Problem 1

Audit on Plant, Property and Equipment

The TGR Company commenced operations on January 1, 2014. The company’s

machinery account is shown below.

Date Particulars Debit Credit Balance

Jan. 1, 2014 Purchase P157,200
120,000
132,000
P409,200
Sept. 30, 2014 Purchase on installment
Payments from Sept. to Dec. 72,000
481,200
Oct. 3, 2014 Freight and installation 6,000
487,200
Dec. 31, 2014 Depreciation P97,440
389,760
2015 Installment payments for acquisition
on Sept. 30, 2014 144,000
533,760
June 30, 2015 Purchase 240,000
773,760
Dec. 31, 2015 Depreciation 154,752
619,008
June 30, 2016 Acquisition – trade in of old machine 150,000
769,008
Dec. 31, 2016 Depreciation 153,802
615,206
Jan. 1, 2017 Sale 71,250
543,956
Dec. 31, 2017 Depreciation 108,791
435,165
Oct. 1, 2018 Sale 24,000
411,165
Dec. 31, 2018 Depreciation 82,233
328,932

The details of the transactions are as follows:

a) On September 30, 2014, a machine was purchased on an installment basis. The

list price was P180,000, but 12 payments of P18,000 each were made by the
company. Only the monthly payments were recorded in the machinery account
starting with September 30, 2014. Freight and installation charges of P6,000
were paid and charged to the machinery account on October 3, 2014.

b) On June 30, 2015, a machine was purchased for P240,000, 2/10, n/30, and
recorded at P240,000 when paid for on July 5, 2015.

c) On June 30, 2016, the machine acquired for P157,200 was traded for a larger
one having a list price of P279,000. Allowance of P129,000 was received on the
 old machine, the balance of the list price being paid in cash and charged to the
machinery account.

d) On January 1, 2017, the machine acquired on January 1, 2014 with cost of

P132,000 was sold for P75,000. The cost of removal and crating totaled P3,750.

e) On October 1, 2018, the machine purchased on January 1, 2014 was sold for
P24,000 cash.

Assume a 5-year useful life for TGR Company’s machinery.

Questions

1.What is the total amount of gain on the sale/trade-in of the machinery acquired on
January 1, 2014?
A. P50,400
B. P40,200
C. P36,450
D. P86,850

Solution:
Trade-in – June 30, 2016
Cost P157,200
Accum. depreciation, 1/1/14 – 6/30/16 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000
P50,400
Sale – Jan. 1, 2017
Cost P132,000
Accum. depreciation, 1/1/14 – 1/1/17 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250
18,450
Sale – October 1, 2018
Cost P120,000
Accum. depreciation, 1/1/14 – 10/1/18 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000
18,000
Total gain
P86,850

2.What is the adjusted balance of the Machinery account on December 31, 2018?
A. P694,200
B. P705,000
C. P700,200
D. P703,950

Solution:
Machine acquired on Sept. 30, 2014 (P180,000 + P6,000)
P186,000
 Machine acquired on June 30, 2015 (P240,000 x 98%)
235,200
Machine acquired on June 30, 2016 (list price)
279,000
Total
P700,200

3.What is the adjusted balance of the Accumulated depreciation account on

December 31, 2018?
A. P465,600
B. P457,140
C. P462,240
D. P397,740

Solution:
Machine acquired on:
Sept. 30, 2014 (P186,000 x 20% x 4 3/12)
P158,100
June 30, 2015 (P235,200 x 20% x 3 6/12)
164,640
June 30, 2016 (P279,000 x 20% x 2 6/12)
139,500
Accumulated depreciation, December 31, 2018
P462,240

4.What is the correct total depreciation provision for the years 2014-2018?
A. P737,400
B. P734,040
C. P728,940
D. P669,540

Solution:
Date of
Acquisition Cost 2014 2015 2016 2017 2018 Total
1/1/14 P157,200 P31,440 P31,440 P15,720 P0 P0 P
78,600
120,000 24,000 24,000 24,000 24,000 18,000
114,000
132,000 26,400 26,400 26,400 0 0
79,200
9/30/14 186,000 9,300 37,200 37,200 37,200 37,200
158,100
6/30/15 235,200 0 23,520 47,040 47,040 47,040
164,640
6/30/16 279,000 0 0 27,900 55,800 55,800
139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040
P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233
597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807)
(P 137,022)
5.The entry to correct the depreciation provision for the years 2014-2018 should
include a debit (credit) to
Depreciation Expense Retained Earnings
A. P75,807 P61,215
B. (P18,492) P79,707
C. P18,492 (P79,707)
D. P75,807 P55,249

Solution:
Depreciation expense (2018) 75,807
Retained earnings (2014 – 2017) 61,215
Accumulated depreciation
137,022

Problem 2
Audit on Investment

YPILAN Investment Company has the following transactions in the common stock of
CHERRY MAE Chemicals Corporation:

A. On January 7, 2000, YPILAN purchased 2005 shares of P100 par value common
stock at P110 per share.

B. The CHERRY MAE Chemicals Corporation was expanding and as of March 1,

2001, issued to YPILAN 2,000 rights each permitting them to purchase one fourth
share of common stock at par. The bid price of these stocks on March 1, 2001 was
P140. There was no quoted price for the rights.

C. YPILAN was advised that they should use the rights. YPILAN thereafter paid for
the new shares on April 1, 2001, charging the payment to the Investment account.
YPILAN purchased 500 shares of stocks using the stock rights.
D. The accountant felt that the cash paid for the new shares was merely an
assessment since their proportionate share in CHERRY MAE Chemicals was not
changed. He credited all dividends (5% in December of each year) to the Investment
Account until the debit was fully offset.

E. In December, 2005, YPILAN received a 50% stock dividend from CHERRY MAE
Chemicals. The accountant did not make any entry for this dividend because the
company president expected to sell the shares received. They did sell the dividend
share in January, 2006 for P160 per share. Income was credited for the proceeds.

F. In December, 2006, the stocks were split on a two-for-one basis and the new
shares. were issued at no-par value. YPILAN found that each new share was worth
P5.00 more! than the P110 per share which they had paid for their original shares so
it was decided to debit the Investment account with the additional shares received at
P110 per share and to credit income for it.

G. In June, 2007, YPILAN sold one-half of then CHERRY MAE Chemicals holdings at
P100 per share. The proceeds was credited to the Investment account.

Questions
1. The balance in Investment in CHERRY MAE's Chemicals account, per books,
before correction is?
A. P 245,000
B. P 275,000
C. P 495,000
D. P. 595,000

2. The correct balance of the Investment in CHERRY MAE Chemicals account as of

June 30, 2007 is
A. P 90,000
B. P 180,000
C. P 245,000
D. P 250,000

Solution for Items 1 and 2

3. The profit on the sale of the stock dividend shares received in December, 2005 is
A. P 200,000
B. P 120,000
C. P 110,000
D. 75,000
Solution:
Selling Price P160
Cost per share ( P72)
Total P88
X 1,250 shares
Total P110,000

4. The profit of YPILAN from the sale of the 2,500 shares in June
A. P 250,000
B. P 160,000
C. P 125,000
D. P75,000

Solution:
Selling Price P100
Cost per share ( P36)
Total P64
X 2,500 shares
Total P160,000

5. Cash dividends received from 2001 to 2004 totaled

A. P 100,000
B. P75,000
C. P50,000
D. P55,000

Solution:
P250,000 par x 5% x 4 years = P50,000
Problem 3
Audit on Intangibles

Joyce CORP. Holds a valuable patent on a precipitator that prevents certain types of air
pollution, JOYCE does not manufacture or sell the products and processes it develops. Instead
it conducts research and develops products and processes which it patents and then assigns
the patents to manufacturers on a royalty basis. Occasionally, it sells a patent. The following
present the summary of the activities in relation to the aforementioned patent:
1996-1997 Research conducted to develop precipitator P3,840,000
Jan. 5, 1998 Design and construction 876,000
March 15 Testing the prototype models 420,000
Jan. 2, 1999 Legal and other professional fees to process
the patent application (useful life - legal life) 620,000
Dec. 10, 2001 Legal fees paid to successfully defend the
device patent 357,000
Jan. 3, 2003 Acquisition of a competitive patent aimed
at protecting old patent 406,000
Jan. 5, 2004 Acquisition of the related patent which extended
the life of the patents for additional 2 years 654,375
Dec. 31, 2006 Legal fees paid in unsuccessful patent infringement
suit against a competitor 250,000

Questions
1. What is the correct cost of the patent upon initial recognition?
A. P5,756,000
B. P1,916,000
C. P1,040,000
D. P620,000

2. What is the carrying value of the patent on December 31, 1999?

A. P589,000
B. P988,000
C. P1,820,000
D. 5,468,2000

Solution:
Cost of obtaining patent 620,000
Amortization 1999 (19,000)
Carrying value, Dec. 31,1999 589,000

Cost of patent 620,000

Legal life of Patent /20
Amortization 19,000

3. What is the carrying value of the patent on December 31, 2003?

A. P1,181,000
B. P845,625
C. P465,000
D. P380,625
Solution:
Carrying value of patent, Jan. 1, 2000 589,000
2000 Amortization (31,000)
2001 Amortization (31,000)
2002 Amortization (31,000)
Carrying vslue, Dec. 31, 2002 496,000

Acquisition of the released, Jan. 3, 2003 406,000

902,000

2003 Amortization 56,375

Carrying value of patent, Dec.31, 2003 845,625

4. What is the carrying value of the patent on December31, 2005?

A. P1,400,000
B. P1,131,000
C. P1,315,000
D. P1,325,529

Solution:
Carrying value of Patent, Jan. 1, 2004 845,625
Acquisition of the related patent Jan. 5, 2004 654,375
Total 1,500,000
2004 Amortization 88,325
2005 Amortization 88,325
Carrying value of Patent, Dec. 31, 2005 1,323,529

5. What is the total loss from patent write off should be recognized in 2006?
A. P1,235,294
B. P1,213,333
C. P1,225,000
D. P1,323,667

Solution:
1,323,529
Divided by 15
88,325

`
1,323,529
(88,325)
1,235, 294