CPA REVIEW SCHOOL OF THE PHILIPPINES © AP-PW77-1 Manila AUDITING PROBLEMS CPA Review PROBLEM NO. 1 The schedule below shows the account balances of BENEFICIO CORPORATION at the beginning and end of the year ended December 31, 2015: DEBITS Dec, 34,2015 Dec. 31, 2014 Cash and cash equivalents 222,000 P 50,000 Investment in trading securities 10,000 40,000 Accounts receivable 148,000 100,000 Inventories 291,000 300,000 Prepaid insurance 2,500 2,000 Land and building 195,000 195,000 Equipment 305,000 170,000 Discount on bonds payable 8,500 9,000 Treasury shares (at cost) 5,000 10,000 Cost of goods sold 539,000 Selling and general expenses 287,000 Income taxes 35,000 Unrealized loss on trading securities 4,000 Loss on sale of equipment 1,000 ——— Total debits 72,053,000 876,000 CREDITS ‘Allowance for bad debts P 8,000 P 5,000 Accumulated depreciation ~ Building 26,250 22,500 Accumulated depreciation - Equipment 39,750 27,500 ‘Accounts payable 55,000 60,000 Notes payable - current 70,000 20,000 Miscellaneous expenses payable 18,000 8,700 Taxes payable 35,000 10,000 Unearned revenue 1,000 9,000 Notes payable - long-term 40,000 60,000 Bonds payable ~ long-term 250,000 250,000 Deferred income tax lability 47,000 53,300 Ordinary shares, P2 par 359,400 200,000 Retained earnings appropriated for ‘treasury shares 5,000 10,000 Retained earnings appropriated for possible building expansion 38,000 23,000 Unappropriated retained earnings 34,600 112,000 Share premium 116,000 5,000 Sales 898,000 Gain on sale of investment securities 12,000 Total credits 2,053,000 P.876,000 ‘Additional information: a) All purchases and sales were on account. b) Equipment with an original cost of P15,000 was sold for P7,000. ¢) Selling and general expenses include the following: Bullding depreciation 3,750 Equipment depreciation 25,250 Bad debt expense 4,000 Interest expense 18,000 Page 1 of 10 Pages‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP-PW7' d) A six-month note payable for P50,000 was issued toward the purchase of new equipment, |e) The kdng-term note payable requires the payment of P20,000 per year plus interest until paid. ) Treasury shares were sold for P1,000 more than their cost. 9) During the year, a 30% stock dividend was declared and issued. At that time, there were 100,000 shares of P2 par ordinary shares outstanding. However, 1,000 of these shares were held as treasury shares at the time and were prohibited from participating in the stock dividend. Market price was P10 per share when the stock dividend was deciared. +h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The cost was debited to Accumulated Depreciation—Equipment. }) Beneficlo has determined that its purchases and sales of trading securities are operating activities. Based on the given data, calculate the following: 1. Net income for 2015 ‘A, P45,000 B, P50,300 C. P43,500 D. P44,000 2, Cash dividends declared and paid during 2015 A. 8,000 Be P52,000 c. P7,400 D. PO 3. Proceeds from issuance of ordinary shares in 2015 A. P100,000 B. P110,000 C, P210,000 ®. P269,400 4. Proceeds from sale of trading securities “A, P26,000 B. -P38,000 £. P42,000 D. P14,000 5. Accumulated depreciation of equipment sold A. P7,000 B. P15,000 Cc. P8,000 D. P9,000 6. Cash paid for purchase of equipment ‘A. P50,000 B. P106,000 €. P150,000 _D. 100,000 7. Proceeds from sale of treasury shares A P6,000 B. P5,000 C. P4,000 D. P10,000 8, Net cash provided by operating activities ~ A. 45,000 B. P87,000 (C P83,000 D. P89,300 9. Net cash used in investing activities _&. P106,000 \B. P99,000 C. 61,000 D, 93,000 j10. Net cash provided by financing activities 1 Ww P188,000 B. P187,000 C. P182,000 D. P106,000 PROBLEM NO, 2 MALOX Specialty Company manufactures three models of gear shift components for bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets, Since beginning operations in 2012, Malox has used normal absorption costing and has assumed a first-in, first-out cost flow in its perpetual inventory system. ‘The balances of the inventory accounts at the end of Malox’s fiscal year, November 30, 2015, are shown below. The inventories are stated at cost before any year-end adjustments. Finished goods 647,000 Work in process 112,500 Raw materials 264,000, Factory supplies 69,000 ‘The following information relates to Malox’s inventory and operations.OF THI LPPIN, PW77-1 1, The finished goods inventory consists of the items analyzed below. Cost RV Dawn tube shifter Standard model P 67,500 P 67,000 ick adjustment model 94,500 89,000 Deluxe model 108,000 110,000 Total down tube shifters 270,000 266,000~ Bar end shifter Standard model 83,000 90,050 Click adjustment mode! 99,000 97,550 Total bar end shifters 182,000 ~ 187,600 Head tube shifter Standard model 78,000 77,650 Click adjustment model 127,000 119,300 Total head tube shifters 195,000 196,950 Total finished goods 647,000 P650,550 2. One-half of the head tube shifter finished goods inventory is held by catalog outlets on consignment. . 3. Three-quarters of the bar end shifter finished goods inventory had been pledged as collateral for a bank loan. 4, One-half of the raw materials balance represents derailleurs acquired at a contracted price 20 percent above the net realizable value. The net realizable value of the rest of the raw materials [s P127,400. 5. The total net realizable value of the work in process inventory is P108,700. 6. Included in the cost of factory supplies are obsolete items with historical cost of P4,200. ‘The net realizable value of the remaining factory supplies is P65,900. 7. Malox applies the lower of cost or net realizable value method to each of the three types of shifters In finished goods inventory. For each of the other three inventory accounts, Malox applies the lower of cost or net realizable value method to the total of each inventory account. 8. Consider all amounts presented above to be material in relation to Malox’s financial ‘statements taken as a whole. Based on the preceding information, determine the proper values of the following on November 30, 2015, 1. Finished goods inventory A, P647,000 B. P643,000 C. P650,550 D. P654,550 2. Work in process inventory ‘A, 108,300 B, P112,500 _C. 208,700 D. P104,500 3. Raw materials inventory A, P264,000 8B. P227,400 c. P242,000 _-D. P237,400 4. Factory supplies . ‘A. P64,800 B. 65,900 C. P61,700 D. 63,000 PROBLEM NO, 3 In connection with your audit of the financial statements of ONOR COMPANY for the year ended * December 31, 2015, you gathered the following information,(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP-PW7T-1 1. The company maintains its current account with Tsunami Bank. The bank statement on December 31; 2015, showed a balance of P638,340. Your audit of the company’s account with Tsunami Bank disclosed the following: «A check for P22,500 received from a customer whose account is current had been deposited and then returned by the bank on December 28, 2015. No entry was made for the return of this check. The customer replaced the check on January 15, 2016. ‘* A check for P5,720 was cleared by the bank as P7,520. The bank made the correction on January 2, 2016. * A check for P3,500 representing payment of an employee advance was received and deposited on December 27, 2015, but was not recorded until January 3, 2016. = Post-dated checks totaling P67,300 were included in the deposits in transit. These represent collections of current accounts receivable from customers. The checks were actually deposited on January 5, 2016. * Various debit memos for drafts purchased for payment of importation of equipment totaling P230,000 were not yet recorded. These purchases were previously set up as accounts payable, Said equipment arrived in December 2015. ‘+ Interest eamed on the bank balance for the 4 quarter of 2015, amounting to 1,950 was not recorded. ‘* Bank service charges totaling P1,260 were not recorded. * Deposit in transit and outstanding checks at December 31, 2015, totaled P136,250 and 276,380, respectively. . 2. Various expenses from the company’s imprest petty cash fund dated December 2015 totaled P16,250, while those dated January 2016 amounted to P5,903. Another disbursement from the fund dated December 2015 was a cash advance to an employee amounting to P3,500. A replenishment of the petty cash fund was made on January 8, 2016. 3. The company's trial balance on December 31, 2015, includes the following accounts: Cash in bank ~ Tsunami Bank P 748,320 Cash in bank ~ Earthquake Bank (restricted account for plant expansion, expected to be disbursed in 2016) 700,000 Petty cash fund 30,000 Time deposit, placed December 20, 2015, and due March 20, 2016 1,000,000 Money market placement — Prudential Bank 4,000,000 1. What Is the adjusted Petty cash fund balance on December 31, 2015? AL P4,347 B. P10,250 Cc. P30,000 D. P24,097 2. The petty cash shortage on December 31, 2015, is APO B, P5,903 C. P3,500 wD. Pa,347 3. What is the adjusted Cash in bank ~ Tsunami Bank balance on December 31, 2015? ‘A. P500,010 B, 748,320 2, P432,710 D. P429,120 4, The entry to adjust the Cash in bank ~ Tsunami Bank account should include a debit to -A. Accounts receivable for P89,800. . 'B. Accounts receivable for P86,300, C. Accounts payable for P228,200. D, Interest expense for P1,950, 5. The December 31, 2015, statement of financial position should show "Cash and cash equivalents” at A. P6,142,960 B. P5,439,360 C. P4,442,960 =D. P5,442,960(CPA REVIEW SCHOOL OF THE PHIWPPINES (CPAR) AP PWT PROBLEM NO. 4 ‘The TOY COMPANY completed the following transactions during 2015: Mar. 1 Purchased real property for P8,297,000, including a charge for P297,000 representing property tax for March 1 — June 30 which was prepaid by the vendor. Of the purchase Price, 25% is deemed applicable to land and the remaining 75% to buildings. The Toy Company assumed a mortgage of P4,600,000 on the purchase and paid cash for the balance. 30 The building acquired necessitates current reconditioning at @ cost of P342,000 because previous owners had failed to take care of norma! maintenance and repair requirements on it. May 15. Garages in the rear of the building were demolished. The Toy Company recovered 66,000 on the lumber salvage. It then proceeded to construct a warehouse at P1,013,000, which was almost exactly the same as bids made by construction companies. Upon completion of construction, city inspectors ordered extensive modifications to the warehouse as a sesult of failure on the part of the company to comply with building safety code. Such modifications, which could have been avoided, cost P124,000, June 1 The company exchanged its own ordinary share capital with a market value of 640,000 (par, P40,000) for a patent and new toy-making machine, The machine has a market value of P310,000. duly 1 The new machinery for the new building arrived. In addition to the machinery, a new franchise was acquired from the manufacturer of the machinery to produce toy robots. Payment was made by issuing the company’s own ordinary shares (par, P1,000,000). ‘The value of the franchise is set at P500,000, while the machine's fair value is 610,000. Nov. 20 The company contracted for parking lots and landscaping at 2 cost of P420,000 and 89,000, respectively. The work was completed and paid for on November 20. Dec. 31 The business was closed to permit taking the year-end inventory. During this time, required redecorating and repairs were completed at 2 cost of P64,000. After considering the preceding transactions, compute the year-end balances of the following: 4. Buildings ; _A. 7,289,000 B. P7,511,750 Cc. P7,413,000 D. P7,635,750 2. Land AL P2,074,250 B. 2,000,000 C. P2,583,250 D. 2,509,000 3. Machinery A. P1,070,000 B. P920,000 C. P770,000 D. P931,000 4, Share premium A. P10,000 B. P500,000 C. P710,000 D. P600,000 5, Intangibles A. P830,000 B. P500,000 C. 330,000 D. P840,000 PROBLEM NO. 5 LAPAYAT CORPORATION, a client, requests that you compute the appropriate balance of its estimated liability for product warranty account for a statement as of June 30, 2015. Lapayat Corporation manufactures television components and sells them with a 6-month warranty under which defective components will be replaced without charge. On December 31, 2014, Estimated Liability for Product warranty had a balance of P620,000. By June 30, 2015, this{ THE PI a <1 \ ibalance had been reduced to P120,400 by debits for estimated net cost of components returned ' ‘that had been sold in 2014. fl L I "The corporation started out in 2015 expecting 7% of the peso volume of sales to be retumed. However,’ due to the introduction of new models during the year, this estimated percentage of retums 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 likely pattern of sales returns during the 6-month period of the warranty, starting with the month following the sale of components. Percentage of Total Month Following Sale Retums Expected First 30% Second 20 Third 20 Fourth through sixth—10% each month 30 100% Gross sales of components were as follows for the first six months of 2015: Month Amount Month Amount January 4,200,000 April 3,250,000 February 4,700,000 May 2,400,000 March 3,900,000 June 3,900,000 ‘The corporation’s 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 5% of the sales price of the components returned. The manufacturing cost of the components is roughly 70% of the sales price, and the salvage value of returned components averages 10% of their sales price. Returned components on hand at December 31, 2013, were ‘thus valued in inventory at 10% of their original sales price. Based on the given information, determine the following: 1. Total estimated returns from the sales made during the first 6 months of 2015, A. P1,481,500 B, P1,651,000 C. P1,424,500 _D. P1,553,500 2. Total estimated retums subsequent to June 30, 2015 A, P678,250 _B. P648,850 C. P591,850 D. P615,950 3. Estimated loss on component replacement (in percentage of sales price) -A. 65% B. 75% c. 70% D, 80% 4. Required Estimated Liability for Product Warranty balance at June 30, 2015 A. P301,353 B.. P421,753 C. P120,400 D. P77,847 5. Required adjustment to liability account A. P301,353 debit C. P421,753 debit B. P301,353 credit D. P421,753 credit PROBLEM NO. 6 A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was requested by your auditor soon after December 31, 2015, showing the additions, retirements, depreciation, and other data affecting the income of the company in the 4-year period 2012 to 2015, inclusive, The following data were ascertained. Balance of Trucks account, Jan. 1, 2012 ‘Truck No. 1 purchased Jan. 1, 2009, cost 180,000 ‘Truck No. 2 purchased July 1, 2009, cost 220,000CPA REVIEW SCHOOL.OF THE PHILIPPINES (PAR) APPT Truck No. 3 purchased Jan. 1, 2011, cost 300,000 * Truck No, 4 purchased July 1, 2011, cost 240,000 Balance, Jan. 1, 2012 240,000 ‘The Accumulated Depreciation—Trucks account previously adjusted to January 1, 2012, and entered In the ledger, had a balance on that date of P302,000 (depreciation on the four trucks from the respective dates of purchase, based on a 5-year life, no salvage value). No charges had been made against the account before January 1, 2012. ‘Transactions between January 1, 2012, and December 31, 2015, which were recorded in the ledger, are as follows. July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase price of which was P400,000, Isidro Mfg. Co. paid the automobile dealer 220,000 cash on the transaction, The entry was a debit to Trucks and a credit to Cash, P220,000. ‘The transaction has commercial substance. Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Trucks, 35,000. July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged at that amount to the Trucks account. (Assume truck No. 2 was not retired.) July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash, Isidro Mfg. Co. received P25,000 from the insurance company. The entry made by the bookkeeper was a debit to Cash, P32,000, and credits to Miscellaneous Income, P7,000, and Trucks, P25,000. Entries for depreciation had been made at the close of each year as follows: 2012, P210,000; 2013, P225,000; 2014, P250,500; 2015, P304,000, 1. What is the total depreciation expense for the year ended December 31, 2012? A. P180,000 3B. P198,000 C. P172,000 D. P228,000 2. What is the gain (loss) on trade in of Truck #3 on July 1, 20127 A. (P30,000) B. P10,000 . (P60,000) D. P190,000 3, What is the net book value of the Trucks on December 31, 20157 fe P414,000 B. P348,000 ~ C. P228,500 D. P894,000 4. The total depreciation expense recorded for the 4-year period (2012-2015) is overstated by A. 185,500 B. P265,500 _&, P287,500 D. P275,500 5, Assuming that the books have not been closed for 2015, what is the compound journal entry on December 31, 2015 to correct the company's errors for the 4-year period (2012- 2015)? A. Accumulated depreciation 629,500 Trucks 480,000 Retained earnings 9,500 Depreciation expense 140,000 8, Accumulated depreciation 665,500 Trucks 480,000 Retained earnings 45,500 Depreciation expense 140,000 C. Accumulated depreciation 665,500 ‘Trucks 480,000 Retained earnings 185,500 D. Accumulated depreciation 665,500 ‘Trucks 665,500CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)* A PROBLEM NO. 7 |MIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The bank has requested audited financial statements. Hiatt’s financial statements have never been audited before. It has prepared the following comparative financial statements for the years ended December 31, 2015 and 2014. HIATT TEXTILE CORPORATION COMPARATIVE STATEMENTS OF FINANCIAL POSITION December 31, 2015 and 2014 2015 2014 Assets Current assets: Cash and cash equivalents, 1,205,000 P_ 800,000 Accounts receivable 1,960,000 1,480,000 Allowance for bad debts (185,000) (90,000) Inventory 1,033,000 1,010,000 Total current assets 4,015,000 -3.200,000 Noncurrent assets: Property, plant, and equipment 835,000 847,500 Accumulated depreciation (608,000) (532,000) Total noncurrent assets 227,000 — 315,500 Total assets 24,242,000 3,515,500 Liabilities and Shareholders’ Equity Liabilities: Accounts payable P_607,000 P 980,500 Shareholders’ equity: Ordinary shares, P20 par value; 150,000 shares authorized; : 65,000 shares issued and outstanding 1,300,000 1,300,000 Retained earnings 2,335,000 -1.235,000 Total shareholders’ equity 3,935,000 2,535,000 Total liabilities and shareholders’ equity P4.242,000 3,515,500 HIATT TEXTILE CORPORATION COMPARATIVE INCOME STATEMENTS For the Years Ended December 31, 2015 and 2014 | : 2015 2014 Sales 5,000,000 4,500,000 ‘Cost of goods sold 2,150,000 1.975.000 Gross income 2850,000 2,525,000 Operating expenses: Selling expenses 1,150,000 1,025,000 Administrative expenses 600,000 525,000 Total operating expenses 1,750,000 71,550,000 Net income 1,100,000 975.000 The 2015 audit revealed the following facts: 2. On January 5, 2014, Hiatt Textile Corporation had charged a 5-year insurance premium to expense. The premium totaled P31,000. b. The amount of lass due to bad debts has steadily decreased over the last 2 years. Hiatt ‘Textile Corporation has decided to reduce the amount of bad debt expense from 2% to 1¥a | 9% of sales, beginning with 2015. (A charge of 29% has already been made for 2015.)ILIPPINES (CP, AP PWT c. Hiatt Textile Corporation uses the periodic inventory system. The following are the inventory. errors for the last 2 years. 2014 - Ending inventory overstated by P75,500 2015 - Ending inventory overstated by P99,000 d. An equipment costing P150,000 was acquired on January 3, 2014. The purchase was recorded by a charge to operating expense, The equipment has a useful life of 10 years and a residual value of P25,000. Hiatt Textile Corporation uses the straightline method in depreciating its assets. €. Assume that the books for 2015 have not yet been closed. Ignore tax implications, Based on the above information, answer the following: 1. The December 31, 2015, adjusting entry to correct the expensing of insurance premium paid is &. Prepaid insurance 18,600 Insurance expense 6,200 Retained earnings 24,800 8. Prepaid insurance 18,600 Retained earnings 18,600 €. Insurance expense 18,600 Retained earnings 18,600 D, -Insurance expense 6,200 Retained earnings 6,200 2. The December 31, 2015, adjusting entry to correct the expensing of the equipment purchased on January 3, 2015, should include a credit to Ay Accumulated depreciation—P12,500, {'B. :Retained eamings—P137,500. C” Equipment—P12,500. D. Depreciation expense—P12,500. 3. The December 31, 2015, adjusting entry to correct the inventory errors should include a debit to ‘A. Cost of goods sold—P99,000, 8. Inventory—P23,500. _& Retained earnings—-P75,500. . Cost of goods sald—P75,500. 4. What is Hiatt’s corrected net income for the year ended December 31, 20147 A. P1,012,200 B. P1,212,800 C. P786,800 -D, 1,061,800 5. What is Hiatt’s corrected net income for the year ended December 31, 2015? A. P1,095,200 B. P1,129,800 —C.P1,082,800 D. P1,107,800 PROBLEM 8 ‘The following information is based on a first audit of SABILA COMPANY. The client has not prepared financial statements for 2013, 2014, or 2015. During these years, no accounts have been written off as uncollectible, and the rate of gross income on sales has remained constant for each of the three years, : Prior to January 1, 2013, the client used the accrual method of accounting. From January 1, 2013, to December 31, 2015, only cash receipts and disbursements records were maintained. When sales on account were made, they were entered in the subsidiary accounts receivable ledger. No general ledger postings have been made since December 31, 2012.CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP PWT ‘As a result of your examination, the correct data shown in the table below are available: 12/31/12 12/31/15 Accounts receivable balances: Less than one year old P 15,400 P28,200 ‘One to two years old 1,200 1,800 ‘Two to three years old ‘800 Over three years old 2.209 ‘Total accounts receivable 16,500 33,000 Inventories Pau.s0o p1s.900 Accounts payable for inventory purchased 25.000 11.900 Cash received on accounts receivable in: 2013 2014 2045 Applied to: ‘Current year collections 148,800 © P161,800 208,800 ‘Accounts of the prior year 13,400 15,000 16,800 Accounts of two years prior 600 = 400 _2,000 Total 162800 177.200 227.600 Cash sales p17.009 = p26,000P31,200 Cash disbursements for Inventory purchased pi25.000 © Pi4i.200 173.800 1. The company’s sales revenue for the three-year periad amounted to A. P658,200 B. P74,200 C. P625,400 D. P415,300 2. What is the company's total sales revenue for 2014? A. P206,400 B. P183,600 C. P268,200 D. P180,400 3. The aggregate amount of purchases for the three-year period is A. P131,000 B. P440,000 C, P434,000 BB, P446,000 4. What is the company’s gross profit ratio in each of the three-year period? LAs 33.33% B. 28.35% C. 35.16% D, 31.15% ‘What is the company’s gross profit for each of the three-year period? 2013 2014 2015 A. P60,933 -P 68,200 P-80,000 B 55,533 60,133 79,000 C —122400 «137,600 178,800 D. 61,200 68,800 89,400 END =~