Professional Documents
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Problem 1: Auditing Problems Reviewers / Testbanks
Problem 1: Auditing Problems Reviewers / Testbanks
Problem 1: Auditing Problems Reviewers / Testbanks
Problem 1
The Christine Manufacturing, which started operations on September 1, 2008, is
owned by Sheila Ltd. Sheila Ltd’s accounts at December 31 included the following
balances:
Additional information:
Sheila Ltd calculates depreciation to the nearest month and balances the
records at month-end. Recorded amounts are rounded to the nearest peso, and
the reporting data is December 31.
Sheila Ltd uses straight-line depreciation for all depreciable assets except
vehicles, which are depreciated on the diminishing balance at 40% p.a.
The vehicles account balance reflects the total paid for two identical delivery
vehicles, each of which cost P23,400.
On acquiring the land and building, Sheila Ltd estimated the building’s useful
life and residual value at 20 years and P5,000, respectively.
2012
January 3 Bought a new machine (machine 3) for a cash price of P57,000.
Freight charges of P442 and installation of P1,758 were paid in cash.
The useful life and residual value were estimated at five years and
P4,000, respectively.
August 28 Exchanged machine 1 for furniture that had a fair value of p12,500 at
the date of exchange. The fair value of machine 1 at the date of
exchange was P11,500. The office furniture originally cost P36,000
and, to the date of exchange, had been depreciated by P24,100 in the
previous owner’s books. Sheila Ltd estimated the office furniture’s
useful life and residual value at 8 years and P540, respectively.
May 25 Sold one of the vehicles bought on November 21, 2010 for P6,600
cash.
June 26 installed a fence around the property at a cash cost of P5,500. The
fence has an estimated useful life of 10 years and zero residual value.
Questions:
Problem 2
Mary Joy Company constructs its own buildings. In 2009, a total of P1,228,500
interest was included as part of the cost of a new building just being completed.
Mary Joy has the following outstanding loans at December 31, 2010:
2
12% note related directly to new building; term, 5 years from beginning of
construction P10,000,000.
General Borrowings:
Questions:
Problem 3
in 2001, Honest Corporation acquired a silver mine in Mr. Diwalwal. Because the
mine is located deep in the Mr. Diwalwal, Honest was able to acquire the mine for
the low price of P50,000. In 2002, Honest 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 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 millions tons of silver in addition to
the original 4 million tons Improvements of P275,000 were made to the mine early
in 2005 to facilitate the removal of the additional silver. Early in2005, 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.
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In 2006, 2.5 million tons of silver were mined and costs P1,100,000 were incurred
at the beginning of the year for improvement 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)
Problem 4
At the beginning of year 1, Charmaine Company grants share options to each of its
100 employees working in the sales department. The share options will vets at the
end of year 3, provided that the employees remain in the entity’s employ, and
provided that the volume of sales a particular product increases by at least an
average of 5 percent per year. If the volume of sales of the product increases by an
average of between 5 percent and 10 percent per year, each employee will receive
100 share options. If the volume of sales increases by an average of between 10
percent and 15 percent each year, each employee will receive 200 share options. If
the volume of sales increases by an average of 15 percent or more, each employee
will receive 300 share options.
On grant date, Charmaine Company estimates that the share options have a fair
value of P20 per option. Charmaine Company also estimates that the volume of
sales of the product will increases by an average of between 10% and 15% per
year. The Charmaine Company also estimates, on the basis of weighted average
probability that 19% of employees will leave before the end of year 3. By the end of
year 1, seven employees have left and the entity still expects that a total of 19
employees will leave by the end of year 3. Product sales have increased by 12%
and the entity expects this rate of increase to continue over the next 2 years.
By the end of year 2, a further six employees have left. The entity now expects only
three more employees will leave during year 3. Product sales have increased by
18%. The entity now expects that sales will average 15% or more over the three-
year period.
By the end of year 3, a further two employees have left. The entity’s sales have
increased by an average of 16% over the 3 years.
4
Questions:
Based on the above and the result of your audit, determine the following:
16. Compensation expense in year 1
a. P162,000 b. P108,000 c. P124,000 d. P0
20. Which of the following is ordinarily the best evidence of fair value?
a. Published price quotations in an active market.
b. Discounted cash flow analysis.
c. Comparative transaction model.
d. Intrinsic value.
Solution
5
Problem 5
You gather the following information pertaining to the stockholders’ equity section of
the Cleeneth Corporation in connection with your audit of the company’s financial
statements for 2009:
All of the outstanding common stock and treasury stock were originally issued in
20002 for P11 per share. The treasury stock is common stock reacquired on March
31, 2004. Cleeneth uses the par value method of accounting for treasury stock.
Feb. 12 Issued 200,000 shares of unissued common stock for P12.50 per
share.
Questions:
Based on the above and the result of your audit, answer the following:
21. The issuance of 200,000 shares of common stock on February 12, 2009
caused Cleeneth’s in additional paid-in capital in excess of par increase by
a. P200,000 b. P2,300,000 c. P2,500,000 d. P0
6
22. The retirement of 50,000 shares of common stock on September 20, 2009
caused Cleeneth’s additional paid-in capital in excess of par to decrease by
a. P50,000 b. P500,000 c.
P600,000 d. P0
23. Cleeneth wants to appropriate retained earnings for all loss contingencies
that are not properly accurate by a charged to expense. How much of Cleeneth
loss contingencies should be appropriated by charged to unappropriated
retained earnings
a. P300,000 b. P500,000 c.
P200,000 d. P0
24. How much cash dividends should Cleeneth charge against unappropriated
retained earnings in 2009
a. P350,000 b. P370,000 c. P180,000 d.
P170,000
25. How much should Cleeneth show in note to financial statements as restriction
on retained earnings because of the acquisition of treasury stock?
a. P100,000 b. P600,000 c. P450,000 d.
P650,000
Solution:
Question no. 21 – b
Proceeds from issuance (200,000 x P12.50) 2,500,000
Less par value of common stock (200,000 shares x P1)
200,000
Increase in APIC 2,300,000
Question no. 22 – b
Common stock (50,000 shares x P1) 50,000
APIC – excess over par [50,000 shares x (P11 – P1)] 500,000
Unappropriated retained earnings 100,000
Cash (50,000 shares x P13) 650,000
Question no. 23 – a
Question no. 24 – a
Dividends declared, 6/15/09
[(750,000 + 200,000 – 50,000) x P0.20] 180,000
Dividends declared, 12/15/09
[(750,000 + 200,000 – 50,000 – 50,000) x P0.20] 170,000
Total cash dividends 350,000
Question no. 25 – c
Treasury stock (50,000 shares x P1) 50,000
APIC – excess over par [50,000 shares x (P11 – P1)] 500,000
APIC – from TS transactions 100,000
Cash (balancing figure) 450,000
Reconstruction of the entry made to record the acquisition of treasury stock
7
Problem 6
Kibungan Company has the following information on January 1, 2010 related to its
property, plant and equipment:
Land 30,000,000
Building 300,000,000
Accumulated depreciation – building (37,500,000)
Machinery (2 machines) 400,000,000
Accumulated depreciation – machinery (100,000,000)
Carrying amount 592,500,000
On June 30, 2011, building was revalued at P300,000,000, its fair market value at
that time. One of the two machines was sold on December 31, 2011 at
P250,000,000.
Questions:
HC FMV
500
Bldg 300 M M
8
(75
(45 M) M)
425
85% 255 M M 170 M
650
Mach 400 M M
(195
(120 M) M)
455
280 M M 175 M
Land 30 M 40 M 10 M
Total Revaluation
Surplus 355 M
Depreciation:
1/1 - 7.5
Bldg 6/30 M
6/30 - 12.5 425 M / 17
12/31 M x 6/12
1/1 - 20.0
Mach 6/30 M
6/30 - 32.5 455 M/ 7 x
12/31 M 6/12
72.5
Total M
Revaluation Surplus
355
Unamortized M
Amortization:
Bldg - 170 M / 17 x
6/12 (5 M)
(12.5
Mach - 175 M/7 x 6/12 M
337.
Balance 5M
June 30:
fmv - fmv -
Bldg before now
500 M
(100 M)
100
80% 400 M 300 M M
(100
M) Rev. Surplus
Impairment
0 Loss
Cash 250 M
146.25
AD M
Machinery 325 M
71.25
Gain on sale M
Problem 7
Brandy Company has two cash generating units. On December 31, 2010, the
assets of one cash generating unit at carrying amount are:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Patent 850,000
Goodwill 100,000
The accounts receivable are regarded as collectible and the inventory’s fair value
less cost to sell is equal to the carrying amount. The patent has fair value less cost
to sell of P750,000.
On December 31, 2010, Brandy Company undertook impairment testing of the cash
generating unit and determined the value in use of the unit at P4,050,000.
Questions:
7. What is the impairment loss of the cash generating unit on December 31, 2010?
a. 800,000 b. 700,000 c. 600,000 d. 0
10
11. What is the amount of Plant and Equipment, net at December 31, 2010?
a. 3,400,000 b. 2,909,280 c. 2,839,180 d. 2,800,000
Recoverable 4,050,00
Cost 0
4,850,00
Carrying Value 0
(800,00
Impairment Loss 0)
100,00
Goodwill 0
IL allocated to (700,00
other assets 0)
800,00
Impairment loss 0
100,00
Goodwill 0
100,00
Patent 0
Plant and 600,00
Equipment 0
Problem 8
Ollie Company began its operation in 2007 and has two classes of share capital
outstanding: 12% P100 par value preference share and P50 par value ordinary
share. Balances on January 1, 2008 are as follows:
*All the preference shares issued and ordinary shares issued were issued as one
lot in 2007.
The following reflects the transactions for the year 2008, in chronological order:
a. Issued 20,000 ordinary shares at P70 per share
b. Reacquired, but not retired, 5,000 ordinary shares at P60
c. Ordinary shares were split on a 2 for 1 basis
d. Reissued 3,000 treasury shares at P40
e. Received 10,000 ordinary shares from stockholders as a donation and
immediately retired the same
f. Reported p1,500,000 net income for the year
g. Declared the preferential dividends and p6 dividend per ordinary shares
Requirements:
12. How much is the total dividends declared to ordinary shares?
11
a. 780,000 b. 738,000 c. 390,000 d. 348,000
13. What is the balance of the Ordinary shares account as of December 31,
2008?
a. 3,075,000 b. 3,250,000 c. 6,150,000 d.
6,500,000
16. What is the correct Stockholders’ equity balance as of December 31, 2008?
a. 7,622,000 b. 7,832,000 c. 7,592,000 d.
7,790,000
(5,00 (300,0
0) 00)
70,00 (5,00
0 - 0) -
3,00 30,0
0 90,000 00
1,500,
000
(60,00
0)
(738,0
- - - - - - 00) - - - -
5,0 500,0 130,0 3,250, 200,0 850,0 2,702, (7,00 (210,0 30,0 300,0
00 00 00 000 00 00 000 0) 00) 00 00
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Problem 9
Sabrina Manufacturing Company had several transactions during 2006 and 2007
concerning Plant assets. Several of these transactions are described below,
followed by the entry or entries made by the company’s accountant.
EQUIPMENT:
Several used items were acquired on February 1, 2006, by using a P100,000
noninterest-bearing note. The note is due one year from the date of issuance. No
market value of the note or the equipment is available. Sabrina’s most recent
barrowing rate was 8%.
Buildings:
A building was acquired on June 1, 2006, by issuing 100,000 shares of the
company’s P5 par value ordinary shares. The ordinary share is not widely traded,
therefore no market price is available. The building was appraised on the
transaction date at P650,000.
Land:
Land was donated to Sabrina by the City of Cagayan in September 2007 as an
inducement to build a facility there. Plans call for construction at an undetermined
future date. The land was appraised at P48,500. No entry was made.
Machinery:
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Machinery was acquired an exchange for similar equipment on October 12, and
were appraised at P45,000 on the date of the exchange. Sabrina received
machinery valued at P40,000 and P5,000 in cash in the transaction.
Additional information:
Compute for the net adjustments to the following account balances as of December
31, 2007:
A B C D
17. Equipment 1,358 16,666 7,404 6,049
18. Buildings 156,000 144,000 124,000
150,000
19. Inventory/Fixtures 5,893 15,000 9,107
10,089
20. Land 48,500 50,000 98,500
38,500
21. Machinery 6,800 5,000 7,556 10,800
What is the correct depreciation expense for the year 2007 for the following items?
Problem 10
The Maria Lovella Mining Company purchased for P13,000,000 mining property
estimated to contain 1,000,000 tons of ore. The residual value of the property is
P1,000,000.
Buildings used in mine operations costs P1,000,000 and have an estimated life of
ten years with no residual value. Mine machinery costs P2,000,000 with an
estimated residual value of P400,000 after its physical life of 4 years.
14
Following is the summary of the company’s operations for the first two years:
Question:
30. The total amount that may be paid as dividends by the company in the first
year is:
a. P 1,580,000 b. P 1,612,000 c. P 1,628,000 d. P
1,632,000
31. The total amount that may be paid as dividends by the company in the
second year is:
a. P 3,135,234 b. P 3,117,790 c. P 3,107,540 d. P
3,095,590
Problem 11
In the course of your first time audit of MISAMIS INC.’s stockholder’s equity
accounts for the audit year 2007, the following schedule of the company’s
stockholder’s equity accounts as of December 31, 2006 were presented by the
client:
Ordinary share capital, P100 par; 200,000 shares authorized; 50,000 shares
Issued and outstanding; options to purchase 10,000 shares at P100 per
Share are held by employees, no value having been assigned to these options
P5,000,000
15
Share premium from ordinary shares
1,000,000
Accumulated profits
3,000,000
a. The options referred to above were granted to each of its 100 employees on
January 1, 2005 which shall vest three year thereafter provided employees
remain in the company’s employ and provided further that sales increase at least
by an average of 5% per year. If the sales increase by an average of at least 5%
per year each year, employees shall receive 100 share options. If the sales
increased by an average of least 10% per year, each employee shall receive 300
options
The fair market value of each share option on the grant date was P30 per share.
No employee left the company during the said vesting period. Records show that
average sales increase over the inclusive vesting period are: 2005, 8%; 2006,
10%, and 2007, 12%
b. On May 1, 2007, the company issued bonds of P5,000,000 at 120 giving each
P1,000 bond a warrant enabling the holder to purchase4 shares at P120 per
share for a one year period. Shares were selling for P140 at this time. The
market value of bond ex-warrant is 105.
c. On June 1, 2007, half of the warrants issued with bonds were exercised.
e. The company declared a P5 per share cash dividends on December 15, 2007
payable to stockholders as of December 31, 2007 on January 31, 2008
Required:
1. What is the retroactive adjustment to the beginning accumulated profits account
related to the options granted in 2005?
a. P600,000 b. P400,000 c. P200,000 d. No
adjustment necessary
2. What is the correct credit to the share premium account as a result of the
exercise of rights referred to in item d?
a. 250,000 b. 270,000 c. 285,000 d. 330,000
16
4. What is the correct Accumulated Profits as of December 31, 2007?
a. 5,145,000 b. 4,900,000 c. 4,745,000 d.
4,245,000
SOLUTION:
Problem 12
Bugle Company’s property, plant, and equipment and related accumulated
depreciation accounts had the following balances at December 31, 2006:
Bugle computes depreciation to the nearest month. The salvage values of the
depreciable assets are considered immaterial.
5. Land improvements
a. 480,000 b. 360,000 c. 320,000 d. 923,000
6. Buildings
a. 2,546,280 b. 3,024,000 c. 2,762,280 d. 1,682,280
8. Transportation equipment
a. 363,132 b. 454,860 c. 433,962 d. 527,760
9. Leasehold improvements
a. 828,750 b. 552,500 c. 663,000 d. 1,326,000
SOLUTION
1. 2007 DEPRECIATION EXPENSE-LAND IMPROVEMENTS:
(P5,760,000/12 years x 9*/12) P360,000
Ans. B.
*April 1-December 31
Problem 13
The following transactions appear on the “Available-for-sale Marketable Securities”
account of Elvisor Company for the year 2007;
19
Shares of Atlas Cons at P12/share
15,200
Dec. 31 Sold the treasury notes at P97 plus accrued interest
101,500
The company received 20% stock dividends from SMC on September 1 and 10%
stock dividend from Atlas Cons on December 1.
SMC shares and Atlas Cons shares were selling at P15 and P12, respectively on
December 31, 2007.
A B C D
10. SMC Shares 800 1,000
1,200 600
11. investments ion SMC at cost 15,000 10,000 12,500
7,500
12. Atlas Shares 2,000 1,200 1,320
2,120
13. Investment in Atlas at cost 20,000 11,780
15,000 12,000
14. Treasury Notes 96,000 0 56,000
40,000
15. Carrying value of SMC 15,000 12,000 10,000
8,000
16. Carrying value of Atlas 15,840 11,780 20,000
15,000
17. unrealized gain/loss on the balance
sheet 5,840 3,840 3,000 2,000
Problem 14
On January 1, 2010, Reyes Company borrowed P5,000,000 from a bank at a
variable rate of interest for 4 years. Interest will be paid annually to the bank on
December 31 and the principal is due on December 31, 2013.
Under the agreement, the market rate of interest every January 1 resets the
variable rate for that period and the amount of interest to be paid on December 31.
In conjunction with the loan, Reyes Company entered into a “receive variable, pay
fixed” interest swap agreement with another bank speculator as a cash flow hedge.
The market rates of interest are 6% on January 1, 2010, 10% on January 1, 2011
and 8% on January 1, 2012.
Questions:
Problem 15
On January 1, 2007, Juliet Company sold equipment to Joed Company of Japan for
¥1,000,000 with payment to be received in two years on January 1, 2009. On
January 1, 2007, the exchange rate is ¥0.50 = P1. On the same date, Juliet enters
into forward contract and agrees to sell ¥1,000,000 on January 1, 2009 at the rate
of ¥0.50 = P1.
On December 31, 2007, the exchange rate is ¥0.47 = P1. On December 31, 2008,
the exchange rate is ¥0.55 = P1. The appropriate discount rate throughout this
period is 10%.
Questions:
Based on the above and the result of your audit, answer the following: (Round off
present value factors to four decimal places)
22. The carrying amount the accounts receivable on December 31, 2007 is
a. P2,127,660 b. P2,000,000 c. P1,934,255 d.
P1,758,298
24. The derivative liability (forward contract payable) on December 31, 2007 is
a. P127,660 b. P116,055 c. P105,498 d. P0
25. The derivative asset (forward contract receivable) on December 31, 2008 is
a. P309,478 b. P181,812 c. P165,291 d. P 0
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