College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 COMPETENCY APPRAISAL GENERAL REVIEW AUDITING PROBLEMS PROBLEM 1 Bernadette Company began operations on January 1, 2016. Authorized where 100,000 ordinary shares of P50 par value and $0,000 convertible preference shares of 10% P50 par value. The following transactions involving shareholders equity occurred during the first year of operations. © January 1. Issued 10,000 ordinary shares to the corporation promoters in exchange for property valued at P1,250,000 and services valued at P250,000. ‘The property had cost the promoters P900,000 three years and was carried on the promoter’s books at P750,000. © February 22. Issued 15,000 preference share at a price of P60 per share. Each share can be converted to five ordinary shares. The entity paid 25,000 to an agent for selling the shares. © March 10. Sold 25,000 ordinary shares for P120 per share. Issue costs were 100,000. © April 10. 20,000 ordinary shares were sold under share subscriptions at P175 per share. No share certificates are issued until a subscription contract is paid in full. No cash was received. © guly 15. Exchanged 12,000 ordinary shares and 20,000 preference shares for a building with a fair value of P3,500,000. The building was originally purchased for P3,250,000 by the owner and has a book value of P2, 400,000. In addition, 10,000 ordinary shares were sold for P1,500,000 in cash. © August 1. Received payments in full for half of the share subscriptions and partial payments on the rest of the subscriptions. Total cash received was 2,250,000. Share certificates were issued for the subscriptions paid in fall. © August 31. Received notice form holders of share subscriptions for 5,000 shares that they would not pay further on the subscription because the price of the share had fallen to P95 per share. The amount still due on those contracts was P750,000. Amount previously paid on the contracts are forfeited according to the agreement. © December 31. Net income for the first year of operations was P1,500,000 Based on the preceding information, determine the correct balances of the following at December 31, 2016: 1, Ordinary share A. P2,850,000 B. P3, 350,000 cc. Pa, 550,000 D. 22,750,000 2. Share premium-ordinary A. P5,775, 000 B. P7, 675,000 cc. 76,975,000 D. 26,850,000 3. Share’ premium-preference A. 825,000 B. P950, 000 . P875,000 D. P850,000 4, Subscription receivable A. P2,250, 000 B. P750,000 c. P1,250,000College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 D. P500,000 5. Total shareholders’ equity A, P14,275, 000 B. P12, 775,000 c. P13, 775,000 D. P15,275, 000 PROBLEM 2 Chile Company reported pretax income of P505,000 and P287,000 for the years ended December 31, 2017 and 2018, respectively. However, the auditor noted that the following errors had been made: ‘a. Sales for 2017 included amounts of P190,000 which had been received in cash during 2017, but for which the related goods were shipped in 2018. Title did not pass to the buyer until 2018. b, The inventory on December 31, 2017 was overstated by P43,200. ‘The company's accountant, in recording interest expense for both 2017 and 2018 on bonds payable made the following entry on an annual basis. Tnterest_expense 75,000 Cash 75,000 ‘The bonds have a face value of 1,250,000 and pay a nominal interest rate of 6%. They were issued at a discount of P75,000 on January 1, 2017 to yield an effective interest rate of ai. d. Ordinary repairs to equipment had been erroneously charged to thee Equipment account during 2017 and 2018. Repairs of P42,500 and P47,000 had been incurred in 2017 and 2018, respectively. In determining depreciation charges, Chile applies a rate of 20% to the balance in the equipment account at the end of the year. 6. What is the corrected pretax income for 2017? A. 303,200 B. P218,800 c. P312,700 D. 7307, 450 7. What is the corrected pretax income for 2018? A, P562,350 B. Pag4,292 €. P570,580 D. Pass, 992, PROBLEM 3 ‘The following is an excerpt of Fankee Inc.'s trial balance as of December 2018: 128 Bonds payable, § years 5,000,000, 93 Bonds payable, 4 years 2,000,000 T0e Notes payable-bank, 5 years 3,000, 000 Additional informatio ‘a. The 12% bonds payable was issued on January 1, 2017 at ?5,386,087, when the prevailing market rate for bonds was at 10%, The company recorded the transaction as a debit to cash for the bon proceeds, credit to bonds payable account at face value, charging any difference to interest expense. Interest on the bonds is payable semi-annually every June 30 and Decenber 31. The payment of interest was recorded properly by the company. b. The 9% Bonds payable were issued at P2,150,000 on January 1, 2017. The bonds which pay annual interest every December 31 matures on December 31,College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 2020. The bonds were convertible into 20,000, P100 par value ordinary shares at the option of the holder. The prevailing market rate of interest for similar debt security without the conversion option on the issuance date was 10%. The company recorded the transaction as a debit to cash for the cash consideration received, credit the bonds payable at its face value with difference being charged the interest expense. The only other entry made by the company in relation to the bands what is the periodic payment of interest. c. The notes payable-bank which was dated April 1, 2014 base interest annually every April 1. As of December 31, 2018, the company has the right to refinance the said loan by issuing bonds. The proceeds shall be used to settle the obligation. On March 1, 2019 the company issued P4,000,000 bonde at face value and used 1/2 of the proceeds to settle the notes on April 1, 2019. The balance off the maturing obligation was settled out of working capital. The 2018 financial statement where approved for issuance by the BOD on April 15, 2019. Required: 8. How much from the 108 notes payable should be presented as non-current liability as of December 31, 2014? A. None B. 1,000,000 c. 2,000,000 D. 3,000,000 ‘The Correct carrying value of the 12% bonds payable as of December 31, 2017 A. 8,379,079 B. 5,323,161 cc. 5,248, 685 D. 5,253,785 10. what is the equity component of the 9% bonds payable? A. 150,000 B. 225,816 cc. 213,397 D. 233,897 ll. | Assuming that the 9% bonds payable were converted into ordinary shares on December 31, 2018, what is the net credit to share premium as a result of the equity conversion? A. 34,711 B. 195,215 c. 163,660 D. 178,687 PROBLEM 4 on January 1, 2015, Joy Waquiz Corporation purchased for P1,200,000, a tract of land (site number 143) with a building. Waquiz paid a real estate broker's commission of P72,000, legal fees of P12,000, and title guarantee insurance of 36,000. The closing statement indicated that the land value was P1,000,000 and the building value was 200,000. Shortly after acquisition, the building was razed at a cost of P108,000. Waquiz entered into a P6,000,000 fixed-price contract with Cabeng Builders, Inc. on March 1, 2015 for the construction of an office building on land site number 143. The building vas completed and occupied on September 1, 2016. Additional construction costs were incurred as follows: Plans, specifications, and blueprints 42,000 Architects’ fees for design and supervision 164,000College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 ‘The building is estimated have a 40-year life from the date of completion and Will he depreciated using the 150% declining balance method. To finance construction, costs, Waquiz borrowed P1,000,000 with a 12% interest on January 1, 2015 The loan was outstanding for the entire years of 2015 and 2016. ‘The company's other interest-bearing debts include the following (also outstanding for the entire years of 2015 and 2016). Principal TOs bank loan 2, 800, 000 10% short-term note | 3,200,000 12% long-term Ioan | 2,000,000 Expenditures on the project were as follows: Date Expenditure 1/15 1, 000, 000 471s 500, 009, 10/1/15 800, 000, 12/31/15 300,000 a/i/16 T, 000, 000 S/iN6 600, 000 9716 T, 200,000 Questions: Based on the above data, compute for the following: 12. Total cost of the land A. P1,272, 000 B. P1,284, 000 cc. P1, 320,000 D. Pi, 428, 000 43. Capitalizable borrowing cost for the year ended 2015. A, P180,375 B. P225,000 ©. p1a7.500 D. 2960, 000 aa. Capitalizable borrowing cost for the year ended 2016. A, 2337.626 B. P340.750 cc. P560,000 D. 2369,126 15. Total cost of the building as of September 30, 2016. 6,771,150 6,755,501 P6, 832,001 26,724,001 16. Interest expense for the year 2016. 590,874 340,750 622,374 + P619.250 pom» goup PROBLEM 5 Milk Corp.’s general ledger showed the following information: Accounts Receivable 550,000 Allowance for doubtful accounts 16, 500 Milk Corp.'s accounts receivable subsidiary ledger on the other hand shows the following compositios“The Universigy of Mindana College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines Phone No. (082) 244-2400 loc. 137 Customer Tnvoice date] Invoice Balance amount, Zula Inc. 2706714 Paz, 000 11/29/14 63,540 | P105, 540 Yankee co. os7a7/ia 36, 000 08/20/14 26, 760 2, 785, kylon ine. 2730744 20, 000 12/08/14 40,000 10/25/14 31,800 31, 800 Whiskey Co. [41/17/14 63, 420, 10 703/14 66,000 135, 420 Victory Corp. | 12/12/14 37, 600, 8/20/14 37,200 34, 800, Uniform Inc.| 9/12/14 32,200, 32, 200 Audit notes: 1, The accounts receivables balances were confirmed with the customers. You have noted the following excey tions: ‘Customer’ Balance, Remarks, Yankee P36, 000 Invoice dated 08/20/14 was already settled. Investigation revealed that Yankee’ payment was erroneously posted against Victory Corp.’s account for an invoice dated 12/20/14 for the same amount. ylen 71, 800 ‘The difference as due to the invoice dated 12/30/14/. Goods have not been received by Xylon Inc. yet as of 12/31/14. Term of sale is FOB destination Victory 121,560 “ARoUnt per our records appear to be higher, please check.” Uniform Tne. Wo reply Uniform Inc. is under liquidation and the amount receivable fom the company is deemed definitely uncollectible. 2. The company’s policy with regards to uncollectible accounts are summarized below: [age @ uncollectible 0-30 days Te 31-60 days 2 61-30 days 58 91-120 days 10% ‘Over 120 days 50% Questions: 17. what is the correct allowance for had debts as of Decenber 31, 2014? A. 31,413 B. 44,525, c. 31,613 D. 44,725 18. | What is the correct realizable value of the receivable as of the year-end? A. 438,907 B. 458,707College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-2400 loc. 137 cc. 456,707 D. 470,320 19. | What is the correct bad debt expense? A, 100,113 B. 67,113 cc. 113,225 D. 100,313 PROBLEM 6 In your audit of the December 31, 2014 financial statements of Ivy Inc., you found the following inventory related transactions: a. Goods costing 100,000 are on consignment with a customer. These goods were invoiced at normal profit margin which was at 40% based on cost and was recorded as 2014 sales. Being Offsite on the count date which was on December 30, 2013, the goods were not included in the physical count. b, Goods costing 233,000 were delivered to Ivy Inc. on January 4, 2015. The invoice of these goods were received and recorded on January 10, 2015. The invoice showed the shipment was made on December 29, 2014, FOB shipping point. Goods costing P40,000 were shipped FOB shipping point on December 31, 2014, and were received by the customer on January 2, 2015. although sale was recorded in 2014, these goods were included in the 2014 inventory. d. Gods costing P16,000 were shipped to a customer on December 30, 2014, FOB destination. These goods were received by the customer on January 5, 2015 and were not included in the physical count. The sale was properly recorded in 2015. @. Gods costing P22,000 shipped by a vendor under FB destination term, were received on January 3, 2015. The related invoice however, were received n December 31, 2014, thus was recorded as purchase in 2014. £. Goods costing P50,000 were received from a vendor under Consignment tezm. ‘These goods were included in the physical count. No purchase related to the inventory had teen recorded yet. g. Ivy Inc., recorded as 2014 sale a P112,000 Invoice for goods delivered to a customer on December 31, 2014, FOB Destination. The goods were received by the customer on January 5, 2015. Having been delivered after the count date, the goods were included in the physical count Requirements: 20. What is the net adjustment to inventories as of December 31, 20147 A. 59,000 B. 43,000 . 50.000 D. 66,000 21. Assuming all sales are on account, what is the net adjustment to accounts receivable as of Decenber 21, 20147 A. 260,000 B. 252.000 €. 140,000 D. 212000 22. | Assuming all purchases are on account, what is the net adjustment to accounts payable? A. 22,000 B. 33,000 ¢. 11,000 D. 55,000 23. | What is the effect of the errors to the 2014 net income? ‘A. 194,000 B. 220,000 cc. 164,000 D. 204,000 GENERAL REVIEW 6College of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 24, 25, 26. 27. 28. 29. 30. GENERAL REVIEW Which of the following is not a control that generally is established over cash receipts? A. To prevent abstraction of cash, a control listing of cash receipts should be prepared by mailroom personnel. B. To insure accurate posting, the accounts receivable clerk should post the customers" receipts from customers’ checks. C. To insure accuracy of the accounts receivable records, the records should be reconciled monthly to the accounts receivable controlling account. D. To prevent theft of cash, receipts should be deposited daily. ‘Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A. Completeness of recording of sales transactions. B. Occurrence of sales transactions. . Billing of all sales transactions. D. Presentation of payables. When there are a large number of relatively small account balances, negative confirmation of accounts receivable is feasible if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. . High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration. An auditor should perform alternative procedures to substantiate the ‘existence of accounts receivable when: A, No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. ©. Collectability of the receivables is in doubt. D. Pledging of the receivables is probable. Which of the following is not true relating to the auditors’ observation of the client's physical inventory? A, The auditors should evaluate the client's planning of the physical inventory. B, The auditors should make certain that consigned items from suppliers are included in physical inventory totals. C. The auditors should evaluate the adequacy of the client's counting procedures. D. The auditors should take test counts of the client's inventory. Which of the following is true about the auditors’ observation of the client's physical inventory? ‘The count must be made at year-end. ‘The auditors should supervise the client's personnel. : The auditors’ observation addresses the existence assertion. The auditors should justify any omission of the observation in the audit report. vay Wnich of the following is not one of the auditors’ objectives in auditing depreciation? Establishing the reasonableness of the client's replacement policy. Establishing that the methods used are appropriate. Establishing that the methods are consistently applied. Establishing the reasonableness of depreciation computations. pourCollege of Accounting Education ‘IF F. Facundo Hal, B& E Bl, ‘Matia, Davao Giy Philippines “The Universigy of Mindana Phone No. (082) 244-3400 lee. 137 31. Which of the following is the best evidence of continuous ownership of property? A. Examination of the deed. B. Examination of rent receipts from lessees of the property. Cl Examination of the title policy. D. Examination of canceled check in payment for the property. 32. Which of the following audit procedures is aimed most directly at testing 33. a4. 35, the completeness assertion for accounts payable: A, Footing the list of accounts payable. B. Examining underlying documentation for cash disbursements in the period after year-end. c. Tracing shipping reports issued on or before year-end to related customer purchase orders and invoices. D. Tracing shipping reports after year-end to related customer purchase orders and invoices. Which of the following procedures is least likely to be completed before the balance sheet date? A. Observation of inventory. B. Review of internal control over cash disbursements. . Search for unrecorded liabilities. D. Confirmation of receivables. Changes in capital stock accounts should normally be approved byt ‘The board of directors. The audit committee. The stockholders. : The president. pomp The auditor can best verify a client's bond sinking fund transactions and year-end balance by A. Confirmation with individual holders of retized bonds. B. Confirmation with the bond trustee. C. Recomputation of interest expense, interest payable, and amortization of bond discount or premium. D. Examination and count of the bonds retired during the year. END OF MATERIAL