College of Business and Accountancy

Seatwork- Assignment in Audit 2-3

Instruction: Show your solutions in good forms. 3 pts for each correct answer (16 x 3= 48 + 2)
PROBLEM 1

The accounting records of Alfonso Corp. which was organized in 2018 include only one
account for all intangible assets. The following is a summary of the items debited to the
said account in 2018 and 2019:
Date Particulars Amount
July 1, 2018 Franchise –indefinite term P 1,260,000
Oct. 1 Lease advance payments – year term, 840,000
starting October 1, 2018
Dec. 31 Net loss for 2018 including incorporation 480,000
fees, P 30,000 and related legal fees of
organizing the business, P 150,000
Jan. 2, 2019 Purchased patent – 10 year life 2,220,000
March 1 Cost of developing a recipe 2,250,000
April 1 Purchased goodwill 8,352,000
July 1 Legal fees for successful defense of the 349,500
patent purchased in Jan. 2019

Audit notes:
a. On December 31, 2018, the management estimated that the annual net future
cash flows from the franchise’s continued use was P 180,000. On December
31, 2019, this estimate was revised due to decline in product demand to P
150,000 annually.
b. On December 31, 2019, the estimated annual net future cash flows from the
patent’s continued use was at P 337,822 for its remaining life.
c. The prevailing market rate of interest as of December 31, 2018 and 2019 was
consistent at 12%

Based on the above information and on your audit, answer the following requirements:

1. What is the correct carrying value of the franchise as of December31, 2019?

a. P 1,200,000 c. P 1,260,000
b. 1,250,000 d. 1,310,000

Solution:

Franchise –indefinite term 1,260,000

2. What is the correct carrying value of the Patent as of December 31, 2019?
a. P 1,998,000 c. P 1,900,000
 b. 1,800,000 d. 1,880,000

Solution:

Cost of purchased patent 2,220,000

Amortization (2,220,000/10 years) 222,000.
Carrying value of the patent ` 1,998,000

3. What is the total retro active adjustment to retained earnings beginning in 2019 s
a result of your audit?
a. P 585,000 c. P 900,000
b. 480,000 d. 420,000

4. What is the total amount chargeable to expense for the current year 2019as a
result of your audit?
a. P 3,479,000 c. P 3,049,500
b. 2,861,500 d. 3,059,500

PROBLEM NO. 2

Argentina Company has been involved in a project to develop an engine that runs on
extracts from sugarcane. It commenced the project in February 2017. Between the
commencement date and June 30, 2017, Argentina spent P 3,810,000 on the project. At
June 30, 2017, Argentina spent P 3,810,000 on the project. At June 30, 2014, there
was no identification that the project would be commercially feasible, although the
company had made significant progress and was sufficiently sure of future success that
it was prepared to outlay more funds on the project.

After spending a further P 1,800,000 during July and August, the company had built a
prototype that appeared to be successful. The prototype was demonstrated to a
number of engineering companies during September,
and number of engineering companies during September, and a number of these
companies expressed interest in the further development of the engine. Convinced that
it now had a product that it would be able to sell, Argentina spent a further P 975,000
during October adjusting for the problems that the engineering firms had pointed out.
On November 1 Argentina applied for the patent on the engine, incurring administrative
costs of P 525,000. The patent had an expected useful life of five years.

Between November and December 2017, Argentina spent an additional amount of P

1,230,000 on engineering and consulting costs to develop the project such that the
engine was at manufacturing stage. These resulted in changes in the overall design of
the engine, and costs of P 75,000 were incurred to add minor changes to the overall
design of the patent authority.
On January 1, 2018, Argentina invited tenders for the manufacture of the engine for
commercial sale.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
5. Total amount to be charge to expense when incurred-
a. P 7,185,000 c. P 6,585,000
b. 7,890,000 d. 8,415,000

Solution:

Initial amount spent 3,810,000

Development cost (1,800,000+375,000) 2,775,000
Total amount charge to expenses 6,585,000

6. Total amount to be recognized as Patent

a. P 1,830,000 c. P 525,000
b. 1,230,000 d. P 0

Solution:

Administrative costs 525,000

Engineering and consulting costs 1,230,000
Design costs 75,000
Total Patent 1,830,000

PROBLEM NO. 3

The following unadjusted section of the Statement of Financial Position of the

Dipolog Inc. as of December 31, 2019 were presented to you.
Cash P 85,000
Accounts receivable 282,400
Merchandise inventory 92,000
Deferred charges 8,600
Current assets P 468,000

Trade accounts payable, net of P 5,000 debit balance P 125,000

Interest payable 3,000
Income tax payable 12,000
Money claims of Union pending final decision 45,000
Mortgage payable due in four annual installments 100,000
Current liabilities P 285,000
 A review of the above indicate that the Cash account of P 85,000 included a
customer’s check returned by the bank marked NSF amounting to P 1,250; and
employee’s IOU of
P 2,000; and P 10,000 deposited with the courts for a case under litigation.

Accounts receivable totaling P 282,400 is composed o: Customers, debit balances-

P 181,400; Advances to subsidiaries- P 20,000; Advances to suppliers- P 15,000;
Receivables from Dipolog officers- P 18,000; Allowance for Bad Debts- P(8,000);
and selling price of merchandise invoiced at 140% of cost but not yet delivered- P
56,000. (The goods were not include in Merchandise inventory)

QUESTIONS: based on the above and the result of your audit, answer the following

7. The correct total of Current Liabilities on December 31, 2019 is-

a. P 170,000 c. P 145,000
b. 160,000 d. 215,000

PROBLEM NO. 4

The noncurrent liabilities of Pitogo Company at December 31, 2018 included the
following:
Note payable, bank P 3,600,000
Liability under finance lease 2,623,200
Note payable, supplier 1,500,000

Transactions during 2019 and other information relating to Pitogo’s liabilities were as
follows;

a) The note payable to the bank bears interest at 20% and is dated May 1, 2018.
The principal amount of P 3,600,000 is payable in four equal annual installments
o f P 900,000 beginning May 1, 2019. The first principal and interest payment
was made on May 1, 2019

b) The finance lease is for a ten year period. Equal annual payments of P 750,000
are due on December 31, of each year. The interest rate implicit in the lease is
18%. The amount of
P 2,623,200 represents the present value of the six remaining lease payments (due
December 31, 2019 through December 31, 2024) discounted at 18%

c) The note payable to supplier bears interest at 19% and matures on September
30, 2020. On February 25, 2016, after the December 31, 2019 balance sheet
date, but before the 2019 statements were authorized for issue, Pitogo Company
consummated a non-cancellable agreement with a lender to refinance the 19%,
P 1,500,000 on a long term basis, on readily determinable terms that have not
 yet been implemented. Both parties are financially capable of honoring the
agreement and there have been no violations of the agreement’s provisions.

d) On April 1, 2019, Pitogo issued for P 7,005,675, P 6,000,000 face amount of its
20%, P 100,000 bonds. The bonds were issued to yield 15%. The bonds are
dated April 1, 2019 and mature on April 1, 2024. Interest is payable annually on
April 1.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
8. Liability under finance lease as of December 31, 2019
a. P 1,873,200 c. P 2,017,544
b. 2,345,376 d. 1,123,200

Solution:

Liability under finance lease 2,623,200

Less: Annual payment 750,000
Less: Interest
(2,623,200 x 18%) 472,176 277,824
Liability under finance lease, end 2,345,376

9. Carrying amount of bonds payable as of December 31, 2019

a. P 6,893,813 c. P 6,856,527
b. 7,417,536 d. 7,117,536

Solution:

Carrying value of issued bonds 7,005,675

Less: Interest (6,000,000 x 20% x 9/12) 900,000
Effective interest (7,005,675 x 15% x 9/12) (788,138) 111,862
Carrying amount of bonds payable 6,893,813

10. Total noncurrent liabilities as of December 31, 2019

a. P 12,211,357 c. P 10,711,357
b. 10,154,190 d. 9,817,014

Solution:

20% Note payable, bank (3,600,000 - 900,000) 2,700,000

Less: Installment due 900,000 1,800,000
Liability under finance lease 2,345,376
Less: Annual payment 750,000
Less: Applicable to interest
 (2,345,376 x 18%) 422,168 327,832 2,017,544
Carrying amount of bonds payable 6,893,813
Total noncurrent liabilities 10,711,357

11. Current portion of long-term liabilities as of December 31, 2019

a. P 3,150,000 c. P 2,727,832
b. 2,812,824 d. 2,169,864

Solution:

20% Note payable, bank due 900,000

Finance lease liability - principal payment due 327,832
19% Note payable, bank due 1,500,000
Current portion of long-term liabilities 2,727,832

12. Total interest expense for the year 2015

a. P 2,145,314 c. P 1,673,139
b. 2,408,028 d. 1,673,139

Solution:

20% Note payable, bank

(3,600,000 x 20% x 4/12) 240,000
(2,700,000 x 20% x 8/12) 360,000 600,000
Liability under finance lease (2,623,200 x 18%) 472,176
20% bonds payable (7,005,675 x 15% x 9/12) 788,138
19% Note payable bank (1,500,000 x 19%) 285,000
Total interest expense 2,145,314

PROBLEM 5

Whitey Corporation carries a wide variety of computer equipments, printer, fax, and
telephone. Whitey uses two sales promotion techniques namely warranties and
premiums, to attract customers.

Computer equipment and printer are sold with a one year warranty for replacement of
parts and labor. The estimated warranty cost, based on past experience, is 2% of
sales.

The premium is offered on the fax and telephone. Customers received a coupon for
each peso spent on fax and telephone. Customers may exchange 2,000 coupons and
P 200 for USB. Whitey pays P 340 for each USB and estimates that 60% of the
coupons given to the customers will be redeemed.

Whitey’s sales for 2019 were P 14,400,000; P 10,800,000 from computer equipments
and printers and P 3,600,000 from fax and telephone. Replacement parts and labor for
warranty work totaled P 328,000 during 2019. A total of 1,300 USB used in the
premium program were purchased during the year and there were 2,400,000 coupons
redeemed in 2019.

The accrual method is used by Whitey to account for the warranty and premium costs
for financial reporting purposes. The balances in the accounts related to warranties
and premiums on January 1, 2019 are shown below:

Inventory of premium USB P 79,900

Estimated premium claims outstanding 89,600
Estimated liability from warranties 272,000

QUESTIONS: based on the above and the result of your audit, answer the following

13. At what amount should the warranty expense and premium expense be shown in
the December 31, 2019 profit or loss of Whitey Corporation?
Warranty expense Premium expense
a. P 216,000 P 113,900
b. 216,000 151,200
c. 272,000 408,000
d. 328,000 240,800

Solution:

Sales from computer and printer 10,800,000

Estimated warranty rate 2%
Warranty expense 216,000

Sales from fax and telephone 3,600,000

Estimated coupon redeemed rate 60%
Total 2,160,000
Div.: Coupons 2,000
Total 1,080
Mult.: Excess of exchange of coupon (340 - 200) 140
Premium expense 151,200

14. At what amount should the estimated liability from warranties be shown in the
December 31, 2019 statement of financial position of Whitey Corporation?
a. P 160,000 b. P 216,000 c, P 272,000 d. 328,000

Solution:

Estimated liability from warranties, beg. 272,000

Add: Warranty expense, 2019 216,000
Total 488,000
Less: Replacement parts and labor for warranty work, 2019 (328,000)
Estimated liability from warranties, 2019 160,000
15. At what amount should the Inventory of premium USB be shown in the
December 31, 2019 financial statements of Whitey Corporation?
a. P 79,900 b. P 113,900 c. P 408,000 d. P 442,000

Solution:

Inventory of premium USB, beg. 79,900

Add: Premium purchases (1,300 x 340) 442,000
Total premiums available 521,900
Less: Premiums issued (2,400,000/2,000 x 340) 408,000
Inventory of premium USB, 2019 113,900.

16. What amount should the estimated premium claims outstanding be shown in the
December 31, 2019 financial statements of Whitey Corporation?
a. P 72,800 b. P 88,000 c. P 151,320 d. P 168,000

Solution:

Estimated premium claims outstanding, beg. 89,600

Add: Premium expense, 2019 151,200
Total 240,800
Less: Premiums issued (2,400,000/2,000 x 140) (168,000)
Estimated premium claims outstanding, 2019 72,800

End