Midterm-quiz-2.pdf

ACCOUNTING 502

6.

Analytical estimation of depreciation by the auditor is an important audit because it does which of the following? A. It yields statistical precision in sampling B. It signals which additions will be vouched C. It gives the auditor an indication of the impaired balances existing in financial statements D. It is a good starting point for determining additional procedures

7.

When few property and equipment transactions occur during the year, the continuing auditor usually obtains an understanding of internal control and performs A. Test of controls B. Analytical procedures to verify current year additions to property and equipment C. A thorough examination of the balances at the beginning of the year D. Extensive tests of current year property and equipment transactions

8.

Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset addition? A. Inspecting documents and physically examining assets B. Recomputing calculations and obtaining written management representations C. Observing operating activities and comparing balances to prior period balances D. Confirming ownership and corroborating transactions through inquiries of client personnel

9.

If an auditor tours a production facility, which of the misstatements or questionable practices is most likely to be detected by the audit procedures specified? A. Depreciation expense on fully depreciated machinery has been recognized B. Overhead has been overapplied C. Necessary facility maintenance has not been performed D. Insurance coverage on the facility has lapsed

QUIZ 2 – MIDTERM SET A (for exclusive use by the School of Accountancy, Saint Louis University, 2600 Baguio City, Philippines)

GENERAL INSTRUCTIONS: You are allowed to have three (3) 10-column or 12-column worksheets ONLY. Write on the upper leftmost portion of each worksheet “Page 1”, “Page 2”, and “Page 3” for pagination. Erasures, superimpositions, or any form of alterations on the pagination will INVALIDATE your quiz. Use blue or black ink only.

Multiple Choice INSTRUCTIONS: Write your answers on the DATE COLUMN of Page 1 ONLY. Use the numbering on the left most portion of the column. Answers for multiple choice written on either Page 2 or Page 3 will not be considered. Erasures, superimpositions, or any form of alterations will invalidate your answers. Solutions for the multiple-choice problems are not required. (2 points each) 1.

2.

Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud because A. The amounts recorded on the balance sheet for most companies are immaterial B. The inherent risk is usually low C. The depreciated values are always smaller than cost D. Internal control is inherently effective regarding this amount Which one of the following procedures would provide the best evidence about the original cost of a piece of equipment? A. Fixed asset schedule B. Purchase invoice C. Receiving report D. Inquiry of the purchasing agent

3.

Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions of valuation and A. Presentation and disclosure B. Rights and obligations C. Completeness D. Existence and occurrence

4.

The auditor may conclude that depreciation charges are insufficient by noting: A. Insured values greatly in excess of book values B. Large numbers of fully depreciated assets C. Continuous trade-in of relatively new assets D. Excessive recurring losses on assets retired

5.

Which of the following procedures would least likely lead the auditor to detect unrecorded fixed asset disposals? A. Examine insurance policies B. Review repairs and maintenance expense C. Review property tax files D. Scan invoices for fixed asset additions

10. In testing for unrecorded retirements of equipment, an auditor is most likely to A. Select items of equipment from the accounting records and then locate them during the plant tour B. Compare depreciation journal entries with similar prior year entries in search of fully depreciated equipment C. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger D. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense 11. The auditor is least likely to learn of retirements of equipment through which of the following? A. Review of the purchase return and allowance account B. Review of depreciation C. Analysis of the debits to the accumulated depreciation account D. Review of insurance policy

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ACCOUNTING 502 – QUIZ # 2 (MIDTERM) April 1, 2019 12. The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit steps primarily tests which of the following assertions for the equipment account? A. Existence and occurrence B. Rights assertion C. Presentation assertion D. Valuation assertion 13. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the auditor to gain reasonable assurance that additions are not understated? A. Accounts payable B. Depreciation expense C. Gain on disposal of equipment D. Repair and maintenance expense 14. In violation of company policy, Coats Company erroneously capitalized the cost of painting its warehouse. An auditor would most likely detect this when A. Discussing capitalization policies with Coats Controller B. Examining maintenance expense accounts C. Observing that the warehouse had been painted D. Examining construction work orders that support items capitalized during the year 15. The most significant audit step in substantiating additions to the equipment account balance is A. Comparison to prior year’s acquisitions B. Review of transactions near the end of the reporting period for proper period cutoff C. Calculation of ratio of depreciation expense to gross office equipment cost D. Examination of vendor’s invoices and receiving reports for current year’s acquisitions Use the following information to answer 16 – 18: LGR Corporation purchased three (3) pieces of equipment during 2017. A summary is presented below: ❖

Equipment AA1001 was purchased on January 3 for P4,000,000. The freight charges related to the delivery of the said piece of equipment total to P50,000. The cost incurred for installing the item was P10,000, and an additional cost of P15,000 for testing the equipment was also paid. Proceeds from the initial testing of the equipment was P2,300. The estimated selling price of Equipment AA1001 at the end of its 10-year useful life is P40,000, and the estimated cost to dismantle is P30,000 (prevailing rate is 8%; present value of dismantling cost is P13,900). The expected total units that can be produced by the said equipment during its life is 18,000 units, and the total number of units produced for 2017 is 2,800. The entity used SYD in depreciating Equipment AA1001.

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Equipment CZ4225 was purchased on April 30 for P1,800,000. The entity paid P300,000 as down payment; the remaining shall be paid in three (3) equal annual instalments starting on April 30, 2018. The entity issued a 9% interest-bearing note for the balance. The said equipment can be sold for P10,000 at the end of its 5-year useful life. The entity used straight-line method in depreciating Equipment CZ4225.

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Equipment ZG2184 was purchased on account for P2,400,000 on December 30. The term is 2/15, n/30; however, due to tight cash, the entity was not able to pay the balance on time for the 2% discount. The estimated useful life of the equipment is 20 years. The said equipment has no residual value.

16. How much is the total cost of the three (3) pieces of equipment? A. 8,224,700 B. 8,238,600 C. 8,254,700 D. 8,257,000 17. How much is the depreciation expense for the period? A. 643,327 B. 972,303 C. 974,412 D. 983,018 18. How much expense related to the transactions stated above shall be recognized for 2017? A. 1,064,412 B. 1,065,524 C. 1,109,412 D. 1,110,524 Use the following information to answer 19 – 21: Your audit client issued a 5-year, 10%, promissory note to purchase an equipment. The note with a face value of P5,000,000, was issued on January 1, 2017, however, the cash price of the equipment is P4,639,400. The effective yield rate for this amount is 12%. The estimated useful life of the equipment is 8 years with no residual value. The entity prepared the following entries for 2017 and 2018: Jan. 1, 2017

Equipment Note Payable

Dec. 31, 2017

Interest Expense Cash

5,000,000 5,000,000 500,000 500,000

Depreciation Expense 625,000 Accum. Depreciation 625,000 Dec. 31, 2018

Interest Expense Cash

500,000 500,000

Depreciation Expense 625,000 Accum. Depreciation 625,000

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ACCOUNTING 502 – QUIZ # 2 (MIDTERM) April 1, 2019

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19. What is the correct carrying value of the equipment as of December 31, 2018? A. 3,479,550 B. 3,750,000 C. 4,059,475 D. 5,000,000

24. What is the carrying value of the note as of December 31, 2016? A. 3,852,360 B. 3,870,180 C. 3,976,120 D. 4,000,000

20. What is the correct carrying value of the notes payable as of December 31, 2018? A. 4,639,400 B. 4,696,128 C. 4,759,663 D. 5,000,000

25. The net income for 2016 is: A. 104,820 overstated B. 129,820 overstated C. 170,180 understated D. 25,000 understated

21. If the books are already closed on December 31, 2018, the retained earnings account is: A. 30,113 overstated B. 30,113 understated C. 500,000 overstated D. 63,395 overstated Use the following information to answer 22 – 25: You were engaged to audit the financial statements of Justice Company as of and for the period ended December 31, 2016. Based from your examination, you were able to discover a transaction which took place on April 1, 2016 involving a sale of one of the buildings of the entity for a note. The entry made by your client as of the date of sale is: Notes receivable Accum. depreciation - building Building Gain on disposal of building

Use the following information to answer 26 – 30: Welders Corporation engaged you for the first time to audit their financial statements as of and for the period ended December 31, 2017. In auditing their PPE, you were able to obtain the balance of their Building account. One of the items under the building account has a cost of P50,000,000, and a related accumulated depreciation of P7,500,000. Based from your investigation, you were able to gather the following information: ❖

Welders decided to construct a new building for their operations and started the construction on January 2, 2014. The entity finished the construction on December 31, 2014 and occupied the building on January 1, 2015.

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Before the construction, the entity obtained a loan on January 1, 2014 specifically to finance the construction of the building. The face value of the loan is P20,000,000, with an interest rate of 10%. The loan is due on December 31, 2018.

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On December 31, 2013, the entity had outstanding loans for general purposes. The loans are as follows: A P30,000,000 loan from PI Bank; 11% interest rate; maturity date is December 31, 2017 P15,000,000 loan from PN Bank; 8.5% interest rate; maturity date is December 31, 2020

❖

The schedule of payments made by the entity during the construction are as follows:

4,000,000 1,300,000 5,000,000 300,000

Further examination revealed the following information: ❖ The building was acquired by Justice on January 2, 2003, for a total cost of P5,000,000, with an estimated useful life is 50 years. ❖ The face value of the note is P4,000,000, with 10% interest rate and maturity date on March 31, 2021. The effective rate on the date of disposal of building is 11%. Interest is collected every March 31. ❖ An entry was prepared by your client on December 31, 2016 debiting Interest Receivable and crediting Interest Income, both for P300,000.

January 2 March 31 June 30 July 31 December 31

Note: round-off present value factors to four decimal places (i.e. x.xxxx) 22. What is the correct gain on disposal of building? A. 152,360 B. 177,360 C. 252,360 D. 325,000 23. What is the correct interest income for 2016? A. 300,000 B. 317,820 C. 400,000 D. 423,760

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9,000,000 8,700,000 4,300,000 24,000,000 4,000,000

The building has no residual value and the company uses straight-line method of depreciating assets.

Note: Round-off any rates to two decimal places (xx.xx%) 26. How much is the capitalizable borrowing cost? A. 2,000,000 B. 2,780,548 C. 2,814,548 D. 4,575,000

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ACCOUNTING 502 – QUIZ # 2 (MIDTERM) April 1, 2019 27. What is the correct cost of the building? A. 52,000,000 B. 52,780,548 C. 52,814,548 D. 54,575,000

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1. 2.

Compute for the carrying value of Office Furniture at the end 2016 Compute for the total depreciation for 2016 relating to the problem as a whole

28. What is the correct depreciation expense for 2017? A. 2,600,000 B. 2,639,027 C. 2,640,727 D. 2,728,750

Use the following information to answer 3 – 4: On January 1, 2015, Selfie Corporation acquired two assets within the same class of PPE. Information on these assets is as follows: Cost Useful Life Machine A 300,000 5 years Machine B 180,000 3 years

29. What is the correct carrying value of the building as of December 31, 2017? A. 42,082,918 B. 42,155,697 C. 44,863,465 D. 45,342,118

The machines are expected to generate benefits evenly over their useful lives. This class of PPE is measured using the revaluation model. At December 31, 2015, information about the assets is as follows:

30. Provided that the nominal accounts have already been closed by the end of 2017, the December 31, 2017 retained earnings is A. 2,363,465 overstated B. 2,363,465 understated C. 2,645,442 overstated D. 2,645,442 understated

Problem Solving INSTRUCTIONS: Write a SUMMARY OF ANSWERS on the long problems on the first few rows of Page 1 ONLY. Erasures on the Summary of Answers will INVALIDATE ALL OF YOUR ANSWERS on the long problems. In case you do not have any answer on any item, write “NO ANSWER”. Leaving any item on the Summary of Answers blank will INVALIDATE ALL OF YOUR ANSWERS on the long problems. Answers in the Summary of Answers should have a corresponding solution in good accounting form to be given credit. Also, any answers in the Summary of Answers without any corresponding solutions, or with a solution that does not match with the said answer, will not be given credit. Double-rule and encircle your final answers on your solutions. Answers that are not doubleruled or encircled, or both, will be considered as no solution. Erasures are allowed, as long as they are done correctly and neatly. (5 points each) Use the following information to answer 1 – 2: On March 1, 2016, the Company exchanged a machine for office furniture that had a fair value of P125,000 at the date of exchange. Additionally, the Company received P18,000 cash. The fair value of the machinery at the date of exchange was P135,000. The machinery has an original cost of P430,000 and book value of 317,250 with useful life of 10 years, purchased last Jan. 1, 2012. The office furniture originally cost P360,000 and to the date of exchange, had been depreciated by P241,000 in the previous owner’s books. The Company estimated the office furniture’s useful life and residual value at 8 years and P5,400, respectively.

Machine A Machine B

Fair Value 252,000 114,000

Useful Life 4 years 2 years

On July 1, 2016, machine B was sold for P87,000 cash. On the same day, Selfie acquired machine C for P240,000 cash. Machine C has an expected useful life of four (4) years. At December 31, 2016, information on the machines is as follows: Fair Value Useful Life Machine A 168,000 3 years Machine C 205,500 1.5 years 3.

The gain (loss) that should be recognized on the sale of machine B on July 1, 2016 is

4.

The amount of revaluation loss to be reported on Selfie’s income statement for 2016 is

Use the following information to answer 5 – 8: Gems Reid Corporation, a company organized late 2011, engaged you to audit their financial statements as of and for the period ended December 31, 2017. Your audit client obtained an 11%, P20,000,000 loan from The Main Bank on October 1, 2012. The loan is for general purposes and will mature on September 30, 2018. Another loan, an 8.5% P30,000,000 loan from The Other Bank, was obtained on January 1, 2014, for normal operations and other financing requirements. The loan from The Other Bank is due on December 31, 2017. By the end of 2016, the entity decided to construct another building (Building B) for expansion of their operations. Gems Reid obtained a 10% P15,000,000 loan from The Good Bank specifically for the construction. The loan is due on December 31, 2019. The entity started the construction of their new building on January 2, 2017, and it was completed on December 30, 2017. Gems Reid occupied the said building on January 3, 2018.

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ACCOUNTING 502 – QUIZ # 2 (MIDTERM) April 1, 2019 The schedule of cash payments for the construction is as follows: Date Amount Jan. 2 7,600,000 Feb. 1 4,900,000 Apr. 30 10,000,000 Jul. 1 8,400,000 Aug. 1 6,900,000 Nov. 30 3,500,000 Dec. 31 700,000 The entity capitalized Building B at P42,000,000, equal to the total amount paid for the construction. The estimated useful life of the building is 25 years, and it has no residual value.

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capitalized the equipment at P5,150,000 (purchase price plus installation costs), and ignored the implications of the dismantling costs. Gems Reid used the straight-line method for Equipment B. ❖

Machine A was purchased on July 1, 2017 for cash, P850,000. The entity incurred additional P15,000 for testing the machine, which was expensed by the entity. The estimated useful life of this machine is 5 years, and the residual value is P65,000. The entity used SYD in depreciating Machine A.

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Your client properly observed the application of their depreciation policies.

5.

What is the correct carrying value of the PPE on December 31, 2016?

6.

How much is the correct depreciation expense for 2017?

7.

How much total expense related to all transactions stated above shall be recognized in 2017?

8.

Provided that the books are already closed by the end of 2017, the retained earnings as of December 31, 2017 is understated (overstated) by?

Other transactions related to their other PPE accounts are as follows: ❖

The entity bought a land and building on January 2, 2012 for a lump-sum amount, P80,000,000. The fair market value of the land on that date is P35,000,000, however, the fair value of the building on that date cannot be determined. The entity incurred additional P1,500,000 to remodel and renovate the building. The estimated useful life of the building is 30 years, with no residual value, and the building is depreciated using the straight-line method. The entity capitalized the fair market value of the land to the Land account, and the remaining amount is capitalized to Building A account. Gems Reid treated the remodeling and renovation costs as expense.

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On March 31, 2012, the entity purchased an equipment (Equipment A) on account, for P7,000,000. If the entity pays within 90 days, a 5% discount will be extended by the supplier. However, due to tight cash, the entity was not able to avail of the discount and paid after three (3) months. Installation costs total to P100,000, and the cost for testing the equipment total to P85,000. Proceeds from the initial run of the equipment is P25,000. The entity capitalized the equipment at P7,185,000, which includes the purchase price, the installation costs, and the cost of testing. The proceeds from the initial testing was recorded as income. The residual value of the machine, after its estimated useful life of 10 years, is P110,000. The entity used straight-line method for Equipment A.

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A P5,000,000 equipment (Equipment B) was purchased on January 2, 2015. The entity paid P1,000,000 cash and issued a promissory note for the remaining balance, to be paid in four (4) equal annual instalments starting December 31, 2015, and every December 31 thereafter. The interest rate on the note is 12%. Installation costs for the equipment total to P150,000. The estimated useful life of the equipment is 8 years, after which, the entity is expected to incur P50,000 for dismantling the said equipment. The present value of the dismantling cost is P20,200 (computed using the prevailing rate of 12%). The equipment has no residual value. The entity

~~~End of Quiz 2~~~

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