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Auditing Problems Reviewer Solution

Problem 1
#21
Gross cost of the patents
(Purchase price)

1,000,000

#22
Cost of patent
1,000,000
Accumulated amortization for
2 years (1,000,000 / 10 x 2)
(200,000)
Carrying amount, 12/31/2011
800,000
#23
Amortization expense, 2012
(1,000,000 / 10)

100,000

#24
Carrying amount, 12/31/2012
(800,000 100,000)
700,000
Recoverable amount
(140,000 x 3.7908)
(530,712)
Impairment loss, 2012
169,288
#25
Recoverable amount
530,712
Divided by: Remaining useful life
5 yrs
Amortization expense, 2013
106,142
#26
Legal costs
70,000
Amortization expense
(150,000 / 3)
50,000
Total expenses relating to Trademark
120,000
#27

Down payment
200,000
Present value of installment payment
(200,000 x 3.1699)
633,980
Correct cost of the franchise
833,980

#28
Carrying amount of notes payable at
1/1/2011
633,980
Discount amortization, 2011
(633,980 x 10%)
63,398
Principal payment
(200,000)
Carrying amount, 1/1/2012
497,378
Interest expense, 2012
(497,378 x 10%)

49,738

#29
Discount on notes payable, 1/1/2011
(800,000 633,980)
166,020
Discount amortization for 2011 and 2012
(63,398 + 49,738)
(113,136)
Discount on notes payable,12/31/2012
52,884
#30
Carrying amount, 1/1/2011
833,980
Amortization expense for 2 years
(833,980 / 10 x 2)
(166,796)
Carrying amount, 12/31/2012
667,184
#31 ?
#32 ?
#33 ?

Problem 2
#34
Accounts payable, per client
5,000,000
Suppliers debit balances
Unrecorded purchase
300,000
Goods held on consignment
(90,000)
Accounts payable, per audit
5,410,000

200,000

#35
Discount on bonds payable
0
*The bonds were sold at a premium.

#36
Carrying value of the bonds, 1/1/2010
2,155,800
Premium amortization for:
2010 [220,000 (2,155,800 x 9%)]
(25,978)
2011 [220,000 (2,129,822 x 9%)]
(28,316)
2012 [110,000 (2,101,506 x 4.5%)]
(15,432)
Carrying value, 7/1/2012
2,086,074
Ratio of bonds sold
x
1/2
Carrying value of bonds sold
1,043,037
Retirement price, excluding interest
[1,100,000 (110,000 x 1/2)]
(1,045,000)
Gain (loss) on retirement of bonds
(1,963)
#37
Carrying value, 9/30/2010
(4,000,000 x 0.7513)
3,005,200
Discount amortization for
2010 (3,005,200 x 10% x 3/12)
75,130

2011 (3,080,330 x 10%)


308,033
2012 (3,388,363 x 10%)
338,836
Carrying amount of notes payable
3,727,199
*Difference due to rounding off.
#38
Provision for litigation expenses
260,000
#39
Minor defects (2,000,000 x 30%)
600,000
Major defects (5,000,000 x 10%)
500,000
Provision for warranties
1,100,000
Problem 3 (next page)

DATE

Beginning
balance
January 15
February 1
April 15
April 30
May 31
June 1
TOTAL

#40) TREASURY
SHARES
Shares
Amount
4,000
150,000

#41) PREFERENCE
SHARES
Shares
Amount

800
200
(150)
(2,000)
2,050

40,000
1,500

30,000

10,000

200,000

2,230
28,730

44,600
574,600

8,600
(6,450)
(75,000)
77,150

900

#43
Beginning balance
4,160,000
January 15 (800 x 5)
4,000
February 15 (1,500 x 22)
33,000
April 30 (10,000 x 20)
200,000
May 1 (2,230 x 35)
78,050
May 31 [(150 x 14) + (2,000 x 19.5)]
41,100
Additional paid-in capital, end
4,516,150
#44
Beginning balance
March 15 (12,500 x 1.50)
May 1 (2,230 x 55)
September 15 (26,680 x 1.50)
(800 x 50 x 8%)

#42) ORDINARY
SHARES
Shares
Amount
15,000
300,000

1,100,000
(18,750)
(122,650)
(40,020)
(3,200)

45,000

Profit for the year


Retained earnings, end

500,000
1,415,380

Problem 4
#45
8% preference share
Ordinary shares, no par
Subscribed ordinary shares
Legal capital

#46
Number of preference shares issued
(250,000 / 100)
shares

250,000
210,000
50,000
510,000

Problem 5
2,500

#48 ?
#49 ?

Preference share capital


250,000
Premium on preference share
20,000
Total
270,000
Divided by: Number of shares issued
2,500
Average issuance price
108
#47
8% preference share
250,000
Ordinary shares, no par
210,000
Subscribed ordinary shares
50,000
Premium on preference share
20,000
Donated capital
20,000
Share warrants outstanding
5,000
Contributed capital
555,000

#50 ?
Problem 6
#51
Interest revenue for 2010
1st half (3,760,000 x 5%)
188,000
2nd half [(3,760,000 +8,000) x 5%]
188,400
Total
376,400
#52
Carrying value, 1/2/2010
3,760,000
Discount amortization for 2010
1st half (188,000 180,000)
8,000
2nd half (188,400 180,000)
8,400
Carrying value, 12/31/2010
3,776,400
#53
NONE.

#54
Carrying amount, 12/31/2010
3,776,400
Discount amortization for 2011
1st half [(3,776,400 x 5%) 180,000]
8,820
2nd half [(3,785,220 x 5%) 180,000]
9,261
Carrying amount, 12/31/2011
3,794,481
Discount amortization for 2012
1st half [(3,794,481 x 5%) 180,000]
9,724
July 1 to November 30
[({3,804,205 x 5%} 180,000) x 5/6]
8,509
Carrying amount, 11/30/2012
3,812,714
Ratio of bonds sold
x
18/40
Carrying amount of bonds sold
1,715,721
Selling price (1,800,000 x 98%)
1,764,000
Gain on sale of securities
48,279

Market price at 12/31/2012


98.5%
Carrying amount of investment
2,167,000

Problem 7
#56 ?
#57 ?

#55
Face value of the remaining bonds
2,200,000
Problem 8
Age

0 to 1 month
1 to 3 months
3 to 6 months
Over 6
months
TOTAL

Per client

Adjustment

8,000
2,000

Per audit

372,960
307,280
88,720
24,000

(4,000)

380,960
309,280
88,720
20,000

792,960

6,000

798,960

#59
Accounts receivable, per audit
798,960
Allowance for doubtful accounts (19,058)
Net realizable value, 12/31/2010 779,902

%
uncollectibl
e
1%
2%
3%
8,000 50%
12,000 20%

#58.
Required
allowance
3,810
6,186
2,662
4,000
2,400
19,058

#60
Required allowance
19,058
Accounts written-off
10,832
Recovery of accounts written-off (1,296)
Beginning balance
(15,250)
Bad debts expense, 2010
13,344
Problem 9
Date

Beginning
balance
January 5
July 1
September 1
December 20
TOTAL

#61. LAND

#62.
BUILDINGS

1,850,000

16,000,000

5,625,000

16,875,000

#63.
MACHINERY
AND
EQUIPMENT
12,250,000

#64.
AUTOMOBIL
ES
2,720,000

#65.
LEASEHOLD
IMPROVEME
NTS
3,160,000

1,398,000
875,000
7,475,000

32,875,000

(525,000)
13,123,000

3,595,000

3,160,000