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AP-PW77-2 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS PROBLEM 1 ‘You have been asked by a client to review the records of BEBEL COMPANY, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. CPA Review Your examination reveals the following: 1, BEBEL commenced business on April 1, 2012, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting Income taxes: Year Ended Income 2013 P 143,200 2014 222,800 2015 207,160 2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to: 2013 P 13,000 2014 None 2015 11,180 Sales price was determined by adding 30% to cost. Assume the consigned machines are sold the following year. 3. On March 30, 2014, two machines were shipped to a customer on a C.O.D. basis, The sale was not entered until April 5, 2014, when cash was received for P12,200. The machines were not included in the inventory at March 31, 2014. (Title passed on March 30, 2014.) 4. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred In connection with the warranty will amount to ¥% of 1% of sales. ‘The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were: Warranty Expense Year Ended For Sales Made In March 31 Sales. 2013 2014 2015. _Total_ 2013 P 1,880,000 ° P 1,520, P 1,520 2014 2,020,000 720 P 2,620 3,340 2015 3,590,000 > 640 3,240 P3820 7,700 5. Badidebts have been recorded on a direct writeoff basis. Experience of similar enterprises insets that losses will approximate Ys of 1% of sales. Bad debts written off were: Bad Debts Incurred on Sales Made In 2013 2014 2015 —Total_ 2013 P 1,500 1,500 2014 1600 P 1,040 2/640 2015 700 3,600 3,400 7,700 6. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were: " 2013 P 2,800 2014 1,600 | 2015 2;240 CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP PWWTT-R 7. Arreview of the corporate minutes reveais the manager is entitled to a bonus of ¥2 of 1% of the income:before deducting income taxes and the bonus. The bonuses have never been recorded or paid. ‘pased! on the preceding Information, determine the foliowingt 1. Correct sales for the year ended March 32, 2013. A. P1,867,000 B. P1,880,000 C. P1,870,000 D. Pi,873,000 2. Correct sales for the year ended March 32, 2014, A. P2,035,200 B. P2,032,200 C. P2,042,200 .D. 2,045,200 3. Correct sales for the year ended March 31, 2015. A. P3,569,200 'B. P3,566,620 C. 73,578,820 D. 3,590,000 4, Additional warranty expense for the year ended March 31, 2015. A. P10,133 8. P24,834 C. 76,886 D. P17,833 5. Additional bad debt expense for the year ended March 31, 2014. AL P2,473 B. P1,217 C. PB,917 D. P6858 6. Additional commission expense for the year ended March 31, 2015. A, P4,600 8, P2,240 C. P4640 D. PeA0 | 7. Manager's bonus expense for the year ended March 31, 2015. A. P92 B, P1781 C. P2,683 D. Piaa9 8 Correct income before income tax for the year ended March 31, 2013. AL P229,841 B. P228,692 Cc. P125,785 D. P126,417 9. Correct income before income tax for the year ended March 31, 2014. LAs P228,692 B. P179,488 C. P125,785 D. P126,417 10. Correct income before income tax for the year ended March 31, 2015. JA. P179,488 B. P229,841 C. P180,390 D. P126,417 PROBLEM 2 MINA MINING CO. has acquired a track of mineral land for 27,000,000. Mina Mining estimates that the acquired property will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in bebween. (Assume 11 years of mining operations.) The iand will have @ residual value of P900,000. Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000. The ‘company estimates that these structures can be used for 15 years but, because they must be dismantied if they are to be moved, they have no residual value. Mina Mining does not intend to se the buicings elsewhere. Mining machinery installed at the mine was purchased secondhand at a total cost of P1,800,000. ‘The machinery cost the former owner P4,500,000 and was 50% depreciated when purchased. Mina Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery. 1. What are the estimated depletion and depreciation charges for the first year? Depletion Depreciation A. 2,610,000 189,000 B. 1,305,000 378,000 c 2,610,000 234,000 D. 1,305,000 189,000 (CPA REVIEW SCHOOL OF THEPHILIPPINES (CPA) APTA: 2. What are the estimated depletion and depreciation charges for the St year? Depletion Depreciation A 1,305,000 378,000 B. 2,610,000 234,000 c 2,610,000 378,000 D. 1,305,000 234,000 3. What are the estimated depletion and depreciation charges for the 6" year? Depletion Depreciation A 2,610,000 378,000 B. 1,305,000 288,000 c 1,305,000 189,000 D> 2,620,000 288,000 4. What are the estimated depletion and depreciation charges for the 11" year? Depreciation x 305,000 99,000 8 1,305,000 189,000 © 2,610,000 99,000 D. 2,610,000 234,000 5. Whatare the depletion and depreciation charges for the first year assuming actual production ‘of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.) Depletion A 1,087,500 P157,500 B P1,305,000 99,000 ie 1,305,000 P189,000 D. P 1,087,500 P82,500 PROBLEM 3 GATAS, INC. produces milk on its farms. Tt produces 30% of the country’s milk that is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500 heifers. The farms produce & million kilograms of milk a year, and the average inventory held is 150,000 kilograms of milk. However, the company is currently holding stocks of 500,000 kifograms of milk in powder form. At October 31, 2015, the herds are: * 21,000 cows (3 years old), all purchased on or before November 1, 2014 + 7,500 heifers, average age 1.5 years, purchased on April 1, 2015 3,000 heifers, average age 2 years, purchased on November 1, 2014 No animals were bom or sold in the year. ‘The unit fair vaiues less estimated point-of-sale costs were: L-year-old animal at October 31, 2015 3,200 2-year-old animal at October 31, 2015 4,500 LS-year-old animal at October 31, 2015 3,600 3-year-old animal at October 31, 2015 5,000 t-year-old animal at November 1, 2014 and April 1, 2015 3,000 2-year-old animal at November 1, 2014 4,000 ‘The company has had problems during the year: Contaminated milk was sold to customers. As a result, milk consumption has gone down, The goverment has decided to compensate farmers for potential loss in revenue from the sale of milk. This fact was published in the national press. on September 1, 2015. Gatas received an offical letter on Gaober 10, 2015, stating that PS million would be paid to'it on January 2, 2016. The company’s business is spread over different parts of the country. The only region affected by the contamination was Central Visayas, where the government curtailed milk production in the region. The cattle were unaffected by the contamination and were healthy. The company