You are on page 1of 27

Ateneo de Naga University

College of Business and Accountancy


Department of Accountancy

In partial fulfillment of Requirements in

ACCM455- AUDITING AND ASSURANCE SERVICES II

Submitted by:

​ARMENTA​, Joy Ysabel O.

​DE CASTRO​, Albert C.

FALABI, Trisha N

LEE, Lanz Cedrick M.

MANALO, Almira S.

NAVAL, Cora Mae A.

ACN2

Submitted to:

Dr. Marcial C. Paglinawan,CPA


PROBLEM NO. 1

During May 2017, GUADALUPE INC. issued 90, 000 of its P10 par value ordinary
shares for P990, 000. Net income through December 31, 2017, was P37, 500.

On July 3, 2018, Guadalupe issued 150, 000 of its ordinary shares for P1, 875, 000. A
5% share dividend was declared on October 2, 2018, and issued on November 6, 2018,
to shareholders of record on October 23, 2018. The market value of the ordinary shares
was P11 per share on the declaration date. Guadalupe’s net income for the year ended
December 31, 2018, was P105, 000.

During 2019, Guadalupe had the following transactions:

1. In February, Guadalupe reacquired 9, 000 of its ordinary shares for P9 per share.
Guadalupe uses the cost method to account for treasury shares.

2. In June, Guadalupe sold 4, 500 of its treasury shares for P12 per share.

3. In September, each shareholder was issued (for each share held) one right to
purchase two additional ordinary shares for P13 per share. The rights expire on
December 31, 2019.

4. In October, 75, 000 rights were exercised when the market value of the ordinary
share was P15 per share.

5. In November, 120, 000 rights issues were exercised when the market value of the
ordinary share was P15 per share.

6. On December 15, Guadalupe declared its first cash dividend to shareholders of


P0.30 per share, payable on January 10, 2020, to shareholders of record on December
31, 2019.

7. On December 21, in accordance with the applicable law, Guadalupe formally retried
3, 000 of its treasury shares and had them revert to an unissued basis. The market
value of the ordinary share was P16 per share on this date.

8. Net income for 2019 was P240, 000.


QUESTIONS:

1​. What are the balances of the following equity accounts on December 31, 2017?
Ordinary Share Share Premium Retained
Capital Earnings

A. P900, 000 P90, 000 P37, 500

B. P990, 000 P0 P37, 500

C. P990, 000 P37, 500 P0

D. P900, 000 P37, 500 P90, 000

2. What are the balances of the following equity accounts on December 31, 2018?
Ordinary Share Share Premium Retained
Capital Earnings

A. P2, 520, 000 P465, 000 P22, 500

B. P2, 532, 000 P465, 000 P10, 500

C. P2, 520, 000 P477, 000 P10, 500

D. P2, 532, 000 P477, 000 P22, 500

3. What are the balances of the following equity accounts on December 31, 2019?
Ordinary Share Share Premium Retained
Capital Earnings

A. P6, 363, 000 P1, 660, 500 P190, 350

B. P6, 390, 000 P1, 663, 500 P59, 250

C. P6, 393, 000 P1, 657, 500 P13, 500

D. P6, 376, 500 P1, 650, 000 P72, 750

4. What amount should be charged to Retained earnings for the cash dividend
declared on December 15, 2019?
A. P191, 250 C. P189, 900
B. P191, 700 D. P120, 600

5. What is the treasury shares balance on December 31, 2019?


A. P40, 500 C. P13, 500
B. P54, 000 D. P81, 00
SOLUTIONS:

1. ​A​.
Share Capital Share Retained

Shares Amount Premium Earnings

May 2017 issuance 90, 000 P900, 000 P90, 000


Dec. 31 Net Income P37, 500
Balances, Dec. 31, 2017 90, 000 P900, 000 P90, 000 P37, 500

2. ​B
Share Capital Share Retained

Shares Amount Premium Earnings

Balances, Jan. 1, 2018 90, 000 P900, 000 P90, 000 P37, 500
2018
July 31 issuance 150, 000 1, 500, 000 375, 000
Oct. 2 share dividend
(P240, 000 ×5%) 12, 000 120, 000 12, 000 (132, 000)
Dec.31 Net Income 105, 000
252, 000 P2, 520, 000 P477, 000 P10, 500

3-5.​C. A. C.

Share Capital Share Retained Treasury Shares

Shares Amount Premium ​ Earnings Shares Cost

Bal., Jan. 1, 2019 252, 000 P2520, 000 P477, 000 P10, 500
Feb. acquisition of treasury 9,000 P81, 000
shares (4,500) (40, 500)
June sale of treasury shares
Oct. exercise of stock rights 150, 000 1500, 000 450, 000
(75,000 × 2) 240, 000 2400, 000 720, 000
Nov. exercise of stock rights
(2×120000) ​(191, 250)
Dec.15 share (3, 000) (30, 000) 3, 000 (3, 000) (27, 000)
dividend(P0.30 × 637500)
Dec. Net Income ​ 240, 000
Balances, Dec. 31, 2019 639, 000 P6,390, 000 1,663, 500 ​ P59, 250 1,500 P13, 500
PROBLEM NO. 2

At December 31, 2017, certain accounts included in the property, plant and equipment
section of the SPEED COMPANY’s statement of financial position had the following
balances:
Land P3, 000, 000

Buildings 24, 000, 000

Leasehold Improvements 3, 500, 000

Machinery and Equipment 1, 400, 000

During 2018, the following transactions occurred:

Land site number 621 was acquired for P2, 000, 000. Additionally, to acquire the land,
Speed paid a P60, 000 commission to a real estate agent. Cost of P15, 000 were
incurred to clear the land for the intended use but not to make room for the construction
of new building. During the course of clearing the land, timber and gravel were
recovered and sold for P5, 000.

A second tract of land (site number 622) with a building was acquired from another
entity in exchange for P100, 000 Speed ordinary shares. On acquisition date, the
shares had a closing market price of P45 on a stock exchange. Current appraised
values for the land and building, respectively, are P1, 200,000 and P2, 400, 000. Shortly
after acquisition, the building was demolished at a cost of P30, 000 to make room for
the construction of new building. A new building was constructed for P10, 500, 000 plus
the following costs:
Excavation Fees P110, 000

Architectural design fees 380, 000

Building permit fee 10, 000

Imputed interest on funds used during 60, 000


construction

The building was completed and occupied on September 30, 2018.

A third tract of land (site number 623) was acquired for P6, 000,000 and was classified
as held for sale.

Extensive work was done to a building occupied by Speed under a lease agreement
that expires on December 31, 2025. The total cost of the work was P1, 250,000 which
consisted of the following:

Painting of ceilings P100, 000 estimated useful life is one year


Electrical work 350, 000 estimated useful life is ten years
Construction of extension to current
working area 800, 000 estimated useful life 30 years

The lessor paid one half of the costs incurred in connection with the extension to the
current working area.
During December 2018, costs of P650, 000 were incurred to improve leased office
space. The related lease will terminate on December 31, 2020 and is not expected to be
renewed.

A group of new machines was purchased under a royalty agreement which provides for
payment of royalties based on units of production for the machines. The invoice price of
the machines was P750, 000, freight costs were P20, 000, unloading charges were
P15, 000 and royalty payments for 2018 were P130, 000.

QUESTIONS:

6. What is the December 31, 2018 balance of the Land account that should be shown
as part of property, plant and equipment in the statement of financial position?
A. P6,270,000 C. P6,570,000
B. P6,470,000 D. P12,570,000

7. What is the total cost of buildings on December 31, 2018?


A. P35,000,000 C. P35,040,000
B. P35,030,000 D. P37,430,000

8. What is the total cost of leasehold improvements on December 31, 2018?


A. P4,250,000 C. P5,000,000
B. P4,900,000 D. P5,300,000

9. What is the total cost of machinery and equipment on December 31, 2018
A. P2,170,000 C. P2,315,000
B. P2,185,000 D. P2,415,000

10. How much should be reported as part of expenses (excluding depreciation) in the
income statement for the year ended December 31, 2018?
A. P130, 000 C. P230, 000
B. P190, 000 D. P290, 000

SOLUTIONS:

6. ​C Land, Jan. 1, 2018 P3,000,000


Land site number 621:
Acquisition cost P2, 000,000
Commission 60,000
Clearing cost 15,000
Sale of timber and gravel ​(5,000)​ 2,070,000
Land site number 622:
Acquisition cost (P45×100,000 shares=P4, 500,000× 1200/3600 ​ 1,500,000
Balance, Dec. 31, 2018 ​P6,570,000

● PFRS 2 on share-based payment, paragraph 10, provides that for


equity-settled transactions, the entity shall measure the goods or services
received at the fair value of the goods or services received.
Accordingly, where a property is acquired through the issuance of share capital,
the property shall be measured at an amount equal to the following in the order
of priority:
a. Fair value of the property received
b. Fair value of the share capital
c. Par value of the share capital
In this case, the fair value of the property received is not given so the fair value of
the share capital will be used.
● Any proceeds from the sale of salvaged materials of a newly acquired acquired
asset should be adjusted/deducted from the initial cost of the new asset.
● When a group of assets is acquired for a lump sum price, the total cost should be
allocated to the individual assets based on their relative fair value, appraised
value or assessed value. P4, 500, 000 acquisition cost should be allocated to the
building and land acquired.
● Under ​PIC Interpretation​, the demolition cost of the old building to make room
for the construction of a new building shall be ​capitalized as cost of new
building​.
● ​Land site 623 will not be included as part of Property, Plant and Equipment but
as part of ​Inventory​ because it is intended for sale.

7.​B. Buildings, Jan.1, 2018 P24, 000,000


Cost of demolition 30,000
New building Construction cost 10,500,000
Excavation fee 110,000
Architectural Design 380, 000
Building permit ​ 10,000
Balance, Dec. 31, 2018 ​P35, 030,000

● Under ​PIC Interpretation​, the demolition cost of the old building to make room
for the construction of a new building shall be ​capitalized as cost of new
building​.
● Imputed interest in ​not capitalizable ​to the Building. Only interest actually
incurred shall be capitalized.

8.​ B. Leasehold improvements, Jan.1, 2018 P3,500, 000


Electrical work 350, 000
Construction of extension (800, 000× 1/2) 400, 000
Improvements on office space ​ 650, 000
Balance, December 31, 2018 ​ P4, 900,000

9. ​B. Machinery and equipment, Jan. 1, 2018 P1, 400,000


New Machine:
Invoice price 750, 000
Freight costs 20, 000
Unloading charges 15, 000
Balance, December 31, 2018 ​ ​P2, 185,000

10.​C. Painting of ceilings P100, 000


Royalty payments ​130, 000
Total expenses ​ ​P230, 000
● Any cost that are not directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended by
management shall not be part of the cost of the asset but should be recognized
as ​expense​.

PROBLEM NO. 3

The following pertain to KUKURUKUKU CORPORATION’s property, plant, and


equipment for 2018.

Audited balances at December 31, 2017:


​ ​DEBIT CREDIT
Land P 7,500,000
Buildings 30,000,000
Accumulated depreciation – Buildings P6,577,500
Machinery and equipment 22,500,000
Accumulated depreciation – Machinery and equipment 6,250,000
Delivery equipment 5,750,000
Accumulated depreciation – Delivery equipment 4,230,000

DEPRECIATION DATA:

​Depreciation Method Useful Life


Buildings 150% declining-balance 25 years
Machinery and Equipment Straight line 10 years
Delivery Equipment Sum-of-the-years’-digits 4 years
Leasehold Improvements Straight line -

Transactions during 2018 and other information are as follows:

a.) On January 2, 2018, KUKURUKUKU purchased a new truck for P1,000,000 cash
and trade in of a 2-year-old truck with a cost of P900,000 and a book value of P270,000.
The new truck has a cash price of P1,200,000; the market value of the trade-in is not
known.

b.) On April 1, 2018, a machine purchase for P575,000 on April 1, 2013, was stolen.
KUKURUKUKU recovered P387,500 from its insurance company.

c.) On May 1,2018 costs of P8,400,000 were incurred to improve leased office
premises. The leasehold improvements have a useful life of 8 years. The related lease
terminates on December 31, 2024

d.) On July 1, 2018, machinery and equipment were purchased at a total invoice cost
of P7,000,000; additional costs of P125,000 for freight and P625,000 for installation
were incurred.
e.) KUKURUKUKU determined that the delivery equipment comprising the P5,750,000
balance at January 1, 2018, would have been depreciated at a total amount of
P900,000 for the year ended December 31, 2018.
The salvage values of the depreciable assets are immaterial. The policy of
KUKURUKUKU is to compute depreciation to the nearest month.

Based on the preceding information, compute the following​:

11. Depreciation expense for 2018 on Buildings


A. P1,405,350 ​ B. P929,700 C. P1,200,000 D. 1,800,000

12. Depreciation expense for 2018 on Leasehold improvements


A. P700,000 B. P1,050,000 ​ C.P840,000 ​ D. 933,333

13. Accumulated depreciation – Machinery and equipment, December 31, 2018


A. 8,644,375 ​ B. P8,556,875 ​ C. P8,500,000 D. P8,844,375

14. Accumulated depreciation – Delivery Equipment, December 31, 2018


A. P5,430,000 B. 4,620,000 C. 4,710,000 ​ D. P4,800,000

15. Gain (loss) on trade in of truck on January 2, 2018


A. P(200,000) B. P200,000 ​ C. P(70,000)​ D. P70,000

SOLUTIONS:

11.​A.
Buildings are depreciated at 150% Declining balance.
To compute for the depreciation expense for 2018 on buildings, we first compute for the
straight line rate and fixed rate under the 150% declining balance method.

The straight line rate is 100%/25 years = 4%


The fixed rate is 150% X 4% = 6%.

Then we multiply the carrying amount of the building by 6%.


30,000,000 – 6,577,500 = 23,422,50023,422,500 X 6% =​ 1,405,350

● According ​PAS 16 ​(Property, Plant and Equipment)​ depreciable amount (cost


The ​

less residual value) should be allocated on a systematic basis over the asset's
useful life. Depreciation begins when the asset is available for use and continues
until the asset is derecognised, even if it is idle
● PAS 16 (Property, Plant and Equipment) also states that each part of an item
of PPE with a cost that is significant in relation to the total cost of the item shall
be depreciated separately. Depreciation shall be recognized in profit or loss
unless it is capitalized into the carrying amount of another asset.

12.​C​.

When computing the depreciation of leasehold improvement we use either the useful
life of the leasehold improvement or lease term whichever is shorter.

Useful life of leasehold improvement is 96 months


Lease term is 80 months
Solution : 8,400,000 / 80 months = 105,000 monthly depreciation
105,000 X 8 months =​ ​840,000

● According to ​PAS 17 ​the depreciation policy for assets held under finance leases
should be consistent with that for owned assets. If there is no reasonable
certainty that the lessee will obtain ownership at the end of the lease – the asset
should be depreciated over the shorter of the lease term or the life of the asset

13​.B.
Machinery is depreciated under the straight line basis over 10 years

6,250,000 + 287,500 = 6,537,500


6,537,500 + 14,375 + 2,192,500 + 387,500 = ​8,556,875

14​.D.
Balance Jan. 1, 2018 P4,230,000
Depreciation for 2018 1,200,000
Truck traded in (900,000cost- 270,000BV) ​(630,000)
Balance Dec. 31,2018 P4800,000

Computation for depreciation in 2018


Depreciation on Jan 1,2018 P900,000
Less:Depreciation on truck traded in [900,000x(2/10)] ​180,000 P720,000
Depreciation on truck purchased [1,200,000x(4/10)] ​ 480,000
Depreciation for 2018 P1,200,000

Sum of Years’ Digit


● The sum of years’ digit method provides for depreciation that is computed by
multiplying the depreciable amount by a series of fractions whose numerator is
the digit in the useful life of the asset and whose denominator is the sum of the
digits in the useful life of the asset

SYD=Life(life + 1) / 2

15.​C.
● PAS16, paragraph 24​, provides that the cost of an item of property, plant and
equipment acquired in exchange for nonmonetary asset or combination of
monetary and nonmonetary asset is measured at ​fair value.

● The cost of acquisition depends on the mode of acquisition. In this case, PPE is
acquired through exchange with commercial substance therefore, PPE is
measured at fair value of asset received ​(which is equal to the fair value of
asset given-up + cash paid or - cash received).

● Using the Fair Value approach for exchanges having commercial substance will
ordinarily ​result in recognition of a gain or loss ​because the fair value will
typically differ from the recorded book value of the swapped asset.

Trade in (1,200,000-1,000,000) P200,000


Book Value ​ 270,000
Loss in trade in ​(70,000)
PROBLEM NO. 4

The following independent situations relate to the audit of intangible assets. Answer the
questions at the end of each situation.

CABOOM LABORATORIES ​holds a valuable patent (No. 112170) on a device that


prevents certain types of air pollution. Caboom does not manufacture or sell the
products and processes it develops; it conducts research and develops products which
it patents, and then assigns the patents to manufacturers on a royalty basis. The history
of patent No. 112170 is as follows:

​ ate
D Activity ​Cost
2008-2009 Research conducted to develop device P1,259,100
Jan. 2010 Design and construction of a prototype 262,800
Mar. 2010 Testing of models 126,000
Jan. 2011 Legal and other fees to process patent application; 186,150
patent granted June 2011
Nov. 2012 Engineering activity necessary to advance the design 244,500
of the device to the manufacturing stage
April 2014 Research aimed at modifying the design of the 129,000
patented device
May 2018 Legal fees paid in a successful patent infringement suit 102,000
against a competition.

Caboom assumed a useful life of 17 years when it received the initial device patent. On
January 1, 2016, it revised its useful life estimate downward to 5 remaining years.
Amortization is computed for a full year if the cost is incurred prior to July 1 and no
amortization for the year if the cost is incurred after June 30. Caboom’s reporting date is
December 31, 2018.

Compute the carrying value of Patent No. 112170 on each of the following dates:

16. December 31, 2011


A. P180,675 B. P186,150 C. P293,788 D. P175,200

17. December 31, 2015


A. P223,200 B. P52,560 C. P131,400 D.P122,640

18. December 31, 2018


A. P120,560 B.P78,840 C. P52,560 D. P98,550

SOLUTIONS​:

16.​D.
Cost to obtain patent (Jan. 2011) P186,150
2011 amortization (P186,150/17) ​(10,950)
Carrying value, Dec. 31,2011 ​P175,200

● According to ​PAS 38​, an intangible asset can be measured using cost model or
revaluation model subsequent to its acquisition. An intangible asset can only be
carried at revalued amount if there is an active market for the asset. The problem
did not provide an active market for said intangible. Thus, we use the cost model.

● Using the cost model, the intangible asset should be carried at cost, less any
accumulated amortization and any accumulated impairment loss. Intangible
assets with limited useful life or finite life are amortized over their useful life. The
intangible asset was expected to have a limited useful life of 17 years.
● Patent was obtained on Jan. 2011. Hence, amortized for a year to obtain the
carrying value for Dec. 31,2011.

17. ​C.
Carrying value, Jan. 1, 2012 P175,200
Amortization: 2012-2015 (P10,950 x 4 years) ​(43,800)
Carrying value, Dec. 31, 2015 ​P131,400

● We still apply the cost model and the useful life of 17 years. Thus, amortization
per year is still P10, 950 (as shown in Solution #16). As of Jan, 1, 2012 the asset
has a remaining useful life of 16 years. The period from Jan. 2012 - Jan. 2015 is
4 years. Thus, amortized for 4 years. We use the carrying value on Jan. 1, 2012
and less the amortized cost of 4 years.

18.​ C.
Carrying value, Jan. 1, 2016 P131,400
Amortization: 2016 - 2018(P131, 400 x ⅗) ​(78,840)
Carrying value, Dec. 31, 2018 P 52,560

● We still apply the cost model but used the remaining useful life of 5 years
estimated on January 1, 2016. As of January 1, 2016 the asset has a remaining
useful life of 5 years. The period from Jan. 1, 2016 - Dec. 31, 2018 is 3 years.
Thus, amortized for 3 years over the remaining useful life of 5 years. We use the
carrying value on Jan. 1, 2016 and less amortized cost of 3 years.

PROBLEM NO. 5

BARTOLO COMPANY​ ​has provided information on Intangible assets as follows:

● A patent was purchased from Valenzuela Company for P4,000,000 on January 1,


2017. Bartolo estimates the remaining useful life of the patent to be 10 years.
The patent was carried in Valenzuela’s accounting records at a net book value of
P4,000,000 when Valenzuela sold it to Bartolo.

● During 2018, a franchise was purchased from Delco Company for P960,000. The
contract which runs for 10 years provides that 5% of revenue from the franchise
must be paid to Delco. Revenue from the franchise for 2018 was P5,000,000.
Bartolo takes a full year amortization in the year of purchase.

● The following research and development costs were incurred by Bartolo in 2018:
Materials and equipment P284,000
Personnel 378,000
Indirect Costs ​204,000
P866,000
Bartolo estimates that these costs will be recouped by December 31, 2021. The
materials and equipment purchased have no alternative uses.

● On January 1, 2018, because of recent events in the field, Bartolo estimates that
the remaining life of the patent purchased on January 1, 2017 is only 5 years
from January 1, 2018.

QUESTIONS:

19. What is the total carrying value of Bartolo’s intangible assets on December 31,
2018?
A. P3,744,000 B. P4,864,000 C. P2,880,000 D. P3,861,500

20. As a result of the facts above, compute the total amount of charges against income
for the year ended December 31, 2018?
A. P2,428,000 B. P1,932,000 ​ C. P1,648,00 D. P1,116,000

SOLUTIONS:

19. ​A.
Cost of patent purchased on Jan. 1, 2017 P4,000,000
2017 amortization (P4,000,000/10) ​(400,000)
Carrying value, Dec. 31, 2017 3,600,000
2018 amortization (P3,600,000/5) ​(720,000) P2,880,000
Cost of franchise P 960,000
2018 amortization (P960,000/10) ​(96,000) 864,000
Total carrying value of intangibles P3,744,000

● According to ​PAS 38​, an intangible asset can be measured using cost model or
revaluation model subsequent to its acquisition. An intangible asset can only be
carried at revalued amount if there is an active market for the asset. The problem
did not provide an active market for said intangible. Thus, we use cost model.
● Using the cost model, the intangible asset should be carried at cost, less any
accumulated amortization and any accumulated impairment loss. Intangible
assets with limited life or finite life are amortized over their useful life. The patent
was assumed to have a remaining useful life of 10 years.
● The patent was obtained on Jan. 1, 2017. Remaining useful life is still 10 years.
Hence, amortized for a year to get the carrying value on Dec. 31, 2017.
● On January 1, 2018 the patent was estimated to only have a remaining useful life
of 5 years. Thus amortized the patent for a year using the remaining useful life of
5 years to get the carrying value as of December 31, 2018.
● The franchise was purchased during 2018 and the problem states that Bartolo
takes a full amortization in the year of purchase. The problem also states that the
contract runs for 10 years. Thus, amortized for a year for a period of 10 years to
get the carrying value as of December 31, 2018.

20.​B
Amortization of patent - 2018 P 720,000
Amortization of franchise - 2018 96,000
Payment to Delco (P5,000,000 x 5%) 250,000
Research and development costs ​866,000
Total charges against 2018 income P1,932,000
● Amortization shows the gradual losses accumulated in the useful life of the asset.
Thereby decreasing income. According to​ PAS 38​, all research and development
costs are charged to expense.
● Amortization for patent and franchise for 2018 is shown on Solution#19. The
problem also provides that 5% of revenue from franchise is to be paid to Delco.

PROBLEM NO.6

At the beginning of year 1, the entity grants 100 shares each to 500 employees,
conditional upon the employees remaining in the entity’s employ during the vesting
period. The shares will vest at the end of year 1 if the entity’s earnings increase by more
than 18 percent; at the end of the year 2 if the entity’s earnings increase by more than
an average of 13 percent per year over the two-year period; and at the end of year 3 if
the entity’s earnings increase by more than an average of 10 percent per year over the
three-year period. The shares have a fair value of P10 per share at the start of year 1,
which equals the share price at grant date.

By the end of year 1, the entity’s earnings have increased by 14 percent, and 20
employees have left. The entity expects that earnings will continue to increase at a
similar rate in year 2, and therefore expects that the shares will vest at the end of year
2. The entity expects, on the basis of a weighted average probability, that a further 30
employees will leave during year 2.

By the end of year 2, the entity’s earnings have increased by only 10 percent and
therefore the shares do not vest at the end of year 2. 42 employees have left during the
year. The entity expects that a further 15 employees will leave during year 3, and that
the entity’s earnings will increase by at least 6 percent, thereby achieving the average
10 percent per year.

By the end of year 3, 10 employees have left and the entity’s earnings had increased by
8 percent, resulting in an average of 10.67 percent per year.

QUESTIONS:

21. What amount of compensation expense should be recognized in year 1?


A. P240,000 B. P225,000 C. P150,000 D. P160,000

22. What amount of compensation expense should be recognized in year 2?


A. P57,000 B. P52,000 C. P67,000 D. P122,000

23. What amount of compensation expense should be recognized in year 3?


A. P151,000 B. P216,000 C. P156,000 D. P146,000

24. What amount should the entity report as share options outstanding at the end of
year 2?
A. P282,000 B. P292,000 C. P272,000 D. P307,00

25. What amount should the entity report as share options outstanding at year 3?
A. P450,000 B. P428,000 C. P490,000 D. P500,000
SOLUTIONS​:

21.​ A.
YEAR 1
Number of employees 500
Employees who left in year 1 (20)
Employees entitled to share options 480

Fair value of share options (480 x 100 x P10) P 480,000

Compensation expense for year 1 (P480,000 x ½) P 240,000

● Compensation expense will only be applied to the remaining employees. Thus,


we calculate the remaining employees by the end of year 1.
● The entity’s earnings increased only by 14 percent on year 1, therefore the
shares will not vest on year 1. By the end of year 1, the entity also expects that
the shares will vest in year 2. Thus, calculate over a two-year period.

22.​B.
YEAR 2
Number of employees 480
Employees who left in year 2 (42)
Employees entitled to share options 438

Fair value of share options (438 x 100 xP10) P 438,000

Cumulative compensation for year 1 and year 2


(P292,000 x ⅔) P 292,000
Compensation expense recognized in year 1 (240,000)
Compensation expense in year 2 P 52,000

● Compensation expense will only be applied to the remaining employees. Thus,


we calculate the remaining employees by the end of year 2.
● The entity’s earnings only increased by 10 percent on year 2, therefore the
shares will not vest on year 2. By the end of year 2, the entity also expects that
the entity’s earnings can have an average increase of 10 percent per year.
Thereby the shares will vest in year 3. Thus, calculate over a three-year period.

23​.D.
YEAR 3
Employees entitled to share options 438

Fair value of share options (438 x 100 x P10) P 438,000


Compensation expense in year 3 (P438,000/3) P 146,000

● The entity’s earnings have an average increased of more than 10 percent per
year. Therefore the shares will vest in year 3. Thus, calculate over a three-year
period.
24.​C.
1st year
20 employees leave
2nd year
42 employees leave
30 projected to leave

42 + 20 + 30 = 92
500 - 92 = 408
408 * 100 * 10 = 408,000

408,000 *⅔ = ​272,000

25.​B.
Total employees that left 72 (500 - 72 = 428)
428 * 100 * 10 =​ 428,000

PROBLEM NO. 7

Harlington Company buys and sells securities expecting to earn profits on short term
differences in price. During 2018, Harlington Company purchased the following trading
securities
Security Cost Fair Value Dec 31 2018
A 585,000 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.

QUESTIONS:

26. What is Harlington’s net income after making any necessary trading security
adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000

27. What would Harlington’s net income be if the fair value of security B were P855,000
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

SOLUTIONS:

26​.A.
Because the securities are considered as Held-For-Trading Securities, the change in
fair value of the held securities is reflected in the income of Harlington company

A. 585,000 - 675000 = 90,000 profit


B. 900,000 - 486000 = 414,000 loss
C. 1,980,000 – 2,034,000 = 54,000 profit
Total Loss = 90,000 + (414,000) + 54000 = (270,000) loss
Net Income = 2,700,000(net income before adjustments) – 270,000 = ​2,430,000
27.​B.
Security B = 900000 – 855,000 = 45,000 loss
Total Income = 90000 + (45,000) + 54,000 = 99,000 profit
Net Income = 2,700,000 + 99,000 = ​2,799,000

PROBLEM NO.8

LABADA CO.’s portfolio of trading securities includes the following on December 31


2017

Cost Fair Value


15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. P1,638,000 P1,710,000

All of the above securities have been purchased in 2017. In 2018, Labada Co.
completed the following securities transactions:

Mar. 1​ Sold 15,000 shares of Camias Co. ordinary shares for 1,381,500

April 1​ Bought 1800 ordinary shares of Waston Inc at P135 plus commission, taxes and
other transaction costs of P4,950

The Labada Co. portfolio of trading securities appeared as follows on December 31


2018

​ Cost Fair Value


30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 ​(1)
1800 ordinary shares of Waston Inc 247,950 225,000 ​(2)

(1) ​Net of 19,500 estimated transaction costs that would be incurred on the sale of the
securities
(2) ​Net of 4,500 estimated transaction costs that would be incurred on the sale of the
securities.

QUESTIONS:

28. What amount of unrealized gain on these securities should be reported in the 2018
income statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000

29. What is the gain on the sale of Camias Co. ordinary shares on March 1 2018
A. P144,000 B. P27,000 ​C. P130,500 D. P13,500

30. What amount should be reported as trading securities in the Labada’s statement of
financial position on December 31 2018?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950
SOLUTIONS:

28​.D
Value of trading securities at the end of 2018 1,989,000
Less:
Trading securities at beginning of 2018 1,953,000 (1710000 + 243000) ​1,953,000
​ P36,000

● PFRS 9​ states that​ all financial instruments are initially measured at fair value
plus or minus, in the case of a financial asset or financial liability not at fair value
through profit or loss, transaction costs

29.​C
In determining the income or loss when trading securities, the fair value is used as the
basis

(fair value at December 31 2017 P1,251,000


(selling price) ​1,381,500
P 130,500
30.​ B

The Value of the transaction costs is included in the fair value of the securities

(1,740,000 + 19,500) + (225,000 + 4,500) = ​P1,989,000

Problem No. 9

Domrox Co. reported the following amounts of net income for the years ended
December 31 2016, 2017 and 2018

2016 P190,500
2017 225,000
2018 192,750

You are performing the audit for the year ended Dec 31 2018. During your
examination you discover the following errors:

a) As a result of errors in the physical count, ending inventories were misstated as


follows:
Dec 31 2017 P21,000 understated
Dec 31 2018 P34,500 overstated

b) On December 29 2018 DOMROX recorded as a purchase, merchandise in transit


which cost P22,500. The merchandise was shipped FOB Destination and had not
arrived by December 31. The merchandise was not included in the ending inventory

c) DOMROX records sales on the accrual basis but failed to record sales on account
made near the end of each year as follows
2016 P6000
2017 7500
2018 5250
d) The company failed to record accrued office salaries as follows:

Dec 31 2016 P15,000


Dec 31 2017 P21,000

e) On March 1 2017 a 10% share dividend was declared and distributed. The par value
of the share amounted to 15,000 and market value was 19500. The share dividend was
recorded as follows:

Miscellaneous expense 19,500


Ordinary share capital 15,000
Retained earnings 4,500

f) On July 1 2017 DOMROX acquired a three year insurance policy. The three year
premium of P9000 was paid on that date and the entire premium was recorded as
insurance expense

g) On January 1 2018 DOMROX retired bonds with a book value of P180,000 for
P159,000. The gain was incorrectly deferred and is being amortized over 10 years as a
reduction of interest expense on other outstanding obligations

QUESTIONS:

31. What is the adjusted net income for the year ended December 31 2016?
A. P169,500 B. P175,500 C. P181,500 D. P199,500

32. What is the adjusted net income for the year ended December 31 2017?
A. P238,500 B. P267,000 C. P268,500 D. P280,500

33. What is the adjusted net income for the year ended December 31 2018?
A. P156,600 B. P194,400 C. P196,500 D. P209,400

34. What adjusting entry should be made on December 31 2018 to correct the error
described in Item B?
A. Accounts Payable 22,500
Purchases 22,500

B. Purchases 22,500
Accounts Payable 22,500

C. Accounts Payable 22,500


Cash 22,500

D. No adjusting entry is necessary

35. The adjusting entry on December 31 2017 to correct the error described in Item E
should include a debit to
A. Ordinary share capital of P15,000
B. Retained earnings of P24,000
C. Share premium of P4,500
D. Miscellaneous expense of P4,500
SOLUTIONS:

31.​C
● Errors that decreased net income​: Unrecorded sales of 6000; the sale
occurred in 2016 and should be recorded in 2016

● Errors that increased net income​: Unrecorded accrued salary of 15,000;


accrued expenses should be recorded in the period in which they have been
incurred

● 190,500(net income before adjustments) – 15,000 + 6000 = 181,500

32.​C
● Errors that decreased net income:

Unrecorded sales of 7500


Understated Ending inventory of 21,000
Error of wrongfully recorded stock dividend of 19500
Insurance expense of 1500 that was recorded as 9000 for the year therefore
wrongfully decreasing net income by 7500

● Errors that increased net income

Unrecorded Accrued Salaries of 21,000

Add 9000 from prior year because of Unrecorded sales on account of 6000 and
Unrecorded accrued salaries of 15,000 because if they were not recorded in the
prior year then they must have been taken away from the next year

225,000 + 7,500 + 21,000+ 19,500 +7,500 +9,000 – 21,000 = 268,500

33.​C
● Errors that decreased net income

Unrecorded accrued sales of 5250


Unrecorded gain from retirement of bonds 21000
Reduction of purchases inventory 22,500

● Errors that increased net income

Overstated ending inventory of 34,500


Decrease in interest expense due to errors of 2100 from the amortization of the gain
from retired bonds
Understated Beginning Inventory of 21000

Add prior year: 21,000(accrued salaries) – 7500 (sales) – 3000 (amortized insurance
expense) = 10500

5,250 + 21,000 + 22,500 – 34,500 – 2,100 – 21,000 + 10,500 = 1,650


1,650 + 192,750 = ​194,400
34. ​A.
● Because the terms were FOB Destination the merchandise in transit should not
be recorded as if it is already in your possession because the right of the
merchandise has not transferred to you
35.​B
● To remove the error of the credited retained earnings of 4500, retained earnings
is debited by 24,000 which includes the 4500 error and the 19500 fair value of
the shares

● Retained earnings 24000


Share premium 4500
Miscellaneous expense 19500

Problem No. 10

You have been appointed as an auditor of MARULAS CO. Its bookkeeper reports the
following statement of financial position amounts as of June 30, 2018.

Current Assets P 885,900


Other Assets 1, 891,800
Current Liabilities 502, 260
Other Liabilities 600,000
Shareholder’s Equity 1, 675,440

A review of account balances reveals the following:


a.) An analysis of current assets discloses the following:

Cash P 178,500
Investment Securities- trading 120,000
Accounts Receivable 204,900
Inventories, including advertising supplies of P10, 500 ​382,500
​P 885,900
b.) Other assets include the following:

Property, Plant and Equipment


Depreciated book value (cost, P2, 325,000) P 1,663, 500
Deposit with a supplier for merchandise ordered for
August delivery 32,100
Goodwill recorded on the books to cancel losses incurred
by the company in prior years ​ 196, 200
​P 1, 891,800
c.) Current liabilities include the following:

Salaries payable P37, 650


Taxes payable 26, 610
Rent payable 23,100
Accounts Payable
Total owed to suppliers on account P 333,900
Less: 6-month note received from a supplier
who purchased some used equipment on
June 29, 2018 ​ 15,000​ 318,900
Notes payable ​ 96,000
​P 502,260

d.) Other Liabilities include the following:


10% mortgage note on property, plant and equipment, payable
in semi-annual instalments of P60,000 through June 30,2023 ​P 600,000

e.) Shareholders’ equity includes the following:

Preference Shares, 45,000 shares issued and outstanding,


P20 par value 900,000
Ordinary Shares, 525,000 shares issued and outstanding,
P1 par value 525,000
Share Premium ​ 250,440
​P1,675,440

f.) Ordinary shares were originally issued for P1, 485,000 but the losses of the company
for the past years were charged against share premium.

Based on the above and the result of the audit, determine the adjusted amounts
of the following:

36. Total current assets

A. P918, 000 B. P922, 500 C. P930, 000 D. P933, 000

37. Property, plant and equipment, net of accumulated depreciation

A. P1, 662,000 B. P1, 663,500 C. P1, 891,800 D. P2, 325,000

38. Total current liabilities

A. P517, 260 B. 549,900 C. 637, 260 D. 642,660

39. Total shareholders’ equity

A. P1, 317,000 B. 1,479,240 C. P1, 485,000 D. 2,385,000

40. Total liabilities and shareholders’ equity

A. P1, 117,260 B. P1,479,240 C. P2, 595,000 ​ D. P2,596,500


SOLUTIONS:
36. ​D.
Cash P178, 500
Investment securities-trading 120,000
Notes Receivable 15,000
Accounts Receivable 204,900
Inventory (P382, 500-P10, 500)* 372,000
Deposit with supplier** 32,100
Advertising supplies* ​ 10,500
​Total Current Assets P933, 000

PAS 1 (Presentation of Financial Statements)​ states that an entity shall classify an


Asset as Current w​ hen:
● It expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle;
● It holds the asset primarily for the purpose of trading;
● It expects to realize the asset within twelve months after the reporting period;
or
● The asset is a cash or a cash equivalent ( as defined in ​IAS 7​) unless the
asset is restricted from being exchanged or used to settle a liability for a least
twelve months after the reporting period.

*​The cost of Advertising supplies should not be included in the Inventory account.
Advertising supplies should be presented as a separate line item in the Current Asset
section.

**​Deposit with a supplier for merchandise ordered shall not be in the Non-current
portion of Asset instead, it shall be classified as current since it satisfies the definition of
Current Asset.

37.​ B.
PPE, net of accumulated depreciation (given) ​ P1, 663,500

PAS 16: Property, Plant and Equipment s​ tates that:


Initial measurement​ of a PPE is at ​COST.
Subsequent measurement:​ ​An entity may choose two accounting models for PPE
● COST MODEL- an entity shall carry an asset at its ​Cost less any accumulated
depreciation and any accumulated impairment loss.

● REVALUATION MODEL-an entity shall carry an asset at a ​revalued amount (​ ​FV


at the date of revaluation less any subsequent accumulated depreciation
and any subsequent impairment loss).

Since the PPE balance is already the net of accumulated depreciation you don’t need to
compute anymore the carrying amount of the PPE.

​ .
38. C
Notes Payable P96, 000
Accounts Payable 333,900
Mortgage payable- current portion* 120,000
Salaries payable 37,650
Taxes payable 26,610
Rent Payable 23,100
​Total Current Liabilities P637, 260
Based from ​PAS 1 (Presentation of Financial Statements),​ an entity shall classify a
liability as ​CURRENT ​when:
● It expects to settle the liability in its normal operating cycle;
● It holds the liability primarily for the purpose of trading;
● The liability is due to be settled within twelve months after the reporting period; or
● It does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period. Terms of the liability that could, at
the option of the counterparty

*The entity should classify part of the mortgage payable which is worth P 120,000
(P60,000 x 2) as current liability since it is due to be settled in its normal operating
cycle.

39. ​B.
Preference shares P900, 000
Ordinary shares 525,000
Share premium* 960,000
Retained earnings (deficit)** ​ (905,000)
​Total Shareholders’ Equity ​ 1, 479,240
P

* Original shares issued P1, 485,000


Ordinary shares per record 525, 000
Share Premium ​P 960,000

**P960, 000 - P250, 440= P709, 500+P196, 200=​P905, 760

40. ​D.
Current liabilities P637, 260
Mortgage payable-noncurrent (P600, 000-P120, 000) 480,000
Shareholders’ equity 1,479,240
​Total Liabilities and Shareholders’ equity ​P2,596,500

● Mortgage Payable r​ ecorded with the amount of P600,000 in other liabilities


section should be deducted with 120,000 since this amount must be classified as
current. Therefore only the amount of P480,000 must be presented as other
liabilities as noncurrent.

Problem No.11

The General Ledger Trial balance of PENTAGON COMPANY includes the following
balance sheet accounts at December 31, 2018:

Cash P1,584,000
Accounts Receivable 1,830,000
Inventory 661,500
listed Investments held for trading purposes at fair value 300,000
Prepaid Insurance 75,000
Additional Information:

Cash
● The sales book was left open up to January 5, 2017, and cash sales totalling
P225,000 were considered as sales in December.
● Checks of P139,500 in payment of liabilities were prepared before December
31,2018, recorded in the books, but not mailed or delivered to payees.
● Post Dated checks totaling P117,000 are being held by the cashier as part of
cash. The company’s experience shows that post-dated checks are eventually
realized.
● Customer’s check for P22,500 deposited with but returned by bank, “NSF” on
December 27, 2018. The return was recorded in the company’s book.
● The cash account includes P600,000 of compensating balance against short
term bank loan. The compensating balance is legally restricted as to withdrawal.

Account Receivable

The Accounts Receivable consists of the following:

Trade Accounts Receivable P975,000


Allowance for uncollectible accounts (30,000)
Claims against shipper for goods lost in transit 495,000
Selling Price of unsold goods sent by PENTAGON on
Consignment at 130% of cost(included in Pentagon’s
Ending inventory at cost) 390,000
Total P1,830,000

Inventory

A Physical count of inventory at December 31, 2018, revealed that PENTAGON had
inventory on hand at that date with a cost of P661,500. The annual audit disclosed that
the following items were ​excluded ​from this amount and the related transactions were
not recorded.

● Merchandise of P91,500 is held by PENTAGON on consignment. The consignor


is Falcon company.
● Merchandise costing P57,000 was shipped by Pentagon, FOB destination, to a
customer on December 31, 2018. The customer was expected to receive the
goods on January 6, 2019.
● Merchandise costing P69,000 was shipped by Pentagon, FOB shipping point, toa
customer on December 29,2018. The customer was scheduled to receive the
goods on January 2, 2019.
● Merchandise costing P124,500 shipped by a vendor, FOB Destination, on
December 31,2018, was received by Pentagon on January 4, 2019.
● Merchandise costing P76,500 purchased under FOB shipping point term was
shipped by the supplier on DEcember 31,2017 and received by Pentagon on
January 5,2019.

Based on the above and the result of our audit, determine the adjusted amounts
of the following:
41. Cash
A. P876,00 B.P759,000 C. P1,381,500 D.P781,500

42. Net Accounts Receivable


A.P1,151,700 B.P945,000 C.P1,174,200 D.P1,131,000

43.Trade and other receivables, net


A.P990,000 B.P1,219,200 C.P1,646,700 D.P1,176,000

44.Inventory
A.P510,000 B.P1,095,000 C.P676,500 D.P795,000

45.Current Assets
A.P3,598,200 B.P3,703,200 C.P4,123,200 D.P4,198,200

SOLUTIONS​:

41. ​D.
Unadjusted cash Balance P1,584,000
Cash sales in January 2019 (225,000)
Undelivered checks 139,500
Post-dated Checks (117,000)
Compensating Balance-restricted ​ (600,000)
Adjusted cash balance P 782,500

● According to ​PAS 1, Paragraph 66, which provides that “an entity shall classify
an asset as current when the asset is cash or a cash equivalent unless it is
restricted in to settle a liability for more than twelve months after the end of the
reporting period. An item must be unrestricted in use which means that the cash
must be readily available in payment of current obligation and not subject to any
restriction, contractual or otherwise.
● Postdated checks received cannot be considered cash yet because these checks
are unacceptable by the bank for deposit and immediate credit or outright
encashment. But in this problem it shows that the company’s experience shows
that the postdated checks are eventually realized.
● The cash sales should be deducted because it is not part of December 31,2018
adjustments.
● The Undelivered checks is still part of cash because it is not mailed or delivered
to the payee

42.​A.
Unadjusted account receivable P1,830,000
Claims against shipper for goods lost in transit (495,000)
Selling price of unsold goods out on consignment (390,000)
Post-dated checks 117,000
Unrecorded sale-goods sold FOB shipping point
(69,000x130%) 89.700
Adjusted account receivable ​ 1,151,700
P
● The selling price of goods on consignment is excluded from accounts receivable
because the goods are still unsold.
● The cost of the consignment goods should be included in inventory.
● The treatment of customers’ post-dated checks is debited to accounts receivable.

43.​C.
Accounts Receivable-Net P1,151,700
Claims against shipper for goods lost in transit ​ 495,000
Trade and other Receivables-net P1,646,700

● Trade receivables and nontrade receivables which are currently collectible shall
be presented on the face of the statement of financial position as one line item
called trade and other receivables.

44 ​D.
Unadjusted Inventory P661,500
Goods in transit-sold FOB Destination 57,000
Goods in transit-Purchased FOB shipping point ​ 76,500
Adjusted inventory P 795,000

● As a rule, all goods to which the entity has title shall be included in the inventory,
regardless of location. The phrase “passing of title” is a legal language which
means “the point of time at which ownership changes”

Goods includible in the inventory


A. Goods owned and on hand
B. Goods in transit and sold FOB Destination
C. Good in transit and purchased FOB Shipping point
D. Goods out on consignment
E. Goods in the hands of salesmen or agents
F. Goods held by customers on approval or on trial

● Under FOB Destination, ownership of goods purchased is transferred only upon


receipt of the goods by the buyer at the point of destination
● Under FOB Shipping point, ownership is transferred upon shipment of the goods
and therefore, the goods in transit are the property of the buyer.

45.​D.
Cash P781,500
Trade and other receivables 1,646,700
Inventories 795,000
Trade securities 300,000
Prepaid Insurance 75,000
Cash held as compensating balance ​600,000
Total Current Assets P4,198,200

● According to ​PAS 1, paragraph 66​, which states: An entity shall classify an


asset as current when the entity expects to realize the asset or intends to sell or
consume it in the entity’s normal operating cycle, or when the entity expects to
realize the asset within twelve months after the reporting period.