amount of borrowings

4.

The financial statements of Bulls Corporation included the following: December 31, 2019 P 735,000 16,200

Accounts Receivable Allowance for doubtful accounts Sales on account Cash collected from customers

December 31, 2020 P

4,500,000 4,200,000

Among the cash collections was the full recovery of a P16,000 receivable from Robert Jawo, a customer whose account had been written off as worthless late in 2019. During 2020, it was necessary to write off uncollectible customers’ accounts totalling P20,200. On December 1, 2020, a customer settled his account by issuing to Bulls Corporation a 9% sixmonth note for P250,000. At December 31, 2020, the accounts receivable included P100,800 past due accounts. After careful study of all past due accounts, the management estimated the probable loss contained therein was 10%. In addition, 2% of the current accounts receivable might prove uncollectible. 1. What is the balance of Accounts Receivable as of Dec. 31, 2020? a. P780,800 c. P821,200 b. P801,000 d. P1,051,000 2. What is the amount of the current accounts receivable that might prove to be uncollectible? a. P13,600 c. P14,408 b. P14,004 d. P19,004

21

3. What is the balance of the allowance for uncollectible accounts before adjustments on December 31, 2020? a. P4,000 c. P12,200 b. P12,000 d. P32,200 4. What is the balance of the allowance for uncollectible accounts after all necessary adjusting entries on December 31, 2020? a. P10,080 c. P14,004 b. P12,084 d. P23,680

5.

Presented below is information related to the Accounts Receivable accounts of Ramil, Inc. during the current year 2020. a. An aging schedule of the accounts receivable as of December 31, 2020 is as follows: Age Under 60 days 61 – 90 days 91 – 120 days Over 120 days

Net Debit Balance P175,000 80,000 42,000 24,000

% to be Applied After Correction Made 1% 3% 6% P4,200 definitely uncollectible remainder estimated 25% uncollectible

b. The Accounts Receivable control account has a debit balance of P321,000 on December 31, 2020. c. Two entries were made in the Uncollectible Accounts Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Uncollectible Accounts as provisions, (2) and a credit of 2,740 because of customer bankruptcy to write off which is related to the 91-120-day category. d. The Allowance for Uncollectible Accounts is as follows for 2020: Date Jan. 1 Nov. 3 Dec. 31

Particulars Beginning balance Write off Provision (5% of P321,000)

Debit

Credit

P2,740 P16,050

Balance 8,750 6,010 22,060

e. A credit balance exists in the Accounts Receivable (61 – 90 days) of P4,800, which represents an advance on a sales contract. 1. Compute the correct balances of Accounts Receivable at December 31, 2020. a.)318, 860 b.)314, 060 c.) 325, 800 d.) 323, 060 2. Compute the correct amount of Uncollectible Accounts Expense for the year 2020. a.)16, 050 b.)9,789 c.) 7, 049 d.) 16, 831

22

6.

On January 2, 2020, a tract of land that originally cost P800,000 was sold by Angel CORPORATION. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate of interest for a note of this type is 10%. The present value table shows the following present value factors of 1 at 10%: Present value factor of 1 for 3 periods Present value factor of 1 for 2 periods Present value factor of 1 for 1 period Present value of an ordinary annuity of 1 for 3 periods 1. The gain on sale of land on January 2, 2020 is: a. P 194,740 b. P 276,847

0.75132 0.82645 0.90909 2.48685 c. P 290,740

d. P 400,000

2. The interest income on the note receivable for the year ended December 31, 2020 using effective interest method is: a. P 120,000 b. P 109,074 c. P 107,685 d. P 99,474 3. How much cash will MYLENE CORPORATION received from notes receivable? a. P 1,076,847 b. P 1,200,000 c. P 1,296,000 d. P 1,476,847

7.

Carla Received from a customer a one-year, P375,000 note bearing annual interest of 8%. After holding the note for six months, Carla discounted the note at I-Bank at an effective interest rate of 10%. Q1. How much should Carla receive from the bank? a. 371,428.50 b. 384,750.00

c. 392,857.50 d. 405,000.00

Q2. If the discounting is treated as a sale, what amount of loss on discounting should Carla recognize? a. 0 c. 9,750 b. 5,250 d. 20,250

8.

Ramil Company assigned specific accounts receivable totaling P3, 100, 000 as collateral on a P2, 500, 000, 12% note from a certain bank on December 1,2020. The entity will continue to collect the assigned accounts receivable. In addition to the interest on the note, the bank also charged a 5% finance charge deducted in advance on the P2, 500, 000 value of the note. The December collections of assigned accounts receivable amounted to P1, 000, 000 less cash discounts of P50, 000. On December 31, 2020, the entity remitted the collections to the bank in payment for the interest accrued on December 31, 2020 and the note payable. i.

ii.

What is the carrying amount of note on December 31, 2020? a. 1, 550, 000 b. 1, 575, 000

c. d.

1, 600, 000 1, 757, 000

What amount should be disclosed as the equity of Ramil Company in assigned accounts on December 31, 2020? a. 425, 000 c. 495, 000 b. 475, 000 d. 525, 000

23

iii. What amount of cash was received from the assignment of accounts receivable on December 1, 2020? a. 2, 000, 000 c. 2, 375, 0000 b. 2, 150, 0000 d. 3, 100, 000

9.

Omar Co. required additional cash for its operation and used accounts receivable to raise such needed cash, as follows: • On December 1, 2020 Omar Company assigned on a non-notification basis accounts receivable of P5,000,000 to a bank in consideration for a loan of 90% of the receivables less a 5% service fee on the accounts assigned. Omar signed a note for the bank loan. On December 31, 2020, Omar collected assigned accounts of P3,000,000 less discount of P200,000. Omar remitted the collections to the bank in partial payment for the loan. The bank applied first the collection to the interest and the balance to the principal. The agreed interest is 1% per month on the loan balance. • Omar Co. sold P1,550,000 of accounts receivable for P1,340,000. The receivables had a carrying amount of P1,470,000 and were sold outright on a nonrecourse basis. • On June 30, 2020, Omar Co. discounted (without recourse) at a bank a customer’s P600,000, 6-month, 10% note receivable dated April 30, 2020. The bank discounted the note at 12% on the same date. Based on the above and the result of your audit, answer the following: 1. In its December 31, 2020 statement of financial position, Omar should report note payable as a current liability at a. P1,745,000 c. P1,545,000 b. P2,250,000 d. P1,700,000 2. Omar Company’s equity in the assigned accounts receivable as of December 31, 2020 is a. P255,000 c. P455,000 b. P300,000 d. P 0 3. The entry to record the sale of accounts receivable would include a. A debit to Finance Charge of P210,000. b. A debit to Allowance for Doubtful Accounts of P80,000. c. A credit to Accounts Receivable of P1,470,000. d. A credit to Notes Payable of P1,550,000. 4. The proceeds from the note receivable discounted on June 30, 2020 is a. P564,000 c. P604,800 b. P617,400 d. P576,000

10.

The Cleo Company included the following in its notes receivable as of December 31, 2020: Note receivable from sale of land Note receivable from consultation Note receivable from sale of equipment

24

P 880,000 1,200,000 1,600,000

In connection with your audit, you were able to gather the following transactions during 2020 and other information pertaining to the company’s notes receivable: ▪

▪

▪

On January 1, 2020, Cleo Company sold a tract of land. The land, purchased 10 years ago, was carried on Cleo Company’s books at a value of P500,000. Cleo received a noninterestbearing note for P880,000. The note is due on December 31, 2021. There is no readily available market value for the land, but the current market rate of interest for comparable notes is 10%. On January 1, 2020, Cleo Company finished consultation services and accepted in exchange a promissory note with a face value of P1,200,000, a due date of December 31, 2022, and a stated rate of 5%, with interest receivable at the end of each year. The fair value of the services is not readily determinable and the note is not readily marketable. Under the circumstances, the note is considered to have an appropriate imputed rate of interest of 10%. On January 1, 2020, Cleo Company sold equipment with a carrying amount of P1,600,000 to X Company. As payment, X gave Cleo Company a P2,400,000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P800,000 (plus interest on the outstanding balance). The first payment was received on December 31, 2020. The market price of the equipment is not reliably determinable. The prevailing rate of interest for notes of this type is 14%.

Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places and final answers to nearest hundred) 1. The consultation service fee revenue that should be recognized in 2020 is a. P1,050,800 c. P 901,600 b. P1,095,800 d. P1,200,000 2. The gain on sale of equipment that should be recognized in 2020 is a. P331,600 c. P412,400 b. P257,280 d. P800,000 3. The noncurrent notes receivable as of December 31, 2020 is a. P2,605,706 c. P2,494,000 b. P1,825,800 d. P2,625,700 4. The current portion of long-term notes receivable as of December 31, 2020 is a. P1,600,000 c. P1,468,200 b. P1,680,000 d. P 800,000 5. The interest income to be recognized in 2020 is a. P464,000 b. P435,800

11.

c. P459,500 d. P156,000

Alex Company has the following transactions in 2020 involving notes receivable: May 1

Received a P1,000,000, 90-day, 12% interest bearing note from A Company in settlement of account.

1

Received a P1,500,000, six-month, 12% interest bearing note from B Company in settlement of account.

Jul. 30

A Company defaulted on the P1,000,000 note.

25

Aug. 1

Discounted the B Company note at a bank at 15%.

Sep. 1

Received a one-year noninterest bearing note from C Company in settlement of a P600,000 account receivable. The face value of the note was P660,000.

28

Collected the defaulted A Company note plus accrued interest at 12% per annum on the total amount due.

Oct. 1

Received a P2,500,000, 90-day note from D Company. The note is for the payment goods purchased and bears interest at 12%.

Nov. 1

B Company defaulted on the P1,500,000 note. Alex Company paid the bank the total amount due plus P60,000 for protest fee and other bank charges.

Dec. 30

Collected D Company note in full.

31

Collected from B Company in full including interest on the total amount due at 12% since default date.

Based on the above and the result of your audit, answer the following: 1. The proceeds from discounted B Company note on August 1, 2020 is a. P1,530,375 c. P1,542,300 b. P1,487,062 d. P1,000,000 2. The amount collected on September 28, 2020 on the defaulted A Company note is a. P1,030,000 c. P1,050,000 b. P1,050,600 d. P1,081,500 3. The amount collected on December 31, 2020 on defaulted B Company note is a. P1,683,000 c. P1,681,800 b. P1,650,000 d. P1,680,000 4. The interest income to be recognized in 2020 related to these transactions is a. P268,600 c. P223,600 b. P238,780 d. P193,600

12.

Montreal Bank granted a loan to a borrower on January 1, 2020. The interest rate on the loan is 10% payable annually starting December 31, 2020. The loan matures in five years on December 31, 2020. The data related to the said loan are: • Principal Amount 8,000,000 • Origination fee received from the borrower 1,250,000 • Direct organization cost incurred 50,000 The effective rate on the loan after considering the direct organization cost incurred and the origination fee is 15%. 1. What is the carrying amount of the loan receivable on January 1, 2020? a. 3,544,000 c. 5,504,000 b. 4,600,000 d. 6,800,000 2. What is the interest income for 2020? a. 1,709,000 c. 1,020,000 b. 1,907,000 d. 2,000,000

26

3. What is the carrying amount of the loan receivable on December 31, 2020? a. 7,020,000 c. 6,200,000 b. 8,000,000 d. 5,100,000

13.

Scotia Bank loaned P5,000,000 to MIJA Company on January 1, 2018. The terms of the loan require principal payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment are due on January 1, 2019. MIJA Company made the required payments during 2019 and 2020. However, during 2020 MIJA Company began to experience financial difficulties, requiring Scotia to reassess the collectability of the loan. On December 31, 2020, Scotia Bank determines that the remaining principal payment will be collected but the collection of the interest is unlikely. The present value of 1 at 8% is as follows: For one period 0.93 For two periods 0.86 For three periods 0.79 Q1. What is the loan impairment loss on December 31, 2020? a. 420,000 c. 630,000 b. 450,000 d. 0 Q2. What is the interest income to be reported by Scotia Bank in 2021? a. 223,200 c. 240,000 b. 143,200 d. 0

14.

You are engaged to perform an audit of the accounts of the Montreal CORPORATION for the year ended December 31, 2020, and have observed the taking of the physical inventory of the company on December 27, 2020. Only merchandise shipped by the Montreal Corporation to customers up to and including December 27, 2020 have been removed or excluded 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. The following lists of sales invoices are entered in the sales books for the months of December 2020 and January 2021, respectively. Date

Sales Invoices Amount Date Shipped

December 2020

(a) (b) (c) (d) (e) (f) (g) (h)

12/23/2020 12/27/2020 12/30/2020 12/22/2020 12/28/2020 12/03/2020 12/31/2020 12/31/2020

P 25,000 18,000 30,000 12,000 16,000 8,000 20,000 14,000

12/31/2020 12/27/2020 01/05/2021 01/08/2021 12/29/2020 12/05/2020 01/07/2021 12/31/2020

January 2021

(i) (j) (k) (l)

12/31/2020 12/27/2020 01/08/2021 01/10/2021

7,500 11,000 9,000 5,000

12/29/2020 01/04/2021 01/09/2021 12/31/2020

27

1. How much sales for month of December 2020 were erroneously recorded in January 2021? a. P 7,500 b. P 12,500 c. P 18,500 d. P 20,000 2. How much sales for the month of January 2021 were erroneously recorded in December 2020? a. Zero b. P 12,500 c. P 20,000 d. P 62,000 3. How much is the correct amount of sales for the month ended December 31, 2020? a. P 143,000 b. P 155,500 c. P 93,500 d. P 81,000

15.

During your audit of the Joshtin COMPANY for the calendar year 2020, you find the following accounts: NOTES RECEIVABLE Sept. 1 Samson, 12%, due in 3 mos. 36,000 36,000 Nov. 1 Hazel, 15%, due in 6 mos. 90,000 126,000 Nov. 1 Salazar, no interest, due in one year 75,000 201,000 Nov. 30 Rosa, Co. 12%, due in 13 mos. 15,000 216,000 Dec. 1 Rona, 15%, due in 15 mos. 36,000 252,000 Dec. 2 Anito, President, 18%, due in 3 mos. 18,000 270,000

Sept. 1 Nov. 1

NOTES RECEIVABLE DISCOUNTED Samson note, discounted at 15% Salazar note, discounted at 15%

Sept. 1 Nov. 1

Samson note Salazar note

INTEREST EXPENSE

36,000 75,000

36,000 111,000

310.50 11,250.00

310.50 11,560.50

All notes are trade notes receivable unless otherwise specified. The Samson note was paid December31, 2020. Interest income is credited only upon receipt of cash. 1. The accrued interest income at December 31, 2020 is: a. P 2,748 b. P 3,018 c. P 3,120

d. P 4,200

2. The interest expense at December 31, 2020 is: a. P 1,875.00 b. P 2,185.50

c. P 4,060.50

d. P 11,560.50

3. The Notes Receivable at December 31, 2020 is: a. P 141,000 b. P 159,000

c. P 216,000

d. P 252,000

4. The Notes Receivable – discounted at December 31, 2020 is: a. P 63,750 b. P 73,125 c. P 75,000

d. P111,000

5. How much is the proceeds in the discounting of notes receivable for the year? a. P 99,439.50 b. P 100,060.50 c. P 111,000.00

d. P 111,310.50

28

APPLIED AUDITING

INVENTORIES Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

Presented below is a list of items that may or may not reported as inventory in a company’s December 31 statement of financial position. 1. Goods out on consignment at another company’s store 2. Goods sold on installment basis 3. Goods purchased f.o.b. shipping point that are in transit at December 31 4. Goods purchased f.o.b. destination that are in transit at December 31 5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory 6. Goods sold where large returns are predictable 7. Goods sold f.o.b. shipping point that are in transit December 31 8. Freight charges on goods purchased 9. Factory labor costs incurred on goods still unsold 10. Interest cost incurred for inventories that are routinely manufactured 11. 12. 13. 14.

Costs incurred to advertise goods held for resale Materials on hand not yet placed into production Office supplies Raw materials on which a the company has started production, but which are not completely processed 15. Factory supplies 16. Goods held on consignment from another company 17. Costs identified with units completed but not yet sold 18. Goods sold f.o.b. destination that are in transit at December 31 19. Temporary investment in stocks and bonds that will be resold in the near future

P800,000 100,000 120,000 200,000 300,000 280,000 120,000 80,000 50,000 40,000 20,000 350,000 10,000 280,000 20,000 450,000 260,000 40,000 500,000

How much of these items would typically be reported as inventory in the financial statements? a. P2,300,000 c. P2,260,000 b. P2,000,000 d. P2,220,000

2.

In connection with your audit of the Rosalina Manufacturing Company, you reviewed its inventory as of December 31, 2020 and found the following items: (a) A packing case containing a product costing P100,000 was standing in the shipping room when the physical inventory was taken. It was not included in the inventory because it was marked “Hold for shipping instructions.” The customer’s order was dated December 18, but the case was shipped and the customer billed on January 10, 2021.

29

(b) Merchandise costing P600,000 was received on December 28, 2020, and the invoice was recorded. The invoice was in the hands of the purchasing agent; it was marked “On consignment”. (c) Merchandise received on January 6, 2021, costing P700,000 was entered in purchase register on January 7. The invoice showed shipment was made FOB shipping point on December 31, 2020. Because it was not on hand during the inventory count, it was not included. (d) A special machine costing P200,000, fabricated to order for a particular customer, was finished in the shipping room on December 30. The customer was billed for P300,000 on that date and the machine was excluded from inventory although it was shipped January 4, 2021. (e) Merchandise costing P200,000 was received on January 6, 2021, and the related purchase invoice was recorded January 5. The invoice showed the shipment was made on December 29, 2020, FOB destination. (f) Merchandise costing P150,000 was sold on an installment basis on December 15. The customer took possession of the goods on that date. The merchandise was included in inventory because Rosalina still holds legal title. Historical experience suggests that full payment on installment sale is received approximately 99% of the time. (g) Goods costing P500,000 were sold and delivered on December 20. The goods were included in the inventory because the sale was accompanied by a purchase agreement requiring Rosalina to buy back the inventory in February 2021. Based on the above and the result of your audit, how much of these items should be included in the inventory balance at December 31, 2020? a. P1,300,000 c. P1,650,000 b. P 800,000 d. P1,050,000

3.

Joseph Sales Company uses the first-in, first-out method in calculating cost of goods sold for the three products that the company handles. Inventories and purchase information concerning the three products are given for the month of October. Oct. 1

Inventory

Oct. 1-15

Purchases

Oct. 16-31

Purchases

Oct. 1-31 Oct. 31

Sales Sales price

Product C 50,000 units at P6.00 70,000 units at P6.50 30,000 units at P8.00 105,000 units P8.00/unit

Product P 30,000 units at P10.00 45,000 units at P10.50

Product A 65,000 units at P0.90 30,000 units at P1.25

50,000 units P11.00/unit

45,000 units P2.00/unit

On October 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, Joseph decided to reduce its sales prices on all items by 10%, effective November 1. Joseph’s selling cost is 10% of sales price. Products C and P have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on product A (after selling cost) is 15% of sales price. Based on the above and the result of your audit, determine the following:

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1. Total cost of Inventory at October 31 is a. P565,000 b. P655,500

c. P557,310 d. P617,500

2. The amount of Inventory to be reported on the company’s statement of financial position at October 31 is a. P569,850 c. P559,350 b. P543,810 d. P595,350 3. The Allowance for inventory write down at October 31 is a. P 5,650 c. P85,650 b. P13,500 d. P60,150 4. The cost of sales after loss on inventory write down for the month of October is a. P1,298,500 c. P1,022,260 b. P1,290,650 d. P1,208,000

4.

The management of Raindrops Company has engaged you to audit its 2020 financial statements. The company’s accounting period ends on December 31. You verified that on November 30, the correct inventory level was 60,000 units. A review of the December purchases orders to various suppliers showed the following. Only merchandise received up to December 31,2020 were recorded as purchase by Raindrops. Date of Purchase order 12-02-2020 12-11-2020 12-14-2020 12-23-2020 12-28-2020 12-31-2020

Invoice Date 01-04-2021 01-04-2021 01-03-2021 12-26-2020 01-10-2021 01-10-2021

Quantity in Units 10,000 12,000* 14,000* 10,000 8,000 15,000

Date Shipped 01-03-2021 12-22-2020 12-28-2021 01-03-2021 12-31-2020 01-04-2021

Date Received 01-04-2021 12-23-2020 01-03-2021 01-04-2021 1-10-2021 01-11-2021

Terms Shipping point Destination Shipping point Shipping point Destination Destination

During the month of December, the company recorded the sale of 50,000 units at P125 selling price per unit. This includes the sale of 14,000 units shipped to Rose Company, a consignee. A letter received from Rose Company indicates that as of December 31, 2020, it had sold 10,000 units and was still trying to sell the remaining units. Inventories presented on the client prepared statement of financial position pertain to inventories actually on hand at yearend. What is the number of units that should be included in the December 31, 2020 inventory? a. P 40,000 c. P30,600 b. P35,000 d. P34,400

5.

You were engaged by Alfredo Corporation for the audit of the company’s financial statements for the year ended December 31, 2020. 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:

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SALES Date Reference Balance forwarded 12/27 SI No. 865 12/28 SI No. 866 12/28 SI No. 867 12/31 SI No. 869 12/31 SI No. 870 12/31 SI No. 871 12/31 Closing entry Note: SI = Sales Invoice

PURCHASES Amount Date Reference P7,800,000 Balance forwarded 60,000 12/28 RR #2059 225,000 12/30 RR #2061 15,000 12/31 RR #2062 69,000 12/31 RR #2063 102,000 12/31 Closing entry 24,000 (8,295,000) P RR = Receiving Report

Accounts receivable Inventory Accounts payable

Amount P4,200,000 36,000 105,000 63,000 96,000 (4,500,000) P -

P750,000 900,000 600,000

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. 2063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 868. 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. 2060 but for which the invoice was not received until the following year. Cost was P27,000. b) On the evening of December 31, there were two trucks in the company siding: • Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No. 2063. The freight was paid by the vendor. •

Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P150,000 per Sales Invoice No. 868.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 866 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. 2064. 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. Based on the above and the result of your audit, determine the following: 1. Sales for the year ended December 31, 2020 a. P8,100,000 b. P7,725,000

c. P7,875,000 d. P8,025,000

2. Purchases for the year ended December 31, 2020 a. P4,500,000 c. P5,631,000 b. P5,727,000 d. P4,527,000

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6.

3. Accounts receivable as of December 31, 2020 a. P330,000 b. P555,000

c. P525,000 d. P180,000

4. Inventory as of December 31, 2020 a. P1,452,000 b. P1,221,000

c. P1,200,000 d. P1,296,000

5. Accounts payable as of December 31, 2020 a. P600,000 b. P627,000

c. P 531,000 d. P1,827,000

The following accounts were included in the unadjusted trial balance of Alfredo Company as of December 31, 2020: Cash Accounts receivable Inventory Accounts payable Accrued expenses

P 481,600 1,127,000 3,025,000 2,100,500 215,500

During your audit, you noted that Alfredo held its cash books open after year-end. In addition, your audit revealed the following: 1. Receipts for January 2021 of P327,300 were recorded in the December 2020 cash receipts book. The receipts of P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts. 2. Accounts payable of P186,200 was paid in January 2021. The payments, on which discounts of P6,200 were taken, were included in the December 2020 check register. 3. Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information had been found relating to certain inventory transactions. a. Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory figure. b. Goods costing P108,750 were received from a vendor on January 4, 2021. The related invoice was received and recorded on January 6, 2021. The goods were shipped on December 31, 2020, terms FOB shipping point. c. Goods costing P318,750 were shipped on December 31, 2020, and were delivered to the customer on January 3, 2021. The terms of the invoice were FOB shipping point. The goods were included in the 2020 ending inventory even though the sale was recorded in 2020. d. A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2021. The sale was properly recorded in 2021.

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e. The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2020. The related goods, shipped FOB destination were received on January 4, 2021, and thus were not included in the physical inventory. f.

Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical inventory.

Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2020:

7.

1. Cash a. P481,600 b. P340,500

c. P334,300 d. P346,700

2. Accounts receivable a. P1,454,300 b. P1,282,000

c. P1,127,000 d. P1,274,250

3. Inventory a. P3,017,500 b. P3,040,000

c. P2,930,000 d. P2,505,000

4. Accounts payable a. P2,395,450 b. P2,307,950

c. P2,286,500 d. P2,301,750

5. Current ratio a. P2.00 b. P1.83

c. P1.84 d. P2.01

Mavis, Inc., owner of a trading company, engaged your services as auditor. There is a discrepancy between the company’s income and the sales volume. The owner suspects that the staff is committing theft. You are to determine whether or not this is true. Your investigations revealed the following. 1. Physical inventory, taken December 31, 2020 under your observation showed that cost was P265,000 and net realizable value (NRV), P244,000. The inventory on January 1, 2020 showed cost of P390,000 and net realizable value of P375,000. It is the corporation’s practice to value inventory at “lower of cost or NRV.” Any loss between cost and NRV is included in “Other expenses.” 2. The average gross profit rate was 40% of net sales. 3. The accounts receivable as of January 1, 2020 were P135,000. During 2020, accounts receivable written off during the year amounted to P10,000. Accounts receivable as of December 31, 2020 were P375,000. 4. Outstanding purchase invoices amounted to P300,000 at the end of 2020. At the beginning of 2020 they were P375,000. 5. Receipts from customers during 2020 amounted to P3,000,000.

34

6. Disbursements to merchandise creditors amounted to P2,000,000. Based on the above and the result of your audit, determine the following: 1. The total sales in 2020 is a. P3,240,000 b. P3,230,000

c. P3,250,000 d. P2,770,000

2. The total purchases in 2020 is a. P2,000,000 b. P2,075,000

c. P1,950,000 d. P1,925,000

3. The amount of inventory shortage as of December 31, 2020 is a. P106,000 c. P100,000 b. P175,000 d. P 0

8.

A recent fire severely damaged Penguin Company’s administration building and destroyed many of its financial records. You have been contracted by Penguin’s management to reconstruct as much financial information as possible for the month of July. You learn that Penguin makes a physical inventory count at the end of each month to determine monthly ending inventory values. You also find out that the company applies the average cost method. You are able to gather the following information by examining various documents: Inventory, July 31 150,000 units Total cost of goods available for sale in July 356,400 Cost of goods sold during July 297,000 Gross profit on sales for July 303,000 Cost of inventory, July 1 P0.35 per unit The following are Penguin’s July purchases of merchandise: Date Quantity Unit Cost July 6 180,000 P0.40 12 150,000 0.41 16 120,000 0.42 17 150,000 0.45 1. Number of units on hand July 1 A. 450,000 B. 848,571 C. 169,714 D. 300,000 2. Units sold during July A. 600,000 B. 300,000 C. 750,000 D. 450,000 3. Unit cost of inventory at July 31 A. 0.35 B. 0.396 C. 0.419 D. 0.279

9.

Dundas Mart uses the average retail inventory method. The following information is available for the current year: Beginning inventory Purchases

Cost P 1,100,000 15,800,000

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Retail P 2,200,000 26,300,000

Freight in Purchase returns Purchase allowances Departmental transfer in Net markups Net markdowns Sales Sales returns Sales discounts Employee discounts Loss from breakage

400,000 600,000 300,000 400,000

1,000,000 800,000 600,000 900,000 24,700,000 350,000 200,000 600,000 50,000

Based on the above and the result of your audit, answer the following: 1. The cost ratio using the average retail inventory method is a. 58.13% c. 62.00% b. 61.07% d. 60.00% 2. The estimated ending inventory at retail is a. P3,000,000 b. P3,600,000

c. P2,800,000 d. P3,650,000

3. The estimated ending inventory at cost is a. P1,743,945 b. P2,198,571

c. P1,832,143 d. P1,800,000

4. The estimated cost of goods sold is a. P15,267,857 b. P14,901,429

c. P15,000,000 d. P15,056,055

5. If the inventory at retail based on physical count at December 31 is P1,700,000, the estimated inventory shortage is a. P780,000 c. P755,709 b. P793,929 d. P 0

10.

On November 17, 2020, Matet Airways entered into a noncancelable commitment to purchase 3,000 barrels of aviation fuel for P9,000,000 on March 31, 2021. Matet entered into this purchase commitment to protect itself against the volatility in the aviation fuel market. By December 31, 2020, the purchase price of aviation fuel had fallen to P2,200 per barrel. However, by March 31, 2021, when Matet took delivery of the 3,000 barrels, the price of aviation fuel had risen to P3,100 per barrel. Based on the above and the result of your audit, answer the following: 1. The loss on purchase commitment on December 31, 2020 is a. P1,500,000 c. P2,400,000 b. P 900,000 d. P 0 2. The gain on purchase commitment on March 31, 2021 is a. P2,700,000 c. P2,400,000 b. P 300,000 d. P 0

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APPLIED AUDITING

INVESTMENT Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

Angel Co.'s portfolio of trading securities includes the following on December 31, 2020: Cost

Fair Value

15,000 ordinary shares of Kris Co.

1,431,000

1,251,000

30,000 ordinary shares of Tris Co.

1,638,000

1,710,000

3,069,000

2,961,000

All of the above securities have been purchased in 2020. In 2021, Angel Co. completed the following securities transactions: Mar. 1 Sold 15,000 shares of Kris Co. ordinary shares at P93, less brokerage commission of P13,500. April 1 Bought 1,800 ordinary shares of Ozz, Inc. at P135 plus commission, taxes, and other transaction costs of P4,950. The Angel Co. portfolio of trading securities appeared as follows on December 31, 2021: Cost Fair Value 30,000 ordinary shares of Tris Co. 1,638,000 1,740,0001 1,800 ordinary shares of Ozz, Inc. 247,950 225,0002 1,885,950 1,965,000 1 Net 2 Net

of P19,500 estimated transaction costs that would be incurred on sale of the securities. of P4,500 transaction costs blat would be Incurred on the sale of the securities.

1.

What amount of unrealized gain on these securities should be reported in the 2021 income statement? a. 31,050 c. 84,000 b. 79,050 d. 36,000

2.

What is the gain on the sale of Kris Co. ordinary shares on March 1, 2021? a. 144,000 c. 130,500 b. 27,000 d. 13,500

3. What amount should be reported as trading securities in Angel's statement of financial position on December 31, 2021? a. 1,965,000 c. 1,885,950 b. 1,989,000 d. 1,909,905

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2.

At December 31, 2020, Ivan, Inc. reported as financial assets at fair value though profit or loss the following marketable equity securities: Seattle Company ordinary share, P10 par, 2,000 shares Grunge Co. preference share, P50, 1,200 shares

P28,400 P78,000

An analysis of transactions during 2021 relating to the account “Trading Securities” reveals the following: • • • • •

• • •

A 20% bonus issue was declared by Seattle Co. when each ordinary share has a market value of P12 per share. Ivans recorded the dividend as a debit to investment with a corresponding credit to dividend income at the total market value of the shares received. Subsequent to the receipt of the bonus issue, 400 shares of Seattle were sold at P12 per share, the proceeds of the sale were credited to the account. A 10% cash dividend from Grunge Company was received and recorded on January 15, 2021. The said dividend was declared on December 15, 2020. 1,500 ordinary shares of Cobain, Inc. were purchased during 2021 at P21 per share. Broker’s commission of P2,800 was recorded as operating expenses. 800 shares of Nirvana Co. were purchased on April 1, 2021, for the purpose of affiliation. Nirvana has 4,000 shares outstanding throughout the year. The company does not intend to sell the said shares in the near future. The shares were recorded at the purchase price of P50 per share. Broker’s commission of P5,400 was recorded as operating expenses. Nirvana reported net income of P50,000 during the year 2021. There were no other investments during the year. Market value per share as of December 31, 2021 are as follows: Seattle ordinary, P14; Grunge preference, P64; Cobain ordinary, P21; and Nirvana ordinary P52. Related unadjusted account balances per books as of December 31, 2021 are as follows: Other Operating Income P53,200 and Operating Expenses P764,000.

1. Trading Securities at December 31, 2021 a. P133,167 b. P136,300

c. P104,800 d. P135,000

2. Total Dividend Income for the year 2021 a. P7,800 b. P6,000

c. P7,680 d. 0

3. Investment in Associate as of December 31, 2021 a. P52,900 c. P41,000 b. P47,500 d. P52,000 4. What is the income from Associate in year 2021? a. 2,500 c. 7,500 b. 72,500 d. 77,500 5. What is the Operating Expenses for the year 2021? a. 769,400 c. 764,000 b. 758,600 d. 730,000 6. Unrealized Gain or Loss on Trading Securities taken to profit or loss? a. P 5,533 c. 4,333 b. P 3,133 d. 1,200

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3.

On January 1, Year 3, Inna Corporation had 30,000 ordinary shares of NPE Company acquired during Year 2 for a total consideration of P1,800,000, including P30,000 directly attributable costs. On December 31, Year 2, the NPE shares were selling at P65 per share. I In July Year 3, Inna Corporation received a 20% bonus issue. Subsequently, it sold 15,000 shares at 70 per share. Market value of NPE ordinary at December 31, Year 3 was P72 per share. The shares were designated at Equity Investments at Fair Value through Other Comprehensive Income. 1. What total amount shall be reported in profit or loss in the statement of comprehensive income for Year 3? a. P237,500 c. P612,000 b. P374,500 d. P0 2. How much total income shall be reported in profit or loss in the statement of comprehensive income for Year 3 as a result of this investment? a. P1,050,000 c. P1,512,000 b. P462,000 d. P0 3. At what amount should the investment be shown on December 31, Year 3 statement of financial position? a. P1,050,000 c. P1,512,000 b. P462,000 d. P0 4. What is the amount that will be shown in the equity section of the statement of financial position at December 31, Year 3 relating to the investment account? a. P1,050,000 c. P1,512,000 b. P462,000 d. P252,000

4.

Harry Corporation had the following portfolio of equity investment at fair value through other comprehensive income at December 31, Year 2: Jackson ordinary shares (5,000) Monterey preference (3,500) Garcia ordinary shares (1,000)

Purchase Price FV 12/31/Year 2 225,000 P250,000 133,000 140,000 180,000 178,000

On April 30, Year 3, Harry sold all the Jackson shares at P54 per share. In addition, on July 31, Year 3, 3,000 of Barney Corporation shares were acquired at P59. The December 31, Year 3 fair values were: Monterey, P135,000; Garcia, P190,000; and Barney, P200,000. Harry has the policy of transferring the equity account to retained earnings at the date the equity investment is derecognized. 1. How much gain or loss shall be recognized on the sale of Harry shares on April 30, Year 3? a. P20,000 c. P30,000 b. P25,000 d. 0

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2. What should be the cumulative balance of Unrealized Gains and Losses on Equity Investments at December 31, Year 3? a. P23,000 c. P33,000 b. P25,000 d. P35,000

5.

On December 31, 2020, Daihatsu, Inc. reported as equity investments at fair value through other comprehensive income the following equity securities: Alaska Corp., 5,000 ordinary shares (a 1% interest) Bahamas Corp., 10, 000 ordinary shares (a 2% interest) Canada Corp., 25, 000 ordinary shares (a 10% interest) Total

Cost P125, 000

Fair Value P 110, 000

160, 000 700, 000 P985, 000

180, 000 750, 000 P1, 040, 000

Additional information: On May 1, 2021, Alaska issued a 10% bonus issue, when, the market price of each share was P24. On November 1, 2021, Alaska paid a cash dividend of P0.75 per share. On July 1, 2021, Daihatsu paid P1, 520, 000(at fair value) for P50, 000 additional shares of Canada Corporation’s ordinary shares which represented a 20% investment in Canada. The fair value of all Canada’s identifiable assets net of liabilities was equal to their carrying amount of P6, 350, 0000. As a result of this transaction, Daihatsu owns 30% of Canada and can exercise significant influence over Canada’s operating and financial policies. •

Daihatsu’s initial 10% interest of 25, 000 shares of Canada’s was acquired on January 2, 2016 for P700, 000. At that date, net assets of Canada totaled P5, 800, 000 and the fair value of Canada’s identifiable assets net of liabilities was equal to their carrying amount.

Market prices per share of the equity securities, all listed on a national securities exchange, were as follows: December 31, 2021 P23 P19 P29

Alaska Corporation- ordinary Bahamas Corporation- ordinary Canada Corporation – ordinary •

Canada reported Profit and paid dividends of: Profit P350, 000 200, 000 370, 000

Year ended 12/31/2020 Six months ended 6/30/2021 Six months ended 12/31/2021

Dividends per share None None P1.30

There were no other intercompany transactions between Daihatsu and Canada. Daihatsu has the policy of transferring to Retained Earnings the Unrealized Gains and Losses relating to equity disposed of.

40

1. What is the balance of the Net Unrealized Gain or Loss on Equity Investments at fair value through Other Comprehensive Income at December 31, 2020? a. P126, 500 c. P55, 000 b. P10, 000 d. P0 2. What amount of dividend income shall be presented in the profit or loss section of the statement of comprehensive income for the year 2021? a. P4, 125 c. P36, 625 b. P12, 425 d. P48, 625 3. What amount, if any, should Daihatsu, Inc. report in its profit or loss as Income from AssociateCanada Corporation for the year ended December 31, 2021? a. P131, 000 c. P 74, 000 b. P171, 000 d. P111, 000 4. At what amount should the Investment in Associate-Canada Corporation be reported in Daihatsu’s December 31, 2021 statement of financial position? a. P2, 313, 500 c. P2, 293, 500 b. P2, 353, 500 d. P2, 256, 500 5. At what amount should the equity Investments at Fair Value be shown on the statement of financial position at December 31, 2021? a. P1, 040, 000 c. P316, 500 b. P290, 00 d. P414, 000 6. What should be the balance of the Net Unrealized Gains or Losses on Equity Investments at December 31, 2021? a. P55, 000 c. P31, 500 b. P5, 000 d. P129, 000 7. What amount of total income or loss (realized or unrealized) shall be presented in profit or loss as a result of the foregoing transactions? a. P151, 000 c. P111, 000 b. P135, 125 d. P115, 125

6.

At December 31, 2020, Maria Angela Corporation had the following investments that were purchased during 2019, its first year of operations: Cost Fair Value Trading Securities: Security A 700,000 725,000 Security B 210,000 200,000 Totals 910,000 925,000 Securities Available for Sale: Security C Security D Totals Securities to be Held to Maturity: Security E Security F Totals

500,000 560,000 850,000 865,000 1,350,000 1,425,000 Amort. Cost Fair Value 970,000 980,000 412,000 409,000 1,382,000 1,389,000

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No investments were sold during 2020. None of the market changes is considered permanent. Questions 1. The amount of investment to be reported as current assets is: a. P 2,465,000 b. P 2,455,000 c. P 2,380,000 d. P 1,485,000 e. P 925 000 2. The amount of investment to be reported as non-current assets is: a. P 1,389,000 b. P 1,382,000 c. P 1,277,000 d. P 2,807,000 3. The unrealized gain (or loss) component of income before taxes is: a. P 15,000 b. P 75,000 c. P 97,000 d. P 100,000 4. The unrealized gain (or loss) component of shareholders’ equity is: a. P 82,000 b. P 75,000 c. P 60,000 d. P 12,000

7.

On January 1, 2020 Piper Ltd bought 20% of the outstanding shares of Jason Construction Company for 300,000,000 cash. At the date of acquisition of the shares, Jason’s net assets had a fair value of 900,000,000. Their book value was 800,000,000. The difference was attributable to the fair value of Jason’s buildings and its land exceeding book value, each accounting for one-half of the difference between the fair value and book value of Jason’s net assets. Jason’s net income for the year ended, December 31, 2020, was 150,000,000. During 2020, Jason declared and paid cash dividends of 30,000,000. The buildings have a remaining life of 10 years. 1. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment in Piper’s 2020 statement of financial position? a. 323,000,000 c. 322,000,000 b. 337,000,000 d. 338,000,000 2. What is the amount to be reported by Piper Ltd in its consolidated financial statements as investment revenue in the income statement? a. 30,000,000 c. 31,000,000 b. 29,000,000 d. 28,000,000

8.

Jeffrey Company bought 20% of Cooper Corporation’s ordinary shares on January 1, 2020 for P11,400,000. Carrying amount of Cooper’s net assets at purchase date totaled P50,000,000. Fair value and carrying amounts were the same for all items except for plant and inventory, for which fair values exceed their carrying amounts by P10,000,000 and P2,000,000 respectively. The plant has a 5-year life. All inventory was sold during 2020. During 2020, Cooper reported profit of P30,000,000 and paid a P10,000,000 cash dividend. Based on the above and the result of your audit, answer the following: 1. What amount should Jeffrey report as net income related to this investment in 2020? a. P5,200,000 c. P5,400,000 b. P6,200,000 d. P4,200,000 2. The carrying amount of Investment in Cooper Corporation as of December 31, 2020 a. P14,600,000 c. P13,600,000 b. P14,800,000 d. P15,600,000

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9.

Your accounting firm was engaged as the auditor of Trishia Company for the examination of its financial statements for the year ended December 31, 2020. In the course of your review, you gathered the following information: a. On May 1, 2019, the Trishia Company acquired P 400, 000 of XYZ Corporation 9% bonds for P 440, 000, inclusive of accrued interest. Interest on bonds is payable semiannually on June 30 and December 31, and bonds mature on December 31, 2024 The XYZ bonds belong to a portfolio of Trishia’s investments intended for profit taking opportunities, and this, are held for trading. b. On October 1, 2020, bonds the Trishia Company sold bonds of P 100, 000 for P 109, 000 inclusive of accrued interest. c. On November 30, 2020, bonds of P 120, 000 were exchanged for 1, 000 shares of XYZ Corporation P 100 per ordinary share. Interest was received on the date of exchange. You obtained the following quoted prices of the securities: December 31, 2019 XYZ bonds November 30, 2020 XYZ ordinary share December 31, 2020 XYZ bonds December 31, 2020, XYZ ordinary shares

107 140 108 143

1. Interest revenue for the years ended December 31, 2019 and December 31, 2020 a. 24, 000 & 32, 850 b. 54, 000 & 51, 300 c. 72, 000 & 51, 300 d. 36, 000 & 51, 300 2. Net unrealized gains and losses during 2019 & 2020 a. 6,000 & 4, 800 b. 0 & 1, 800 c. 6, 000 & 1, 800

d. 4, 800 & 1, 800

3. Gains and losses on disposal of the investments in 2020 a. 14, 100 gain b. 14, 100 Loss c. 11, 600 & (250)

d. (11,600) & 2, 500

4. Carrying value of the investments in bonds at December 31, 2019 and December 31, 2020 a. 186, 600 & 140, 000 b. 11, 610 & 140, 000 c. 11, 610 & 107 d. 428, 000 & 194, 400

10.

On June 1, 2019, Edna Corporation purchased as a long-term investment 4,000 of the P1,000 face value, 8% bonds of Mayet Corporation. 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, 2025. Edna uses the effective interest method of amortization. On November 1, 2020, Edna sold the bonds for a total consideration of P3,925,000. Edna intended to hold these bonds until they matured, so yearto-year market fluctuations were ignored in accounting for bonds. QUESTIONS: Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places) 1. The purchase price of the bonds on June 1, 2019 is a. P3,645,328 c. P3,696,736 b. P3,691,132 d. P3,624,596 2. The interest income for the year 2019 is a. P215,850 b. P215,521

c. P212,829 d. P211,612

3. The carrying amount of the investment in bonds as of December 31, 2019 is a. P3,725,919 c. P3,719,986 b. P3,649,541 d. P3,671,491

43

4. The interest income for the year 2020 is a. P306,608 b. P310,715

c. P311,218 d. P304,748

5. The gain on sale of investment in bonds on November 1, 2020 is a. P21,196 c. P 27,632 b. P80,235 d. P104,045

44

APPLIED AUDITING

PPE & INTANGIBLES Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

You noted during your audit of Joseph Company that the company carried out a number of transactions involving the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as Property and equipment: Property and equipment Acquisition price of land and building P 960,000 Options taken out on several pieces of property 16,000 List price of machinery purchased 318,400 Freight on machinery purchased 5,000 Repair to machinery resulting from damage during shipment 1,480 Cost of removing old machinery 4,800 Driveways and sidewalks 102,000 Building remodeling 400,000 Utilities paid since acquisition of building 20,800 P1,828,480 Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related to those not purchased. The old machinery was sold at book value. Based on the above and the result of your audit, determine the adjusted balance of the following: 1. Land a. P644,000 c. P326,000 b. P322,000 d. P424,000

2.

2. Building a. P 644,000 b. P1,040,000

c. P1,044,000 d. P 722,000

3. Machinery a. P317,032 b. P318,512

c. P323,400 d. P321,832

Ivan Corp. uses different kinds of machines in its manufacturing process. It constructs some of these machines itself and acquires others from the manufacturers. The following information relates to two machines that it has recorded in 2020. Machine A (purchased) Cash paid for equipment Cost of transporting machine - insurance and transport Labor cost of installation by expert fitter Labor cost of testing equipment Insurance cost for 2020

45

P250,000 9,000 15,000 12,000 4,500

Cost of training for personnel who will use the machine Cost of safety rails and platforms surrounding machine Cost of water devices to keep machine cool Cost of adjustments to machine during 2020 to make it operate more efficiently

7,500 18,000 24,000 22,500

Machine B (self-constructed) Cost of materials to construct machine Labor cost to construct machine Allocated overhead cost-electricity, factory space, etc. Allocated interest cost of financing machine Cost of installation Profit saved by self-construction Safety inspection cost prior to use

3.

P210, 000 129,000 66,000 30,000 36,000 45,000 12,000

1. What is the cost of machine A? a. P380,500 b. P358,000

c. P328,000

d. P350,500

2. What is the cost of machine B? a. P471,000 b. P417,000

c. P483,000

d. P438,000

During 2020, Joshtin Company made the following property, plant and equipment expenditures: Land and building acquired from Jerome Company Repairs and reconditioning cost made to the building Reconstruction of sidewalk and fences Special tax assessment Remodeling of office space including new partitions and walls

7,000,000 250,000 100,000 50,000 400,000

In exchange for the land and building acquired from Jerome, Joshtin issued 50,000 ordinary shares of its P100 par value ordinary shares. On the date of purchase, the shares had a market value of P140 per share and the land and building had a fair value of P2,000,000 and P6,000,000 respectively. During the year, Joshtin also received land from a shareholder to facilitate to relocation of its main offices in the city. Joshtin paid P50,000 for the donated land transfer. The donated land is fairly valued at P1,800,000. What is the total cost of the land acquisition? a. P 4,100,000 b. P 3,900,000 c. P 3,850,000 d. P 3,600,000

4.

In connection with your examination of the financial statements of the Angel Corporation for the year 2021, the company presented to you the Property, Plant and Equipment section of its balance sheet as of December 31, 2020 which consists of the following: Land Buildings Leasehold improvements Machinery and equipment

P 400,000 3,200,000 2,000,000 2,800,000

The following transactions occurred during 2021:

46

•

Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land Angel paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred 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 Architectural design fees Building permit fee Imputed interest on funds used during construction

P 44,000 32,000 4,000 24,000

The building was completed and occupied on September 1, 2021. •

A third tract of land (site number 104) was acquired for P2,400,000 and was put on the market for resale.

•

Extensive work was done to a building occupied by Angel under a lease agreement. The total cost of the work was P500,000, which consisted of the following: Particulars Painting of ceilings Electrical work Construction of extension to current working area

Amount

Useful life

P 40,000 140,000

One year Ten years

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 2021, costs of P260,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2023, 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 2021 were P52,000.

Based on the above and the result of your audit, compute for the following as of December 31, 2021: 1.

Land a. P8,400,000 b. P5,900,000 c. P5,480,000

d. P6,000,000

2.

Buildings a. P4,280,000 b. P3,880,000 c. P3,800,000

d. P4,000,000

3.

Leasehold improvements a. P2,720,000 b. P2,600,000 c. P2,560,000

d. P2,300,000

4.

Machinery and equipment a. P3,100,000 b. P3,108,000 c. P3,114,000

d. P3,166,000

47

5.

You are engaged to examine the financial statements of the Joshtin Manufacturing Corp. for the year ended December 31, 2020. The following schedules for property, plant, and equipment and related accumulated depreciation accounts have been prepared by your client. The opening balances agree with your prior year’s audit working papers. Joshtin Manufacturing Co. Analysis of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts Year Ended December 31, 2020 Cost

Land Buildings Machinery & equipment

Final 12-31-2019 P450,000 2,400,000 2,770,000 P5,620,000

Additions P100,000 350,000 808,000 P1,258,000

P520,000 P520,000

Per books 12-31-2020 P550,000 2,750,000 3,526,000 P6,826,000

P P -

P1,303,000 860,100 P2,163,100

Retirement

Accumulated Depreciation Buildings Machinery & equipment

P1,200,000 546,500 P1,746,500

P103,000 313,600 P416,600

Further investigation revealed the following: a.

All equipment is depreciated on the straight-line basis (with no salvage value) based on the following estimated lives: Buildings – 25 years, all other items 10 years.

b.

The company entered into a lease contract for a derrick machine with annual rental of P100,000 payable in advance every April 1. The parties to the contract stipulated that a 30day written notice is required to cancel the lease. Estimated useful life is 10 years. The derrick was recorded under machinery and equipment at P808,000 and P60,600, applicable to the machine was included in the depreciation expense during the year.

c.

The company finished construction of a new building wing in June 30. The useful life of the main building was not prolonged. The lowest construction bid was P350,000 which was the amount recorded. Company personnel constructed the building at a total cost of P330,000.

d.

P100,000 was paid for the construction of a parking lot which was completed on July 1, 2020. The expenditure was charged to land.

e.

The P520,000 equipment under retirement column represent cash received on October 1, 2020 for a machinery bought on October 1, 2016 for P960,000. The bookkeeper recorded depreciation expense of P72,000 on this machine in 2020.

f.

The company’s president donated land and building appraised at P200,000 and P400,000 respectively to the company to be used as plant site. The company began operating the plant on September 30, 2020. Since no money was involved, the bookkeeper did not make any entry for the above transaction.

Based on the above and the result of your audit, answer the following:

48

1. The carrying amount of the buildings on December 31, 2020 is a. P1,820,250 b. P1,827,400 c. P1,816,250

d. P1,447,000

2. The carrying amount of the land on December 31, 2020 is a. P650,000 b. P750,000 c. P450,000

d. P545,000

3. The loss on the disposal of the machinery sold for P520,000 is a. P56,000 b. P152,000 c. P80,000

d. P0

4. The carrying amount of the property, plant and equipment as of December 31, 2020 is a. P3,860,750 b. P3,755,750 c. P3,955,750 d. P3,312,900

6.

You obtain the following information pertaining to Red Co.’s property, plant, and equipment for 2020 in connection with your audit of the company’s financial statements. Audited balances at December 31, 2019:

Debit P 3,750,000 30,000,000

Land Buildings Accumulated depreciation – buildings Machinery and equipment Accumulated depreciation – Machinery and Equipment Delivery Equipment Accumulated Depreciation – Delivery Equipment

Credit P 6,577,500

22,500,000 2,875,000

6,250,000 2,115,000

Depreciation Data: Depreciation Method 150% declining – balance Straight-line Sum-of-the-years’-digits Straight-line

Buildings Machinery and Equipment Delivery Equipment Leasehold Improvements

Useful Life 25 years 10 years 4 years -

Transaction during 2020 and other information are as follows: a.

On January 2, 2020, Red purchased a new truck for P500,000 cash and traded-in a 2-year-old truck with a cost of P450,000 and a book value of P135,000. The new truck has a cash price of P600,000; the market value of the old truck is not known.

b.

On April 1, 2020, a machine purchased for P575,000 on April 1, 2015 was destroyed by fire. Red recovered P387,500 from its insurance company.

c.

On May 1, 2020, cost of P4,200,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2026.

d.

On July 1, 2020, machinery and equipment were purchased at a total invoice cost of P7,000,000; additional cost of P125,000 for freight and P625,000 for installation were incurred.

49

e.

Red determined that the delivery equipment comprising the P2,875,000 balance at January 1, 2020, would have been depreciated at a total amount of P450,000 for the year ended December 31, 2020.

The salvage values of the depreciable assets are immaterial. The policy of the Red Co. is to compute depreciation to the nearest month. Based on the above and the result of your audit, answer the following:

7.

1.

How much is the Accumulated depreciation – Buildings as of December 31, 2020? a. P7,777,500 b. P7,982,850 c. P8,377,500 d. P7,103,700

2.

How much is the Accumulated depreciation – Machinery and Equipment as of December 31, 2020? a. P8,844,375 b. P8,614,375 c. P8,830,000 d. P8,556,875

3.

How much is the Accumulated depreciation – Delivery Equipment as of December 31, 2020? a. P2,715,000 b. P2,400,000 c. P2,490,000 d. P2,805,000

4.

How much is the Accumulated depreciation – Leasehold Improvements as of December 31, 2020? a. P420,000 b. P525,000 c. P350,000 d. P630,000

5.

How much is the net gain (loss) from disposal of assets for the year ended December 31, 2020? a. P100,000 b. (P35,000) c. P65,000 d. (P65,000)

Your audit of Kimberlie Corporation for the year 2020 disclosed the following property dispositions: Land Building Warehouse Machine Delivery truck

Cost P3,200,000 1,200,000 5,600,000 640,000 800,000

Acc. Dep. 880,000 256,000 380,000

Proceeds 2,480,000 288,000 5,920,000 72,000 376,000

Fair value 2,480,000 5,920,000 576,000 376,000

Mode Condemnation Demolition Destruction by fire Exchange Sale

Land On January 15, a condemnation award was received as consideration for the forced sale of the company’s land and building, which stood in the path of a new highway. Building On March 12, land and building were purchased at a total cost of P4,000,000, of which 30% was allocated to the building on the corporate books. The real estate was acquired with the intention of demolishing the building, and this was accomplished during the month of August. Cash proceeds received in September represent the net proceeds from demolition of building. Warehouse On July 4, the warehouse was destroyed by fire. The warehouse was purchased on January 2, 2003. On December 12, the insurance proceeds and other funds were used to purchase a replacement warehouse at a cost of P4,800,000. Machine On December 15, the machine was exchanged for a similar machine having a fair value of P504,000 and cash of P72,000 was received.

50

Delivery Truck On November 13, the delivery truck was sold to a used car dealer. Based on the above and the result of your audit, compute the gain or loss to be recognized for each of the following dispositions: 1. Land a. P2,480,000 gainb. P3,200,000 loss

c. P720,000 loss

d. P0

2. Building a. P288,000 gain b. P912,000 loss

c. P1,488,000 loss

d. P0

3. Warehouse a. P1,200,000 gainb. P3,600,000 loss

c. P320,000 gain

d. P0

4. Machine a. P24,000 gain

c. P18,000 gain

d. P0

c. P424,000 gain

d. P44,000 gain

b. P192,000 gain

5. Delivery truck a. P424,000 loss b. P44,000 loss

8.

You are making your second annual examination of Tess Company. The Equipment account and its related accumulated depreciation are shown below: EQUIPMENT 01/01/2020 Balance P500,000 09/30/2020 Equipment 5 sold P54,000 04/01/2020 Purchased Equipment 9 100,000 ACCUMULATED DEPRECIATION – EQUIPMENT 01/01/2020 Balance 12/31/2020 Depreciation

P312,500 54,600

You obtained the following additional information: • The beginning balances agree with the balances in your last year’s working paper. • The company depreciates all items of equipment at 10% a year, rounded to the nearest month. • On April 1, 2020, the company purchased equipment Number 9 on account under the credit terms of 2/10, n/30. The invoice price of P100,000 was paid on May 31,2020. • Installation Cost of P5,000 was incurred by the company on equipment no. 9; this amount was charged by Tess to Repairs and Maintenance. • On September 30, 2020, the company sold equipment no. 5 for P54,000. Equipment No. 5 purchased for P180,000 on March 30, 2013. 1.

The correct cost of Equipment no. 9 is a. P98,000 b. P100,000

c. P103,000

d. P105,000

2. The gain or loss on sale of Equipment no. 5 a. P7,500 b. P(7,500)

c. P9,000

d. P(9,000)

3. The Depreciation Expense for the year 2020 a. P60,300 b. P53,225

c. P48,350

d. P42,300

51

4. The adjusted ledger balance of the equipment account at December 31,2020 is a. P418,000 b. P423,000 c. P425,000 d. P546,000

9.

In the audit of the books of Trisha Company for the year 2020, the following items and information appeared in the Production Machines account of the auditee: Date 2020 Jan. 01 Aug 31 Sept 30 Dec 01 Dec 01 31

Particulars

Debit

Balance–Machines 1, 2, 3, and 4 at P90,000 each Machine 5 Machine 1 Machine 6 Machines 7 and 8 at P216,000 each Machine 2 Balance

P 360,000 198,000 96,000 432,000 . P1,086,000

Credit

P 3,000 21,000 1,062,000 P1,086,000

The Accumulated Depreciation account contained no entries for the year 2020. The balance on January 1, 2020 per your audit, was as follows: Machine 1 Machine 2 Machine 3 Machine 4 Total

P 84,375 39,375 33,750 22,500 P 180,000

Based on your further inquiry and verification, you noted the following: 1.

Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P3,000.

2.

Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2020. Insurance of P21,000 was recovered. Machine 7 was to replace Machine 2.

3.

Machine 3 was traded in for Machine 6 at an allowance of P12,000; the difference was paid in cash and charged to Production Machine account.

4.

Depreciation rate is recognized at 25% per annum.

Determine the adjusted balance of the Production Machine as of December 31, 2020 and Depreciation Expense for the year 2020.

10.

On January 1, 2020, Jerome Corporation purchased for P1,200,000, a tract of land (site number 143) with a building. Jerome paid a real estate broker’s commission of P72,000, legal fees of 12,000, and title guarantee insurance of 36,000. The closing statement indicated that the land value was P1,000,000 and the building value was P200,000. Shortly after acquisition, the building was razed at a cost of P108,000

52

Jerome entered into a P6,000,000 fixed-price contract with JADE Builders, Inc. on January 1, 2020 for the construction of an office building on land site number 143. The building was completed and occupied on September 1, 2021. Additional construction costs were incurred as follows: Plans, specifications, and blueprints

42,000

Architects’ fees for design and supervision

164,000

The Building is estimated to have a 40-year life from the date of completion and will be depreciated using the 150% declining method. To finance construction costs, Jerome borrowed 1,000,000 with a 12% interest on January 1, 2020. The loan was outstanding for the entire years of 2020 and 2021. The company’s other interestbearing debts include the following (also outstanding for the entire year of 2020 and 2021):

10% bank loan 10% long-term note 12% long-term loan

Principal

Borrowing Costs

2,800,000 3,200,000 2,000,000 8,000,000

280,000 320,000 240,000 840,000

Expenditures of the project were as follows: Date

Expenditures

January 1, 2020 April 1, 2020 October 1, 2020 December 31, 2020 January 1, 2021 May 1, 2021 September 1, 2021

1,000,000 500,000 800,000 900,000 1,000,000 600,000 1,200,000

Based on the above data. Compute for the following: 1. Total cost of the land a. 1,272,000 b. 1,284,000

c. 1,120,000 d. 1,428,000

2. Capitalizable borrowing cost for the year ended 2020 a. 180,375 b. 225,000

c. 187,500 d. 960,000

3. Capitalizable borrowing cost for the year ended 2021 a. 337,626 b. 340,750

c. 560,000 d. 369,126

4. Total cost of the building as of September 30, 2021 a. 6,771,750 b. 6,775,501

c. 6,832,001 d. 6,724,001

5. Interest expense for the year 2021 a. 590,874 b. 340,750

c. 622,374 d. 619,25

53

3,200000

6. Depreciation Expense for the building in 2021 a. 84,050 b. 85,400

11.

c. 84,648 d. 252,150

In connection with your audit of the Josef Mining Corporation for the year ended December 31, 2020, you noted that the company purchased for P10,400,000 mining property estimated to contain 8,000,000 tons of ore. The residual value of the property is P800,000. Building used in mine operations costs P800,000 and have estimated life of fifteen years with no residual value. Mine machinery costs P1,600,000 with an estimated residual value P320,000 after its physical life of 4 years. Following is the summary of the company’s operations for first year of operations. Tons mined Tons sold Unit selling price per ton Direct labor Miscellaneous mining overhead Operating expenses (excluding depreciation)

800,000 tons 640,000 tons P4.40 640,000 128,000 576,000

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. Based on the above and the result of your audit, answer the following: (Disregard tax implications) 1. How much is the depletion for 2020? a. P768,000 b. P960,000 c. P192,000 d. P1,040,000 2. 3. 4. 5.

12.

Total inventoriable depreciation for 2020? a. P400,000 b. P362,667

c. P384,000

d. P0

How much is the Inventory as of December 31, 2020? a. P438,400 b. P422,400 c. P425,600

d. P418,133

How much is the cost of sales for the year ended December 31, 2020? a. P1,689,600 b. P1,753,600 c. P1,702,400

d. P1,672,533

How much is the maximum amount that may be declared as dividends at the end of the company’s first year of operations? a. P1,494,400 b. P1,289,600 c. P1,302,400 d. P1,319,467

During the current year, an entity incurred the following costs to develop and produce a routine, low-risk computer software product: Completion of detailed program design 1,300,000 Cost incurred for coding and testing to establish technological feasibility 1,000,000 Other coding costs after establishment of technological feasibility 2,400,000 Other testing costs after establishment of technological feasibility 2,000,000 Costs of producing product masters for training materials 1,500,000 Duplication of computer software and training materials from product master 2,500,000 Packaging product 900,000

54

1. What amount should be reported as inventory? a. 2,500,000 b. 3,400,000

c. 4,000,000 d. 4,900,000

2. What total amount of the costs incurred should be expensed immediately? a. 8,200,000 c. 6,700,000 b. 2,300,000 d. 4,400,000 3. What amount should be capitalized initially as software cost? a. 5,400,000 b. 3,700,000

13.

c. 5,900,000 d. 6,900,000

On December 31, 2018, Cleo 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 Cleo’s Manufacturing reporting unit.

•

A customer list for P220,000. By contract, Cleo 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, 2019, 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. b) The cash flows expected to be generated by the Cleo 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 Cleo Manufacturing reporting unit are as follows: Book values P2,700,000 1,500,000 1,800,000

Identifiable assets Goodwill Liabilities

Fair values P3,000,000 ? 1,800,000

c) The cash flows expected to be generated by the customer list are P120,000 in 2020 and P80,000 in 2021. 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 amortization for the year 2019 a. P73,333 b. P141,515 c. P116,190 d. P86,857 2. Impairment loss for the year 2019 a. P90,476 b. P133,333

c. P179,584

3. Carrying value of Trademark as of December 31, 2019 a. P300,000 b. P257,143 c. P166,667

55

d. P0 d. P120,416

4. Carrying value of Goodwill as of December 31, 2019 a. P1,500,000 b. P1,431,818 c. P1,425,000 d. P1,462,500 5. Carrying value of Customer list as of December 31, 2019 a. P220,000 b. P146,667 c. P176,000

14.

d. P0

You are in the process of examining the intangible asset accounts of Jo Company and you obtained the following information: A patent was purchased from Pizza Hot Company for P2,000,000 on January 1, 2019. Jo Company estimated the remaining useful life of the patent to be 10 years at the date of purchase. The patent was carried on Pizza Hot Company’s accounting records at a net carrying amount of P1,600,000 when Pizza Hot sold it to Jo Company. During 2020, a franchise was purchased from Yellow Cob for P516,000. The terms of the payment are as follows: P180,000 down payment on the date of the purchase, April 1,2020 and P336,000 one-year non-interest-bearing note due on April 1, 2021. Implicit interest in this transaction is 12%. In addition, 5% of revenue from the franchise must be paid to Yellow Cob. Revenue from the franchise for 2020 wasP2,500,000. Jo estimated on the date of purchase that the useful life was 10 years. JO incurred the following expenditures relating to research and development activities in 2020: Materials P42,000 Equipment 100,000 Indirect Cost 102,000 Jo estimates that these costs will be recouped by December 31, 2023. The materials and equipment purchased have no alternative future uses. During 2020, because of recent events in the field, Jo estimates that the remaining life of the patent purchased on January 1, 2019 is only 5 years from January 1, 2020. The company takes a full year’s amortization or depreciation on assets acquired during the year. 1.

The amortization of the patent for the year 2020 is a. P200,000 b. P288,000

c. P333,000 d. P360,000

2. Total research and development expense to be shown in the 2020 statement of comprehensive income is a. P244,000 c. P144,000 b. P164,000 d. P48,800 3. The carrying Value of the Franchise at December 31, 2020 is a. P360,000 c. P432,000 b. P370,000 d. P444,000 4. The total amount that will be charged against revenue for 2020 related to the franchise is a. P192,000 c. P161,000 b. P182,000 d. P200,000 5. The amortized cost of the Notes Payable on December 31, 2020 is a. P300,000 c. P327,000 b. P309,000 d. P336,000

56

15.

Coney Corporation was incorporated on January 3, 2018. The corporation’s financial statements for its first year of operations were not examined by a CPA. You have been engaged to audit the financial statements for the year ended December 31, 2019, and your audit is substantially completed. The corporation’s trial balance appears below: Coney CORPORATION Trial Balance December 31, 2019 Cash Accounts receivable Allowance for Uncollectible accounts Inventories Machinery Equipment Accumulated Depreciation Patents Leasehold Improvements Prepaid Expenses Organization Costs Goodwill Licensing Agreement no.1 Licensing Agreement no.2 Accounts Payable Unearned Revenue Share Capital Retained Earnings (January 1, 2019) Sales Cost of goods sold Selling and general expenses Interest expense Other operating expenses Totals

P

15,000 73,000 50,200 82,000 37,000 128,200 36,100 13,000 32,000 30,000 60,000 56,000

475,000 180,000 9,500 20,000 P1,297,000 P

P

1,460

26,200

73,000 17,280 300,000 159,060 720,000

1,297,000

The following information relates to accounts that may yet require adjustment: •

Patents for Coney’s manufacturing process were acquired on January 1, 2019, at cost of P93,500.

•

An additional P34, 700 was spent in December 2019 to improve machinery covered by the patents and charged to the Patents account.

•

Depreciation on fixed assets has been properly recorded for 2019 in accordance with Coney’s practice, which provides a full year’s depreciation for property on hand June 30 and no depreciation otherwise. Coney uses the straight-line method for all depreciation and amortization and 17- year life on its patents.

•

On January 3, 2018, Coney purchased licensing agreement no. 1, which was believed to have an unlimited useful life. The balance in the licensing agreement no. 1 accounts include its purchase price of P57,000 and expenses of 3,000 related to the acquisition.

57

•

On January 1, 2019, Coney purchases licensing agreement no. 2, which has a life expectancy of 10 years. The balance in the licensing agreement no.2 includes its purchase price P54,000 and P6,000 in acquisition expenses, but it has been reduced by a credit of P4,000 for the advance collection of 2020 revenue from the agreement.

•

In late December 2019, an explosion caused a permanent 70% reduction in the expected revenue producing value of licensing agreement no. 1, and in January 2020, a flood caused additional damage that rendered the agreement worthless.

•

The balance in the goodwill account includes (a) the P18,000 paid December 2018, for an advertising program that was estimated to help increase Coney’s sales over a period of 4 years following the disbursement, an (b) legal expenses of P12,000 incurred for Coney’s incorporation on January 3, 2018.

•

The leasehold improvements account includes (a) P15,000 cost of improvements with a total estimated useful life of 12 years, which Coney, as tenant, made leased premises in January 2018, (b) movable assembly line equipment costing P15,000 that was installed in the leased premises in December 2019, and (c) real estate taxes of 6,100 paid by Coney in 2019, which under terms of the lease should have been paid by the landlord. Coney paid its rent full during 2019. A ten-year non-renewable lease was signed January 3,2018, for the leased building that Coney used in manufacturing operations.

•

The balance in the organization costs account includes costs incurred during the organizational period. The corporation has exercised its option to amortize organization costs over a 60-month period for income tax purposes and wishes to amortize these for accounting purposes on same basis.

1. What is the amortization of patents for manufacturing processes at December 31, 2019? a. P7, 541 b. P5,500 c. P3, 458 d. P2,041 2. Impairment loss on licensing agreement no. 1 account is a. P42,000 c. P 0

b. P39,900 d. P18,000

3. Adjustment on leasehold improvements account will include a credit on leasehold improvement of a. P15, 000 b. P8,900 c. P 21, 100 d. P6,100

16.

As the recently appointed auditor for Shawn Company, you have been asked by your senior in charge to examine the entity’s intangible assets. The trial balance submitted to you by Shawn listed the following intangible assets account at December 31, 2020: Patents Trademarks Franchise Organization costs Goodwill

P

You obtained the following additional information:

58

920,000 220,000 900,000 40,000 450,000

1. The patents were purchased by the company on January 1, 2018 for P1,000,000. At the date of purchase, the patents were assessed to have an estimates useful life of 10 years, although it will expire on December 31, 2033. Amortization was made by the company for years 2018 and 2019, based on its 10-year life. In 2020, the company successfully defended the patents in an infringement suit; the decision was rendered by the court on December 28, 2020. Legal fees of P120, 000 were incurred and capitalized by the company in 2020. 2. At December 31, 2020, the company assessed the economic benefits expected to be derived from the patents. Because of new products and processes introduced in the market, it is believed that these patents would provide annual cash inflow of P140, 000 for the next 5 years. The company’s appropriate discount rate is 10%. Since there is no homogeneous market for these patents, their selling price is not reliably determinable. 3. The balance of the Trademarks account represents its purchase price of P150, 000 paid on January 1, 2018 and P70, 000 of legal costs incurred during the current year 2020 for the cost of infringement suit filed by the company against its competitor. The trademark was originally believed to have an indefinite useful life, hence no amortization was taken up by the company for years 2018 and 2019. Because of new products introduces in the market the trademark is now believed to benefit the company up to the end of 2022. 4. The franchise account represents the total cash paid to acquire it on January 1, 2019, P200, 000 plus the P800, 000 face value of the promissory note issued on the same date, reduced by 2019 amortization of P100, 000. The P800, 000 promissory note was non-interest bearing, payable in four annual installments of P200, 000 due every December 31 starting December 31, 2019. All installment payments up to December 31, 2020 have been made on due date. Implicit interest rate on the note is 10% based on the equivalent cash price of the franchise when purchased 5. The organization costs represent the unamortized portion of the costs of drafting and registering the corporate charter and the costs incurred in the shareholders’ meetings during the process of incorporation, reduced by amortization taken up in 2018 through 2019. The corporation opted to amortize the organization costs over five years for tax purposes and applied the same treatment for accounting purposes. 1. Carrying amount of patents at December 31, 2019 is a. P704, 000 c. P896, 000

b. P800, 000 d. P 1, 000,000

2. Total expenses recognized in 2020 relating to trademark a. 120, 000 c. 20, 000

b. 70, 000 d. 50, 000

3. Interest expense on notes payable 2020 a. P49, 738 c. P80, 000

b. P63, 398 d. P71, 429

4. Correct cost of franchise a. P633, 980 c. P 800, 000 5. An adjustment on organization cost includes a debit to a. Retained earnings 40, 000 b. Organization cost 40, 000

17.

b. P1,000,000 d. P833, 980 c. Retained earnings 8, 000 d. Organization costs 8,000

Steven Company, an entity belonging to the category of small and medium- sized entities, was formed in January 2017 and is preparing its financial statements under IFRS for the first time at the end of 2019. You found the following accounts relating to intangible assets

59

Patents Copyright Trade name Computer software Start-up Costs Intellectual capital Goodwill

P1,200,000 1,400,000 1,500,000 400,000 300,000 2,000,000 900,000

You discovered the following up on your further investigation: 1. The patents were acquired on January 2, 2019 and were expected to provide uniform economic benefits over their estimated useful life of 12 years. The purchase price was P1,150,000 and P50,000 was incurred to register the patent in the name of Steven. 2. The copyright is expected to be of benefit to Steven for an indefinite period of time. At December 31, 2019, there was no indication of impairment for the copyright. 3. The software was purchased by the entity and was installed on June 30, 2019. The software is expected to be used for 5 years, at the end of which it is expected to be replaced. 4. Steven Company believed that the competencies of its administrative and sales staff were a company’s part of competitive advantage; hence, the board of directors resolved to capitalize these as intellectual capitals with a credit to share premium. 5. The goodwill account was the result of an acquisition in January 2018 of a micro- enterprise operating at a profit. You were satisfied that the assets and liabilities acquired were recorded at their fair values. Steven Company did not record amortization, as it believed that the acquisition of Steven will provide economic benefits for an indefinite period of time. 1. Adjustment to patents includes a credit to patents accounts a. P50, 000 c. P120, 000 2. Amortization of computer software a. P80,000 c. P60, 000

60

b. P100, 000 d. P 0 b. P40, 000 d. P20,000

APPLIED AUDITING

LIABILITIES Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

2.

PROF. U.C. VALLADOLID

Emerson Machineries operates a mechanical company which have the following transactions: • The beginning of the year Accounts Payable was P150,000. Purchases on trade accounts during the year were P975,000 and payments on account were P915,000. • The Company incurs substantial costs for electricity to run its stores and air conditioning systems. As of December 31, 2019, it is estimated that P82,500 of electricity has been used, although the monthly billing for December has not yet been received. • The company a cash balance of P118,000 • Depreciation for tax purposes was P43,000 • Emerson machineries sells service plans for as low as P25 per month. However, it requires its customers to repay on a 6-month increments. As of the year-end P562,500 has been collected for 2020 web hosting plans. • The entity acquired asset amounting to P86,000 using its cash before coming up to the yearend balance • Emerson’s service plans are subject to sales taxes and Emerson collected P97,500 during the year. All of these amounts have been remitted to taxing authorities, with the exception of P7,500 that is due to be paid at January, 2020. • The company has total bank loans of P2,250,000. The debt bears interest at 6% payable monthly. As of December 31, 2019, all interest has been paid, with the exception of accrued interest for the last half of December. • Emerson had income for operations amounting to P457,000 • The company’s bank loans (P2,250,000) are all due on June 30, 2020. However, on December 31,2019, Emerson has a firm lending agreement with the bank to renew and extend P1,500,000 of this amount on a 5-year basis. 1. How much would be the amount of Accounts Payable? a. P90,000 b. P916,125

c. P210,000 d. P150,000

2. What would be the amount of interest payable? a. P5655 b. P5535

c. P5545 d. P5625

3. What would be the amount of current liabilities? a. P1,618,125 b. P 860,625

c. P1,605,000 d. P 845,625

JP, INC., a dealer of household appliances, sells washing machines at an average price of P8,100. The company also offers to each customer a separate 3-year warranty contract for P810 that requires the company to provide periodic maintenance services and to replace defective parts. During 2018, JP sold 300 washing machines and 270 warranty contracts for cash. The company estimates that the warranty costs are P180 for parts and P360 for labor. Assume sales occurred on December 31, 2018. JP policy is to recognize income from the warranties on a straight-line basis. In 2019, JP incurred actual costs relative to 2018 warranty sales of P18,000 for parts and P36,000 for labor.

61

1. What liability relative to these transactions would appear on the December 31, 2018, statement of financial position and how would it be classified? Current Noncurrent a. P145,800 P72,900 b. P72,900 P72,900 c. P72,900 P145,800 d. P0 P218,700 2. What amount of warranty expense would be reported for 2018? a. P18,000 b. P 0 c. P 36,000 d. P54,000 3. What liability relative to the 2018 warranties would be reported on December 31, 2019, and how would it be classified? Current Noncurrent a. P145,800 P72,900 b. P72,900 P72,900 c. P72,900 P145,800 d. P145,800 P0

3.

Gisel Co. includes one coupon in each box of laundry soap they sell. Customers receive a towel in exchange for 10 coupons and a remittance of P15. Each towel costs 20. Gisel estimates that 50% of coupons will be redeemed. Data for 2018 and 2019 are as follows 2018 2019 Boxes of laundry sold 450,000 500,000 Towel purchased 25,000 37,000 Coupons redeemed 150,000 230,000 1. What is the premium expense for 2018? a. 15,000 b. 112,500

c. 1,125,000 d. 45,000

2. What amount of estimated premium liability will be reported on December 31, 2018? a. 37,500 c. 25,000 b. 35,000 d. 30,000 3. What amount of estimated premium liability will be reported on December 31, 2019? a. 9,500 c. 31,000 b. 10,500 d. 47,500

4.

In the packages of its products, Alyssa, INC. includes coupons that may be presented at retail stores to obtain discounts on other Alyssa products. Retailers are reimbursed for the face amount of coupons redeemed plus 10% of that amount for handling costs. Alyssa honors requests for coupon redemption by retailers up to 3 months after the consumer expiration date. Alyssa estimates that 60% of all coupons issued will ultimately be redeemed. Information relating to coupons issued by Alyssa during 2019 is as follows: Consumer expiration date 12/31/2019 Total payments to retailers 12/31/2019 165,000 Liability for unredeemed coupons 12/31/2019 99,000

62

5.

1. The total face amount of coupons issued in 2019 is a. P 600,000 b. P 440,000

c. d.

P 400,000 P 240,000

2. Coupons expense at year-end is a. P 440,000 b. P 400,000

c. d.

P 264,000 P 240,000

3. Estimated liability for unredeemed coupons is a. P 219,000 b. P 123,000

c. d.

P 99,000 P 3,000

Rosa, president of the Valla Company, has a bonus arrangement with the company under which she receives 10% of the net income (after deducting taxes and bonuses) each year. For the current year, the net income before deducting either the provision for income taxes or the bonus is P4,650,000. The bonus is deductible for tax purposes, and the tax rate is 32%. 1. The amount of Maria Rosa’s bonus is a. P 465,000.00 b. P 364,285.71

c. P 339,270.39

2. The appropriate provision for income tax for the year is a. P 1,488,000.00 b. P 1,393,258.43 c. P 1,371,428.57

d. P 296,069.42 d. P 1,379,433.48

3. The entry to record the bonus (which will be paid in the following year) is a. Bonus expense 296,069.42 Bonus payable 296,069.42 b. Bonus expense 339,270.39 Bonus payable 339,270.39 c. Bonus expense 465,000.00 Bonus payable 465,000.00 d. No entry

6.

Joseph CORP. has been producing quality disposable diapers for more than two decades. The company’s fiscal year runs from April 1 to March 31. The following information relates to the obligations of Joseph as of March 31, 2019. Bonds Payable Joseph issued P10,000,000 of 10% bonds on July 1,2017. The prevailing market rate of interest for these bonds was 12% on the date of issue. The bonds will mature on July 1, 2027. Interest is paid semiannually on July 1 and January 1. Joseph uses the effective interest rate method to amortize bond premium or discount. The following present value factors are taken from the present value tables: Present value of 1 at 12% for 10 periods Present value of 1 at 6% for 20 periods Present value of an ordinary annuity of 1 at 12% for 10 periods Present value of an ordinary annuity of 1 at 6% for 20 periods

63

0.32917 0.31180 5.65022 11.46992

Notes Payable Joseph has signed several long-term notes with financial institutions. The maturities of these notes are given in the schedule below. The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2019. Due Date Amount Due April 1, 2019 P400,000 July 1, 2019 600,000 October 1, 2019 300,000 January 1, 2020 300,000 April 1, 2020 – March 31,2021 1,200,000 April 1, 2021 – March 31,2022 1,000,000 April 1, 2022 – March 31,2023 1,400,000 April 1, 2023 – March 31,2024 800,000 April 1, 2024 – March 31,2025 1,000,000 P7,000,000 Estimated Warranties Joseph has a one-year product warranty on some selected items in its product line. The estimated warranty liability on sales made during the 2017-2018 fiscal year and still outstanding as of March 31, 2018, amounted to P180,000. The warranty costs on sales made from April 1, 2018, through March 31,2019, are estimated at P520,000. The actual warranty costs incurred during the current 2018-2019 fiscal year are as follows: Warranty claims honored on 2017-2018 sales P180,000 Warranty claims honored on 2018-2019 sales 178,000 Total warranty claims honored P358,000 Other Information 1. Trade Payables Accounts payable for supplies, good and services purchased on open account amount to P740,000 as of March 31, 2019. 2. Payroll Related Items Accrued salaries and wages Withholding taxes payable Other payroll deductions Total

P300,000 94,000 10,000 P404,000

3. Miscellaneous Accruals - Other accruals not separately classified amount to P150,000 as of March 31,2019. 4. Dividends - On March 15, 2019, Joseph’s board of directors declared a cash dividend of P0.20 per ordinary share and a 10% share dividend. Both dividends were to be distributed on April 12, 2019, to the shareholders of record at the close of business on March 31, 2019. Data regarding Joseph ordinary share capital are as follows: Par value Number of shares issued and outstanding Market values of ordinary shares: March 15,2019 March 31,2019 April 12, 2019

64

P5.00 per share 6,000, 000 shares P22.00 per share 21.50 per share 22.50 per share

1. How much was received by Joseph from the sale of the bonds on July 1, 2017? a. P8,852,960 c. P10,500,000 b. P10,000,000 d. P10,647,040 2. What is the current portion of Joseph’s notes payable at March 31, 2019? a. P2,800,000 c. P1,300,000 b. P1,600,000 d. P3,800,000 3. The balance of the estimated warranties payable at March 31, 2019 is? a. P342,000 c. P520,000 b. P 18,000 d. P180,000 4. On March 31, 2019, Joseph’s statement of financial position would report total current liabilities of a. P5,286,000 c. P5,336,000 b. P4,386,000 d. P5,642,000 5. On March 31, 2019, Joseph’s statement of financial position would report total noncurrent liabilities of a. P14,389,350 c. P14,370,783 b. P14,352,217 d. P14,252,960

7.

In the course of your examination of the liability accounts of Constancia Company, you found that the entity on January 2, 2019 issued at a premium bonds payable with a face value of P500,000. The premium was erroneously credited by the company to Interest Income. The bonds are payable December 31, 2026 and pay interest semi-annually on June 30 and December 31. You instructed your audit staff to compute the premium amortization using the interest method and he provided you with the following: Premium amortization from January 2, 2019 to June 30, 2019 Bond carrying value as of June 30, 2019 Total interest paid on bonds for the year 2019 (payments made on June 30 and December 31)

P

1. The annual stated interest rate on the bond is a. 10% b. 11%

c. 12% d. 14%

2. The effective annual interest rate on the bonds is a. 10% b. 11%

c. 12% d. 14%

3. The premium amortization on the bonds payable for 2019 is a. P3,124 b. P3,218

c. P5,574 d. P8,022

4. The interest expense on the bonds for 2019 is a. P61,978 b. P66,782

c. P66,876 d. P70,000

65

1,562 555,738 70,000

8.

On January 1, 2019, an entity leased a building from a lessor with the following pertinent information. Annual rental payable at the end of each year 1,000,000 Initial direct cost paid 400,000 Lease incentive received 100,000 Leasehold improvement 200,000 Purchase option that is reasonably certain to be exercised 500,000 Lease term 5 years Useful life of building 8 years Implicit interest rate 10% PV of an ordinary annuity of 1 for 5 periods at 10% 3.79 Present value of 1 for 5 periods at 10% 0.62 1. What is the cost of the right of use asset? a. 4,500,000 c. 4,700,000 b. 4,400,000 d. 4,600,000 2. What is the lease liability on December 31, 2019? a. 3,510,000 b. 3,169,000

9.

c. 3,950,000 d. 3,719,000

OPERATING LEASE- LESSOR Ivan Company, a lessor, leased an equipment under an operating lease. The lease term is 5 years and the lease payments are made in advance on January 1 of each year as shown in the following schedule: January 1, 2017 1,000,000 January 1, 2018 1,000,000 January 1, 2019 1,400,000 January 1, 2020 1,700,000 January 1, 2021 1,900,000 Total rentals 7,000,000 1. What is the rent income for 2017? a. 1,000,000 b. 1,400,000

c. 2,000,000 d. 1,500,000

2. On December 31, 2018, what amount should be recognized as accrued rent receivable? a.700,0000 c.400,000 b.800,000 d. 0

10.

SALES TYPE LEASE- LESSOR An entity is a dealer in equipment and uses leases to facilitate the sale of its product. The entity expects a 12% return. At the end of the lease term, the equipment will revert to the lessor. On January 1, 2019, an equipment is leased to a lessee with the following information: Cost of equipment to the entity Fair value of equipment Residual value – unguaranteed Initial direct cost Annual rental payable in advance Useful life and lease term

3,500,000 5,500,000 600,000 200,000 900,000 8 years

66

Implicit interest rate PV of 1 at 12% for 8 periods PV of an ordinary annuity of 1 at 12% for 8 periods PV of an annuity due of 1 at 12% for 8 periods First lease payment

12%

January 1, 2019

1. What is the gross investment in the lease? a. 7,800,000 b. 7,200,000

c. 6,600,000 d. 6,900,000

2. What is the net investment in the lease? a. 5,004,000 b. 5,244,000

c. 5,500,000 d. 5,740,000

3. What is the total financial revenue? a. 2,196,000 b. 2,796,000

c. 2,556,000 d. 1,956,000

0.40 4.97 5.56

4. What amount should be recognized as interest income for 2019? a. 600,480 c. 536,760 b. 492,480 d. 521,280 5. What amount of cost of goods sold should be recognized in recording the lease? a. 3,260,000 c. 3,740,000 b. 3,500,000 d. 3,460,000

11.

An entity provided the following pension plan information: Projected benefit obligation – January 1, 2019 Fair value of plan assets – January 1, 2019 Pension benefits paid during the year Current service cost for 2019 Past service cost for 2019 (vesting period 5 years) Actual return on plan assets Contribution to the plan Actuarial loss due to change in assumptions on projected benefit obligation Discount or settlement rate 1. What is the employee benefit expense for the current year? a. 2,245,000 c. 2,525,000 b. 1,905,000 d. 1,750,000 2. What is the net remeasurement loss for the current year? a. 200,000 c. 300,000 b. 100,000 d. 400,000 3. What is the projected benefit obligation on December 31, 2019? a. 5,550,000 c. 5,775,000 b. 5,075,000 d. 5,975,000 4. What is the fair value of plan assets on December 31, 2019? a. 4,480,000 c. 4,300,000 b. 4,230,000 d. 4,050,000 5. What amount should be reported as accrued benefit cost on December 31, 2019? a. 1,745,000 c. 1,045,000 b. 1,750,000 d. 700,000

67

3,500,000 2,800,000 250,000 1,750,000 425,000 180,000 1,500,000 200,000 10%

12.

13.

Brad Company provided the following information for the current year: Current service cost 520,000 Actual return 810,000 Interest expense 590,000 Interest income 350,000 Loss on settlement 240,000 Past service cost 360,000 Contribution 1,500,000 1. What is the employee benefit expense? a. 1,710,000 b. 1,470,000

c. 1,350,000 d. 1,360,000

2. What is the remeasurement gain or loss on plan assets? a. 460,000 loss b. 460,000 gain

c. 220,000 loss d. 220,000 gain

3. What is the total defined benefit cost? a. 820,000 b. 900,000

c. 740,000 d. 960,000

4. What is the prepaid or accrued benefit cost for the year? a. 600,000 b. 600,000

c. 140,000 d. 140,000

Jeffrey Company is experiencing financial difficulty and is negotiating trouble debt restructuring with its creditors to relieve its financial stress. Jeffrey has a P5,000,000 note payable to Metrobank. The bank is considering acceptance of an equity interest in Jeffrey Company in the form of 400,000 ordinary shares with a fair value of P12 per share. The par value of the ordinary share is P10 per share. 1. If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain to be reported by Jeffrey in its profit or loss statement as a result of the restructuring? a. None b. P200,000 c. P 500,000 d. P1,000,000 2. If the issue of equity is treated as an extinguishment of an existing debt instrument, what amount of gain or loss should Jeffrey Company report in its profit or loss statement as a result of the restructuring? a. None b. P200,000 c. P 500,000 d. P1,000,000

14.

Mhel Company has the following loans payable scheduled to be repaid in February of the next year. The company’s accounting year ends on December 31. The company intends to repay Loan1 for P100,000 when it comes due in February. In the following October, the company intends to get a new loan for P80,000 from the same bank. The company intends to refinance Loan 2 for P150,000 when it comes due in February. The refinancing agreement of P180,000 will be signed in April, after the financial statements for this year have been authorize for release.

68

The company intends to refinance Loan 3 for P200,000 before it comes due in February. The actual refinancing for P175,000 took place in January before the financial statements for this year have been authorize for issue. As of December 31, of this year, the total current liabilities to be reported on the company’s statement of financial position should be: a. 0 b. 250,000

c. 350,000 d. 450,000

As of December 31, of this year, the total noncurrent liabilities to be reported on the company’s statement of financial position should be: a. 0 c. 350,000 b. 250,000 d. 450,000

15.

Cooper Company reported taxable income of P8,000,000 in the income tax return for the first year of operations. Temporary differences between financial income and taxable income for the first year are as follows: Tax depreciation in excess of book depreciation 800,000 Accrual for product liability claim in excess of actual claim 1,200,000 Reported installment sales income in excess of taxable 2,600,000 Installment sales income Income tax rate 30%

16.

1. What is the deferred tax asset at year-end? a. 240,000 b. 360,000

c. 780,000 d. 0

2. What is the deferred tax liability at year-end? a. 1,020,000 b. 780,000

c. 240,000 d. 0

3. What is the deferred tax expense for the first year? a. 1,380,000 b. 1,020,000

c. 660,000 d. 360,000

4. What is the total tax expense for the first year? a. 3,060,000 b. 2,400,000

c. 2,580,000 d. 2,220,000

Chet Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Chet recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections and pretax accounting income for 2017-2020 are as follows: Year 2017

Service Revenue 650,000

Collections 620,000

69

Pretax Accounting Income 186,000

2018 2019 2020

750,000 715,000 700,000

770,000 700,000 720,000

250,000 220,000 200,000

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%. 1. What should be reported as income tax payable for 2017? a. 62,400 b. 156,000

c. 620,000 d. 186,000

2. What should be reported as income tax payable for 2018? a. 270,000 b. 108,000

c. 250,000 d. 750,000

3.

What should be reported as income tax payable for 2019? a. 205,000 b. 220,000

c. 82,000 d. 700,000

4. What should be reported as income tax payable for 2020? a. 200,000 b. 220,000

c. 700,000 d. 88,000

70

APPLIED AUDITING

SHAREHOLDER’S EQUITY Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

The following data were compiled prior to preparing the balance sheet of the Angel Corporation as of December 31, 2020: Authorized ordinary stock, P100 par value Cash dividends payable Donated capital Gain on sale of treasury stock Net unrealized loss on available for sale securities Premium on capital stock Premium on bonds payable Reserve for bond sinking fund Reserve for depreciation Revaluation increment on property Retained earnings, unappropriated Subscribe capital stock Stock subscriptions receivables Stock warrants outstanding Treasury stock, at cost Unissued ordinary stock

P4,000,000 160,000 800,000 80,000 96,000 320,000 240,000 400,000 600,000 800,000 720,000 480,000 120,000 200,000 144,000 800,000

Compute for the following: A

2.

B

C

D

1.

Ordinary Stock Issued

4,000,000

3,200,000

3,056,000 3,680,000

2. 3. 4. 5.

Share Premium (APIC) Appropriated Retained Earnings Total Stockholders’ Equity Legal Capital

320,000 400,000 6,760,000 3,200,000

1,400,000 544,000 6,640,000 3,680,000

1,320,000 1,200,000 1,000,000 6,480,000 6,240,000 3,560,000 4,000,000

The “shareholders’ equity” account of Facundo Corporation, after its initial year of operation in 2020 shows the following: Date Particulars Debit Credit Jan. 1 Issued 6,000 shares at par of P100 in exchange for real property with a market value of P800,000; authorized 20,000 P600,000 shares Jan. 15 Sold 8,000 shares at P120 960,000 Mar. 10 Purchased 800 Facundo shares at P150 P120,000 May 15 Loss on sale of machinery 40,000 June 10 Sold 400 treasury shares 68,000 Dec. 31 Cash dividends declared payable January 15, 80,000 2021 Dec. 31 Profit for the year 316,000

71

Based on the information presented above and the result of your audit, answer the following. 1. The adjusted share capital as of December 31 2020 is a. P1,360,000 c. P1,400,000 b. P1,560,000 d. P1,340,000 2. The total share premium as of December 31 2020 is a. P360,000 c. P368,000 b. P160,000 d. P168,000 3. The unappropriated retained earnings as of December 31 2020 is a. P196,000 c. P136,000 b. P156,000 d. P144,000 4. The adjusted total equity on December 31, 2020 is a. P1,944,000 c. P1,744,000 b. P1,704,000 d. P1,904,000 5. The book value per share of Facundo Corporation on December 31, 2020 was a. P140.00 c. P128.20 b. P132.22 d. P125.29

3.

Following is the stockholders’ equity section of Jerome Corporation’s balance sheet at December 31, 2019: Ordinary Stock, P10 par value; authorized 1,500,000 shares; issued and outstanding 900,000 shares Share Premium Retained Earnings Total Stockholders’ Equity

P9,000,000 750,000 2,700,000 P12,450,000

Transactions during 2020 and other information relating to the stockholders’ equity accounts were as follows: •

On January 26, Jerome reacquired 75,000 shares of its ordinary stock for P11 per share.

•

On April 4, Jerome sold 45,000 shares of its treasury stock for P14 per share.

•

On June 1, Jerome declared a cash dividend of P1 per share, payable on July 15, 2020 to stockholders of record on July 1, 2020.

•

On August 15, each stockholder was issued one stock right for each share held to purchase two additional shares of stock for P12 per share. The rights expire on October 31, 2020.

•

On September 30, 150,000 stock rights were exercised when the market value of the stock was P12.50 per share.

•

On November 2, Jerome declared a two for one stock split-up and charged the par value of the stock from P10 to P5 per share. On November 20, shares were issued for the stock split.

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1.

4.

•

On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It originally cost P600,000, was carried by the previous owner at a book value of P300,000, and was recently appraised at P390,000.

•

Net income for 2020 was P720,000.

Based on the above and the result of your audit, determine the following as of December 31, 2020: Ordinary stock a. 12,600,000 b. 10,800,000 c. 10,050,000 d. 12,300,000

2.

Share premium a. 1,485,000 b. 1,575,000

c. 3,825,000

d. 1,275,000

3.

Unapproriated retained earnings a. 2,550,000 b. 2,422,500

c. 2,220,000

d. 2,190,000

4.

Total stockholders’ equity a. 16,425,000 b. 14,295,000

c. 16,095,000

d. 16,065,000

Angel Corporation was authorized at the beginning of 2018 with 300,000 authorized shares of P100, par value ordinary stock. At December 31, 2018, the stockholders’ equity section of Angel was as follows: Ordinary Stock, par value P100 per share; authorized 300,000 shares; issued 30,000 shares Share Premium Retained Earnings Total Stockholders’ Equity

P3,000,000 300,000 450,000 P3,750,000

On June 15, 2019, Angel issued 50,000 shares of its ordinary stock for P6,000,000. A 5% stock dividend was declared on September 30, 2019 and issued on November 10, 2019 to stockholders of record on October 31, 2019. Market value of ordinary stock was P110 per share on declaration date. The net income of Angel for the year ended December 31, 2019 was P475,000. During 2020, Angel had the following transactions; March 1

Angel reacquired 3,000 shares of its ordinary stock for P95 per share.

May 31

Angel sold 1,500 shares of its treasury stock for P120 per share.

August 10

Issued to stockholders one stock right for each share held to purchase two additional shares of ordinary stock for P125 per share. The rights expire on December 31, 2020.

September 15

25,000 stock rights were exercised when the market value of ordinary stock was P130 per share.

October 31

40,000 stock rights were exercised when the market value of the ordinary stock was P140 per share.

December 10

Angel declared a cash dividend of P2 per share payable on January 5, 2021 to stockholders of record on December 31, 2020.

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1.

Angel retired 1,000 shares of its treasury stock and reverted them to an unused basis. On this date, the market value of the ordinary stock was P150 per share.

December 31

Net income for 2020 was P500,000.

Based on the above and the result of your audit, determine the following as of December 31, 2020: Ordinary stock a. 21,400,000 b. 21,300,000 c. 14,800,000 d. 21,250,000

2.

Share premium a. 4,627,500 b. 3,007,500

3.

Retained earnings a. 600,000

b. 565,000

c. 557,000

d. 560,000

Treasury stock a. 10,000

b. 47,500

c. 50,000

d. 0

4.

5.

December 20

c. 4,632,500

d. 4,592,500

In connection with your audit of the Trisha Corporation, you were able to obtain the following information pertaining to the corporation’s equity accounts. Trisha Corporation has 32,000 shares of P2 par value ordinary stock authorized. Only 75% of these shares have been issued, and of the shares issued, only 22,000 are outstanding. On December 31, 2019, the stockholders’ equity section revealed that the balance in share premium in Excess of Par Value – ordinary was P832,000, and the Retained Earnings balance was P220,000. The Treasury stock was purchased at an average price of P37.50 per share. During 2020, Trisha had the following transactions: Jan. 15

Trisha issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative preference stock; 4,000 shares are authorized

Feb. 01

Trisha sold 3,000 shares of newly issued P2 par value ordinary stock at P42 per share.

Mar. 15

Trisha declared a cash dividend on ordinary stock of P0.15 per share, payable on April 30 to all stockholders of record on April 1

Apr. 15

Trisha reacquired 400 shares of its ordinary stock for P43 per share. Employees exercised 2,000 stock options granted in 2019. When the options were granted, each option entitled the employees to purchase 1 share of ordinary stock for P50 per share. The share price on the date of grant was also P50 per share. Trisha issued new shares to the employees.

May 01

Trisha declared a 10% stock dividend to be distributed on June 1 to stockholders of record on May 7. The market price of the ordinary stock was P50 per share on May 1.

31

Trisha sold 300 treasury shares reacquired on April 15 and an additional 400 shares costing P15,000 that had been on hand since the beginning of the year. The selling price was P57 per share.

74

Sept.15

The semiannual cash dividend on ordinary stock was declared, amounting to P0.15 per share. Trisha also declared the yearly dividend on preference stock. Both are payable on October 15 to stockholders of record on October 1.

Net income for 2020 was P100,000. Based on the above and the result of your audit, determine the balances of the following as of December 31, 2020: 1. Preference stock a. 86,000 b. 80,000 c. 90,000 d. 84,000

6.

2.

Ordinary stock a. 63,320

3.

Additional paid in capital a. 1,175,680 b. 1,195,680

4.

Treasury stock a. 64,300

b. 92,200

c. 77,200

d. 75,000

5.

Total retained earnings a. 74,756

b. 183,250

c. 99,756

d. 174,756

b. 183,320

c. 23,320

c. 1,068,000

d. 58,000

d. 1,099,680

You were able to gather the following information in connection with your audit of Tintin Corporation: •

• •

On January 1, 2018, Tintin Corporation granted share options to officers and key employees for the purchase of 30,000, P10 par value, ordinary shares of the company at P25 per share. The options are exercisable within a 5-year period beginning January 1, 2020 by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. The fair value option pricing model determined total compensation expense to be P525,000. The share was selling at P35 at the time the options were granted. On April 1, 2019, 3,000 options were terminated when the employees resigned from the company. The market value of ordinary share was P35 per share on this date. On March 31, 2020, 18,000 option shares were exercised when the market value of ordinary share was P40 per share.

Based on the above and the result of your audit, determine the following: 1. Compensation expense in 2018 a. 525,000 c. 236,250 b. 262,500 d. 150,000 2. Net compensation expense in 2019 a. 262,500 b. 210,000

c. 120,000 d. 150,000

3. The exercise of the 18,000 options will result in a credit to Share premium - excess over par of a. 585,000 c. 270,000 b. 620,000 d. 450,000 4. Share premium - share options as of December 31, 2020 a. 0 c. 472,500 b. 90,000 d. 157,500

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7.

The stockholders’ equity section of the Joseph Inc. showed the following data on December 31, 2019: ordinary stock, P3 par, 450,000 shares authorized, 375,000 shares issued and outstanding, P1,125,000; share premium in excess of par, P10,575,000; share premium from stock options, P225,000; Retained earnings, P720,000. The stock options were granted to key executives and provided them the right to acquire 45,000 shares of ordinary stock at P35 per share. Each option has a fair value of P5 at the time the options were granted. The following transactions occurred during 2020:

1. 2.

8.

Feb. 1

Key executives exercised 6,750 options outstanding at December 31, 2019. The market price per share was P44 at this time.

Apr. 1

The company issued bonds of P3,000,000 at par, giving each P1,000 bond a detachable warrant enabling the holder to purchase two shares of stock at P40 each for a 1-year period. The bonds would sell at P996 per P1,000 bond without the warrant.

July 1

The company issued rights to stockholders (one right on each share, exercisable within a 30-day period) permitting holders to acquire one share at P40 with every 10 rights submitted. All but 9,000 rights were exercised on July 31, and the additional stock was issued.

Oct. 1

All warrants issued in connection with the bonds on April 1 were exercised.

Dec. 1

The market price per share dropped to P33 and options came due. Because the market price was below the option price, no remaining options were exercised.

Dec. 31

Net income for 2020 was P375,750.

Based on the above and the result of your audit, determine the following as of December 31, 2020: Ordinary stock a. 1,165,950 b. 1,250,775 c. 1,275,075 d. 1,273,050 Total share premium a. 12,629,175 b. 11,283,300

3.

Retained earnings a. 870,750

4.

Total stockholders’ equity a. 13,545,000 b. 15,000,000

c. 12,329,475

b. 1,095,750

d. 12,604,200

c. 1,287,000

c. 14,676,000

d. 981,225

d. 14,973,000

Shawn financial and operating circumstances warrant that Shawn Company undergo a quasireorganization at December 31, 2020. The following information may be relevant in accounting for the quasi-organization. Inventory with a fair value of P2,000,000 is currently recorded in the accounts at its cost of P2,500,000. Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000 net of accumulated depreciation.

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Individual stockholders contribute P4,000,000 to create share premium to facilitate the reorganization. No new shares of stock are issued, although control of a majority of the company’s outstanding stock passes to the company’s creditors. The par value of the ordinary share is reduced from P25 to P5 Immediately before those events, the stockholders’ equity section appears as follows: Ordinary share (P25 par value, 100,000 shares authorized and outstanding 2,500,000 Share premium 1,750,000 Retained earnings (deficit) (3,000,000) 1,250,000 After the quasi-organization, the Share premium should have a balance of a. 2,750,000 c. 3,750,000 b. 3,250,000 d. 1,750,000

9.

The Retained Earnings account of Trisha company follows: Date 01-01-2019 03-31-2019 12-31-2019 04-01-2020 06-30-2020 09-30-2020 12-31-2020 12-31-2020 12-31-2020

Item Balance Dividends declared Profit for the year Share Premium Gain on sale of treasury shares Dividends declared Profit for the year Appraisal increase of land Balance

Debit 200,000

300,000

Credit 485,000 324,000 150,000 100,000 451,000 300,000

1,310,000 1,810,000 1,810,000 The only other shareholder's equity account in the books of the company as of December 31, 2020 is ordinary share capital, which has a balance of P2,000,000. This is composed of 20,000 issued shares with par value of P100. All of these shares are outstanding as of December 31, 2020.

10.

1. The correct balance of Retained Earnings as of December 31, 2020 is A. 760,000 B. 860,000 C. 1,060,000

D. 1,310,000

2. Additional Paid in Capital is A. 100,000 B. 150,000

C. 250,000

D. 550,000

3. Total shareholder's Equity is A. 2,710,000 B. 2,760,000

C. 3,010,000

D.3,310,000

In connection with your audit of the balance sheet of the Guts Company on December 31, 2020, the Liability side of the Balance Sheet shows following items: Current Liabilities P571,000 Bonds Payable 600,000 Reserve for bond retirement 320,000 6% Cumulative Preference Stock, P100 par value (liquidation value, P115 per share); Authorized, 6,000 shares; issued, 4,000 shares; in treasury, 600 shares 400,000 Ordinary Stock, P100 par value, authorized, 20,000 shares; issued and outstanding, 8,000 shares 800,000 Premium on Preference Stock 150,000

77

Premium on Ordinary Stock Retained Earnings Treasury Preference Stock, at cost

165,000 458,600 84,000

REQUIRED: 1. Compute for the total stockholders’ equity as of December 31, 2020. 2. Compute for the book value per share of each class of stock as of December 31, 2020. 3. Assuming the preference stock is participating, compute for the book value per share of each class of stock as of December 31, 2020.

11.

The year-end audit of the records of Kaila Farms disclosed a shortage in cash amounting to P600,000. The treasurer had concealed the fraud by increasing inventories by P300,000, land by P100,000 and accounts receivable by P200,000. Faced with prosecution, the treasurer offered to surrender 6,000 Kaila Farms shares owned by him. The board of directors accepted the offer, with the agreement that the treasurer would pay any deficiency between the shortage and the book value of the shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any, of the book value over the shortage. As of December 31, 2020, there were 40,000 ordinary shares issued and outstanding with a par value of P100; Retained earnings as of January 1, 2020 was P1,600,000 and net income from 2020 operations was P1,400,000. REQUIRED: Considering the above information, answer the following: 1. What would be the book value per share for purposes of the agreement? a. P175 b. P206 c. P150 d. None of these 2. How much would the company pay the treasurer, if any? a. P450,000 b. P300,000 c. P636,000

d. None of these

3. Assuming further the company distributes the 6,000 shares as dividend to the remaining stockholders, what would be the balance of the Retained earnings as of December 31, 2020? a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these

12.

Presented below is the stockholder’s equity of the comparative balance sheet of Pembo co. on December 31, 2020 and 2019: Dec. 31, 2020 12% Preferred stock, P100 par Paid in capital in excess of par – preferred Common stock, P10 par* Paid in capital in excess of par – common Paid in capital from treasury stock Retained earnings Total stockholder’s equity *Par value after June 1, 2020 stock split

78

P 165,000 26,800 821,200 128,600 3,600 942,400 P 2,087,600

Dec. 31,2019 P 135,000 18,400 799,200 117,600 1,600 792,920 P 1,864,720

Pembo had 32,500 common stock outstanding at December 31,2018. The following stockholders’ equity transactions were recorded in 2019 and 2020: 2019 May 1 Sold 4,500 common shares for P24 par value P20 June 30 Sold 350 preferred shares for P124, par value P100 Aug. 1 Issued an 8% stock dividend on common stock. The market value of the stock was P30 per share. Sept. 1 Declared cash dividends of 12% on preferred stock and P3 on common stock Dec. 31 Net income for the year is P632,400 2020 Jan. 31 Sold 1,100 common shares for P30 May 1 Sold 300 preferred shares for P128 June 1 Issued a 2-for-1 split of common stock. The par value of common stock was reduced t oP10 per share Sept. 1 Purchased 500 common shares for P18 to be held as treasury stock. Oct. 1 Declared cash dividends of 12% on preferred stock and P4 per share on outstanding common stock Nov. 1 Sold 500 shares of treasury stock for P22 What is Pembo’s basic earnings per share for 2019? a. 8.25 b. 8.04

c. d.

16.07 16.49

What is Pembo’s net income for 2020? a. 475,960 b. 456,160

c. d.

497,760 495,760

What is Pembo’s basic earnings per share for 2020? a. 5.81 b. 6.06

c. d.

5.82 6.05

79

APPLIED AUDITING

FINANCIAL STATEMENTS Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 1.

PROF. U.C. VALLADOLID

Statement of financial position The following unadjusted sections of the Statement of Financial Position of the Loeb Inc. as at December 31, 2019 were presented to you. Cash Accounts receivable Merchandise inventory Deferred charges Current assets

P 85,000 282,400 92,000 8,600 P468,000

Trade accounts payable, net of P5,000 debit balance Interest payable Income tax payable Money claims of Union pending final decision Mortgage payable due in four annual installments Current liabilities

P125,000 3,000 12,000 45,000 100,000 P285,000

A review of the above indicate that the Cash account of P85,000 included a customer’s check returned by the bank marked NSF amounting to P1,250; and employee’s IOU of P2,000; and P10,000 deposited with the courts for a case under litigation. Accounts receivable totaling P282,400 is composed of: Customers, debit balances – P181,400; Advances to subsidiaries – P20,000; Advances to suppliers – P15,000; Receivables from Loeb officers – P18,000; Allowance for Bad Debts – (P8,000); and selling price of merchandise invoiced at 140% of cost but not yet delivered – P56,000 (The goods were not included in Merchandise Inventory). QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The correct total of Current Assets on December 31, 2019 is a. P410,150 c. P413,400 b. P415,150 d. P418,400 2. The correct total of Current Liabilities on December 31, 2019 is a. P170,000 c. P145,000 b. P160,000 d. P215,000

2.

Statement of financial position In connection with your audit of the Steven Co. for the year 2019, you were able to gather the following accounts are from the unadjusted trial balance of the company on December 31, 2019:

80

Cash Accounts receivable Allowance for bad debts Notes receivable Prepaid rent expense Trading securities Merchandise inventory Accounts payable Note payable Accrued expenses Bonds payable (due semi-annually in June and December at P30,000) Income tax payable SSS and HDMF premiums payable Withholding tax payable Mortgage payable, due July 31, 2021 Contingent liability

P170,000 525,000 4,000 180,000 10,000 150,000 450,000 242,500 100,000 22,000 300,000 30,000 12,000 9,000 200,000 80,000

Additional information: • Cash consists of: Cash in bank per bank statement (outstanding checks, P12,000) Petty cash, including unreplenished petty cash expense vouchers of P150) Customer’s advance deposit in check dated January 15, 2020

P167,000 500 2,500 P170,000

•

Accounts receivable includes P125,000 selling price of goods sent on consignment at 125% of cost and not included in the inventory.

•

Notes receivable include notes discounted of P80,000.

•

Accounts payable includes P40,000 cost of purchases in transit FOB destination but not included in the inventory. It also includes customer’s advance deposit in check dated January 15, 2020 of P2,500.

•

The Note Payable is a promissory note dated October 1, 2019, due March 31, 2020 with 18% interest p.a. This is in connection with a loan from a Chubby Bank. Accrued expenses exclude the interest payable on the note.

QUESTIONS: Based on the above and the result of your audit, determine the amounts to be presented in Steven’s statement of financial position as of December 31, 2019 for the following: 1. Cash a. P167,500 c. P155,500 b. P155,350 d. P157,850 2. Trade and other receivables a. P496,000 b. P500,000

c. P576,000 d. P498,500

3. Total current assets a. P1,363,850 b. P1,321,250

c. P1,361,350 d. P1,261,350

81

3.

4. Trade and other payables a. P243,000 b. P247,500

c. P277,500 d. P250,000

5. Total current liabilities a. P437,500 b. P440,000

c. P433,000 d. P377,500

Statement of financial position The following statement of financial position is submitted to you for inspection and review. Kimberlie Corporation Statement of Financial Position December 31, 2019 Assets Cash Accounts receivable Inventories Prepaid insurance Property, plant, and equipment Total assets Liabilities and Equity Miscellaneous liabilities Loan payable Accounts payable Share capital Paid in capital Total liabilities and equity

P 180,200 450,000 816,000 35,200 1,507,200 P2,988,600 P

14,400 304,800 301,000 536,000 1,832,400 P2,988,600

In the course of the review, you find the following data: (a)

The possibility of uncollectible accounts on accounts receivable has not been considered. It is estimated that uncollectible accounts will total P19,200.

(b)

The amount of P180,000 representing the cost of large-scale newspaper advertising campaign completed in 2019 has been added to the inventory because it is believed that this campaign will benefit sales of 2020. It is also found that inventories include merchandise of P65,000 received on December 31 and has not been recorded as a purchase.

(c)

The books show that property, plant and equipment have a cost of P2,227,200 with accumulated depreciation of P720,000. However, these balances include fully depreciated equipment of P340,000 that has been scrapped and is no longer on hand.

(d)

Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current advances of P23,600 made to company officials.

(e)

Loan payable represents a loan from the bank that is payable in regular quarterly installments of P25,000.

82

(f)

Income tax payable not shown is estimated at P73,000.

(g)

Deferred tax liability arising from temporary differences totals P178,200. This liability was not included in the statement of financial position.

(h)

Share capital consists of 6%, par P20, 25,000 preference shares and 36,000 ordinary shares, par value P1.

(i)

Share capital have been issued for a total consideration of P1,134,400; the amount received in excess of the par values of the shares has been reported as Paid in capital. Profit and dividends were recorded in Paid in capital.

QUESTIONS: Based on the above and the result of the audit, determine the adjusted amounts of the following: 1. Current assets a. P1,347,200 c. P1,217,200 b. P1,282,200 d. P1,462,200

4.

2. Noncurrent assets a. P1,530,800 b. P1,190,800

c. P1,507,200 d. P1,167,200

3. Total assets a. P2,878,000 b. P2,789,400

c. P2,473,000 d. P2,813,000

4. Current liabilities a. P512,000 b. P504,000

c. P577,000 d. P600,600

5. Noncurrent liabilities a. P383,000 b. P406,600

c. P204,800 d. P433,000

6. Total liabilities a. P983,600 b. P716,800

c. P895,000 d. P960,000

7. Equity a. P1,853,000 b. P1,918,000

c. P2,096,200 d. P2,368,400

Statement of comprehensive income The alphabetical list of items that may be relevant in the preparation of a statement of comprehensive income of Kimberlie Corporation is provided below: Actuarial gains on defined benefit pension plans recognized outside profit or loss Decrease in inventories of finished goods and work in progress Depreciation and amortization expense Employee benefits expense Exchange differences gain on translating foreign operations

83

P

1,333 107,900 17,000 43,000 10,667

Finance costs Gains on property revaluation Income tax expense Income tax relating to components of other comprehensive income Loss for the year from discontinued operations Other expenses Other income Raw material and consumables used Revenue Share of other comprehensive income of associates (Unrealized loss on available-for-sale financial assets) Share of profit of associates Unrealized gain on available-for-sale financial assets Unrealized loss on derivatives in an effective cash flow hedge Work performed by the entity and capitalized

18,000 3,367 32,000 9,334 30,500 5,500 11,300 92,000 355,000 700 30,100 26,667 4,000 15,000

QUESTIONS: Based on the above and the result of the audit, determine the following: 1. The profit for the year a. P65,500 c. P 96,000 b. P64,800 d. P281,300

5.

2. The other comprehensive income for the year a. P93,500 b. P32,700

c. P28,700 d. P28,000

3. Total comprehensive income for the year a. P93,500 b. P92,800

c. P94,200 d. P28,000

Statement of comprehensive income In your audit of Kristine Company’s statement of comprehensive income for the year ended December 31, 2019, you noted that company reported profit of P10,000,000. You raised questions about the following amounts that had been included in profit: Unrealized loss on decline in value of available for sale securities Loss on 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 Realized revaluation surplus

P 500,000 1,500,000 2,000,000 3,500,000 4,500,000 1,000,000

The loss from expropriation was unusual in occurrence in Kristine’s line of business. QUESTIONS: Based on the above and the result of the audit, answer the following: 1. Kristine Company’s 2019 statement of comprehensive income should report profit at a. P9,000,000 c. P7,000,000 b. P6,500,000 d. P8,500,000

84

2. Kristine Company’s 2019 statement of comprehensive income should total comprehensive income at a. P12,000,000 c. P5,000,000 b. P11,000,000 d. P4,000,000

6.

Income statement The bookkeeper for the Kristine Company prepared the following income statement and retained earnings statement for the year ended December 31, 2019: Kristine Company December 31, 2019 Expense and Profits Sales (net) Less: Selling expenses Net sales Add: Interest revenue Add: Gain on sale of equipment Gross sales revenue Less: Costs of operations Cost of goods sold Correction of overstatement in last year’s income due to error (net of P13,200 income tax credit) Dividend costs (P4 per share for 8,000 ordinary shares) Loss due to earthquake Taxable revenues Less: Income tax on income from continuing operations Net income Miscellaneous deductions Loss from operations of discontinued Segment X44 (net of P7,200 income tax credit) Administrative expenses Net revenues

P1,568,000 (156,800) 1,411,200 18,400 25,600 1,455,200 P960,800 30,800 32,000 33,600

16,800 134,400

(1,057,200) 398,000 ( 99,840) 298,160

( 151,200) P 146,960

Kristine Company Retained Revenue Statement For the Year Ended December 31, 2019 Beginning retained earnings Add: Gain on sale of Segment X44 (net of P10,800 income taxes) Recalculated retained earnings Add: Net revenues Less: Interest expense Ending: retained earnings

P474,400 25,200 499,600 146,960 646,560 ( 27,200) P619,360

The preceding account balances are correct but have been incorrectly classified in certain instances.

85

QUESTIONS: Based on the above and the result of the audit, answer the following: 1. The income from continuing operations for the year ended December 31, 2019 is a. P207,760 c. P299,200 b. P199,360 d. P226,560 2

The income (loss) from discontinued operations for the year ended December 31, 2019 is a. P 8,400 c. P25,200 b. (P16,800) d. P 0

3. The profit for the year ended December 31, 2019 is a. P234,960 c. P209,760 b. P307,600 d. P207,760 4. The balance of retained earnings as of December 31, 2019 should be a. P619,360 c. P650,160 b. P646,560 d. P709,360

7.

Statement of financial position and Income statement Kelly Company was organized on January 1, 2019. On the same date, 25,000, P100 par value, ordinary shares were issued in exchange for property, plant and equipment valued at P3,000,000 and cash of P1,000,000. The following data summarize activities for 2019: a) Profit for the year ended December 31, 2019 was P1,000,000. b) Raw materials on hand on December 31 were equal to 25% of raw materials purchased. c) Manufacturing costs were distributed as follows: Materials used Direct labor Factory overhead

50% 30% 20% (includes depreciation of building, P100,000)

d) Goods in process remaining in the factory on December 31 were equal to 1/3 of the goods finished and transferred to stock. e) Finished goods remaining in stock on December 31 were equal to 25% of the cost of goods sold. f)

Operating expenses were 30% of sales.

g) Cost of goods sold was 150% of the operating expenses total. h) Ninety percent of sales were collected during 2019. The balance was considered collectible. i)

Seventy five percent of the raw materials purchased were paid for. There were no expense accruals or prepayments at the end of the year.

86

QUESTIONS: Based on the above and the result of the audit, compute for the following: 1. Sales for the year ended December 31, 2019 a. P4,000,000 c. P2,000,000 b. P5,000,000 d. P3,000,000 2. Total manufacturing cost for the year ended December 31, 2019 a. P4,166,667 c. P 666,667 b. P3,000,000 d. P2,850,000 3. Cash as of December 31, 2019 a. P1,900,000 b. P1,150,000

c. P650,000 d. P500,000

4. Total current assets as of December 31, 2019 a. P4,000,000 b. P2,600,000

c. P2,575,000 d. P3,861,111

5. Total liabilities and equity as of December 31, 2019 a. P5,761,111 c. P5,500,000 b. P5,750,000 d. P5,475,000

8.

Statement of cash flows Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One statement that the entity is anxious to have prepared is a statement of cash flows. Financial statements of Kelly Corporation for 2019 and 2018 are provided below. Statements of Financial Position Cash Accounts receivable Merchandise inventory Property, plant and equipment (net of accumulated depreciation of P120,000 and P114,000 as of 12/31/2019 and 12/31/2018 respectively) Accounts payable Income taxes payable Bonds payable Share capital Retained earnings

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12/31/2019 P153,000 135,000 144,000

12/31/2018 P 72,000 81,000 180,000

108,000 P540,000

246,000 P579,000

P 66,000 132,000 135,000 81,000 126,000 P540,000

P 36,000 147,000 225,000 81,000 90,000 P579,000

Income Statement For the Year Ended December 31, 2019 Sales Cost of sales Gross profit Selling expenses Administrative expenses Income from operations Interest expense Profit before taxes Income taxes Profit

P3,150,000 2,682,000 468,000 P225,000 72,000

297,000 171,000 27,000 144,000 36,000 P 108,000

The following additional data were provided: 1. Dividends for the year 2019 were P72,000. 2. During the year, equipment was sold for P90,000. This equipment cost P132,000 originally and had a book value of P108,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales. 3. All depreciation expense is in the selling expense category. QUESTIONS: Based on the above and the result of your engagement, you are asked to provide the following information) for the year ended December 31, 2019, for Kelly Corporation: 1. The net cash provided by operating activities is a. P153,000 c. P108,000 b. P 90,000 d. P 75,000 2. The net cash provided (used) by investing activities is a. (P132,000) c. P 18,000 b. P 90,000 d. P(108,000) 3. Under the direct method, the cash received from customers is a. P3,204,000 c. P3,096,000 b. P3,150,000 d. P3,165,000 4. Under the direct method, the total taxes paid is a. P36,000 b. P21,000

c. P15,000 d. P51,000

5. The net cash provided (used) by financing activities is a. (P 90,000) c. P18,000 b. (P162,000) d. P72,000

9.

Statement of cash flows In connection with your audit of the IVAN Corporation for the year ended December 31, 2019, the following financial information were presented.

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IVAN Corporation Statements of Financial Position December 31, 2019 and 2018 2019

2018

P 45,000 75,000 30,000 285,000

P 15,000 37,500 22,500 285,000

105,000 15,000 P555,000

247,500 22,500 P630,000

Liabilities Accounts payable Income taxes payable Deferred taxes payable Total liabilities

P 75,000 30,000 45,000 150,000

P187,500 15,000 30,000 232,500

Equity Share capital Retained earnings Total equity Total liabilities and equity

97,500 307,500 405,000 P555,000

97,500 300,000 397,500 P630,000

Assets Cash and cash equivalents Accounts receivable Inventory Available-for-sale securities Property, plant and equipment (net of accumulated depreciation of P75,000 and P90,000 as of December 31, 2019 and 2018, respectively) Intangible asset, net Total assets

IVAN Corporation Income Statement For the year ended December 31, 2019 Sales Cost of sales Gross profit Administrative and selling expenses Interest expense Depreciation of property, plant and equipment Amortization of intangible asset Dividend income Profit before income taxes Income tax expense Profit

P450,000 (150,000) 300,000 (30,000) (30,000) (30,000) (7,500) 45,000 247,500 (60,000) P187,500

Additional information: •

The company pays salaries and other employee dues before the end of each month. All administration and selling expenses incurred were paid before December 31, 2019.

•

Dividend income comprised dividends received from available-for-sale securities. This was received before December 31, 2019. Dividends received were classified under investing activities in last year’s statement of cash flows.

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•

Equipment with a carrying amount P112,500 and cost of P157,500 was sold for P112,500.

•

The company declared and paid dividends of P180,000 to its shareholders during 2019.

QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cash collections from customers a. P450,000 c. P487,500 b. P412,500 d. P367,500 2. Cash paid to suppliers and employees a. P270,000 b. P330,000

c. P300,000 d. P450,000

3. Cash paid for income taxes a. P30,000 b. P75,000

c. P45,000 d. P90,000

4. Net cash provided by operating activities a. P82,500 b. P37,500

c. P52,500 d. P 0

5. Net cash used in investing and financing activities a. P22,500 c. P52,500 b. P67,500 d. P 0

10.

Statement of cash flows Financial statements for Ivan Company are given below: Ivan Company Statement of Financial Position January 1, 2019 Assets Cash Accounts receivable Buildings and equipment Acc. depreciation Patents

Liabilities and Equity P 240,000 Accounts payable P 114,000 216,000 900,000 (300,000) Share capital 690,000 108,000 Retained earnings 360,000 P1,164,000 P1,164,000

Ivan Company Statement of Cash Flows For the Year Ended December 31, 2019 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities:

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P300,000

Depreciation - buildings and equipment Gain on sale of equipment Amortization of patents Increase in accounts receivable Increase in accounts payable Net cash provided by operating activities

P 90,000 (36,000) 12,000 (96,000) 48,000

Cash flows from investing activities Sale of equipment Purchase of land Purchase of buildings and equipment Net cash used by investing activities

72,000 (150,000) (288,000)

Cash flows from financing activities Payment of cash dividend Sale of ordinary shares Net cash provided by financing activities Net increase in cash Cash, January 1, 2019 Cash, December 31, 2019

18,000 318,000

(366,000)

(90,000) 240,000 150,000 102,000 240,000 P342,000

Additional information: •

Accumulated depreciation on the equipment sold was P84,000.

•

All items that should be included in the cash flow statement were properly included.

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. When the equipment was sold, the Buildings and Equipment account received a credit of a. P72,000 c. P156,000 b. P84,000 d. P120,000 2. The carrying amount of the buildings and equipment at December 31, 2019 is a. P912,000 c. P762,000 b. P726,000 d. P876,000 3. The total assets at December 31, 2019 is a. P1,662,000 b. P1,512,000

c. P1,650,000 d. P1,578,000

4. The total equity at December 31, 2019 is a. P1,500,000 b. P1,350,000

c. P1,416,000 d. P1,488,000

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APPLIED AUDITING

FINANCIAL STATEMENTS AND REPORTING PROF. U.C. VALLADOLID

Problem 1.

Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One statement that the entity is anxious to have prepared is a statement of cash flows. Financial statements of Kelly Corporation for 2019 and 2018 are provided below. Statements of Financial Position Cash Accounts receivable Merchandise inventory Property, plant and equipment (net of accumulated depreciation of P120,000 and P114,000 as of 12/31/2019 and 12/31/2018 respectively) Accounts payable Income taxes payable Bonds payable Share capital Retained earnings

12/31/2019 P153,000 135,000 144,000

12/31/2018 P 72,000 81,000 180,000

108,000 P540,000

246,000 P579,000

P 66,000 132,000 135,000 81,000 126,000 P540,000

P 36,000 147,000 225,000 81,000 90,000 P579,000

Income Statement For the Year Ended December 31, 2019 Sales Cost of sales Gross profit Selling expenses Administrative expenses Income from operations Interest expense Profit before taxes Income taxes Profit

P225,000 72,000

P3,150,000 2,682,000 468,000 297,000 171,000 27,000 144,000 36,000 P 108,000

The following additional data were provided: 1. Dividends for the year 2019 were P72,000. 2. During the year, equipment was sold for P90,000. This equipment cost P132,000 originally and had a book value of P108,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales. 3. All depreciation expense is in the selling expense category.

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Based on the above and the result of your engagement, you are asked to provide the following information) for the year ended December 31, 2019, for Kelly Corporation: 1. The net cash provided by operating activities is 2. The net cash provided (used) by investing activities is 3. Under the direct method, the cash received from customers is 4. Under the direct method, the total taxes paid is 5. The net cash provided (used) by financing activities is

2.

Following is the stockholders’ equity section of Angel Corporation’s balance sheet at December 31, 2018: Ordinary stock, P10 par value; authorized 1,500,000 shares; issued and outstanding 900,000 shares Share Premium Retained earnings Total stockholders’ equity

P9,000,000 750,000 2,700,000 P12,450,000

Transactions during 2019 and other information relating to the stockholders’ equity accounts were as follows: •

On January 26, Angel reacquired 75,000 shares of its ordinary stock for P11 per share.

•

On April 4, Angel sold 45,000 shares of its treasury stock for P14 per share.

•

On June 1, Angel declared a cash dividend of P1 per share, payable on July 15, 2019 to stockholders of record on July 1, 2019.

•

On August 15, each stockholder was issued one stock right for each share held to purchase two additional shares of stock for P12 per share. The rights expire on October 31, 2019.

•

On September 30, 150,000 stock rights were exercised when the market value of the stock was P12.50 per share.

•

On November 2, Angel declared a two for one stock split-up and charged the par value of the stock from P10 to P5 per share. On November 20, shares were issued for the stock split.

•

On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It originally cost P600,000, was carried by the previous owner at a book value of P300,000, and was recently appraised at P390,000.

•

Net income for 2019 was P720,000.

QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2019: 1. Ordinary stock

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3.

2.

Share Premium

3.

Unapproriated retained earnings

4.

Total stockholders’ equity

The following statement of financial position is submitted to you for inspection and review. Kimberlie Corporation Statement of Financial Position December 31, 2019

Assets Cash Accounts receivable Inventories Prepaid insurance Property, plant, and equipment Total assets Liabilities and Equity Miscellaneous liabilities Loan payable Accounts payable Share capital Paid in capital Total liabilities and equity

P 180,200 450,000 816,000 35,200 1,507,200 P2,988,600 P

14,400 304,800 301,000 536,000 1,832,400 P2,988,600

In the course of the review, you find the following data: (a)

The possibility of uncollectible accounts on accounts receivable has not been considered. It is estimated that uncollectible accounts will total P19,200.

(b)

The amount of P180,000 representing the cost of large-scale news paper advertising campaign completed in 2019 has been added to the inventory because it is believe that this campaign will benefit sales of 2020. It is also found that inventories include merchandise of P65,000 received on December 31 and has not been recorded as a purchase.

(c)

The books show that property, plant and equipment have a cost of P2,227,200 with accumulated depreciation of P720,000. However, these balances include fully depreciated equipment of P340,000 that has been scrapped and is no longer on hand.

(d)

Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current advances of P23,600 made to company officials.

(e)

Loan payable represents a loan from the bank that is payable in regular quarterly installments of P25,000.

(f)

Income tax payable not shown is estimated at P73,000.

(g)

Deferred tax liability arising from temporary differences totals P178,200. This liability was not included in the statement of financial position.

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(h)

Share capital consists of 6%, par P20, 25,000 preference shares and 36,000 ordinary shares, par value P1.

(i)

Share capital have been issued for a total consideration of P1,134,400; the amount received in excess of the par values of the shares has been reported as Paid in capital. Profit and dividends were recorded in Paid in capital.

QUESTIONS: Based on the above and the result of the audit, determine the adjusted amounts of the following: 1. Current assets 2. Noncurrent assets 3. Total assets 4. Current liabilities 5. Noncurrent liabilities 6. Total liabilities 7. Equity

4.

The bookkeeper for the Kristine Company prepared the following income statement and retained earnings statement for the year ended December 31, 2019: Kristine Company December 31, 2019 Expense and Profits Sales (net ) Less: Selling expenses Net sales Add: Interest revenue Add: Gain on sale of equipment Gross sales revenue Less: Costs of operations Cost of goods sold Correction of overstatement in last year’s income due to error (net of P13,200 income tax credit) Dividend costs (P4 per share for 8,000 ordinary shares) Loss due to earthquake Taxable revenues Less: Income tax on income from continuing operations Net income Miscellaneous deductions Loss from operations of discontinued Segment X44 (net of P7,200 income tax credit) Administrative expenses Net revenues

95

P1,568,000 (156,800) 1,411,200 18,400 25,600 1,455,200 P960,800 30,800 32,000 33,600

16,800 134,400

(1,057,200) 398,000 ( 99,840) 298,160

( 151,200) P 146,960

Kristine Company Retained Revenue Statement For the Year Ended December 31, 2019 Beginning retained earnings Add: Gain on sale of Segment X44 (net of P10,800 income taxes)

P474,400 25,200 499,600 146,960 646,560 ( 27,200) P619,360

Recalculated retained earnings Add: Net revenues Less: Interest expense Ending: retained earnings

The preceding account balances are correct but have been incorrectly classified in certain instances. Based on the above and the result of the audit, answer the following: 1. The income from continuing operations for the year ended December 31, 2019 is 2

The income (loss) from discontinued operations for the year ended December 31, 2019 is

3. The profit for the year ended December 31, 2019 is 4. The balance of retained earnings as of December 31, 2019 should be

5.

You were engaged by Jerome Company to audit its financial statements for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end of 2018 and 2019. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: 12/31/2019 12/31/2018 Salaries payable P780,000 P873,600 Interest receivable 213,000 259,200 Prepaid insurance 307,800 384,000 Advances from customers (Collections from 561,000 470,400 customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year) Machinery (Capital expenditures had been 522,000 564,000 recorded as repairs but should have been charged to Machinery; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%) QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the net effect of the errors on the 2018 profit? 2. What is the net effect of the errors on the 2019 profit? 3. What is the net effect of the errors on the company’s working capital at December 31, 2019? 4. What is the net effect of the errors on the balance of the company’s retained earnings at December 31, 2019?

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6.

An entity reported the following data for the current year: Net sales Cost of goods sold Selling expenses Administrative expenses Interest expense Gain from expropriation of land Income tax Income from discontinued operations Unrealized gain on equity investment at FVOCI Unrealized loss on futures contract designated as a cash flow hedge Increase in projected benefit obligation due to actuarial assumptions Foreign translation adjustment – debit Revaluation surplus

9,500,000 4,000,000 1,000,000 1,200,000 700,000 500,000 800,000 600,000 900,000 400,000 300,000 100,000 2,500,000

1. What amount should be reported as income from continuing operations? 2. What net amount should be recognized in other comprehensive income for the year? 3. What net amount in OCI should be presented as “may not be recycled to profit or loss?

97

98

APPLIED AUDITING

FINANCIAL STATEMENTS AND REPORTING Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 2.

PROF. U.C. VALLADOLID

Kelly Corporation has recently decided to go public and has hired you as an independent CPA. One statement that the entity is anxious to have prepared is a statement of cash flows. Financial statements of Kelly Corporation for 2019 and 2018 are provided below. Statements of Financial Position Cash Accounts receivable Merchandise inventory Property, plant and equipment (net of accumulated depreciation of P120,000 and P114,000 as of 12/31/2019 and 12/31/2018 respectively) Accounts payable Income taxes payable Bonds payable Share capital Retained earnings

12/31/2019 P153,000 135,000 144,000

12/31/2018 P 72,000 81,000 180,000

108,000 P540,000

246,000 P579,000

P 66,000 132,000 135,000 81,000 126,000 P540,000

P 36,000 147,000 225,000 81,000 90,000 P579,000

Income Statement For the Year Ended December 31, 2019 Sales Cost of sales Gross profit Selling expenses Administrative expenses Income from operations Interest expense Profit before taxes Income taxes Profit

P225,000 72,000

P3,150,000 2,682,000 468,000 297,000 171,000 27,000 144,000 36,000 P 108,000

The following additional data were provided: 1. Dividends for the year 2019 were P72,000. 2. During the year, equipment was sold for P90,000. This equipment cost P132,000 originally and had a book value of P108,000 at the time of sale. The loss on sale was incorrectly charged to cost of sales. 3. All depreciation expense is in the selling expense category.

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Based on the above and the result of your engagement, you are asked to provide the following information) for the year ended December 31, 2019, for Kelly Corporation: 1. The net cash provided by operating activities is a. P153,000 c. P108,000 b. P 90,000 d. P 75,000 2. The net cash provided (used) by investing activities is a. (P132,000) c. P 18,000 b. P 90,000 d. P (108,000) 3. Under the direct method, the cash received from customers is a. P3,204,000 c. P3,096,000 b. P3,150,000 d. P3,165,000 4. Under the direct method, the total taxes paid is a. P36,000 b. P21,000

c. P15,000 d. P51,000

5. The net cash provided (used) by financing activities is a. (P 90,000) c. P18,000 b. (P162,000) d. P72,000

2.

Following is the stockholders’ equity section of Angel Corporation’s balance sheet at December 31, 2018: Ordinary stock, P10 par value; authorized 1,500,000 shares; issued and outstanding 900,000 shares Share Premium Retained earnings Total stockholders’ equity

P9,000,000 750,000 2,700,000 P12,450,000

Transactions during 2019 and other information relating to the stockholders’ equity accounts were as follows: •

On January 26, Angel reacquired 75,000 shares of its ordinary stock for P11 per share.

•

On April 4, Angel sold 45,000 shares of its treasury stock for P14 per share.

•

On June 1, Angel declared a cash dividend of P1 per share, payable on July 15, 2019 to stockholders of record on July 1, 2019.

•

On August 15, each stockholder was issued one stock right for each share held to purchase two additional shares of stock for P12 per share. The rights expire on October 31, 2019.

•

On September 30, 150,000 stock rights were exercised when the market value of the stock was P12.50 per share.

•

On November 2, Angel declared a two for one stock split-up and charged the par value of the stock from P10 to P5 per share. On November 20, shares were issued for the stock split.

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•

On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It originally cost P600,000, was carried by the previous owner at a book value of P300,000, and was recently appraised at P390,000.

•

Net income for 2019 was P720,000.

QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2019: 1. Ordinary stock a. P12,600,000 b. P10,800,000 c. P10,050,000 d. P12,300,000 2. Share Premium a. P1,485,000 b. P1,575,000 c. P3,825,000

d. P1,275,000

3. Unapproriated retained earnings a. P2,550,000 b. P2,422,500 c. P2,220,000

d. P2,190,000

4. Total stockholders’ equity a. P16,425,000 b. P14,295,000 c. P16,095,000 d. P16,065,000

3.

The following statement of financial position is submitted to you for inspection and review. Kimberlie Corporation Statement of Financial Position December 31, 2019

Assets Cash Accounts receivable Inventories Prepaid insurance Property, plant, and equipment Total assets Liabilities and Equity Miscellaneous liabilities Loan payable Accounts payable Share capital Paid in capital Total liabilities and equity

P 180,200 450,000 816,000 35,200 1,507,200 P2,988,600 P

14,400 304,800 301,000 536,000 1,832,400 P2,988,600

In the course of the review, you find the following data: (a)

The possibility of uncollectible accounts on accounts receivable has not been considered. It is estimated that uncollectible accounts will total P19,200.

(b)

The amount of P180,000 representing the cost of large-scale news paper advertising campaign completed in 2019 has been added to the inventory because it is believe that this campaign will benefit sales of 2020. It is also found that inventories include merchandise of P65,000 received on December 31 and has not been recorded as a purchase.

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(c)

The books show that property, plant and equipment have a cost of P2,227,200 with accumulated depreciation of P720,000. However, these balances include fully depreciated equipment of P340,000 that has been scrapped and is no longer on hand.

(d)

Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current advances of P23,600 made to company officials.

(e)

Loan payable represents a loan from the bank that is payable in regular quarterly installments of P25,000.

(f)

Income tax payable not shown is estimated at P73,000.

(g)

Deferred tax liability arising from temporary differences totals P178,200. This liability was not included in the statement of financial position.

(h)

Share capital consists of 6%, par P20, 25,000 preference shares and 36,000 ordinary shares, par value P1.

(i)

Share capital have been issued for a total consideration of P1,134,400; the amount received in excess of the par values of the shares has been reported as Paid in capital. Profit and dividends were recorded in Paid in capital.

QUESTIONS: Based on the above and the result of the audit, determine the adjusted amounts of the following: 1. Current assets a. P1,347,200 c. P1,217,200 b. P1,282,200 d. P1,462,200 2. Noncurrent assets a. P1,530,800 b. P1,190,800

c. P1,507,200 d. P1,167,200

3. Total assets a. P2,878,000 b. P2,789,400

c. P2,473,000 d. P2,813,000

4. Current liabilities a. P512,000 b. P504,000

c. P577,000 d. P600,600

5. Noncurrent liabilities a. P383,000 b. P406,600

c. P204,800 d. P433,000

6. Total liabilities a. P983,600 b. P716,800

c. P895,000 d. P960,000

7. Equity a. P1,853,000 b. P1,918,000

c. P2,096,200 d. P2,368,400

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4.

The bookkeeper for the Kristine Company prepared the following income statement and retained earnings statement for the year ended December 31, 2019: Kristine Company December 31, 2019 Expense and Profits Sales (net ) Less: Selling expenses Net sales Add: Interest revenue Add: Gain on sale of equipment Gross sales revenue Less: Costs of operations Cost of goods sold Correction of overstatement in last year’s income due to error (net of P13,200 income tax credit) Dividend costs (P4 per share for 8,000 ordinary shares) Loss due to earthquake Taxable revenues Less: Income tax on income from continuing operations Net income Miscellaneous deductions Loss from operations of discontinued Segment X44 (net of P7,200 income tax credit) Administrative expenses Net revenues

P1,568,000 (156,800) 1,411,200 18,400 25,600 1,455,200 P960,800 30,800 32,000 33,600

16,800 134,400

(1,057,200) 398,000 ( 99,840) 298,160

( 151,200) P 146,960

Kristine Company Retained Revenue Statement For the Year Ended December 31, 2019 Beginning retained earnings Add: Gain on sale of Segment X44 (net of P10,800 income taxes) Recalculated retained earnings Add: Net revenues Less: Interest expense Ending: retained earnings

P474,400 25,200 499,600 146,960 646,560 ( 27,200) P619,360

The preceding account balances are correct but have been incorrectly classified in certain instances. Based on the above and the result of the audit, answer the following: 1. The income from continuing operations for the year ended December 31, 2019 is a. P207,760 c. P299,200 b. P199,360 d. P226,560 2

The income (loss) from discontinued operations for the year ended December 31, 2019 is a. P 8,400 c. P25,200 b. (P16,800) d. P 0

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3. The profit for the year ended December 31, 2019 is a. P234,960 c. P209,760 b. P307,600 d. P207,760 4. The balance of retained earnings as of December 31, 2019 should be a. P619,360 c. P650,160 b. P646,560 d. P709,360

5.

You were engaged by Jerome Company to audit its financial statements for the first time. In examining the books, you found out that certain adjustments had been overlooked at the end of 2018 and 2019. You also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized below: 12/31/2019 12/31/2018 Salaries payable P780,000 P873,600 Interest receivable 213,000 259,200 Prepaid insurance 307,800 384,000 Advances from customers (Collections from 561,000 470,400 customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year) Machinery (Capital expenditures had been 522,000 564,000 recorded as repairs but should have been charged to Machinery; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%) QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the net effect of the errors on the 2018 profit? a. Understated by P775,800 c. Understated by P1,236,600 b. Overstated by P165,000 d. Overstated by P80,400 2. What is the net effect of the errors on the 2019 profit? a. Understated by P376,500 c. Understated by P320,100 b. Overstated by P324,300 d. Overstated by P380,700 3. What is the net effect of the errors on the company’s working capital at December 31, 2019? a. Understated by P301,800 c. Understated by P265,800 b. Overstated by P119,400 d. Overstated by P820,200 4. What is the net effect of the errors on the balance of the company’s retained earnings at December 31, 2019? a. Understated by P155,100 c. Understated by P265,800 b. Overstated by P930,900 d. Understated by P855,900

6.

An entity reported the following data for the current year: Net sales Cost of goods sold

9,500,000 4,000,000

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Selling expenses Administrative expenses Interest expense Gain from expropriation of land Income tax Income from discontinued operations Unrealized gain on equity investment at FVOCI Unrealized loss on futures contract designated as a cash flow hedge Increase in projected benefit obligation due to actuarial assumptions Foreign translation adjustment – debit Revaluation surplus

1,000,000 1,200,000 700,000 500,000 800,000 600,000 900,000 400,000 300,000 100,000 2,500,000

1. What amount should be reported as income from continuing operations? a. 3,100,000 b. 2,300,000 c. 1,800,000 d. 2,900,000 2. What net amount should be recognized in other comprehensive income for the year? a. 2,600,000 b. 3,100,000 c. 3,400,000 d. 800,000 3. What net amount in OCI should be presented as “may not be recycled to profit or loss? a. 3,400,000 b. 2,700,000 c. 3,700,000 d. 3,100,000

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