Problem 1: Auditing Problems: Investing Cycle

Auditing Problems: Investing Cycle

Problem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery account). Company policy on depreciation which you accept, provides an annual rate of 10% without salvage value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposition. Question 1 The adjusted balance of the Machinery account at December 31, 2006 is: a P 290,000 b. P 370,000 c. P 260,000 d. P 300,000 2

The correct depreciation expense for the machinery for the year ended December 31, 2006 is: a P 37,000 b. P 29,000 c. P 30,000 d. P 26,000

Problem 2 Two independent companies, KAYA and MUYAN, are in the home building business. Each owns a tract of land for development, but each company would prefer to build on the other’s land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the report and the companies records, the following information was obtained: KAYA Co.’s Land MUYAN Co.’s Land Cost (same as book value) P 800,000 P 500,000 Market value, per appraisal 1,000,000 900,000 The exchange of land was made and based on the difference in appraised values, MUYAN Company paid P100,000 cash to KAYA Company. Question 1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the exchange in the amount of: a P 20,000 b. P 60,000 c. P 100,000 d. P 200,000 2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the exchange in the amount of: a P0 b. P 100,000 c. P 300,000 d. P 400,000 3. After the exchange, KAYA Company record its newly acquired land at: a P 700,000 b. P 720,000 c. P 800,000 d. P 900,000 4. After the exchange, MUYAN Company record its newly acquired land at: a

P 1,000,000

b. P

900,000

c. P 600,000

d. P 500,000

Auditing Problems: Investing Cycle

Problem 3 In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002, the corporation purchased a building site for its proposed research and development laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in service on January 1, 2004. The estimated useful life of the building for depreciation purposes was 20 years; the straight-line method of depreciation was to be employed and there was no estimated salvage value. Management estimates that about 50% of the projects of the research and development group will result in long-term benefits to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2004 appears below. No. of Salaries and Other expenses Projects employees benefits (excluding dep’n.) Completed projects with long-term benefits 60 3,600,000 2,000,000 Abandoned projects that benefit the current year 40 2,600,000 600,000 Projects in process – results indeterminate 20 1,600,000 480,000 Upon the recommendation of the research and development group, Bing-Bong Corporation acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was acquired on March 31, 2003, and has an economic life of 10 years. Questions 1 Carrying value of the patent as of December 31, 2004 is: a. P 3,600,000 b. P 3,200,000 c. P 2,880,000

d. P 2,640,000

2

Carrying value of the building as of December 31, 2004 is: a. P 5,320,000 b. P 10,640,000 c. P 10,080,000

d. P 0

3

Carrying value of the land as of December 31, 2004 is: a. P 1,200,000 b. P 2,400,000 c. P 2,160,000

d. P 0

Research and development expense for 2004 is: a. P 5,280,000 b. P 10,880,000 c. P 11,440,000

d. P 11,760,000

4

Problem 4 On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on June 30, 2004. Expenditures on the project were as follows: January 3, 2003 March 31, 2003 June 30, 2003 October 31, 2003 January 31, 2004

P 500,000 600,000 800,000 600,000 300,000

Auditing Problems: Investing Cycle

March 31, 2004 May 31, 2004

500,000 600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10% interest rate. The loan was outstanding all of 2003 and 2004. The company’s other interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31. Questions 1 The interest capitalized at the end of December 31, 2003 is: a P 113,100 b. P 145,000 c. P 150,000 2

d. P 200,000

The interest capitalized at the end of December 31, 2004 is: a P 145,132 b. P 159,632 c. P 290,263

d. P 319,263

3

The total cost of the Building at December 31, 2004 is: a P 3,535,132 b. P 4,190,131 c. P 4,480,263

d. P 4,535,263

4

The total interest expense at the end of December 31, 2003 is: b P 780,000 b. P 635,000 c. P 630,000

d. P 560,000

The total interest expense at the end of December 31, 2004 is: a P 460,737 b. P 489,737 c. P 620,368

d. P 634,868

5

Problem 5 The following information pertains to Marlisa Company’s delivery trucks: Date 1/1/04 3/15/05 7/1/05 7/10/05 9/1/05 10/1/05 4/1/06 5/2/06 6/30/06 12/1/06

Particulars Trucks 1, 2, 3, & 4 Replacement of truck 3 tires Truck 5 Reconditioning of truck 4, which was damaged in a collision Insurance recovery on truck 4 accident Sale of truck 2 Truck 6 Repainting of truck 4 Truck 7 Cash received on lease of truck 7

Debit 3,200,000 25,000 800,000 35,000 1,000,000 27,000 720,000

Credit

33,000 600,000 150,000 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT Date 12/31/04 12/31/05 12/31/06

Particulars Depreciation expense Depreciation expense Depreciation expense

Debit

Credit 300,000 300,000 300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the selling party allowed a P50,000 trade in value for the old truck.

Auditing Problems: Investing Cycle

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000 being given for the new truck. c. The depreciation rate is 20% by unit basis. d. Unit cost of Trucks 1 to 4 is at P800,000 each. Questions 1. What is the loss on trade-in of truck 3? a. P 50,000 b. P 430,000

c. P 510,000

d. P 560,000

2. The correct cost of truck 5 is a. P 560,000 b. P 610,000

c. P 800,000

d. P 850,000

3. The book value of truck 5 at December 31, 2006 is a. P 850,000 b. P 595,000 c. P 560,000

d. P 510,000

4. What is the loss in trade-in of Truck 1? a. P 150,000 b. P 250,000

d. P 410,000

c. P 290,000

5. The correct cost of truck 6 is a. P 590,000 b. P 800,000 c. P 850,000 6. The carrying value of Truck 6 at December 31, 2006 is a. P 501,500 b. P 680,000 c. P 850,000 7. The gain (loss) on sale of truck 2 is a P 80,000 b. P 331,600

d. P 1,000,000 d. P 1,100,000

c. P 495,000

d. P 496,200

8. The book value of truck 4 at December 31, 2006 is a. P 320,000 b. P 331,600 c. P 495,000

d. P 496,200

9. The 2006 depreciation expense is understated by a. P 92,000 b. P 252,000 c. P 292,000

d. P 372,000

10. The cost of repainting truck 4 should have been charged to: a. Claims receivable - insurance company b. Retained earnings c. Accumulated depreciation d. Repairs and maintenance 11. Which of the following controls would most likely allow for a reduction in the scope of the auditor’s tests of depreciation expense? a. Review and approval of the periodic property depreciation entry by a supervisor who does not actively participate in its preparation. b. Comparison of property account balances for the current year with the current year budget and prior-year actual balance. c. Review of the miscellaneous revenue account for salvage credits and scrap sales of partially depreciated property. d. Authorization of payment of vendors’ invoices by a designated employee who is independent of the property receiving functions.

Auditing Problems: Investing Cycle

Problem 6 You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year ended December 31, 2006. You gathered the following information pertaining to the company’s Equipment and Accumulated Depreciation accounts. EQUIPMENT 1.1.06 Balance P 446,000 9.1.06 No. 6 sold 6.1.06 No. 12 36,000 12.31.06 Balance 3 Dismantling of No. 6 1,000 P 483,000

P

9,000 474,000

______ P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT 12.31.06 Balance P 271,400 1.1.06 Balance P 224,000 ______ 12.31.06 2006 Dep’n 47,400 P 271,400 P 271,400 The following are the details of the entries above: 1

The company depreciates equipment at 10% per year. The oldest equipment owned is seven years old as of December 31, 2006.

2

The following adjusted balances appeared on your last year’s working papers:

3

Equipment P 446,000 Accumulated depreciation 224,000 Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on September 1, 2006, for P9,000.

4

Included in charges to the Repairs Expense account was an invoice covering installation of Machine No. 12 in the amount of P2,500.

5

It is the company’s practice to take a full year’s depreciation in the year of acquisition and none in the year of disposition.

Questions 1. The gain/(loss) on sale of Machine 6 is: a P 1,000 b. P 500

c. P (1,000)

d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is: a P 446,000 b. P 452,000 c. P 454,500 d. P 475,500 3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31, 2006 is: a P 45,200 b. P 45,450 c. P 46,525 d. P 53,525 4. The entry to correct the sale of Machine 6 is: a. Loss on sale of equipment 1,000

Auditing Problems: Investing Cycle

Accumulated depreciation Equipment

21,000

22,000

b. Accumulated depreciation 22,500 Equipment 22,000 Gain on sale 500 c. Accumulated depreciation 21,500 loss on sale of equipment 500 Equipment 22,000 d. Accumulated depreciation 23,000 Equipment 22,000 Gain on sale of equipment 1,000 5. The Depreciation Expense at December 31, 2006 is: a. Overstated by P6,125 c. Understated by P1,950 b. Understated by P6,125 d. Overstated by P1,950 Problem 7 On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of Crame Corporation. Plant assets consists of: Land Leasehold improvements Equipment Total per WBS

P 100,000 190,000 450,000 P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal annual installments of P100,000. The first interest and principal payment is due on October 1, 2004. No interest has been accrued as of December 31, 2003. In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which was charged to operating expenses. You ascertained that due to obsolescence, computer equipment with an original cost of P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a permanent impairment in value and, as a result, should have a carrying value of only P40,000 at the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For 2003, the company recorded depreciation of P16,000 for the said equipment. At present, Crame Corporation’s office and warehouse are located in a rented building. The rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install walls and fixtures. The leasehold improvements have a useful life of five years. No amortization has been booked as of December 31, 2003. Questions 1. The adjusted cost of land amounted to: a P 528,000 b. P 510,000

c. P 500,000

d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to: a P 190,000 b. P 183,000 c. P 180,500 d. P 180,000

Auditing Problems: Investing Cycle

3

Audit adjustments will increase depreciation/amortization expense by: a P 38,000 b. P 24,000 c. P 14,000 d. P 13,500

4. Loss due to impairment in value amounted to: a P 30,000 b. P 28,000 c. P 24,000

d. P 20,000

Problem 8 You are engaged to examine the financial statement of the Rabago Manufacturing Corporation for the year ended December 31, 2004. The following schedules for property, plant, and equipment and the related accumulated depreciation accounts have been prepared by your client. The opening balances agree with your prior year’s audit working papers. Rabago Manufacturing Corporation Analysis of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts Year Ended December 31, 2004 COST

Final 12/31/03 Land P 450,000 Buildings 2,400,000 Machinery/Equip 2,770,000 P 5,620,000

ACCUMULATED DEPRECIATION Final 12/31/03 Buildings P 1,200,000 Machinery/Equip 546,500 P 1,746,200

Additions P 100,000 350,000 808,000 P1,258,000

Retirements P

Additions

Retirements

P 103,000 313,600 P 416,600

520,000 P 520,000

Per Books 12/31/04 P 550,000 2,750,000 3,526,000 P 6,826,000 Per Books 12/31/04 P 1,303,000 860,100 P 2,163,100

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: Building – 25 years, all other items 10 years. b. The company entered into a 10-year 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 30-day 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 P60,000 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, 2004. The expenditure was charged to land.

Auditing Problems: Investing Cycle

e. The P520,000 equipment under retirement column represent cash received on October 1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper recorded depreciation expense of P72,000 on this machine in 2004. f.

Mr. Rabago, 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, 2004. Since no money was involved, the bookkeeper did not make any entry for the above transaction.

Questions 1. The balance of rent expense as of December 31, 2004 is: a P0 b. P 25,000 c. P 75,000

d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is: a. P 0 b. P 25,000 c. P 75,000

d. P 100,000

3. The life of the building wing is a 25 years b. 11 years

d. 13 years

c. 12 years

4. The carrying value of the building as of December 31, 2004 is a P 1,447,000 b. P 1,816,250 c. P 1,820,250

d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004 is: a P 450,000 b. P 545,000 c. P 650,000 d. P 750,000 6. The loss on the disposal of the machinery sold for P520,000 is a P0 b. P 30,000 c. P 56,000

d. P 152,000

Problem 9 Siacor Inc. acquired 30% of Lozano Co.’s voting stock for P200,000 on January 2, 2007. Siacor’s 30% interest in Lozano gave Siacor the ability to exercise significant influence over Lozano’s operating and financial policies. During 2007, Lozano earned P80,000 and paid dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June 30, 2008, and P200,000 for the year ended December 31, 2008. On July 1, 2008, Siacor sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on October 1, 2008. 1. Before income taxes, what amount should Siacor include in its 2007 income statements as a result of investment? a. P15,000 b. P24,000 c. P50,000 d. P80,000 2. In Siacor’s December 31, 2007 balance sheet, what should be the carrying amount of this investment? a. P200,000 b. P209,000 c. P224,000 d. P230,000 3. In its 2008 income statement, what amount should Siacor report as gain from the sale of half of its investment? a. P24,500 b. P30,500 c. P35,000 d. P45,500

Auditing Problems: Investing Cycle

Problem 10 In connection with your audit of the financial statement of the William Company for the year 2007, the following investment in stock and dividend income accounts were presented to you: Investment in Stock Debit Credit June 18, 2006 10,000 shares common par value P50, Samson Company 390,000 April 30, 2007 5,000 shares Samson Company received as stock dividend 250,000 May 20, 2007 Sold 5,000 shares @ P25 125,000 Dec. 10, 2007 Sold 2,000 shares @ P60 120,000 April 30, 2007 Nov. 30, 2007

Dividend Income Stock dividend Samson Company common

250,000 50,000

The following information was obtained during your examination: 1.

The balance in the investment in stock account at December 31, 2006 per your last year‘s working papers, was P390,000.

2. From independent sources, you determine the following dividend information: Type of Dividend Stock Cash Cash

Date Declared March 15, 2007 Nov. 1, 2007 Dec. 1, 2007

Date of Record April 1, 2007 Nov. 15, 2007 Dec. 15, 2007

Date of Payment April 30, 2007 Nov. 28, 2007 Jan. 2, 2008

Rate 50% P5/share 20%

3. Closing market quotation as at December 31, 2007: Bid Asked Samson Company common 13¾ 16½ Questions: Based on the above and the result of your audit, answer the following: 1. How much is the gain (loss) on the May 20, 2007 sale? a. P (70,000) b. P (5,000) c. P 5,000

d. P 0

2. How much is the gain on the December 10, 2007 sale? a P 68,000 b. P 48,000 c. P 42,000

d. P 0

3. How much is the total dividend income for the year 2007? a. P 400,000 b. P 300,000 c. P 150,000

d. P

50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007? a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000

Auditing Problems: Investing Cycle

5. How much is the Allowance for Unrealized loss as of December 31, 2007? a. P 98,000 b. P 35,000 c. P 7,000 d. P 0

Problem 11 Macky Corporation’s accounting records showed the following investment at January 1, 2007: Common stock Johny Corp (1,000 shares) P 10,000 Sony Corp (5,000 shares) 100,000 Real estate: Parking lot (leased to Ruel Co.) 300,000 Other: Trademark (at cost, less accumulated amortization 25,000 Total investment P435,000 Macky owns 1% of Johny and 30% of Sony. Maky’s directors constitute a majority of Sony’s directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the trademark items. Royalties are payable semiannually on March 1 (for sales in July though December of the prior year), and on September 1 for the sales in January through June of the same year). During the year ended December 31, 2007, Macky received cash dividends of P1,000 from Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000 respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties from Nappy: March 1 September 1 2006 P3,000 P5,000 2007 4,000 7,000 Nappy estimated that sales of the trademark items would total to P20,000 for the last half of 2007. Questions 1

In Macky’s 2007 income statement, how much should be reported for royalty revenue? a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000

2

In Macky’s 2007 income statement, how much should be reported for rental revenue? a. P 43,000 b. P 48,000 c. P 53,000 d. P 53,800

3. In Macky’s 2007 income statement, how much should be reported as the total investment income? a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000

Auditing Problems: Investing Cycle

Problem 12 The INVESTMENT account, as of December 31, 2007, appearing in the records JOY CORPORATION is as follows: Date Particular January 1 Balance January 31 Sold Ventanilla Stock March 31 Bought Don Dave Common June 30 Dividend on Suson Common July 31 Sold Suson Common August 31 Sold Jasmin bonds September 30 Interest on Sucuahi Mortgage

Debit 188,300 12,125 10,000

Credit 21,364 8,750 22,083 500

The audit working papers of the preceding year show that the account balances as of January 1, 2007, consisted of the following: Ventanilla Company – Common 1,000 shares, purchased in June 1997 at P20 per share, P20,000. 2,000 shares, purchased in August 1999 at P16 per share, P32,000. 1,500 shares, purchased in May 2002 at P22 per share, P33,000 Don Dave Company – Common 2,000 shares. Purchased in January 2003 at P33 per share, P66,000 Suson Company – Common 100 shares purchased in August 2003 at P73 per share, P7,300 Jasmin Company 5% bonds 2 bonds, P10,000 each purchased in July 2001 at par, P20,000 (Interest dates February 1 and August 1). Sucuahi Company chattel mortgage on machinery 5, P10,000 mortgage taken in September 2004 in settlement of a receivable, P10,000 Your examination discloses the following information: 2

In January 2007, 1,000 shares of the Ventanilla company common stock purchased in May 2002 were sold for P21,364 net.

3

In March 2007, 500 shares of Don Dave common stock were purchased at P24 per share plus brokerage, for P12,125.

4

In June 2007, the Suson Company paid a 100% stock dividend on common.

Auditing Problems: Investing Cycle

5

In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100 shares of Suson common stock, for which the president gave his check for P8,750 and a letter in which he agreed to pay the balance upon demand of the treasurer of JOY CORPORATION.

6

On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued interest.

7

In September 2007, JOY CORPORATION received one year interest on the P10,000 chattel mortgage of Sucuahi.

Question 1 The adjusted balance of Gain or Loss of Sale/Redemption on Investment at December 31, 2007 is: a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,714 2

The adjusted balance of Investment at December 31, 2007 is: a. P 157,728 b. P 155,411 c. P 154,775

3

The Investment at December 31, 2007 is: a. Overstated by P 2,953 c. Overstated by P5,036 b. Overstated by P 2,317 d. Overstated by P3,056

d. P 152,692

4. Investment in Ventanilla Company common stock at year-end is: a. P 65,000 b. P 63,000 c. P 63,636

d. P 52,000

5. Investment in Don Dave Company common stock at year-end is: a. P 78,125 b. P 66,000 c. P 61,625

d. P 49,500

6. Investment in Suson Company common stock at year-end is: a. P 7,300 b. P 3,650 c. P 2,500

d. P 1,450