Finals-answer-key (1).docx

St. Peter’s College Acctg 22 Auditing Problem F 5:30pm – 8:30pm Final Exam Name: ________________________ Multiple Choice. Problem 1: Yellow Bells, Inc. estimates its bad debt losses by aging its accounts receivable. The aging schedule of accounts receivable at December 31, 2019, is presented below: (Aud prob 2013 pg. 140) Age of Accounts Amount 0 – 30 days 843,200 31 – 60 days 461,000 61 – 90 days 192,400 91 – 120 days 76,650 Over 120 days 39,400 Yellow Bells, Inc.’s uncollectible accounts experience for the past 5 years are summarized in the following schedule: A/R Balance 0-30 31-60 61-90 91-120 Over 120 Year 2018 2017 2016 2015 2014

Dec. 31 1,312,500 999,999 465,000 816,000 1,243,667

Days 0.3% 0.5% 0.2% 0.4% 0.9%

Days 1.8% 1.6% 1.5% 1.7% 2.0%

Days 12% 11% 9% 10.2% 9.7%

Days 38% 41% 50% 47% 33%

Days 65% 70% 69% 81% 95%

The balance of allowance for bad debts account at December 31, 2019, (before adjustment) is 84,500. 1. What is the average bad debt expense rate for “91-120 days” accounts? a. 76% b. 8.6% c. 10.38% d. 41.80% 2. What is the average bad debt expense rate for “31-60 days” accounts? a. 10.38% b. 41.80% c. 0.46% d. 1.72% 3. The net realizable value of company’s accounts receivable on December 31, 2019, should be a. P1,518,887 b. 1,612,650 c. 1,528,150 d. 1,603,358 4. What entry should be made to adjust the allowance for bad debts on December 31, 2019? a. Bad debt expense 178,263 Allowance for bad debts 178,263 b. Bad debt expense 93,763 Allowance for bad debts 93,763 c. Bad debt expense 9,263 Allowance for bad debts 9,263 d. Allowance for bad debts 9,263 Bad debt expense 9,263 5. In evaluating the adequacy of the allowance for bad debts, an auditor most likely reviews the entity’s aging of receivables to support management’s financial statement assertion of a. Existence b. Valuation and allocation c. Completeness d. Right and obligations

Problem 2: The following accounts were taken from the adjusted trial balance of Golden Three Company at December 31, 2019: Land 25,000,000 Building 36,000,000 A/D – Building 16,400,000 Equipment 24,000,000 A/D – Equipment 8,000,000 The company provides depreciation based on straight line method and the following useful lives: building, 20 years; equipment, 10 years. Salvage values are ignored and depreciation is rounded to the nearest full month. No fixed asset was acquired nor disposed of during the year 2019. Depreciation has already been provided for the current year. In the course of your examination, you were able to gather the following information: a. The land account is composed of the following: Land for use in selling and administrative activities Land on which an apartment being leased out to others under operating leases was completed on June 30, 2017 Land intended for future factory site Land held as present factory site Total

Cost 8,000,000

Fair value at (12/31/2019) 9,000,000

6,000,000 4,000,000 7,000,000_ 25,000,000

7,500,000 4,500,000 8,000,000

b. The building balance is composed of the following: Bldg held for selling and admin activities Apartment building being leased out to others under operating leases Factory Building Total

Cost 12,000,000

A/D 8,000,000

Fair value 6,000,000

8,000,000 16,000,000 36,000,000

400,000 8,000,000 16,400,000

8,500,000 10,000,000

c. Included in the balance of the Equipment account is a special equipment costing 800,000 and with recorded accumulated depreciation of 320,000 as at December 31, 2019. This unit of equipment had been depreciated until December 31, 2019 although it was retired by the company from active use on September 30, 2019 at which time a negotiation for its sale had been entered into. The sale was considered then as highly probable although no selling price had been contracted yet with the willing buyers on that date. On December 31, 2019, the expected selling price of this equipment based on negotiation with the potential buyer was 520,000. Expected selling cost was 50,000. The company is committed to the plan of selling this equipment, which had already been replaced by a unit with higher capacity. d. The company shall use the cost model to account for its investment property. 6. Land to be classified under “Property, Plant and Equipment” is a. 25,000,000 b. 21,000,000 c. 19,000,000 7. Building to be classified as “Property, Plant and Equipment” (at gross cost) a. 12,000,000 b. 24,000,000 c. 28,000,000 8. The depreciation expense of Investment property is a. 0 b. 200,000 c. 400,000 9. The correct balance of Equipment at gross cost is a. 15,520,000 b. 16,000,000 c. 23,200,000 10. The correct Accumulated Depreciation – Equipment is a. 7,660,000 b. 7,680,000 c. 7,980,000

d. 15,000,000 d. 36,000,000 d. 460,000 d. 24,000,000 d. 8,000,000

Problem 3: On January 2, 2017, Plum Company purchased as a long term investment a debt instrument with a five-year term for its fair value of 1,386,275. The instrument has principal amount of P1,500,000 and carries a fixed interest of 8% annually. The effective interest is determined to be 10%. The company’s management has the positive intent and ability to hold the debt instrument until maturity. During 2019, the issuer of the instrument is in financial difficulties and it becomes probable that the issuer will be put into administration by a receiver. The fair value of the instrument is estimated to be 750,000 at the end of 2012, calculated by discounting the expected future cash flows at 10%. No cash flows are received during 2020. At the end of 2020, the issuer is released from administration and Plum receives a letter from the receiver stating that the issuer will be able to meet its remaining obligations, including interest and repayment of principal. (Aud prob 2013, pg 317) 11. What is the book value of the held-to-maturity investment at the end of 2018? a. 1,347,157 b. 1,460,882 c. 1,500,000 12. What amount of impairment loss should be recognized in 2019? a. 697,932 b. 750,000 c. 636,275 13. How much interest income should be recognized in 2020? a. 24,793 b. 0 c. 75,000 14. What amount of impairment loss reversal should be recognized in 2020? a. 697,932 b. 647,725 c. 750,000 15. How much discount amortization should be recognized in 2021? a. 27,725 b. 0 c. 120,000

d. 1,425,393 d. 675,393 d. 120,000 d. 0 d. 75,000

Problem 4: Your company has been engaged to examine the financial statements of Gloria Company for the years ended December 31, 2019 and December 31, 2018. You have been assigned to review the liabilities and shareholders equity balances. You have learned that on January 1, 2017, Gloria Company issued a five year, 8% bonds 5,000,000 bonds for 5,500,000. Each 1,000 bond is convertible into 8 shares of P100 par ordinary share of Gloria Company, at the option of the bondholder. Interest on the bonds is payable annually on December 31. Without the conversion feature, the bonds would have sold to yield 10% to the holders. (Round the present value factors to four decimal places) 16. The issue price that was attributable to the debt is a. 5,420,000 b. 5,399,350 c. 5,000,000 d. 4,620,820 17. What was the correct carrying value of the bonds on December 31, 2017? a. 4,682,902 b. 4,744,984 c. 5,000,000 d. 5,467,402 18. What is the interest expense on these bonds for the year ending December 31, 2018? a. 400,000 b. 437,392 c. 468,290 d. 500,000 19. 2,000,000 of the bonds were converted into ordinary shares on January 1, 2019. What amount should have been credited to share premium, upon conversion? a. 652,149 b. 520,000 c. 400,000 d. 300,477 20. Disregard the information given in item 5. Assume, instead, that on January 1, 2019, 2,000,000 of the bonds were retired @ 109. The bonds without the conversion feature would have sold @105 on this date. What amount of gain or (loss) should be recognized on the retirement of the bonds? a. 40,000 b. 160,000 c. (59,523) d. (199,523) Problem 5: The Nepal Company is authorized to issue 600,000 shares of P10 par value ordinary share capital. Nepal’s accounting year ends on December 31. The following transactions occurred in 2019, the company’s first year of operations. (Aud prob 2013, pg 618) a. Issued 20,000 shares at P20 per share; received cash. b. Issued 2,500 shares to attorneys for services in securing the corporate charter and for preliminary legal costs of organizing the corporation. The value of the services was P85,000 c. Issued 300 shares, valued objectively at P15,000, to the employees instead of paying them cash wages. d. Issued 325,000 shares in exchange for a building valued at P3,000,000 and land valued at P4,000,000. (The building was originally acquired by the investor for P2,500,000 and has P1,000,000 of accumulated depreciation; the land was originally acquired for P1,500,000.)

21. What is the ordinary share capital balance on December 31, 2019? a. 3,453,000 b. 3,478,000 c. 3,490,000 d. 4,278,000 22. The amount of share premium to be reported on Nepal’s statement of financial position at December 31, 2019 is a. 3,962,000 b. 4,047,000 c. 3,022,000 d. 4,022,000 23. The amount of organization expense to be charged against Nepal’s income for 2012 is a. 85,000 b. 0 c. 25,000 d. 60,000 24. Recalculation of dividends, share issuances and share repurchases made by the treasury department is a test of a. Cutoff b. occurrence c. ownership d. valuation 25. Footing the shares outstanding in the share register and comparing the total to the shares outstanding in the general ledger addresses the audit objective of a. Classification b. completeness c. ownership d. valuation Problem 6: The following information was provided by the bookkeeper of COW, INC.:  Sales for the month of June totalled 286,000 units.  The following purchases were made in June: Date Quantity Unit Cost June 4 50,000 P13.00 8 62,500 12.50 11 75,000 12.00 24 70,000 12.40  There were 108,500 units on hand on June 1 with a total cost of P1,450,000. Cow, Inc. uses a periodic FIFO costing system. The company’s gross income for June was P2,058,750. 26. How many units were on hand on June 30? a. 80,000 b. 177,500 c. 28,500 d. 149,000 27. What is the FIFO cost of the company’s inventory on June 30? a. P1,025,000 b. P1,016,230 c. P988,000 d. P1,069,124 28. What is the total cost of goods sold in June? a. P3,632,200 b. 3,617,900 c. 3,580,126 d. 3,661,250 29. The 286,000 units sold in June had a unit selling price of a. P20 b. P13 c. P12.70 d. P7.20 30. An essential procedural control to ensure the accuracy of the recorded inventory quantities is a. Performing gross profit test b. Testing inventory extensions c. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy. d. Establishing a cutoff for goods received and shipped (Aud prob pg 202) Problem 7: In connection with your audit of the financial statements of Onor Company for the year ended December 31, 2018, you gathered the following information. 1. The company maintains its current account with Tsunami Bank. The bank statement on December 31, 2018 showed a balance of 638,340. Your audit of the company’s account with Tsunami Bank disclosed the following:  A check of 22,500 received from a customer whose account is current had been deposited and the returned by the bank on December 28, 2018. No entry was made for the return of this check. The customer replaced the check on January 15, 2019.  A check for 5,720 was cleared by the bank as 7,520. The bank made correction on January 2, 2019.  A check for 3,500 representing payment of an employee advance was received and deposited on December 27, 2018, but was not recorded until January 3, 2019.

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Post-dated checks totalling 67,300 were included in the deposits in transit. These represent collections of current accounts receivable from customers. The checks were actually deposited on January 5, 2019.  Various debit memos for drafts purchased for payment of importation of equipment totalling 230,000 were not yet recorded. These purchases were previously set up as accounts payable. Said equipment arrived in December 2018.  Interest earned on the bank balance for the 4th quarter of 2018 amounting to 1,950 was not recorded.  Bank service charge totalling 1,260 were not recorded.  Deposit in transit and outstanding checks at December 31, 2018 totaled 136,250 and 276,380, respectively. 2. Various expenses from the company’s imprest petty cash fund dated December 2018 totaled 16,250, while those dated January 2019 amounted to 5,903. Another disbursement from the fund dated December 2018 was a cash advance to an employee amounting to3,500. A replenishment of the petty cash fund was made on January 8, 2019. 3. The company’s trial balance on December 31, 2018 includes the following accounts: Cash in bank – Tsunami bank 748,320 Cash in bank – Earthquake Bank (restricted account for plant expansion, expected to be disbursed in 2019) 700,000 Petty cash fund 30,000 Time deposit, placed December 20, 2018 and due March 20, 2019 1,000,000 Money market placement – Prudential Bank 4,000,000 31. What is the adjusted petty cash fund balance on December 31, 2018? a. 4,347 b. 10,250 c. 30,000 d. 24,097 32. The petty cash shortage on December 31, 2018 is a. 0 b. 5,903 c. 3,500 d. 4,347 33. What is the adjusted Cash in bank – Tsunami Bank balance on December 31, 2018? a. 500,010 b. 748,320 c. 432,710 d. 429,110 34. The entry to adjust the Cash in bank – Tsunami Bank account should include a debit to a. Accounts receivable for 89,800 c. Accounts payable for 228,200 b. Accounts receivable for 86,300 d. Interest expense for 1,950 35. The December 31, 2012 statement of financial position should show Cash and Cash equivalents at a. 6,142,960 b. 5,439,360 c. 4,442,960 d. 5,442,960 Problem 8: Robi Corp. reported profit for the years 2019 and 2018 at P700,000 and P550,000, 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 29,000 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 not recorded until the following year, and also was not included in the ending inventory. 60,000 36. The adjusted profit for 2019 was a. 677,000 b. 700,000 c. 710,000 d. 737,000 37. What is the effect of the foregoing errors on total assets at December 31, 2019? a. 30,000 overstated b. 36,000 overstated c. 45,000 overstated d. 66,000 overstated 38. What is the effect of the foregoing errors on retained earnings at December 31, 2018? a. 22,000 overstated b. 38,000 understated c. 67,000 overstated d. 82,000 overstated

39. Which of the following is a list of activities o be undertaken by the auditor to gather audit evidence? a. Audit documentation b. Audit plan c. Audit program d. Audit strategy 40. A working paper that gives the components of a line item to be presented on the face of financial statements is called a. Working trial balance b. Supporting schedule c. Lead schedule d. Draft of financial statements 41. Which of the following pairs of accounts would an auditor most likely analyze on the same working paper? a. Notes receivable and accounts payable b. Notes receivable and interest payable c. Notes receivable and interest income d. Interest income and interest expense 42. The following factors are considered in the selection of audit procedures to be performed in an engagement, except a. The composition of the audit team b. Audit objectives c. Level of audit risk d. Type of audit evidence available 43. Which of the following cycles does not affect cash in bank? a. Financing cycle c. Revenue & collection cycle b. Inventory and warehousing cycle d. Investing & disbursement cycle 44. Which document evidences that goods are received by the common carrier for shipment to the customer? a. Shipping report b. Receiving report c. Bill of lading d. Sales order 45. An essential procedural control to ensure the accuracy of the recorded inventory quantities is a. Performing gross profit test b. Testing inventory extensions c. Calculating unit costs and valuing obsolete or damaged inventory items in accordance with inventory policy. d. Establishing a cutoff for goods received and shipped (Aud prob pg 202)

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