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Cebu CPAR
Mandaue City

FINAL PREBOARD EXAMINATION


AUDITING PROBLEMS

WEDNESDAY, FEBRUARY 28, 2006


6:00 PM TO 9:00 PM

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING.


MARK THE LETTER OF YOUR CHOICE WITH A VERTICLE LINE ON THE ANSWER
SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.
PROBLEM NO. 1
The following balance sheet is submitted to you for inspection and review.
Close to You Corporation
Balance Sheet
December 31, 2006
Assets
Cash
Accounts receivable
Inventories
Prepaid insurance
Property, plant, and equipment
Total assets
Liabilities and Owners Equity
Miscellaneous liabilities
Loan payable
Accounts payable
Capital stock
Paid-in capital
Total liabilities and owners equity

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

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

In the course of your audit, 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 2006 has been added to the inventory because it is believe
that this campaign will benefit sales of 2007. 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 balance sheet.

(h)

Capital stock consists of 25,000 shares of preferred 6% stock, par P20, and 36,000
shares of common stock, par value P1.

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(i)

Capital stock have been issued for a total consideration of P1,134,400; the amount
received in excess of the par values of the stock has been reported as paid-in capital.
Net income 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.
2.
3.
4.
5.
6.
7.
8.
9.

Current assets
a. P1,347,200

b. P1,217,200

c. P1,282,200

d. P1,462,200

Noncurrent assets
a. P1,530,800

b. P1,507,200

c. P1,190,800

d. P1,167,200

Total assets
a. P2,878,000

b. P2,473,000

c. P2,789,400

d. P2,813,000

Current liabilities
a. P512,000

b. P577,000

c. P504,000

d. P600,600

Noncurrent liabilities
a. P383,000
b. P204,800

c. P406,600

d. P433,000

Total liabilities
a. P983,600

b. P895,000

c. P716,800

d. P960,000

Contributed capital
a. P634,400

b. P1,134,400

c. P598,400

d. P536,000

Owners equity
a. P1,853,000

b. P2,096,200

c. P1,918,000

d. P2,368,400

Under PAS 1 Presentation of Financial Statements, which of the following should be


disclosed in the balance sheet?
a. A statement of compliance with PFRS
b. The measurement basis used for the revaluation of assets.
c. Information about the key assumptions used in the depreciation of assets.
d. The carrying amount of property, plant and equipment.

10. If you have no reservations concerning the fairness of the clients financial
statements, then you should issue a (an)
a. Unqualified opinion.
c. Disclaimer of opinion.
b. Qualified opinion.
d. Adverse opinion.
PROBLEM NO. 2
Your audit of the Weygandt Corporation disclosed that the company owned the following
securities on December 31, 2005:
Trading securities:
Security
Crosswind Corp.
Fortune, Inc.
10% , P200,000 face value , Coastwise bonds
(interest payable every Jan. 1 and Jul. 1)
Total

Shares
9,600
16,000

Cost
P144,000
432,000

Market
P184,000
288,000

158,400
P734,400

163,440
P635,440

Available-for-sale securities:
Security
Ultimate Products
Finite Corp.
GUTS, Inc.
Total

Shares
32,000
240,000
80,000

Cost
P1,376,000
6,240,000
960,000
P8,576,000

Market
P1,440,000
5,840,000
1,280,000
P8,560,000

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Held to maturity:
Cost
12%, 2,000,000 face value, Innovator bonds (interest
payable annually every Dec. 31)

Book value

P1,900,000 P1,926,000

During 2006, the following transactions occurred:


Jan. 1

Receive interest on the Coastwise bonds.

Mar. 1

Sold 8,000 shares of Fortune, Inc. stock for P152,000.

May 15

Sold 3,200 shares of GUTS, Inc. for P15 per share.

July 1

Received interest on the Coastwise bonds.

Dec. 31

Received interest on the Innovator bonds.

31

Transferred the Innovator bonds to the available-for-sale portfolio. The


bonds were selling at 101 on this date. The bonds were purchased on
January 2, 2005. The discount was amortized using the effective interest
method.

The market values of the stocks and bonds on December 31, 2006, are as follows:
Crosswind Corp.
Fortune, Inc.
10% Coastwise bonds
Ultimate Products
Finite Corp.
GUTS, Inc.

P22 per share


P15 per share
P151,200
P42 per share
P28 per share
P18 per share

QUESTIONS:
Based on the above and the result of your audit, determine the following:
11. Gain or loss on sale of 8,000 Fortune, Inc. shares on March 1, 2006
a. P8,000 loss
b. P64,000 loss
c. P8,000 gain
d. P64,000 gain
12. Realized gain or loss on sale of 3,200 GUTS, Inc. shares on May 15, 2006
a. P9,600 loss
b. P3,200 loss
c. P9,600 gain
d. P3,200 gain
13. Total interest income for the year 2006?
a. P260,000
b. P289,640

c. P251,120

d. P286,000

14. The amount that should be reported as unrealized gain in the statement of changes in
equity regarding transfer of Innovator bonds to available-for-sale?
a. P94,000
b. P123,640
c. P64,360
d. P
0
15. Carrying value of Trading Securities and Available-for-sale securities as of December
31, 2006 should be
Trading securities Available-for-sale securities
a.
P482,400
P11,466,400
b.
P602,400
P 9,446,400
c.
P482,400
P11,524,000
d.
P602,400
P11,441,600

PROBLEM NO. 3
The property, plant and equipment section of Warfield Corporations balance sheet at
December 31, 2005 included the following items:
Land
Land improvements
Buildings
Machinery and equipment

P 600,000
280,000
2,200,000
1,920,000

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The following transactions occurred during 2006:


a)

A tract of land was acquired for P300,000. As of December 31, the company has not
determined its future use.

b)

A plant facility consisting of land and building was acquired from Heneral Company in
exchange for 40,000 shares of Warfields common stock. On the date of acquisition,
Warfields stock had a closing market price of P37 per share on the Philippine Stock
Exchange. The plant facility was carried on Henerals books at P220,000 for land
and P640,000 for the building on the date of exchange. Current appraised values for
land and building, respectively, are P460,000 and P1,380,000.

c)

On May 1, 2006, items of machinery and equipment were purchased at a total cost of
P896,000, inclusive of 12% VAT. Additional costs of P26,000 for freight and P52,000
for installation were incurred.

d)

Expenditures totaling P190,000 were made for new parking lots, streets and
sidewalks at the corporations various plant locations. These expenditures had an
estimated life of 15 years.

e)

A machine costing P160,000 on January 1, 1998, was scrapped on June 30, 2006.
Double-declining-balance depreciation has been recorded on the basis of a 10-year
useful life.

f)

A machine was sold for P40,000 on July 1, 2006. Original cost of the machine was
P88,000 on January 1, 2003, and it was depreciated on a straight-line basis over an
estimated useful life of 7 years and a salvage value of P4,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
16. Adjusted balance of Land as of December 31, 2006
a. P970,000
b. P1,060,000
c. P1,270,000

d. P1,460,000

17. Adjusted balance of Buildings as of December 31, 2006


a. P3,580,000
b. P3,500,000
c. P2,200,000

d. P3,310,000

18. Adjusted balance of Machinery and Equipment as of December 31, 2006


a. P2,646,000
b. P2,550,000
c. P2,472,000
d. P2,710,000
19. Loss on scrapping of machine on June 30, 2006
a. P21,475
b. P24,160
c. P26,845

d. P0

20. Loss on sale of machine on July 1, 2006


a. P6,000
b. P4,000
c. P18,000

d. P0

PROBLEM NO. 4
In 2001, Kieso Corporation acquired a silver mine in Benguet. Because the mine is
located deep in the Benguet mountains, Kieso was able to acquire the mine for the low
price of P50,000. In 2002, Kieso constructed a road to the silver mine costing P5,000,000.
Improvements to the mine made in 2002 cost P750,000. Because of the improvements to
the mine and the surrounding land, it is estimated that the mine can be sold for P600,000
when the mining activities are complete.
During 2003, five buildings were constructed near the mine site to house the mine workers
and their families. The total cost of the five buildings was P1,500,000. Estimated residual
value is P250,000. In 2001, geologists estimated 4 million tons of silver ore could be
removed from the mine for refining. During 2004, the first year of operations, only 5,000
tons of silver ore were removed from the mine. However, in 2005, workers mined 1 million
tons of silver. During that same year, geologists discovered that the mine contained 3
million tons of silver ore in addition to the original 4 million tons. Improvements of
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P275,000 were made to the mine early in 2005 to facilitate the removal of the additional
silver. Early in 2005, an additional building was constructed at a cost of P225,000 to
house the additional workers needed to excavate the added silver. This building is not
expected to have any residual value.
In 2006, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at the
beginning of the year for improvements to the mine.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off
depletion and depreciation rates to two decimal places)
21. Depletion for 2004
a. P6,300

b. P6,500

c. P7,250

d. P5,550

22. Depletion for 2005


a. P1,300,000

b. P1,820,000

c. P780,000

d. P870,000

23. Depreciation for 2005


a. P250,000
b. P490,000

c. P180,000

d. P210,000

24. Depletion for 2006


a. P1,950,000

c. P2,425,000

d. P2,275,000

c. P1,225,000

d. P450,000

b. P2,150,000

25. Depreciation for 2006


a. P525,000
b. P625,000

PROBLEM NO. 5
You gathered the following information related to the Patents account of the Lady Han
Cookie Corporation in connection with your audit of the companys financial statements
for the year 2006.
In 2005, Lady Han developed a new machine that reduces the time required to insert the
fortunes into its fortune cookies. Because the process is considered very valuable to the
fortune cookie industry, Lady Han patented the machine. The following expenses were
incurred in developing and patenting the machine:
Research and development laboratory expenses
Metal used in the construction of the machine
Blueprints used to design the machine
Legal expenses to obtain patent
Wages paid for the employees work on the research, development, and
building of the machine (60% of the time was spent in actually building
the machine)
Expense of drawing required by the patent office to be submitted with the
patent application
Fees paid to the government patent office to process application

P1,000,000
320,000
128,000
480,000

1,200,000
68,000
100,000

During 2006, Lady Han paid P150,000 in legal fees to successfully defend the patent
against an infringement suit by Cookie Monster Corporation.
It is the companys policy to take full year amortization in the year of acquisition.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
26. Cost of patent
a. P580,000

b. P1,128,000

c. P648,000

d. P 798,000

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27. Cost of machine


a. P1,236,000

b. P1,040,000

c. P1,648,000

d. P1,168,000

28. Amount that should charged to expense when incurred in connection with the
development of the patented machine
a. P1,480,000
b. P1,608,000
c. P1,000,000
d. P
0
29. Carrying amount of patent as of December 31, 2006
a. P522,000
b. P1,015,200
c. P583,200

d. P 837,900

30. The most effective means for the auditor to determine whether a recorded intangible
asset possesses the characteristics of an asset is to
a. Analyze research and development expenditures to determine that only those
expenditures possessing future economic benefit have been capitalized.
b. Vouch the purchase by reference to underlying documentation.
c. Inquire as to the status of patent applications.
d. Evaluate the future revenue-producing capacity of the intangible asset.

PROBLEM NO. 6
Lady Choi Corporation manufactures television components and sells them with 6-month
warranty under which defective components will be replaced without charge. On
December 31, 2005, Estimated Liability for Product Warranty had a balance of P765,000.
By June 30, 2006, this balance had been reduced to P120,375 by debits for estimated net
cost of components returned that had been sold in 2005.
The company started out in 2006 expecting 8% of the peso volume of sales to be returned.
However, due to the introduction of new models during the year, this estimated percentage
of returns was increased to 10% on May 1. It is assumed that no components sold during
a given month are returned in that month. Each component is stamped with a date at time
of sale so that the warranty may be properly administered. The following table of
percentages indicates the like pattern of sales return during the 6-month period of the
warranty, starting with the month following the sale of components.
Month Following Sale
First
Second
Third
Fourth through sixth 10% each month

Percentage of Total
Returns Expected
20%
30
20
30
100%

Gross sales of components were as follows for the first 6 months of 2006:
Month
January
February
March
April
May
June

Amount
P5,400,000
4,950,000
6,150,000
4,275,000
3,000,000
2,700,000

The companys warranty also covers the payment of freight cost on defective components
returned and on the new components sent out as replacements. This freight cost runs
approximately 10% of the sales price of the components returned. The manufacturing cost
of the components is roughly 80% of the sales price, and the salvage value of returned
components averages 15% of their sales price. Returned components on hand at
December 31, 2005, were thus valued in inventory at 15% of their original sales price.

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QUESTIONS:
Based on the above and the result of your audit, answer the following:
31. The total estimated returns for the six-month period ended June 30, 2006 is
a. P2,232,000
b. P2,118,000
c. P2,647,500
d. P2,382,750
32. The warranty expense for the six-month period ended June 30, 2006 is
a. P1,985,625
b. P2,057,400
c. P1,674,000
d. P1,588,500
33. The Estimated Liability for Product Warranty as of June 30, 2006 should have a
balance of
a. P956,400
b. P713,250
c. P795,938
d. P636,750
34. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of
a. P592,875
b. P675,563
c. P740,385
d. P516,375
35. In evaluating an entitys accounting estimates, one of an auditors objectives is to
determine whether the estimates are
a. Not subject to bias.
b. Based on objective assumptions.
c. Consistent with industry guidelines.
d. Reasonable in the circumstances.

PROBLEM NO. 7
On January 1, 2005, Lian Sheng Corporation issued 2,000 of its 5-year, P1,000 face
value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%.
Interest is payable each December 31. Lian Sheng uses the effective interest method of
amortization. On December 31, 2006, the 2,000 bonds were extinguished early through
acquisition in the open market by Lian Sheng for P1,980,000 plus accrued interest.
On July 1, 2005, Lian Sheng issued 5,000 of its 6-year, P1,000 face value, 10%
convertible bonds at par. Interest is payable every June 30 and December 31. On the
date of issue, the prevailing market interest rate for similar debt without the conversion
option is 12%. On July 1, 2006, an investor in Lian Shengs convertible bonds tendered
1,500 bonds for conversion into 15,000 shares of Lian Shengs common stock, which had
a fair value of P105 and a par value of P1 at the date of conversion.
QUESTIONS:
Based on the above and the result of your audit, determine the following: (Round off
present value factors to four decimal places.)
36. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31,
2005 is
a. P1,898,400
b. P2,129,500
c. P2,000,000
d. P2,121,100
37. The gain on early retirement of bonds on December 31, 2006 is
a. P20,000
b. P112,000
c. P121,200
d. P0
38. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31,
2005 is
a. P4,605,800
b. P5,000,000
c. P4,732,875
d. P4,615,400
39. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2006 will
increase equity by
a. P1,485,000
b. P1,374,600
c. P1,415,054
d. P1,377,697
40. During the audit of a publicly held company, the auditor could obtain written
confirmation regarding long-term bond transactions from the
a. Bond holders.
c. Client's attorney.
b. Trustee.
d. Internal auditors.

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PROBLEM NO. 8
Geum Young Corporation was authorized at the beginning of 2004 with 300,000
authorized shares of P100, par value common stock. At December 31, 2004, the
stockholders equity section of Geum Young was as follows:
Common stock, par value P100 per share; authorized
300,000 shares; issued 30,000 shares
Additional paid-in capital
Retained earnings
Total stockholders equity

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

On June 15, 2005, Geum Young issued 50,000 shares of its common stock for
P6,000,000. A 5% stock dividend was declared on September 30, 2005 and issued on
November 10, 2005 to stockholders of record on October 31, 2005. Market value of
common stock was P110 per share on declaration date. The net income of Geum Young
for the year ended December 31, 2005 was P475,000.
During 2006, Geum Young had the following transactions;
March 1

Geum Young reacquired 3,000 shares of its common stock for P95 per
share.

May 31

Geum Young 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 common stock for P125 per share. The rights expire
on December 31, 2006.

September 15 25,000 stock rights were exercised when the market value of common
stock was P130 per share.
October 31

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

December 10

Geum Young declared a cash dividend of P2 per share payable on


January 5, 2007 to stockholders of record on December 31, 2006.

December 20

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

December 31

Net income for 2006 was P500,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2006:
41. Common stock
a. P21,400,000

b. P21,300,000

c. P14,800,000

d. P21,250,000

42. Additional paid-in capital


a. P4,627,500
b. P3,007,500

c. P4,632,500

d. P4,592,500

43. Retained earnings


a. P600,000

b. P565,000

c. P557,000

d. P560,000

44. Treasury stock


a. P10,000

b. P47,500

c. P50,000

d. P0

45. An auditor usually obtains evidence of shareholders equity transactions by reviewing


the entitys
a. Canceled stock certificates.
b. Transfer agents records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
st

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PROBLEM NO. 9
You were able to gather the following information in connection with your audit of the
stockholders equity section of the balance sheet of Jang Duk, Inc. The company is a
manufacturer of school and office equipment. As of December 31, 2005, the stockholders
equity of the company is presented below:
Cumulative preferred stock (P15 par value; 50,000
shares authorized, 6,000 shares issued and outstanding)
Common stock (P10 par value; 500,000 shares authorized,
165,000 shares issued and outstanding
Retained earnings

90,000

1,650,000
933,000
P2,673,000

Jang Duks capital stock transactions during 2006 were as follows:


a.

On January 31, 12,000 preferred shares were issued in exchange for land with an
appraised value of P150,000. Six months ago, 1,000 shares of Jang Duks preferred
stock were exchanged over the counter for P14 per share.

b.

On February 14, 6,750 shares of common stock were sold to Ms. Acti Vista at P25
per share.

c.

On December 14, Jang Duk purchased dissident stockholder Vistas 6,750 shares at
P27 per share. The shares are to be held as treasury shares. (Vista violently
opposed Jang Duk business strategy and Jang Duks management decided to
eliminate her interest.)

d.

On December 20, Jang Duk contracted with Ma Ria for the sale of 15,000 previously
unissued shares at P25 per share to be issued when the purchase price is fully paid.
At December 31, only 292,500 had been paid. Ria agreed to pay the balance on or
before January 31, 2007.

e.

On December 31, Jang Duk retired 6,000 preferred shares at P18 per share.

f.

A cash dividend of P2 per share was declared on the preferred shares on October 15,
and paid on November 15.

g.

A cash dividend of P1.50 per share was declared on December 15, and payable on
January 15, 2007.

h.

Jang Duks net income for the year 2006 was P375,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2006:
46. Preferred stock
a. P180,000

b. P132,000

c. P150,000

d. P162,000

47. Common stock


a. P1,717,500

b. P1,867,500

c. P2,010,000

d. P1,818,750

48. Additional paid-in capital


a. P296,250
b. P326,250

c. P101,250

d. P71,250

49. Total retained earnings


a. P988,500
b. P1,006,500

c. P824,250

d. P1,018,500

50. Total stockholders equity


a. P3,085,500
b. P3,198,000

c. P3,018,000

d. P3,168,000

- end of examination -

GOOD LUCK!

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