CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS: FIRST PRE-BOARD EXAMINATION July 27, 2014 PROBLEM 1 ~ BRANDY CO. 1. © Ordinary shares issued and outstanding 72,000 Ordinary shires subscribed 72,000 Total 44,000 Ordinary shares issued to acquire land (24,000) Ordinary shares originally subscribed 120,000 Par value/share xP10 ‘Total par value 1,200,000 Share premium (P2,850,000 ~ P450,000) 2,400,000 Total subscription price 3.500.000 + P60,000 FV of land ~ P240,000 PY 2. D_ Subscription of 12,000 preference shares @ P120/share 1,440,000 Subscription of 60,000 preference shares @ P100/share 6,000,000 Total 7,440,000 ‘Year-end balance of subscriptions receivable ~ preference (360,000) Amount collected from subscribers PZ.080,000 3.8 Preference Ordinary Issued 6,600,000 720,000 Subscribed 600,000, 720,000 Share premium 240,000 2,850,000 Subscriptions receivable (360,000) (1.080,000) ‘Contributed capital 27,080.000 P5.210,000 CONDESA CO. 1. Dividends payable ~ preference (P8 x 60,000) 480,000 Dividends payable ~ ordinary (P2 x 600,000) 3,200,000 Gash 1,680,000 2. Treasury shares 3,240,000 Cash (P40 x 61,000) 3,240,000 3. Land 900,000, Fl “Treasury shares (P40 x 21,000) 840,000 Share premium ~ treasury 60,000 4, Cash (P105 x 15,000) 41,575,000 Preference share capital (P100 x 15,000) 1,500,000 Share premium = preference 75,000 Retained earnings (P45 x 54,000") 2,430,000 Stock dividends payable (PS x 54,000) 270,000 Share premium — ordinary 2,160,000 * 600,000 ~ 60,000 treasury shares = 540,000 x 105% 6. Stock dividends payable 270,000 ‘Ordinary share capital 270,000 7. Retained earings 1,788,000 Dividends payable ~ preference (P8 x 75,000) 600,000 Dividends payable ~ ordinary (P2 x 594,000*) - 41,188,000 * 540,000 + 54,000 8, Income summary 9,900,000 Retained earnings - 9,300,000 PROBLEM 2— SINEGUELAS COMPANY ‘Accounts payable 30,000 Cash in bank 30,000 2. Accounts receivable 4,000 Cash in bank 4,000(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITING PROBLEMS <___WULY 27, 2014 / SUNDAY / 8:008M — 11:00am, 3. Cash restricted for acquisition of equipment (noncurrent investment) 200,000 Cash In bank 200,000 4. Cash In bank 41,000,000 Note payable — current (P1,000,000/5 years) 200,000 Note payable ~ noneurrent 800,000, 5. Land (PPE) 500,000 Land held for future plant site (noncurrent investment) 500,000 6. Officer's note receivable 35,000 ‘Accounts receivable 35,000 7. Operating expenses (Bad debt expense) 15,000 Allowance for bad debts . 15,000 8. Cost of sales 50,000 Inventories 50,000 9. Mortgage payable ~ noncurrent 4,800,000 Mortgage payable ~ current 41,800,000 PROBLEM 3 ~ DELTA CORPORATION 2012 20:3 2014 Total 1 (Traded in 4/1/14) P160,000 P1600» P 40,000 360,000 2 (Sold 10/1/13) 160,000 126.100 280,000 3 (Traded in 7/1/13) 160,000 80,000 240,000 4 160,000, 160,000 160,000 480,000 5 (Acquired 7/1/33) 255,000 6 (Acquired 4/1/14) 150,000 7 (Acquired 6/30/14) 72,000 Correct depreciation 1,837,000 Depreciation per client (300,000) Understatement 237,000 PROBLEM 4 — WALASTIK COMPANY/ADANTE CO./DWAYT CO. 26. A Inventory, December 31, 2014 (unadjusted) 2,348,900 Transaction 2 104,200 3 ~ 4 ~ 5 85,400 6 (204,380) 7 (415,200) 8 15,000 Adjusted inventory P2.333.920 Fy 2009 2010 201 2012 2013 2014 Net income per books 500,000 P520,000 540,000 P560,000 580,000 600,000 2009 = overstated (50,000) 50,000 2010 ~ overstated (90,000) 90,000 2011 ~ understated 110,000 (110,000) 2013 - understated 20,000 (20,000) 2014 — overstated a (09,000) ‘Net income, as corrected 450.000 480.000 740.000 450.000 600,000 480.000 27. B 2A 2D 30, B 3 A BA 33. A P3,900,000/P2,000,000 . 426to1 34. A P3,990,000%/P1,800,000" 222tol 33,900,000 + P220,000 ~ 130,000 32,000,000 — 200,000 35.8 Adjusted Income Increase (Decrease) 1. Understatement of ending inventory 220,000 2. Overstatement of purchases 200,000 3. Overstatement of ending inventory 130,000) Net adjustment P290,000(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA AUDITING PROBLEMS PROBLEM 5 — KIMCHI CORPORATION 36. A Cost of patent, Jan. 2, 2014 Less: Amortization for 2014 (P233,000/10 years) Unamortized patent cost, Dec. 31, 2014 37, © Cost of franchise, July 1, 2013 Less: Amortization, July 1, 2013 ~ Dee. 31, 2014 (P189,000/8 x 1 6/12) Unamortized franchise cost, Dec. 31, 2044 38. B_ Prepaid rent, Dec. 31, 2014 (P126,000 x 9/24) 39. D FIRST PREBOARD EXAMINATION 7, 2014 Y OAM — 11:00AM 333,000 33.300 299,700 189,000) 35,438 Pis3.562) P42.250) Franchises 189,000 Prepaid rent 126,000 Retained earnings 72,000 Patents 333,000 Research and development expense (P337,500 + 720,000) 1,057,500 | Goodwili 1,252,800 ‘ Legal fees expense 56,925 Intangible assets 3,087)225 b, Franchise amortization expense (P189,000/8) 23,625 Retained earnings (P189,000/8 x 6/12) 11,812 Franchises (35,437 c. Rent expense (P126,000/2 years) 63,000 Retained earnings (P126,000 x 3/24) 15,750 Prepaid rent 78,750 d, Patent amortization expense 33,300 Patents 33,300 (P333,000/10 years) | Net debit to retained earnings (P72,000 + Pi1,812 + P15,750) 40, B Charges against 2014 income: Research and development expense P1,057/ Legal fees expense 56,925 Franchise amortization expense 23,625, Rent expense 63, Patent amortization expense Total PL224350 PROBLEM 6—ENTITY A ; Compensation Cumulative 1 (P20 x 80 x 200 x 13) P106,667 106,667 2 (P20x85x200x 2/,)-P106,667 233,333 340,000 3 (P20x85x 300% 2/,)~P340,000 176,000 516,000 41 A 42. € 43. B 4.«=«wB 45. D ~ PROBLEM 7 — CHILE CO. ~ 2013 2014 Pretax income 505,000 387,000 2014 Sales erroneously recorded in 2013 (191,000) 191,000 Understatement of 2013 ending inventory 43,200 (43,200) Understatement of bond interest expense (7,250) (7,758) | Ordinary repairs erroneously capitalized Overstatement of depreciation Corrected pretax income 4%6.C 47.8 48.A 493,D SOA (42,500) (47,000) — 8950 4250 PZLL7200 — PABB.992(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA AUDITING PROBLEMS PROBLEM 8 — IDAHU, INC. 51. A Canying value, Jan. 1, 2014 Premium amortization, Jan. 1 ~June 30: ‘Nominal interest (P100,000 x 5%) Effective interest (P113,592 x 4%) Carrying value, June 30, 2014 Premium amortization, July 1 ~ Dec. 31: Nominal interest Effective interest (P113,136 x 4%) Carrying value, Dec. 31, 2014 52. C Interest expense for 2014 (4,544 + P4,525) 53, A Inventory, Dec. 31, 2014 Cost of goods sold Goods available for sale Inventory, Jan. 1, 2014 Purchases Accounts payable, Jan. 1, 2014 Purchases Total ‘Accounts payable, Dec. 31, 2014 Cash paid for inventory purchases 54. B_ Gross income Interest expense Depreciation expense Other expenses Net income 55. € Accounts receivable, Jan. 1, 2014 Sales Total “Accounts receivable, Dec. 31, 2014 Gash receved from customers PROBLEM 9 56. B Book value, beg. of 2014 (P600,000 x 10/20) Divide by revised estimated useful Ife Depreciation expense for 2014 57. © Total cost (P650,000 + 5,000 + P20,000 + P4,000) “5 Salvage value * Depreciable cost Divide by estimated useful fe Depreciation — original asset Depreciation ~ accessories (P48,600/18 years) ‘Total depreciation expense for 2014 58. D_ Double-declining-balance rate (1/8 x 2) Depreciation for 2014 (P680,000 x 25% x Ys) 59. A Cost. Salvage value Depletion base Divide by expected reserves Depletion rate per ton Multiply by tons mined Depletion for 2014 60. D Acquisition cost Divide by estimated useful life Depreciation for 2014 -- END ~ JULY 27 FIRST PREBOARD EXAMINATION 20148 / SUNDAY / 8:00AM — 11:00AM 113,592 * __ (456) 113,136 P 87,000 180,000 267,000 (93,000) 174,000 P 58,000 174,000 232,000 (60,000) 2.172.000 120,000 (9,069) (14,500) {82,000) Biggs: 48,000 300,000 348,000 (35,000) 2293.00 300,000 ibys B20,000 679,000 (50,000) 629,000 220 yrs P 31,450 2200 B34.150 25% 285,000 10,000,000 (500,000) 9,500,000 3,900,000 2.50 700,000 2.4,750,000 200,000 2 10ys 220,000