ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Preweek

AUDITING (Auditing Problems) S. Ireneo  C. Espenilla

AP-702S: SOLUTIONS TO AUDIT CASES/PROBLEMS

PROBLEM 1: AUDIT OF CASH: MARKAT CORPORATION (Ans. A.)
Accountability:
Petty cash fund (imprest balance) 40,000
Collections for charity (not in tact) 2,500 42,500
Valid supports:
Cash items:
Currencies and coins 12,540
Replenishment check 15,600
Accommodated check 4,000
Non Cash items:
PCExpense vouchers 4,500
Accommodated check - NSF 2,000 38,640
Shortage 3,860

PROBLEM 2: AUDIT OF CASH: JADE CORPORATION

Bank Reconciliation
BANK BOOK
Unadjusted balance 792,285 726,600 Unadjusted balance
Deposit in transit, excluding NSF 10,500 20,000 Unrecorded credit
Outstanding check, excluding certified check (75,975) (5,000) Unrecorded debit
Bank error 2,250 31,500 Book errors (note a.)
Correct cash balance (1. Ans. A) 729,060 773,100
(44,040) Shortage 3. Ans. C
729,060 Adjusted balance

Unadjusted balance per books 726,600

Correct cash balance 729,060
Net adjustment to cash (12/31) (2,460) 2. Ans. B

Accountability as of January 15 180,500

Unrecorded credit as of 12/31 (20,000)
Book errors in January (audit note b & c) 19,500
Adjusted accountability 180,000
January deposits from January collections
January bank credits 143,895
Correction of Dec. bank charge error (2,250)
Dec. deposit in transit (10,500) 131,145
Cash on hand 10,125
Expense vouchers 1,125
Cash shortage from Jan. 2 - Jan. 15 37,605
Add: Cash shortage as of Dec. 31 44,040
Total cash short as of Jan. 15, 2019 81,645 4. Ans. A

PROBLEM 3: AUDIT OF CASH: CARRERA INC.

Proof of Cash, July 31, 2018 June 30, Receipt Disburs. July 31,
Unadjusted balances per bank statement 172,590 751,680 903,390 20,880
Deposit in transit, June 18,000 (18,000)
Deposit in transit, July (SQUEEZE) 30,000 30,000 2. Ans. B.
Outstanding checks, June (52,260) (52,260)
Outstanding checks, July (SQUEEZE) 41,820 (41,820) 1. Ans. B.
Bank error, July Overstated disbursement (11,880) 11,880
Adjusted balances 138,330 763,680 881,070 20,940 3. Ans. C.
March 31, Receipt Disburs. April 30,
Unadjusted balances per book 140,330 763,680 654,330 249,680
Unrecorded bank debits, July Payment of AP 31,800 (31,800)
Unrecorded bank debits, July BSC 2,610 (2,610)
Unrecorded bank debits, July Payment of NP 183,000 (183,000)
Unrecorded bank debits, July NSF 9,330 (9,330)
Adjusted balances 140,330 763,680 881,070 22,940
Cash in bank, shortage June 30 2,000 4. Ans. C.

PROBLEM 4: AUDIT OF CASH; CASH/ACCRUAL: BURBERRY CORPORATION

1. Ans. A.
Cash collection from customers 45,780,000
Add: Sales discounts 1,580,000
Sales returns, excluding refunds 1,590,000
Write-off of receivables 1,120,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
Decrease in advances from customers 1,900,000
Increase in accounts receivables 4,200,000
Total 56,170,000
Less: Recoveries of previous write-off (420,000)
Accrual basis gross sales 55,750,000
2. Ans. D.
Cash payments to suppliers of inventory 24,490,000
Add: Purchase discounts 1,290,000
Purchase returns, excluding refunds 1,320,000
Increase in accounts payable 3,780,000
Total 30,880,000
Less: Increase in advances to suppliers (1,512,000)
Accrual basis gross purchases 29,368,000
3. Ans. C.
Accrual basis gross purchases 29,368,000
Less: Purchase discount (1,290,000)
Purchase returns (total) (1,960,000)
Net Purchases 26,118,000
Less: Increase in Inventories (2,690,000)
Cost of Sales 23,428,000
4. Ans. A.
Increase in allowance for bad debt 840,000
Add: Write-off of AR 1,120,000
Less: Recovery of previous write-off (420,000)
Bad debt expense 1,540,000
5. Ans. A.
Increase in accumulated depreciation 1,000,000
Decrease in accum depr from equpment sold* 1,400,000
Depreciation expense for the year 2,400,000
Increase in Equipment account 2,000,000
Purchase of Equipment during the year 5,000,000
Cost of Equipment sold during the year 3,000,000
Carrying value of equipment sold 1,600,000
Accum Depr. of equipment sold during the year 1,400,000

PROBLEM 5: AUDIT OF CASH; CASH/ACCRUAL: FORD CORP.

1. Ans. C.
Accounts receivable, beginning balance 30,000
Add: Sales, accrual basis 538,800
Less: Accounts receivable, ending bal. (33,000)
Collections from customers 535,800
2. Ans. A.
Inventory, ending balance 31,000
Add: Cost of goods sold for the year 250,000
Less: Inventory, beginning balance (47,000)
Purchases, accrual basis 234,000
Add: Trade accounts payable, beg. bal. 17,500
Less: Trade accounts payable, end bal. (25,000)
Cash payments made to suppliers 226,500
3. Ans. C.
Interest expense, accrual basis 4,300
Amortization of discount on bonds (500)
Interest expense paid 3,800
4. Ans. B.
Income tax expense, accrual basis 20,400
Add: Income tax payable, beg. bal. 27,100
Deferred tax liability, beg. bal. 4,600
Less: Income tax payable, end. bal. (21,000)
Deferred tax liability, end bal. (5,300)
Income tax expense paid 25,800
5. Ans. D.
Selling expenses, accrual basis 141,500
Depr. expense - selling (1,500 * 1/3) (500)
Selling expenses paid 141,000

PROBLEM 6: AUDIT OF CASH; CASH/ACCRUAL: JOURNEY CORPORATION (ANS. D)

Cash sales 3,000,000
Collections from accounts receivable 30,000,000
Collections from trade notes receivable 2,400,000 35,400,000
Add: Sales returns and allowances (no refund) 800,000
Increase in Accounts receivable 1,400,000
Total 37,600,000
Less: Decrease in Notes receivable (600,000)
Gross Sales P37,000,000
Less: Sales returns (total) (1,200,000)
Net sales, per audit P35,800,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
PROBLEM 7: AUDIT OF CASH; CASH/ACCRUAL: CLARKE CORPORATION (ANS. C)
Cash collected from customers 9,890,000
Add: AR, ending 835,000
Deduct: AR, beginning (536,000)
Advances from customers, ending (125,000)
Sales Accrual basis 10,064,000

PROBLEM 8: AUDIT OF RECEIVABLES: GENEROSITY INC.

Aug. and
Dec. Nov. Oct. Sept. prior
Invoice 0-30 31-60 61-90 91-120 >120
Customer Amount
date days days days days days
Grace Inc. 9/12/18 139,200 139,200
Truth Corp. 12/12/18 153,600 153,600
12/2/18 99,200 99,200
Gusto Co. 11/17/18 185,120 185,120
10/8/18 176,000 176,000
National Co. 12/8/18 160,000 160,000
10/25/18 144,800 144,800
8/20/18 40,000 40,000
Nano Inc. 9/27/18 96,000 96,000
Bruce Inc. 8/20/18 71,360 71,360
Privacy Corp. 12/6/18 112,000 112,000
11/29/18 169,440 169,440
Total 1,546,720 524,800 354,560 320,800 235,200 111,360

Reconciliation between GL and SL with Aging of AR analysis

0-30 31-60 61-90 91-120 >120
Per GL Per SL days days days days days
Unadjusted balances 1,566,720 1,546,720 524,800 354,560 320,800 235,200 111,360
(a) Write-off of AR-Bruce (71,360) (71,360) (71,360)
(b) Pricing error (30,000) (30,000) (30,000)
(c) Posting error - - (99,200) 99,200
Adjusted balances 1,465,360 1,445,360 425,600 453,760 290,800 235,200 40,000
Unreconciled difference (20,000)
Adjusted balance 1,445,360
Required allowance for
BD in % 2% 5% 10% 20% 50%
Required allowance
for Bad Debt 127,320 8,512 22,688 29,080 47,040 20,000
1.Ans. D.

2. Ans. B.
Allowance for BD, ending 127,320
Less: Allowance for BD, unadjusted (46,720)
Add: Write off of AR-Bruce 71,360
Bad Debt Expense 151,960

3. Ans. A.
Gross Accounts Receivable 1,445,360
Allowance for Bad Debts (127,320)
Amortized cost/Carrying value 1,318,040

4. Ans. B.
AJE to record unreconciled difference:
Sales 20,000
Accounts receivable 20,000

PROBLEM 9: AUDIT OF RECEIVABLES: JACKSON INC.

1. Ans. A.
Adjusting entry: DR: Sales allowance/Sales P30,000
CR: Accounts receivable P30,000
2. Ans. C.
Adjusting entry: DR: Sales returns 140,000
CR: Accounts receivable 140,000
DR: Inventory 98,000
CR: Cost of Sales 98,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
3. Ans. C.
Adjusting entry: DR: Sales 44,000
CR: Accounts receivable 44,000
4. Ans. D.
Adjusting entry: DR: Sales return 45,000
CR: Accounts receivable 45,000
DR: Accounts payable 45,000
CR: Purchases 45,000
*Note that the inventory were appropriately taken in the perpetual records.
The Debit to Sales return is offset by the Credit to Purchases, thus no effect to net income.
5. Ans. A. The transaction with Endigo Corp. is a valid sale as it is in-transit FOB Shipping Point.

PROBLEM 10: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC CO.

Amortization table:
Correct Interest Nominal Interest Amortization Balance
(CV*12%) (Princ*10%)
1/2015 (Initial amount recognized) P9,279,045
12/2015 1,113,485 1,000,000 113,485 9,392,530
12/2016 1,127,104 1,000,000 127,104 9,519,634
12/2017 1,142,356 1,000,000 142,356 9,661,990
12/2018 1,159,439 1,000,000159,439 9,821,429 1. Ans. C.

Loans and receivable, including interest (9,821,429+1,000,000) 10,821,429

PV of future cash flows using the original effective rate %: 12%
(1,000,000*0.8929) = P892,857
(2,000,000*0.7972) = 1,594,388
(2,500,000*0.7118) = 1,779,451
(2,500,000*0.6355) = 1,588,795 (5,855,491) 3. Ans. C.
Impairment loss P4,965,938 2. Ans. C.

Date Amortization/ Principal

(CV*12%) Collection Balance
12/2018 P5,855,491
12/2019 702,659 (1,000,000) 5,558,150 4. Ans. B.
12/2020 666,978 (2,000,000) 4,225,128 5. Ans. D.
12/2021 507,015 (2,500,000) 2,232,143
12/2022 267,857 (2,500,000) -

PROBLEM 11: AUDIT OF LOANS RECEIVABLES (FINANCING): ABC FINANCING CORP. (Ans. C)
DEF Corp, 10% - Trade receivable, Term, Interest-bearing
CORRECT ENTRIES:
Jan. 1, 2017:
Cash 4,754,134
Loans receivable 4,754,134
Fair value = Loan proceeds (PV of cash flows at 6% semi-annual eff. rate for 6 semi-annual pds)
Principal: (5,000,000*0.704961) 3,524,803
Interest: (250,000*4.917324) 1,229,331
Total 4,754,134
Amortization table: Loans receivable, DEF Corp.
Correct Int. Nominal Int. Amort. Balance
January 1, 2017: 4,754,134
June 30, 2017: 285,248 250,000 35,248 4,789,382
December 31, 2017: 287,363 250,000 37,363 4,826,745
June 30, 2018: 289,605 250,000 39,605 4,866,349
December 31, 2018: 291,981 250,000 41,981 4,908,330
June 30, 2019: 294,500 250,000 44,500 4,952,830
December 31, 2019: 297,170 250,000 47,170 5,000,000

PROBLEM 12: AUDIT OF LOANS RECEIVABLES (FINANCING): XYZ FINANCING CORP. (Ans. A)
KLM - Trade receivable, Term and Non-interest-bearing
CORRECT ENTRIES
January 1, 2016:
Cash 2,483,685
Loans receivable 2,483,685
Fair market value = Loan proceeds (PV of future cash flows at 10%effective rate for 5 periods)
Principal: P4,000,000*0.6209213) 2,483,685 0.6209213
Amortization table: Loans receivable, KLM
Correct Int. Nominal Int. Amortization Balance
January 1, 2016: 2,483,685
December 31, 2016: 248,369 - 248,369 2,732,054

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS

December 31, 2017: 273,205 - 273,205 3,005,259

December 31, 2018: 300,526 - 300,526 3,305,785
December 31, 2019: 330,579 - 330,579 3,636,364
December 31, 2020: 363,636 - 363,636 4,000,000

December 31, 2016:

Loans receivable 248,369
Interest income 248,369

December 31, 2017:

Loans receivable 273,205
Interest income 273,205

December 31, 2018:

Loans receivable 300,526
Interest income 300,526

Adjusting Journal entry at the beginning of 2018:

Retained earnings, beg 994,741
Loans receivable 994,741
Principal amount 4,000,000
Less: Proceeds (2,483,685)
Interest income rececognized in 2016 1,516,315
Correct interest income in 2016 (see amo.) (248,369)
Correct interest income in 2017 (see amo.) (273,205)
Overstatement in interest income in '16 and '17 994,741

PROBLEM 13: AUDIT OF TRADE RECEIVABLES AND INVENTORIES:

AR Inventories Sales COS
376,500 525,000 1,520,000 942,000
December recorded sales:
Shipment to consignee
(Half has been sold) (10,000) 7,000 (10,000) (7,000)
Commission of consignee (2,000)
In-tansit FOB, Dest. (8,680) 7,240 (8,680) (7,240)
In-tansit FOB, Dest. (10,000) (10,000)
In-transit FOB, SP (6,100) 6,100
Sipment to consignee (14,000) (14,000)
January recorded sales:
In-transit FOB, SP 21,000 21,000
In-transit FOB, SP 10,500 (8,800) 10,500 8,800
Adjusted balance 363,320 524,340 1,508,820 942,660
1. Ans A. 2. Ans. B. 3. Ans. C. 4. Ans. D.

PROBLEM 14: AUDIT OF INVENTORIES: PORTENT CORP.

Cost Retail Price
Inventory, January 1 1,698,735 2,516,129 -
Purchases 13,901,265 21,600,000
Freight in 702,000
Purchase discount (1,684,800)
Purchase returns and allowances (1,123,200) (1,728,000)
Departmental tranfer in 2,808,000 4,320,000
Departmental transfer out (1,684,800) (2,592,000)
Abnormal spoilages (493,812) (894,240)
Mark-up 3,510,000
Mark-up cancellation (1,053,000)
COGAS (Net Marked-up) 14,123,388 25,678,889 55.00% Conservative
Mark-down (2,106,000)
Mark-down cancellation 365,058
COGAS (Marked-up and Marked-down) 14,123,388 23,937,947 59.00% Average
Less: Beginning inventories (1,698,735) (2,516,129)
COGAS excluding beg. inventories 12,424,653 21,421,818 58.00% FIFO Retail
1. Ans. A.
COGAS at retail (marked-up and marked-down) 23,937,947
Less: Cost of Sales at Ret./Gross sales
Sales 18,630,000
Sales discounts to employees 745,200
Sales returns and allowances (2,235,600)

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
Normal spoilages 1,117,800 18,257,400
Ending Inventory at Retail Price 5,680,547
2. Ans. A.
Ending Inventory at Retail Price 5,680,547
Multiply by: Cost rate under Conservative Approach 55%
Ending Inventory at Cost 3,124,302
Ending Inventory per books/count 2,811,690
Inventory Shortage 312,612
3. Ans. B.
Ending Inventory at Retail Price 5,680,547
Multiply by: Cost rate under Average Approach 59%
Ending Inventory at Cost 3,351,522
Ending Inventory per books/count 2,811,690
Inventory Shortage 539,832
4. Ans. B.
Ending Inventory at Retail Price 5,680,547
Multiply by: Cost rate under Conservative Approach 58%
Ending Inventory at Cost 3,294,717
Ending Inventory per books/count 2,811,690
Inventory Shortage 483,027

PROBLEM 15: AUDIT OF INVENTORIES: GLORIA CORP.

1. Ans. C.
Finished goods Item M Item P Item Q
Cost 550,000 540,000 430,000 1,520,000
NRV: Est. Selling Price - Cost to Sell 540,000 527,000 697,000
Required allowance for write-down 10,000 13,000 - (23,000)
Lower of Cost or NRV 1,497,000
2. Ans D.
Work-in-process Item M Item P Item Q
Cost 240,000 188,000 320,000 748,000
NRV: (Est. Selling Price - Cost to Sell -
Cost to Complete) 240,000 148,000 550,750
Required allowance for write-down - 40,000 - (40,000)
Lower of Cost or NRV 708,000
3. Ans. C.
Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down.
A B C
Cost 250,000 500,000 400,000 1,150,000
Current purchase price 250,000 480,000 375,000
Required allowance for write-down - 20,000 25,000 (45,000)
1,105,000
Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down.
X Y Z
Cost 400,000 300,000 200,000 900,000
Current purchase price 450,000 275,000 180,000
Required allowance for write-down - 25,000 20,000 (45,000)
855,000
Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down.
D E
Cost 375,000 450,000 825,000
TOTAL RAW MATERIALS 2,785,000
4. Ans. D.
Allowance for WD-FG, ending 23,000
Less: Allowance for WD-FG, beg. (10,000)
Loss on write-down - FG 13,000
Allowance for WD-WIP, ending 40,000
Less: Allowance for WD-WIP, beg. -
Loss on write-down - WIP 40,000
Allowance for WD-RM, ending 90,000
Less: Allowance for WD-RM, beg. (40,000)
Loss on write-down - RM 50,000
Total loss on inventory write-down 103,000

PROBLEM 16: AUDIT OF TRADE PAYABLES: ABC CORPORATION

1. Ans. A.
Accounts payable, unadjusted 1,250,000
Purchase on consignment recorded in Dec. (70,000)
Purchase in transit FOB Dest. (60,000)
Purchase in transit FOB SP recorded in Jan. 50,000
Accounts payable, adjusted 1,170,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
2. Ans. A.
Total Sales in 2017 1,500,000
Multiply by estimated redemption rate 60%
900,000
Divide by: # of labels required to be surrendered to redeem 1 premium 30
Estimated expense in number of premiums 30,000
Multiply by net cost (P100-40) 60
Total premiums expense in 2017 1,800,000
Less: Net cost of premiums actually redeemed (20,000-3,500)*P60 990,000
Estimated premiums liability 12/31/2017 P810,000
3. Ans. B.
Total Sales in 2018 1,800,000
Multiply by estimated redemption rate 60%
1,080,000
Divide by: # of labels required to be surrendered to redeem 1 premium 30
Estimated expense in number of premiums 36,000
Multiply by net cost (P100-40) 60
Total premiums expense in 2018 2,160,000
Add: Liability from 2017 premiums 810,000
Less: Net cost of redeemed premiums in 2018 (3,500+15,000-6,000)*P60 750,000
Estimated premiums liability 12/31/2018 2,220,000

4. Ans. B.
Total accum. compensated absences 2017 1,200
Add: additional comp. absences in 2018 900
Total 2,100
Less: 2017 absences taken advantage in 2018 (450)
2017 absences forfeited in 2018 (300)
Total accum. Compensated absences 2018 1,350
Multiply by: Daily wage rate in 2018 (360,000/1,200days)*1.1 330
Total accum compensated absences 2018 445,500

5. Ans. C.
Prepayments balance 2018 970,000
Multiply by tax rate: 40%
Deferred tax liability balance 388,000
*Prepayments create FTALE: future taxable amount/ deferred tax liability/expense
Premiums payable create FDAAB: future deductible amount/ deferred tax asset/benefit
*Deferred tax liability and Deferred tax asset should be presented separately and not be presented as offsetting amounts, unless
right of offset exists. Deferred tax liability and Deferred tax assets are not presented as current.

6. Ans. D.
Unadjusted net income 5,450,000
Overstatement in accounts payable (1,250,000-1,170,000) 80,000
Understatement in premiums liability (810,000-2,220,000) (1,410,000)
Understatement in acc. comp. absences (360,000-445,500) (85,500)
Adjusted net income 4,034,500
Bonus = 10%(NI-Bonus): B = 10% (4,034,500-B): Bonus = P366,773

PROBLEM 17: AUDIT OF INVESTMENTS: BENSHOPPE INC.

1. Ans. B.
2. Ans. A.
FMV 12/18 CV/Cost
Aye Corp. Shares 700,000 540,000 (29.50-2-0.50)*20,000sh
Bee Inc. Shares 1,000,000 1,080,000 (27.50-.50)*40,000sh
See Co. 10%, 2M Bonds** 1,964,948 1,923,000 (1,973,000-50,000)
3,664,948 3,543,000
Unrealized holding gain - IS 121,948
Financial assets at FMVPL 3,664,948
See Co. 10%, 2M Bonds (FMV/PV of Cash flows using 5.5% semi-annual effective rate)
Principal (2M*0.8072) 1,614,433 1
Interest (100,000*3.5052) 350,515
** 1,964,948
3. Ans. A.
Investment in Dee Shares (Associate)
Intial cost (6/30/18) 2,400,000
Share from dividends (250,000)
Share from net income 280,000 (2,240,000*6/12)*25%
Investment in Assoc Balance 2,430,000
4. Ans. D.
Amortization table: Financial asset at amortized cost, See Co at effective rate 10%
Correct Nominal
Int. Int. Amortization Balance
October 1, 2018: 1,923,000 *excluding accrued interest
December 31, 2018: 57,690 50,000 7,690 1,930,690

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
PROBLEM 18: AUDIT OF INVESTMENTS: IFFY CORP.
Acquisition price 5,000,000
Share from net income (4.8M*30%) 1,440,000
Understatement depr. (1.6M/5)*30% (96,000) 1,344,000
Share from other comp. loss (800,000*30%) (240,000)
Share from dividends (1,500,000*30%) (450,000)
Carrying Value, 12/31/18 5,654,000 1. A.
If SME using the FMV Method:
Acquisition price 5,000,000
Fair market value, 12/31/18 (30,000*210) 6,300,000
Unrealized holding gain - IS 1,300,000
Dividend Income (1.5M*30%) 450,000
Total Investment Income 1,750,000 2. A.
CESSATION:
Proceeds from sale (18,000*210) 3,780,000
Fair Value of remaining share to be reclassified
to FA at FMV (12,000*210) 2,520,000 4. B.
Total 6,300,000
Less: Carrying Value of Investment in Assoc. before
cessation 5,654,000
Gain before recycling of OCLoss 646,000
Recycling of OCloss (240,000)
Total cessation loss - IS 406,000 3. C.

DILUTION: Before After

# shares held 30,000 30,000
# shares outstanding 100,000 125,000
% of interest 30% 24%
Share from increase in Assoc.'s net assets
(25,000*210)*24% 1,260,000
Carrying value of Investment as if given up
(5,654,000*6/30) (1,130,800)
Gain on dilution before recycling of OCLoss 129,200
Recycling of Ocloss (240,000*6/30) (48,000)
Total cessation loss - IS 81,200 5. A.

PROBLEM 19: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: RURAL CORPORATION

1. Ans. D.
Initial cost of Warehouse:
Materials (P150,000 - 10,000) 140,000
Direct Labor (P800,000 - 25,000) 775,000
Supervision 65,000
Design and planning costs 20,000 1,000,000
Depreciation for the year: (1,000,000 / 20 years) (50,000)
Carrying value as of December 31, 2018 950,000
2. Ans. D.
Plant, Carrying Value as of December 31, 2017 2,070,000
CV as of 12/31/17 of the plant sold in 2018 (270,000)
CV as of 12/31/17 of the remaining plant 1,800,000
Less: Depreciation for the year (P1.8M*25%) (450,000)
Plant, Carrying Value as of December 31, 2018 1,350,000
3. Ans. A
Depreciation
Remaing Plant 450,000
New Warehouse 50,000
Building at revalued amount (P4.8M/20yrs) 240,000
Total depreciation for the year 740,000
4. Ans. A.
Fair market value of the building 1/1/18 4,800,000
Carrying value of the building 1/1/18 3,200,000
Revaluation surplus on building, 1/1/18 1,600,000
Piecemeal transfer of RS as of 12/31 (1.6M/20yrs) (80,000)
Revaluation surplus on building as of 12/31/18 1,520,000
Revaluation surplus on land (1.2M - 1M) 200,000
Total Revaluation Surplus as of December 31, 2018 1,720,000

PROBLEM 20: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: KINDNESS CORPORATION

1. Ans. B.
Cash price of new automotive equipment 1,600,000
Less: Cash payment made (850,000)
Trade in allowance/Fair value of old eqpt. 750,000
Carrying value of old equipment
P2,100,000 - (2,100,000*26/36) 583,333
Gain on trade-in 166,667

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS

2. Ans. C.
Depreciation - Building
Beginning Balance, CV 5,314,410
Multiply by: Double declining rate: 10% 531,441
Building Improvement
Cost 1,250,000
Multiply by: Double declining rate based
on Bldg's remaining life (16yrs*) 12.50% 156,250
Total depreciation expense 687,691
*Note: Through trial and error, one can figure out based on the Accum Depr.-Bldg balance that the
building has already been depreciated for 4 year as of December 31, 2015. Thus the building's
remaining life as of January 1, 2016 is 16 years.

3. Ans. D.
Depreciation - Machinery and equipment
Beginning Balance (5.4M - 1.8M) 3,600,000
Divide by: useful life 10 360,000
Machinery destroyed by fire 1,800,000
Divide by: useful life 10
Multiply by: 6mos/12mos 6/12 90,000
Replacement machinery 3,200,000 *
Divide by: useful life 10
Multiply by: 4mos/12mos 4/12 106,667
Total depreciation expense 556,667

* PV of installment payments:
Installment price 3,837,054
Divide by: 5 years 5
Installment payment, in advance 767,411
Multiply by: PV of 1 at 10% for 5 periods in advance 4.169865 0.68301
Cash price equivalent/Initial cost of the new machine 3,200,000

4. Ans. B.
Depreciation - Automotive equipment
Beginning Balance 511,111
Less: Depreciation on old equipment traded out
P2,100,000*4/36 (233,333)
Add: Depreciation on new equipment traded in
P1,600,000*8/36 355,556
Total depreciation expense 633,333

PROBLEM 21: AUDIT OF PROPERTY, PLANT AND EQUIPMENT: MONICA CORP.

Value in use: P40,000*5.33493 P213,397
50,000*0.46651 23,325 P236,722 1. Ans. B.
(higher than fair value less cost to sell, P220,000)
Carrying value (12/31/15) (400,000*8/10)+50,000 P370,000
Recoverable value (236,722)
Impairment loss P133,278 2. Ans. A.
Carrying value (12/31/17) ((236,722-50,000)*6/8)+50,000 P190,042 3. Ans. C.
Carrying value had there been no impairment: (400,000*6/10)+50,000 P290,000
Carrying value (with impairment): 190,042
Gain on impairment recovery P99,958 4. Ans. B.
FMV = (555,000-50,000)*60% = 303,000 + 50,000 = P353,000
Depreciation 2019: (P290,000-50,000)/8 (revised remaining life) P30,000 5. Ans. D.
Depreciation 2019: (P353,000-50,000)/8 (revised remaining life) P37,875 6. Ans. C.
Revaluation surplus 12/31/2019 (353,000-290,000) P63,000
Multiply by: 6/8 P47,250 7. Ans. A.

PROBLEM 22: AUDIT OF INTANGIBLES: CRUZ COMPANY

1. Ans. B.
Amortization:
Patent (P200,000 / 10 years) 20,000
Computer software (P100,000 * 60/120) 50,000
Total Amortization 70,000

2. Ans. C.
Impairment loss:
Copyright:
Carrying value 400,000
Recoverable value/Value in use (P8,000 / 5%) 160,000 240,000

Tradename

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
Carrying value 350,000
Recoverable value/Value in use (P15,000 / 5%) 300,000 50,000

Goodwill
Carrying value of the CGU including Goodwill 3,000,000
Recoverable value/Value in use (P200,000 * 14.09394) 2,818,789 181,211
(present value at 5% for 25 periods with annuity)
Total Impairment Loss 471,211

3. Ans. D.
Goodwill before impairment loss 900,000
Impairment of the CGU entirely attributed to Goodwill (181,211)
Carrying value of Goodwill after impairment loss 718,789

4. Ans. B.
Patent, 12/31/18 (P200,000 - P20,000) 180,000
Computer software (P100,000 - P50,000) 50,000
Copyright 160,000
Tradename 300,000
Carrying Value of Intangibles as of 12/31/18 690,000

PROBLEM 23: AUDIT OF INTANGIBLES: DOHA CORPORATION

1. Ans. A.
CV, Patent, 12/31/15: P444,000*9yrs/10yrs 399,600

2. Ans. A.
CV, Franchise, 12/31/15: P252,000*6.5yrs/8yrs 204,750

3. Ans. C.
Amortization of franchise, 2017 (P252,000/8yrs)*6/12 15,750
Rent expense, 2017 (P168,000/2yrs)*3/12 21,000
Net loss including organization expense in 2017 96,000
Retroactive adjustment to RE,beg. 2018 132,750

4. Ans. C.
Amortization of franchise, 2018 (P252,000/8yrs) 31,500
Rent expense, 2018 (P168,000/2yrs) 84,000
Amortization of patent, 2018 (P444,000/10yrs) 44,400
Cost to develop a secret formula 450,000
Legal fees - successful defense 75,900
Research and development expense, 2018 960,000
Total expense in 2018 1,645,800

PROBLEM 24: AUDIT OF INTANGIBLES: SABRINA MANUFACTURING CORPORATION

1. Ans. B.
Patent per books 85,000
Cost to improve the machinery charged to the patent (17,000)
Correct cost of the Patent 68,000
Amortization for the year: (68,000 / 17 years) (4,000)
Correct Carrying Value of the Patent as of 12/31/18 64,000
2. Ans. A.
Correct Initial Cost of Lic. Agreement A 50,000
Impairment loss in 2017 (P50,000*60%) (30,000)
Carrying Value of Lic. Agreement A as of 12/31/18 20,000
*Note that the flood happening on January 2019 is a Type 2 (Non-adjusting subsequent event)
3. Ans. C.
Correct Iniital Cost of Lic. Agreement B 50,000
Amortization for 2018 (P50,000/10yrs) (5,000)
Carrying Value of Lic. Agreement B as of 12/31/18 45,000

4. Ans. A.
Correct cost of Leasehold Improvement 1/1/17 15,000 *
Accumulated Depreciation: (15,000/10yrs)*2yrs (3,000) **
Carrying Value as of December 31, 2018 12,000
*The initial cost excluded the movable equipment which shall be recognized separately and the
real property taxes paid by Sabrina which shall be recognized as an advances to the lessor.
**Depreciation is over the lease term since it is shorter that the life

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS
PROBLEM 25: AUDIT OF NON-TRADE PAYABLES: YZ CORPORATION
1. Ans. D.
Present value of periodic payments: (550,000*4.1699) 2,293,426
Present value of BPO: (250,000*0.6209) 155,230
Total 2,448,656

2. Ans. D.
Capitalized cost of the asset: 12/31/17 2,488,656
Accumulated depreciation (2018) (2,488,656/12) (over useful life) (408,109)
Carrying value (12/31/2018) 2,244,601
Long Term Short Term Interest
Expense
a. Note Payable P3,000,000 P1,500,000
Interest: (6M*10%*8/12) P400,000
(4.5M*10%*4/12) 150,000
b. Bonds Payable** 3,193,897 322,245
c. Lease Liability*** 1,142,374 396,148 189,866
Total 7,336,271 1,896,148 1,062,111
3. Ans. C 4. Ans. B 5. Ans. C.
**(Amortization Table – 12% Bonds Payable)
Date Nom. Int. Eff. Int Amort. Balance
1/1/18 3,231,652
6/30 180,000 161,583 (18,417) 3,213,235
12/31 180,000 160,662 (19,338) 3,193,897
Total 322,245

***(Amortization Table -10% Lease Liability

Date Periodic Effective Principal Balance
payments Interest
12/31/17 2,488,656
12/31/17 550,000 0 550,000 1,898,656
12/31/18 550,000 189,866 360,134 1,538,522
12/31/19 550,000 153,852 396,148 1,142,374

PROBLEM 26: AUDIT OF EQUITY ACCOUNTS: NEVADA SQUARE COMPANY

1. Ans. A.; 2. Ans. A.; 3. Ans. C.
Retained earnings, Jan. 1, 2015 P30,000,000
Cash dividends (2,800,000)
Stock dividends (100,000*P68) (a) (6,800,000)
Property dividends (800,000/2)*P25 (b) (10,000,000)
Net income for the year 60,000,000
Retained earnings, Dec. 31, 2015 P16,400,000
(a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market value.
(b) The property dividends’ valuation (debit to RE) shall be final at the settlement date.
4. Ans. D.
Ordinary shares, January 1, 2014 P14,000,000
Stock dividends issuance (100,000*20) 2,000,000
Ordinary shares, December 31, 2014 P16,000,000
*share split is accounted through memo entry only, aggregate par value remains the same.

PROBLEM 27: AUDIT OF EQUITY ACCOUNTS: SPURS INC.

1. Ans. C.
Debit to RE, per books 1,500,000
Debit to RE, per audit (15%*100,000sh)*P110 1,650,000
Adjustment to RE (additional debit) (150,000)
2. Ans. C.
Unadjusted Net Income, per books 9,000,000
Inventory fire loss (150,000)
Impairment loss on PPE (750,000)
Loss on sale of Equipment (200,000)
Gain on retirement of bonds 300,000
Unrealized holding gain on FA 800,000
Increase in beg. Inventory under FIFO (100,000)
Increase in end. Inventory under FIFO 300,000
Adjusted Net Income, per audit 9,200,000
3. Ans. D.
Inventory beg, under FIFO 2,600,000
Inventory beg, under weighted average 2,500,000
Adjustment to RE, beg (credit) 100,000
4. Ans. D.
Retained earnings, beginning 7,800,000
Correction of prior period error (1,500,000)
Change in policy (Ave to FIFO) 100,000
Retained earnings, beg. as restated 6,400,000
15% stock dividend declaration (1,650,000)
Loss on retirement of Treasury (P1,050,000-P850,000) (200,000)
Reserve for plant expansion (3,000,000)
Adjusted Net Income 9,200,000
Retained earnings, ending balance 10,750,000

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-702S
PREWEEK: SOLUTIONS TO AUDITING CASES/PROBLEMS

PROBLEM 28: AUDIT OF EQUITY ACCOUNTS: EKKANS CORPORATION

Ordinary Preference Sh. Accum. Treasury
Sh. Sh. Premium Profits Sh.
Captial blances as of December 31, 2017 100,000 2,600,000 222,000
1/2 Issue of Preference shares 1,000,000
3/1 Ordinary shares issue for services 3,000 93,000
7/1 Ordinary shares issue for cash 40,000 1,640,000
10/1 Reacquisition of Treasury (544,000)
12/1 Reissue of Treasury shares for cash (15,000) 102,000
12/30 Cash dividends declaration
Ordinary shares: (P0.20*130,000) (26,000)
Preference shares: (6%*P100*10,000sh) (60,000)
12/31 Net income for 2018 380,000
Capital balances as of December 31, 2018 143,000 1,000,000 4,333,000 501,000 (442,000)

1. Ans. A.
2. Ans. A.
3. Ans. A.
Paid-in Capital
Ordinary shares 143,000
Preference shares 1,000,000 1,143,000
Additional paid-in capital/Share premium 4,333,000
Contributed Capital 5,476,000
Accumulated profits - appropriated for treasury 442,000
Accumulated profits - unappropriated 59,000 501,000
Treasury shares (442,000)
Total Stockholders' Equity 5,535,000

4. Ans. C.
Net income 380,000
Less: PS Dividends (60,000)
Net income to ordinary shares 320,000
Divide by: Weighted average ordinary shares outstanding* 118,750
Basic Earnings Per Share 2.69
1/1 Beginning balance (100,000*12/12) 100,000
3/1 OS issue for services (3,000 * 10/12) 2,500
7/1 OS Share issue for cash (40,000 * 6/12) 20,000
10/1 Reacquisition of TS (16,000 * 3/12) (4,000)
12/1 Reissue of Treasury shares (3,000 * 1/12) 250
Weighted average ordinary shares oustanding 118,750 *
5. Ans. C.
Net income 380,000
Divide by: Weighted average ordinary shares outstanding** 168,750
Diluted Earnings per Share 2.25
Weighted average ordinary shares oustanding 118,750
Additional OS from assumed PS conversion on 1/2 50,000
Weighted average ordinary shares oustanding 168,750 **

PROBLEM 29: AUDIT OF EQUITY ACCOUNTS: DIESEL CORPORATION

1. Ans. C.
Cash 114,000 4. Ans. A.
Trading securities 80,000 Total Current Assets 534,000
Receivables, net 160,000 Total Noncurrent Assets 2,545,000
Inventories 180,000 Total Assets 3,079,000
Total Current Assets 534,000
5. Ans. A.
2. Ans. C. Unearned revenues 5,000
3. Ans. C. Bank Overdraft 14,000
Property, Plant and Equipment Accounts payable 90,000
Land 500,000 Notes payable - short term 80,000
Building, net 680,000 Taxes payable 40,000
Equipment, net 270,000 1,450,000 Total current liabilities 229,000
Investments
Available for sale securities 270,000
Land held for future use* 270,000
Cash Surrender Value 40,000
Bond Sinking Fund 250,000 830,000
Franchise 165,000
Goodwill 100,000
Total Non Current Assets 2,545,000

*note that the land held for future use was classified as LT investment instead of PPE. Had it been a land held as a
future plant site, it would have been appropriately included in PPE instead.

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