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I - AUDIT OF CASH AND CASH EQUIVALENTS PROBLEM NO. 1 - Composition of Cash and Cash Equivalents The following data pertain to PRTC Corporation at December 31, 2015: Current account at Metrobank

P 1,800,000 Current account at Allied Bank (100,000) Payroll account 500,000 Foreign bank account (in equivalent pesos) 800,000 Savings deposit in a closed bank 150,000 Postage stamps 1,000 Employee's postdated check 4,000 IOUs from employees 10,000 Credit memo from a vendor for a purchase return 20,000 Traveler's check 50,000 Money order 30,000 Petty cash fund (P4,000 in currency and expense receipts for 10,000 P6,000) Pension fund 2,000,000 DAIF check of customer 15,000 Customer's check dated 1/1/16 80,000 Time deposit - 30 days 200,000 Money market placement (due 6/30/16) 500,000 Treasury bills, due 3/31/16 (purchased 12/31/15) 200,000 Treasury bills, due 1/31/16 (purchased 2/1/15) 300,000 REQUIRED: Determine the cash and cash equivalents to be reported on the entity's December 31, 2015 statement of financial position. SOLUTION: Items included: Current account at Metrobank

1,800,000

Payroll account

500,000

Foreign bank account (in equivalent pesos)

800,000

Traveler’s check

50,000

Money order

30,000

Petty cash fund - currency

4,000 1

Time deposit – 30 days Treasury bills, due 3/31/13 12/31/12)

200,000 (purchased 200,000 3,584,000

Items not included: Current account at Allied Bank Savings deposit in a closed bank Postage stamps Employee’s post dated check

(100,000) 150,000 1,000 4,000

IOU from employees 10,000 Credit memo from a vendor for a purchase return 20,000 Petty cash fund - expense receipts 6,000 Pension fund 2,000,000 DAIF check of customer 15,000 Customer’s check dated 1/1/13 80,000 Money market placement (due 6/30/13) 500,000 Treasury bills, due 1/31/13 (purchased 2/1/12) 300,000

Short term borrowing Other noncurrent assets Unused supplies (Other CA) Trade and other receivables Trade and other receivables Deduction from accounts payable Expenses Noncurrent asset Trade and other receivables Trade and other receivables Short term investment Short term investment

PROBLEM NO.2 - Computation of adjusted cash and cash equivalents You were able to gather the following from the December 31, 2015 trial balance of PRTC Corporation in connection with your audit of the company: Cash on hand

P 372,000

Petty cash fund

10,000

BPI current account

950,000

Security Bank current account No.01

1,280,000

Security Bank current account No.02

(40,000)

2

PNB savings account

500,000

PNB time deposit

300,000

Cash on hand includes the following items: a) Customer's check for P60,000 returned by bank on December 26, 2015 due to insufficient fund but subsequently redeposited and cleared by the bank on January 8, 2016. b) Customer's check for P30,000 dated January 2, 2016, received on December 29, 2015. c) Postal money orders received from customers, P36,000. The petty cash fund consisted of the following items as of December 31, 2015: Currency and coins

P 2,100

Employees' vales

1,600

Currency in an envelope marked "collections for charity" with names 1,200 attached Unreplenished petty cash vouchers

800

Check drawn by PRTC Corporation, payable to the petty cashier

4,600 P10,300

Included among the checks drawn by PRTC Corporation against the BPI current account and recorded in December 2015 are the following: a) Check written and dated December 29, 2015 and delivered to payee on January 2, 2016, P50,000. b) Check written on December 27, 2015dated January 2, 2016, delivered to payee on December 29, 2015, P86,000. The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the deposit balance. These checks were still outstanding at December 31,2015. The savings account deposit in PNB has been set aside by the board of directors for acquisition of new equipment. This account is expected to be disbursed in the next 3 months from the balance sheet date. REQUIRED: 1. Compute for the adjusted balances of following: 3

2.

a. Cash on hand b. Petty cash fund c. BPI current account d. Cash and cash equivalents Adjusting entries as of December 31, 2015

SOLUTION: Requirement No. 1.a Cash on hand, per trial balance

372,000

(a) NSF check

(60,000)

(b) Postdated check received

(30,000)

Cash on hand, as adjusted

282,000

Adjusting journal entries Accounts receivable

60,000

Cash on hand Accounts receivable

60,000 30,000

Cash on hand Requirement No. 1.b Petty cash fund per total

30,000

10,300

Employees' vales

(1,600)

Currency in envelope marked "collections for charity"

(1,200)

Unreplenished petty cash vouchers Petty cash fund, as adjusted

(800) 6,700

Alternative computation: Currency and coins Replenishment check Petty cash fund, as adjusted

2,100 4,600 6,700

Adjusting journal entries: Advances to officers and employees Expenses

1,600 800 4

Cash short/over (balancing figure or see computation below) Petty cash fund (P10,000 - P6,700) Computation of shortage: Currency and coins Employees' vales Unreplenished petty cash vouchers Replenishment check Cash and cash items counted Cash accountability Unaccounted/Shortage

900 3,300

2,100 1,600 800 4,600 9,100 10,000 (900)

Requirement No. 1.c BPI current account, per trial balance Unreleased check Post dated check delivered

950,000 50,000 86,000

BPI current account, as adjusted

1,086,000

Adjusting journal entries: BPI current account

50,000

Accounts payable Accounts receivable

50,000 86,000

Cash on hand

86,000

Requirement No. 1.d Cash on hand (see no. 1.a) Petty cash fund (see no. 1.b)

282,000 6,700

BPI current account (see no. 1.c)

1,086,000

Security Bank current account no. 1

1,280,000

Security Bank current account no. 2

(40,000)

1,240,000

PNB time deposit (cash equivalent)

300,000

Cash and cash equivalents, as adjusted

2,914,700 5

Note: The P500,000 PNB savings account should be presented separately from cash and cash equivalents since it has been earmarked for the acquisition of a noncurrent asset.

6

PROBLEM NO. 3 - Cash count and shortage computation In connection with the audit of the financial statements of Rupee Company for the year ended December 31, 2015,you performed a surprise count of the petty cash fund and undeposited collections under the custody of Ms. Jessie at 8:15 a.m. on January 3, 2016. Your count disclosed the following: Bills and Coins Bills Coins P 100 10 pieces P 410 pieces 1.00 50 80 pieces 0.50 324 pieces 20 70 pieces 0.25 64 pieces 10 54 pieces Unused postage stamps - P730 Checks Date Payee Drawer Amount Dec. 30 Cash Ms. Jessie P 2,400 Dec. 30 Rupee Company Robert 28,000 Dec. 31 Rupee Company Jay Ar, sales manager 3,360 Dec. 31 Rupee Company Francis 35,600 Dec. 31 Rupee Company Ryan 16,600 Dec. 31 German Corp. Rupee Company 54,000 Expense Vouchers Date Payee Dec. 23 Jay Ar, sales manager Dec. 27 Central Post Office Dec. 29 Messengers Dec. 29 PC Express

Description Amount Cash advance for trip to Baguio P 14,000 City Postage stamps 3,240 Transportation 300 Computer repair 1,600

Other items found inside the cash box: a) Two pay envelopes which had been opened and the contents aggregating P15,000 representing unclaimed salaries had been removed. b) The sales manager's liquidation report for his Baguio trip: Cash advance received on Dec. 23 P 14,000 Less: Hotel accomodation P 9,000 Bus fare for two 800 Cash given to Roy, salesman 600 10,400 Balance P 3,600

7

Accounted for as follows: Cash returned by Roy to the sales manager Personal check of sales manager Total

P 240 3,360 P 3,600

Additional information: a) The custodian is not authorized to cash checks. b) The last official receipt included in the deposit on December 30 is No. 351 and the last official receipt issued for the current year is No. 355. The following official receipts are all dated December 31, 2015. O.R. No. Amount Form of payment 352 P 27,200 Cash 353 35,600 Check 354 7,200 Cash 355 16,600 Check c) The Petty Cash balance per general ledger is P20,000. The last replenishment of the fund was made on December 22, 2015. REQUIRED: 1. Determine shortage or overage, if any 2. Adjusting entries as of December 31, 2015 SOLUTION: Requirement No. 1 Bills and coins Denomination

Quantity

Amount

P100.00

10

1,000

50.00

80

4,000

20.00

70

1,400

10.00

54

540

1.00

410

410

0.50

324

162

0.25

64

16

Total

7,528 8

Checks Date

Drawer

Amount

Dec. 30

Ms. Jessie

2,400 28,000

Dec. 30

Robert

Dec. 31

Jay Ar

Dec. 31

Francis

Dec. 31

Ryan

3,360 35,600 16,600 85,960

Unreplenished vouchers Date Dec. 23

Account

Amount 14,000

Advances Dec. 27

3,240 Postage

Dec. 29 Dec. 29

300 Transportation Repairs

1,600

Total cash and cash items counted

19,140

AJE 1&2

112,628

Less accountabilities: Petty cash Undeposited collections - per OR

20,000 86,600

Undeposited collections - without OR

28,000

AJE 4

Excess travel advance returned

3,360

AJE 3

Unclaimed salaries

15,000

Cash shortage

152,960

AJE 5

(40,332)

AJE 6

Requirement No. 2

9

Advances 1 employees

to

officers

and 14,000

Postage expense

3,240

Transportation expense

300

Repairs and maintenance

1,600

Petty cash fund

2 Unused postage

19,140

730

Postage expense

3 Travel expense [P9,000+P800+(P600-P240)] Petty cash fund (personal check of sales manager)

730

10,160 3,360

Advances to officers and employees

4 Cash

13,520

28,000 Accounts receivable

5 Cash

28,000

15,000 Salaries payable

6 Cash short/over (Receivable from custodian)

15,000

40,332

Cash

7 Cash

40,332

54,000 Accounts payable

54,000

10

PROBLEM NO. 4 - Bank reconciliation The Cash in Bank account of Dollar Company disclosed a balance of P203,000 as of December 31. The bank statement as of December 31 showed a balanced of P106,000. Upon comparing the bank statement with cash records, the following facts were developed: a. The company's account was charged on December 26 for a customer's uncollectible check amounting to P30,000. b. A two-month, 17% P60,000 customer's note dated October 25, discounted on November 25, was dishonored on December 25, and the bank charged the company P62,000, which included a protest fee of P2,000. c. A customer's check for P15,400 was entered as P14,500 by both the depositor and the bank but was later corrected by the bank. d. Check no. 142 for P12,425 was enter in the cash disbursement journal at P12, 245 and check no. 156 for P3,290 was entered as P32,900. e. Bank service charges of P1,830 for December were not yet recorded on the books. f. A bank memo stated that a customer's note for P25,000 and interest of P1,000 had been collected on December 28, and the bank charged P500 (No entry was made on the books when the note was sent to the bank for reconciliation). g. Receipts for December 31 for P24,000 were deposited on January 2. No. 123 P 3,000 No. 154 P 4,000 143 2,000 157 6,000 144 7,000 159 7,000 147 3,000 169 5,000 *Certified by the bank in December i. A deposit of P20,000 was recorded by the bank on December 5, but it should have been recorded for Dolor Company rather than Dollar Company. j. Petty cash of P10,000 was included in the Cash in Bank balance. k. Proceeds from cash sales of P60,000 for December 18 were stolen. The company expects to recover this amount from insurance company. The cash receipts were recorded in the books, but no entry was made for the loss. 11

l. The December 21 deposit included a check for P20,000 that had been returned on December 15 marked NSF. Dollar Company had made no entry upon return of the check. the redeposit of the check on December 21 was recorded in the cash receipts journal of Dollar Company as collection on account. REQUIRED: 1. Bank reconciliation using: a. Bank to book method; b. Book to bank method; and c. Adjusted balance method 2. Adjusting entries as of December 31, 2015.

SOLUTION: DOLLAR COMPANY Bank Reconciliation - Bank to Book Method December 31, 2012

Balance per bank

106,000

Add (deduct): a)

Customer's uncollectible check (NSF)

b)

Dishonored note receivable (including P2,000 protest fee)

c)

Book error in recording collection (P15,400 - P14,500)

d)

Book errors in recording disbursements Check no. 142 (P12,425 - P12,245) - under Check no. 156 (P3,290 - P32,900) - over

e)

December bank service charges

f)

Note collected by bank (including interest income of P1,000 and net of service charge of P500)

30,000

62,000 (900)

180 (29,610) 1,830

(25,500) 12

g)

Deposits in transit

24,000

h)

Outstanding checks

(35,000)

I)

Bank error in recording deposit

(20,000)

j)

Petty cash fund

10,000

k)

Stolen cash sales to be recovered from insurance co.

60,000

l)

Double counted deposit - NSF

20,000

Balance per books

203,000 DOLLAR COMPANY Bank Reconciliation - Book to Bank Method December 31, 2012

Balance per books

203,000

Add (deduct): a)


b)


c)


d)


e)


f)


(30,000)

(62,000) 900

(180) 29,610 (1,830)

25,500

g)

Deposits in transit

(24,000)

h)

Outstanding checks

35,000 13

I)


20,000

j)

Petty cash fund

(10,000)

k)


(60,000)

l)


(20,000)

Balance per bank

106,000 DOLLAR COMPANY Bank Reconciliation - Adjusted Balance Method December 31, 2012 BANK

Unadjusted balances, December 31

106,000

BOOKS 203,000

Add (deduct): a)


b)


c)


d)


e)


f)


(30,000)

AJE No. 1

(62,000)

AJE No. 2

900

AJE No. 3

(180)

AJE No. 4

29,610

AJE No. 5

(1,830)

AJE No. 6

25,500

AJE No. 7

g)

Deposits in transit

24,000

h)

Outstanding checks

(35,000)

I)


(20,000)

j)

Petty cash fund

(10,000)

AJE No. 8

k)


(60,000)

AJE No. 9 14

l)


(20,000)

Adjusted balances, December 31

75,000

AJE No. 10

75,000

Adjusting Journal Entries

1)

Accounts receivable

30,000

Cash in bank

2)

Notes receivable - dishonored

30,000

62,000

Cash in bank

Notes receivable - discounted

62,000

60,000

Notes receivable

3)

Cash in bank

60,000

900

Accounts receivable

4)

Accounts payable

900

180

Cash in bank

5)

Cash in bank

180

29,610

Accounts payable

6)

Bank service charge

29,610

1,830

Cash in bank

7)

Cash in bank

1,830

25,500 15

Bank service charge

8)

500

Notes receivable

25,000

Interest income

1,000

Petty cash fund

10,000

Cash in bank

9)

Claims from insurance co.

10,000

60,000

Cash in bank

10)

Accounts receivable

60,000

20,000

Cash in bank

20,000

PROBLEM NO. 5 - Bank reconciliation and shortage computation You are conducting an audit of the Swerte Company for the year ended December 31, 2015. The internal control procedures surrounding cash transactions were not adequate. The bookkeeper-cashier handles cash receipts, maintains accounting records, and prepares the monthly bank reconciliations. The bookkeeper-cashier prepared the following reconciliation at the end of the year: Balance per bank statement Add: Deposit in transit Note collected by bank Total Less: Outstanding checks Balance per general ledger

P 350,000 P 175,250 15,000

190,250 540,250 246,750 293,500

In the process of your audit, you gathered the following: 

At December 31, 2015, the bank statements and general ledger showed balances of P350,000 and P293,500, respectively.

16

 



The cut-off bank statement showed a bank charge on January 2,2016 for P30,000 representing correction of an erroneous bank credit. Included in the list of outstanding checks were the following: a. A check payable to a supplier, dated December 29, 2015, in the amount of P14,750, released on January 5,2016. b. A check representing advance payment to a supplier in the amount of P37,210, the date of which is January 4, 2016, and released in December, 2015. On December 31, 2015, the company received and recorded customer's postdated check amounting to P50,000.

REQUIRED 1.

2.

Compute for the following as at December 31, 2015: a. Adjusted deposit in transit b. Adjusted outstanding checks c. Adjusted cash in bank d. Cash shortage Adjusting entries as of December 31, 2015

SOLUTION: Requirement No. 1.a Unadjusted deposit in transit

175,250

Post dated check received

(50,000)

Adjusted deposit in transit

125,250

Requirement No. 1.b Unadjusted outstanding checks

246,750

Unreleased check

(14,750)

Post dated check issued

(37,210)

Adjusted outstanding checks

194,790

Requirement No. 1.c&d

17

Unadjusted balances

Bank

Books

350,000

293,500

Add (deduct) adjustments: Post dated check received

(50,000)

AJE 1

Unreleased check

14,750

AJE 2

Post dated check issued

37,210

AJE 3

Note collected by bank

15,000

AJE 4

Deposit in transit (see 1.a)

125,250

Outstanding checks (see 1.b)

(194,790)

Erroneous bank credit

(30,000)

Balances

250,460

Shortage Adjusted balances

310,460 (60,000)

250,460

AJE 5

250,460

Requirement No. 2

1 Accounts receivable

50,000

Cash

2 Cash

50,000

14,750

Accounts payable

3 Cash Accounts payable

14,750

37,210 37,210

18

4 Cash

15,000

Notes receivable

15,000

Cash short/over (Receivable from 5 cashier) 60,000 Cash

60,000

PROBLEM NO. 6 - Cash shortage computation You were engaged to audit the books of Davao Company. From the records of the company, you gathered the following information: Davao Company started operations on October 2, 2015 with the owners investing P150,000 cash. Monthly bank reconciliation statements have not been prepared; however, bank statements for October, November, and December were made available to you. Your analysis of these bank statements showed total bank credits (deposits) of P575,000 including the owners' initial investment and a bank loan, details of which are in additional data. The bank statement in December, 2015 showed an ending balance of P91, 500. Examination of the paid checks disclosed that checks totaling P4,500 were issued by the company in December, 2015, and were presented for payment only in January, 2016. Cash count of the cashier's accountability amounted to P5,000. You were told by the cashier that these were collections from credit sales on December 30, 2015, deposited on January 2, 2016. Additional information are as follows: a. Accounts receivable subsidiary ledgers had a total balance of P70,000 at December 31, 2015. P5,000 of this was ascertained to be uncollectible. b. Suppliers' unpaid invoices for merchandise totaled P15,000;while an account for store fixtures bought for P50,000 had an unpaid balance of P5,000. c. Merchandise inventory at December 31, 2015 amounted to P30,000 but P5,000 of these were spoiled with no resale value. d. The bank statement in October showed a bank credit for P98,000, dated October 2, 2015. Inquiry from the cashier disclosed that the amount represents proceeds of a 90-day, discounted bank note.P80,000 o this loan was paid by check in December, 2015. e. Operating expenses paid during the period totaled P180,000; while merchandise purchase amounted to P250,000. f. The gross profit rate is 120% of cost. 19

REQUIRED: Determine the cash shortage as of December 31, 2015.

SOLUTION: Unadjusted balance per bank, 12/31

91,500

Outstanding checks , 12/31

(4,500)

Undeposited collections, 12/31

5,000

Adjusted balance per bank, 12/31 (Cash accounted) 92,000 Cash balance per books, 12/31/Cash accountability (see computation below) 122,000 Cash over (short)

(30,000)

Computation of cash balance per books, 12/31 Cash receipts: Owners' investment

150,000

Proceeds from loan

98,000

Collections from customers (see computation below)

414,000

Total

662,000

Cash disbursements: Purchases (P250,000 - P15,000)

235,000

Store fixtures (P50,000 - P5,000)

45,000

Loan payment

80,000

Expenses paid

180,000

Cash balance per books, 12/31

540,000 122,000

20

Computation of collections from sales Purchases/TGAS

250,000

Less merchandise inventory, 12/31

30,000

Cost of sales

220,000

Add gross profit (P220,000 x 120%)

264,000

Sales

484,000

Less accounts receivable, 12/31

70,000

Collections from sales

414,000

PROBLEM NO. 7 - Proof of cash You were able to obtain the following information during your audit of Euro Company: Reconciling Items: Undeposited collections Outstanding checks Customer's notes collected by the bank Bank service charges Erroneous bank debits Erroneous bank credits NSF checks not redeposited Customer's check deposited December 10, returned by bank on December 16 marked NSF, and redeposited immediately; no entry made on books for return or redeposit Unadjusted balances: Books Bank

Nov. 30 P 200,000 80,000 100,000 2,000 10,000 40,000 5,000

Dec. 31 P 120,000 60,000 120,000 3,000 20,000 30,000 7,000 10,000

? 230,000

90,000 ?

Bank P 420,000 500,000

Books P270,000 407,000

December Transactions: Receipts Disbursements

21

REQUIRED: 1.

2.

Prepare a 4-column bank reconciliation for the month of December a. Bank to book method; b. Book to bank method; and c. Adjusted balanced method Adjusting entries as of December 31, 2015.

SOLUTION: Euro Company Proof of Cash - Bank to Book Method For the month of December, 2012 Beginning

Unadjusted bank balances

230,000

Receipts

420,000

Disb

500,000

Ending

150,000

Undeposited collections November

200,000

December

(200,000) 120,000

120,000

Outstanding checks November

(80,000)

(80,000)

December

60,000 (60,000)

Customers' note collected by bank November December

(100,000)

100,000 (120,000)

(120,000)

Bank service charges 22

November

2,000

2,000

December

3,000)

3,000

20,000)

20,000

Erroneous bank debits November

10,000

(10,000)

December Erroneous bank credits November

(40,000)

December

40,000) (30,000)

(30,000)

NSF checks not redeposited November

5,000

5,000

December

(7,000)

NSF check redeposited

(10,000)

Unadjusted book balances

227,000

270,000

7,000

(10,000) 407,000

90,000

Euro Company Proof of Cash - Book to Bank Method For the month of December, 2012

Beginning


Receipts

227,000

270,000

(200,000)

200,000

Disb

407,000

Ending

90,000


23

December

(120,000)

(120,000)


80,000

80,000

December

(60,000)

60,000

Customers' note collected by bank November

100,000

December

(100,000) 120,000

120,000

Bank service charges November

(2,000)

(2,000)

December

3,000

(3,000)

20,000

(20,000)


(10,000)

10,000

December Erroneous bank credits November

40,000

December

40,000 30,000

30,000

NSF checks not redeposited November

(5,000)

(5,000)

December

7,000



230,000

10,000

10,000

420,000

500,000

(7,000)

150,000

Euro Company 24

Proof of Cash - Adjusted Balance Method For the month of December, 2012

Beginning


Receipts

230,000

420,000

200,000

(200,000)

Disb

500,000

Ending

150,000

Undeposited collections November December

120,000

120,000


(80,000)

(80,000)

December

60,000

(60,000)


10,000

(10,000)

December

(20,000)

20,000

Erroneous bank credits November

(40,000)

December

(40,000) (30,000)


(30,000)

(10,000) (10,000)

Adjusted bank balances

320,000

290,000

410,000

200,000


227,000

270,000

407,000

90,000

100,000

(100,000)

Customers' note collected by bank November December

120,000

120,000

AJE 1 25


(2,000)

(2,000)

December

3,000

(3,000)

AJE 2

(7,000)

AJE 3

NSF checks November

(5,000)

(5,000)

December Adjusted book balances

7,000 320,000

290,000

410,000

200,000

Adjusting journal entries:

1) Cash in bank

120,000

Note receivable

2) Bank service charge

120,000

3,000

Cash in bank

3) Accounts receivable Cash in bank

3,000

7,000 7,000

PROBLEM NO. 8 - Proof of cash In your audit of the cash account of Cebu Company, you were requested by the client to prepare a four-column reconciliation of receipts, disbursements, and balances to reconstruct the balances per books. Nov. 30 Dec.31 a. Balances per bank P 14,010 P19,630 b. Deposits in transit 2,740 3,110 c. Outstanding checks 4,260 3,870 d. Bank collections not in books 1,200 1,600 e. Bank charges not in books 950 640 26

f. of g. h.

Of the checks outstanding on December 31, one check for P700 was certified at the request the payee. Receipts for December, per bank statements - P281,070. DAIF check from customer was charged by the bank on December 28, and has not been recorded - P800. i. DAIF check returned in November and recorded in December, P1,050. j. DAIF check returned and recorded in December, P900. k. Check of Cibo Company charged by the bank in error, P2,010. l. Receipt on December 6 paid out in cash for travel expenses, P750. Recorded as receipts and disbursements per books. m. Error in recording customer's check on December 20, P165 instead of P465. n. Error in disbursements journal for December, P3,250 instead of P325. You noted in your audit that the DAIF checks returned by the bank are recorded as a reduction on the cash receipts journal instead of recording it at cash disbursement journal; redeposits are recorded as regular cash receipts.

REQUIRED: 1.

2.

Prepare a 4-column bank reconciliation for the month of December a. Bank to book method; b. Book to bank method; and c. Adjusted balance method Adjusting entries as of December 31, 2015.

SOLUTION: Cebu Company Proof of Cash - Bank to Book Method For the month of December, 2012

11/30 Balances per bank (a,g)

14,010

Receipts 281,070

Disb. 275,450

12/31 19,630

Deposits in transit (b) November 30 December 31

2,740

(2,740) 3,110

3,110

27

Outstanding checks (c,f) November 30

(4,260)

(4,260)

December 31 (P3,870 - P700)

3,170

(3,170)

Bank collections not in books (d) November 30

(1,200)

December 31

1,200 (1,600)

(1,600)

Bank service charges not in books (e) November 30

950

950

December 31

(640)

640

(800)

800

DAIF checks Returned in Dec., not recorded (h) Returned in Nov., recorded in Dec. (i)

1,050

Returned and recorded in Dec. (j)

(1,050) (900)

Bank error - Check of Cibo Company (k)

(900) (2,010)

Cash receipts used for payment (l)

750

2,010

750

Book errors (m,n) Customer check (P465-P165)

(300)

Disb check (P3,250-P325) Balances per books

(300) 2,925

13,290

279,540

274,635

(2,925) 18,195

Cebu Company Proof of Cash - Book to Bank Method For the month of December, 2012

28

11/30 Balances per books (refer to requirement 1.a)

13,290

Receipts 279,540

Disb.

12/31

274,635

18,195

Deposits in transit (b) November 30

(2,740)

December 31

2,740 (3,110)

(3,110)


4,260

4,260

December 31 (P3,870 - P700)

(3,170)

3,170

Bank collections not in books (d) November 30

1,200

December 31

(1,200) 1,600

1,600


(950)

(950)

December 31

640

(640)

800

(800)

DAIF checks Returned in Dec., not recorded (h) Returned in Nov., recorded in Dec. (i)

(1,050)

Returned and recorded in Dec. (j)

1,050 900

Bank error - Check of Cibo Company (k)

900 2,010

Cash receipts used for payment (l)

(750)

(2,010)

(750)


300

Disb check (P3,250-P325) Balances per bank (a,g)

300 (2,925)

14,010

281,070

275,450

2,925 19,630

Cebu Company Proof of Cash - Adjusted Balance Method For the month of December, 2012

29

Balances per bank (a,g)

11/30

Receipts

Disb.

12/31

14,010

281,070

275,450

19,630

2,740

(2,740)

Deposits in transit (b) November 30 December 31

3,110

3,110


(4,260)

(4,260)

December 31 (P3,870 - P700) Bank error - Check of Cibo Company (k) Cash receipts used for payment (l)

Balances per books

3,170

(3,170)

(2,010)

2,010

750

750

12,490

282,190

273,100

21,580

13,290

279,540

274,635

18,195

1,200

(1,200)

Bank collections not in books (d) November 30 December 31

1,600

1,600

AJE 1

640

(640)

AJE 2

800

(800)

AJE 3

300

AJE 4


(950)

(950)

December 31 DAIF checks Returned in Dec., not recorded (h) Returned in Nov., recorded in Dec. (i)

(1,050) Returned and recorded in Dec. (j)

1,050 900

900


300

30

Disb check (P3,250-P325)

12,490

282,190

(2,925)

2,925

273,100

21,580

AJE 5


1) Cash in bank

1,600

Note receivable


1,600

640

Cash in bank

3) Accounts receivable

640

800

Cash in bank

4) Cash in bank

800

300

Accounts receivable

5) Cash in bank Accounts payable

300

2,925 2,925

PROBLEM NO.9 – Proof of cash In connection with your examination, the MQM Company presented to you the following information regarding its Cash in Bank account for the month of December 2015: a) Balance per bank statements: November 30, P215,600, and December 31, P230,400. b) Balances per bank statement account in the company’s books: November 30, P 165,450 and December 31, P226,800. 31

c) Total receipts per books were P2, 221,900 of which P12,100was paid in cash to a creditor on December 24. d) Total charged in the bank statement during December were P2,189,700. e) Undeposited receipt were: November 30, P90,600 and December 31, P101,200 f) Outstanding checks were: November 30, P26,750, and December 31, P19,100, of which a check for P5,000 was certified by the bank on December 26. g) NSF checks returned, recorded as reduction of cash receipts, were:  Returned by the bank on December, recorded also in December, P10,400  Returned by bank on December but recorded in January, P8,600 h) Collections by bank not recorded by Company were P121,500 in November and P116,400 in December. i) Banks service charges not entered in the company’s books were: November 30, P7,500 and December 31, P4,200. j) A check for P9,500 of QMQ Company was charged to MQM Company in error. k) A check drawn for P8,400 was erroneously entered in the books as P4,800.

REQUIRED: 1. Prepare a 4-colunm bank reconciliation for the month of December a. Bank to book method; b. Book to bank method; and c. Adjusted balance method 2. Adjusting entries as of December 31,2015.

SOLUTION: MQM Company Proof of Cash - Bank to Book Method For the month of December, 2012

32

December Nov. 30


215,600

Receipts

Disb.

2,204,500

2,189,700

Dec. 31

230,400

Undeposited receipts: November

90,600

December

(90,600) 101,200

101,200

Outstanding checks: November

(26,750)

(26,750)

December Erroneous bank debit Payment to creditor in cash

14,300

(14,300)

(9,500)

9,500

12,100

12,100

(10,400)

(10,400)

NSF checks: Returned, recorded in December Returned, recorded in January

(8,600)

8,600

Unrecorded bank collections: November

(121,500)

December

121,500 (116,400)

(116,400)

Bank service charges: November

7,500

7,500

December

(4,200)

4,200

(3,600)

3,600

2,160,550

226,800

Book error in December Unadjusted book balances

165,450

2,221,900

MQM Company Proof of Cash - Book to Bank Method For the month of December, 2012

December

33

Nov. 30


165,450

Receipts

Disb.

Dec. 31

2,221,900

2,160,550

226,800

Undeposited receipts: November

(90,600)

December

90,600 (101,200)

(101,200)


26,750

26,750


(14,300)

14,300

9,500

(9,500)

(12,100)

(12,100)

10,400

10,400


8,600

(8,600)


121,500

December

(121,500) 116,400

116,400


(7,500)

(7,500)

December Book error in December Unadjusted bank balances

215,600

2,204,500

4,200

(4,200)

3,600

(3,600)

2,189,700

230,400

MQM Company Proof of Cash - Adjusted Balance Method For the month of December, 2012

December Nov. 30

Receipts

Disb.

Dec. 31

34


215,600

2,204,500

90,600

(90,600)

2,189,700

230,400

Undeposited receipts: November December

101,200

101,200


(26,750)

(26,750)


14,300

(14,300)

(9,500)

9,500

12,100

12,100


279,450

2,227,200

2,179,850

326,800


165,450

2,221,900

2,160,550

226,800

10,400

10,400


8,600

(8,600)

AJE 1

116,400

AJE 2

4,200

(4,200)

AJE 3

3,600

(3,600)

AJE 4

2,227,200

2,179,850

326,800

-

-

-


121,500

December

(121,500) 116,400


(7,500)

(7,500)

December Book error in December Adjusted book balances

279,450 -


35


8,600

Cash in bank

2) Cash in bank

8,600

116,400

Note receivable


116,400

4,200

Cash in bank

4) Accounts payable

4,200

3,600

Cash in bank

3,600

PROBLEM NO.10- Proof of cash You obtained the following information on the current account of Baht Company during your examination of its financial statements for the year ended December 31, 2015. The bank statement on November 30, 2015 showed a balance of P76, 500. Among the bank credits in November was customer’s note for P25,000 collected for the account of the company which the company recognized in December among its receipts. Included in the bank debits were cost of check books amounting to P300 and a P10,000 check which was charged by the bank in error against Baht Co. Account. Also in November you ascertained that there were deposits in transit amounting to P20,000 and outstanding checks totaling P42,500. The bank statement for the month of December showed total credits of P104,000 and total charges of P51,000. The company’s book for December showed total receipts of P183,900 disbursements of P101,800 and a balance of P121,400. Bank debits memos for December were: No. 143 for service charges, P400 and No. 145 on a customer’s returned check marked “DAIF” for P6,000. On December 31,2015 the company placed with the bank a customer’s promissory note with a faced value of P30,000 for collection. The company treated this note as part of its receipts although the bank was able to collect on the note only in January, 2016. A check for P990 was recorded in the company cash payments books in December as P9,900.

36

REQUIRED: 1.

Prepare a 4-column bank reconciliation for the month of December a. Bank to book method; b. Book to bank method; and c. Adjusted balance method 2. Adjusting entries as of December 31, 2015.

SOLUTION: Baht Company Proof of Cash - Bank to Book Method For the month of December, 2012 December


Nov. 30 Receipts

Disb.

Dec. 31

76,500

104,000

51,000

129,500

(25,000)

25,000

Add (deduct) adjustments: Customers' note collected by bank November Bank service charges November

300

300

December Erroneous bank debit-November

(400) 10,000

(10,000)

20,000

(20,000)

400 -


54,900

54,900


(42,500)

(42,500)

37

December

90,490

(90,490)

(6,000)

6,000

NSF checks December Book errors in December Uncollected customer's note treated as receipts 30,000 Error in recording a check (SB P990, AR P9,900)

8,910

(8,910)


101,800

121,400

39,300

183,900

30,000

Computation of deposits in transit, December 31:

Deposit in transit, Nov. 30

20,000

Add collections in December: December book receipts Less receipts not representing collections in December: Customers' note collected by bank, Nov. 30 25,000 Note with the bank treated as receipts 30,000

183,900

55,000

Total

128,900 148,900

Less deposits credited by the bank in December: December bank receipts Less receipts not representing deposits: Erroneous bank debit, Nov.; corrected Dec.

104,000

10,000

94,000 54,900

Outstanding checks, December 31: 38

Outstanding checks, Nov. 30

42,500

Add checks issued in December: December book disbursements

101,800

Less disbursements not representing checks for December: Book error (SB P990, AR P9,900) 8,910 Bank service charge, Nov.; recorded Dec. 300 9,210 Total Less checks paid by the bank in December:

92,590 135,090

December bank disbursements

51,000

Less disbursements not representing checks: NSF checks, Dec.

6,000

Bank service charge, Dec.

400

6,400

44,600 90,490

Baht Company Proof of Cash - Book to Bank Method For the month of December, 2012 Nov. 30 Unadjusted book balances

39,300

December Receipts 183,900

Disb.

Dec. 31

101,800

121,400

Add (deduct) adjustments: Customers' note collected by bank November

25,000

(25,000)

Bank service charges November December

(300)

(300) 400

(400) 39

Erroneous bank debit-November

(10,000)

10,000

(20,000)

20,000

-


(54,900)

(54,900)


42,500

42,500

December

(90,490)

90,490

NSF checks December

6,000

(6,000)

Book errors in December Uncollected customer's note treated as receipts Error in recording a check (SB P990, AR P9,900)


76,500

(30,000)

(30,000) (8,910)

104,000

51,000

8,910

129,500

Baht Company Proof of Cash - Adjusted Balance Method For the month of December, 2012 December


Nov. 30

Receipts

Disb.

Dec. 31

76,500

104,000

51,000

129,500

10,000

(10,000)

20,000

(20,000)

Add (deduct) adjustments: Erroneous bank debit-November

-


40

December

54,900

54,900


(42,500)

(42,500)

December



90,490

64,000

39,300

(90,490)

128,900

98,990

93,910

183,900

101,800

121,400

Add (deduct) adjustments: Customers' note collected by bank November

25,000

(25,000)


(300)

(300)

December

400

(400)

AJE 1

(6,000)

AJE 2

(30,000)

AJE 3 AJE 4

NSF checks December

6,000

Book errors in December Uncollected customer's note treated as receipts (30,000) Error in recording a check (SB P990, AR P9,900)

(8,910)

8,910

Adjusted book balances

98,990

93,910

64,000

128,900

-

-

-

-


41


400

Cash in bank

400


6,000

Cash in bank

6,000

3) Notes receivable

30,000

Cash in bank

30,000

4) Accounts payable

8,910

Cash in bank

8,910

PROBLEM NO.11 – Proof of cash Hangover Company received the following bank statements on August 1, 2015: DATE July 1 2 3 5 6 8 9 10 11 12 13 15 16 17 18 19

DEBITS 2,502 2,240

CREDITS

1,050 2,106 5,535 5,817

8,181 6,819 7,425

4,317 4,926

3,509 9,777 6,221 6,484

7,702 3,418

BALANCE 66,405 63,903 62,713 64,819 70,354 76,171 67,990 72,307 65,488 62,989 62,989 66,498 56,721 58,202 51,718 55,136 42

20 22 23 24 25 26 27 29 30 31 TOTALS

5,310 6,492

60,446 66,938 61,392 61,392 52,657 60,903 70,288 63,288 63,228 65,810

5,546 8,735 8,246 9,385 7,060 6,405 P77,395

8,987 P76,800

Hangover’s cash account shows the following information for the month of July, 2015: The June 30, 2015 balance was P62, 150. DATE July 1 2 3 5 6 8 9 12 13 15 16 17 18 19 20 22 23 26 29 30 31 TOTALS

DEBITS 3,729 5,535

CREDITS 165 8,181

5,817 4,317 4,926 3,509

6,819 7,425 9,391

7,702 3,418 5,310 6,492

6,221 6,484

5,074 8,735 8,286 8,913 5,152 2,238 P75,304

6,885 5,913 5,857 P77,150

Additional information: 1. Hangover makes a journal entry for service charges, direct deposits, and interest earned in the month subsequent to the month the items are reflected on the bank statement.

43

2. Barek Co. Makes a direct deposit of P675 to Hangover’s account at the bank on the 30th of every month. This payment, which is rent revenue to Hangover, is not recorded by Hangover until the bank statement is received. 3. In the 23th of July, an NSF check for P472 was returned by the bank. The check was redeposited on July 27th, and no entry was made by Hangover. 4. Check No. 1145 dated July 29 was written for P1,492 of wages, but recorded by Hangover on the books as P1,000. 5. On July 16, the bank recorded a withdrawal of P386 for Hangover that should have been for Handover Company. 6. The bank service charge for June was P165 ND FOR July was P175. 7. The interest earned on June was P3,054 and in July was P3,160. 8. During June, Hangover wrote check no. 1095 for P9,850 for rent expense but recorded the check on its books as P8,955. Hangover discovered the mistake in July, when the cancelled checks were returned with the June bank statement but neglected to correct the error on the books at that time. 9. At the end of June, Hangover had P3,156 of deposits in transit, and checks totalling P4,742 that had not cleared the bank. In addition, all of Hangover’s transactions with the bank after July 29 have not cleared the bank.

REQUIRED: 1. Prepare a 4-colunm bank reconciliation for the month of July a. Bank to book method; b. Book to bank method: and c. Adjusted balance method 2. Adjusting entries as of December 31, 2015.

SOLUTION: Hangover Company Proof of Cash - Bank to Book Method For the month of July, 2012

July


6/30

Receipts

Disb

7/31

66,405

76,800

77,395

65,810 44

Direct deposits June

(675)

July

675 (675)

NSF check redeposited - July

(472)

(675) (472)

Book error - July (SB P1,492, AR P1,000)

(492)

492

Bank error - July

(386)

386

Bank service charges June

165

165

July

(175)

175

Interest earned June

(3,054)

July Book error - June (SB P9,850, AR P8,955) 895

3,054 (3,160)

(3,160) 895

Deposits in transit June

3,156

July

(3,156) 2,238

2,238

Outstanding checks June

(4,742)

(4,742)

July Unadjusted book balances

62,150

75,304

5,857

(5,857)

77,150

60,304

Hangover Company Proof of Cash - Book to Bank Method For the month of July, 2012

45

July


6/30

Receipts

Disb

7/31

62,150

75,304

77,150

60,304

675

(675)

Direct deposits June July

675


472

675 472

Book error - July (SB P1,492, AR P1,000)

492

(492)

Bank error - July

386

(386)

Bank service charges June

(165)

(165)

July

175

(175)


3,054

July Book error - June (SB P9,850, AR P8,955) (895)

(3,054) 3,160

3,160 (895)

Deposits in transit June

(3,156)

July

3,156 (2,238)

(2,238)


4,742

4,742

July Unadjusted bank balances

66,405

76,800

(5,857)

5,857

77,395

65,810

46

Hangover Company Proof of Cash - Adjusted Balance Method For the month of July, 2012 July


6/30

Receipts

Disb

7/31

66,405

76,800

77,395

65,810

3,156

(3,156)

Deposits in transit June July

2,238

2,238


(4,742)

(4,742)

July

5,857


(472)

Bank error - July

(5,857)

(472) (386)

386


64,819

75,410

77,652

62,577


62,150

75,304

77,150

60,304

675

(675)

Direct deposits June July

675

675

AJE 1

(175)

AJE 2

Bank service charges June July

(165)

(165) 175

47


3,054

July

(3,054) 3,160

3,160

AJE 3

(895)

AJE 4

492

(492)

AJE 5

Book errors June (SB P9,850, AR P8,955) (895) July (SB P1,492, AR P1,000)


64,819

75,410

77,652

62,577

-

-

-

-


1) Cash in bank

675

Rent income


675

175

Cash in bank

3) Cash in bank

175

3,160

Interest income

4) Rent expense

3,160

895

Cash in bank

5) Wages expense Cash in bank

895

492 492

48

PROBLEM NO.12- Proof of cash Celtics Company had the following bank reconciliation on June 30, 2015: Balance per bank statement, June 30, 2015 Add: Deposit in transit Total Less: Outstanding checks Balance per book, June 30

P3,000,000 400,000 3,400,000 900,000 P2,500,000

The bank statement for the month of July 2015 showed the following: Deposits (including P200,000 note collected for Celtics) P9,000,000 Disbursements (including P140,000 NSF check and P10,000 service 7,000,000 charge) All reconciling items on June 30,2015 cleared through the bank in july. The outstanding checks totaled P600,000 and the deposits in transit amounted to P1,000,000 on July 31, 2015. REQUIRED: Determine the following: 1. 2. 3. 4.

Cash receipts per books in July Cash disbursement per books in July Cash balance per books at July 31 Adjusted cash balance at July 31

SOLUTION: Requirement No. 1 Total deposits per bank statement in June

9,000,000

Note collected by bank in July

(200,000)

Deposits in transit, June 30

(400,000)

Deposits in transit, July 31

1,000,000

Cash receipts per books in July

9,400,000 49

Requirement No. 2 Total disbursements per bank statement in June

7,000,000

July NSF check

(140,000)

July service charge

(10,000)

Outstanding checks, June 30

(900,000)

Outstanding checks, July 31

600,000

Cash disbursements per books in July

6,550,000

Requirement No. 3 Balance per books, June 30, 2007

2,500,000

July receipts per books (see no. 21)

9,400,000

July disbursements per books (see no. 22)

(6,550,000)

Balance per books, July 31, 2007

5,350,000

Requirement No. 4 Balance per bank statement, July 31 (P3M+P9M-P7M)

5,000,000

Deposits in transit, July 31

1,000,000

Outstanding checks, July 31

(600,000)

Adjusted bank balance, July 31

5,400,000

Balance per books, July 31

5,350,000

Note collected by bank in July

200,000 50

NSF check

(140,000)

Bank service charges

(10,000)

Adjusted book balance, July 31

5,400,000

PROBLEM NO.13 – Proof of cash You are able to obtain the following information in connection with your audit for the Cash account of the Syria Company as of December 31, 2015: November 30 P480,000 244,000

December 31 P420,000 300,000

a. Balance per book b. Undeposited collections c. Outstanding checks 150,000 120,000 d. The bank statement for the month of December showed total credits of P240,000 e. DAIF checks are recorded as a reduction of cash receipts. DAIF checks which are later redeposited are then recorded as regular receipts. Data regarding DAIF checks are as follows: 1. Returned by the bank in Nov. and recorded by the company in Dec., P10,000. 2. Returned by the bank in Dec. and recorded by the company in Dec., P25,000. 3. Returned by the bank in Dec. and recorded by the company in Jan., P29,000. f. Check of Syria Company amounting to P90,000 was charged to the company’s account by the bank in error on December 31. g. A bank memo stated that the company’s account was credited for the net proceeds of a customer’s note for P106,000. h. The company has hypothecated its accounts receivable with the bank under an agreement wherby the bank lends the company 80% of the hypothecated accounts receivable. The company performs accounting and collection of the accounts. Adjustments of the loan are made from daily sales reports and deposits. i. The bank credits the company accounts and increases the amount of the for 80% of the reported sales. The loan agreement states specifically that the sales report must be accepted by the bank before the company is credited. Sales reports are forwarded by the company to the bank on the first day following the date of sale. The bank allocates each deposit 80% to the payment of the loan, and 20% to the company account. Thus, only 80% of each day’s 51

sales and 20% of each collection deposits are entered on the bank statement. The company accountant records the hypothecation of new accounts receivables (80% of sales) as a debit to Cash and a credit to the bank loan as of the date of the sales. One hundred percent of the collection on accounts receivables is recorded as cash receipts: 80% of the collection is recorded in the disbursements book as a payment on the loan. In connection with the hypothecation, the following facts were determined:  Included in the undeposited collections is cash from the hypothecation of accounts receivable. Sales were P 180,000 on November 30, and P200,000 at December 31. The balance was made up from collections which were entered on the books in the manner indicated above.  Collections on accounts receivable deposited in December, other than deposits in transit, totalled P725,000. j. Interest on the bank loan for the month of December charged by the bank nut not recorded in the books, amounted to P38,000. REQUIRED: Determine the following: 1. 2. 3. 4.

Unadjusted balance per books as of November 30 Unadjusted book receipts for December Unadjusted book disbursements for December Unadjusted balance per books as of December 31

SOLUTION: Syria Company Proof of Cash - Bank to Book Method For the month of December, 2012

Nov. 30 Unadjusted bank balances

December Receipts

480,000

240,000

100,000

(100,000)

Disb 300,000

Dec. 31 420,000

Undeposited collections: November 30 December 31

140,000

140,000 52

Outstanding checks: November 30

(150,000)

(150,000)

December 31

120,000

DAIF checks: Returned in Nov., recorded in Dec. Returned and recorded in Dec.

10,000

(10,000) (25,000)

Returned in Dec., recorded in Jan. Erroneous bank debit Unrecorded bank collection in Dec. Anticipated loan proceeds hypothecation Nov. 30 sales (P180,000 x 80%)

(25,000) (29,000)

29,000

(90,000)

90,000

(106,000) from

(120,000)

(106,000)

AR

144,000

(144,000)

Dec. 31 sales (P200,000 x 80%)

160,000

Deposits with loan payment (P725,000 x 80%)

580,000

160,000 580,000

Anticipated loan payment from undeposited collections Nov. 30 (P100,000 x 80%) (80,000) Dec. 31 (P140,000 x 80%)

(80,000) 112,000

(112,000)

Interest charge for bank loan in Dec.

(38,000)

38,000

700,000

539,000


504,000

735,000

Syria Company Proof of Cash - Adjusted Balance Method For the month of December, 2012

Nov. 30 Unadjusted bank balances

480,000

December Receipts 240,000

Disb 300,000

Dec. 31 420,000 53

Undeposited collections: November 30

100,000

December 31

(100,000) 140,000

140,000

Outstanding checks: November 30

(150,000)

(150,000)

December 31

120,000

(120,000)

(90,000)

90,000

Erroneous bank debit Deposits with loan payment (P725,000 x 80%) Adjusted bank balances 430,000

580,000 860,000

580,000 760,000

530,000


504,000

735,000

700,000

539,000

DAIF checks: Returned in recorded in Dec. Returned recorded in Dec.

(10,000)

10,000

Nov., and 25,000

Returned in Dec., recorded in Jan. Unrecorded bank collection in Dec. Anticipated loan proceeds from AR hypothecation Nov. 30 sales (P180,000 x 80%) (144,000) Dec. 31 sales (P200,000 x 80%)

29,000 106,000

106,000

(160,000)

Interest charge for bank loan in Dec. 430,000

(29,000)

144,000

Anticipated loan payment from undeposited collections Nov. 30 (P100,000 x 80%) 80,000 Dec. 31 (P140,000 x 80%)


25,000

860,000

(160,000)

80,000 (112,000)

112,000

38,000

(38,000)

760,000

530,000

54

PROBLEM NO.14 –Three-dated bank reconciliation The client, Noel Corporation, obtained bank statements for November 30 and December 31, 2015 and reconciled the balanced. You obtained directly the statements of January 12,2016 and obtained the necessary confirmation. You have found that there are no errors in addition or subtraction in the client’s books. Balance, bank statement Balance, company records Deposits in transits Outstanding checks

11/30/15 P344,420 271,260 35,000 88,240

12/31/15 P275,020 226,010 ? ?

Receipts, cash records Credits, bank statement Disbursements, cash records Charges, bank statement

12/1-31/15 P963,230 941,010 1,008,480 1,010,410

1/1-12/16 P292,500 321,490 177,570 230,180

The following information also was obtained: a) Check no. 804 for P340 cleared by the bank in December as P1,340. This was found in proving the bank statement. The bank made the correction on January 8, 2016. b) A note of P20,000, sent to the bank for collection on November 15,2015, was collected and credited to the account on November 28, 2015, net of a collection fee of P80. The note was recorded in the cash receipts on December 21, 2015, at which date the collection fee was entered as a disbursement. c) The client records returned checks in red in the cash receipts journal. The checks listed in the table were returned by the bank. Co. A Co. B

Amount P3,270 P6,730

Returned 12/6/15 12/27/15

Recorded No entries 1/3/16

Redeposited 12/8/15 1/15/16

d) Two payroll checks for employee’s vactions totalling P5,500 were drawn on January 3, 2016, and cleared the bank on January 8,2016. Those checks were not entered in the clients records because semi-monthly payroll summaries are entered only on the 15th and the last day of each month. REQUIRED: 55

1. Compute for the following: a. Deposits in transit as of December 31, 2015 b. Outstanding checks as of December 31,2015 c. Deposits in transits as of January 12, 2016 d. Outstanding checks as of January 12,2016 2. Prepare a 4-column bank reconciliation for the month of December 2015 and for the period January 1 to 12, 2016 using the adjusted balance method.

SOLUTION: Requirement 1.a Deposits in transit, Nov. 30 Add collections in December: December book receipts

35,000

963,230

Customers' note collected by bank in Nov. (20,000) Total

943,230 978,230

Less deposits credited by the bank in December: December bank receipts 941,010 NSF check redeposited (Customer A) Deposits in transit, Dec. 31

(3,270)

937,740 40,490

Requirement 1.b Outstanding checks, Nov. 30

88,240

Add checks issued in December: December book disbursements

1,008,480

Collection fee for note collected in Nov.

(80)

1,008,400 56

Total

1,096,640

Less checks paid by the bank in December: December bank disbursements 1,010,410 Bank error in check payment (P1,340 P340) (1,000) NSF check Customer A (3,270) NSF check Customer B (6,730) Outstanding checks, Dec. 31

999,410 97,230

Requirement 1.c Deposits in transit, Dec. 31 (see Requirement 1.a) Add collections, Jan. 112: Jan. 1-12 book receipts 292,500 NSF check Customer B 6,730 Total

40,490

299,230 339,720

Less deposits credited by the bank, Jan. 1-12: Jan. 1-12 bank receipts 321,490 Correction of error in check payment in Dec. (1,000) Deposits in transit, Jan. 12

320,490 19,230

Requirement 1.d Outstanding checks, Dec. 31 (see Requirement 1.b)

97,230

Add checks issued, Jan. 1-12: Jan. 1-12 book disbursements

177,570 57

Unrecorded payroll checks

5,500

183,070

Total

280,300

Less checks paid by the bank, Jan. 1-12: Outstanding checks, Jan. 12

230,180 50,120

December Nov. 30 Receipts

Unadjusted bank balances 344,420

941,010

January 1-12 Disb

Dec. 31

Receipts

Disb

Jan. 12

1,010,410

275,020

321,490

230,180

366,330

Deposits in transit: eginning of period

35,000

End of period

(35,000)

(40,490)

40,490

40,490 19,230

19,230

Outstanding checks: Beginning of period

(88,240)

(88,240)

(97,230)

End of period Bank error in check payment NSF check redeposited (Customer A) (3,270)

97,230

(97,230)

(1,000)

1,000

(1,000)


943,230

1,015,130

219,280

963,230

1,008,480

291,180

Unadjusted book balances 271,260 Note collected by bank in Nov. 19,920

50,120

(50,120)

299,230

183,070

335,440

226,010

292,500

177,570

340,940

(6,730)

6,730 5,500

(5,500)

(3,270)

(20,000) (80)

NSF check not redeposited (Customer B) Unrecorded payroll in Jan.

6,730

58


291,180

943,230

1,015,130

219,280

299,230

183,070

PROBLEM NO.15- Theory Select the best answer for each of the following: 1. Who is responsible, at all times, for the amount of petty cash fund? a. General cashier b. President of the company c. Petty cash custodian d. Chairman of the Board of Directors 2. What is the effect of not replenishing the petty cash fund at the year-end and not making the appropriate adjusting entry? a. A detailed audit is necessary. b. The petty cash custodian should turn over the petty cash to the general cashier. c. Cash will be overstated and expenses understated. d. Expenses will be overstated and cash will be understated. 3. The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to. a. Detect kiting activities that may otherwise not be discovered. b. Corroborate information regarding deposit and loan balances. c. Provide the data necessary to prepare a proof of cash. d. Request information about contingent liabilities and secured transactions. 4. The auditor should ordinarily mail confirmation request to all banks with which the client has conducted any business during the year, regardless of the year-end balance, since a. The confirmation form also seeks information about indebtedness to the bank. b. This procedure will detect kiting activities which otherwise not be detected. c. The mailing of confirmation forms to all such banks is required by GAAS. d. This procedure relieves the auditor of any responsibility with respect to non-detection of forged checks. 5. How will the auditor most likely utilize the bank reconciliation as evidence in the audit of cash? a. The auditor test deposits-in-transit and outstanding items to other corroborating evidence. 59

335,440

b. The auditor sends the reconciliation to the bank for independent verification. c. The auditor performs the reconciliation for the client to record the proper cash balance. d. The auditor traces the book balance of the reconciliation to the cut off bank statement. 6. The auditor will send a standard bank confirmation to which of the following? a. Financial institutions for which the client has a balance greater than P0 at the end of the year. b. Financial institutions with which the client has transacted during the year. c. Financial institutions of customers using the lockbox. d. Financial institutions used by significant shareholders. 7. An auditor who is engaged to examine the financial statements of a business enterprise will request cut-off bank statement primarily in order to a. Verify the cash balance reported on the bank confirmation inquiry form. b. Verify reconciling items on the client’s bank reconciliation. c. Detect lapping. d. Detect kiting.

8. Which of the following cash transfers would appear as a deposit in transit on the December 31, 2015 bank reconciliation? Bank Account A Bank Account B Disbursing Date (Month/Day Receiving Date (Month/Day) Per Bank Per Books Per Bank Per Books a. 12/31 12/30 12/31 12/30 b. 1/2 12/30 12/31 12/31 c. 1/3 12/31 1/2 1/2 d. 1/3 12/31 1/2 12/31

9. Which of the following transfers would not appear as an outstanding check on the December 31, 2015 bank reconciliation? Bank Account A Bank Account B Disbursing Date (Month/Day) Receiving Date (Month/Day) Per Bank Per Books Per Bank Per Books a. 12/31 12/30 12/31 12/30 b. 1/2 12/30 12/31 12/31 c. 1/3 12/31 1/2 1/2 d. 1/3 12/31 1/2 12/31 60

Use the following information for the next two question. The information below was taken from the bank transfer schedule prepared during the audit of Khaye Ting Company’s financial statements for the year ended December 31,2015. Assume all checks are dated and issued on December 30, 2015. No. 101 102 103 104

From Pbcom UCPB HSBC MBank

To HSBC MBank PSBank PNB

Disbursements Per Books Per Bank 12/30 1/4 1/3 1/2 12/31 1/3 1/2 1/2

Receipts Per Books 12/30 12/30 1/2 1/2

Per Bank 1/3 12/31 1/2 12/31

10. Which of the following checks might indicate kiting? a. Check No. 101 and 103 b. Check No. 102 and 104 c. Check No. 101 and 104 d. Check No. 102 and 103 11. Which of the following checks illustrates deposits/transfers in transit at December 31? a. Check No. 101 and 102 b. Check No. 101 and 103 c. Check No. 102 and 104 d. Check No. 102 and 104 12. Which of the following cash transfer results in a misstatement of cash at December 31?

a. b. c. d.

ANSWERS: 1. C 2. C 3. B 4. A

From Pbcom UCPB HSBC MBank

5. A 6. B 7. B 8. D

To HSBC MB PBank PNB

Disbursements Per Books Per Bank 12/31/15 1/4/16 1/4/16 1/5/16 12/31/15 1/5/16 1/4/16 1/11/16

Receipts Per Books 12/31/15 12/31/15 12/31/15 1/4/16

Per Bank 12/31/15 1/4/16 1/4/16 1/4/16

9. B 10. B 11. B 12. B 61

II – AUDIT OF RECEIVABLES PROBLEM NO. 1 – Composition of trade and other receivables On December 21, 2015 the accounts receivable control account of Ipil-ipil Co. had a balance of P181,100. An analysis of the accounts receivable account showed the following: Accounts known to be worthless

P 2,500

Advance payments to creditors on purchase orders

10,000

Advances to affiliated companies Customers’ accounts reporting credit balance arising from sales return

25,000 (15,000)

Interest receivable on bonds

10,000

Other trade accounts receivable – unassigned 50,000 Subscriptions receivable for ordinary share capital due in 30 55,000 days Trade accounts receivable – assigned 15,000 Trade installment receivable due 1 – 18 months, (including unearned finance charges, P2,000) 22,000 Trade receivables from officers, due currently

1,500

Trade accounts on which post-dated checks are held (no entries were made on receipts of checks)

5,000

Total

P181,000

REQUIRED: 62

Determine the trade and other receivables to be reported on the entity’s December 31, 2015 statement of financial position. SOLUTION:

Items included: Trade accounts receivable (see computation below)

91,500

Advance payments to creditors on purchase orders

10,000

Interest receivable on bonds

10,000

Subscriptions receivable due in 30 days

55,000

Trade and other receivables

166,500

Composition of trade accounts receivable: Other trade accounts receivable – unassigned

50,000

Trade accounts receivable - assigned

15,000

Trade installment receivable due 1 – 18 months, net of unearned finance charges of P2,000 Trade receivables from officers due currently

20,000 1,500

Trade accounts on which post-dated checks are held (no entries were made on receipts of checks)

5,000

Trade accounts receivable

91,500

Items not included: Accounts known to be worthless Advances to affiliated companies Customers' account with credit balance

2,500 25,000 (15,000)

Write off Noncurrent investment Trade and other payables

PROBLEM NO. 2 – Computation of adjusted accounts receivable 63

In the audit of Beatles Company, the auditor had an appreciation of the following schedule and noted some comments for possible adjustments: Beatles Company Accounts Receivable Schedule December 31, 2015 Customer Love M. Do Strawberry Fields This Boy Company Girl Corporation Ticket To Ride Transport Corp Let It Be Corp Hey Jude Get Back Company Yesterday Corp Totals

Balance P92,000 420,000 350,000 374,000 160,000 124,000 4,000 256,000 240,000 P2,020,000

Current P 248,000 92,000 212,000 60,000 4,000 80,000 240,000 P936,000

Past Due P92,000 172,000 258,000 162,000 160,000 64,000 176,000 P1,084,000

The Accounts Receivable control account balance was determined to be P2,020,000. The external auditor submitted the following audit comments for possible adjustments: Love M. Do

Merchandise found defective; returned by customer on October 31, 2015 for credit, but the credit memo was issued y Beatles only on January 15, 2016.

Strawberry Fields

Account is good but usually pays late.

This Boy Company

Merchandise worth P160,000 was destroyed while in transit on May 31, 2015, terms FOB Destination. The carrier was billed on June 15, 2015. (See Ticket To Ride Corp. and Yesterday Corp.)

Girl Corporation

Customer billed twice in error for P40,000. Balance is collectible.

Ticket To Ride Corp.

Collected in full on January 31, 2016.

Let It Be Corp.

Paid in full on December 30, 2015 but not recorded. Collections were deposited on January 2, 2016.

Hey Jude

Received account confirmation from customer for P44,000. Investigation revealed an erroneous credit for P40,000. (See Get Back Company)

64

Get Back Company

Neglected to post P40,000 credit to customer’s account.

Yesterday Corp.

Customer wants to know reason for receipt of P160,000 credit memo as their accounts payable balance was P400,000.

REQUIRED: 1. Adjusting entries as of December 31, 2015. 2. Adjusted balance of Accounts Receivable – Trade as of December 31, 2015.

SOLUTION:

Requirement No. 1

1)

Love M. Do Sales returns

92,000

Accounts receivable

2)

Strawberry Fields None

3) This Boy Company None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

4)

Girl Corporation Sales

40,000

Accounts receivable

5)

Ticket To Ride Corp. Accounts receivable-Nontrade

160,000

Accounts receivable 65

6)

Let It Be Corp Cash

124,000 Accounts receivable

7)

Hey Jude None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

8)

Get Back Company None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

9)

Yesterday Corp None, this is misposting only in the SL. However, the customers' ledger should be adjusted.

Requirement No. 2

Unadjusted balance

2,020,000

Add (Deduct) adjustments: No. 1

(92,000)

No. 4

(40,000)

No. 5

(160,000)

No. 6

(124,000)

Adjusted balance

1,604,000

PROBLEM NO. 3 – Audit of accounts receivable and related accounts

66

In connection with the audit of the financial statements of Praktis Corporartion, your audit senior instructed you to examine the company’s accounts receivable. Prior to any adjustments you were able t extract the following balances from Praktis’ trial balance as of December 31, 2015: Accounts receivable

P442,500

Allowance for doubtful accounts

15,000

From the schedule of accounts receivable as of December 31, 2015, you determined that this account includes the following: Accounts with debit balances: 60 days old and below

P 238,500

61 to 90 days

117,200

Over 90 days

85,400

P 441,100

Advances to officers

16,400

Accounts with credit balance Accounts receivable per GL

(15,000) P 442,500

The credit balance in customer’s account represents collection from a customer whose account had been written-off as uncollectible in 2014. Accounts receivable for more than a year totaling P21,000 should be written off. Confirmation replies received directly from customers disclosed the following exceptions:

Customer

Customer’s Comments

Jessie

The goods sold on December 1 were The client failed to record credit returned on December 16, 2015. memo no. 23 for P12,000. The merchandise was included in the ending inventory at cost.

Audit Findings

67

Robert

We do not owe this amount *%#@ Investigation revealed that goods (bad word). We did not receive any sold for P16,000 were shipped to merchandise form your company. Robert on December 29, 2015, terms FOB shipping point. The goods were lost in transit and the shipping company has acknowledged its responsibility for the loss of merchandise.

Anne

I am entitled to a 10% employee Anne is an employee of Praktis. discount. Your bill should be Starting November 2015, all reduced by P1,200. company employees were entitled to a special discount.

Jay-ar

We have not yet sold the goods. We Merchandise billed for P18,000 will remit the proceeds as soon as were consigned to Jay-ar on the goods are sold. December 30, 2015. The goods cost P13,000.

Roy

We do not owe you P20,000. We The sale of merchandise on already paid our accounts as December 18, 2015 was paid by evidenced by OR # 1234. Roy on January 6, 2016.

Carla

Reduce your bill by P1,500

This amount represents freight paid by the customer for the merchandise shipped on December 17, 2015, terms, FOB destinationcollect.

Based on your discussion with Praktis’ Credit Manager, you both agreed that an allowance for doubtful accounts should be maintained using the following rates: 60 days old and below

1%

61 to 90 days

2%

Over 90 days

5%

REQUIRED: 1. Compute for the adjusted balances of the following: a. Accounts receivable P387,400 b. Allowance for doubtful accounts P 7,622 2. Adjusting entries as of December 31, 2015 SOLUTION: 68

Per Books Accounts receivable

60 days old and below

442,500

238,500

Adjustment s

Per Audit

1

(16,400)

387,400

2

15,000

3

(21,000)

4

(12,000)

5

(1,200)

6

(18,000)

7

(1,500)

4

(12,000)

5

(1,200)

6

(18,000)

7

(1,500)

205,800

61 to 90 days

117,200

Over 90 days

85,400

3

(21,000)

64,400

15,000

2

15,000

7,622

3

(21,000)

8

(1,378)


117,200

Adjusting Journal Entries 1 Advances to officers and employees Accounts receivable

16,400 16,400

69

2 Accounts receivable

15,000


15,000

Erroneous recording of recovery from written off account

3 Allowance for doubtful accounts

21,000

Accounts receivable (>90 days)

21,000

Accounts that should be written off

4 Net sales

12,000

Accounts receivable (<60 days)

12,000

Unrecorded credit memo

5 Net sales

1,200

Accounts receivable (<60 days)

1,200

Unrecorded employee discount

6 Net sales

18,000

Accounts receivable (<60 days) Inventory

18,000 13,000

Cost of sales Goods out on consignment erroneously billed

7 Freight out Accounts receivable (<60 days)

13,000

1,500 1,500

Unrecorded freight-out

70

8 Allowance for doubtful accounts

1,378

Doubtful accounts expense

1,378

60 days old and below

205,800

61 to 90 days

117,200

Over 90 days

64,400

1 % 2 % 5 %

2,058 2,344 3,220

Required allowance 7,622 Balance per books before this adjustment (15,000+15,00021,000) 9,000 Adjustment

1,378

PROBLEM NO. 4 – Audit of allowance for doubtful accounts Professional company produces paints and revealed products for sale to the construction industry throughout Metro Manila. While sales have remained relatively stable despite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the company’s customers are paying their bills. The company sells its products on payment terms of 2/10, n/30. In the past, over 75 percent of the credit customers have taken advantage of the discount by paying within 10 days of the invoice date. During the year ended December 31, 2015, the number of customers taking the full 30 days to pay has increased. Current indications are that less than 60% of the customers are now taking the discount. Uncollectible accounts as a percentage of total credit sales have risen from the 1.5% provided in the past years to 4% in the current year. In response to your request for more information on the deterioration of accounts receivable collections, the company’s controller has prepared the following report: Professional Company Accounts Receivable Collections December 31, 2015 The fact that some credit accounts will prove uncollectible is normal, and annual bad debt writeoffs had been 1.5% of total credit sales for many years. However, during the year 2015, this percentage increased to 4%. The accounts receivable balance is P1,500,000, and the condition of this balance in terms of age and probability is shown below: 71

Proportion to total

Age of Accounts

Probability of collection

64% 18% 8% 5% 3% 2%

1-10 days 11-30 days Past due 31-60 days Past due 61-120 Past due 121-180 Past due over 180 days

99.0% 97.5% 95.0% 80.0% 65.0% 20.0%

At the beginning of the year, the Allowance for Doubtful Accounts had a credit balance of P27,300. The company has provided for a monthly bad debt expense accrual during the year based on the assumption that 4% of total credit sales will be uncollectible. Total credit sales for the year 2015 amounted to P8,000,000, and write-offs of uncollectible accounts during the year totaled P292,500. REQUIRED: 1. Adjusted balance of the allowance for doubtful accounts as of December 31, 2015. 2. The necessary adjusting journal entry to adjust the allowance for doubtful accounts as of December 31, 2015.

SOLUTION: Requirement No.1 Category 1 – 10 days

Aging ratio AR Balance

Rate

Allowance

64%

960,000

1.00%

9,600

18%

270,000

2.50%

6,750

8%

120,000

5.00%

6,000

5%

75,000

20.00%

15,000

3%

45,000

35.00%

15,750

2%

30,000

80.00%

24,000

11 – 30 days 31 – 60 days 61 – 120 days 121 – 180 days over 180 days 100%

1,500,000

77,100

Requirement No.2 72

Doubtful accounts expense

22,300

*


22,300

Allowance for doubtful accounts, 1/1

27,300

Add provisions (P8,000,000 x 4%)

320,000

Total

347,300

Less accounts written-off

292,500

Balance before adjustment Required allowance (see no. 1)

54,800

Additional required allowance for doubtful accounts

22,300

77,100

PROBLEM NO. 5 – Analysis of accounts receivable and related accounts The poster Co. sells direct to retail customers and also to wholesalers. Accounts receivable and an allowance for bad debts are maintained separately for each division. On January 1, 2015 the balance of the retail accounts receivable was P209,000 while the bad debts with respect to retail customers was a credit of P7,600. The following summary pertains only to retail sales since 2012: 2012 2013 2014 2015

Credit Sales P1,110,000 1,225,000 1,465,000 1,500,000

Bad Debts Written Off P26,000 29,500 30,000 31,000

Bad Debts Recoveries P2,150 3,750 3,600 4,200

Bad debts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as a percentage of the credit sales for the same period. Cash receipts in 2015 from credit sales to retail customers was P1,380,000. REQUIRED: Determine the following: 1. Adjusted accounts receivable as of December 31, 2015 2. Adjusted allowance for doubtful accounts as of December 31, 2015 73

SOLUTION:

Requirement No. 1 Accounts receivable, 1/1/12

209,000

Credit sales for 2012

1,500,000

Collections during 2012

(1,380,200)

Accounts written off - 2012 Accounts receivable, 12/31/12

(31,000) 297,800

Requirement No. 2 Allowance for doubtful accounts, 1/1/12

7,600

Doubtful accounts expense - 2012 (see computation below)

30,000

Accounts written off - 2012

(31,000)

Recovery of accounts written off – 2012

4,200

Allowance for doubtful accounts, 12/31/12

10,800

Computation of doubtful accounts expense - 2012:

Doubtful accounts expense for 2012 (P1,500,000 x 2%)

30,000

Computation of bad debt rate: Year Credit sales AR writen-off

Recoveries

Net

2009

1,110,000

26,000

2,150

23,850

2010

1,225,000

29,500

3,750

25,750

2011

1,465,000

3,600

26,400

30,000

74

3,800,000

85,500

9,500

76,000

Net accounts written off (2009 to 2011)

76,000

Divide by credit sales (2009 to 2011)

3,800,000

Percentage of uncollectible accounts to charge sales

2.00%

PROBLEM NO. 6 – Audit of accounts receivable and related accounts In connection with your examination of the financial statements of RIngo, Inc. for the year ended December 31, 2015, you were able to obtain certain information during your audit of the accounts receivable and related accounts.  

The December 31, 2015 balance in the Accounts Receivable control accounts is P837,900. An aging schedule of the accounts receivable as of December 31, 2015 is presented below: Age







Net debit balance

Percentage to be applied after corrections have been made 60 days & under P387,800 1 percent 61 to 90 days 307,100 2 percent 91 to 120 days 89,800 5 percent Over 120 days 53,200 Definitely uncollectible, P9,000; the remainder is P837,900 estimated to be 25% uncollectible. The Allowance for Doubtful Accounts schedule is presented below: Debit Credit Balance January 1, 2015 P19,700 November 30, 2015 P6,100 13,600 December 31, 2015(P837,900 x 5%) P41,895 P55,495

Entries made to Doubtful Accounts Expense account were: 1. A debit on December 31 for the amount of the credit to the Allowance for Doubtful Accounts. 2. A credit for P6,100 on November 30, 2015, and a debit to Allowance for Doubtful Accounts because of a bankruptcy. The related sales took place on October 1, 2015. There is a credit balance in one account receivable (61 to 90 days) of P11,000, it represents an advance on a sales contract.

REQUIRED:

75

1. Determine the following as of and for the year ended December 31, 2015: a. Accounts receivable b. Allowance for doubtful accounts c. Doubtful accounts expense 2. Adjusting entries as of December 31, 2015

SOLUTION:

Requirement No. 1.a GL/SL

60

61 to 90

91 to 120

over 120

837,900

387,800

307,100

89,800

53,200

Unadjusted balances Add (deduct) adjustments: AJE No. 1 (9,000)

(9,000)

AJE No. 2 (6,100)

(6,100)

AJE No. 3 11,000 833,800

387,800

11,000 318,100

Age of accounts

balance

Rate

Allowance

60

387,800

1%

3,878

61 to 90

318,100

2%

6,362

91 to 120

83,700

5%

4,185

over 120

44,200

25%

11,050

Adjusted balances

83,700

44,200

Requirement No. 1.b

833,800

25,475

Requirement No. 1.c

76

Unadjusted allowance for doubtful accounts 55,495 Add (deduct) adjustments: AJE no. 1 (9,000) AJE no. 4 (squeeze) (21,020)

(30,020)

Required allowance (see no. 1.b) 25,475 Balance per books (P41,895 - P6,100) 35,795 Add (deduct) adjustments: AJE no. 2 6,100 AJE no. 4 (21,020) Doubtful accounts expense per audit

(14,920) 20,875

Requirement No. 2 Adjusting journal entries:

1) Allowance for doubtful accounts Accounts receivable - over 120 days

9,000 9,000

To write off definitely uncollectible accounts 2) Doubtful account expense 6,100 Accounts receivable - 91 to 120 days 6,100 To correct entry made in recording accounts written off

3) Accounts receivable - 61 to 90 days 11,000 Advances customers

from 11,000

77

To reclassify advances from customers

4) Allowance for doubtful accounts Doubtful account expense To adjust allowance to required balance

21,020 21,020

PROBLEM NO. 7 – Analysis of notes receivable and related accounts The balance sheet of Yoko Corporation reported the following long-term receivables as of December 31, 2014: Note receivable from sale of plant Note receivable from officer

P6,000,000 1,600,000

In connection with your audit, you were able to gather the following transactions during 2015 and other information pertaining to the company’s long-term receivables: a. The note receivable from sale of plant bears interest at 12% per annum. The note is payable in 3 annual installments of P2,000,000 plus interest on the unpaid balance every April 1. The initial principal and interest payment was made on April 1, 2015. b. The note receivable from officer is dated December 31,2014, earns interest at 10% per annum, and is due on December 31,2017. The 2015 interest was received on December 31,2015. c. The corporation sold a piece of equipment to Yes, Inc. on April 1, 2015, in exchange for an P800,000 non-interest bearing note due on April 1,2017. The note had no ready market, and there was no established exchange price for the equipment. The prevailing interest rate for a note of this type at April 1, 2015, was 12%. The present value factor of 1 for two periods at 12% is 0.797. d. A tract of land was sold by the corporation to No Co. on July 1, 2015, for P4,000,000 under an installment sale contract. No Co. signed a 4-year 11% note for P2,800,000 on July 1,2015, in addition to the down payment of P1,200,000. The equal annual payments of principal and interest on the note will be P902,500 payable on July 1, 2016, 2017, 2018 and 2019. The land had an established cash price of P4,000,000 and its cost to the corporation was P3,000,000. The collection of the installments on this note is reasonable assured. REQUIRED: Determine the following as of and for the year ended December 31,2015: 1. Noncurrent receivables 2. Current portion of long-term receivables 3. Accrued interest receivable 78

4. Interest income 5. SOLUTION:

Requirement No. 1 Note receivable from sale of plant Balance, 12/31/12 (P6,000,000 - P2,000,000) 4,000,000 Less installment due on April 1, 2013 2,000,000

2,000,000

Note receivable from officer, due 12/31/14 1,600,000 Note receivable from sale of equipment Present value of note, 4/1/12 (P800,000 x 0.797) 637,600 Discount amortization-2012 (P637,600 x 12% x 9/12) 57,384

694,984

Note receivable from sale of land Balance, 12/31/12 2,800,000 Less principal installment due on 7/1/13 Total amount to be received 902,500 Less interest (P2,800,000 x 11%) 308,000

594,500

2,205,500

Total noncurrent receivables, 12/31/12 6,500,484 Requirement No. 2 Note receivable from sale of plant due on 4/1/13 2,000,000 Note receivable from sale of land (see no. 1) 594,500 Current portion of long-term receivables 2,594,500

79

Requirement No. 3 Note receivable from sale of plant (P4,000,000 x 12% x 9/12) 360,000 Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,000 Accrued interest receivable, 12/31/12 514,000 Requirement No. 4 Note receivable from sale of plant: P6,000,000 x 12% x 3/12 180,000 P4,000,000 x 12% x 9/12 360,000

540,000

Note receivable from officer (P1,600,000 x 10%) 160,000 Note receivable from sale of equipment (P637,600 x 12% x 9/12) 57,384 Note receivable from sale of land (P2,800,000 x 11% x 6/12) 154,000 Total interest income for 2012 911,384 PROBLEM NO. 8 – Audit of notes receivable and related accounts On January 1, 2015, Pedro Company sold land that originally cost P400, 000 to Buyer Company. As payment, Buyer gave Pedro Company a P600, 000 note. The note bears an interest rate of 4% and is to be repaid in three annual installments of P200, 000 (plus interest on the outstanding balance). The first payment is due on December 31, 2015. The market price of the land is not reliably determinable =. The prevailing rate of interest for notes of this type is 14% on January 1, 2015 and 15% on December 31, 2015. Pedro made the following journal entries in relation to the sale of land and the relate note receivable. January 1, 2015 Notes Receivable Land Gain on sale of Land

P600,000 P400,000 200,000

December 31, 2015 80

Cash

P224,000 Notes receivable Interest income

P200,000 24,000

Pedro reported the notes receivable in its statement of financial position at December 31, 2015 as part of trade and other receivables. REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Correct gain on sale of land b. Correct interest income c. Overstatement of profit d. Correct carrying amount of note receivable e. Overstatement of working capital 2. Adjusting entries as of December 31, 2015 SOLUTION: Requirement No. 1.a PV of consideration receivable (see computation below) 503,105 Carrying amount of land (400,000) Correct gain on sale of land 103,105

Present value of cash flows to determine initial CA: Date

12/31/1 2 12/31/1 3 12/31/1 4

Principal

Interest (4%) Total

200,000 24,000

224,000

16,000

216,000

8,000

208,000

200,000 200,000 600,000

PVF (14%)

PV, 1/1/12

PV, 12/31/12

0.8772

196,493

0.7695

166,212

189,475

0.6750

140,400

160,056

503,105

349,531 81

Requirement No. 1.b Amortization schedule using effective interest method: Date

EI (14%)

NI (4%)

Disc. Amort.

Repayment AC

1/1/12 503,105 12/31/1 2 12/31/1 3 12/31/1 4

70,435 24,000

46,435

200,000

349,540

16,000

32,936

200,000

182,476

8,000

17,524

200,000

-

48,936 25,524 23

Interest income - 2012 (P503,105 x .14) 70,435 Requirement No. 1.c Gain on sale of land - overstated (P200,000 P103,105) 96,895 Interest income for 2012 - understated (P70,435 P24,000) (46,435) Net overstatement of 2012 profit 50,460 Requirement No. 1.d Carrying amount, schedule)

12/31/12

(see 349,540

Requirement No. 1.e Amount reported as notes receivable 400,000 Correct current portion of NR (P349,540 - P182,476) 167,064 Overstatement of CA/working capital 232,936

82

Requirement No. 2 Adjusting entries:

journal

To corect the entrymade to record the sale of land on 1/1/12: Gain on sale of land 96,895 Discount on notes receivable (FV-PV) 96,895 To record amortization of discount on 12/31/12: Discount on notes receivable 46,435 Interest income 46,435

PROBLEM NO. 9 – Audit of notes receivable and related accounts My Love Corporation is a local company engaged in buying and selling of manufacturing equipment. On 1 January 2014, My Love Corporation sold equipment, with cash price of P1,500,000, to Silly Love Corporation. The cost of the equipment is P750,000. Silly Love signed a deferred payment contract that provides for a down payment of P300,000and a 5-year notes for P1,705,900. The note is to be paid In 5 equal annual payments of P341,180. The payments include interest and are made on December 31 of each year, beginning on December 31, 2014. My Love Corporation made the following entries in relation to the sale of the equipment and the related note receivable: January 1, 2014 Cash Notes Receivable Cost of goods sold Sales Inventory

P

300,000 1,705,900 750,000 P2,005,900 750,000

December 31, 2014

83

Cash

P 341,180 Notes Receivable

P 341,180

December 31, 2015 Cash

P 341,180 Notes Receivable

P 341,180

My Love Corporation reported the notes receivable in its statement of financial position at December 31, 2014 and 2015 as part of trade and other receivables. REQUIRED: Determine the following: 1. The effective interest rate 2. Overstatement of profit for 2014 3. Overstatement of retained earnings as of December 31,2015 4. Overstatement of working capital as of December 31,2015

SOLUTION: Requirement No. 1 PVF used to calculate the annual payment (P1.2M/P341,180) Ordinary annuity factor at 13% for 5 periods

3.5172 3.5172

Requirement No. 2

Profit over (under)

Sales - over Reported

2,005,900

Should be

1,500,000

505,900

Interest income - under Reported Should be (refer to amortization schedule)

0 156,000

(156,000) 84

Net misstatement

349,900

Requirement No. 3

RE, 12/31/12 over (under)

2011 profit overstated (see no. 2)

349,900

2012 profit understated (interest income under) Reported

0

Should be (refer to amortization schedule) Net misstatement

131,927

(131,927) 217,973

Requirement No. 4 Amount reported under current assets [P1,705,900 - (P341,180 x 2)]

1,023,540

Should be (refer to amortization schedule)

236,456

Net misstatement of WC, 12/31/12 - over (under)

787,084

Amortization schedule: Date

Payment

Interest (13%)

Principal

CA 1,200,000

12/31/11

341,180

156,000

185,180

1,014,820

12/31/12

341,180

131,927

209,253

805,567

12/31/13

341,180

104,724

236,456

569,111

12/31/14

341,180

73,984

267,196

301,915

12/31/15

341,180

39,265

301,915

-

1,705,900

85

PROBLEM NO. 10 – Analysis of notes receivable and related accounts You are examining the financial statements of Merlyn, In., for the year ended December 31, 2015. Your analysis of the 2015 entries in the Notes Receivable account follows: Merlyn, Inc. Analysis of Notes Receivable For the Year Ended December 31,2015 Date 2015 Jan. 1

Balance Forwarded Received P25,000 6% note due 10/29/15 from Anna whose trade account was past due.

Feb. 28

Discounted Anna note

Mar. 31

Received non-interest-bearing demand note from Julia, the corporation’s treasurer for a loan

Aug. 30

Received principal and interest due from Robinson in accordance with agreement, two principal payments in advance.

Sept. 4

Paid protest fee on note dishonored by Pepper.

Nov. 1

Received check dated 2/1/16 in settlement of Tripper note. The check was included in cash on hand 12/31/15

Nov. 4

Paid protest fee and maturity value of Anna note to bank. Note discounted 2/28/15 was dishonored.

Debit P118,000

Credit

P24,960 6,200

34,200

500

8,120

26,031

86

Dec. 27

Accepted equipment with a fair market value of P24,000 in full settlement from Anna

24,000

Dec. 31

Received check dated 1/2/16 from Julia in payment of 3/31/15 note. (The Cash was included in petty cash until 1/2/16 when it was returned to Julia in exchange for new demand note for the same amount.)

6,200

Dec. 31

Received principal and interest on Pepper note

Dec. 31

Accrued interest on Robinson note

42,437 1,200 P151,931

P139,917

The following information is available: (1) Balances at January 1, 2015, were a debit of P1,400 in the Accrued Interest Receivable account and accredit of P400 in the Unearned Interest Income account. The P118,000 debit in the Note Receivable account consisted the following three notes: Robinson note of 8/31/08 payable in annual installments of P10,000 principal plus accrued interest at 6% each August 31

P70,000

Tripper note discounted to Merlyn, Inc. at 6% 11/1/14 due 11/1/15

8,000

Pepper note for P40,000 plus 6% interest dated 12/31/14 due on 9/1/15

40,000

(2) No entries were made during 2015 to the Accrued Interest Receivable of the Unearned Interest Income account and only one entry for a credit of P1,200 on December 31, appeared in the Interest Income account. (3) All notes were from the trade customers unless otherwise indicated.

87

(4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts indicate otherwise.

REQUIRED: 1. Determine the following as of and for the year ended December 31,2015: a. Notes receivable- trade b. Interest income 2. Adjusting entries as of December 31,2015

SOLUTION:. Requirement No. 2 1/1

Notes receivable

25,000

Accounts receivable

2/28

Notes receivable Loss on discounting (P25,250 - P24,960)

25,000

24,960 290

Notes receivable - discounted

25,000

Interest income (P25,000 x .06 x 2/12)

3/29

Notes receivable - Officers

250

6,200

Notes receivable

8/30

Notes receivable

6,200

4,200

Interest receivable

1,400

Interest income

2,800

88

9/4

Notes receivable dishonored

500

Notes receivable


500

40,000

Notes receivable

11/1

Notes receivable

40,000

8,120

Cash

11/4


8,120

26,031

Notes receivable

Notes receivable discounted

26,031

25,000

Notes receivable

12/27

Notes receivable Loss on settlement of NR

25,000

24,000 2,031


12/31

Notes receivable

26,031

6,200

Petty cash fund

12/31

Notes receivable Notes receivable dishonored Interest income

6,200

42,437 40,500 1,937 89

12/31

Interest receivable (P40,000 x 6% x 4/12)

800

Interest income

400

Notes receivable

12/31

Interest receivable (P8,000 x 6% x 2/12)

1,200

80

Interest income

12/31

Unearned interest income

80

400

Interest income

400

Requirement No. 1.a Unadjusted trade NR

12,014

Add (Deduct) adjustments: 1/1

25,000

2/28

24,960

3/29

(6,200)

8/30

4,200

9/4

(40,500)

11/1

8,120

11/4

(26,031) (25,000)

12/27

24,000

12/31

6,200

90

12/31

42,437

12/31

(1,200)

Adjusted trade NR, 12/31/12

48,000

Composition: Robinson (P70,000 - P30,000)

40,000

Tripper (received PDC on 11/1)

8,000

Adjusted notes receivable-trade, 12/31/12

48,000

Notes: 1) NR from Pepper - collected on 12/31/12 2) NR from Anna - accepted equipment in full settlement on 12/27/12 3) NR from Julia - non-trade

Requirement No. 1.b Robinson: Jan. to Aug. (P70,000 x .06 x 8/12)

2,800

Sept. to Dec. (P40,000 x .06 x 4/12) Tripper (P8,000 x .06 x 12/12)

800

3,600 480

Pepper (P42,437 - P40,500)

1,937

Anna (P25,000 x .06 x 2/12)

250

Julia (non-interest bearing)

-

Total interest income - 2012

6,267

PROBLEM NO. 11 – Loan impairment Bahrain Bank granted a loan to a borrower in the amount of P10,000,000 on January 1,2014. The interest rate on the loan is 10% payable annually starting December 31, 2014. The loan matures in 91

five years on December 31, 2018. Bahrain Bank incurs P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In addition, Bahrain Banks charges the borrower a 5-point nonrefundable loan origination fee. The borrower paid the interred due on December 31, 2014. However during 2015 the borrower began to experience financial difficulties, requiring the bank to reassess the collectability of the loan. As of December 31, 2015, the bank expects that only P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is expected to be collected in two equal installments on December 31,2017 and December 31,2019. The prevailing interest rates for similar type of note as of December 31, 2014 and 2015 are 15% and 16%, respectively. REQUIRED: Determine the following: 1. Interest income to be recognized in 2014 2. Carrying amount of the loan as of December 31, 2014 3. Loan impairment loss to be recognized in 2015 SOLUTION: Requirement No.s 1 & 2 Principal

10,000,000

Direct origination cost

130,900

Origination fee received from borrower (P10M x .05)

(500,000)

Carrying amount, 1/1/12

9,630,900

Amortization schedule Date 1/1/11

EI (11%)

NI (10%)

Disc. Amort.

C.A. 9,630,900

12/31/11

1,059,399

1,000,000

59,399

9,690,299

12/31/12

1,065,933

1,000,000

65,933

9,756,232

12/31/13

1,073,186

1,000,000

73,186

9,829,418

92

12/31/14

1,081,236

1,000,000

81,236

9,910,654

12/31/15

1,089,346

1,000,000

89,346

10,000,000

826 Requirement No. 3 Carrying amount, 12/31/12 (see schedule)

9,756,232

Less PV of expected cash flows: 12/31/14 (P4M x 0.8116)

3,246,400

12/31/16 (P4M x 0.6587)

2,634,800

Loan impairment (bad debt expense)

5,881,200 3,875,032

PROBLEM NO. 12 – Theory Select the best answer for each of the following: 1. In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? a. Equipment b. Bank charges c. Bonds payable d. Sales 2. The purpose of tests of controls over shipping is to determine whether a. Billed goods have been shipped. b. Shipments are billed. c. Shipping department personnel are competent. d. Credit approved before goods are shipped. 3. The purpose of tests of controls over billing is to determine whether a. Billed goods have been shipped b. Shipments are billed. c. Billing department personnel are competent. d. Credit is approved before goods are billed.

93

4. An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management’s financial statement assertion of a. Existence or occurrence b. Rights and obligations c. Valuation d. Completeness 5. Which of the following might be detected by an auditor’s review of client’s sales cut-off? a. Excessive goods returned for credit b. Unrecorded sales discounts c. Lapping of year-end accounts receivable d. Inflated sales for the year 6. An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if a. Positive confirmation sent to debtors are not returned b. Negative confirmations sent to debtors are not returned c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that the amount being confirmed. d. Most of the returned positive confirmations indicate that the debtor owes a larger balance that the amount being confirmed. 7. The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario? a. Send positive confirmations to a random selection of customers. b. Send negative confirmations to all outstanding accounts receivable customers. c. Perform, a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal. d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal. 8. All of the following are examples of substantive tests to verify valuation of net accounts receivable except the a. Re-computation of the allowance for bad debts b. Inspection of accounts for current versus non-current status in the statement of financial position. c. Inspection of the aging schedule and credit records of past due accounts. d. Comparison of the allowance for bad debts with past records. 94

9. Confirmation, which is a specific type of inquiry, is the process of obtaining a presentation of information or of an existing condition directly from a third party. Two assertions for which confirmation of accounts receivable balances provides primary evidence are a. Completeness and valuation b. Rights and obligations and existence c. Valuation and rights and obligation d. Existence and completeness 10. The negative request form of accounts receivable confirmation may be used when the Combined Assessed Number of Consideration by Level of Inherent Small Business the Recipient is and Control Risk is a. Low Many Likely b. Low Few Unlikely c. High Few Likely d. High Many Likely 11. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. Review the cash receipts journal for the month prior to year-end. b. Intensify the study of internal control concerning the revenue cycle. c. Increase the assessed level of detection risk for the existences assertion d. Inspect the shipping records documenting the merchandise sold to the debtors. ANSWERS: 1. D 2. B 3. A 4. D

5. D 6. D 7. C 8. B

9. B 10. A 11. D 12. B

95

III – AUDIT OF INVENTORIES PROBLEM NO. 1 – Computation of adjusted inventory Ovation Company asks you to review its December 31, 2015 inventory values and prepare the necessary adjustments to the books. The following information is given to you. a. Ovation uses the periodic method of recording inventory. A physical count reveals P2,348,900 inventory on hand at December 31, 2015. 96

b. Not included in the physical count of inventory is P134,200 of merchandise purchased on December 15 from Standing. This merchandise was shipped F.O.B shipping point on December 29 and arrived in January. The invoice arrived and was recorded on December 31. c. Included in inventory is merchandise sold to Oval on December 30, F.O.B destination. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale on account for P128,000 on December 31. The merchandise cost P73,500 and Oval received it on January 3. d. Included in inventory was merchandise received from Owl on December 31 with an invoice price of P156,300. The merchandise was shipped FOB. destination. The invoice, which has not yet arrived, has not been recorded. e. Not included in inventory is P85,400 of merchandise purchased from Oxygen Industries. The merchandise was received on December 31 after the inventory had been counted. The invoice was received and recorded on December 30. f. Included in inventory was P104,380 of inventory held by Ovation on consignment from Ovoid Industries. g. Included in inventory is merchandise sold to Kemp FOB. shipping point. This merchandise was shipped after it was counted. The invoice was prepared and recorded as a sale for P189,000 on December 31. The cost of this merchandise was P105,200 and Kemp received the merchandise on January 5. h. Excluded from inventory was carton labeled, “Please accept for credit.” This carton contains merchandise costing P15,000 which had been sold to a customer for P25,000. No entry had been made to the books to reflect the return, but none of the returned merchandise seemed damaged. REQUIRED: Determine the adjusted balance of Inventory.

SOLUTION:

Unadjusted inventory 2,348,900 Add (deduct) adjustments: b) Goods in-transit purchased FOB shipping - not included 134,200 c) Goods in-transit sold FOB destination - included d) Goods purchased and received already - included 97

e) Goods purchased and received already - not included

85,400

f) Goods held on consignment - included

(104,380)

g) Goods in-transit sold FOB shipping point - included (105,200) e) Goods returned by customers, received already - not included 15,000 Adjusted inventory

2,373,920

PROBLEM NO. 2 – Computation of adjusted inventory and related accounts Bulls Company, a manufacturer of small tools, provided the following information from its accounting records for the year ended December 31, 2015: Inventory at December 31, 2015 (based on physical count on Dec. 31, 2015) Accounts Payable at December 31, 2015 Net Sales (sales less sales returns)

P

980,000 586,000 10,048,000

Additional information follows: a. Goods held on consignment from Chicago to Bulls amounting to P9,000 were included in the physical count of goods in Bulls’ warehouse on December 31, 2015, and in accounts payable at December 31, 2015. b. Retailers were holding P50,000, at cost, of goods on consignment from Bulls, at their stores on December 31, 2015. c. Included in the physical count were goods billed to a customer FOB shipping point on December 31, 2015. These goods had a cost of P31,000 and were billed at P40,000. The shipment was on Bulls’ loading dock waiting to be picked up by the common carrier. d. P15,000 worth of parts which were purchased from Deng Co. and paid for in December 2015 were sold in the last week of 2015 and appropriately recorded as sales of P21,000. The parts were included in the physical count on December 31, 2015 because the parts were on the loading dock waiting to be picked up by the customer. e. Goods were in transit from a vendor to Bulls on December 31, 2015. The invoice cost was P71,000 and the goods were shipped FOB shipping point on December 29, 2015. f. Work in process inventory costing P30,000 was sent to an outside processor for plating on December 30, 2015.

98

g. Goods returned by customers and held pending inspection in the returned goods area on December 31, 2015 were not included in the physical count. On January 8, 2016, the tools costing P32,000 were inspected and returned to inventory. Credit memos totaling P47,000 were issued to the customers on the same date. h. Goods shipped to a customer FOB destination on December 26, 2015 were in transit at December 31, 2015, and had a cost of P21,000. Upon notification of receipt by the customer on January 2, 2016, Bulls issued a sales invoice for P42,000. i. Goods, with an invoice cost of P27,000, received from a vendor at 5:00 p.m. on December 31, 2015, were recorded on a receiving report dated January 2, 2016. The goods were not included in the physical count, but the invoice was included in accounts payable at December 31, 2015. j. Goods received from a vendor on December 26, 2015 were included in the physical count. However, the related P56,000 vendor invoice was not included in accounts payable at December 31, 2015, because the accounts payable copy of the receiving report was lost. k. On January 3, 2016, a monthly freight bill in the amount of P6,000 was received. The bill specifically related to merchandise purchased in December 2015, one-half of which was still in the inventory at December 31, 2015. The freight charges were not included in either the inventory or accounts payable at December 31, 2015. REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Inventory b. Net Sales c. Accounts Payable 2. Adjusting entries as of December 31, 2015

SOLUTION:

Requirement No. 1 Inventory

Unadjusted balances Add (deduct) adjustments:

Accts. Payable

980,000

586,000

a - Goods held on consignment

(9,000)

(9,000)

b - Goods out on consignment

50,000

Sales, net

10,048,000

-

99

c - Unshipped goods, erroneously billed d - Goods with constructive delivery e - Goods purchased FOB shipping point

-

-

(15,000)

-

71,000

-

71,000

f - WIP sent to outside processor

30,000

-

g - Goods returned by customers

32,000

-

h - Goods sold FOB destination i - Goods excluded from physical count j - Unrecorded purchases

21,000

-

k - Unrecorded freight-in

3,000

Adjusted balances

(40,000)

27,000 -

1,190,000

56,000

(47,000) -

6,000 710,000

9,961,000

Requirement No. 2

a) Accounts payable Inventory

9,000

b) Inventory P/L summary (Cost of sales)

50,000

c) Sales Acccounts receivable

40,000

d) P/L summary (Cost of sales) Inventory

15,000

e) Inventory Accounts payable

71,000

f) Inventory P/L summary (Cost of sales)

30,000

9,000

50,000

40,000

15,000

71,000

30,000

100

g) Inventory P/L summary (Cost of sales) Sales returns Acccounts receivable

32,000 32,000 47,000 47,000

h) Inventory P/L summary (Cost of sales)

21,000

i) Inventory P/L summary (Cost of sales)

27,000

j) P/L summary (Cost of sales) Accounts payable

56,000

k) Inventory

3,000

P/L summary (Cost of sales) Accounts payable

21,000

27,000

56,000

3,000 6,000

PROBLEM NO. 3 – Computation of adjusted inventory and related accounts You were engaged by Quezon Corporation for the audit of the company’s financial statements for the year ended December 31, 2015. The company is engaged in the wholesale business and makes all sales at 25% over cost. The following were gathered from the client’s accounting records: SALES Date Ref. Amount Balance forwarded P5,200,000 Dec. 27 SI No. 965 40,000 Dec. 28 SI No. 966 150,000 Dec. 28 SI No. 967 10,000 Dec. 31 SI No. 969 46,000 Dec. 31 SI No. 970 68,000 Dec. 31 SI No. 971 16,000 Dec. 31 Closing entry (5,530,000) P -

PURCHASES Date Ref. Amount Balance forwarded P2,700,000 Dec. 27 RR No. 1057 35,000 Dec. 28 RR No. 1058 65,000 Dec. 29 RR No. 1059 24,000 Dec. 30 RR No. 1061 70,000 Dec. 31 RR No. 1062 42,000 Dec. 31 RR No. 1063 64,000 Dec. 31 Closing entry (3,000,000) P 101

Note: SI = Sales Invoice

RR = Receiving Report Inventory Accounts Receivable Accounts Payable

P600,000 500,000 400,000

You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made in any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information: a) Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P18,000. b) On the evening of December 31, there were two trucks in the company siding:  

Truck No. CPA 123 was unloaded on January 2 of the following year and received on Receiving Report No. 1063. The freight was paid by the vendor. Truck No. ILU 143 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P100,000 per Sales Invoice No. 968.

c) Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to Brooks Trading Corporation. Brooks received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day. d) Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. REQUIRED: 1. Determine the following as of and for the year ended December 31, 2015: a. Sales b. Accounts Receivable c. Inventory d. Accounts Payable e. Purchases 2. Adjusting entries as of December 31, 2015

102

SOLUTION: Adjustments Inc.(Dec.)

Per books Sales

Accounts receivable

Inventory

5,530,000

500,000

600,000

1

(130,000)

5

(150,000)

1

(130,000)

5

(150,000)

3

64,000

4

80,000

6

120,000

Per audit 5,250,000

220,000

864,000

Accounts payable

400,000

2

18,000

418,000

Purchases

3,000,000

2

18,000

3,018,000

Note : Prepare "T" accounts then post identified adjustments. Adjusting entries

1 Sales (P46,000+P68,000+P16,000)

130,000

Accounts receivable 130,000 To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971)

2 Purchases

18,000

Accounts payable To take up unrecorded purchases (RR No. 1060)

3 Inventory P/L summary (Cost of sales) To take up goods under RR No. 1063

18,000

64,000 64,000

103

4 Inventory (P100,000/1.25) P/L summary (Cost of sales) To take up unshipped goods under SI No. 968

5 Sales

80,000 80,000

150,000

Accounts receivable To reverse enrty made to record SI No. 966

6 Inventory (P150,000/1.25) P/L summary (Cost of sales) To take up goods under SI No. 966

150,000

120,000 120,000

PROBLEM NO. 4 – Effect of inventory errors During your audit of the Makati Corporation for the year ended December 31, 2015, you found the following information relating to certain inventory transactions from your observation of the client’s physical count and review of sales and purchases cutoff: a. Goods costing P180,000 were received from a vendor on January 3, 2016. The goods were not included in the physical count. The related invoice was received and recorded on December 30, 2015. The goods were shipped on December 31, 2015, terms FOB Shipping Point. b. Goods costing P200,000, sold for P300,000, were shipped on December 31, 2015, and were received by the customer on January 2, 2016. The terms of the invoice were FOB Shipping Point. The goods were included in the ending inventory for 2015 and the sale was recorded in 2016. c. The invoice for goods costing P150,000 was received and recorded as a purchase on December 31, 2015. The related goods, shipped FOB Destination, were received on January 2, 2016, but were included in the physical inventory as goods in transit. d. A P600,000 shipment of goods to a customer on December 30, 2015, terms FOB Destination, was recorded as a sale upon shipment. The goods, costing P400,000 and delivered to the customer on January 6, 2016, were not included in the 2015 ending inventory. 104

e. Goods valued at P250,000 are on consignment from a vendor. These goods are included in the physical inventory. f. Goods valued at P160,000 are on consignment with a customer. These goods are not included in the physical inventory. REQUIRED: 1. Determine the effect of the foregoing errors on the following as of and for the year ended December 31, 2015 (Indicate whether overstated or understated): a. Inventory b. Cost of Sales c. Profit d. Working Capital 2. Adjusting entries as of December 31, 2015

SOLUTION:

Sales over (under) a b c d

Purchases Inventory over over (under) (under)

(300,000) -

150,000

600,000

COS over (under)

Effect on Profit over (under)

Effect on WC over (under)

-

(180,000) 180,000

(180,000)

(180,000)

-

200,000

(200,000)

(100,000)

(100,000)

150,000

-

-

-

(400,000) 400,000

200,000

200,000

e

250,000

250,000

250,000

f

(160,000) 160,000

(160,000)

(160,000)

(140,000) 290,000

10,000

10,000

300,000

150,000

(250,000)

Requirement No. 2

a) Inventory

180,000 105

Cost of sales

b) Accounts receivable

180,000

300,000

Sales Cost of sales

300,000 200,000

Inventory

c) Accounts payable

200,000

150,000

Inventory

d) Sales

150,000

600,000

Accounts receivable Inventory

600,000 400,000

Cost of sales

e) Cost of sales

400,000

250,000

Inventory

f) Inventory

250,000

160,000

Cost of sales

160,000

PROBLEM NO. 5 – Effect of inventory errors You were engaged to perform an audit of the accounts of the Oh! Darling Corporation for the year ended December 31, 2015, and you observed the taking of the physical inventory of the company on December 30, 2015. Only merchandise shipped by the company to customers up to and including December 30, 2015 have been eliminated from inventory. The inventory as determined by physical inventory count has been recorded on the books by the company’s controller. No 106

perpetual inventory records are maintained. All sales are made on an FOB Shipping Point basis. You are to assume that all purchase invoices have been correctly recorded. The inventory was recorded through the cost of sales method. The following lists of sales invoices are entered in the sales books for the month of December 2015 and January 2016, respectively. DECEMBER 2015 Sales Invoice Amount a) P150,000 b) 100,000 c) 50,000 d) 200,000 e) 500,000

Sales Invoice Date Dec. 21 Dec. 31 Dec. 29 Dec. 31 Dec. 30

Cost P100,000 40,000 30,000 120,000 280,000

Date Shipped Dec. 31, 2015 Nov. 03, 2015 Dec. 30, 2015 Jan. 03, 2016 Dec. 29, 2015 (shipped to consignee)

JANUARY 2016 f) P300,000 g) 200,000 h) 600,000

Dec. 31 Jan. 02 Jan. 03

P200,000 115,000 475,000

Dec. 30, 2015 Jan. 02, 2016 Dec. 31, 2015

REQUIRED: 1. Determine the effect of the foregoing errors on the following as of and for the year ended December 31, 2015 (Indicate whether overstated or understated): a. Inventory b. Sales c. Profit d. Working Capital 2. Adjusting entries as of December 31, 2015

PROBLEM NO. 5 - Oh! Darling Corporation

Inventory over (under)

Adjusting journal entries

a)

Cost of sales

b) c)

None None

d)

Sales

100,000

Inventory

Accounts receivable

Sales over (under)

COS over (under) (100,000)

100,000

200,000

AR over (under)

WC over (under)

100,000

100,000

100,000

200,000 200,000

Profit over (under)

200,000 200,000

200,000

107

e)

Sales

500,000

Accounts receivable Inventory

Accounts receivable

g)

None

h)

Accounts receivable

280,000

(280,000) 280,000

300,000

(300,000)

(280,000)

(600,000)

475,000

(300,000)

(600,000)

(600,000)

(600,000) (475,000)

475,000

(300,000) (300,000)

600,000 600,000

475,000

475,000

295,000

500,000 (280,000)

300,000

Sales

Inventory

500,000

280,000

Sales

Cost of sales

500,000

500,000

Cost of sales f)

500,000

475,000

(200,000)

(295,000)

95,000

(200,000)

95,000

PROBLEM NO. 6 – Cost flow assumptions Orang Dampuan Co. wholesales bicycles. It uses the perpetual inventory system. The company’s reporting date is 31 December. At 1 December 2015, inventory on hand consisted of 350 bicycles at P820 each and 43 bicycles at P850 each. During the month ended 31 December 2015, the following inventory transactions took place (all purchase and sales transactions are on credit) December: 02 Sold 300 bicycles forP1, 200 each. 03 Five bicycles were returned by a customer. They had originally cost P820 each and were sold for P1, 200 each. 09 Purchase 55 bicycles at P910 each. 13 Purchased 76 bicycles at P960 each. 15 Sold 86 bicycles for P1, 350 each. 16 Returned one damaged bicycles to the supplier. This bicycle had been purchased on 9 December. 22 Sold 60 bicycles for P1, 250 each 26 Purchased 72 bicycles at P980 each 29 Two bicycles, sold on 22 December, were returned by a customer. The bicycles were badly damages so it was decided to write them off. They had originally cost P910 each. 108

REQUIRED: Determine the cost of inventory as of Dec 31, 3015 and the cost of sales for the month of December 31, 2015. 1. First in, first out (FIFO) method 2. Moving average method SOLUTION:

Units Dec. 1

UC

TC

350

820

287,000

43

850

36,550

Dec. 2

(300)

Dec. 3

5

Dec. 9

55

910

50,050

Dec. 13

76

960

72,960

Dec. 15

(86)

Dec. 16

(1) 910

Dec. 22

(60)

Dec. 26

72

980

154

(910)

70,560 516,210

FIFO Composition of inventory, 12/31 Date Units UC TC Dec. 26

72

980

70,560

Dec. 10

76

960

72,960 109

Dec. 9

6

Total

910

5,460

154

148,980

Inventory, 12/1

323,550

Net Purchases Total goods available for sale

192,660

Inventory, 12/31

516,210 (148,980)

Cost of sales

367,230

Moving average

Date

Purchased Units UC

TC

COS Units

UC

TC

Dec. 1

Balance Units UC

TC

350

820

287,000

43

850

36,550

393

823

323,550

Dec. 2

300

823

246,900

93

823

76,650

Dec. 3

(5)

823

(4,115)

98

823

80,765

98

823

80,765

55

910

50,050

153

855

130,815

153

855

130,815

76

960

72,960

229

890

203,775

Dec. 9

Dec. 13

55 910

76 960

50,050

72,960

110

Dec. 15 Dec. 16 Dec. 22 Dec. 26

86 (1)

910

76,540

(910) 60

72 980

890

890

53,400

70,560

192,660

372,725

143

890

127,235

142

890

126,325

82

890

72,925

82

890

72,925

72

980

70,560

154

932

143,485

PROBLEM NO. 7 – Measurement of inventory and inventory shortage Jay Roy Retailing Ltd is a food wholesaler that supplies independent grocery stores. The company operates a perpetual inventory system, the first in first out method used to assign costs to inventory items. Transactions and other related information regarding two of the items (baked beans and plain flour) are given below for June 2015 the last month of the company’s reporting period.

Unit packaging

Baked beans Case containing 25 x 410g cans

Plain Flour Box containing 12 x 4kg bags

Inventory @ 1 June 2015

35,000 cases @P19.60

62,500 boxes @38.40

Purchases

1. 10 June: 20,000 cases @ P19.50 per case 2. 19 June: 47,000 cases @19.70 per case

1. 3 June: 15,000 boxes @ P38.45 2. 15 June: 20,000 boxes @ P38.45 3. 29 June: 24,000 boxes @ P39

Purchase Items

2/10, n/30, FOB destination

n/30, FOB destination

June sales

73,000 cases @P28.50

95,000 boxes @ P40

Returns and Allowances

A customer returned 5,000 Cases that had been shipped in error. Customers account Credited for P142, 500

As June 15 purchase was unloaded, 1000 boxes were discovered damaged. Credit of P38, 450 was received by 111

Jay Roy retailing ltd. Physical count at 30 June 2015

32,600 cases on hand

1,500 boxes on hand

Explanation of variance

No explanation found assumed stolen

Boxes purchased on 29 June still in transit on 30 June

Net Realizable Value at 30 June 2015 REQUIRED:

P29 per case

P38.50 per box

Determine the following: 1. Inventory shortage 2. Inventory to be reported at June 30, 2015 balance sheet

SOLUTION:

Requirement No. 1 Baked beans

Quantity

Price

Amount

Balance, June 1

35,000

19.60

686,000

Purchase 10 June

20,000

19.50

390,000

Purchase 19 June

47,000

19.70

925,900

Sales (73,000 cases)

Sales returns

(35,000)

19.60 (686,000)

(20,000)

19.50 (390,000)

(18,000)

19.70 (354,600)

5,000

19.70

98,500

Perpetual balance

34,000

19.70

669,800

Inventory shortage (squeeze)

(1,400)

19.70 (27,580) 112

Physical count

32,600

Plain flour

Quantity

19.70

Price

642,220

Amount

Balance, June 1

62,500

38.40 2,400,000

Purchase 03 June

15,000

38.45

576,750

Purchase 15 June

20,000

38.45

769,000

Purchase 29 June

24,000

39.00

936,000

Sales (95,000 boxes)

(62,500)

38.40 (2,400,000)

(15,000)

38.45 (576,750)

(17,500)

38.45 (672,875)

Perpetual balance

26,500

38.45 1,032,125

Damaged goods

(1,000)

38.45 (38,450)

Goods in transit

(24,000)

39.00 (936,000)

Physical count

1,500

38.45

57,675

Requirement No. 2 Quantity Baked beans Plain flour

Cost

NRV

LCN

32,600

642,220

945,400

642,220

1,500

57,675

57,750

57,675

Total

699,895

PROBLEM NO. 8 - Write down of inventory to net realizable value Banger sales company uses FIFO method in calculation cost of goods sold for the three products that the company sells. At July 1, the balance of inventory account was P658, 500, and the 113

allowance for inventory write down was P3, 000. Inventories and purchase information concerning the three products are given for the month of July. Date July 1

Particulars Inventory

C 50,000 units at P6

P 30,000 units at P10

A 65, 000 units at P.09

July 1-15

Purchases

70, 000 units At P6.50

45, 000 units at P10.50

30,000 units at P1.25

July 16-31

Purchases

30, 000 units at P8

July 1-31

Sales

105,000 units

50, 000 units

45, 000 units

July 31

Sales price per unit

P8

P11

P2

On July 31, the company’s suppliers reduced their prices from the most recent purchase prices by the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Bangar decided to reduce its sales price on all items by 10%, effective August 1. Bangar selling cost is 10% of sales price. Products C and P have a normal profit (after selling cost) of 30% on sales prices, while the normal profit on product A ( after selling cost) is 15% of sales price. REQUIRED Determine the following: 1. Inventory to be reported at July, 31, 2015 statement of financial position 2. Loss on inventory write down for the month of July 2015 3. Cost of sales including loss on inventory write down for the month of July 2015

114

SOLUTION:

Computation of units on hand, 7/31: C Inventory, 7/1 50,000 Purchases, 7/1-15 70,000 Purchases, 7/16-31 30,000 TGAS 150,000 Sales (105,000) Inventory, 7/31 45,000

P

A 30,000 45,000

65,000 30,000

75,000 (50,000) 25,000

95,000 (45,000) 50,000

Requirement No. 1

Item Product C

Units in Ending Inventory (FIFO) Unit cost

Total cost

Est. Selling Price (a)

30,000

8.00

240,000

7.20

15,000

6.50

97,500

7.20

45,000

337,500

Product P

25,000

10.50

262,500

9.90

Product A

30,000

1.25

37,500

1.80

20,000

0.90

18,000

1.80

50,000

55,500

655,500

115

Est. Cost to Sell (b) NRV 0.72 0.72

LCN

6.48 6.48

6.48 6.48

Total NRV

Inventory LCN

at Allowance

194,400 97,200

194,400 97,200

45,600 300

291,600

291,600

45,900 39,750

0.99

8.91

8.91

222,750

222,750

0.18 0.18

1.62 1.62

1.25 0.90

48,600 32,400

37,500 18,000

-

81,000

55,500

-

595,350

569,850

85,650

(a) Existing selling price x .9 (b) Amount in letter (a) x .1

Requirement No. 2

Item Product C Product P Product A

Total cost

Inventory LCN

at Allowance (a)

337,500 262,500 55,500

291,600 222,750 55,500

45,900 39,750 -

655,500

569,850

85,650

(a) Inventory at cost - Inventory at LCN

Required allowance, 7/31

85,650

Recorded allowance, 7/1

(3,000) 116

Loss on inventory writedown

82,650

Requirement No. 3

Inventory, 7/1 (at cost)

658,500

Purchases: Product C [(70,000 units x P6.50)+(30,000 units x P8) 695,000 Product P (45,000 units x P10.50) Product A (30,000 units x P1.25)

472,500 37,500

1,205,000

Total goods available for sale

1,863,500

Inventory, 7/31 (at cost)

(655,500)

Cost of sales before loss on inventory writedown

1,208,000

Loss on inventory writedown

82,650

Cost of sales including loss on inventory writedown

1,290,650

Alternative computation: Inventory, 7/1 (at LCN) (P658,500 P3,000)

655,500

Purchases: Product C [(70,000 units x P6.50)+(30,000 units x P8) 695,000 Product P (45,000 units x P10.50) Product A (30,000 units x P1.25) Total goods available for sale

472,500 37,500

1,205,000 1,860,500 117

Inventory, 7/31 (at LCN)

(569,850)

Cost of sales including loss on inventory writedown

1,290,650

PROBLEM NO. 9 - Inventory estimation Your client, Mandaluyong Company, is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused until sold to customers. In conducting your audit for the year ended December 31, 2015, you were satisfied that the system of internal control was good. Accordingly, you observed the physical inventory at an interim date, November 30, 2015 instead of at year end. You obtained the following information from your client’s general ledger: Inventory, January 1, 2015 Physical inventory, November 30, 2015 Sales for 11 months ended Nov. 30, 2015 Sales for the year ended Dec. 31, 2015 Purchases for 11 months ended Nov. 30, 2015 (before audit adjustments) Purchases for the year ended Dec. 31, 2015 (before audit adjustments)

P1, 312,500 1, 425,000 12,600,000 14,400,000 10,125,000 12,000,000

Your audit disclosed the following information: a.) Shipments received in November and included in the physical inventory but recorded as December purchases P112, 500 b.) Shipment received in unsalable condition and excluded from physical inventory. Credit memos had not been received nor chargebacks to vendors been recorded: Total at Nov 30, 2015

P15, 000

Total at Dec 31, 2015 (including the November unrecorded chargebacks)

P22, 500

c.) Deposit made with vendor and charged to purchases in October 2015. Product was shipped in January 2016 P30, 000 d.) Deposit made with vendor and charged to purchases in November 2015. Product was shipped FOB destination on November 29, 2015 and was included in November 30, 2015 physical inventory as goods in transit P82, 500

118

e.) Through the carelessness of the receiving department shipment in early December 2015 was damaged by rain. This shipment was later sold on the last week of December at cost. P150, 000

REQUIRED: Determine the December 31, 2015 inventory using the gross profit method. SOLUTION:

Computation of adjusted balances: Inventory

Unadjusted balances

Nov. 30

Purchases Purchases Up to Up to Dec. Nov. 30 31

1,425,000

10,125,000 12,000,000

Add (deduct) adjustments: a

-

112,500

b

-

(15,000)

(22,500)

c

-

(30,000)

(30,000)

d

(82,500)

e

(82,500) -

1,342,500

-

-

-

10,110,000 11,947,500

Inventory, January 1

1,312,500

Add - Net purchases up to Nov. 30

10,110,000


11,422,500

Less - Inventory, Nov. 30

1,342,500

119

Cost of sales for 11 months

10,080,000

Sales for 11 months ended Nov. 30

12,600,000

Cost of sales for 11 months ended Nov. 30

(10,080,000)

Gross profit

2,520,000

Divide by sales for 11 months ended Nov. 30

12,600,000

Gross profit rate for 11 months ended Nov. 30

20.00%

Computation of inventory, 12/31

Inventory, January 1

1,312,500

Add - Purchases for the year ended Dec. 31

11,947,500


13,260,000

Less - Cost of sales Cost of sales with profit [(14,400,000 - 150,000) x 80%] 11,400,000 Cost of sales without profit

150,000

Estimated inventory, December 31

11,550,000 1,710,000

PROBLEM NO. 10 – Inventory estimation On April 21, 2015 a fire damaged the office and warehouse of Muntinlupa Company. The only accounting record saved was the general ledger from which the trial balance was prepared. Muntinlupa Company Trial Balance March 31, 2015

Cash

Debit 180,000

Credit

120

Accounts Receivable Inventory, Dec 31, 2014 Land Building Acc. Dep Other assets Accounts payable Accrued expenses Share capital, 100 par Retained earnings Sales Purchases Operating expense Totals

400,000 750,000 350,000 1,100,000 413,000 56,000 237, 000 180, 000 1,000,000 520, 000 1,350,000 520, 000 344,000 P3, 700,000

__________ P3, 700,000

The following data and information have been gathered: a.) The company’s year end is December 31 b.) And examination of the April bank statement and cancelled checks revealed that checks written during the period April 1 to 21 totalled P130, 000: P57, 000 paid to accounts payable as of March 31, P34, 000 for April merchandise purchases, and P39, 000 paid for other expenses. Deposits during the same period amounted to 129,500 which consisted of receipts on account from customers with the exception of a 9,500 refund from a vendor for merchandise in April c.) Correspondence with the suppliers revealed unrecorded obligations at April 21 of 106,000 for April merchandise purchases including 23,000 for shipments in transit on that date. d.) Customers acknowledge indebtedness of 360,000 at April 21 2015. It was also estimated that customers owed another 80,000 that will never be acknowledge or recovered. Of the acknowledge indebtedness, 6,000 will probably be uncollectible. e.) The insurance company agreed that the fire loss claim should be based on the assumption that that the overall gross profit ratio for the past two years was in effect during the current year. The company’s audited financial statements disclosed the following information. 2014

2015

Net Sales

5,300,000

3,900,000

Net Purchases

2,800,000

2,350,000

121

Beg. Inventory

500,000

660,000

End. Inventory

750,000

500,000

f.) Inventory with a cost of 70, 000 was salvaged and sold for 35, 000. The balance of the inventory was a total loss.

REQUIRED: Determine the estimated inventory fire loss. SOLUTION:

Inventory, December 31, 2011 Add purchases for the period Jan. 1 to April 21 Purchases up to March 31, 2012 Payments for April purchases Unrecorded obligations for purchases

750,000

520,000 34,000 April

Purchase returns

106,000 (9,500)

650,500


1,400,500

Less cost of sales (see computation below)

830,500

Estimated inventory on the date of fire Less: Proceeds from sale of salvaged merchandise 35,000

570,000

Shipments in transit Inventory fire loss

23,000

58,000 512,000

Computation of cost of sales: 122

Sales up to March 31, 2012

1,350,000

Sales for the period April 1 to 21 Accounts receivable, 4.21.12

360,000

Accounts receivable for write-off 80,000 Receipts from customers (P129,500 P9,500) 120,000 Total

560,000

Less Accounts receivable, 3.31.12

400,000

160,000

Total sales

1,510,000

x cost ratio (see computation below)

0.55

Cost of sales

830,500

Computation of cost ratio: Inventory, 1/1/10

660,000

Net purchases (2010 and 2011)

5,150,000

Inventory, 12/31/11

(750,000)

Cost of sales (2010 and 2011)

5,060,000

/ Net sales (2010 and 2011)

9,200,000

Overall cost ratio

0.55

PROBLEM NO. 11 – Roll forward analysis You are engaged in the regular annual examination of the accounts and records of Valenzuela manufacturing for the year ended December 31, 2015. To reduce the workload at year end, the company upon your recommendation, took its annual physical inventory in November 30, 2015. You observed the taking of the inventory and made tests of the inventory count and inventory records.

123

The company’s inventory account, which includes raw materials and work in process, is on perpetual basis. Inventories are valued at cost, FIFO method. There is no finished goods inventory. The company’s physical inventory revealed that the book inventory of 1,695,960 was understated by 84,000. To avoid delay in completing its monthly financial statements, the company decided not to adjust the book inventory until year end except for obsolete inventory items. Your examination disclosed the following information regarding the November 30 inventory 1. Pricing tests showed that the physical inventory was overstated by 61, 600. 2. An understatement of the physical inventory by 4,200 due to errors in footings and extensions. 3. Direct labor included in the inventory amounted to 280,000. Overhead was included at the rate of 200% of direct labor. You have ascertained that the amount of direct labor was correct and that the overhead rate was proper. 4. The physical inventory included obsolete materials with a total cost of 7,000. During December the obsolete materials were written off by a charge to cost of sales. Your audit also disclosed the following information about the December 31 inventory: a. Total debits to the following accounts during December were: Cost of sales 1,920,800 Direct labor 338, 800 Purchases 691, 600 b. The cost of sales of 1,920,800 included direct labor of 386,000

REQUIRED Compute for the following: 1. Adjusted amount of physical inventory at November 30, 2015 2. Adjusted amount of inventory at December 31, 2015 3. Breakdown of inventory at December 31, 2015 a. Cost of materials on hand, and materials included in work in process b. Direct labor included in work in process c. Factory overhead included in work in process

124

SOLUTION:

Requirement No. 1

Inventory per books, 11/30 Add understatement of inventory

1,695,960 booked 84,000

Physical inventory,11/30, per client

1,779,960

Add (deduct) adjustments Overstatement due to pricing errors (61,600) Understatement due to footing and extension errors 4,200 Obsolete materials Inventory per physical adjusted

(7,000) count,

as 1,715,560

Requirement No. 2

Adjusted balance of inventory, 11/30

1,715,560

Purchases

691,600

Direct labor

338,800

Factory overhead (200% of direct labor)

677,600

Total

3,423,560

Less cost of sales: Per books Obsolete materials through COS Inventory, 12/31

1,920,800 written

off (7,000)

1,913,800 1,509,760

125

Requirement No. 3 Inventory, 11/30 (see no. 1)

1,715,560

Direct labor

(280,000)

Factory overhead (200% of direct labor)

(560,000)

Raw materials, 11/30

875,560

Purchases

691,600

Total

1,567,160

Less: Materials included in cost of sales Adjusted cost of sales (see no. 2)

1,913,800

Direct labor

(386,400)

Factory overhead (772,800) 754,600 Cost of materials on hand and materials included in WIP 812,560 Labor cost in the WIP: Labor included in 11/30 inventory

280,000

Labor incurred in December

338,800

Total

618,800

Labor included in COS

(386,400)

232,400

Applied factory overhead (200% of direct labor)

464,800

Total, as shown in no.2

1,509,760

126

IV – AUDIT OF INVESTMENTS SUBSTANTIVE AUDIT PROCEDURES FOR INVESTMENTS

PROBLEM NO. 1 – Analysis of investments in debts instruments (comprehensive)

On January 1, 2015, Isabela Corporation purchase P1,000,000 8% bonds for P924,164 (including broker’s commission of P50,000). The bonds were purchased to yield 10%. Interest is payable annually every January 1. The bonds mature on January 1, 2020. Quoted price of the bonds as of the dates indicated follows: December 31, 2015

98.0

December 31, 2016

99.0

REQUIRED: A. Prepare the journal entries on the books of Isabela Corporation to record the following: (Round off present value factors to four decimal places) a) Purchase of the investment on January 1, 2015; b) Accrual of interest income on December 31, 2015; c) Amortization of premium or discount on December 31, 2015; and d) Fair value adjustment as of December 31, 2015 Under the following assumptions: a) The investment is designated as FA@FVTPL; b) The investment is available-for-sale; and c) The investment is held-to-maturity B. Compute for the carrying amount of the investment in bonds at December 31, 2015 if: a. The investment is designated as FA@FVTPL; b. The investment is available-for-sale; and 127

c. The investment is held-to-maturity C. Assuming the bonds were sold on December 31, 2016 at 99, prepare the journal entry to record the sale under the following assumptions: a) The investment is designated as FA@FVTPL; b) The investment is available-for-sale; and c) The investment is held-to-maturity

SOLUTION: Requirement A a. FA@FVTPL

b. Available for Sale (AFS)

1) Purchase of investment: FA@FVTPL Commission exp. Cash

P874,164 50,000

AFS securities Cash

P924,164 P924,164

P924,164

2) Accrual of interest: Interest receivable P80,000 Interest income

P80,000

Interest receivable P80,000 Interest income P80,000

3) Amortization of discount: No entry

AFS securities P12,416 Interest income P12,416

4) FV adjustment: FA@FVTPL P105,836* FV adj. gain (P/L)

P105,836

* (P980,000 - P874,164)

AFS securities P43,420** FV adj. G/L (OCI) P43,420 ** (P980,000 - P936,580)

Held to Maturity (HTM) Purchase of investment: HTM securities P924,164 Cash P924,164

128

Accrual of interest: Interest receivable P80,000 Interest income P80,000 Amortization of discount: HTM securities P12,416 Interest income P12,416 FV adjustment: No entry Amortization schedule: Date 1/1/2012 12/31/2012 12/31/2013 12/31/2014 12/31/2015 12/31/2016

EI (10%)

NI (8%)

Disc. Amort.

P92,416 93,658 95,024 96,526 98,212

P80,000 80,000 80,000 80,000 80,000

P12,416 13,658 15,024 16,526 18,212

Amortized cost P 924,164 936,580 950,238 965,262 981,788 1,000,000

Requirement B Carrying amount, 12/31/12 FA@FVTPL Available for Sale (AFS) Held to Maturity (HTM)

980,000 980,000 936,580

Fair value Fair value Amortized cost

Requirement C FA@FVTPL

Available for Sale (AFS)

To update amortization

To update amortization

No entry

AFS securities

P13,658

Interest income

P13,658

FV adjustment before sale

FV adjustment before sale

No entry

FV adj. G/L (OCI) P3,658* AFS securities P3,658

129

* (P990,000 - P993,658) Disposal entry

Disposal entry

Cash

Cash

P1,070,000 FA@FVTPL

P980,000

Interest income

80,000

Gain on sale of TS

10,000

P1,070,000

FV adj. G/L (OCI)

39,762

AFS securities

P990,000

Interest income

80,000

Gain on sale of AFS (P/L)

39,762

Held to Maturity (HTM) To update amortization HTM securities

P13,658

Interest income

P13,658

FV adjustment before sale No entry

Disposal entry Cash

P1,070,000 HTM securities

P950,238

Interest income

80,000

Gain on sale of HTMS

39,762

PROBLEM NO. 2 – Audit of investments in equity instruments (held for trading)

You were able to obtain the following ledger details of Trading Securities in connection with your audit of the IMBC Corporation for the year ended December 31, 2015: 130

Date

Particulars

Debit

Credit

Jan. 10

Purchase of 6,000 4WARD Co. shares

P1,440,000

Feb. 20

Purchase of 7,000 BACK Co. shares

1,800,000

Mar. 01

Sale of 2,400 BACK Co. shares

May 31

Receipt of 4WARD share dividendcredited to retained earnings

Aug, 15

Dale of 4,800 4WARD shares

1,176,000

Sep, 01

Sale of 1,200 4WARD shares

276,000

540,000 132,000

From the Philippine Stock Exchange, the 4WARD dividends were analyzed as follows: Nature

Declared

Record

Payment

Rate

Cash

01/02/15

01/15/15

01/31/15

P20/share

Share

05/02/15

05/15/15

05/31/15

10%

Cash

08/01/15

08/30/15

09/15/15

P30/share

At December 31, 2015, 4WARD and BACK shares were selling at P210 and P240 per share, respectively.

REQUIRED: 1. Determine the following: a) Gain or oss on sale of 2,400 BACK shares on March 1 b) Total gain or loss of 4WARD shares in 2015 c) Total dividend income to be recognized in 2015 d) Carrying amount of Trading Securities as of December 31, 2015 2. Adjusting entries

SOLUTION: 131

Requirement 1 a. (60,000) Sales proceeds CA of investment sold (P1,800,000 x 2,400/7,200) Loss on sale of 2,400 BACK shares on 3/1/12

540,000 600,000 (60,000)

b. 108,000 Total proceeds Less dividends sold (4,800 shares x P30) Net proceeds CA of investment sold (P1,320,000* x 4,800/6,600**) Gain on sale of 4,800 4WARD shares on 8/15/12

1,176,000 144,000 1,032,000

Total cash paid Less purchased dividend (6,000 x P20) Adjusted cost

1,440,000 120,000 1,320,000

960,000 72,000

** after 10% share dividend Sales proceeds CA of investment sold (P1,320,000* x 1,200/6,600**) Gain on sale of 800 4WARD shares on 9/1/12

276,000

Total gain on sale of 4WARD shares

108,000

240,000 36,000

c. 198,000 Declared January 2 Declared May 2 Declared August 1 (6,600 shares x P30) Total dividend income for 2012

198,000 198,000

d. 1,278,000 4WARD Co. [(6,000 x 1.1) - 4,800 - 1,200] = 600 x P210 BACK Co. (7,200 - 2,400) = 4,800 x P240 CA of trading securities (FV), 12/31/12

126,000 1,152,000 1,278,000

132

Requirement 2 Jan. 10 (See requirement 1.b) Dividend income Trading securities - 4WARD

120,000 120,000

Feb. 20 No AJE Mar. 1 (See requirement 1.a) Loss on sale of TS - BACK Trading securities - BACK

60,000

May 31 Retained earnings Trading securities - 4WARD

132,000

Aug. 15 (See requirement 1.b) Entry made Cash Trading securities - 4WARD Correct entry Cash Trading securities - 4WARD Dividend income Gain on sale of TS - 4WARD Adjusting entry

60,000

132,000

1,176,000 1,176,000

1,176,000 960,000 144,000 72,000

Trading securities - 4WARD Dividend income Gain on sale of TS - 4WARD

216,000

Trading securities - 4WARD Gain on sale of TS - 4WARD

36,000

FV adjustment loss (P/L) Trading securities

42,000

144,000 72,000

36,000

42,000

PROBLEM NO. 3 – Audit of investments in equity instrument (AFS)

133

In connection with your audit of the financial statements of the Pin Shop Company for the year 2015, the following Available for Sale Securities and Dividend Income accounts were presented to you: Date

Available for Sale Securities

Debit

Credit

Description 01/15

10,000 ordinary shares, par value P50, SPIKES Co.

390,000

04/30

5,000 shares SPIKES Co. received as share dividend

250,000

05/20

Sold 5,000 shares @ P25

125,000

12/10

Sold 5,000 shares @ P60

120,000

04/30

Share dividend

250,000

11/30

SPIKES Company ordinary

50,000

The following information was obtained during your examination: Type of Dividend

Date Declared

Date of Record

Date of Payment

Rate

Share

03/15/15

04/01/15

04/30/15

50%

Cash

11/01/15

11/15/15

11/28/15

P5/share

Cash

12/01/15

12/15/15

01/02/16

20%

Closing market quotation as at December 31, 2015:

SPIKES Company Ordinary

Bid

Asked

13-4/4

16-1/2

REQUIRED: 1. Determine the following using PAS 39: 134

a. Net amount to be recognized in 2015 profit or loss b. Carrying amount of investment as of December 31, 2015 2. Assuming the entity applies PFRS 9, determine the following if the investment is designated as a financial asset at fair value through other comprehensive income: a. Net amount to be recognized in 2015 profit or loss b. Carrying amount of investment as of December 31, 2015

SOLUTION: Investment ledger Particulars Balance, 1/1/2012 Share dividend, 4/30/12 Balance Sale of 5,000 shares, 5/20/2012 Balance Sale of 2,000 shares, 12/10/2012 Balance, 12/31/2012

Shares 10,000 5,000 15,000 (5,000) 10,000 (2,000) 8,000

Cost/share 39.00 26.00 26.00 26.00 26.00

Total 390,000 390,000 (130,000) 260,000 (52,000) 208,000

Requirement 1 a. 193,000 Loss on sale 5/20 (see computation below) Gain on sale 12/10 (see computation below) Dividend income (see computation below) Net amount to be recognized in P/L

(5,000) 48,000 150,000 193,000

Loss on sale 5/20: Sales proceeds (5,000 shares x P25) Cost of investment sold (see investment ledger) Loss on sale of investment

125,000 (130,000) (5,000)

Gain on sale 12/10: Sales proceeds (2,000 shares x P60) Dividends sold (2,000 shares x P50 x 20%) Net sales proceeds Cost of investment sold (see investment ledger) Gain on sale of investment

120,000 (20,000) 100,000 (52,000) 48,000

135

Dividend income: Cash dividends declared, 11/1/2012 (10,000 shares x P5) Cash dividends declared, 12/1/2012 (10,000 shares x P50 x 20%) Total dividend income

50,000 100,000 150,000

FV adjustment: Fair value Cost Unrealized loss (FV adjustment) - OCI

110,000 208,000 (98,000)

b. 110,000 Carrying amount, 12/31/12 (8,000 shares x P13.75)

110,000

Requirement 2 a. 150,000 Amount to be recognized in P/L - Dividend income

150,000

At initial recognition, an entity may make an irrevocable election to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument within the scope of PFRS 9 that is not held for trading. If an entity makes the election, it shall recognise in profit or loss dividends from that investment when the entity’s right to receive payment of the dividend is established in accordance with PAS 18. b. 110,000 Carrying amount, 12/31/12 (8,000 shares x P13.75)

110,000

PROBLEM NO. 4 – Analysis of investments in equity instruments (Trading and AFS)

136

On December 31 2014, L Cost Company’s financial statements showed the following balances related to its securities accounts: Trading Securities

P1,477,500

Available-for-sale securities (AFS)

1,180,000

La Cost’s securities portfolio on December 31, 2014, was made up of the following securities:

Security

Classification

Cost

Fair Value

10,000 Yeye Bonel Corp. shares

Trading

P750,000

P762,500

8,000 Totoy Bibo Inc. shares

Trading

550,000

528,250

10% Mayniladlad bonds

Traing

250,000

186,750

10,000 Blaklak Inc shares

Available for sale

590,000

630,000

20,000 Jumbo Inc. shares

Available for sale

490,000

550,000

During 2015, the following transactions took place: Mar. 1

Purchased 3,000 additional shares of Yeye Bonel Corp. for P229,500, classified as held for trading

Apr. 15

Sold 4,000 shares of Totoy Bibo Inc. for P69 per share

May 4

Sold 4,000 shares of Bulaklak Inc. for P62 per share

Oct. 30

Purchased 15,000 shares of Pasaway Co. for P832,500, classified as held for trading

The fair values of the shares and bonds on December 31, 2015, are as follows: Yeye Bonel Corp. shares

P76.60 per share

Totoy Bibo Inc. shares

P68.50 per share

Pasaway Co. shares

P55.25 per share

137

Mayniladlad water bonds

P205,550

Bulaklak Inc. shares

P61.00 per share

Jumbo Unlimited Inc. shares

P27.00 per share

REQUIRED: Determine the following: 1. Gain or loss on sale of 4,000 Totoy Bibo Inc. shares on April 15, 2015 2. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares on May 4, 2015 3. Carrying of trading securities and AFS AS OF December 31, 2015

SOLUTION: 1. 11,875 Selling price (4,000 shares x P69) CA of shares sold (P528,250 x 4/8) Gain on sale of Totoy Bibo shares

276,000 (264,125) 11,875

2. 12,000 Selling price (4,000 shares x P62) Cost of shares sold (P590,000 x 4/10) Gain on sale of Bulaklak shares 3. 2,304,100 & 906,000 Yeye Bonel [(10,000+ 3,000) x P76.60] Totoy Bibo [(8,000 - 4,000) x P68.50] Pasaway (15,000 x P55.25) Mayniladlad Total fair value - Trading securities Bulaklak Inc. [(10,000 - 4,000) x P61] Jumbo Hotdog (20,000 x P27) Total fair value - AFS

248,000 (236,000) 12,000 995,800 274,000 828,750 205,550 2,304,100 366,000 540,000 906,000

PROBLEM NO. 5 – Audit of investments in equity instruments (carried at cost) 138

The LEE BUYS COMPANY had acquired interest in a promising local company, the Silver Tab Company. During your audit of the company’s accounts for the year 2015, which was a fist audit, you obtained the following:

2013-Jan. 2

Investment in Silver Tab Company 30,000 sh @ 35 P1,050,000 2015-Jul. 15

2014- Jul. 2

90,000 sh @ 60

5,400,000

2015-Mar. 2

30,000 sh @ 70

2,100,000

2015 – Aug. 10

P2,000,000

Investment in Silver Tab Company P10,000

Dividend Income 2015 – Jan. 2

P120,000

Apr. 1

150,000

Aug. 10

10,000

Dec. 20

100,000

The transactions pertaining to the foregoing for 2015 were as follows: Jan. 2

Received cash dividend (declared on December 1) of P1 per share

May 2

Bought 30,000 shares at P70 per share

Apr. 1

Received cash dividend (declared on March 1 to shareholders of record as of March 10) of P1 per share

July 15

Sold 50,000 shares at P40 per share

Aug. 10

Received an “extra” dividend in shares of one share of Red Tab Company for every ten shares of Silver Tab Company. The share dividend had a market value of P3 per share and its book value on the ledger of Silver Tab Company was on P1 per share. 139

Received cash dividend of P1 per share, declared December 1, out of Silver Tab Company’s “Reserve for Depletion”.

Dec. 20

Sold 10,000 Silver Tab Company shares at P90. Cash was received on January 5, 2016

29

REQUIRED: Adjusting entries as of December 31, 2015.

SOLUTION: 1/2 3/2 7/15

8/10

12/20 12/29

1/2 3/2

7/15

Entry made Cash Dividend income Investment in Silver Tab Cash Cash Investment in Silver Tab (50,000 shares x P40) Investment in Red Tab Dividend income (100,000/10 x P1) Cash Dividend income None

120,000 120,000 2,100,000 2,100,000 2,000,000 2,000,000 10,000 10,000 100,000 100,000

Should be entry Note: the entry made can be considered correct if the company accrued the dividend in 2011 and reversed in 2012. Since there was no debit entry in the "Dividend Income" account, we will assume that no accrual was made in 2011. Investment in Silver Tab 2,070,000 Dividend income 30,000 * Cash 2,100,000 *(30,000 x P1) - purchased dividend Cash 2,000,000 Loss on sale 250,000 Investment in Silver Tab 2,250,000 Note: in the absence of specific identification, use FIFO to determine cost of investment sold 140

From 2010 lot (30,000 x P35) From 2011 lot (20,000 x P60) 8/10

12/20

12/29

1,050,000 1,200,000 2,250,000

Investment in Red Tab 30,000 Dividend income (100,000/10 x P3) Note: Property dividend received is recorded at FV Cash 100,000 Investment in Silver Tab Note: the dividend received is a liquidating dividend. AR - non trade 900,000 Investment in Silver Tab Gain on sale * (10,000 x P90) From 2011 lot: Original cost Sold on 7/15 Balance Liquidating dividend (70,000 x P1) Balance

Shares 90,000 (20,000) 70,000 70,000

30,000

100,000 * 590,000 310,000

Cost 5,400,000 (1,200,000) 4,200,000 (70,000) 4,130,000

(10,000/70,000 x P4,130,000)

1/2 3/2 7/15 8/10

12/20 12/29

Adjusting journal entry Dividend income Retained earnings Dividend income Investment in Silver Tab Loss on sale Investment in Silver Tab Investment in Red Tab Dividend income Dividend income Investment in Silver Tab AR - non trade Investment in Silver Tab

120,000 120,000 30,000 30,000 250,000 250,000 20,000 20,000 100,000 100,000 900,000 590,000 141

Gain on sale

310,000

PROBLEM NO. 6 – Analysis of investments in equity and debt instruments Your audit of the Norte Corp. disclosed that the company owned the following securities on December 31, 2014: Trading Securities: Security Vigan, Inc. Laoag, Inc. 10%, P200,000 face value,Santiago bonds (interest payable every Jan. 1 and Jul. 1) Total Available-for-sale Securities: Security Candon Products Pagudpud, Inc. Batac, Inc. Total

Shares 9,600 16,000

Shares 32,000 240,000 80,000

Cost P144,000 432,000

Fair Value P184,000 288,000

158,400

163,440

P734,400

P635,440

Cost P1,376,000 6,240,000 960,000 8,576,000

Fair Value P1,440,000 5,840,000 1,280,000 8,560,000

Held to Maturity: 12%, 2,000,000 face value, Ilocos bonds (interest payable annually every Dec. 31)

Cost

Book Value

P1,900,000

1,926,000

During 2015, the following transactions occurred: Jan. 1

Receive interest on Santiago bonds

Mar. 1

Sold 8,000 shares of Laoag, Inc. for P152,000.

May 15

Sold 3,200 shares of Batac, Inc. for P15 per share

July 1

Received interest on the Santiago bonds.

Dec. 31

Received interest on the Ilocos bonds.

31

Transferred the Ilocos bonds to the available-for-sale portfolio. The bonds were selling at 101 on this date. The bonds were purchased on January 2, 2014. The discount was amortized using the effective interest method.

The fair values of the shares and bonds on December 31, 2015, are as follows: Vigan, Inc.

P22 per share 142

Laoag, Inc. 10% Santiago bonds Candon Products Pagudpud, Inc. Batac, Inc.

P15 per share P151,200 P42 per share P28 per share P18 per share

REQUIRED: Determine the following: 1. Gain or Loss on sale of 8,000 Laoag, Inc. shares on March 1 2. Gain or Loss on sale of 3,200 Batac, Inc. shares on May 15 3. Total interest income for the year 2015 4. Carrying of trading securities and AFS as of December 31, 2015 SOLUTION: 1. P 8,000 gain Sales proceeds CA of shares sold (P288,000 x 8/16) Gain on sale of 8,000 Laoag, Inc. shares

152,000 (144,000) 8,000

2. P9,600 gain Sales proceeds (3,200 shares x P15) Cost of shares sold (P960,000 x 3.2/80) Gain on sale of 3,200 Batac, Inc. shares

48,000 (38,400) 9,600

3. P289,640 Santiago bonds (P200,000 x 10%) Ilocos bonds (P1,926,000 x 14%*) Total interest income for 2012

20,000 269,640 289,640

*Computation of effective interest rate: Carrying amount, 12/31/11 Less carrying amount, 1/2/11 (Cost) Discount amortization for 2011 Add nominal interest (P2,000,000 x 12%) Effective interest Divide by carrying amount, 1/2/11 Effective interest rate 4. Trading Securities: P482,400; AFS: P11,466,400 Trading securities Vigan, Inc. (9,600 x P22)

1,926,000 1,900,000 26,000 240,000 266,000 1,900,000 14.00%

211,200 143

Laoag, Inc. [(16,000 - 8,000) x P15] 10% , P200,000 face value , Santiago bonds Total fair value

120,000 151,200 482,400

Available-for-sale securities Candon Products (32,000 x P42) Pagudpud, Inc. (240,000 x P28) Batac, Inc. [(80,000 - 3,200) x P18] Ilocos bonds (P2,000,000 x 1.01) Total fair value

1,344,000 6,720,000 1,382,400 2,020,000 11,466,400

FV adjustment gain on transfer of securities (OCI) Carrying amount, 12/31/11 Add discount amortization in 2012: Effective interest (P1,926,000 x 14%) Nominal interest (P2,000,000 x 12%) Carrying amount, 12/31/12 Fair value of Ilocos bonds on 12/31/12 (P2M x 1.01) FV adjustment gain on transfer of securities (OCI)

1,926,000 269,640 240,000

29,640 1,955,640 2,020,000 64,360

PROBLEM NO. 7 – Analysis of investments in equity instruments (Trading and Associate) The following subsidiary ledger reflects the trading securities of Gateway Company for the year of 2015: TEMPLAR CORPORATION Date Sep. 05 08

Transactions Purchased 20,000 shares Cash dividends to stockholders of record Sept. 15, declared Aug. 15

Debit P1,000,000

Oct. 01 05

Purchase 50,000 shares Sold 20,000 shares at P5

2,600,000

Nov. 30 Dec. 15

P50,000

1,000,000

Cash collected for sale of 20,000 shares made on Nov. 1 declaration of P5 cash dividend per share to stockholders on record as of December 1 Cash dividend received Total

Credit

3,300,000 150,000 P3,600,000

P4,500,000 144

On January 2, 2015, Gateway Company purchased 39,000 ordinary shares of Dark Co.’s 200,000 shares outstanding for P1,170,000. On the date, the carrying amount of the acquired shares on Dark Co.’s books was P810,000. Gateway attributed the excess of cost over carrying amount to goodwill. During 2015, Gateway’s president gained a seat on Dark’s board of directors, which enables Gateway to exercise significant influence over Dark. Dark reported profit of P800,000 for the year ended December 31, 2015, and declared and paid cash dividends of P200,000 during 2015. Market values of the securities at December 31, 2015, are as follows: Templar Corp. P60 per share Dark Company P30 per share

REQUIRED: Determine the amount to be included in Gateway’s 2015 profit or loss and the carrying amount of investments as of December 31, 2015 to be reported on the statement of financial position. Templar Dark

SOLUTION: 1. Amount in profit or loss Templar Dark

P3,000,000 P156,000

2. Carrying amount in SFP Templar Dark

P1,800,000 P1,287,000

Amount to be recognized in profit or loss - Investment in Templar Gain on sale 10/05 (see computation below) Gain on sale 11/30 (see computation below) Dividend income (50,000 shares x P5) FV adjustment gain Net amount to be recognized in P/L Gain on sale 10/05: Sales proceeds (20,000 shares x P65) Less Cost of investment sold (see below) Gain on sale

350,000 2,160,000 250,000 240,000 3,000,000

1,300,000 950,000 350,000 145

Cash paid Less Purchased dividend Correct acquisition cost

1,000,000 50,000 950,000

Gain on sale 11/30: Cash received Less dividends sold (20,000 shares x P5) Net sales proceeds Less Cost of investment sold Gain on sale

3,300,000 100,000 3,200,000 1,040,000 2,160,000

FV adjustment gain: Fair value, 12/31/12 (30,000 x P60) Balance before FV adjustment (see investment ledger) FV adjustment gain

1,800,000 1,560,000 240,000

Investment in Templar ledger Sept. 5 acquisition Purchase, Sept. 5 Sale, Oct. 5 (use FIFO) Balance, Dec. 31, 2012

Shares 20,000 (20,000) -

Cost/share 47.50 47.50

Oct. 1 acquisition Purchase, Oct. 1 Sale, Nov. 30 Balance, Dec. 31, 2012

Shares 50,000 (20,000) 30,000

Cost/share 52.00 52.00 52.00

Amount to be recognized in SFP - Investment in Templar Fair value, 12/31/12 (30,000 x P60)

Amount to be recognized in profit or loss - Investment in Dark Share of profit (P800,000 x .195) Amount to be recognized in SFP - Investment in Dark Acquisition cost Share of profit (P800,000 x .195) Dividends received (P200,000 x .195) Investment in stock balance, 12.31.11

1,800,000

156,000

1,170,000 156,000 (39,000) 1,287,000 146

* Use equity method since there is a significant influence, i.e. Gateway's President is represented in the board of directors.

PROBLEM NO. 8 – Analysis of investments in equity instruments (AFS and Associate) On January 3, 2013, JR Company purchased for P500,000 cash a 10% interest in Judi Corp. On that date, the net assets of Judi had a book value of P3,750,000. The excess of cost over the underlying equity in the net assets is attributable to undervalued depreciable assets having a remaining life of 10 years from the date of JR’s purchase. The investment in Judi Corp. is not intended for trading.

The fair value of JR’s investment in Judi securities is as follows: December 31, 2013 December 31, 2014 December 31, 2015

P570,000 P525,000 P2,200,000

On January 2, 2015, JR purchased an additional 30% of Judi’s stock for P1,575,000 cash when the book value of Judi’s net assets was P4,150,000. The excess was attributable to depreciable assets having a remaining life of 8 years. During 2013, 2014, and 2015 the following occurred:

2013 2014 2015

Judi Net Income P350,000 P400,000 P550,000

Dividends Paid by Judi to JR P15,000 P20,000 P70,000

REQUIRED: Answer the following: 1. The net amount to be recognized in 2013 comprehensive income related to this investment? 2. The net amount to be recognized in 2014 comprehensive income related to this investment? 3. The adjustment to retained earnings as of January 1, 2015 as a result of the acquisition of the additional 30% interest in Judi Corp. is? 4. The carrying amount of the investment in Judi Corp. as of December 31, 2015 is?

147

SOLUTION: 1. P 85,000 Profit or loss - Dividend income OCI - FV adjustment (P570,000 - P500,000) Net amount in comprehensive income - 2010

15,000 70,000 85,000

2. (P25,000) Profit or loss - Dividend income OCI - FV adjustment (P525,000 - P570,000) Net amount in comprehensive income - 2011

20,000 (45,000) (25,000)

3. Nil 4. P2,195,000 Fair value of original investment Purchase price of 30% interest Total cost of 40% interest Share of profit - 2012 Based on reported amount (P550,000 x .4) Excess of cost over underlying equity amortization {[P2.1M - (P4.15M x .4)]/8} Dividends received Carrying amount, 12/31/12

525,000 1,575,000 2,100,000 220,000 (55,000)

165,000 (70,000) 2,195,000

PROBLEM NO. 9 – Analysis of investments in debt instrument (HTM)

On June 1, 2014, Panday Corporation purchased as a long term investment 6,000 of the P1,000 face value, 8% bonds of Pira Corporation. Panday Corporation has the positive intention and ability to hold these bonds to maturity. The bonds were purchased to yield 10% interest. Interest is payable semi-annually on December 1 and June 1. The bonds mature on June 1, 2020. On November 1,2015, Panday Corporation sold the bonds for a total consideration of P5,887,500. REQUIRED: Determine the following: (Round off present value factors to four decimal places) 1. 2. 3. 4.

The purchase price of the bonds on June 1, 2014 The carrying amount of the investment in bonds as of December 31, 2014. The interest income for the year 2015 The gain on sale of investment in bonds on November 1, 2015. 148

SOLUTION: 1.

P5,467,992 PV of principal (P6,000,000 x 0.5568) PV of interest [(P6,000,000 x 4%) x 8.8633] Purchase price

2.

3,340,800 2,127,192 5,467,992

P5,507,237 Date 6/1/11 12/1/11 6/1/12 12/1/12

EI (5%) 273,400 275,070 276,823

NI (4%) 240,000 240,000 240,000

Disc. Amort.

Amort. Cost 5,467,992 5,501,392 5,536,462 5,573,285

33,400 35,070 36,823

Carrying amount, 12/1/11 (see amortization schedule) Add discount amortization, 12/1/11 to 12/31/11 (P35,070/6) Carrying amount, 12/31/11 3.

5,501,392 5,845 5,507,237

P459,911 Jan. 1 to May 31 (P275,070 x 5/6) June 1 to Nov. 1 (P276,823 x 5/6) Total interest income for 2012

4.

229,225 230,686 459,911

P120,352

Total proceeds Accrued interest (P240,000 x 5/6) Net proceeds Less carrying amount, 11/1/12: Carrying amount, 6/1/12 (see amortization schedule) Add discount amortization, 6/1/12 to 11/1/12 (P36,823 x 5/6) Gain on sale on investment in bonds

5,887,500 (200,000) 5,687,500 5,536,462 30,686

5,567,148 120,352

PROBLEM NO. 10 – Impairment of investments in debt instruments (HTM)

149

On April 1, 2012, KLOOTZ Corporation purchased a 5-year P10,000,000 10% bonds dated January 1, 2012. The bonds were purchased to yield 8%. Interest is payable annually every December 31. KLOOTZ Corporation has the positive intention and ability to hold these bonds to maturity. This issuer paid the interest as scheduled in 2012 and 2013. During 2014, the issuer of the bonds is in financial difficulties and it becomes probable that the issuer will be put into administration by a receiver. On December 31, 2014, KLOOTZ estimated that none of the interest will be collected and only P8,000,000 of the principal will be collected on maturity date. No cash flows are received during 2015. At the end of 2015, the issuer is released from administration and KLOOTZ receives a letter from the receiver stating that the issuer will be able to meet its remaining obligations, including interest and repayment of principal.

REQUIRED: Answer the following: (Round off present value to four decimal places) 1. How much was the total amount paid to acquire the investment in bonds on April 1, 2012? 2. How much is the carrying amount of the investment in bonds on December 31, 2012? 3. How much should be recognized as impairment loss in 2014? 4. How much is the interest income to be recognized in 2015? 5. How much should be recognized as reversal of impairment loss in 2015?

SOLUTION: 1.

P11,014,674 Cash flow Principal 10,000,000 Interest 1,000,000 Purchase price, 1/1/09

Amortization schedule: EI (8%) 1/1/09 12/31/09 863,896 12/31/10 853,008 12/31/11 841,248 12/31/12 828,548 12/31/13 814,832 PV, 1/1/09

PVF@8% 0.6806 3.9927

PV, 1/1/09 6,806,000 3,992,700 10,798,700

NI (10%)

Amort

1,000,000 1,000,000 1,000,000 1,000,000 1,000,000

(136,104) (146,992) (158,752) (171,452) (185,400)

CA 10,798,700 10,662,596 10,515,604 10,356,852 10,185,400 10,000,000 10,798,700 150

Premium amortization, 1/1 to 4/1 (P113,456 x 3/12) PV, 4/1/09 Accrued interest (P10,000,000 x 10% x 3/12) Total purchase price 2. P10,662,100 Refer to the amortization schedule Alternative computation: Cash flow Principal 10,000,000 Interest 1,000,000 Carrying amount, 12/31/11 3.

(34,026) 10,764,674 250,000 11,014,674

10,662,596 PVF@8% 0.7350 3.3121

PV, 12/31/09 7,350,000 3,312,100 10,662,100

P3,497,900

Carrying amount, 12/31/11 (see amortization schedule) PV of expected cash flows (P8,000,000 x 0.7972) Impairment loss

10,356,852 6,858,400 3,498,452

Alternative computation: Cash flow Principal 10,000,000 Interest 1,000,000 Carrying amount, 12/31/11 PV of expected cash flows (P8,000,000 x 0.8573) Impairment loss

4.

5.

PV, 12/31/11 8,573,000 1,783,300 10,356,300 6,858,400 3,497,900

Amort

CA 6,858,400 7,407,072 8,000,000

P548,672 EI (8%)

12/31/11 12/31/12 12/31/13

PVF@8% 0.8573 1.7833

548,672 592,928

NI (10%) -

548,672 592,928

P2,777,828

Carrying amount, 12/31/12 (without impairment) Carrying amount, 12/31/12 (with impairment) Reversal of impairment loss

10,185,400 7,407,072 2,778,328

The limit on the amount of reversal is what the amortized cost of the asset would have been at the date of reversal had the impairment loss not been recorded. 151

Alternative computation: Cash flow Principal 10,000,000 Interest 1,000,000 Carrying amount, 12/31/12 - without impairment Carrying amount, 12/31/12 - with impairment Impairment loss

PVF@8% 0.9259 0.9259

PV, 12/31/12 9,259,000 925,900 10,184,900 7,407,072 2,777,828

PROBLEM NO. 11 – Analysis of investments in associates of an SME You were engaged by Spurs Corporation, a small and medium-sized entity, to audit its financial statements for the year 2015. During the course of your audit , you noted the following regarding its recent acquisitions of investments in equity securities: a.

On January 1, 2015, the entity acquired 25 percent of the equity of each of entities B, C and D for P10 million, P15 million and P28 million respectively. Transaction costs of 1 percent of the purchase price of the shares were incurred by the entity.

b.

On January 2, 2015, entity B declared and paid dividends of P1 million for the year ended 2014.

c.

On December 31, 2015, entity C declared a dividend of P8 million for the year ended 2015. The dividend declared by entity C was paid in 2016.

d.

For the year ended December 31, 2015, entities B and C recognized profit of respectively P5 million and P18 million. However, entity D recognized a loss of P20 million for the year.

e.

Published price quotations do not exist for the shares of entities B, C and D. Using appropriate valuation techniques the entity determined the fair value of its investments in entities B, C and D at December 31, 2015 as P13 million, P29 million and P15 million respectively. Costs to sell are estimated at 5 percent of the fair value investments.

f.

The entity has no subsidiaries and therefore does not produce consolidated financial statements.

In accordance with section 14.4 of the PFRS for SMEs, an investor shall account for all of its investments in associates using one of the following: (a) the cost model in paragraph 14.5, (b) the equity method in paragraph 14.8, or (c) the fair value model in paragraph 14.9. The entity is seeking your advice on the effect of each method on the carrying amount of the investment and its effect on profit or loss. REQUIRED: 152

Determine the net amount to be recognized in 2015 profit or loss and the total carrying amount of the investments as of December 31, 2015 using: 1. 2. 3.

Cost Model Fair Value Model Equity Method

SOLUTION: 1. P/L:P(11.78) million; CA:P39.50 million SFP amount (Cost Model) B Purchase price 10,000,000 Transaction costs 100,000 Total cost 10,100,000 Impairment loss* CA, 12/31/12 10,100,000 *Impairment loss computation: Total cost FV less cost to sell (RA)

P/L amount (Cost Model) Dividend income Impairment loss

C 15,000,000 150,000 15,150,000 15,150,000

D 28,000,000 280,000 28,280,000 (14,030,000) 14,250,000

10,100,000 12,350,000 -

15,150,000 27,550,000 -

28,280,000 14,250,000 14,030,000

B 250,000 250,000

C 2,000,000 2,000,000

(14,030,000) (14,030,000)

Total 2,250,000 (14,030,000) (11,780,000)

C 29,000,000

D 15,000,000

Total 57,000,000

C (150,000) 2,000,000 14,000,000 15,850,000

D (280,000) (13,000,000) (13,280,000)

D

Total 53,000,000 530,000 53,530,000 (14,030,000) 39,500,000

2. P/L:P5.72 million; CA:P57 million FP amount (Fair Value Model) Fair value P/L amount (Fair Value Model) Transaction costs Dividend income FV adjustment gain (loss)*

B 13,000,000 B (100,000) 250,000 3,000,000 3,150,000

Total (530,000) 2,250,000 4,000,000 5,720,000

*FV adjustment gain (loss) 153

Fair value CA before FV adjustment

13,000,000 10,000,000 3,000,000

3. P/L:P(8.28) million ; CA:P43.00 million SFP amount (Equity Method) B Purchase price 10,000,000 Transaction costs 100,000 SOPA (SOLA) 1,250,000 Dividends CA, 12/31/12 - before impairment Impairment loss* CA, 12/31/12

15,000,000 28,000,000 (13,000,000)

C 15,000,000 150,000 4,500,000

D 28,000,000 280,000 (5,000,000)

Total 53,000,000 530,000 750,000

(250,000) (2,000,000) 11,100,000 17,650,000 11,100,000 17,650,000

23,280,000 (9,030,000) 14,250,000

(2,250,000) 52,030,000 (9,030,000) 43,000,000

*Impairment loss computation: CA, 12/31/12 - before impairment FV less cost to sell (RA)

P/L amount (Equity Method) SOPA (SOLA) Impairment loss

29,000,000 15,000,000 14,000,000

11,100,000 12,350,000 B 1,250,000 1,250,000

C 4,500,000 4,500,000

17,650,000 27,550,000 -

23,280,000 14,250,000 9,030,000

D (5,000,000) (9,030,000) (14,030,000)

Total 750,000 (9,030,000) (8,280,000)

PROBLEM NO. 12 – Theory Select the best answer for each of the following: 1. Which of the following is not one of the auditor’s primary objectives in an audit of trading securities? a. b. c. d.

To determine whether securities are authentic To determine whether securities are the property of the client To determine whether securities actually exist To determine whether securities are properly classified on the statement of financial position

2. An auditor who physically examines securities should insist that a client representative be present in order to a. Detect fraudulent securities b. Lend authority to the auditor’s directives 154

c. Coordinate the return of securities to the proper locations d. Acknowledge the receipt of securities returned

3. A client has a large and active investment portfolio that is kept in a bank safe-deposit box. If the auditor is unable to count the securities at the end of the reporting period, the auditor most likely will: a. Request the bank to confirm to the auditor the contents of the safe deposit box at the end of the reporting period b. Examine supporting evidence for transactions occurring during the year c. Count the securities at a subsequent date and confirm with the bank whether securities were added or removed since the end of the reporting period d. Request the client to have a bank seal the safe-deposit box until the auditor can count the securities at a subsequent date

4. When an auditor is unable to inspect and count a client’s investment securities until after the end of the reporting period, the bank where the securities are held in a safe deposit box should be asked to a. Verify any differences between the contents of the box and the balances in the client’s subsidiary ledger b. Provide a list of securities added and removed from the box between the end of the reporting period and the security count date c. Count the securities in the box so that the auditor will have an independent direct verification d. Confirm that there has been no access to the box between the end of the reporting period and the security-count date

5. In establishing the existence and ownership of an investment held by a corporation in the form of publicly traded shares an auditor should inspect securities or a. Obtain written representations from management confirming that the securities are properly classified as trading securities. b. Inspect the audited financial statements of the investee company. c. Confirm the number of shares held by an independent custodian. d. Determine that the investment is carried at the lower of cost or market.

6. Which of the following is the least effective audit procedure regarding the existence assertion for the securities held by the auditee? 155

a. b. c. d.

Examination of paid checks issued in payment of securities purchased Vouching all changes during the year to supporting documents Simultaneous count of liquid assets Confirmation from the custodian

7. Which of the following is the most effective audit procedure for verification of dividends earned on investments in equity securities? a. b. c. d.

Tracing the deposited dividend checks to the cash receipt book Reconciling amount received with the published dividend records Comparing the amounts received with preceding year dividends received Recomputing selected extensions and footings of dividend schedules and comparing totals to the general ledger.

8. In performing tests of the carrying amount of trading securities, the auditor would usually: a. b. c. d.

Ask management to estimate the market value of the securities Refer to the quoted market prices of the securities Value the securities at cost regardless of their market prices Count the securities

9. An audit procedure that provides evidence about proper valuation of trading securities arising from a short term investment of excess cash is a. b. c. d.

Calculation of premium or discount amortization Recalculation of investment carrying amount by applying the equity method Comparison of carrying amount with the current market quotations Confirmation of securities held by broker

10. Which of the following provides the best form of evidence pertaining to the annual valuation of an investment in which the independent auditor’s client owns a 30% voting interest? a. b. c. d.

Market quotations of the investee company’s stock Current fair value of the investee company’s assets Historical cost of the investee company’s assets Audited financial statements of the investee company 156

ANSWERS: 1. A 2. D 3. D 4. D

5. C 6. A 7. B 8. B

9. C 10. D

V- AUDIT OF PROPERTY, PLANT AND EQUIPMENT

PROBLEM NO. 1 – Classification of property, plant and equipment expenditures

White company commenced operations on July 1 2014. During the following year, the company acquired a tract of land, demolished the building on the land and built a new factory. Equipment was acquired for the factory and, in March 2015, the plant was ready to commence operation. During this period, the following inflows and outflows occurred: While searching for a suitable block of land, White Company placed an option to buy with three real estate agents at a cost of P1,000 each. One of these blocks of land was later acquired. Payment of option fees

P 3,000

157

Receipt of loan from bank Payment to settlement agent for title search, stamp duties and settlement fees Payment of arrears in rates on building and land Payment for land Payment for demolition of current building on land Proceeds from sale of material from old building

4,000,000 100,000

50,000

1,000,000 120,000

55,000

Payment to architect

230,000

Payment to council for approval of building construction

120,000

Payment for safety fence around construction site Payment to construction contractor for factory building

34,000

2,400,000

Payment for external driveways, parking bays and safety lighting

540,000

Payment for safety inspection on building

30,000

Payment for equipment

640,000

Payment of freight and insurance costs on delivery of equipment

56,000

Payment of installation costs on equipment

120,000

158

Payment for safety equipment surrounding equipment

110,000

Payment for removal of safety fence

20,000

Payment for new fence surrounding the factory

80,000

Payment for advertisements in the local paper about the forthcoming factor and its benefits to the local community

5,000

Payment for opening ceremony

60,000

Payments to adjust equipment to more efficient operating levels subsequent to initial operation

33,000

REQUIRED: Compute the cost of the following: 1. 2. 3. 4.

Land Land improvements Building Equipment SOLUTION:

Land Option cost (Exercised)

1,000

Settlement agent

100,000

Rates

50,000

Payment for land

1,000,000

Demolition of old building

120,000

Proceeds on sale of material

(55,000) 159

1,216,000 Land improvements Driveway et al

540,000

New fence

80,000 620,000

Building Architect’s fee

230,000

Building permit fees

120,000

Fence during construction

34,000

Payment to construction contractor

2,400,000

Safety inspection

30,000

Removal of safety fence

20,000 2,834,000

Equipment Payment for equipment

640,000

Freight & Insurance

56,000

Installation

120,000

Safety equipment Adjustments

110,000 33,000 959,000

160

PROBLEM NO. 2 – Classification of property, plant and equipment expenditures The following expenditures were incurred by Ayos Enterprises Co, in 2015: Purchase of Land

Land survey Fees for search of title for land Building permit Temporary quarters for construction crews Payment to tenants of old building for vacating premises

P 3,9,000,000 52,000 6,000 35,000 107,500

46,000

Razing old building

470,000

Excavating basement

100,000

Special assessment tax for street project

20,000

Dividends

50,000

Damaged awarded for injuries sustained in construction (no insurance was carried)

84,000

Costs of construction

29,000,000

Cost of paving parking lot adjoining building

400,000

Cost of shrubs, trees, and other landscaping

330,000

REQUIRED: Determine the cost of each of the following:

161

1. Land 2. Land improvements 3. Building SOLUTION: Land Purchase of land Land survey Fees for search of title for land Payment to tenants of old building for vacating premises Razing old building Special assessment tax for street project

3,900,000 52,000 6,000 46,000 470,000 20,000 4,494,000

Land improvements Cost of paving parking lot adjoining building Cost of shrubs, trees, and other landscaping

400,000 330,000 730,000

Building Building permit Temporary quarters for construction crews Excavating basement Costs of construction

35,000 107,500 100,000 29,000,000 29,242,500

PROBLEM NO. 3 – Audit of machinery and accumulated depreciation accounts You were engaged in making your second annual examination of Indigo Company. The machinery and Accumulated Depreciation accounts are shown below: Machinery 01/01/15

Balance

500,000

09/01/15

Sale of Machin e No. 3

10,000

162

06/01/15

Machine No. 23

150,000

09/01/15

Dismantlin g of Machine no. 3

4,000

12/31/15

Balance 644,000

654,000 01/01/16

Balance

654,000

644,000

Accumulated Depreciation 12/31/15

Balance

344,000

01/01/15

Balance

280,000

12/31/15

Depreciation

64,400

344,400

344,400 01/01.16

Balance

344,400

Your examination disclosed the following information: a. The following adjusted balances appeared on December 31, 2014 working papers: machinery – P 500,000; Accumulated Depreciation – P 280,000. b. The company has depreciated all items of machinery at 10% per annum. The oldest item owned in seven years old as of December 31, 2015. c. It is the company’s policy to take full year’s depreciation in the year of acquisition and none in the year of disposition. d. Machine No. 3, which was purchased on March 1, 2011, at a cost of P 80,000, was sold on September 1, 2015 for 10,000 cash. e. Included in charges to Repairs and Maintenance account was an invoice for installation of Machine No. 23, in the amount of P 35,000. REQUIRED: 1. Compute for the following: a. Loss on the sale of Machine No. 3 b. Adjusted balance of Machinery as of December 31,2015 163

c. Depreciation expense for 2015 d. Adjusted balance of Accumulated Depreciation as of December 31,2015 2. Adjusted entries as of December 31, 2015 SOLUTION: Requirement No. 1. a Sales proceeds

10,000

Dismantling cost

(4,000)

Net sales proceeds Less carrying amount:

6,000

Cost 80,000 Accumulated dep. (80,000 x 10% x 4) (32,000) Gain (Loss) on sale of machine no. 3

48,000 (42,000)

Requirement No. 1. b Unadjusted machinery, 12/31/12 Add (deduct) adjustments: Error in recording disposal of machine no. 3, net (P80,000 P6,000) Installation cost of machine no. 23 Adjusted machinery, 12/31/12

644,000

(74,000) 35,000 605,000

Requirement No. 1. c Depreciation expense (P605,000 x 10%)

60,500

Requirement No. 1. d Unadjusted accumulated depreciation, 12/31/12 Add (deduct) adjustments: Accumulated depreciation of machine no. 3 (80,000 x 10% x 4) Overstatement of depreciation expense Should be (605,000 x 10%)

344,400

(32,000)

60,500 164

As recorded

64,400

Adjusted accumulated depreciation, 12/31/12

(3,900) 308,500

Requirement No. 2 AJE 1 - To correct recording of sale of machine no. 3 Loss on sale of machine

42,000

Accumulated depreciation

32,000

Machinery

74,000

AJE 2 - To correct recording of installation of machine no. 23 Machinery Repairs and maintenance

35,000 35,000

AJE 3 - To correct overstatement of depreciation Accumulated depreciation Depreciation

3,900 3,900

PROBLEM NO. 4 – Audit of machine and accumulated depreciation accounts In the audit of the books of yellow orporation for the year 2015, the following items and information appeared in the Production Machine account of the client: D at e

Particu lars

Debi t

01 /0 1

Balanc eMachi ne 1,2,3 and 4

P 20,0 00

Cre dit

165

at P 180,00 0 each 02 /2 8

Machi ne 5

396, 000

Machi ne 1

P6, 000

09 /0 1

Machi ne 6

192, 000

12 /0 1

Machi ne 7

432, 000

The Accumulated Depreciation account contained no entries for the year 2015. The balance on January 1, 2015 per your audit, as as follows: Machine 1

P 168,750

Machine 2

78,750

Machine 3

67,500

Machine 4

45,000

Based on your further inquiry and verification, you noticed the following: 1. Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for P 6,000. 2. Machine 2 was destroyed by the thickness of engine oil used leading to explosion on December 1, 2015. Machine 7 was to replace Machine 2. 3. Machine 3 was traded in for Machine 6 at an allowance of P 24,000; the difference was paid in cash and charged to Production Machine account. 4. Depreciation rate is recognized at 25% per annum. 166

REQUIRED: 1. a. b. 2.

Compute for the following: Total depreciation for the year ended December 31, 2015. Carrying amount of production machine as of December 31, 2015 Adjusting entries as of December 31,2015

SOLUTION: Requirement No. 1 Adjusted bal.

DA

Fraction Depreciation

AD

CA

Machine 1 - sold 2/28

- 180,000

2/12

7,500

-

-

Machine 2 - destroyed 12/1

- 180,000

11/12

41,250

-

-

Machine 3 - traded in 9/01

- 180,000

8/12

30,000

-

-

Machine 4

180,000

180,000

12/12

45,000

90,000

90,000

Machine 5 - acquired 2/28

396,000

396,000

10/12

82,500

82,500

313,500


216,000

216,000

4/12

18,000

18,000

198,000


432,000

432,000

1/12

9,000

9,000

423,000

199,500

1,024,500 (1.b)

Total

1,224,000

233,250 (1.a)

Requirement No. 2 AJE 1 - To correct recording of sale of Machine 1 Accumulated depreciation (P180,000 - P3,750) Production machine (P180,000 - P6,000) Gain on sale (see computation below) Computation of gain on sale of Machine 1: Sales proceeds Less carrying amount, 2/28/12

176,250 174,000 2,250

6,000

167

Carrying amount, 1/1/12 (P180,000 P168,750) Depreciation - 2012 (P180,000 x .25 x 2/12) Gain (loss) on sale of Machine 1

11,250 (7,500)

3,750 2,250

AJE 2 - To correct non-recording of destruction of Machine 2 Accumulated depreciation (P180,000 - P60,000)

120,000

Loss on destruction (see computation below) Production machine

60,000 180,000

Computation of loss on destruction of Machine 2: Carrying amount, 1/1/12 (P180,000 - P78,750)

101,250

Depreciation - 2012 (P180,000 x .25 x 11/12)

(41,250)

Carrying amount, 12/1/12/Loss on destruction

60,000

AJE 3 - To correct recording of trade-in of Machine 3 Production machine no. 6

24,000

Accumulated depreciation (P180,000 - P82,500) Loss on exchange (see computation below) Production machine no. 3

97,500 58,500 180,000

Computation of loss on exchange (tradein): Trade-in value Less carrying amount, 9/1/12

24,000

Carrying amount, 1/1/12 (P180,000 - P67,500) 112,500 Depreciation - 2012 (P180,000 x .25 x 8/12) Gain (loss) on trade-in of Machine 3

(30,000)

82,500 (58,500)

AJE 4 - To record depreciation for 2012 Depreciation

233,250 168

PROBLEM NO. 5 – Roll-forward analysis At December 31,2014, Arnold Company’s noncurrent operating asset accounts had the following balances: Land

P 175,000

Buildings

1,500,000

Machinery and equipment

1,125,000

Automobiles

172,000

Leasehold improvements

216,000

Land improvements

0

Transactions for 2015 included the following: Jan. 6

A plant facility consisting of land and a building was acquired from Jesco Corp. in exchange for 24,000 ordinary shares of Arnold. On this date, Arnold’s share had a market price of P50 a share. Current assessed values of land and building for property tax purposes are P187,500 and P562,500, respectively.

Mar. 25

New parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of P192,000

July 1

Machinery and equipment were purchased at an invoice cost of P325,000, which excluded P39,000 of input tax. Additional costs of P10,000 169

for delivery and P50,000 for installation were incurred. Aug. 30

Arnold purchased a new automobile for P22,500.

Nov. 4

Arnold purchased for P350,000 a tract of land as a potential future building site.

Dec. 20

A machine with a cost of P17,000 and a remaining book value of P2,975 at date of disposition was scrapped without cash recovery.

REQUIRED: Based on the above and the result of your audit, calculate the balance of the following as of December 31, 2015. 1. 2. 3. 4.

Land Buildings Machinery and equipment Property, plant and equipment SOLUTION: 12/31/11

Addition

Disposal

12/31/12

Cost Land

175,000

Land improvements

312,500

Buildings Machinery and equipment Automobile and trucks Leasehold improvements

-

a)

192,000

1,500,000 937,500

b)

1,125,000 385,000

c) 17,000

172,000

22,500

487,500

(1)

-

192,000

-

2,437,500

(2)

1,493,000

(3)

194,500

216,000 3,188,000 1,849,500

-

216,000 17,000

5,020,500

(4) 170

a) 25,000 x P50 = 1,250,000 x 187,500/750,000 b) 25,000 x P50 = 1,250,000 x 562,500/750,000 c) P325,000 + P10,000 + P50,000 PROBLEM NO. 6 – Roll-forward analysis Olive company’s property, plant, and equipment, accumulated depreciation, and amortization balances at December 31,2014 are: Accumulated Cost

Depreciation

Land

P 275,000

Buildings

2,800,00

P 672,900


2,380,000

367,500

Automobile and trucks

210,000

114,326


432,000

108,000

P 5,097,000

P 1,262,726

Totals

Additional information on depreciation methods and useful lives follows: Asset

Depreciation method

Useful life

171

Buildings

150%decliningbalance

25 years


straight-line

10 years

Automobile and trucks

150%decliningbalance

5 years


Straight-line

Depreciation is computed to the nearest month. Salvage values of depreciable assets are immaterial except for automobiles and trucks which have estimated salvage values equal to 15% of cost. Other additional information: 

Olive entered into a twelve-year operating lease starting January 1, 2012. The leasehold improvements were completed on December 31, 2011 and the facility was occupied on January 1, 2012.



On January 6, 2015, olive completed its self-construction of a building on its own land. Direct costs of construction were P 1,095,000. Construction of the building required 15,000 direct labor hours. Olive’s construction department has an overhead allocation system for outside jobs based on an activity denominator of 100,000 direct labor hours, budgeted fixed costs of P2,500,00, and budgeted variable costs of P27 per direct labor hour.



On July 1, 2015 machinery and equipment were purchased at a total invoice cost of P325,000. Additional costs of P23,000 to rectify damage on delivery and P18,000 for concrete embedding of machinery were incurred. A wall had to be demolished to enable a large machine to be moved into the plant. The wall demolition cost P7,000, and rebuilding of the wall cost P19,000.



On August 30, 2015, Olive purchased a new automobile costing P25,000. 172



On September 30,2015, a truck with a cost of P48,000 and a carrying amount of P30,000 on December 31, 2014 was sold for P23,500.



On November 4, 2015, Olive purchased a tract of land for investment purposes for P700,000. Olive thinks it might use the land as a potential future building site.



On December 20,2015, a machine with a cost of P17,000 a carrying amount of P2,975 on date of disposition, and a market value of P4,000 was sold to a corporate officer. REQUIRED: Based on the above and the result of your audit, compute for the following as of and for the year ended December 31,2015:

1. 2. 3. 4. 5.

Total depreciation Carrying amount of buildings Carrying amount of machinery and equipment Carrying amount of automobiles and trucks Carrying amount of property, plant and equipment SOLUTION: 12/31/11

Addition

Disposal

12/31/12

CA, 12/31/12

Cost Land

275,000

-

Buildings Machinery and equipment Automobile and trucks Leasehold improvements

2,800,000 1,875,000 a) 1,380,000 369,000 210,000 432,000

25,000

-

275,000

-

4,675,000 3,761,974

(2)

1,732,000 1,222,075

(3)

187,000

68,472

(4)

432,000

288,000

b) 17,000 48,000

-

5,097,000 2,269,000

65,000

275,000

7,301,000 5,615,521

Accumulated depreciation 173

(5)

Land Buildings Machinery and equipment Automobile and trucks Leasehold improvements

-

-

672,900

240,126

c)

367,500

156,450

d) 14,025

g) 509,925

114,326

28,952

e) 24,750

h) 118,528

108,000

36,000

f)

1,262,726 461,528 (1)

-

913,026

144,000 38,775

1,685,479

a) P1,095,000 + (2,500,000 x 15/100) + (15,000 x P27) b) P325,000 + P18,000 + P7,000 + P19,000 c) [(P2,800,000 - P672,900) + P1,875,000] x .06 d) [(P1,380,000 x .1) + (P369,000 x .1 x 6/12)] e) [(P210,000 - P114,326 - P30,000) x .3 + (P30,000 x .3 x 9/12) + (P25,000 x .3 x 4/12)] f) P432,000/ 12 g) P17,000 - P2,975 h) (P48,000 - P30,000) + (P30,000 x 0.3 x 9/12) PROBLEM NO. 7 – Audit of Plant Assets and accumulated depreciation accounts The following data relate on the Plant Assets account of Survive, Inc. at December 31, 2014: Plant Assets P

R

T

C

Original Cost

P 175,000

P 255,000

P 400,000

P 400,000

Year Purchased

2009

2010

2011

2013

Useful Life

10 years

75,000 hours

15 years

10 years

Salvage value

P 15,500

P 15,000

P 25,000

P 25,000

174

Depreciation method

SYD

Activity

Straight line

Doubledeclining balance

Note: in the year an asset is purchased, Survive, Inc. does not record any depreciation expense on the asset. In the year an asset is retired or traded in, Survive, Inc. takes a full year depreciation on the asst. The following transaction occurred during 2015: (a) On May 5, asset P was sold for P 65,000 cash. (b) On December 31, it was determined that asset R had been used 10,500 hours during 2015. (c) On December 31, before computing depreciation expense on Asset T, the management of Survive, Inc. decided the useful life remaining from 1/1/12 was 10 years. (d) On December 31, it was discovered that a plant asset purchased in 2014 had been expensed completely in that year. This asset costs P 110,000 and has useful life of 10 years and no salvage value. Management has decided to use the double-declining balance for this asset, which can be referred to as “Asset I.” REQUIRED: Based on the above and the result of your audit, compute for the following as of and for the year ended December 31, 2015: 1. Total depreciation expense for 2015 2. Adjusted balance of Plant Assets as of December 31, 2015 SOLUTION: Requirement No. 1 Asset P [(P175,000-P15,500) x 5/55]

14,500

Asset R [(P255,000 - P15,000)/75,000 x 10,500]

33,600

Asset T (see computation below)

30,000

Asset C (P400,000 x .8 x .2)

64,000 175

Asset I (P110,000 x .2)

22,000

Total depreciation expense for 2012

164,100

Depreciation of Asset T for 2012: Cost Acc. depreciation, 12/31/11 [(P400,000 - P25,000) x 3/15]

400,000


325,000

Residual value

(25,000)

Remaining depreciable amount Divide by remaining life

300,000

(75,000)

10 30,000

Requirement No. 2 Asset P (Sold)

-

Asset R

255,000

Asset T

400,000

Asset C

400,000

Asset I

110,000

Plant Assets, 12/31/12

1,165,000

PROBLEM NO. 8 – Analysis of property, plant and equipment transactions The draft balance sheet of Four Corporation as of December 31, 2015 reported the net property, plany and equipment at P 6,270,000. Details of the amount follow: Land at cost Building at cost

P 1,000,000 P 4,000,000

176

Less accumulated depreciation at December 31, 2014

(800,000)

Plant at cost

5,200,000

Less accumulated depreciation at December 31, 2014

(3,130,000)

3,200,000

2,070,000

P 6,270,000 The following matters are relevant (a) The company policy for all depreciation is that it is charged to cost of sales and a full year’s charge is made in the year of acquisition or completion and none in the year of disposal. (b) Included in the sales revenue is P 300,000 being the sales proceeds of an item of plant that was sold on June 30,2015. The plant had originally cost P 900,000 and had been depreciated by P 630,000 as of December 31, 2014. Other that recording the proceeds in sales and cash, no other accounting entries for the disposal of the plant have been made. All plant is depreciated at 25% per annum on the reducing balance basis. (c) On September 30, 2015, the company completed the construction of a new warehouse. The construction was achieved using the company’s own resources as follows: Purchased materials P 150,000 Direct labor

800,000

Supervision

65,000

Design and planning costs

20,000

Included in the above figures are P 10,000 for materials and P 25,000 for labor costs that were effectively lost due to the foundations being too close to a neighboring property. All the above costs are included in cost of sales. The building was brought into immediate use upon completion and has an estimated useful life of 20 years (straight-line depreciation). (d) At the beginning of the current year, the company had an open market basis valuation of its properties (excluding the newly constructed warehouse). Land was valued at P1.2 million and the property at 4.8 million. The directors with these values to be incorporated into the financial statements. The properties had an estimated remaining life of 20 years at the date of the

177

valuation (straight-line depreciation is used). The company makes a transfer to retained earnings in respect of the excess depreciation on revalued assets. (e) Depreciation for the year 2015 has not been accounted for the in the draft financial statements. REQUIRED: Compute for the following as of and for the year ended December 31, 2015: 1. 2. 3. 4.

The carrying amount of the new warehouse The carrying amount of plant The total depreciation The revaluation surplus is

SOLUTION: Requirement No. 1 Purchased materials

150,000

Direct labor

800,000

Supervision

65,000

Design and planning costs

20,000

Total

1,035,000

Less costs of inefficiency

35,000

Adjusted cost of new warehouse Less accumulated depreciation, 12/31/12 (P1,000,000/20) Carrying amount of warehouse, 12/31/12

1,000,000

Requirement No. 2 Carrying amount of plant, 12/31/11 (P5,200,000P3,130,000) Carrying amount of plant sold (P900,000-P630,000) Carrying amount of remaining plant, 12/31/11 Depreciation for 2012 (P1,800,000 x .25)

50,000 950,000

2,070,000 (270,000) 1,800,000 (450,000)

178

Carrying amount of plant, 12/31/12

1,350,000

Requirement No. 3 Building (P4,800,000/20)

240,000

New warehouse (see no. 1)

50,000

Plant ( see no. 2)

450,000

Total depreciation

740,000

Requirement No. 4 Land

Building

Total

Fair value

1,200,000

4,800,000

Carrying amount Revaluation surplus, 1/1/12

1,000,000

3,200,000

200,000

1,600,000

1,800,000

(80,000)

(80,000)

1,520,000

1,720,000

Realized in 2012 Revaluation surplus, 12/31/12

200,000

PROBLEM NO. 9 – Property, plant and equipment transaction errors

You requested a depreciation schedule for Delivery Trucks of Woman Corporation showing the additions, retirements, depreciation and other data affecting the income of the Company in the 4year period 2012 to 2015, inclusive. The Delivery Trucks account consists of the following as of January 1, 2012:

Truck No. 1 purchased Jan. 1, 2009, cost

P 180,000

Truck No. 2 purchased July 1, 2009, cost

220,000

Truck No. 3 purchased Jan. 1, 2011, cost

300,000

Truck No. 4 purchased July 1, 2011, cost

240,000

179

P 940,000

The Delivery Trucks-Accumulated Depreciation account previously adjusted to January 1, 2012, and duly entered to the ledger, had a balance on that date of P302,000 (depreciation on the 4 trucks from respective date of purchase, based on five-year life, no salvage value). No charges have been made against the account before January 1, 2012. Transactions between January 1, 2012 and December 31, 2015, and their record in the ledger were as follows:

July 1, 2012 – Truck No. 3 was traded for larger one (No.5), the agreed purchase price of which was P340,000. Woman Mfg. Co. paid the automobile dealer P150,000 cash on the transaction. The entry was debit to Delivery Trucks and credit to cash, P150,000. Jan. 1, 2013 – Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited Delivery Trucks, P35,000. July 1, 2014 – A new truck (No. 6) was acquired for P360,000 cash and was charged at that amount to Delivery Trucks account. (Assume truck No. 2 was not retired.) July 1, 2014 – Truck No. 4 was damaged in a wreck to such an extent that it was sold as junk for P7,000 cash. Woman Mfg. Co. received P25,000 from the insurance company. The entry made by the bookkeeper was a debit to cash, P32,000, and credits to Miscellaneous Income, P7,000 and Delivery Trucks P25,000. Entries for depreciation had been made for the close of each year as follows: 2012, P203,000; 2013, P211,000; 2014, P244,500; 2015, P278,000

REQUIRED:

Based on the above and the result of your audit, determine the following:

1. 2. 3. 4. 5.

The 2012 profit is overstated by The 2013 profit is understated by The 2014 profit is understated by The 2015 profit is understated by Adjusted carrying amount of Delivery Trucks as of December 31, 2015

SOLUTION: Requirement No. 1-4 180

Profit over (under) 2009: Unrecorded loss on trade-in of Truck 3: Trade-in value (P340,000 - P150,000)

190,000

Carrying amount,7/1/09 (P300,000 x 3.5/5)

210,000

20,000

Overstatement of depreciation expense: Truck No. 1 (P180,000/5)

36,000

Truck No. 2 (P220,000/5)

44,000

Truck No. 3 (P300,000/5 x 6/12)

30,000

Truck No. 4 (P240,000/5)

48,000

Truck No. 5 (P340,000/5 x 6/12)

34,000

Should be depreciation expense

192,000

Depreciation expense per books

203,000

(11,000)

9,000

(1)

2010: Unrecorded loss on sale of Truck 1: Sales proceeds

35,000

Carrying amount, 1/1/10 (P180,000 x 1/5)

36,000

1,000

Overstatement of depreciation expense: Truck No. 2 (P220,000/5)

44,000

Truck No. 4 (P240,000/5)

48,000

Truck No. 5 (P340,000/5)

68,000


160,000

181


211,000

(51,000)

(50,000)

(2)

(23,500)

(3)

(138,000)

(4)

2011: Unrecorded loss on disposal of Truck 4: Sales proceeds

7,000

Insurance proceeds

25,000

Total

32,000


96,000

Erroneous credit to Miscellaneous Income

64,000 7,000

Overstatement of depreciation expense: Truck No. 2 (P220,000/5 x 6/12)

22,000

Truck No. 4 (P240,000/5 x 6/12)

24,000

Truck No. 5 (P340,000/5)

68,000

Truck No. 6 (P360,000/5 x 6/12)

36,000


150,000


244,500

(94,500)

2012: Overstatement of depreciation expense: Truck No. 2 (fully depreciated as of 7/1/11)

-

Truck No. 5 (P340,000/5)

68,000

Truck No. 6 (P360,000/5)

72,000


140,000


278,000

182

Requirement No. 5 Cost Truck No. 1 (sold, 1/1/09)

Acc. Dep.

CA, 12/31/12

-

-

-

Truck No. 2 (acquired, 7/1/06)

220,000

220,000

-

Truck No. 3 (traded-in, 7/1/10)

-

-

-

Truck No. 4 (damaged and sold, 7/1/11)

-

-

-


340,000

238,000

102,000


360,000

108,000

252,000

920,000

566,000

354,000

PROBLEM NO. 10 – Revaluation model On 1 January 2014, Afternoon Corporation acquires two assets within the same class of plant and equipment. Information on these assets follows:

Cost

Expected useful life

Machine A

100,000

5 years

Machine B

60,000

3 years

The machines are expected to generate benefits evenly over their useful lives. The class of plant and equipment is measured using the revaluation model. At 31 December 2014, information about the assets follows:

Machine A Machine B

Fair value P 84,000 38,000

Expected useful life 4 years 2 years

183

On1 July 2015, machine B was sold for P32,000 cash. On the same day, Afternoon Corporation acquired machine C for P80,000 cash. Machine C has expected useful life of four years.

At 31 December 2015, information on the machines is as follows: Fair value

Expected useful life

Machine A

P61,500

3 years

Machine C

68,500

1.5 years

REQUIRED:

Based on the above and the result of your audit, determine the following: 1. The amount to be recognized in 2014 profit or loss related to the revaluation of the assets 2. The amount to be recognized in 2014 comprehensive income related to the revaluation of the assets 3. The gain or loss on sale of Machine B 4. The total depreciation for the year 2015 5. The amount to be recognized in 2015 profit or loss related to the revaluation of the assets SOLUTION: Requirement No. 1 Machine A

Machine B

84,000

38,000

Cost

100,000

60,000


(20,000)

(20,000)

Fair value Carrying amount, 12/31/11:

184

80,000

40,000

Increase (Decrease)

4,000

(2,000)

To be recognized in

OCI

Profit or loss

Requirement No. 2 Profit or loss

(2,000)

Other comprehensive income (OCI)

4,000

Comprehensive income

2,000

Requirement No. 3 Sales proceeds

32,000

Less carrying amount, 7/1/12: Carrying amount, 12/31/11

38,000

Depreciation up to 7/1, (P38,000/2 x 6/12)

(9,500)

Gain on sale of Machine B

28,500 3,500

Requirement No. 4 Machine A (P84,000/4)

21,000

Machine B (P38,000/2 x 6/12)

9,500

Machine C (P80,000/4 x 6/12)

10,000

185

Total depreciation - 2012

40,500

Requirement No. 5 Machine A

Machine C

61,000

68,500

Previous carrying amount

84,000

80,000

Depreciation - 2012

(21,000)

(10,000)

63,000

70,000

(2,000)

(1,500)

OCI

Profit or loss

Fair value Carrying amount, 12/31/11:

Increase (Decrease) To be recognized in PROBLEM NO. 11 – Borrowing costs

Oceanwide Enterprises, Inc., is involved in building and operating cruise ships. Each ship is identified as separate discrete job in the accounting records. At the end of 2014, Oceanwide correctly reported P5,400,00 as Construction in Progress on the following jobs.

Ship 340 341

Completion Date (end of month) October 31,2014* June 30, 2015

342

September 30, 2015

343

January 31, 2016

Accumulated Costs (including 2014 interest) December 31, 2014 P2,300,000 1,150,000 1,200,000 750,000

*Ship 340 was completed and ready for use in October 2014 and will be placed in service May 1, 2015. Construction costs for 2015, and the dates the expenditures were made, were as follow:

Ship 341 342

Date April 1, 2015 May 1, 2015

Costs P1,200,000 1,600,000 186

343 344 345

July 1, 2015 September 1, 2015 November 1, 2015

2,200,000 810,000 360,000

Oceandwide had the following general liabilities at December 31, 2015: 12%, 5-year note (maturity date-2017)

P2,000,000

10%, 10-year bonds (maturity date-2020)

8,000,000

On January 1, 2015, Oceanwide borrowed P2,000,000 specifically for the construction of ship 343. The loand was for 3 years with interest at 13%. REQUIRED: Based on the above and the result of your audit, calculate the following for the year ended December 31, 2015. 1. 2. 3. 4. 5.

Weigthed-average interest rate for the general liabilities Capitalized interest on Ship No. 341 Capitalized interest on Ship No. 342 Capitalized interest on Ship No. 343 Total interest that Oceanwide should capitalize

Answer: Requirement No. 1 CA

Interest

12%, 5 year note

2,000,000

240,000

10%, 10 year bonds

8,000,000

800,000

Total

10,000,000

1,040,000

Weighted-average interest rate (1,040,000/10,000,000)

10.40%

Requirement No. 2

Date

Amount

CR

Fraction of the year Capitalized outstanding interest 187

Ship No. 341 1/1 1,150,000

10.4%

6/12

59,800

1,200,000

10.4%

3/12

31,200

4/1

91,000

Requirement No. 3

Date

Amount

CR

Fraction of the year Capitalized outstanding interest

1,200,000

10.4%

9/12

93,600

1,600,000

10.4%

5/12

69,333

Ship No. 342 1/1 5/1

162,933

Requirement No. 4

Date

Amount

CR

Fraction of the year Capitalized outstanding interest

750,000

13.0%

12/12

97,500

1,250,000

13.0%

6/12

81,250

950,000

10.4%

6/12

49,400

Ship No. 343 1/1 7/1 7/1

228,150

188

Requirement No. 5 Ship No. 340 (completed 10/31/11) Ship No. 341 (see no. 2) 91,000 Ship No. 342 (see no. 3) 162,933 Ship No. 343 (see no. 4) 228,150 Ship No. 344 (P810,000 x 10.4% x 4/12) 28,080 Ship No. 345 (P360,000 x 10.4% x 2/12) 6,240 Total 516,403 PROBLEM NO. 12 – Wasting Asset On January 2, 2013, Calamba Company purchased land for P450,000, from which it is estimated that 400,000 tons of ore could be extracted. It estimates that it will cost P80,000 to restore the land, after which it could be sold for P30,000. During 2013, the company mined 80,000 tons and sold 50,000 tons. During 2014, the company mined 100,000 tons and sold 120,000 tons. At the beginning of 2015, the company spent an additional P100,000, which increased the reserves by 60,000 tons. In 2015, the company mined 140,000 tons and sold 130,000 tons. The company uses a FIFO cost flow assumption.

REQUIRED: Based on the above and the result of your audit, compute for the following: (Round depletion rate to two decimal places) 1. 2. 3. 4.

Depletion for 2014 Depletion for 2015 is Depletion included in 2015 cost of sales Carrying amount of the natural resources as of December 31, 2015

Answer: Requirement No. 1 189

Cost of land

450,000

Estimated restoration cost

80,000

Total cost

530,000

Less residual value

30,000

Cost subject to depletion

500,000

Divide by total estimated reserves

400,000

2010 and 2011 depletion per ton

1.25

Depletion for 2011 (100,000 x P1.25)

125,000

Requirement No. 2 Original cost to be depleted

500,000

Less accumulated depletion, 1/1/12 (180,000 x P1.25)

225,000

Remaining DA, 1/1/12

275,000

2012 mine improvements

100,000

New cost to deplete

375,000

Divide by remaining estimated reserves (400,000 - 180,000 + 60,000)

280,000

2012 depletion per ton

1.34

Depletion for 2012 (140,000 x P1.34)

187,600

Requirement No. 3 From 1/1/12 inventory (10,000 x 1.25)

12,500

190

From 2012 extraction (120,000 x 1.34)

160,800

Depletion included cost of sales for 2012

173,300

Requirement No. 4 Cost (P450T + P80T + P100T)

630,000

Less accumulated depletion, 12/31/12 Accumulated depletion, 1/1/12

225,000

Depletion for 2012

187,600

CA, 12/31/12

412,600 217,400

PROBLEM NO. 13 – Wasting asset In connection with your audit of the Gold Mining Corporation for the year ended December 31, 2015, you noted that the company purchased for P16,640,000 mining property estimated to contain 12,800,000 tons of ore. The residual value of the property is P1,280,000. Building used in mine operations costs P1,280,000 and have estimated life of fifteen years with no residual value. Mine machinery costs P2,560,000 with an estimated residual value of P512,000 after its physical life of 4 years. Following is the summary of the company’s operations for the first year of operations. Tons mined Tons sold Unit selling price per ton Direct labor Miscellaneous mining overhead Operating expenses (excluding depreciation

1,280,000 tons 1,024,000 tons P4.40 1,024,000 204,800 921,600

Inventories are valued on a first-in, first-out basis. Depreciation on the building is to be allocated as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is chargeable to production. REQUIRED: Based on the above and the result of your audit, answer the following: (Disregard tax implications) 1. How much is the depletion for 2015? 191

2. 3. 4. 5.

Total inventoriable depreciation for 2015? How much is the Inventory as of December 31,2015? How much is the cost of sales for the year ended December 31, 2015? How much is the maximum amount that may be declared as dividends at the end of the company’s first year of operations?

Answer: Requirement No. 1 Acquisition cost

16,640,000

Less residual value

1,280,000

Depletable cost

15,360,000

Divide by total estimated reserves

12,800,000

Depletion rate

1.20

Tons mined in 2012

1,280,000

Depletion for 2012

1,536,000

Requirement No. 2 Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x 80%]

102,400

Depreciation - Machinery [(P2,560,000-P512,000/4]

512,000

Total

614,400

Requirement No. 3 Depletion (see no. 1)

1,536,000

Direct labor

1,024,000

Depreciation (see no. 2)

614,400 192

Miscellaneous mining overhead

204,800

Total available for sale

3,379,200

Divide by tons mined

1,280,000

Cost per ton

2.64

Tons remaining (1,280,000 - 1,024,000)

256,000

Inventory, 12/31/12

675,840

Requirement No. 4 Cost of sales (1,024,000 tons x P2.64)

2,703,360

Requirement No. 5 Sales (1,024,000 x P4.4)

4,505,600

Cost of sales (see no. 4)

(2,703,360)

Gross profit

1,802,240

Operating expenses Depreciation - Building [(P1,280,000/12,800,000 tons) x 1,280,000 tons x 20%]

(921,600)

Net income

855,040

Realized depletion (1,024,000 tons x P1.2)

1,228,800

Maximum amount that may be declared as dividends

2,083,840

PROBLEM NO. 14 –

(25,600)

Analysis of property, plant and equipment and investment property of an SME

In 2015, your audit client Hawks Corporation, a small and medium-sized entity, incurred (and paid) the following expenditures in acquiring property consisting of ten identical freehold detached houses each with separate legal title including the land on which it is built: 193

Date

Amount (in Php)

1-Jan-15

200,000,000

1-Jan-15

20,000,000

1-Jan-15

1,000,000

Additional information 20 per cent of the price is attributable to the land

Non-refundable transfer taxes (not included in the P200,000,000 purchase price

Legal costs directly attributsble to the acquisition

Reimbursing the previos owner for prepaying the nonrefundable local government property taxes for the sixmonth period ending 30 June 2015

1-Jan-15

10,000

1-Jan-15

500,000

Advertising campaign to attract tenants

2-Jan-15

200,000

Opening function to celebrate new rental business that attracted extensive coverage by the local press

30-Jun-15

20,000

Non-refundable annual local government property taxes for the year ending 30 June 2016

120,000

Day-to-day repairs and maintenance, including the salary and other costs of the administration and maintenance staff. These costs are attributable equally to each of the ten units

Throughout 2015

The entity uses one of the ten units to accommodate its administration and maintenance staff. The other nine units are rented to independent third parties under non-cancellable operating leases. At 31 December 2015, the entity made the following assessments about the units: 194

 

Useful life of the buildings: 50 years from the date of acquisition The entity will consume the building’s future economic benefits evenly over 50 years from the date of acquisition

The fair value of the units can be determined reliably without undue cost or effort on an ongoing basis and that the residual value of the owner-occupied unit is nil. At 31 December 2015 the fair value of each unit was reliably estimated as P25,000,000. REQUIRED: Based on the above and the result of your audit, answer the following as of and for the year ended December 31, 2015: 1. How much should be reported as property, plant and equipment? 2. How much should be recognized in profit or loss regarding the increase in fair value of investment properties? 3. How much is the total expense to be recognized in profit or loss? 4. Assume that the fair value of the units cannot be determined reliably without undue cost or effort on an ongoing basis, how much should be reported as line item for investment properties in the entity’s statement of financial position? 5. Assume that the fair value of the units cannot be determined reliably without undue cost or effort on an ongoing basis, how much is the total expense to be recognized in profit or loss? Answer: Requirement No. 1 Purchase price Non-refundable transfer taxes Legal costs Total cost

Cost of owner-occupied property (P221 million x 1/10) Depreciation - 2012 (P22.1 million x .8 x 1/50) Carrying amount, 12/31/12

Requirement No. 2 Fair value of investment properties (P25 million x 9)

200,000,000 20,000,000 1,000,000 221,000,000

22,100,000 (353,600) 21,746,400

225,000,000 195

Cost of investment properties (P221 million x 9/10) FV adjustment gain

Requirement No. 3 Property taxes for 2012

198,900,000 26,100,000

20,000

Advertising

500,000

Opening function

200,000

Day-to-day repairs and maintenance

120,000

Depreciation of owner-occupied property (see no. 1)

353,600

Total expense in profit or loss

1,193,600

Requirement No. 4 The fair value of the units cannot be determined reliably without undue cost or effort on an ongoing basis. Therefore, the entity accounts for the units as property, plant and equipment using the cost-depreciation-impairment model in Section 17. However, in accordance with paragraph 17.31, it discloses investment property as a separate class of property, plant and equipment.

Requirement No. 5 Property taxes for 2012

20,000

Advertising

500,000

Opening function

200,000

Day-to-day repairs and maintenance

120,000

Depreciation of properties (P221 million x .8 x 1/50)

3,536,000

Total expense in profit or loss

4,376,000

196

PROBLEM NO. 15 – Theory Select the best answer for each of the following: 1. Property, plant and equipment is typically judged to be one of the accounts least susceptible to fraud because a. The amounts recorded on the balance sheet for most companies are immaterial b. The inherent risk is usually low. c. The depreciated values are always smaller than cost. d. Internal control is inherently effective regarding this account. 2. Which one of the following procedures would provide the best evidence about the original cost of a piece of equipment? a. Fixed asset schedule b. Purchase invoice c. Receiving report d. Inquiry of the purchasing agent 3. Determining that proper amounts of depreciation are expensed provides assurance about management’s assertions of values and a. Presentation and disclosure. b. Rights and obligations. c. Completeness. d. Existence or occurrence. 4. The auditor may conclude that depreciation charges are insufficient by noting a. Insured values greatly in excess of book values. b. Large numbers of fully depreciated assets. c. Continuous trade-in of relatively new assets. d. Excessive recurring losses on assets retired. 5. Analytical estimation of depreciation by the auditor is an important audit test because it does which of the following? a. It yields statistical precision in sampling. b. It signals which additions will be vouched. c. It gives the auditor an indication of the impaired balances existing in financial statements. d. It is a good starting point for determining additional procedures. 197

6. When few property and equipment transactions occur during the year the continuing auditor usually obtains an understanding of internal control and performs a. Test of controls b. Analytical procedures to verify current year additions to property equipment c. A thorough examination of the balances at the beginning of the year, d. Extensive tests of current year property and equipment transactions. 7. Which of the following combinations of procedures is an auditor most likely to perform to obtain evidence about fixed asset addition? a. Inspecting documents and physically examining assets b. Recomputing calculations and obtaining written management representations. c. Observing operating activities and comparing balances to prior period balances. d. Confirming ownership and corroborating transactions through inquiries of client personnel. 8. If an auditor tours a production facility, which of the following misstatements or questionable practices is most likely to be detected by the audit procedures specified? a. Depreciation expense on fully depreciated machinery has been recognized. b. Overhead has been overapplied. c. Necessary facility maintenance has not been performed. d. Insurance coverage on the facility has lapsed. 9. In testing for unrecorded retirements of equipment, an auditor is most likely to a. Select items of equipment from the accounting records and then locate them during the plant tour. b. Compare depreciation journal entries with similar prior-year entries in search of fully depreciated equipment. c. Inspect items of equipment observed during the plant tour and then trace them to the equipment subsidiary ledger. d. Scan the general journal for unusual equipment additions and excessive debits to repairs and maintenance expense 10. The auditor is least likely to learn of retirements of equipment through which of the following? a. Review of the purchase return and allowance account b. Review of depreciation. c. Analysis of the debits to the accumulated depreciation account. d. Review of insurance policy. 11. Which of the following procedures would least likely lead the auditor to detect unrecorded fixed asset disposals? a. Examine insurance policies. b. Review repairs and maintenance expense. c. Review property tax files. d. Scan invoices for fixed asset additions. 198

12. The auditor selects a sample of asset disposals and examines the sales documentation evidencing disposal of the equipment and recomputes gain or loss on the disposal. This audit steps primarily tests which of the following assertions for the equipment account? a. Existence assertion b. Rights assertion c. Presentation assertion d. Valuation assertion 13. Additions to equipment are sometimes understated. Which of the following accounts would be reviewed by the auditor to gain reasonable assurance that additions are not understated? a. Accounts payable b. Depreciation expense c. Gain on disposal of equipment d. Repair and maintenance expense 14. In violation of company policy, Coatsen Company erroneously capitalized the cost of painting its warehouse. An auditor would most likely detect this when a. Discussing capitalization polices with Coatsen’s controller. b. Examining maintenance expense accounts. c. Observing the warehouse had been painted. d. Examining construction work orders that support items capitalized during the year. 15. The most significant audit step in substantiating additions to the equipment account balance is a. Comparison to prior year’s acquisitions. b. Review of transactions near the end of the reporting period for proper period cutoff. c. Calculation of ratio of depreciation expense to gross office equipment cost. d. Examination of vendor’s invoices and receiving reports for current year’s acquisitions. ANSWERS: 1. B 2. B 3. A 4. D

5. D 6. D 7. A 8. C

9. A 10. A 11. B 12. D

13. D 14. D 15. D

VI – AUDIT OF INTANGIBLE AND OTHER ASSETS PROBLEM NO. 1 – Audit of recognition and measurement of intangible assets The accountant of the newly organized Zerg Corporation provided to you the details the company’s Intangible Assets account as follows: Date 01/02 01/15

Intangible Assets Description Amount Organization costs P 233,000 Goodwill 15,000 199

04/01 05/01 07/01 12/31

Patent License and trademark R & D laboratory Product development costs

490,000 300,000 1,310,000 1,750,000 4, 098, 000

Transactions during 2015 included the following: Jan 2

Paid legal fees of P 150,000 and stock certificate costs of P83,000 to complete organization of the corporation of the corporation.

15

Hired a clown to stand in front of the corporate office for 2 weeks and hand out pamphlets and candy to create goodwill for the new enterprise. Clown cost, P10,000; pamphlets and candy, P5,000.

Apr. 1

Patented a newly developed process with costs as follows: Legal fees to obtain patent

P429,000

Patent application licensing fees Total

490,000

and 61,000

It is estimated that in 5 years other companies will have developed improved processes, making the Zerg Corporation process obsolete. May 1

Acquired both a license to use a special type of container and a distinctive trademark to be printed on the container in exchange for 6, 000, no-par, ordinary shares of Zerg selling for P50 per share. The license is worth twice as much as the trademark, both of which may be used for 5 years.

Jul.1

Constructed a shed for P1,310,000 to house prototypes of experimental models to be developed in future research projects.

Dec. 31

Paid salaries for an engineer and chemist involved in research and development totaling P1,720,000 in 2015.

It is the company’s policy to take full year amortization in the year of acquisition. REQUIRED: 1. Prepare the necessary adjusting journal entries as of December 31, 2015. 2. Compute the carrying amount of the Intangible assets as of December 31, 2015. 3. Compute the total amount resulting from the foregoing transactions that should be expensed when incurred. 200

SOLUTION:

Requirement No. 1 1/2

Organization expenses

233,000

Intangible assets

1/15

Advertising expense

233,000

15,000

Intangible assets

4/1

Patents

15,000

490,000

Intangible assets

5/1

490,000

Licences (P300,000 x 2/3)

200,000

Trademark

100,000

Intangible assets

7/1

Building

300,000

1,310,000

Intangible assets Research 12/31 expense

and

1,310,000

development 1,750,000

Intangible assets

Amortization expense Patent (P490,000/5)

1,750,000

158,000 98,000 201

Licences (P200,000/5)

40,000

Trademark (P100,000/5)

20,000

Requirement No. 2 Cost Patent

490,000

Licences

200,000

Trademark

100,000

790,000

Less amortization Patent (P490,000/5)

98,000

Licences (P200,000/5)

40,000

Trademark (P100,000/5)

20,000


158,000 632,000

Requirement No. 3 Organization expenses (Jan. 2 transaction)

233,000

Advertising expense (Jan. 15 transaction)

15,000

R and D expense (Dec. 31 transaction)

1,750,000

Total

1,998,000

PROBLEM NO. 2 – Audit of patent You gathered the following information related to the Patents account of the Templar Cookie Corporation in connection with your audit of the company’s financial statements for the year 2015.

202

In 2014, Templar developed a new machine that reduces the time required to insert the fortunes into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Templar patented the machine. The following expenses were incurred in developing and patenting the machine: Research and development laboratory expenses Metal used in the construction of the machine Blueprints used to design the machine Legal expenses to obtain patent Wages paid for the employees’ work on the research, development, and building of the machine (60% of the time was spent in actually building the machine) Expense of drawing required by the patent office to be submitted with the patent application Fees paid to the government patent office to process application

P1,500,000 480,000 192,000 720,000 1,800,000

102,000 150,000

Duting 2015, Templar paid P225,000 in legal fees to successfully defend the patent against an infringement suit by Cookie Monster Corporation. It is the company’s policy to take full year amortization in the year of acquisition. REQUIRED: Based on the above and the result of your audit, determine the following: 1. Cost of machine 2. Amount that should charged to expense when incurred in connection with the development of the patented machine. 3. Carrying amount of patent as of December 31, 2015. SOLUTION:

Requirement No. 1 Metal used in the construction of the machine

480,000

Blueprints used to design the machine

192,000

Wages paid to the employees (P1,800,000 x 60%)

1,080,000

Cost of machine

1,752,000

203

Requirement No. 2 Research and development laboratory expenses

1,500,000

Wages paid to the employees (P1,800,000 x 40%)

720,000

R & D expense

2,220,000

Requirement No. 3 Legal expenses to obtain patent

720,000

Expense of drawing required by the patent office Fees paid to the government patent office

102,000

Cost of patent

972,000

Less amortization up to 12/31/12 (P972,000 x 2/20)

97,200

Carrying amount of patent, 12/31/12

874,800

150,000

Notes: Cost of defending the patent should be expensed Since the useful life is not given, the patent was amortized using the legal life of 20 years.

PROBLEM NO. 3 – Amortization and impairmentof intangible assets The Terran Company acquired several small companies at the end of 2014 and, based on the acquisitions, reported the following intangibles in its December 31, 2014 statement of financial position: Patent Copyright Tradename Computer software Goodwill

P200,000 400,000 350,000 100,000 900,000 204

The company’s accountant determines the patent has an expected life of 10 years and no expected residual value, and that it will generate approximately equal benefits each year. The company expects to use the copyright and tradename for the foreseeable future. The accountant knows that the computer software is used in the company’s 120 sales offices. The company has replaced the software in 60 offices in 2015, and expects to replace the software in 40 more offices in 2016 and the remainder in 2017. In December 31, 2015, there are no indications of impairment of patent and computer software. The following information relate to the other intangible assets: a.) Because of the rampant piracy, the copyright is expected to generate cash flows of just P8,000 per year. b.) The tradename is expected to generate cash flows of P15,000 per year. c.) The goodwill is associated with Terran’s SCV Manufacturing reporting unit. The cash flows expected to be generated by the SCV Manufacturing reporting unit is P200,000 per year for the next 24 years. The reporting unit has a carrying amount of P2,100,000. REQUIRED: Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for al litems is 5%) 1. Total amortization of intangible assets in 2015 2. Total loss on impairment in 2015 3. Carrying amount of goodwill on December 31, 2015 4. Carrying amount of other intangible assets on December 31, 2015

SOLUTION:

Requirement No. 1 Patent (P200,000/10)

20,000

Computer software [P100,000 x (60/120)]

50,000 205

Total amortization

70,000

*The useful lives of copyright and tradename are indefinite, so no amortization expense is recognized. ** Goodwill is not amortized.

Requirement No. 2 Impairment loss Copyright: Carrying amount

400,000

Recoverable amount (P8,000/0.05)

160,000

240,000

Tradename: Carrying amount

350,000


300,000

50,000

Goodwill: Carrying amount of Anne Manufacturing unit 3,000,000 Recoverable amount (P200,000 x 14.0939)

2,818,780 181,220

Total impairment loss

471,220

Requirement No. 3 Original amount of Goodwill

900,000

Less impairment loss

181,220

Carrying amount of Goodwill, 12/31/12

718,780

Question No. 4 - A Patent (P200,000 - P20,000)

180,000 206

Copyright (recoverable amount)

160,000

Tradename (recoverable amount)

300,000

Computer software (P100,000 - P50,000) 50,000 Carrying amount of other intangible assets, 12/31/12 690,000

PROBLEM NO. 4 – Amortization and impairment of intangible assets On December 31, 2014, Probe Corporation acquired the following three intangible assets: 

A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.



Goodwill for P1,500,000. The goodwill is associated with Probe’s Nexus Manufacturing reporting unit.



A customer list for P220,000. By contract, Probe has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2015, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets: a.) Because of a decline in the economy, the trademark is now expected to generate cash flows of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon. b.) The cash flows expected to be generated by the Nexus Manufacturing reporting unit is P250,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the Nexus Manufacturing reporting unitare as follows:

Identifiable assets Goodwill Liabilities

Book values P2,700,00 1,500,000 1,800,000

Fair values P3,000,000 ? 1,800,000

c.) The cash flows expected to be generated by the customer list are P120,000 in 2016 and P 80,000 in 2017. REQUIRED: 207

Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%): 1. Total amortixation for the year 2015 2. Impairment loss for the year 2015 3. Carrying amount of Trademark as of December 31, 2015 4. Carrying amount of Goodwill as of December 31, 2015 5. Carrying amount of Customer list as of December 31, 2015

SOLUTION:

Requirement No. 1 Trademark*

-

Goodwill*

-

Customer list (P220,000/3)

73,333

Total amortization

73,333

*The useful life is indefinite, so no amortization expense is recognized.

Requirement No. 2 Impairment loss Trademark: Carrying amount

300,000


166,667

133,333

Goodwill*: Carrying amount of Manufacturing unit 208

(P2,700,000 + P1,500,000 - P1,800,000) Recoverable amount (P250,000 x 12.0416)

2,400,000 3,010,400

-

Customer list Carrying amount (P220,000 - P73,333)

146,667

Recoverable amount: 2013: (P120,000 x 0.9434)

113,208

2014: (P80,000 x 0.8900)

71,200

184,408

Total impairment loss

133,333

*Since goodwill does not generate cash flows independently from other assets or group of assets, the recoverable amount of goodwill as an individual asset cannot be determined. Therefore, the recoverable amount is determined for the cash generating unit to which goodwill belongs.

Requirement No. 3 Cost

300,000

Less impairment loss

133,333

Carrying amount of Trademark, 12/31/12 166,667

Requirement No. 4 Since goodwill is not amortized and is not impaired as of 12/31/12, the carrying amount is P1,500,000.


220,000 209

Less amortization for 2012 73,333 Carrying amount of Customer List, 12/31/12 146,667

PROBLEM NO. 5 – Expenses related to intangible assets You noted the following items relative to the company’s Intangible assets in connection with your audit of the Five Corporation’s financial statements for the year 2015. Franchise On January 1, 2015, Five signed an agreement to operate as franchisee of Clear Copy Service, Inc. for an initial franchise of P680,000. Of this amount, P200,000 was paid when the agreement was signed and the balance was payable in four annual payments of P120,000 each, beginning January 1, 2016. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The implicit rate for loan of this type is 14%. The agreement also provides the 5% of the revenue from the franchise for 2015 was P8,000,000. Five estimates the useful life of the franchise to be ten years. Patent On July 1, 2015, Five purchased a patent from the inventor, who asked P1,100,000 for it. Five paid for the patent as follows: cash, P400,000; issuance of 10,000 shares of its ordinary shares, par P10 (market value, P20 per share); and a note payable due at the end of three years, face amount, P500,000, noninterest-bearing. The current interest rate for this type of financing is 12 percent. Five estimates the useful life of the patent to be ten years. Trademark Five purchased for P1,200,000 a trademark for a very successful soft drink it markets under the name POWER! The trademark was determined to have an indefinite life. A competitor recently introduced a product that is in direct competition with the POWER! Product, thus suggesting the need for an impairment test. Data gathered by the entity suggests that the useful life of the trademark is still indefinite, but the cash flows expected to be generated by the trademark have been reduced either to P40,000 per year (with a probability of 70%) or to P80,000 per year (with 30% probability). The appropriate risk-free interest rate is 5%. The appropriate risk-adjusted interest rate is 10%. REQUIRED: Based on the above and the result of your audit, determine the following: (Round off present value factors to 4 decimal places) 1. Carrying amount of franchise as of December 31, 2015. 210

2. Carrying amount of patent as of December 31, 2015 3. Total expenses related to the intangible assets in 2015

SOLUTION:

Requirement No. 1 Down payment 200,000 Add PV of installment payments (P120,000 x 2.9137) 349,644 Cost of franchise

549,644

2012 amortization (P549,644/10)

(54,964)

Carrying amount of franchise, 12/31/12

494,680

Requirement No. 2 Cash paid

400,000

Fair value of shares issued (10,000 x P20)

200,000

PV of note payable (P500,000 x 0.7118)

355,900

Cost of patent

955,900

2012 amortization (P955,900/10 x 6/12)

(47,795)

Carrying amount of patent, 12/31/12

908,105

Requirement No. 3 Franchise related expenses Amortization of franchise (see no. 1)

54,964

Periodic franchise fee (P8,000,000 x .05)

400,000

211

Interest expense (P349,644 x .14)

48,950

503,914

Patent related expenses: Amortization (see no. 2)

47,795

Interest expense (P355,900 x .12 x 6/12)

21,354

69,149

Trademark related expense (Impairment loss) Carrying amount

1,200,000

Recoverable amount: Outcome 1 (P40,000/.05 x .7)

560,000

Outcome 2 (P80,000/.05 x .3)

480,000 1,040,000

Total expenses - 2012

160,000 733,063

PROBLEM NO. 6 – Impairment of cash generating unit On November 15, 2015, Rodeo Corporation acquired Rapids, a company that operates a scenic railway along the coast of a popular tourist area. The summarized statement of financial position at fair values of Rapids on July 1, 2015, reflecting the terms of acquisition was. Goodwill Operating license Property-train stations and land Rail track and coaches Steam engines (2) Purchase consideration

P 200,000 1,200,000 300,000 300,000 1,000,000 P3,000,000

The operating license is for ten years. It has recently been renewed by the transport authority and is stated at the cost of its renewal. The carrying amounts of the property and rail track and coaches are based on their estimated replacement cost. The engines are valued at their net selling price. On December 1,2015, the boiler of one of the steam engines exploded, completely destroying the whole engine. Fortunately no one was injured, but the engine was beyond repair. Due to its age, a replacement could not be obtained. Because of the reduced passenger capacity, the estimated value in use of the business after the accident was assessed at P2million.

212

Passenger numbers after the accident were below the expectations even after allowing for the reduced capacity. A market research report concluded that the tourists were not using the railway because of the fear of a similar accident occurring to the remaining engine. In the light of this, the value in use of the business was re-assessed on December 31,2015 at P1.8 million. On this date Rodeo received an offer of P900,000 in respect of the transferable operating license. REQUIRED: Based on the above and the result of your audit, compute the carrying amount of the following as of December 31,2015 after recognizing the impairment loss, if any: 1. Goodwill 2. Operating license 3. Property-trains stations and land 4. Rail track and coaches 5. Steam engines

SOLUTION:

1

Assets

Carrying amount

CA after Impairment CA after Impairment impairment allocated impairment reallocation reallocation

Goodwill

200,000

(200,000)

2

-

-

-

Operating license 1,200,000 (333,333) Property-train stations and 3 land 300,000 (83,333)

866,667

33,333

900,000

216,667

(16,667)

200,000

4

Rail tracks and coaches

300,000

216,667

(16,667)

200,000

5

Steam engines (2)

1,000,000 (500,000)

(83,333)

500,000

3,000,000 (1,200,000) 1,800,000

-

500,000 1,800,000

Computation of impairment loss: 213

Carrying amount of the CGU

3,000,000

Recoverable amount (VIU)

1,800,000

Impairment loss

1,200,000

Allocation of impairment loss: Exploded steam engine

(500,000)

Goodwill

(200,000)

Balance pro rata (Operating license, Train stations and Rail tracks)

(500,000)

Re-allocation of impairment loss: Pro rata (Train stations and Rail tracks)

33,333

Alternative solution:

1

Assets

Carrying amount

Impairment CA after allocated impairment

Goodwill

200,000

(200,000)

2

-

Operating license 1,200,000 (300,000) Property-train stations and 3 land 300,000 (100,000)

900,000

4

Rail tracks and coaches

300,000

(100,000)

200,000

5

Steam engines (2)

1,000,000 (500,000)

500,000

200,000

3,000,000 (1,200,000) 1,800,000

Allocation of impairment loss: Exploded steam engine

500,000

Goodwill

200,000 214

Operating license (P1,200,000 - P900,000)

300,000

Balance pro rata (Train stations and Rail tracks)

200,000 1,200,000

PROBLEM NO. 7 - Impairment and reversal of impairment in a cash-generating unit One of the cash-generating units of Tweak Corporation is the associated with the manufacture of wine barrels. At 31 December 2014, Tweak Corporation believed, based on an analysis of economic indicators, that the assets of the unit were impaired. The carrying amounts of the assets of the unit at 31 December 2014 were: Buildings, net(Depreciated at P60,000 per annum) Machinery, net(Depreciated at P45,000 per annum) Goodwill Inventory Receivables, net(Allow. For doubtful debts of P5,000) Cash Total

P240,000 180,000 15,000 80,000 35,000 __20,000 P570,000

Tweak Corporation determined the value in use of the unit to be P535,000. The receivables were considered to be collectible, except those considered doubtful. During 2015, Tweak Corporation increased the depreciation charge on buildings to P65,000 per annum, and to P50,000 per annum for factory machinery. The inventory on hand at 31, December 2014 was sold by the end of 2015. At 31 December,2015, Tweak Corporation, due to return in the market to the use of traditional barrels for wines and an increase in wine production, assessed the recoverable amount of the cash-generating unit to be P20,000 greater than the carrying amount of the unit. REQUIRED: 1. Carrying amount of the assets at 31 December 2014 after allocating impairment loss. 2. Carrying amount of the assets at 31 December 2015 after the reversal of impairment loss.

SOLUTION: 215

Requirement No. 1 CA

500,000 I.L. Allocation*

CA after

Buildings

240,000

(9,600)

230,400

Factory machinery

180,000

(7,200)

172,800

Goodwill

15,000

(15,000)

Inventory

80,000

(3,200)

Receivables

35,000

35,000

Cash

20,000

20,000

570,000

(35,000)

76,800

535,000

* Charge the impairment loss first to goodwill. The balance (P20,000) will be allocated pro rata to the other assets in the unit except cash and receivables.

Requirement No. 2

Reversal of impairment loss on impaired assets: Inventory

- Sold already. No more reversal.

Goodwill

- Not allowed. - Allowed subject to limit. - Allowed subject to limit.

Buildings Machinery

Computation of limit on the extent of reversal: Buildings

Machinery

Total

CA, 12/31/12 - without impairment Buildings (P240,000 - P60,000)

180,000 216

Machinery (P180,000 - P45,000)

135,000

CA, 12/31/12 - with impairment Buildings (P230,400 - P65,000)

165,400

Machinery (P172,800 - P50,000)

122,800 14,600

12,200

26,800

Buildings

Machinery

Total

9,600

7,200

16,800

5,000

5,000

10,000

12,200

26,800

Alternative computation:

Allocated impairment loss Increase in depreciation

14,600

*Since the excess of RA over the CA did not exceed the limit, the reversal would be based on a pro rata allocation based on carrying amounts at time of reversal.

CA Buildings

165,400

Machinery

122,800 288,200

Allocation*

CA after

11,478

176,878

8,522 20,000

131,322 308,200

PROBLEM NO. 8 - Impairment, reversal of impairment and revaluation of patent Protoss Corporation acquired a patent right on July 1, 2012 for P250,000. The remaining legal life on the date of purchase is 15 years. However, due to rapidly changing technology, management estimates that the remaining useful life on July 1, 2012 is only 5 years.

217

At January 1, 2013, management is uncertain that the process can actually be made economically feasible, and decides to write down the patent to an estimated recoverable amount of P75,000. Amortization will be taken over 3 years from that point. On January 1, 2015, having perfected the related production process, the entity adopts the revaluation model to measure the patent. The patent now has a fair value of P300,000. Furthermore, the estimated remaining useful life is now believed to be 5 years. REQUIRED: : Based on the above and the result of your audit, determine the following: 1. Loss on impairment on January 1, 2013 2. Gain on impairment recovery in 2015 3. Revaluation surplus as of December 31, 2015 4. Carrying amount patent as of December 31, 2015

SOLUTION:

Requirement No. 1 Carrying amount, 1/1/10 (P250,000 x 4.5/5)

225,000

Recoverable amount

75,000

Impairment loss

150,000

Requirement No. 2 Fair value, 1/1/12

300,000


25,000

Revaluation increase

275,000

218

CA without impairment, 1/1/12 (P250,000 x 2.5/5) 125,000 Carrying amount, 1/1/12 (P75,000 x 1/3) Gain on impairment recovery

25,000 100,000

Requirement No. 3 Revaluation increase Gain on impairment recovery

275,000

Revaluation surplus, 1/1/12 Realized 2012 (P175,000/5) Revaluation surplus, 12/31/12

175,000

(100,000)

(35,000) 140,000

Requirement No. 4 Carrying amount (Fair value), 1/1/12

300,000

Amortization - 2012 (P300,000/5)

(60,000)


240,000

PROBLEM NO.9 - Audit of intangibles and other assets Among the account balances of Naga Corporation at December 31, 2014 are the following: Patent, net Installment contract receivable

P2,450,000 7,200,000

Relevant transactions and other information for 2015 were as follows: a.) The patent was purchased from Inventor Company for P3,150,000 on September 1, 2011. On that date, the remaining legal life was fifteen years, which was also determined to be the useful life. 219

b.) The installment contract receivable represents the balance of the consideration received from the sale of a factory building to Feeble Company on March 31,2013, for P12,000,000. Feeble ade a P3,000,000 down payment and signed a five year 13% note for the P9,000,000 balance. The first of equal annual principal payments of P1,800,000 was received on March 31,2014 together with interest to that date. The note is collateralized by the factory building with a fair value P10,000,000 at December 31, 2015. The 2015 payment was received on time. c.) On January 2, 2015, Naga purchase a trademark from Cool Corporation for P2,500,000. Naga considers the life of the trademark to be indefinite. d.) On May 1, 2015, Naga sold the patent to Simple Company in exchange for a P5,000,000 non-interest bearing note due on May 1, 2018. There was no established exchange price for the patent, and the note had no ready market. The prevailing rate of interest for a note this type at May 1, 2015 was 14%. The present value of 1 for three period at 14% is 0.675. The collection of the note receivable from Simple is reasonably assured. e.) On July 1, 2015, Naga paid P18,800,000 for 750,000 ordinary shares of Pure Corporation, which represented 25% investment in Pure. The fair value of all of Pure’s identifiable assets net of liabilities equals their carrying amount of P64,000,000. The market price of Pure’s ordinary share on December 31, 2015 was P26.00 per share. f.) Pure reported net income and paid dividends of Net income Six months ended 6/30/15 P5,760,000 Six months ended 12/31/15 7,040,000

Dividends per share None P2.00

Dividend was paid on November 30, 2015 QUESTIONS: Based on the above and the result of your audit, compute for the following: 1. Gain on sale of patent 2. Total interest income for 2015 3. Noncurrent portion of the installment contract receivable as of December 31, 2015 4. Carrying amount of the note receivable from sale of patent as of December 31, 2015 220

5. The carrying amount of the investment in Pure Corporation as of December 31, 2015

SOLUTION:

Requirement No. 1 Present of note received (P5,000,000 x 0.675)

3,375,000

Less carrying amount of patent, 5/1/12: Carrying amount, 1/1/11

2,450,000

Amortization up to 5/1/12 (P3,150,000/15x4/12)

(70,000)

Gain on sale of patent

2,380,000 995,000

Requirement No. 2 Note receivable from sale of patent (P3,375,000 x 14% x 8/12)

315,000

Installment contract: 1/1 to 3/31 (P7,200,000 x 13% x 3/12)

234,000

4/1 to 12/31 (P5,400,000 x 13% x 9/12)

526,500

Total interest income - 2012

760,500 1,075,500

Requirement No. 3 Installment contract receivable, 12/31/11

7,200,000

Less principal payment received, 3/31/12

1,800,000

Balance, 12/31/12

5,400,000

Less principal payment to be received, 3/31/13

1,800,000

Noncurrent portion

3,600,000 221

Requirement No. 4 CA - NR from sale of patent, 5/1/12 3,375,000 Amortization of discount, 5/1/ to 12/31 (P3,375,000 x 14% x 8/12) 315,000 CA - NR from sale of patent, 12/31/12

3,690,000

Requirement No. 5 Acquisition cost

18,800,000

Dividends received (750,000 x 2)

(1,500,000)

Share of profit (P7,040,000 x 25%)

1,760,000

CA - Investment in Pure Corp., 12/31/12

19,060,000

PROBLEM NO.10 – Audit of intangibles and other assets GDI., Inc, had the following noncurrent asset account balances at December 31, 2014 Patent P1,920,000 Accumulated amortization (240,0000) Deferred tax asset 360,000 Transactions during 2015 and other information relating to the noncurrent assets of GDL, Inc were as follows: a. The patent was purchased from Grey Company for P1,920,000 on January 1, 2013, at which date the remaining life was sixteen years. On January 1, 2015, GDL determined that the useful life of the patent was only eight years from the date of acquisition. b. On January 3, 2015, in connection with the purchase of a trademark from Cody Corporation, the partie entered into a noncompetiton agreement and a consulting contract. GDL paid Cody P8,000,000, of which three-quarters was for trademark and one-quarter was for Cody’s agreement not to compete for a five-year period in the line of business covered by the trademark. GDI considers the life of the trademark to be indefinite. Under

222

the consulting contract, GDL agreed to pay Cody P500,000 annually on January 3 for five years. The first payment was made on January 3,2015 c. Deferred tax asset is provided in recognition of temporary differences between accounting and tax reporting of rent income and warranty liability. For the year ended December 31, 2015, (1) rent collected in advance decreased by P200,000, and (2)product warranty liability increased by P150,000. GDL’s income tax rate for 2015 was 35% REQUIRED: Based on the above and the result of your audit, determine the following: 1. The total amortization of the intangible assets for the year 2015 2. The carrying amount of the intangible assets as of December 31,2015 3. The carrying amount of deferred tax asset as of December 31, 2015

SOLUTION:

Requirement No. 1 Patent amortization (P1,680,000/6)

280,000

Trademark

-

Noncompetition agreement (P2,000,000/5)

400,000

Total amortization

680,000

Requirement No. 2 Patent (P1,680,000 - P280,000)

1,400,000

Trademark (P8,000,000 x 3/4)

6,000,000

Noncompetition agreement (P2,000,000 - P400,000)

1,600,000

Carrying amount of intangible assets, 12/31/12

9,000,000

223

Requirement No. 3 Deferred tax asset, 12/31/11

360,000

Decrease in deferred tax asset: Decrease in unearned rent (P200,000 x 35%) (70,000) Increase in warranty liability (P150,000 x 35%) 52,500

(17,500)

Deferred tax asset, 12/31/12

342,500

PROBLEM NO. 11 - Theory Select the best answer for each of the following 1. In evaluating control risk and effectiveness for intangible assets, controls should be designed for numerous purposes. Which of the following is not a usual control for intangible assets? a. Ensure that decision are appropriately made as to when to capitalize or expense research and development expenditures. b. Develop amortization schedules that reflect the remaining useful life of patents or copyrights associated with the assets. c. Identify and account for intangible asset impairment. d. All of the above are usual controls for intangible assets. 2. The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristics of an asset is to a. Vouch the purchase by reference to underlying documentation. b. Inquire as to the status of patent applications. c. Evaluate the future revenue-producing capacity of the intangible asset. d. Analyze research and development expenditures to determine that only those expenditures possessing future economic benefit have been capitalized. 3. In auditing intangible assets, an auditor most likely review or recomputed amortization and determine whether the amortization period is reasonable in support of management’s financial statement assertion of a. Valuation 224

b. Completeness c. Existence or occurrence d. Rights and obligations 4. When an internally generated asset meets the recognition criteria the appropriate treatment for costs previously expensed is: a. Reinstatement b. No adjustment as these amounts may not be reinstated. c. Include in the cost of the development of the asset. d. Capitalize into the cost of the asset and adjust the opening balance of retained earnings. 5. Which statement is correct regarding initial recognition of research and development costs? a. All research costs should be charged to expense. b. All development costs should be capitalized. c. If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the development phase, the enterprise treats the expenditure for that project as if it were incurred in the development phase only. d. A research and development project acquired in a business combination is not recognized as an asset. 6. Assuming TLL Co. has capitalized all research and development costs associated with patent. You, CPA, who is examining this account, will probably a. Confer with management regarding transfer of the amount from the balance sheet to the income statement. b. Confirm that the patent is registered and on file with the intellectual property office. c. Confer with the management regarding a change in the tite of the account to “goodwill” d. Confer with management regarding ownership of the patent. 7. There is goodwill involved in the acquisition of a business if the purchase price paid is in excess of the normal or usual return for the industry as a whole but such goodwill is not recorder if it has not been purchased or paid for. a. False; True. b. True; False. c. False; False. d. True; True. 8. Which of the following comparisons would be the most appropriate audit test for the amount of recorded goodwill? a. The purchase price and the book value of assets purchased 225

b. The purchase price and the fair value of assets purchased. c. The figure for goodwill specified in the contract for purchase. d. Earnings in excess of 5% of net assets for the past five years. ANSWERS: 1. D 2. C 3. A 4. B

5. A 6. A 7. D 8. B

226

V11 – AUDIT OF LIABILITIES PROBLEM NO. 1 – Recognition and classification of liabilities The Comprehensive Entity’s chief accountant provided the following information: Notes payable: Arising from purchase of goods 304,000 Arising from 5 year-bank loans, on which marketable securities valued at P600,000 have been pledged as security, 500,000 P400,000 due on June 30, 2016; P100,000 due on Dec. 31, 2016 Arising from advances by officers, due June 30,2016 50,000 Reserve for general contingencies 400,000 Employees’ income tax withheld 20,000 Advances received from customers on purchase orders 64,000 Container’s deposit 50,000 Accounts payable arising from purchase of goods, 170,000 net of debit balances of P30,000 Accounts receivable, net of credit balances P40,000 360,000 Cash dividends payable 80,000 Share dividends payable 100,000 Dividends in arrears on preference shares 800,000 Convertible bonds, due January 31, 2107 1,000,000 First mortgage serial bonds, payable in semi-annual installments of P50,000, due April 1 and October 1 of each year 2,000,000 Overdraft with Allied Bank 90,000 Cash in bank balance with PNB 390,000 Estimated liability for damages 160,000 Estimated liability on meeting guarantee for service requirements on merchandise sold 120,000 Estimated liability for premiums 75,000 Deferred revenue 87,000 Accrued interest on bonds payable 360,000 Share warrants outstanding 120,000 Share options outstanding 210,000 227

Unused letters of credit 400,000 Notes receivable discounted

20,000

On March 1, 2016, the P400,000 note payable was replaced by an 18-month note for the same amount. The entity is considering similar action on the P100,000 note payable due on December 31, 2016. The 2015 financial statements were authorized for issue on March 31, 2016. On December 1, 2105, a former employee filed a lawsuit seeking P200,000 for unlawful dismissal. The entity’s attorney believe that the suit is without merit. No court date has been set. REQUIRED: Determine the following as of December 31, 2015. 1. Total current liabilities 2. Total noncurrent liabilities SOLUTION: Requirement No. 1 NP - Arising from purchase of goods NP - Arising from 5 year-bank loans, P400,000 due on June 30, 2013; P100,000 due on Dec. 31, 2013 NP - Arising from advances by officers, due June 30, 2013 Employees’ income tax withheld Advances received from customers on purchase orders Containers’ deposit Accounts payable arising from purchase of goods - gross (P170,000+P30,000) AR with credit balance Cash dividends payable First mortgage serial bonds - current portion (P50,000 x 2) Overdraft with Allied Bank

Trade and other 304,000 payables 500,000 50,000 20,000 64,000 50,000 200,000 40,000 80,000 100,000 90,000

Borrowings Trade and other payables Trade and other payables Trade and other payables or Separate item Trade and other payables Trade and other payables Trade and other payables Trade and other payables Borrowings separate item Borrowings

228

Estimated liability for damages Estimated liability on meeting guarantee for service requirements on merchandise sold

160,000 120,000

Estimated liability for premiums Deferred revenue Accrued interest on bonds payable Current liabilities

75,000

Provisions Provisions Provisions

Trade and other payables or Separate 87,000 item Trade and other 360,000 payables 2,300,000

Requirement No. 2 Convertible bonds, due January 31, 2014 First mortgage serial bonds - noncurrent portion (P2M - P.1M) Noncurrent liabilities

1,000,000 1,900,000

Separate item Separate item

2,900,000

Items not included: Reserve for general contingencies - Equity AP with debit balances - Trade and other receivables Accounts receivable gross - Trade and other receivables Share dividends payable - Equity Dividends in arrears on preference shares - Disclose only Cash in bank balance with PNB - Cash and cash equivalents Share warrants outstanding - Equity (share premium) Share options outstanding - Equity (share premium) Unused letters of credit - Contingent liability Notes receivable discounted - Contingent liability Treatment of additional information: Note refinancing - disclose Lawsuit filed by former employee - ignore

PROBLEM NO. 2 – Classification of liabilities 229

You were able to obtain the following from the accountant for Okey Corp. related to the company’s liabilities as of December 31, 2015 Accounts Payable P 650,000 Notes payable – trade 190,000 Notes payable – bank 800,000 Wages and Salaries payable 15,000 Interest payable 143,000 Mortgage notes payable – 10% 600,000 Mortgage notes payable - 12% 1,500,000 Bonds payable 2,000,000 The following additional information pertains to these liabilities. a. Bank notes-payable include two separate notes payable to Allied Bank. (1) A P300,000, 8% note issued March 1, 2013, payable on demand. Interest is payable every six months. (2) A 1-year, P500,000, 11 ½ % note issued January 2, 2105. On December 30, 2015, Okey negotiated a written agreement with Allied Bank to replace the note with a 2-year, P500,000, 10% note to be issued January 2, 2016. The interest was paid on December 31, 2015. b. The 10% mortgage note was issued October 1, 2012, with a term of 10 years. Terms of the note give the holder the right to demand immediate payment if the company fails to make a monthly interest payment within 10 days of the date the payment is due. As of December 31, 2015, Okey is three months behind in paying its required interest payment. c. The 12% mortgage note was issued May 1, 2009, with a term of 20 years. The current principal amount due is P1,500,000. Principal and interest payable annually on April 30. A payment of P220,000 is due April 30, 2016. The payment includes interest of P180,000. d. The bonds payable is 10-year, 8% bonds, issued June 30, 2006. Interest is payable semiannually every June 30 and December 31. REQUIRED: Determine the following as of December 31, 2015. 1. Total current liabilities 2. Total noncurrent liabilities SOLUTION: Requirement No. 1 Accounts payable Notes payable – trade

Trade and other 650,000 payables Trade and other 190,000 payables

230

Notes payable – bank (payable on demand) Wages and salaries payable Interest payable Mortgage notes payable – 10% (with breach of covenant) Mortgage notes payable – 12% (current portion) Bonds payable (due, 6/30/13) Current liabilities

300,000

Borrowings

Trade and other 15,000 payables Trade and other 143,000 payables 600,000

Borrowings

Borrowings - separate 40,000 item 2,000,000

Borrowings

3,938,000

Requirement No. 2 Notes payable – bank (refinanced) Mortgage notes payable – 12% (noncurrent portion) Noncurrent liabilities

500,000 1,460,000

Separate item Separate item

1,960,000

PROBLEM NO. 3 – Classification of liabilities Dallas Corporation is selling audio and video appliances. The company’s fiscal year ends on March 31. The following information relates to the obligation of the company as of March 31, 2015: Notes Payable Dallas has signed several notes with financial institutions. The maturities of these notes are given below. The total unpaid interest for all of these notes amounts to P340,000 on March 31, 2015. Due date Amount April 31, 2105 P 700,000 July 31, 2105 900,000 February 1, 2016 800,000 April 30, 2016 1,200,000 June 30, 2106 1,500,00 P 1,500,000 Estimated warranties Dallas has a one-year product warranty on some selected items. The estimated warranty liability on sales made during the 2013-2104 fiscal year and still outstanding as of March 31, 2014, 231

amounted to P252,000. The warranty costs on sales made from April 1, 2104, to March 31, 2015, are estimated at P630,000. The actual warranty costs incurred during 2014-2015 fiscal year are as follows: Warranty claims honored on 2013-2014 sales P 252,000 Warranty claims honored on 2014-2105 sales 285,000 Total P 537,000 Trade payables Accounts payable for supplies, goods, and services purchases on open account amount to P 560,000 as of March 31, 2015. Dividends On March 10, 2015, Dallas’ board of directors declared a cash dividend of P0.30 per ordinary share and a 10% ordinary share dividend. Both dividends were to be distributed on April 5, 2015 to ordinary shareholders on record at the close of business on March 31, 2015. As of March 31, 2015. As of March 31, 2015, Dallas has 5 million, P2 par value, ordinary shares issued and outstanding. Bonds Payable Dallas issued P5,000,000, 12% bonds, on October 1, 2009 at 96. The bonds will mature on October 1, 2019. Interest is paid semi-annually on October 1, 2019. Interest is paid semi-annually on October 1 and April 1. Dallas uses the straight line method to amortize bond discount. REQUIRED: Determine the following as of March 31, 2015. 1. Total current liabilities 2. Total noncurrent liabilities SOLUTION: Requirement No. 1 Notes payable - current (maturing up to 3/31/13)

2,400,000

Accrued interest - notes payable Estimated warranty payable (P252,000 + P630,000 P537,000)

340,000

Accounts payable Cash dividends payable (5 million shares x P0.30)

560,000

345,000

1,500,000

232

Accrued interest - bonds payable (P5,000,000 x .12 x 6/12)

300,000

Total current liabilities

5,445,000

Requirement No. 2 Bonds payable: Face value Unamortized bond discount (P200,000 x 4.5/10)

5,000,000 (90,000)

4,910,000

Notes payable - non current

2,700,000

Total non current liabilities

7,610,000

PROBLEM NO. 4 – Audit of liability for premiums and warranties Nuggets’ Music Emporium carries a wide variety of music promotion techniques – warranties and premiums – to attract customers. Musical instrument and sound equipment are sold in 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 recorded and sheet music. Customers receive a coupon for each peso spent on recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Nuggets pays P34 for each radio and estimates that 60% of the coupons given to customers will be redeemed. Nuggets’ total sales for 2015 were P7,200,000 – P5,400,000 from musical instrument and sound reproduction equipment and P1,800,000 from recorded and sheet music. Replacement parts and labor for warranty work totaled P164,000 during 2015. A total of 6,500 AM/FM radio used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2015. The accrual method is used by Nuggets to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2015, were as shown below: Inventory of Premium AM/FM radio P 39,950 Estimated Premium Claims Outstanding 44,800 233

Estimated Liability from Warranties

136,000

REQUIRED: Based on the above and the result of your audit, determine the amounts that will be shown on the 2015 financial statements for the following: 1. Warranty expense 2. Estimated liability from warranties 3. Premium expense 4. Inventory of AM/FM radio 5. Estimated liability for premiums SOLUTION: Requirement No. 1 Warranty expense (P5,400,000 x .02)

108,000

Requirement No. 2 Estimated liability from warranties, 1/1/12

136,000

Add warranty expense for 2012

108,000

Total

244,000

Less actual expenditures for 2012 Estimated liability from warranties, 12/31/12

164,000

Requirement No. 3 Premium expense [(1,800,000 x .6)/200 x P14]

80,000

75,600

Requirement No. 4 Inventory of premium, 1/1/12

39,950

Add premium purchases (6,500 x P34)

221,000

Total premiums available Less premiums issued (1,200,000/200 x P34)

260,950

Inventory of premiums, 12/31/12

56,950

204,000

234

Requirement No. 5 Estimated premium claims outstanding, 1/1/12

44,800

Add premium expense for 2012

75,600

Total Less premiums issued (1,200,000/200 x P14) Estimated premium claims outstanding, 12/31/12

120,400 84,000 36,400

PROBLEM NO. 5 – Audit of provisions and contingencies Relevant extracts from Magic Corporation’s financial statements at 31 December 2014 are as follows: Current Liabilities Provisions for warranties P405,000 Non-current liabilities Provisions for warranties 270,00 Note 10 – Contingent liabilities Magic is engaged in litigation with various parties in relation to allergic reactions to traces of peanuts alleged to have been found in packets of fruit gums. Magic strenuously denies the allegations and, as at the date of authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any costs or damages that may be payable to the plaintiffs. The provision for warranties at 31 December 2014 was calculated using the following assumptions: There was no balance carried forward from the prior year. Estimated costs of repairs – products with minor defects P1,500,000 Estimated cost of repairs – products with major defects P9,000,000 Expected % of products sold during 2014 having no defects in 2105 80% Expected % of products sold during 2014 having minor defects in 2105 Expected % of products sold during 2014 having major defects in 2105

15% 5% 235

Expected timing of settlement of warranty payments -those with minor defects 2015 Expected timing of settlement of warranty payments -those with major defects

All

in

40% in 2015, 60% in 2016

During the year ended 31 December 2015 the following occurred: 1. In relation to the warranty provision of P675,000 at 31 December 2014, P300,000 was paid out of provision. Of the amount paid, P225,000 was for products with minor defects and P75,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2015. 2. In calculating its warranty provision for 31 December 2015, Magic made the following adjustments to the assumptions used for the prior year: Estimated costs of repairs – products with minor defects change Estimated cost of repairs – products with major defects P7,500,000 Expected % of products sold during 2014 having no defects in 2105 85% Expected % of products sold during 2014 having minor defects in 2105 Expected % of products sold during 2014 having major defects in 2105 Expected timing of settlement of warranty payments -those with minor defects 2016 Expected timing of settlement of warranty payments -those with major defects 2017

No

35% 2% All

in

20% in 2016, 80% in

3. Magic determined that part of its plant and equipment needed an overhaul – the conveyer belt on one of its machines would need to be replaced in about December 2016 at an estimated cost of P500, 000. The carrying amount of the conveyer belt at 31 December 2104 was P280,000. Its original cost was P400,000. 4. Magic was unsuccessful in its defense of the peanut allergy case and was ordered to pay P2,000,000 to the plaintiffs. As at 31 December 2015 Magic had paid P1,500,000.

236

5. Magic commenced litigation against one of its advisers for negligent advise given on the original installation of the conveyers belt referred to in (4) above. In October 2015 the court found in favor of Magic. The hearing for damages had not been scheduled as at the date of financial statements for 2015 were authorized for issue. Magic estimated that it would receive but P500,000. 6. Magic signed an agreement with Choko Bank to the effect that Magic would generate a loan made by Choko Bank to Magic’s subsidiary, UN Ltd. UN‘s Ltd. loan with Choko Bank was P300,000,000 as at 31 December. UN Ltd. was in strong financial position at 31 December 2015. REQUIRED: Determine the following as of and for the year ended December 31, 2015. 1. Net amount to be recognized in profit or loss 2. Total current provisions 3. Total noncurrent provisions SOLUTION: Requirement No. 1 No defects - 85% Minor defects (P1,500,000 x .13) Major defects (P5,000,000 x .02) Increase in provision in 2012 Unused amounts reversed in 2012 (P180,000 - P75,000) Warranty expense in 2012 Requirement No. 2 Balance, 1/1/12 (P405,000+270,000)

195,000 150,000 345,000 (105,000) 240,000

675,000

Amounts used in 2012 Increase in provision in 2012

(300,000) 345,000

Unused amounts reversed in 2012 Balance, 12/31/12

(105,000) 615,000

Alternative computation: New provision Balance of provision from 2010 payable in 2012 Balance, 12/31/12 Current portion of Provision for warranties Balance of provision from 2011 payable in 2013 2012 provision: Minor defects

345,000 270,000 615,000

270,000 195,000 237

Major defects (P100,000 x .2)

30,000 495,000

Requirement No. 3 Provision for warranties, 12/31/12 Less current provision for warranties Noncurrrent provision for warranties

615,000 495,000 120,000

Notes: 1. The expected overhaul is not a provision, as the entity has no present obligation to conduct the overhaul. Rather, it is evidence that the conveyer belt’s useful life has been shortened. 2 . The unpaid amount of P700,000 owing as a result of the peanut allergy case should be included as part of trade and other payables as there is no uncertainty regarding timing or amount of settlement and hence it is not a provision. 3. The entity's guarantee of the loan made by Choko Bank to UN Ltd would be disclosed as a contingent liability rather than recorded as a provision because UN Ltd was in a strong financial position at 31 December 2011 and therefore whilst the entity has a present obligation under the guarantee, it is not probable that an outflow of economic benefits will be required to settle the obligation.

PROBLEM NO. 6 – Audit of bonds payable In your initial audit of Bulls Co., you find the following ledger account balance. 12%, 25-year Bonds Payable, 2011 issue 1/1/2011 CR P 1,600,000

1/1/2015

CD

Treasury Bonds P 216,000

Bond Premium 1/1/2011

CR

P 80,000

238

1/1/2015

CD

Interest Expense P 96,000

7/1/105

CD

P 96,000

The bonds were redeemed for permanent cancellation on October 1, 2015 at 105 plus accrued interest. REQUIRED: 1. Compute for the adjusted balances of the following (Use straight-line amortization method) a. Adjusted balance of bonds payable as of December 31, 2015 b. Unamortized bond premium on December 31, 2015 c. The total bond interest expense for the year 2105 d. The gain or loss on bond redemption 2. Adjusting entries as of December 31, 2015 SOLUTION: Requirement No. 1.a Total bonds issued Face value of bonds retired {P216,000/[1.05 + (.12 x 3/12)]} Adjusted balance of bonds payable, 12/31/12 Requirement No. 1.b Unamortized bond premium, 12/31/12 (P80,000 x 14/16 x 20/25)

1,600,000 200,000 1,400,000

56,000

Requirement No. 1.c Nominal interest Remaining bonds (P1,400,000 x .12)

168,000

Bonds retired (P200,000 x .12 x 9/12)

18,000

Total Less premium amortization Bonds retired (P80,000/25 x 2/16 x 9/12)

186,000

300

239

Remaining bonds (P80,000/25 x 14/16)

2,800

Bond interest expense

3,100 182,900

Requirement No. 1.d Carrying amount of bonds retired Face value Unamortized bond premium (P80,000 x 2/16 x 20.25/25)

200,000

8,100

Redemption price (P200,000 x 1.05) Gain (Loss) on bond redemption

208,100 210,000 (1,900)

Requirement No. 2 AJE 1 - To correct recording of bond retirement (see requirement 1.d) Bonds payable

200,000

Premium on bonds payable

8,100

Interest expense (P200,000 x .12 x 3/12)

6,000

Loss on bond retirement

1,900

Treasury bonds

216,000

AJE 2 - To correct non-recording of premium amortization Premium on bonds payable

15,900

Retained earnings (P80,000 x 4/25)

12,800

Interest expense (see requirement 1.c)

3,100

AJE 3 - To correct entry made on 1/1/12 on Interest expense Retained earnings

96,000

240

Interest expense

96,000

AJE 4 - To correct non-accrual of interest expense at 12/31/12 Interest expense (P1.4M x .12 x 6/12) Interest payable

84,000 84,000

PROBLEM NO. 7 – Audit of bonds payable On January 1, 2014, Thunder Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds dated January 1 at an effective annual interest rate(yield) of 9%. Interest is payable each December 31. Thunder uses the effective interest method of amortization. On December 31, 2015, the 2,000 bonds were extinguished early through acquisition in the open market by Thunder for P 1,980,000 plus accrued interest. On July 1, 2014, thunder issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2015, an investor in Thunder’s convertible bonds tendered 1,500 bonds for conversion into 15,000 ordinary shares of Thunder, which had a fair value of P105 and a par value of P1 at the date of conversion. REQUIRED: Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places) 1. Issue price of the 2,000 5 year bonds 2. Carrying amount of the 2,000 5 year bonds at December 31, 2014 3. Gain on early retirement of bonds on December 31, 2015 4. Equity component of the 6-year bonds 5. Increase share premium as a result of the conversion of the 1,500 6-year SOLUTION: Requirement No. 1 PV of principal (P2,000,000 x 0.6499)

1,299,800

PV of interest [(P2,000,000 x .11) x 3.8897]

855,734

Issue price

2,155,534 241

Requirement No. 2 Carrying amount, 1/1/11 (see no. 1) Less premium amortization for 2011:

2,155,534

Nominal interest (P2,000,000 x .11)

220,000

Effective interest (P2,155,534 x .09)

193,998


26,002 2,129,532

Alternative computation: PV of principal (P2,000,000 x 0.7084)

1,416,800


712,734


2,129,534

Requirement No. 3 Retirement price Carrying amount, 12/31/12:

1,980,000

Carrying amount, 12/31/11 (see no. 1) Less premium amortization for 2012:

2,129,532

Nominal interest (P2,000,000 x .11)

220,000

Effective interest (P2,129,532 x .09)

191,658

28,342

Gain early retirement of bonds

2,101,190 121,190

Alternative computation: PV of principal (P2,000,000 x 0.7722)

1,544,400


556,886


2,101,286

Retirement price

1,980,000

Gain early retirement of bonds

121,286 242

Requirement No. 4 Total proceeds Less liability component: Present value of the principal (P5,000,000 x 0.4970) Present value of the interest [(P5,000,000 x .05 x 8.3838)

5,000,000

2,485,000 2,095,950

Equity component

4,580,950 419,050

Requirement No. 5 PV of principal (P1,500,000 x 0.5584)

837,600


552,008


1,389,608

Par value of shares issued (15,000 shares x P1)

15,000

Net increase in share premium

1,374,608

PROBLEM NO. 8 – Convertible bonds payable On January 1, 2011, Calauag Corporation issued a 10 per cent convertible bonds with face value of P 4,000,000 maturing on December 31, 2019. Each P1,000 bond is convertible into ordinary shares of Calauag at a conversion price of P25 per share. Interest is payable half-yearly in cash. At the date of issue, Calauag could have issued nonconvertible debt with a ten-year term bearing a coupon interest rate of 11 per cent. On January 1, 2015, the convertible bond has a fair value of P 4,400,000. Calauag makes a tender offer to the holders to repurchase the bonds for P4,400,000. The holders of the P2,000,000 bonds accepted the offer. At the date of repurchase, Calauag could have issued non-convertible debt with a five-year term being a coupon interest rate of 8 per cent. On December 31, 2015, to induce the holders of the remaining bonds to convert the bonds promptly, Calauag reduces the conversion price to P20 if the bonds are converted before March 1, 2016 (ie within 2 months). The market price of Calauag’s ordinary shares on the date the terms are amended is P32 per share. REQUIRED: Based on the above and the result of your audit, determine the following: 243

(Round off present value factors to four decimal places) 1. The proceeds from issuance of convertible bonds to be allocated to the equity component 2. Carrying amountof the bonds at December 31, 2014 3. Amount to be recognized in profit or loss as a result of the repurchase of the bonds on January 1, 2015 4. Decrease in equity as a result of the repurchase of the bonds on January 1, 2015 5. Amount to be recognized in profit or loss as a result of the amendment of the terms on December 31, 2015 is SOLUTION: Requirement No. 1 Issue price Less liability component:

4,000,000

PV of principal (P4,000,000 x 0.3427)

1,370,800


2,390,080 3,760,880

Equity component

239,120

Requirement No. 2 PV of principal (P4,000,000 x 0.5854) PV of interest [(P4,000,000 x .05) x 7.5376] Carrying amount, 12/31/11

2,341,600 1,507,520 3,849,120

Requirement No. 3 Carrying amount of bonds retired (P3,849,120 x 1/2)

1,924,560

PV of principal (P2,000,000 x 0.6756) PV of interest [(P2,000,000 x .05) x 8.1109] Retirement price - liability (Fair value of bonds retired, 1/1/12) Loss on retirement of bonds - profir or loss

1,351,200 811,090 2,162,290 (237,730)

244

Requirement No. 4 Retirement price (P4,400,000 x 1/2)

2,200,000

Less payment applied to liability component (see no. 3) Retirement price - equity (residual amount)

2,162,290 37,710

Requirement No. 5 Ordinary shares to issued - amended terms (P2,000,000/P20) Ordinary shares to issued - original terms (P2,000,000/P25)

100,000

Incremental ordinary shares to be issued

20,000

Fair value of incremental shares to be issued (20,000 x P32)

640,000

80,000

PROBLEM NO. 9 - Audit of Leases

Ebony Ltd is asset rich but cash poor. In an attempt to alleviate its liquidity problems, it entered into an agreement on July 1, 2014 to sell its processing plant to Ivory Ltd P467,100. At the date of sale, the plant had a carrying amount of P400,000 and a future useful life of five years. Ivory Ltd immediately leased the processing plant back to Ebony Ltd. The terms of the lease agreement were:

• • • • • •

Lease term: 3 years Economic life of plant: 5 years Annual rental payment, in arrears (commencing 30/6/15): P165,000 Residual value of plant at end of lease term: P90,000 Residual value guaranteed by Ebony Ltd: P60,000 Interest rate implicit in the lease: ?

The lease is cancellable, but only with the permission of the lessor. At the end of the lease term, the plant is to be returned to Ivory Ltd. In setting up the lease agreement, Ivory Ltd incurred P9,414 in legal fees and stamp duty costs. The annual rental payment includes P15,000 to reimburse the lessor for maintenance costs incurred on behalf of the lessee.

245

REQUIRED: Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places) 1. 2. 3. 4.

Interest rate implicit in the lease Interest income to be recognized by the lessor for the fiscal period ended June 30, 2015 Carrying amount of the finance lease receivable to be reported by the lessor at June 30, 2015 Total lease-related expenses to be recognized by the lessee during the fiscal period ended June 30, 2015 5. Amount to be reported by the lessee under current liabilities as liability under finance lease as of June 30, 2015 SOLUTION:

Requirement No. 1 Computation of net investment in the lease:

Fair value of asset

467,100

Initial direct cost (IDC)

9,414

476,514

Using 6%:

Cash flow

PVF at 6%

PV

PV of rental payments

150,000

2.6730 400,950

PV of GRV

60,000

0.8396 50,376

PV of MLP

PV of URV

451,326

30,000

0.8396 25,188

246

476,514

The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the URV to be equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of the lessor.

Requirement Nos. 2&3 Refer to the amortization schedule below.

Amortization schedule (Lessor)

Date

Payment

Interest (10%)

Principal

7/1/11

C.A.

476,514

6/30/12

150,000

28,591

121,409

355,105

6/30/13

150,000

21,306

128,694

226,411

6/30/14

240,000

13,589

226,411

-

Requirement No. 4

Interest expense (see amortization schedule below)

27,080 247

Executory costs

15,000

Depreciation [(P451,326 - P60,000) / 3]

130,442

Lease related expenses

172,522

Requirement No. 5 Amortization schedule (Lessee)

Date

Payment

Interest (10%)

Principal

7/1/11

C.A.

451,326

6/30/12

150,000

27,080

122,920

328,406

6/30/13

150,000

19,704

130,296

198,110

6/30/14

210,000

11,890

198,110

-

PROBLEM NO. 10 - Audit of Leases 248

Jackie Corporation has entered into an agreement to lease a machine to a Lessee Corporation. The lease agreement details are as follows:

• • • • • • •

Length of lease: 5 years Commencement date: January 1, 2015 Annual lease payment payable December 31 each year commencing December 31, 2015: P8000 Fair value of the machine at January 1, 2015: P34,797 Estimated economic life of the machine: 8 years Estimated economic residual value of the asset at the end of its economic life: P2000 Residual value at the end of the lease term, of which 50% is guaranteed by Lessee Corporation: P7,200 • Interest rate implicit in the lease: ? The lease is cancellable, but a penalty equal to 50% of the total lease payments is payable on cancellation. Lessee Corporation does not intend to buy the machine at the end of the lease term, Jackie Corporation incurred P1,000 to negotiate and execute the lease agreement. Jackie Corporation purchased the machine for P34,797 just before the inception of the lease.

REQUIRED: Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places) 1. The interest rate implicit in the lease is 2. Ignoring income taxes, if Jackie Corporation erroneously accounted for the transaction as an operating lease, its profit for 2015 will be overstated by 3. The amount to be reported by Lessee Corporation under current liabilities as liability under finance lease as of December 31, 2015 4. The depreciation7 amount to be recognized by Lessee Corporation for the year ended December 31, 2015 5. Ignoring income taxes, if Lessee Corporation erroneously accounted for the transaction as an operating lease, its profit for 2015 will be overstated by SOLUTION:

249

Requirement No. 1 Computation of net investment in the lease:

Fair value of asset

34,797

Initial direct cost (IDC)

1,000

35,797

Using 9%:

Cash flow

PVF at 9%

PV


8,000

3.8897 31,118

PV of GRV

3,600

0.6499 2,340

PV of MLP

PV of URV

33,457

3,600

0.6499 2,340

35,797

The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the aggregate present value of (a) the minimum lease payments and (b) the URV to be equal to the sum of (i) the FV of the leased asset and (ii) any initial direct costs of the lessor.

Requirement No. 2

250

Profit under operating lease (As recorded)

Rent income

8,000

Depreciation [(P34,797 - P2,000)/8]

(4,100)

IDC amortization (P1,000/5)

(200)

3,700 Profit under finance lease (Should be)

Interest income (P35,797 x .09)

3,222

Over (Under)

478

Requirement No. 3 Computation of present value of MLP:


8,000

3.8897 31,118

PV of GRV

3,600

0.6499 2,340

PV of MLP

33,457

The PV of the MLP is 96% (P33,457/P35,797) of the fair value of the leased asset.

Amortization schedule (Lessee) Date

Payment

Interest (9%)

Principal

C.A.

251

1/1/12

33,457

12/31/12

8,000

3,011 4,989

28,468

12/31/13

8,000

2,562 5,438

23,030

12/31/13

8,000

2,073 5,927

17,103

12/31/14

8,000

1,539 6,461

10,642

12/31/15

11,600

958 10,642

-


Guaranteed residual value

33,457

(3,600)

Depreciable amount / Lease term Annual depreciation

29,857 5 5,971

Requirement No. 5 Expenses under operating lease (As recorded)

Rent expense

8,000

Expenses under finance lease (Should be) Interest expense

3,011

252

Depreciation

5,971 8,982

Over (Under)

(982)

Therefore, profit is overstated.

PROBLEM NO. 11 - Audit of Income Taxes

Roy Ltd has determined its accounting profit before tax for the year ended June 30, 2015 to be P256,700. Included in this profit are the items of income and expense shown below.

• Royalty revenue (exempt from taxation): P8,000 • Proceeds on sale of building: P75,000 • Carrying amount of building sold: P70,000 • Entertainment expense (non deductible): P1,700 • Depreciation expense - Buildings: P7,600 • Depreciation expense - Plant: P22,500 • Doubtful debts expense: P4,100 • Annual leave expense: P46,000 • Insurance expense: P4,200 • Development expense: P15,000 The company's draft balance sheet at June 30, 2015 showed the following assets and liabilities:

Assets Cash

P2,500

Accounts receivable

21,500

Allowance for doubtful debts

(4,100)

Inventory Prepaid insurance

P17,400 31,600 4,500 253

Land

75,000

Buildings

170,000


(59,500) 110,500

Plant

150,000

Accumulated Depreciation

(67,500) 82,500

Deferred Tax Asset, 9opening balance)

9,600 333,600

Liabilities Accounts Payable

25,000

Provision for annual leave

10,000

Deferred tax liability (opening balance)

27,270

Loan

140,000 202,270

Additional Information a. Quarterly income tax installments paid during the year were: October 28, 2014 P18,000 January 28, 2015

17,500

April 28, 2015

18,000

with the final balance due on July 28, 2015

b. The tax depreciation rate for plant (which cost P150,000 three years ago) is 20%. Depreciation on buildings is not deductible for taxation purposes. c. The building sold during the year had cost P100,000 when acquired six years ago. The company depreciates buildings at 5% p.a., straight-line. 254

d. During the year, the following cash amounts were paid: Annual leave P52,000 Insurance

3,700

e. Bad debts of P3,500 were written off against the allowance for doubtful debts during the year. f. The P15,000 spent (and expensed) on development during the year is not deductible for tax purposes until June 30, 2016. g. Roy Lt has tax losses amounting to P12,500 carried forward from prior years. h. The company tax rate is 30%. REQUIRED: Compute for the following as of and for the fiscal period ended June 30, 2015: 1. 2. 3. 4. 5.

Current tax expense Current tax payable Deferred tax liability Deferred tax asset Deferred tax expense (benefit)

SOLUTION:

Requirement No. 1 Accounting profit

256,700

Reversal of accounting items: Royalty revenue (exempt from taxation)

(8,000)

Gain on sale of building (P75,000 - P70,000)*

(5,000)

Entertainment expense (non-deductible)

1,700

Depreciation expense - buildings

7,600

Depreciation expense - plant Doubtful debts expense Annual leave expense

22,500 4,100

46,000 255

Insurance expense Development expense

4,200 15,000 344,800

Add (deduct) tax amounts: Depreciation expense - plant (P150,000 x .2) Bad debts written off (item e) Annual leave paid (item d) Insurance paid (item d) Tax losses from prior years (item g) Taxable profit Tax rate Current tax expense

(30,000) (3,500) (52,000) (3,700) (12,500) 243,100 30% 72,930

* Non assessable since depreciation is not deductible for tax purposes

Requirement No. 2 Current tax expense (see no. 1)

72,930

Less quarterly income tax installments paid

53,500

Current tax payable

19,430

Requirement No. 3 Total taxable temporary differences (see analysis below) Tax rate Deferred tax liability, 6/30/12

27,000 30% 8,100

256

Requirement No. 4 Total deductible temporary differences (see analysis below)

29,100

Tax rate

30%

Deferred tax asset, 6/30/12

8,730

Comparison of carrying amount of asssets/liabilities and tax base

Accounts receivable Prepaid insurance Buildings

Plant Development expenditure Annual leave

Carrying amount

Tax base

Differenc e

17,400

21,500

4,100

Deductible

4,500

Taxable

4,500

-

110,500

110,500

82,500

60,000

10,000

-

Permanent

22,500

Taxable

15,000

Deductible

10,000

Deductible

Beginnin g

Inc(Dec)

Effect on tax expense

27,270

(19,170)

Credit

15,000 -

*

Remarks

* P150,000 x 2/5

Requirement No. 5

Ending Deferred tax liability

8,100

257

Deferred tax asset

8,730

9,600

(870)

Debit

Journal entry: Deferred tax liability

19,170

Deferred tax asset Income tax expense

870 18,300

PROBLEM NO. 12 – Audit of Income Taxes

The accounting profit before tax for the year ended December 31, 2015 for Belen Ltd amounted to P18,500 and included:

Depreciation – motor vehicle (25%)

P4,500

Depreciation – equipment (20%)

20,000

Rent revenue

16,000

Royalty revenue (exempt from tax)

5,000

Doubtful debts expense

2,300


1,500

Proceeds on sale of equipment

19,000

Carrying amount of equipment sold

18,000

Annual leave expense

5,000

The draft statement of financial position at December 31, 2015 contained the following assets and liabilities:

258

2015

2016

Assets Cash

P11,500

P9,500

Receivables

12,000

14,000

Allowance for doubtful debts

(3,000)

(2,500)

Inventory

19,000

21,500

2,800

2,400

18,000

18,000

Acc. Dep – motor vehicle

(15,750)

(11,250)

Equipment

100,000

130,000

Acc. Dep – equipment

(60,000)

(52,000)

Rent receivable Motor vehicle

Deferred tax asset

?

5,550 P135,200

Liabilities Accounts payable Provision for annual leave

15,655

21,500

4,500

6,000

Current tax liability

?

7,600

Deferred tax liability

?

2,745 37,845

Additional information  The company can claim a deduction of P15,000 (15%) for depreciation on equipment, but the motor vehicle is fully depreciated for tax purposes.  The equipment sold during the year had been purchased for P30,000 two years before the date of sale.  The company tax rate is 30%. 259

REQUIRED: Compute for the following as of and for the year ended December 31, 2015:

1. 2. 3. 4.

Current tax expense Deferred tax liability Deferred tax asset Deferred tax expense (benefit)

SOLUTION:

Requirement No. 1 Accounting profit

18,500

Reversal of accounting items: Depreciation - motor vehicle Depreciation - equipment Rent revenue Royalty revenue (exempt from taxation)

4,500 20,000 (16,000) (5,000)

Doubtful debts expense

2,300


1,500

Gain on sale of equip. (P19,000 - P18,000) Annual leave expense

(1,000) 5,000 29,800

Add (deduct) tax amounts: Depreciation - motor vehicle Depreciation - equipment

(15,000)

260

Rent revenue collected (P16,000 + P2,400 - P2,800)

15,600

Royalty revenue (exempt from taxation)

-

Bad debts written off (P2,500 + P2,300 - P3,000)

(1,800)


-

Loss on sale of equip. - tax [P19,000 - (P30,000 x .7)]

(2,000)

Annual leave paid (P5,000 + P6,000 - P4,500)

(6,500)

Taxable profit

20,100

Tax rate

30%

Current tax expense

6,030

Requirement Nos. 2-4 Comparison of carrying amount of asssets/liabilities and tax base

Receivables

Carrying amount

Tax base

12,000

15,000

Difference

a

Remarks

3,000

Deductible

Rent receivable

2,800

-

2,800

Taxable

Motor vehicle

2,250

-

2,250

Taxable

Equipment Provision for annual leave

40,000 4,500

55,000 -

b

15,000

Deductible

4,500

Deductible

a - [P100000-(P100000*0.15*3)] b - (P12,000 + P3,000)

Requirement No. 2 261

Deferred tax liability, 12/31/12 (P5,050 x .3)

1,515

Requirement No. 3

6,750

Deferred tax asset, 12/31/12 (P22,500 x .3)

Requirement No. 4

Ending

Beginning

Inc(Dec)

Effect on tax expense


1,515

2,745

(1,230)

Credit

Deferred tax asset

6,750

5,550

1,200

Credit

Journal entry: Deferred tax liability

1,230

Deferred tax asset

1,200

Income tax expense

2,430

PROBLEM NO. 13 – Audit of long term liabilities

In connection with your audit of Celtics Corporation’s financial statements for the year 2015, you noted the following liability account balances as of December 31, 2014: Note payable, bank

P5,600,000

Liability under finance lease

430,000


700,000

262

Transactions during 2015 and other information relating to Celtics’ liabilities were as follows:

a. The principal amount of the note payable is P5,600,000 and bears interest at 12%. The note is dated April 1, 2014 and is payable in four equal annual installments of P1,400,000 beginning April 1, 2015. The first principal and interest payment was made on April 1, 2015. b. The finance lease is for a ten-year period beginning December 31, 2012. Equal annual payments of P100,000 are due on December 31 of each year, and the 14% interest rate implicit in the lease known by Celtics. The present value at December 31, 2014 of the seven remaining lease payments (due December 31, 2015 through December 31, 2021) discounted at 14% was P430,000. c. Deferred income taxes are provided in recognition of temporary differences between financial and income tax reporting. For the year ended December 31, 2015, depreciation per tax return exceeded book depreciation by P312,500. Celtics; effective income tax rate before 2015 is 32%. Effective January 1, 2015, the tax rate was changed from 325 to 35%. d. On July 1, 2015, Celtics issued for P1,774,000, P2,000,000 face amount of its 10%, P1,000 bonds. The bonds were issued to yield 12%. The bonds are dated July 1, 2015 and will mature on July 1, 2022. Interest is payable annually on July 1. REQUIRED: Based on the above and the result of your audit, determine the following: 1. 2. 3. 4.

Total noncurrent liabilities as of December 31, 2015 Current portion of long-term liabilities as of December 31, 2015 Total interest expense for the year 2015 Accrued interest payable as of December 31, 2015

SOLUTION:

Requirement No. 1 15% Note payable, bank

Balance, 12/31/12 (P5,600,000 - P1,400,000)

4,200,000

Less installment due on April 1, 2013

1,400,000 2,800,000

Liability under finance lease 263

Balance, 12/31/11

430,000

Less principal payment on 12/31/12:

Total payment

100,000

Applicable to interest (P430,000 x .14)

60,200

Balance, 12/31/12 (see no. 1)

39,800

390,200

Less principal payment due on 12/31/13:

Total payment

100,000

Applicable to interest (P390,200 x .14)

54,628

45,372

344,828

10% bonds payable


1,774,000

Add discount amortization:

Effective interest (1,774,000 x .12 x 6/12)

106,440

Nominal interest (2,000,000 x .10 x 6/12)

100,000

6,440

1,780,440

Deferred income tax liability

Balance, 12/31/11 Effect of change in tax rate [(P700,000/.32 x .35) P700,000]

Provision for deferred income tax (P312,500 x .35)

700,000

65,625

109,375

875,000

264

Total noncurrent liabilities, 12/31/12

5,800,268

Requirement No. 2

Note payable, bank - due 4/1/13

1,400,000

Finance lease liability - principal payment due on 12/31/13 (see no. 2)

45,372

Current portion of long-term liabilities, 12/31/12

1,445,372

Requirement No. 3 Note payable, bank

1/1 to 3/31 (P5,600,000 x .12 x 3/12)

168,000

4/1 to 12/31 (P4,200,000 x .12 x 9/12)

378,000

546,000

Liability under finance lease (see no. 1)

60,200

Bonds payable (1,774,000 x .12 x 6/12)

106,440

Total interest expense for 2012

712,640

Requirement No. 4

Note payable, bank (P4,200,000 x .12 x 9/12)

378,000

265

Bonds payable (P2,000,000 x .10 x 6/12)

100,000

Accrued interest payable, 12/31/12

478,000

PROBLEM NO. 14 – Audit of employee benefits

The following information pertain to Mavericks Corporation’s, your audit client which started operations on December 31, 2011, employee benefits.

Summarized information about its employees at December 31, 2015 includes:

Employee

Number of

Salary level for the

Percentage wage

Category

employees

the 12-month period increase effective

in category

ending 6/30/16

from 7/1/16

A

9

P100,000

5%

B

200

P50,000

7%

C

300

P25,000

9%

Annual salary increases are expected to continue at the same rates for the foreseeable future.

At December 31, 2015, the appropriate discount factors (determined using the current market yield for high quality corporate bonds) are 0.9524 for a 12-month period, 0.9009 for a 24-month period, 0.8547 for a 36-month period and 0.8 for a 48-month period. 266

The entity’s employees work a five-day week. The entity’s operations close for the six mandatory public holidays. Three of the public holidays are before June 30.

Holiday leave

The entity’s employees are each entitled to 20 paid days’ holiday leave per year.

Category A employees can carry forward unused holiday leave for one calendar year on a first-in, first out (FIFO) basis. Holiday leave not taken in the prescribed period is forfeited.

Category B employees cannot carry forward unused holiday leave but are paid for all-holiday leave not used in the previous calendar year. The payment is made as part of the January payroll of the following year.

Category C employees cannot carry forward unused holiday leave and are not paid for unused holiday leave.

At December 31, 2015 the entity’s holiday leave records were as follows: Employee

Number of employees

Average days’ holiday

Category

in category January 1, 2015

leave per employee unused on

A

9

10

B

200

6

C

300

8

At December 31, 2015 the entity expects 25 days’ holiday leave accumulated at December 31, 2015 by employees in category A to expire unused on December 31 2016. 267

The entity expects that holiday leave will on average be taken evenly throughout the year.

Long-service awards

The entity’s employees are entitled to receive government mandated long-service payments from the entity calculated at 5% of salary (as determined for the 12 months before the payment) at the end of each 5-year period of continuous employment. The payment is made as part of the December payroll in the fifth year. The entity does not fund this obligation in advance.

Employee turnover is expected to follow average historical patterns. For ease of calculation assume that staff join and leave on December 31. Furthermore, assume that none of the employees who joined the entity after January 1 2012 left or are expected to leave the entity in the foreseeable future (i.e. all leavers were employed on December 31, 2011)

At December 31, 2015 the entity’s long-service award records were as follows:

Employee Category A

B

C

9

196

306

Joined

1

9

18

Left

1

8

20

Employed on 12/31/2011 Employee turnover on 12/31/2012:

Employee turnover on 12/31/2013:

268

Joined

0

10

11

Left

0

9

16

Joined

0

11

15

Left

0

10

12

Joined

0

10

16

Left

0

9

18



Pension plan

On January 5 2016 the entity paid a contribution of P100,000 to a defined contribution plan in part exchange for services performed by the entity’s employees in December 2015.

Voluntary redundancy offer

In December 2015, with a view to reducing its workforce, the entity made an irrevocable offer to its employees of a voluntary redundancy package. In accordance with the offer the entity will compensate any employee who accepts voluntary redundancy on or before June 30, 2016. The compensation offered is equal to the employee’s annualized salary for the 12-month period ending June 30, 2016.

269

At December 31, 2015 the entity’s voluntary redundancy records include:

Employee Category

Number of employees Number of employees who accepted voluntary expected to accept redundancy by 12/31/15 voluntary redundancy in 2016

A

0

1

B

2

8

C

5

25

REQUIRED: Based on the above and the result of your audit, calculate the entity’s liability for employee benefits at December 31, 2015. 1. 2. 3. 4. 5.

Short-term employee benefits Other long term employee benefits – category A employees Other long term employee benefits – category B employees Other long term employee benefits – category C employees Total provision for employee benefits

SOLUTION:

Requirement No. 1 Category A employees

[(32.5* days x P392.16**) + (32.5 days x P411.76***)]

Category B employees [(200 x 6 days x P50,000/255]

26,127

235,294

270

Category C employees (non-accumulating and non-vesting)

Short-term employee benefits (holiday leave)

-

261,421

working days for the year (255) = [(365/7 x 5) - 6] * {[(9 x 10) - 25]/2} ** P100,000/255 *** [(P100,000 x 1.05)/255]

Requirement No. 2 To be paid, 12/31/13 (Joined 12/31/08)

(P102,500* x .05 x 8 x 4/5 x 0.9524)

31,239

To be paid, 12/31/14 (Joined 12/31/09)

(P107,625* x .05 x 1 x 3/5 x 0.9009)

2,909

Other long term benefits - Category A employees

34,148

*Computation of expected salary: For 2013: Jan - Jun (P100,000/2)

Jul - Dec (P100,000/2 x 1.05) For 2014: Jan - Jun (P100,000/2 x 1.05)

Jul - Dec (P52,500 x 1.05)

50,000

52,500

102,500

52,500

55,125

107,625

271


(P51,750* x .05 x .77** x 196 x 4/5 x 0.9524)

297,534

To be paid, 12/31/14 (Joined 12/31/09)

(P55,373* x .05 x .77 x 9 x 3/5 x 0.9009)

10,371

To be paid, 12/31/15 (Joined 12/31/10)

(P59,250* x .05 x .77 x 10 x 2/5 x 0.8547)

7,799

To be paid, 12/31/16 (Joined 12/31/11)

(P63,398* x .05 x .77 x 11 x 1/5 x 0.8)

4,296

Other long term benefits - Category B employees

320,000



Jul - Dec (P26,750 x 1.07) For 2015: Jan - Jun (P26,750 x 1.07)


25,000

26,750

51,750

26,750

28,623

55,373

28,623

30,627

59,250

30,627

272

Jul - Dec (P30,627 x 1.07)

32,771

63,398

**Estimated payment for a five-year cycle (saving of 23% due to employees leaving before vesting) Computation of saving: {[36 + (36/4)]/196}


(P26,125* x .05 x .73** x 306 x 4/5 x 0.9524)

222,321

To be paid, 12/31/14 (Joined 12/31/09)

(P28,476* x .05 x .73 x 18 x 3/5 x 0.9009)

10,113

To be paid, 12/31/15 (Joined 12/31/10)

(P31,039* x .05 x .73 x 11 x 2/5 x 0.8547)

4,261

To be paid, 12/31/16 (Joined 12/31/11)

(P33,833* x .05 x .73 x 15 x 1/5 x 0.8)

2,964

Other long term benefits - Category C employees

239,659



12,500

13,625

26,125

13,625

273



Jul - Dec (P16,188 x 1.09)

14,851

28,476

14,851

16,188

31,039

16,188

17,645

33,833

**Estimated payment for a five-year cycle (saving of 27% due to employees leaving before vesting) Computation of saving: {[66 + (66/4)]/306}

Requirement No. 5

Short-term employee benefits (see no. 1)

261,421

Other long term employee benefits (long service awards) Category A employees (see no. 2)

34,148

Category B employees (see no. 3)

320,000

Category C employees (see no. 4)

239,659

593,807

Post-employment benefits - defined contribution plan (pension)

100,000

Termination benefits (see computation below)

1,350,000

Total

2,305,228

274

*Computation of termination benefits:

Category A employees (P100,000 x 1)

100,000

Category B employees (P50,000 x 10)

500,000

Category C employees (P25,000 x 30)

750,000

1,350,000

275

VIII – AUDIT OF EQUITY PROBLEM NO. 1 - Equity components The following data were compiled prior to preparing the statement of financial position of the Conviction Corporation. Authorized share capital, P100 par value P4,000,000 Unissued share capital 800,000 Subscribe share capital 480,000 Subscriptions receivable 120,000 Premium on share capital 320,000 Premium on bonds payable 240,000 Gain on sale of treasury shares 80,000 Donated capital 800,000 Share warrants outstanding 200,000 Reserve for bond sinking fund 400,000 Reserve for depreciation 600,000 Treasury shares, at cost 144,000 Retained earnings, unappropriated 720,000 Cash dividends payable 160,000 Revaluation increment on property 800,000 Net unrealized loss on available for sale 96,000 securities Required: Compute for the following: 1. Total share premium 2. Contributed capital 3. Appropriated retained earnings 4. Total Equity 5. Legal Capital SOLUTION:

Requirement Nos. 1 to 4 Authorized share capital

4,000,000 276

Unissued share capital

(800,000)

Issued share capital

3,200,000

Subscribed share capital

480,000

Subscriptions receivable

(120,000)

360,000

Share premium Premium on share capital

320,000

Gain on sale of treasury shares

80,000

Donated capital

800,000

Stock warrants outstanding

200,000

Contributed capital

1,400,000

(1)

4,960,000

(2)

Retained earnings Appropriated for sinking fund

400,000

Appropriated for treasury shares

144,000

Total appropriated retained earnings

544,000

Unappropriated (P720,000 - P144,000)

576,000

(3) 1,120,000

Revaluation surplus

800,000

Net unrealized loss on available for sale securities

(96,000)

Treasury shares

(144,000)

Total equity

6,640,000

(4)

(5)

¸

Requirement No. 5 Issued share capital

3,200,000

Subscribed share capital

480,000

Legal capital

3,680,000

277

PROBLEM NO. 2 - Analysis of transactions affecting equity components The shareholders’ equity accounts of Tenacity Corporation at December 31, 2014, had the following balances: Share capital - preference shares, P100 par value, 6% cumulative; 15,000 shares authorized; 9,000 shares issued and outstanding Share capital - ordinary, P1 par value, 900,000 shares authorized; 600,000 shares issued and outstanding Share premium Retained earnings Total shareholder’s equity

P900,000

600,000

1,200,000 3,300,000 P6,000,000

The following transactions occurred during 2015: 

January 6 - Issued 22,500 ordinary shares to Weakness Company in exchange for land. On the date issued, the share had a market price of P16.50 per share. The land had a carrying amount of P210,000, and an assessed value for property taxes of P245,000.



January 31 - Sold 1,200, P1,000, 12% bonds, at 98 with one detachable share warrant attached to each bond. Interest is payable annually on January 31. The fair value of the bonds without the share warrants is 95. The detachable warrants have a fair value of P50 each and expire one year from issuance. Each warrant entitles the holder to purchase 10 ordinary shares at P10 per share.



February 22 - Purchased 7,500 of its own ordinary shares to be held as treasury shares for P24 per share.



February 28 - Subscriptions for 21,000 ordinary shares were received at P26 per share, payable 50% down and the balance by March 15.



March 15 - The balance due on 18,000 shares was received and those shares were issued. The subscriber who defaulted on the 3,000 remaining shares forfeited the down payment in accordance with the subscription agreement.



April 30 - Distributed property dividend to ordinary shareholders. The property had a carrying amount of P910,000 and fair value of P950,000.



August 30 - Reissued 3,000 treasury shares for P20 per share. 278



September 14 - There were 945 warrants detached from the bonds and exercised.



November 30 - Declared a cash dividend of P2 per share to all ordinary shareholders of record December 15, 2015. The dividend was paid on December30, 2015.



December 15 - Declared the required annual cash dividends on preference shares 2014. The dividend was paid on January 15, 2015.



January 8, 2016 - Before closing the accounting records for 2015, Tenacity became aware that no depreciation had been recorded for 2014 for a machine purchased on July 1, 2014. The machine was properly capitalized at P480,000 and has an estimated useful life of eight years when purchased. Tenacity is subject to 35% income tax. The appropriate correcting entry was recorded on the same day.



Adjusted net income after tax for 2015 was P2,585,650. Required: Compute for the following as of December 31, 2015: 1. Share capital - preference shares 2. Share capital - ordinary shares 3. Share premium 4. Unappropriated retained earnings 5. Total equity

SOLUTION: 2012 12.31.11

Share capital - PS Share capital - OS

Subscribed share capital-OS


900,000 600,000

-

-

Transactions

12.31.12

1/6

22,500

900,000 649,950

3/15

18,000

9/14 2/28

9,450 21,000

3/15

(18,000)

3/15 2/28

(3,000) (273,000)

-

279

Share premium

1,200,000

3/15

234,000

3/15

39,000

1/6

348,750

1/31

36,000

2/28

525,000

3/15

(75,000)

3/15

39,000

9/14

(28,350)

9/14

113,400

2,158,800

Retained earnings - appropriated

-

12/31

108,000

108,000

Retained earnings - unappropriated

3,300,000

4/30

(950,000)

3,451,250

8/30

(12,000)

11/30

(1,290,900)

12/15

(54,000)

12/31

2,585,650

1/8

(19,500)

12/31

(108,000)

2/22

(180,000)

8/30

72,000

Treasury shares

-

6,000,000

(108,000)

7,160,000

Journal entries for 2012

1/6

Land (22,500 shares x P16.50)

371,250

280

1/31

2/22

Share capital-OS (22,500 shares x P1)

22,500

Share premium-EOP

348,750

Cash (1,200 x P1,000 x .98)

1,176,000

Discount on bonds payable (P1,200,000 - P1,140,000)

60,000

Bonds payable

1,200,000

Share premium-warrants

36,000

Issue price with

1,176,000

Issue price without (1,200 x P1,000,000 x .95)

(1,140,000)

Equity component

36,000

Treasury shares (7,500 x P24)

180,000

Cash

2/28

3/15

180,000

Cash (21,000 x P26 x 50%)

273,000

Subscriptions receivable (21,000 x P26 x 50%)

273,000

Subscribed share capital-OS (21,000 shares x P1)

21,000

Share premium-EOP

525,000

Cash (18,000 x P26 x 50%)

234,000


Subscribed share capital-OS (18,000 shares x P1) Share capital-OS

234,000

18,000 18,000 281

Subscribed share capital-OS (3,000 shares x P1) Share premium-EOP [3,000 shares x (P26 P1)]

4/30

3,000 75,000

Subscriptions receivable (3,000 x P26 x 50%)

39,000

Share premium - forfeited subscriptions

39,000

Retained earnings (at fair value)

950,000

Property dividends payable

8/30

9/14

950,000

Cash (3,000 x P20)

60,000

Retained earnings Treasury shares (3,000 x P24)

12,000

Cash (945 x 10 x P10) Share premium-warrants P36,000)

72,000

94,500 (945/1,200

x 28,350

Share capital-OS (945 x 10 x P1)

9,450

Share premium-EOP

113,400

11/30 Retained earnings

1,290,900

Dividends payable - OS

1,290,900

Ordinary shares issued and outstanding, 1/1

600,000

Shares issued, 1/6

22,500

Shares issued, 3/15

18,000 282

Shares issued, 9/14

9,450

Number of shares issued, 12/31

649,950

Treasury shares (7,500 - 3,000)

(4,500)

Number of shares issued and outstanding

645,450

Dividends per share

2.00

Total dividends

1,290,900

12/15 Retained earnings (900,000 x 6%)

54,000

Dividends payable - PS

1/8

54,000

Retained earnings

19,500

Income tax payable (480,000/8 x 1/2 x 35%)

10,500

Accumulated depreciation (480,000/8 x 1/2 )

12/31 P/L summary

30,000

2,585,650

Retained earnings Retained earnings 12/31 unappropriated

2,585,650 -

Retained earnings - appropriated (cost of TS)

108,000 108,000

PROBLEM NO. 3 - Audit of equity transactions and balances With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was engaged in the audit of the Fortitude Company at the close of the company’s first year of operations on December 31, 2015. The company closed its books prior to the time you began your year-end fieldwork. Your audit and review showed the following shareholders’ equity accounts in the general ledger: 283

Share Capital 08/30

Retained Earnings 12/29

CD

P550,000 01/02 12/29

CR J

P6,000,000 545,000

J

P545,000 12/01 12/31

CR J

P287,500 4,000,000

Based on the other working papers submitted by your audit staff, the following additional information was forwarded: From the Articles of Incorporation Fortitude Company:  

Authorized share capital - 150,000 shares Par value per share - P100

From the board of directors’ minutes of meetings, the following resolutions were extracted: 

01/02 - authorized the issuance of 50,000 shares at P120 per share.



08/30 - authorized the acquisition of 5,000 shares at P110 per share.



12/01 - authorized the re-issuance of 2,500 treasury shares at P115 per share.



12/29 - Declared a 10% share dividend, payable January 31, 2016 to shareholders on record as of January 15, 2016. The market value of the share on December 29, 2015 was P130 per share. Required: 1. Prepare adjusting entries as of December 31, 2015. 2. Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2015. a. Share capital b. Share premium c. Total retained earnings d. Total equity SOLUTION:

Requirement no. 1 01/02 Share capital [50,000 shares (P120-P100)]

1,000,000 284

Share premium

08/30 Treasury shares

1,000,000

550,000

Share capital

12/01 Retained earnings

550,000

287,500

Treasury shares (2,500 shares x P110)

275,000

Share premium

12,500

12/29 Retained earnings (P617,500 - P545,000) Share capital

72,500 545,000

Share dividends distributable (4,750 x P100)

475,000

Share premium

142,500

Shares issued

50,000

Treasury shares (5,000 -2, 500)

(2,500)

Shares outstanding

47,500

Dividend rate (small share dividend)

10%

Shares to be issued

4,750

Market value per share

130

Total amount to be charged to RE

617,500

Total par value of stock dividend payable

475,000

Share premium

142,500

12/31 Retained earnings (2,500 shares x P110)

275,000 285

Retained earnings appropriated for treasury shares

275,000

Requirement no. 2 Share capital (P5,995,000-P1,000,000+P550,000-P545,000)

5,000,000

Share dividends distributable

475,000

Share premium (P1,000,000+P12,500+P142,500)

1,155,000

Retained earnings-appropriated Retained earnings (P3,742,500-P287,500-P72,500-P275,000)

275,000 3,107,500

3,382,500

Treasury shares (P550,000-P275,000)

(275,000)

Total equity

9,737,500

PROBLEM NO. 4 - Audit of retained earnings The Retained Earnings account of Endurance Company shows the following debits and credits for the year 2015: RETAINED EARNINGS Date Jan. 1 (a) (b) (c)

(d)

Debit

Credit

Balance Loss from fire Write-off of goodwill Share dividends distributed Loss on sale of equipment

Balance Debit Credit 726,400

5,250

721,150

52,500

668,650

140,000

528,650

48,300

480,350

RETAINED EARNINGS Date

Debit

Credit

Balance Debit Credit 286

Officers’ compensation related to income of 325,500 prior periods accrual overlooked (f) Loss on retirement of preference 70,000 shares at more than issue price (g) Paid in capital in excess of par (h) Share issuance expenses ( 10,000 related to letter g) (i) Share subscription defaults (j) Gain on retirement of preference shares at less than issue price RETAINED EARNINGS (e)

Date (k)

(l)

(m)

Debit Gain on early retirement of bonds Gain on life insurance policy settlement Correction of a fundamental error

154,850

84,850

129,500

214,350

204,350

8,470

212,820

25,900

238,720

Credit

Balance Debit Credit

15,050

253,770

10,500

264,720

50,050

314,320

287

(n)

(o) (p)

(q)

Effect of change in accounting principle from FIFO to weighted average Dividends 25,000 Payable Loss on sale of treasury 20,000 shares Proceeds from sale of donated shares

100,000

414,320

389,320 369,320

40,000

409,320

RETAINED EARNINGS Date (r)

(s)

Debit

Credit

Balance Debit Credit

Appraisal increase in 250,000 land Gain on life insurance 100,000 policy settlement

659,320

559,320

Required: 1. Prepare adjusting journal entries to correct the Retained Earnings account. 2. Determine the correct amount of Retained Earnings account before closing the profit or loss for the period. SOLUTION:

a

Profit or loss (Other expense) Retained earnings

5,250 5,250

288

b

Profit or loss (Other expense)

52,500

Retained earnings

d

Profit or loss (Other expense)

52,500

48,300

Retained earnings

g

Retained earnings

48,300

129,500

Share premium

h

Share premium

129,500

10,000

Retained earnings

i

Retained earnings

10,000

8,470

Share premium

j

Retained earnings

8,470

25,900

Share premium

k

Retained earnings

25,900

15,050

Profit or loss (Other income)

l

Retained earnings

15,050

10,500

Profit or loss (Other income)

q

Retained earnings

10,500

40,000 289

Share premium

r

Retained earnings

40,000

250,000

Revaluation surplus

250,000

Unadjusted retained earnings balance

559,320

a

5,250

b

52,500

d

48,300

g

(129,500)

h

10,000

i

(8,470)

j

(25,900)

k

(15,050)

l

(10,500)

q

(40,000)

r

(250,000)

Correct amount of RE before closing profit or loss

195,950

Alternative computation: Jan. 1

Balance

726,400

c

Share dividend

(140,000)

e

Officers’ compensation related to income of prior periods – accrual overlooked

(325,500) 290

f

Loss on retirement of preferred shares at more than issue price

(70,000)

m

Correction of prior-period error

50,050

n

Effect of change in accounting principle from FIFO to weighted average

100,000

o

Dividends payable

(25,000)

p

Loss on sale of treasury stock

(20,000)

s

Appropriated for property acquisition

(100,000)

Correct amount of RE before closing profit or loss

195,950

PROBLEM NO. 5 - Audit of equity transactions and balances Resilience Corporation was organized on January 1, 2013, and began operations immediately. Unfortunately, the company hired an incompetent bookkeeper. For the years 2013 through 2015, the bookkeeper presented an annual balance sheet that reported only one amount for shareholders’ equity: 2013, P1,377,000; 2014, P1,566,000 and 2015, P1,850,000. Also, the condensed income statement reported as follows: 2013, net loss, Pl75,000; 2014, net profit, P120,000; and 2015, net profit, P409,300 (cumulative earnings of P354,300). Based on the P354,300, the president has recommended to the board of directors that a cash dividend f P350,000 be declared and paid during January 2016. The outside director on the board has objected on the basis that the company’s financial statements contain major errors (there has never been an audit). You have been engaged to clarify the situation. The single shareholders’ equity account, provided by the bookkeeper, appeared as follows: Shareholders’ Equity 2013

2013 2014

Share issue costs

P13,000

Net loss 175,000 Bought 1,000 shares 7000 from an unhappy

2013

Ordinary shares, par P P1,600,000 5,200,00 0 shares issued

2014

Net profit (includin g 220,000 P100,000 land 291

shareholde r Ekis

write-up based on president ’s estimate) Ordinary shares, 2,000 18,000 shares issued

Depreciation expense*

2014

(2013, P15,000; 2014, P17,000; 55,000 2015, P23,000) Miscellaneous expense*

2015

Sold 300 of Ekis 2,700 shares

2015

Net Profit 409,300 P2,250,000

(2013, P20,000; 50,000 2014, P250,000; 2015, P5,000) 2015 Cash loan to the company president 100,000 P400,000

* Recorded as expense but not shown on the income statement. Required: Based on the concerns of the outside director, answer the following: 1. What is the adjusted balance of retained earnings as of December 31, 2015? 2. What entry is necessary (a) to close the above single shareholders’ equity account and (b) to record the various components of shareholders’ equity in separate accounts? 3. What is the adjusted total equity as of December 31, 2015? SOLUTION:

Requirement no. 1 RE 12.31.12

2010

2011

2012

Unadjusted profit (loss)

(175,000)

220,000

409,300

Depreciation expense

(15,000)

(17,000)

(23,000)

(55,000)

Miscellaneous expense

(20,000)

(25,000)

(5,000)

(50,000)

454,300

292

Land write-up Adjusted profit (loss)

(100,000) (210,000)

78,000

(100,000) 381,300

249,300

Requirement no. 2 Shareholders equity

1,850,000

Treasury shares

4,900

Loans receivable

100,000

Share capital

1,010,000

Share premium – EOP

595,000

Share premium – TS

600

Land

100,000

Retained earnings

249,300

Requirement no. 3 Share capital

1,010,000

Share premium – EOP

595,000

Share premium – TS

600

Retained earnings

249,300

Treasury shares

(4,900)

Total equity

1,850,000

PROBLEM NO. 6 - Audit of equity-settled share-based payment At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales department. The share options will vest at the end of year 3, provided that the employees remain in the entity’s employ, and provided that the volume of sales of a particular product increases by at least an average of 5 per cent per year. If the volume of sales of the product increases 293

by an average of between 10 per cent and 15 per cent each year, each employee will receive 200 share options. If the volume of sales increases by an average of 15 per cent or more, each employee will receive 300 share options. On grant date, Entity A estimates that the share options have a fair value of P20 per option. Entity A also estimates that the volume of sales of the product will increase by an average of between 10 per cent and 15 per cent per year, and therefore expects that, for each employee who remains in service until the end of year 3, 200 share options will vest. The entity also estimates, on the basis of a weighted average probability, that 20 per cent of employees will leave before the end of year3. By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by the end of year 3. Hence, the entity expects that 80 employees will remain in service for the three-year period. Product sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2 years. By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects only three more employees will leave during year 3, and therefore expects a total of 15 employees will have left during the three-year period, and hence 85 employees are expected to remain. Product sales have increased by 18 per cent, resulting in an average of 15 per cent over the two years to date. The entity now expects that sales will average 15 per cent or more over the three-year period, and hence expects each sales employee to receive 300 share options at the end of year 3. By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year period, and 86 employees remain. The entity’s sales have increased by an average of 16 per cent over the three years. Therefore, each of the 86 employees received 300 share options. Required: Compute for the amounts to be recognized as compensation expense in year 1 to 3. SOLUTION:

Year

Computation

Comp. Exp.

Cumulative

1

80 × 200 options ×P20 × 1/3

106,667

106,667

2

(85 × 300 options ×P20 × 2/3) – P106,667

233,333

340,000

3

(86 × 300 options ×P20 × 3/3) – P233,333

176,000

516,000

PROBLEM NO. 7 - Audit of cash-settled share-based payment An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the employees remain in its employ for the next three years. 294

During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3. During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3. During year 3, 22 employees leave. At the end of year 3, 150 employees exercise their SARs, another 140 employees exercise their SARs at the end of year 5. The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below. Year Fair value Intrinsic value 1 P14.40 2 15.50 3 18.20 P15.00 4 21.40 20.00 5 25.00 Required: Compute for the amounts to be recognized as compensation expense and liability in year 1 to 5. SOLUTION:

Year Computation

Expense

Liability

1

405 × 100 SARs × P14.40 × 1/3

194,400

194,400

2

400 × 100 SARs × P15.50 × 2/3 - P194,400

218,933

413,333

3

253 × 100 SARs × P18.20 × 3/3 - P413,333

47,127

150 × 100 SARs × P15.00

225,000

113 × 100 SARs × P21.40 - P460,460

(218,640)

140 × 100 SARs × P20.00

280,000

0 - P241,820

(241,820)

113 × 100 SARs × P25.00

282,500

4

5

460,460 272,127

241,820 61,360

40,680

PROBLEM NO. 8 - Audit of cash or equity settled share-based payment 295

An entity grants to an employee the right to choose either 1,000 phantom shares, ie. a right to a cash payment equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’ service. If the employee chooses the share alternative, the shares must be held for three years after vesting date. At grant date, the entity’s share price is P50 per share. At the end of years 1, 2 and 3, the share price is P52, P55 and P60 respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date fair value of the share alternative is P48 per share. Required: Compute for the amounts to be recognized as expense, equity and liability in year 1 to 3, if at the end of year 3 the employee chooses: 1. The cash alternative 2. The equity alternative SOLUTION: The fair value of the equity alternative is P57,600 (1,200 shares × P48). The fair value of the cash alternative is P50,000 (1,000 phantom shares × P50). Therefore, the fair value of the equity component of the compound instrument is P7,600 (P57,600 – P50,000).

Year Computation

Expense

Equity

1

Equity component (P7,600 × 1/3) Liability component (1,000 × P52 × 1/3)

2,533 17,333

2,533

Total

19,866

2,533

Equity component (P7,600 × 1/3) Liability component [(1,000 × P55 × 2/3)-P17,333]

2,533 19,334

2,533

Total

21,867

5,066

Equity component (P7,600 - P5,066) Liability component [(1,000 × P60 × 3/3)-P36,667]

2,534 23,333

2,534

2

3

Liability

17,333 17,333

19,334 36,667

23,333

296

Total

25,867

7,600

Scenario 1: cash of P60,000 paid Scenario 1 totals

(60,000) 67,600

Scenario 2: 1,200 shares issued Scenario 2 totals

60,000

67,600

7,600

-

60,000

(60,000)

67,600

-

PROBLEM NO. 9 - Book value per share The equity section of the balance sheet of the Guts Company on December 31, 2015 shows the following items: 6% Cumulative preference share capital, P100 par value (liquidation value, P115 per share); Authorized, 6,000 shares, issued, 4,000 shares; in treasury, 600 shares P400,000 Ordinary share capital, P100 par value, authorized, 20,000 shares; issued and outstanding, 8,000 shares 800,000 Share premium - preference shares 150,000 Share premium - ordinary shares 165,000 Retained earnings 458,600 Reserve for bond retirement 320,000 Treasury shares - preference, at cost (84,000) Total P2,209,600 Required: 1. Book value per share of ordinary 2. Book value per share of ordinary, assuming the preference share is participating

SOLUTION:

297

Requirement No. 1 Excess over par

Preference

Balances

1,069,600

340,000

PS dividend (P340,000 x 6%)

(20,400)

20,400

PS liquidation premium (3,400 x P15)

(51,000)

51,000

Balance to OS

998,200

Ordinary * 800,000

998,200

Total

411,400

1,798,200

Divide by outstanding shares

3,400

8,000

Book value per share

121.00

224.78

Computation of "excess over par" Total equity

2,209,600

Outstanding par value of PS*

(340,000)

Outstanding par value of OS

(800,000) 1,069,600

Details of "excess over par" 150,000 Premium on PS 165,000 Premium on OS Retained earnings, retirement

appropiated

-

bond 320,000

Retained earnings, unappropiated 458,600 Excess of cost of TS over par (P84,000 P60,000) (24,000) Excess over par

1,069,600

298

Note: For computation of BV/share purposes, TS is treated as a retired stock.

Shares

Amount

4,000

400,000

Treasury PS, at par (600 x P100)

(600)

(60,000)

Outstanding PS

3,400

340,000

over par

Preference

Ordinary

Balances

1,069,600

340,000

PS dividend (P340,000 x 6%)

(20,400)

20,400

PS liquidation premium (3,400 x P15)

(51,000)

51,000

OS dividend (P800,000 x 6%)

(48,000)

Balance for participation

950,200

* PS issued

Requirement No. 2 Excess

Preference (340/1,140 x P950,200)

* 800,000

48,000

283,393

Ordinary (800/1,140 x P950,200)

666,807

Total

694,793

1,514,807

Divide by outstanding shares

3,400

8,000

Book value per share

204.35

189.35

PROBLEM NO. 10 - Earnings per share The information below pertains to Prancer Company for 2015. 299

Profit for the year 8% convertible bonds issued at par (P1,000 per bond). Each bond is convertible into 40 ordinary shares 6% convertible, cumulative preference shares, P100 par value. Each share is convertible into 3 ordinary shares. Ordinary shares, P10 par value Share options (granted in a prior year) to purchase 50,000 ordinary shares at P20 per share Tax rate Average market price of ordinary shares

P1,200,000

2,000,000

3,000,000 6,000,000

500,000 40% P25 per share

There were no changes during 2015 in the number of ordinary shares, preference shares, or convertible bonds outstanding. There is no treasury share. Required: Compute basic and diluted earnings per share for 2015 SOLUTION: Profit to OS Basic Exercise options

1,020,000 of

Bond conversion

a)

EPS

600,000

1.70

-

10,000

1,020,000

610,000

96,000

c)

1,116,000 PS conversion

WA Outs. OS

180,000 1,296,000

b) 1.67

80,000 690,000

d)

90,000 780,000

1.62 e) 1.66

Notes:

a) Profit for the year

1,200,000 300

PS dividend (P3M x .06)

(180,000) 1,020,000

b) Shares to be issued on exercise Assumed TS acquired [(50,000 x P20)/P25]

50,000 (40,000) 10,000

c) Net interest savings on bond conversion (P2M x .08 x .6)

96,000

d) PS dividend (P3M x .06)

180,000

e) Shares to issued on PS conversion (P3M/P100 x 3)

90,000

PROBLEM NO. 11 - Earnings per share Edmund Halvor of the controller’s office of East Aurora Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2015. Additional information: a. The company is authorized to issue 8,000,000, P10 par value, ordinary shares. As of December 31, 2014, 3,000,000 shares had been issued and were outstanding. b. The per share market prices of the ordinary shares on selected dates were as follows. Price per Share July 1, 2014 P20.00 January 1, 2015 21.00 April 1, 2015 25.00 July 1, 2015 11.00 August 1, 2015 10.50 November 1, 2015 9.00 December 31, 2015 10.00 301

c. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred shares had been issued on July 1, 2014. The share was issued at its par value of P25, and it has a cumulative dividend of P3 per share. The share is convertible into ordinary shares at the rate of one share of convertible preference for one share of ordinary. The rate of conversion is to be automatically adjusted for share splits and share dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30. d. East Aurora Corporation is Subject to a 40% income tax rate. e. The after-tax profit for the year ended December 31, 2015 was P13,550,000. The following specific activities took place during 2015. 1. January 1 - A 5% ordinary share dividend was issued. The dividend had been declared on December 1, 2014, to all shareholders of record on December 29, 2014. 2. April 1 - A total of 200,000 preference shares was converted into ordinary shares. The company issued new ordinary shares and retired the preference shares. 3. July 1 - A 2-for-1 ordinary share split became effective on this date. The board of directors had authorized the split on June 1. 4. August 1 - A total of 300,000 ordinary shares were issued to acquire a factory building. 5. November 1 - A total of 24,000 ordinary shares were purchased on the open market at P9 per share. These shares were to be held as treasury shares and were still in the treasury as of December 31, 2015. 6. Ordinary shares cash dividends - Cash dividends to ordinary shareholders were declared and paid as follows. April 15 - P0.30 per share October 15 - P0.20 per share 7. Preference shares cash dividends - Cash dividends to preference shareholders were declared and paid as scheduled. Required: Compute Basic and diluted earnings per share for 2015. SOLUTION:

Computation of basic EPS: 302

Profit for 2012

13,550,000

Less PS dividends: March 31 (700,000 shares x P.75) 6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3)

525,000 1,125,000

1,650,000

Profit to OS

11,900,000

/WA outstanding OS (see below)

6,736,000

Basic EPS

1.77

Computation of WA outstanding OS: Date

Adj. shares

Mos. O/S

W.A

1/1/12

(3,000,000 x 1.05 x 2)

6,300,000

12/12

6,300,000

4/1/12

(200,000 x 1.05 x 2)

420,000

9/12

315,000

8/1/12

300,000

5/12

125,000

11/1/12

(24,000)

2/12

(4,000) 6,736,000

Computation of diluted EPS: Profit to OS

11,900,000

Add PS dividends: March 31 (700,000 shares x P.75) 6/30, 9/30 & 12/31 (500,000 shares x P.75 x 3)

525,000 1,125,000

1,650,000

Profit to OS

13,550,000

/WA outstanding OS (see below)

7,891,000

Diluted EPS

1.72

303

Computation of WA outstanding OS: Number of shares to compute basic EPS

6,736,000

Convertible PS still outstanding (500,000 x 1.05 x 2)

1,050,000

Convertible PS converted (200,000 x 1.05 x 2 x 3/12)

105,000

Number of shares to compute diluted EPS

7,891,000

PROBLEM NO. 12 - Analysis equity transactions including EPS computation Hawks Corporation was incorporated in 2014. During 2014, the company issued 100,000 shares of P1 par value ordinary shares for P27 per share. During 2015, the company had the following transactions. 1/2/15

Issued 10,000 shares of P100 par value cumulative preference shares at par. The preference shares are convertible into five ordinary shares and had a dividend rate of 6%.

3/1/15

Issued 3,000 ordinary shares for legal service performed. The value of the legal services was P100,000. The shares are actively traded on a stock exchange and valued on 3/1/12 at P32 per share.

7/1/15 10/1/15

Issued 40,000 ordinary shares for P42 per share. Repurchased 16,000 treasury shares for P34 per share

12/1/15

Sold 3,000 treasury shares for P29 per share.

12/30/15

Declared and paid a dividend of P0.20 per share on ordinary shares and a 6% dividend on the preference shares.

During 2014, Hawks Corporation had a profit of P250,000 and paid dividends of P28,000. During 2015 Hawks Corporation had a profit of P380,000. Required: Based on the above and the result of your audit, determine the following: 1. Total share premium as of December 31,2015 2. Total retained earnings as of December 31, 2015 304

3. Total equity as of December 31, 2015 4. Basic earnings per share for the year 2015 5. Diluted earnings per share for the year 2015 SOLUTION:

Requirement No. 1-3 Share premium

RE

Total equity

2011 Issued 100,000 ordinary shares at P27

2,600,000

2,700,000

Profit

250,000

250,000

Dividends

(28,000)

(28,000)

222,000

2,922,000

Balances, 12/31/11

2,600,000

2012 1/2/12 - Issued 10,000 PS at par

1,000,000

3/1/12 - Issued 3,000 OS for legal services

93,000

96,000

7/1/12 - Issued 40,000 OS at P42

1,640,000

1,680,000

10/1/12 - Repurchased 16,000 TS at P34

(544,000)

12/1/12 - Reissuance of 3,000 TS at P29

(15,000)

87,000

12/30/12 - PS dividend (P1M x .06)

(60,000)

(60,000)

(26,000)

(26,000)

380,000

380,000

4,333,000

501,000

5,535,000

(1)

(2)

(3)

'- OS dividend (130T x P.20) Profit Balances, 12/31/12

Requirement No. 4 305

Profit for 2012

380,000

Less PS dividend for 2012

60,000

Profit to OS

320,000

Divide by the WA outstanding OS (see below)

118,750

Basic EPS for 2012

2.69

Computation of WA outstanding OS: Shares

Time O/S

WA

1/1/12

100,000

12/12

100,000

3/1/12

3,000

10/12

2,500

7/1/12

40,000

6/12

20,000

10/1/12

(16,000)

3/12

(4,000)

12/1/12

3,000

1/12

250 118,750

Requirement No. 5 Profit to OS (see no. 4)

320,000

Add PS dividend for 2012

60,000

Adjusted profit to OS

380,000

Divide by the WA outstanding OS: Actual (see no. 4)

118,750

Potential (10,000 x 5)

50,000

Diluted EPS for 2012

168,750 2.25

PROBLEM NO. 13 - Analysis equity transactions including EPS computation

306

The shareholders’ equity section of the Jerely Corporation’s statement of financial position as of December 31, 2014 is presented below: 12% Preference share capital, P100 par Ordinary share capital, P20 par Share premium - preference Share premium - ordinary Share premium - treasury shares Retained earnings Total shareholders’ equity

P 270,000 1,598,400 36,800 235,200 3,200 1,585,840 P3,729,440

Jerely had 65,000 ordinary shares as December 31, 2013. The following shareholders’ equity transactions were recorded in 2014 and 2015: 2014 May 1 - Sold 9,000 ordinary shares for P24, par value P20. July 1 - Sold 700 preference shares for P124, par value P100. Jul. 31 - Issued an 8% share dividend on ordinary shares. The market value of ordinary share was P30 per share. Aug. 30 - Declared cash dividends of 12% on preference shares and P3 per share on ordinary shares. Dec. 31 - Profit for the year amounted to P1,345,040 2015 Feb. 1 - Sold 2,200 ordinary shares for P30. May 1 - Sold 600 preference shares for P128. May 31 - Issued 2-for-1 split of ordinary shares. The par value of the ordinary share was reduced to P10 per share. Sep. 1 - Purchased 1,000 ordinary shares for P18 to be held as treasury shares. Oct. 1 - Declared and paid cash dividends of 12% on preference shares and P4 per share on ordinary shares. Nov. 1 - Sold 1,000 shares of treasury shares for P22. Dec. 31 - Profit for the year amounted to P991,520. Required: 307

Determine the amounts, as required, in Jerely Corporation’s comparative financial statements as of and for the years ended December 31,2014 and 2015. 1. 2. 3. 4. 5.

Dividends paid to ordinary shareholders in 2015 Retained earnings as of December 31, 2015 Total equity as of December 31, 2015 Basic earnings per share for 2014 Basic earnings per share for 2015

SOLUTION:

Requirement No. 1 Ordinary shares outstanding, 12/31/11 (P1,598,400/P20)

79,920

Shares issued 2/1/12

2,200 82,120

Share split, 5/31/12

x

2 164,240

Treasury shares acquired, 9/1/12

(1,000)

Ordinary shares outstanding, 10/1/12

163,240

x Dividend per share

4

Dividends paid to ordinary shareholders

652,960

Requirement No. 2 Retained earnings, 12/31/11

1,585,840

Profit for 2012

991,520

Dividends - ordinary (see no. 36)

(652,960)

Dividends - preference [(P270,000 + P60,000) x .12]

(39,600)

Retained earnings, 12/31/12

1,884,800

308

Requirement No. 3 Total equity, 12/31/11

3,729,440

Add (deduct) 2012 transactions: 2/1 - Issuance of OS (2,200 x P30)

66,000

5/1 - Issuance of PS (600 x P128)

76,800

5/31 - share split

-

9/1 - Acquisition of TS (1,000 x P18)

(18,000)

10/1 - PS dividend (see no. 37)

(39,600)

- OS dividend (see no. 37)

(652,960)

11/1 - Re-issuance of TS (1,000 x P22)

22,000

Profit for 2012

991,520

Total equity, 12/31/12

4,175,200

Requirement No. 4 Profit for 2011

1,345,040

Less PS dividend (270,000 x 12%)

32,400

Profit to OS

1,312,640

Divide by weighted average number of OS (see below)

153,360

Basic earnings per share - 2011

8.56

Computation of weighted average number of OS Adjusted shares

Fraction

Total

Jan. 1 (65,000 x 1.08* x 2**)

140,400

12/12

140,400

May 1 (9,000 x 1.08* x 2**)

19,440

8/12

12,960

Total

153,360 309

*Share dividend, 7.31.11 **2-for-1 share split, 5.31.12

Requirement No. 5 Profit for 2012

991,520

Less PS dividend (P330,000 x 12%)

39,600

Profit to OS

951,920

Divide by weighted average number of OS (see below)

163,707

Basic earnings per share - 2012

5.81

Computation of weighted average number of OS Adjusted shares

Fraction

Total

Jan. 1 (79,920 x 2*)

159,840

12/12

159,840

Feb. 1 (2,200 x 2*)

4,400

11/12

4,033

Sept. 1

(1,000)

4/12

(333)

Nov. 1

1,000

2/12

167

Total

163,707

PROBLEM NO. 14 - Theory Select the best answer for each of the following: 1. In an examination of shareholder’s equity, an auditor is most concerned that a. Capital stock transactions are properly authorized. 310

b. Stock splits are capitalized at par or stated value on the dividend declarations date. c. Dividends during the year under audit were approved by the shareholders. d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent. 2. In audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time? a. Owner’s equity b. Assets c. Revenue d. Liabilities 3. When corporate client maintains its own stock records, the auditor primarily will rely upon a. Confirmation with the company secretary of shares outstanding at year-end. b. Review of the corporate minutes for data as to shares outstanding. c. Confirmation of the number of shares outstanding at year-end with the appropriate state official. d. Inspection of the stock book at year-end and accounting for all certificate numbers. 4. When a client company does not maintain its own share records, the auditor should obtain written confirmation from the transfer agent and registrar concerning a. Restrictions on the payment of dividends. b. The number of shares issued and outstanding. c. Guarantees of preferred stock liquidation value. d. The number of shares subject to agreement to repurchase. 5. The auditor is concerned with establishing that dividends are paid to client corporation shareholders owning shares of the a. Issue date b. Record date c. Declaration date d. Payment date 6. An audit program for the retained earnings account should include a step that requires verification of the a. Fair value used to charge retained earnings to account for a two-for-one share split. b. Approval of the adjustment to the beginning balance as a result of a write-down of an account receivable. c. Authorization for both cash and share dividends. d. Gain or loss resulting from disposition of treasury shares. 7. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify management’s assertion of a. Existence b. Valuation 311

c. Completeness d. Presentation and disclosure 8. If the auditee has a material amount of treasury shares on hand at year-end, the auditor should a. Count the certificates at the same time other securities are counted. b. Count the certificates only if the company had treasury share transactions during the year. c. Not count the certificates if treasury share is a deduction from shareholders’ equity d. Count the certificates only if the company classifies treasury shares with other assets. 9. In performing tests concerning the granting of stock options, an auditor should a. Confirm the transaction with the Securities and Exchange Commission. b. Verify the existence of option holders in the entity’s payroll records or stock ledgers. c. Determine that sufficient treasury stock is available to cover any new stock issued. d. Trace the authorization for the transaction to a vote of the board of directors. 10. The auditor would not expect the client to debit retained earnings for which of the following transactions? a. A 4-for-1 share split. b. “Loss” resulting from disposition of treasury shares. c. A 1-for-10 share dividend. d. Correction of error affecting prior year’s earnings. ANSWER: 1. A 2. A 3. D 4. B

5. B 6. C 7. D 8. A

9. D 10. A

IX – COMPLETING THE AUDIT AND AUDIT OF FINANCIAL STATEMENTS PRESENTATION PROBLEM NO. 1 – Statement of financial position

312

The general ledger summarized trial balance of Heat Corporation, a manufacturing company, includes the following accounts at December 31, 2015: Debit Accumulated depreciation - buildings Accumulated depreciation – leased assets Accumulated depreciation – plant and equipment Allowance for doubtful debts Bank loans Bank overdrafts Buildings, at cost Cash Current tax payable Debentures Deferred tax Deposits, at call Finished goods Goodwill Investments in listed (AFS) Investments revaluation reserve Land, at valuation Land revaluation reserve Lease liabilities Leased assets Others Patents Plant and equipment Prepayments Provision for employments benefits Provision for restructuring Provision for warranty Raw materials Retained earnings Share capital Sundry creditors and accruals Sundry debtors Trade creditors Trade debtors Work in progress

Credit P 120,000 310,000 3,726,000 80,000 2,215,000 350,000

P 1,030,000 175,000 152,000 675,000 420,000 36,000 1,042,000 2,530,000 52,000 25,000 250,000 81,000 350,000 775,000 575,000 110,000 8,275,000 141,000 275,000 412,000 42,000 490,000 1,481,000 3,500,000 715,000 320,000 1,617,000 1,744,000 151,000 P17,121,000

P17,121,000

Additional information: a) Bank loans and other loans are all repayable beyond one year. 313

b) P 300,000 of the debentures is repayable within one year. c) Lease liabilities include P 125,000 repayable within one year. d) Provision for employment benefits includes P 192,000 payable within one year. e) The planned restructuring is intended to be completed within one year. f) Provision for warranty includes P 20,000 estimated to be incurred beyond one year. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. Total current assets is a. P4,019,000 b. P3,983,000

c. P4,071,000 d. P4,035,000 e.

Answer: A 2. Total noncurrent assets is a. P8,814,000 b. P8,839,000

c. P8,891,000 d. P8,866,000

Answer: D 3. Total current liabilities is a. P3,883,000 b. P3,885,000

c. P3,921,000 d. P3,693,000

Answer: B 4. Total noncurrent liabilities is a. P3,913,000 b. P4,105,000

c. P3,810,000 d. P3,915,000

Answer: A

5. Which of the following events after the reporting period will be at least likely to result in an adjustment to the financial statement? a. Culmination of events affecting the realization of accounts receivable owned as of the end of the reporting period. b. Culmination of events affecting the realization of inventories owned as of the end of the reporting period. 314

c. Making changes in the settlement of liabilities which were estimated as of the end of the reporting period. d. Material changes in the quoted market prices of listed investment securities since the end of the reporting period. Answer: D PROBLEM NO. 2 – Statement of financial position (Small and Medium sized Entity) The accounts were taken from the unadjusted trial balance of VECO Co., a small and medium sized entity, as at December 31, 2015: Cash Trading Securities, at cost Notes Receivable Trade accounts Receivable Allowance for doubtful accounts Merchandise Inventory Notes Payable Trade accounts payable Employee’s’ income tax withheld Bonds payable Share dividends payable Income tax payable

P 124,000 87,000 92,000 122,000 6,000 136,000 150,000 75,000 4,000 250,000 15,000 28,000

Analysis of the above accounts disclosed in the following: 

Bank overdraft of P 13,000 was deducted from cash balance



Trade accounts receivable was net of customers’ deposit of P 7,000



Merchandise worth P 15,000 received December 30, 2015 was included in the inventory but was not recorded as purchase.



Accounts payable was net of accounts with debit balance of P 12,000



A bank loan of P30,000due December 31, 2017 was included in the notes payable balance



Bonds payable which was issued in 2015 will mature in five annual installments beginning June 1, 2016



Trading securities are investment in 10,000 ordinary shares with publish price quotation at December 31, 2015 of P9 per share.

315

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much total current assets should be reported on the statement of financial position as at December 31, 2015? a. P590,000 b. P598,000 c. P605,000 d. P587,000 Answer: A 2. How much total current liabilities should be reported on the statement of financial position as at December 31, 2015? a. P590,000 b. P598,000 c. P605,000 d. P587,000 Answer: C PROBLEM NO. 3 – Statement of financial position The following statement of financial position was prepared by the accountant for Excel Corporation. Excel Corporation Statement of Financial Position December 31, 2015 Assets Cash Investment securities – Trading (includes long term investment of P250,000 in shares of Professional Developers) Inventories (net amount still due of P10,000 made on inventories to be delivered in 18 months) Prepaid expenses Property, plant and equipment (excluding P60,000 of equipment still in use, but fully depreciated) Goodwill (based on estimate by the president of Excel Corporation) Total Assets Liabilities and Equity

P 25,500 312,000

624,600

33,000 220,000

70,000 P 1,285,100

316

Notes payable (P75,000 due in 2017) Accounts payable (not including amount due to suppliers of inventory – see above) Long term liability under pension plan Retained earnings restricted for buildings expansion Accumulated depreciation Taxes payable Bonds payable (net of discount of P10,000) Deferred income tax liability Share capital (10,000 shares, P1 par) Share premium

P 135,000 142,000 60,000 105,000 73,000 44,500 290,000 68,000 10,000 240,500

Unrestricted retained earnings Total Liabilities and Owner’s Equity

117,100 P 1, 285,000

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The total current assets as of December 31, 2015 is a. P735,100 c. P830,100 b. P820,100 d. P745,100 Answer: B 2. The total assets as of December 31, 2015 is a. P1,142,100 b. P1,215,100

c. P1,057,100 d. P1,227,100

Answer: D 3. The total current liabilities as of December 31, 2015 is a. P331,500 c. P406,500 b. P321,500 d. P246,500 Answer: A

4. The total equity as of December 31, 2015 is a. P402,600 c. P367,600 b. P472,600 d. P297,600 Answer: A

317

5. Which statement is correct regarding the presentation and disclosure of the entity’s financial position? a. When an entity presents current and non-current liabilities, as separate classifications in its statement of financial position, it may classify deferred tax liabilities as current liabilities. b. An entity may not present assets and liabilities in order of liquidity. c. An entity is required to disclose the maturity dates of financial assets and financial liabilities. d. Current assets include assets that are sold, consumed, or realized as part of the normal operating cycle only when they are expected to be realized within twelve months after the reporting period. Answer: C PROBLEM NO. 4 – Statement of financial position In connection with your audit of the Manning Corporation, the company’s bookkeeper prepared a statement of financial position at December 31, 2015 which was presented with the total assets aggregating P 1,965,500 and total liabilities and equity for the same amount. Your verification disclosed the following: Assets Cash (including paid expenses of p100 and P4,000 contribution to a special fund for the acquisition of fixed assets) Advances by employees Certificate of PLDT preference shares (not held for trading) Petty cash fund Marketable equity securities intended for long term income earnings Promissory note from a corporate officer(renewed for the past two years) Merchandise inventory (including P1,000 worth of obsolete items and P4,000 merchandise received on consignment which was included in accounts payable) Accounts receivable (including P3,000 ascertained to be uncollectible. Of the amount collectible, a provision for bad debts 1% should be set up) Manning Corporation shares, at cost Prepaid insurance (including P800 cash surrender value of life insurance on the president; the company is the beneficiary)

P 80,000

1,000 2,000 1,000 52,000 14,000 489,500

188,000

10,000 2,000

318

Prepaid rental (covering the period January 1, 2015 to December 31, 2016) Building (net of P60,000 allowance for depreciation; current year’s depreciation of P5,000 not yet entered) Equipment, at cost (prior and current years’ depreciation amounted to P10,000) Total Assets

6,000 1,000,000

120,000 P1,965,000

Liabilities and Equity Serial bonds (ten year bonds issued on 1/1/13 maturing on 12/31/22 at P25,000 a year) Accounts payable (of this total, P2,000 pertains to creditors with debit balances deducted there-from) Notes payable (due 7/7/17) Accrued taxes Premium on share capital Appropriated retained earnings for plant expansion Cash dividends payable Share dividends payable Share capital, at par value Retained earnings Total liabilities and Equity

P 150,000 210,000

10,000 5,500 10,000 20,000 30,000 30,000 1,000,000 500,000 P 1,965,000

QUESTIONS: Based on the above and the result of your audit, compute the adjusted amount of the following as of December 31, 2015: 1. Total current assets a. P749,750 b. P746,750

c. P753,750 d. P751,750

Answer: D

2. Total noncurrent assets a. P1,777,800 b. P1,175,800

c. P1,117,800 d. P1,180,800

Answer: A

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3. Total current liabilities a. P268,500 b. P298,500

c. P269,500 d. P272,750

Answer: A 4. Total liabilities a. P407,500 b. P403,500

c. P433,500 d. P404,500

Answer: B 5. Total equity a. P1,521,050 b. P1,529,150

c. P1,526,050 d. P1,496,050

Answer: C PROBLEM NO. 5 – Statement of the financial position Presented below is the unaudited statement of financial position of EPSI Manufacturing Corporation as of December 31, 2015, prepared by the bookkeeper. EPSI Manufacturing Corporation Statement of Financial Position For the year ended December 31, 2015 Assets Cash Accounts Receivable, net Inventories Prepaid income taxes Investments Land Building Machinery and Equipment Goodwill Total Assets

P 225,000 345,700 560,000 40,000 57,700 450,000 1,750,000 1,964,000 37,000 P 5,429,400

Liabilities and Equity Accounts payable Mortgage payable Notes payable Lawsuit liability Income taxes payable Deferred tax liability Accumulated depreciation

P 133,800 900,000 500,000 80,000 61,200 28,000 420,000 320

Total liabilities

P 2,123,000

Share capital, P50 par, 40,000 shares issued Retained earnings Total equity Total liabilities and equity

2, 231,000 1,075,400 3,036,400 P 5,429,400

Your firm has been engaged to perform an audit, during which time the following data are found: 

Checks totaling P14,000 in payment of accounts payable were mailed on December 30, 2015 but were not recorded until 2016. Late in December 2015, the bank returned a customer’s P2000 check, marked DAIF, but no entry was made. Cash includes P100,000 restricted for building purposes.



Included in accounts receivable is a Р30,000 note due on December 31, 2018, from the company's president.



During 2015, the company purchased 500 ordinary shares of a corporation that supplies the company with raw materials. Total cost of these shares was P51,300, and the fair value on December 31, 2015 was Р47‚000. The company plans to hold the shares indefinitely.



Treasury shares were recorded at cost when the company purchased 200 of its own shares for P32 per share in May 2015. This amount is 1 included in investments.



On December 30, 2015, the company borrowed P500,000 from a bank in exchange for a 10% note payable, maturing on December 30, 2020. Equal principal payments are due December 30 of each year, beginning in 2016. This note is collateralized by a P250,000 tract of land acquired as a potential future building site, which is included.



The mortgage payable requires Р50,000 principal payments, plus f interest, at the end of each month. Payments were made on January 31 and February 28, 2016. The balance of this mortgage is due on 1 June 30, 2016. On March 1, 2016, prior to issuance of the audited financial statements, the company consummated a noncancellable agreement with the lender to refinance this mortgage. The new terms require P100,000 annual principal payments, plus interest, on February 28 beginning in 2017. The final payment is due on February 28, 2021



The lawsuit liability will be paid in 2016.



The following is an analysis of the deferred tax liability at December 31, 2015: Deferred taxes related to depreciation Deferred taxes related to lawsuit liability Net deferred tax liability

P48,000 (20,000) P28,000

321



The current income tax expense reported in company’s 2015 income statement was P61,200.



The company is authorized to issue 100,000 shares of P50 par value ordinary shares.

QUESTIONS: Based on the result of your audit, compute the adjusted amount of the following as of December 31, 2015: 1. Current assets a. P 984,700 b. P 1,012,700 c. P 986,700 d. P 1,026,700 Answer: C 2. Carrying amount of the property, plant and equipment a. P 3,914,000 b. P 3,774,000 c. P 4,164,000 d. P 3,494,000 Answer: D 3. Total assets a. P 4,994,700 b. P 4,964,700 c. P 4,984,700 d. P 5,004,700 Answer: D 4. Current assets a. P 1,221,000 b. P 1,261,000 c. P 421,000 d. P 426,000 Answer: B 5. Current liabilities a. P 1,221,000 b. P 1,261,000 c. P 421,000 d. P 426,000 322

Answer: A 6. Noncurrent liabilities a. P 1,223,000 b. P 1,200,000 c. P 428,000 d. P 448,000 Answer: D 7. Equity a. P 3,295,700 b. P 3,306,400 c. P 3,300,000 d. P 3,302,100 Answer: A PROBLEM NO. 6 – Statement of financial position The following data were taken from Jun Company for the year 2015: Sales Sales returns Inventories, January 1: Raw materials Work in process Finished goods Inventories, January 1: Raw materials Work in process Finished goods Direct labor Purchases Purchase returns Purchase discounts Freight in Freight out Allowance for doubtful accounts Sales salaries Office salaries Depreciation – factory building Depreciation – office equipment Depreciation – store equipment Depreciation – machinery and equipment

P 5,590,000 55,000 131,000 238,350 442,000 145,500 175,720 412,000 1,050,300 2,051,500 17,150 12,550 8,250 200,000 25,000 445,000 155,000 44,000 44,000 77,000 25,500 323

Amortization – patents Bad debts expense Factory supplies expense Accrued manufacturing expense payable Indirect labor Interest income Interest income Factory light and power Property taxes and insurance – factory building Prepaid insurance expense Royalties on production Supervision expense Tools expense Miscellaneous factory expense Dividends paid

33,000 20,000 75,550 34,500 35,300 116,240 34,250 65,000 13,200 18,750 13,200 65,000 10,500 50,250 70,000

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The total manufacturing costs is a. P 3,450,050 b. P 3,496,250 c. P 3,420,750 d. P 3,431,250 Answer: B 2. Cost of goods sold is a. P 3,588,880 b. P 3,513,380 c. P 3,523,880 d. P 3,542,680 Answer: A

3. Total selling expense is a. P 522,000 b. P 735,200 c. P 800,200 324

d. P 722,000 Answer: D 4. The income before income taxes is a. P 1,005,120 b. P 1,114,860 c. P 1,121,360 d. P 1,051,360 Answer: C PROBLEM NO. 7 – Statement of profit and loss The B corporation presented the following multiple-step income statement and statement of retained earnings for the year ended December 31, 2015, as developed by its bookkeeper who has completed 12 units of accounting: B Corporation Revenue Statement 31 December 2015 Net sales Less: Dividends declared P3.50 per ordinary share Revenues Less: Selling expenses Gross profit Less: Operating expenses Interest expense Cost of goods sold Provision for income tax Net operating income Add: Dividend revenue Less: General and administrative expenses Net Profit

P 390,000 15,000

P 375,000 41,600 P 8,200 227,400 23,920 P 73,880 3,600 48,600 P 28,880

B Corporation Retained Earnings Statement 31 December 2015 Beginning retained earnings Add: net profit Adjusted retained earnings Less: Loss on sale of land Ending retained earnings

P 116,000 28,880 P144,880 8,000 P 136,880 325

QUESTIONS: The correct net profit is a. P43,880 b. P39,000

c. 34,000 d. 35,880

Answer: A PROBLEM NO. 8 – Statement of profit or loss and other comprehensive income Tawi2 Company’s income statement fot the year ended December 31, 2015 reported net profit of P 10,000,000. The auditor raised questions about the following amounts that had been included in the net profit: Unrealized loss on decline in value of available for sale securities Loss onj write off of inventory due to a government ban net of tax Adjustment of profit of prior year net-debit Loss from expropriation of property , net of tax Exchange differences gain on translating foreign operations Revaluation surplus realization

P 500,000 1,500,000 2,000,000 3,500,000 4,500,000 1,000,000

QUESTIONS: 1. Tawi2 Company’s 2015 statement of comprehensive income should report profit at a. P 9,000,000 c. P7,000,000 b. P 6,500,000 d. P 8,500,000 Answer: C 2. Tawi2 Company’s 2015 statement of comprehensive income should total comprehensive income at a. P12,000,000 c. P 5,000,000 b. P11,000,000 d. P 4,000,000 Answer: B

PROBLEM NO. 9 – Statement of financial postion and statement of profit or loss

326

Bulls, Inc., a nonpublic enterprise, is negotiating a loan for expansion purposes and the bank requires audited financial statements. Before closing the accounting records for the year ended December 31, 2015, Bulls’ controller prepared the following comparative financial statements for 2015 and 2014. Bulls, Inc. Statement of Financial Position December 31, 2015 and 2014 2015

2014

P 275,000 78.000 487,000 (50,000) 425,000 310,000 (150,000) P 1,375,000

P 150,000 78,000 392,000 (32,000) 307,000 217,000 (121,000) P991,000

P 420,000

P 347,000

100,000 260,000 130,000 465,000 P 1,375,000

_ 260,000 130,000 254,000 P 991,000

Assets Cash Trading Secutities Accounts Receivable Allow. For doubtful accounts Inventories Property, plant, and equipment Accumulated depreciation Total assets Liabilities and Equity Accounts payable and accrued liabilities Estimated liability from lawsuit Share capital, P10 par Share premium Retained earnings Total liabilities and equity

Bulls, Inc. Statement of Profit or Loss For the Years Ended December 31, 2015 and 2014 2015 P1580,000

Net Sales Operating expenses: Cost of Sales Selling and admin. Depreciation Estimated loss form lawsuit Profit

P755,000 485,000 29,000 100,000 P1,369,000 P 211,000

2014 P1,250,000 P690,000 365,000 18,000 _________ P1,073,000 P 177,000

During the course of the audit, the following additional information was obtained:

327

a. The trading securities were acquired on December 31, 2014. The securities have a fair value of P67, 000 at December 31, 2015. b. In discussion with the company officials, it was determined that the doubtful accounts expense rate based on net sales should be reduced to 2% from 3%, effective January 1, 2015 c. As a result of errors in the physical count, inventories were overstated by P12,000 at December 31, 2014 and by P17,500 at December 31, 2015 d. On January 1, 2014, the cost of equipment purchased for P30, 000 was debited to repairs and maintenance. Bulls depreciates equipment of this type by straight-line method over five-year life with no residual value. e. On July 1, 2015, fully depreciated equipment purchased for P21, 000 was sold as scrap for P2,500. The only entry Bulls made was to debit cash and credit property and equipment for the scrap proceeds. The property and equipment (net) had a current cost of P250, 000 at December 31, 2015. f. Advertising and promotion expense for the year ended December 31, 2014 includes the P25,000 cost of printing sales catalogs for a special promotional campaign held in January 2015 g. Bulls was named as defendant in a lawsuit in October 2015. Bulls’ counsel is of the opinion that Bulls has good defense, and does not anticipate any impairment of Bulls ‘management wished liability will be incurred. Nevertheless, Bulls’ management wished to be conservative and, therefore established a loss contingency of P100,000 QUESTIONS: Based on the above and the result of your audit, compute for the following: (Disregard income taxes) 1. Adjusted retained Earnings as of January 1, 2015 a. P266,000 b. P297,000 c. P285,000 d. P291,000 Answer: D 2. Adjusted profit for the year ended December 31, 2015 a. P281,800 b. P181,800 c. P287,800 d. P306,800 Answer: A

328

3. Adjusted current assets as of December 31, 2015 a. P1,266,760 b. P1,190,300 c. P1,154,900 d. P1,202,300 Answer: D 4. Adjusted carrying amount of property and equipment as of December 31, 2015 a. P168,500 b. P180,500 c. P178,000 d. P192,500 Answer: B 5. Adjusted Shareholders’ equity as of December 31, 2015 a. P962,800 b. P950,800 c. P974,800 d. P862,800 Answer: A

PROBLEM NO. 10 – Statement of financial position of profit or loss Reproduced below is the draft statement of financial position of Spurs, a public listed company, as at 31 March 2015 P’00 Non-current assets (note(i)) Freehold property Plant Investment property at 1 April 2014 (note(iii)) Current Assets Inventory (note(iii)) Trade receivables and prepayments Cash Total Assets

P’00 126,000 110,000 15,000 251,000

60,400 31,200 13,800

105,400 356,400

Equity and liabilities Capital Reserves: 329

Ordinary shares of P0.25 each Reserves: Share Premium Accumulated profits – 1 April 2014 : Year 31 March 2015

150,000 10,000 52,500 47,500

Non-Current liabilities Deferred tax – at 1 April 2014 (note (v)) Current Liabilities Trade payables (note(iii)) Provision for plant overhaul (note(iv)) Income tax payable Suspense account (note(vi)) Total equity and liabilities

110,000 260,000 18,700

47,400 12,000 4,200

63,600 14,100 356,400

(i)

The profit or loss has been charged with P32 million being the first of four equal annual rental payments for an item of excavating plant. This first payment was made on 1 April 2014. Spurs has been advised that this is a finance lease with an implicit interest rate of 10% per annum. The plant had a fair value of 1311.2 million at the inception of the lease. None of the non-current assets have been depreciated for the current year. The freehold property should be depreciated at 2% on its cost of P130 million, the leased plant 18 depreciated at 25% per annum on a straight-line basis and the non-leased plant 15 depreciated at 20% on the reducing balance basis.

(ii)

Spurs adopts the fair value model for its investment property. Its value at 31 March 2015 has been assessed by a qualified surveyor at P12 .4 million.

(iii)

During an inventory count on 31 March 2015 items that had cost P6 million were identified as being either damaged or slow moving. It ' is estimated that they will only realize P4 million in total, on which sales commission of 10% will be payable. An invoice for materials » delivered on 12 March 2015 for P500, 000 has been discovered. It has not been recorded in Spurs‘ bookkeeping system, although the materials were included in the inventory count.

(iv)

Spurs operates some heavy excavating plant which requires a major overhaul every three years. The overhaul is estimated to cost P18 million and is due to be carried out in April 2016. The provision of P12 million represents two annual amounts of P6 million made in the years to 31 March 2014 and 2015.

(v)

The deferred tax liability required at 31 March 2015 has been calculated at P225 million 330

(vi)

The suspense account contains the credit entry relating to the issue on 1 October 2014 of a P 15 million 8% loan note. It was issued at a discount of 5% and incurred direct issue costs or P150, 000. It is redeemable after four years at a premium of 10%. Interest is payable six months in arrears. The first payment of interest has not been accrued and is due on 1 April 2015. Appointment of issue costs, discounts and premiums can be made on straight-line basis.

QUESTIONS: Based on the above and the result of your audit, compute for the following: (Disregard effect of the adjustments on current income tax) 1. Adjusted profit for the fiscal year ended 31 March 2015 a. P18,487,500 c. P12,487,500 b. P18,300,000 d. P18,675,000 Answer: B 2. Total noncurrent assets as of 31 March 2015 a. P232,200,000 c. P223,800,000 b. P236,200,000 d. P219,800,000 Answer: A 3. Total current liabilities as of 31 March 2105 a. P55,400,000 c. P55,900,000 b. P55,100,000 d. P54,500,000 Answer: C 4. Total non-current liabilities as of 31 March 2015 a. P42,500,000 c. P42,125,000 b. P44,000,000 d. P42,312,500 Answer: A 5. Total equity as of 31 March 2015 a. P237,175,000 c. P224,800,000 b. P236,987,500 d. P236,800,000 Answer: D 331

PROBLEM NO. 11 – Computation of statement of profit or loss items from statement of financial position and statement of cash flows The following financial statements are for Pol Company. Pol Company Comparative Statements of Financial Postion December 31, 2015 and 2014 Assets 2015 Cash P 400 Accounts Receivable 25,000 Inventory 30,000 Prepaid general expenses 5,700 Property, plant, and equipment 305,000 Accumulated depreciation (103,500) Patent 36,000

2014 P 3,400 18,000 34,000 5,000 320,000 (128,900) 40,000

Total Assets

P302,200

P291,500

Liabilities and Equity Accounts Payables Wages Payable Interest Payable Dividends Payable Income taxes Payable Bonds Payable Share Capital Retained Earnings

P 25,000 12,000 2,800 14,000 1,600 100,000 50,000 96,800

P 22,000 10,300 4,300 _ 1,200 120,000 50,000 84,000

Total Liabilities and Shareholders’ Equity

P302,200

P291,500

Pol Company Statement of Cash Flows For the Year Ended December 31, 2015 Cash flows from operating acitivites Cash collected from customers Cash payments for: Inventory purchases General expenses

P 685,300 P 300,000 102,000 332

Wages expenses Interest expenses Income tax expenses Net cash provided by operating activities Cash flows from investing activities Sale of property, plant, and equipment Purchase of property, plant, and equipment Net cash used in investing activities Cash flows from financing activities: Retirement of bonds payable Payment of Dividends Net cash used in financing activities Net increase in cash Cash at the beginning of the year Cash at the end of the year

150,000 11,000 23,900

586,900 P 98,400

P 27,200 (60,000) (32,800) P (23,000) (42,000) (65,000) P 600 3,400 P 4,000

Consider the following additional information: (a) All accounts payable relate to inventory purchases. (b) Property, plant, and equipment sold had an original cost of P75,000 and a carrying amount of P22,000.

QUESTIONS: Based on the foregoing, compute the following for the year ended December 31, 2015: 1. Cost of goods sold a. P307,000 b. P300,000 c. P299,000 d. P293,000 Answer: A 2. Depreciation expense a. P27,600 b. P25,400 c. P53,000 d. P78,400 Answer: A

333

3. Total operating expense a. P282,400 b. P284,600 c. P310,000 d. P335,400 Answer: B 4. Loss on retirement of bonds payable a. P3,000 b. P20,000 c. P23,000 d. P0 Answer: A 5. Net Income a. P12,800 b. P54,800 c. P40,800 d. P68,800 Answer: D PROBLEM NO. 12 – Computation of statement of cash flow items from statement of financial position and statement of profit or loss items Al Corp. uses the direct method to prepare its statement of cash flows. Al’s trial balances at December 31, 2015 and 2014 are as follows: 12/31/15 12/31/14 Debits P 35,000 P 32,000 Cash 33,000 30,000 Accounts Receivable 31,000 47,000 Inventory 100,000 95,000 Unamortized bond discount 4,500 5,000 Cost of goods sold 250,000 380,000 Selling expenses 141,500 172,000 General and Administrative expenses 137,000 151,300 Interest expense 4,300 2,600 Income tax expense 20,400 61,200 P 756,700 P 976,100 Credits Allowance for uncollectible accounts P 1,300 P 1,100 Accumulated depreciation 16,500 15,000 Trade accounts payable 25,000 17,500 334

Income taxes Payable Deferred tax liability 8% callable bonds payable Share capital Share Premium Retained earnings Sales  

21,000 5,300 45,000 50,000 9,100 44,700 538,800 P 756,700

27,100 4,600 20,000 40,000 7,500 64,600 778,600 P 976,100

Al purchased P5,000 equipment during 2015 Al allocated one-third of its depreciation expense to selling expense and the remainder to general and administrative expenses

QUESTIONS: Based on the foregoing, what amounts should Al report in its statement of cash flows for the year ended December 31, 2015 for: 1. Cash collected form customers? a. P258,500 b. P541,600

c. P536,000 d. P535,800

Answer: D

2. Cash paid for goods to be sold? a. P258,500 b. P257,500

c. P242,500 d. P226,500

Answer: D 3. Cash paid for interest? a. P4,800 b. P4,300

c. P3,800 d. P1,700

Answer: C 4. Cash paid for income taxes? a. P25,800 b. P20,400

c. P19,700 d. P15,000

Answer: A

335

5. Cash paid for selling expenses? a. P142,000 b. P141,500

c. P141,000 d. P140,000

Answer: C PROBLEM NO. 13 – Statement of cash flows The following is a list of the items to be included in the preparation of the 2015 statement of cash flows for the Norhan Company: a. Net income, P59,200

b. c. d. e. f. g. h. i. j. k. l. m. n. o. p. q.

Payment for purchase of building, P98,000 Increase in accounts receivable, P7,400 Proceeds from issuance of ordinary shares, P37,100 ’ Increase-in accounts payable, P4,500 Proceeds from' sale of land, P7,000 Depreciation expense, P12,600 Payment of dividends, P36,000 Gain on sale of land, P5,300 Decrease in inventory, P3,700 Payment for purchase of long-term investments, P9,600 Amortization of discount on bonds payable, P1,900 Proceeds from issuance of note, P18,000 Increase in deferred taxes payable, P5,000 Equipment acquired by finance lease, P19,500 Decrease in salaries payable, P2,300 Beginning cash balance, P20,300

QUESTIONS: Based on the foregoing information, compute for the following. 1. Cash provided by operating activities a. P68,100 b. P89,900 c. P74,900 d. P71,900 Answer: D

336

2. Cash used in investing activities a. P120,010 b. P107,600 c. P100,600 d. P9,600 Answer: C 3. Cash provided by financing activities a. P19,100 b. P38,600 c. P20,600 d. P1,100 Answer: A 4. Net decrease in cash a. P19,600 b. P6,600 c. P13,400 d. P9,600 Answer: D 5. Cash balance, ending a. P13,700 b. P10,700 c. P700 d. P6,900 Answer: B PROBLEM NO. 14 – Statement of cash flows The statement of financial position of Davao Company at the end of 2015 and 2014 follow:

Cash Accounts receivable (net) Inventory Prepaid expenses Buildings and equipment

2015 P 125,000 300,000 350,000 50,000 450,000

2014 P 175,000 225,000 225,000 125,000 375,000

Increase Decrease P (50,000) 75,000 125,000 (75,000) 75,000 337

Accumulated depreciation – buildings and equipment Land

Accounts payable Accrued expenses Notes payable – bank, long-term Mortgage payable Share capital, P10 par Retained earnings (deficit)

(90,000)

(40,000)

50,000

450,000 P 1,635,000

200,000 P 1,285,000 P 275,000 90,000 200,000

250,000 P 350,000

P 340,000 60,000 _ 150,000 1,045,000 40,000 P 1,635,000

795,000 (75,000) P 1,285,000

P 65,000 (30,000) (200,000) 150,000 250,000 115,000 P 350,000

Land was acquired for P250, 000 in exchange for ordinary shares, par P250, 000, during the year; all equipment purchased was for cash. Equipment costing P25, 000 was sold for P10, 000; book value of the equipment was P20, 000 and the loss was reported as an ordinary item in net income. Cash dividends of P50, 000 were charged to retained earnings and paid during the year; the transfer of net income to retained earnings was the only other entry in the Retained Earnings account. QUESTIONS: Based on the foregoing information, compute for the following 1. Net cash provided by operating activities. a. P120,000 b. P130,000 c. P140,000 d. P165,000 Answer: C 2. Net cash provided by (used in) investing activities. a. P10,000 b. (P100,000) c. (P90,000) d. (P340,000) Answer C 3. Net cash provided by (used in) financing activities. a. P150,000 b. P350,000 c. (P100,000) d. (P250,000) 338

Answer: C

X – SIMULATED BOARD EXAMINATIONS 1 PROBLEM NO. 1 Your audit of Nine Company disclosed that your client kept very limited records. Purchases of merchandise were paid for by check, but most other items were out of cash receipts. The company’s collections were deposited weekly. No record was kept of cash in the bank, nor was a record kept of sales. Accounts receivable were recorded only by keeping a copy of the ticket, and this copy was given to the customer when he paid his account.

339

Additional Information a. On January 2, 2015 Nine Company started business and issued share capital, 72,000 shares with P100 par, for the following considerations: Cash P 600,000 Building (useful life, 15 years) 5,400,000 Land 1,800,000 P 7,800,000 b. An analysis of the bank statements showed total deposits, including the original cash investment, of P4,200,000. The balance in the bank statement on December 31, 2015, was P300,000, but there were checks amounting to P60,000 dated in December but not paid by the bank until January 2016. Cash on hand on December 31, 2015 was P150,000 including customers’ deposit of P90,000. c. During the year, Nine borrowed P600,000 from the bank and repaid P150,000 and P30,000 interest. d. Disbursements paid in cash during the year were as follows: Utilities P 120,000 Salaries 120,000 Supplies 240,000 Dividends 180,000 P 660,000 e. An inventory of merchandise taken on December 31, 2015 showed P906,000 of merchandise. f. Tickets for accounts receivable totaled P1,080,000 but P60,000 of that amount may prove uncollectible. g. Unpaid suppliers invoices for merchandise amounted to P420,000. h. Equipment with a cash price of P480,000 was purchased in early January on a one-year installment basis. During the year, checks for the down payment and all maturing investments totaled P534,000. The equipment has a useful life of 5 years. QUESTIONS: Based on the above and the result of your audit, determine the following: (Disregard income taxes) 1. Payments for merchandise purchases in 2015 a. P2,586,000 b. P2,436,000 2. Collections from sales in 2015 a. P3,720,000 b. P4,320,000 3. Net income for the year ended December 31, 2015 a. P1,770,000 b. P1,620,000 4. Shareholders’ equity as of December 31, 2015 a. P9,390,000 b. P9,240,000

c. P2,646,000 d. P3,246,000 c. P3,000,000 d. P4,920,000 c. P1,560,000 d. P 960,000 c. P9,180,000 d. P8,580,000 340

5. Total assets as of December 31, 2015 a. P9,583,200 b. P9,540,000

c. P9,390,000 d. P9,450,000

PROBLEM NO. 2 The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts at December 31, 2014, had the following balances. Raw materials P 650,000 Work in process 1,200,000 Finished goods 1,640,000 The following are some of the transactions that affected the inventory of the Bolinao Company during 2015. Jan. 8

Feb. 14

Mar. 1 Apr. 3 Aug. 30

Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price. Bolinao repossessed an inventory item from a customer who was overdue in making payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit for this item is considered to be P3,200. Refinishing costs of P6,400 were incurred on the repossessed item. The repossessed item was resold for P24,000 on account, 20% down. A sale on account was made on finished goods that have a list price of P59,200 and a cost P38,400. A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price.

QUESTIONS: Based on the above and the result of your audit, answer the following: (Assume the client is using perpetual inventorysystem) 6. The entry on Jan. 8 will include a debit to Raw Materials Inventory of a. P200,000 b. P144,000 c. P141,120 d. P196,000 7. The repossessed inventory on Feb. 14 is most likely to be valued at a. P14,000 b. P24,000 c. P17,200 d. P14,400 8. The journal entries on April 3 will include a a. Debit to Cash of P24,000. b. Debit to Cost of Repossessed Goods Sold of P14,000. 341

c. Credit to Profit on Sale of Repossessed Inventory of P3,600. d. Credit to Repossessed Inventory of P20,400. 9. The trade-in inventory on Aug. 30 is most likely to be valued at a. P8,000 b. P4,800 c. P6,000 d. P6,400 10. How much will be recorded as Sales on Aug. 30? a. P51,200 b. P56,000 c. P57,200 d. P57,600 PROBLEM NO. 3 In connection with your examination of the financial statements of the Anne Corporation for the year 2015, the company presented to you the Property, Plant and Equipment section of its statement of financial position as of December 31, 2014 which consists of the following: Land P 400,000 Buildings 3,200,000 Leasehold improvements 2,000,000 Machinery and equipment 2,800,000 The following transactions occurred during 2015:  Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land Anne paid a P240,000 commission to a real estate agent. Costs of P60,000 were incurred to clear the land. During the course of clearing the land, timber and gravel were recovered and sold for P20,000.  A second tract of land (site number 103) with a building was acquired for P1,200,000. The closing statement indicated that the land value was P800,000 and the building value was P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. A new building was constructed for P600,000 plus the following costs: Excavation fees P 44,000 Architectural design fees 32,000 Building permit fee 4,000 The building was completed and occupied on September 1, 2015.  A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided regarding its future use.  Extensive work was done to a building occupied by Anne under a lease agreement. The total cost of the work was P500,000, which consisted of the following: Particulars

Amount

Painting of the ceilings

P 40,000 One year

Electrical work

Useful Life

Ten years 140,000 342

Construction of extension to current working area 320,000

 

Thirty years

The lessor paid one-half of the costs incurred in connection with the extension to the current working area. During December 2015, costs of P260,000 were incurred to improve leased office space. The related lease will terminate on December 31, 2017, and is not expected to be renewed. A group of new machines was purchased under a royalty agreement which provides for payment of royalties based on units of production for the machines. The invoice price of the machines was P300,000, freight costs were P8,000, unloading charges were P6,000, and royalty payments for 2015 were P52,000.

QUESTIONS: Based on the above and the result of your audit, determine the adjusted balance of the following as of December 31, 2015: 11. Land a. P8,400,000 c. P5,480,000 b. P6,000,000 d. P5,900,000 12. Buildings a. P3,800,000 c. P4,200,000 b. P4,280,000 d. P3,880,000 13. Leasehold improvements a. P2,600,000 c. P2,560,000 b. P2,300,000 d. P2,720,000 14. Machinery and equipment a. P3,114,000 c. P3,166,000 b. P3,100,000 d. P3,108,000 15. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records. Which of the following is the best evidence to help achieve this objective? a. Documentary support obtained by vouching entries to subsidiary records and invoices. b. Oral evidence obtained by discussions with operating management. c. Physical examination of a sample of newly recorded fixed assets. d. Documentary support obtained by reviewing titles and tax returns. PROBLEM NO. 4 The following information pertain to Teal Company’s delivery trucks: DELIVERY EQUIPMENT Date Particulars

Debit

01/01/13

P3,200,000

Trucks 1,2,3, and 4

Credit

343

03/15/14

Replacement of Truck 3 tires

25,000

07/01/14

Truck 5

800,000

07/10/14

Reconditioning of Truck 4, which was damaged in a 35,000 collision

09/01/14

Insurance recovery on Truck 4 accident

P33,000

10/01/14

Sale of Truck 2

600,000

04/01/15

Truck 6

1,000,000

05/02/15

Repainting of Truck 4

27,000

06/30/15

Truck 7

720,000

ACCUMULATED DEPRECIATION-DELIVERY EQUIPMENT Date Particulars

Debit

150,000

Credit

12/31/13


P300,000

12/31/14


300,000

12/31/15


300,000

a. On July 1, 2014, Truck 3 was traded in for a new truck, Truck 5, costing P850,000; the selling party allowed a P50,000 trade in value for the old truck. b. On April 1, 2015, Truck 6 was purchased for P1,000,000; truck 1 and cash of P850,000 being given for the new truck. c. The depreciation rate is 20% by unit basis. d. Unit costs of trucks 1 to 4 is at P800,000 each. QUESTIONS: Based on the above and the result of your audit, answer the following: 16. How much is the net loss on disposal of trucks in 2014? a. P510,000 c. P590,000 b. P430,000 d. P230,000 17. What is the loss on trade-in of Truck 1? a. P410,000 c. P250,000 b. P290,000 d. P150,000 18. What is the adjusted balance of the Delivery Equipment account as of December 31, 2015? a. P4,170,000 c. P3,170,000 b. P2,650,000 d. P3,370,000 19. The 2015 depreciation expense in understated by: 344

a. P372,000 c. P92,000 b. P252,000 d. P292,000 20. Which of the following procedures would least likely lead the auditor to detect unrecorded fixed asset disposals? a. Examine insurance policies. b. Review repairs and maintenance expense. c. Review property tax files. d. Scan invoices for fixed asset additions. PROBLEM NO. 5 Maybe company is constructing a building. Construction began on January 1 and was completed on December 31. Expenditures were P2,400,000 on March 1, P1,980,000 on June 1, and P3,000,000 on December 31. Maybe Company borrowed P1,200,000 on January 1 on a 5-year, 12% note to help finance construction of the building. In addition, the company had outstanding all year a 10%, 3-year, P2,400,000 note payable and an 11%, 4-year, P4,500,000 note payable. 21. What are the weighted-average accumulated expenditures? a. P4,380,000 c. P7,380,000 b. P3,155,000 d. P3,690,000 22. What is the weighted-average interest rate used for interest capitalization purposes? a. 11% c. 10.5% b. 10.85% d. 10.65% 23. What is the avoidable interest for Maybe Company? a. P144,000 c. P164,281 b. P463,808 d. P352,208 24. What is the actual interest for Maybe Company? a. P879,000 c. P735,000 b. P891,000 d. P352,208 25. What amount of interest should be charged to expense? a. P382,000 b. P735,000 c. P526,792 d. P415,192

345

PROBLEM NO.6 The following information relates to the obligations of Lakers Corporation as of December 31, 2015. 

Accounts payable for goods and services purchased on open account amounted to P35,000 at December 31, 2015.



On December 15, 2015, Lakers declared a cash dividend of P.05 per share, payable on January 12, 2016, to shareholders of record as of December 31, 2015. Lakers had 1 million ordinary shares issued and outstanding.



On December 31, 2015, Lakers entered into a six-year finance lease on a warehouse and made the first annual lease payment of P100,000. The incremental borrowing rate was 12%, and the interest rate implicit in the lease, which was known to Lakers, was 10%. The rounded present value factors for an annuity due for six years are 4.6 at 12% and 4.8 at 10%.



On July 1, 2015, Lakers issued P500,000, 8% bonds for P440,000 to yield 10%. The bonds pay interest annually every June 30. At December31, 2015, the bonds were trading on the open market at 86 to yield 12%. Lakers uses the effective interest method.



Lakers’ 2015 accounting profit was P850,000 and its taxable profit was P600,000. The difference is due to P100,000 permanent differences and P150,000 of temporary differences related to noncurrent assets. At December 31, 2015, Lakers had cumulative taxable differences of P300,000 related to noncurrent assets. Lakers’ effective tax rate is 30%. Lakers made no estimated tax payments during the year.

Questions: Based on the above and the result of your audit, determine the following as of and for the year ended Dec. 31, 2015: 26. Carrying amount of finance lease liability a. P480,000 c. P380,000 b. P428,000 d. P360,000 27. Carrying amount of bonds payable a. P446,400 c. P442,000 b. P444,000 d. P430,000 28. Current liabilities a. P342,200 b. P327,000

c. P367,000 d. P347,000 346

29. Noncurrent liabilities a. P850,000 b. P854,400

c. P895,000 d. P902,800

30. Interest expense a. P92,000 b. P70,000

c. P44,000 d. P22,000

PROBLEM NO.7 In connection with your audit of the Get Back Company, you were asked to prepare comparative data from the company’s inception to the present. The following were gathered during your audit: a. Get Back Company’s charter became effective on January 2, 2011, when 80,000, P10 par value, ordinary shares and 40,000, 5% cumulative, nonparticipating, preference shares were issued. The ordinary share was sold at P12 per share and the preference share was sold at its par value of P100 per share. b. Get Back was unable to pay preference dividends at the end of its first year. The owners of the preference shares agreed to accept 2 ordinary shares for every 5 shares of preference shares owned in discharge of the preference share dividends due on December 31, 2011. The shares were issued on January 2, 2012. The fair value was P30 per share for ordinary on the date of issue. c. Get Back Company acquired all outstanding shares of Day Tripper Corporation on May 1, 2013, in exchange for 40,000 ordinary shares of Get Back. d. Get Back split its ordinary shares 3 for 2 on January 1, 2014, and 2 for 1 on January 1, 2015. e. Get Back offered to convert 20% of the preference shares to ordinary on the basis of 2 ordinary share for 1 preference share. The offer was accepted, and the conversion was made on July 1, 2015. f. No cash dividends were declared on ordinary shares until December 31, 2013. Cash dividends per ordinary share were declared and paid as follows:

2013 2014 2015

December 31 P4.00 P5.00 P2.00

June 30 P3.00 P2.50

Questions: 347

Based on the above and the result of your audit, determine the following: 31. Outstanding number of ordinary shares as of December 31, 2015 a. 364,800 c. 372,800 b. 684,800 d. 380, 800 32. Outstanding number of preference shares as of December 31, 2015 a. 40,000 c. 32,000 b. 24,000 d. 96,000 33. Amount of cash dividends declared and paid to ordinary shareholders for the year 2014 a. P972,800 c. P1,459,200 b. P608,000 d. P1,981,440 34. Amount of cash dividends declared and paid to ordinary shareholders for the year 2015 a. P3,911,040 c. P1,713,600 b. P3,041,600 d. P1,673,600 35. Where no independent stock transfer agent are employed and the corporation issues its own stocks and maintains stock records, cancelled stock certificates should a. Be destroyed to prevent reissuance. b. Be defaced and sent to the secretary of state. c. Be defaced to prevent reissuance and attached to their corresponding stubs. d. Not be defaced but segregated from other stock certificates and retained in a cancelled certificates file. PROBLEM NO.8 Bryant Corporation, a non-public entity, was incorporated on December 1, 2014, and began operations one week late closing the books for the fiscal year ended November 30, 2015, the controller prepared the following financial statements: Bryant Corporation Statement of Financial Position November 30, 2015 Assets Current assets: Cash Marketable securities, at cost Accounts receivable Allowance for doubtful accounts Inventories Prepaid insurance Total current assets

P150,000 60,000 450,000 (59,000) 430,000 15,000 1,046,000 348

Property, plant and equipment Less accumulated depreciation Property, plant and equipment, net Research and development costs Total assets Liabilities and Shareholder’s equity Current liabilities: Accounts payable and accrued expenses Income taxes payable Total current liabilities Shareholders’ equity Share capital, P10 par value Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity

426,000 (40,000) 386,000 120,000 P1,552,000

P592,000 224,000 816,000 400,000 336,000 736,000 P1,552,000

Bryant Corporation Statement of Income For the Fiscal Year Ended November 30, 2015 Net Sales Operating expenses: Cost of Sales Selling and administrative Depreciation Research and development Income before income taxes Provision for income taxes Net income

P2,950,000

1,670,000 650,000 40,000 30,000 2,390,000 560,000 224,000 P336,000

Bryant is in the process of negotiating a loan for expansion purposes, and the bank has requested audited financial statements. During the course of the audit, the following additional information was obtained: a. The investment portfolio consists of short-term investments in marketable equity securities with a total market valuation of P55,000 as of November 30,2015. b. Based on an aging of the accounts receivable as of November 30, 2015, it was estimated that P36,000 of the receivables will be uncollectible. c. Inventories at November 30, 2015 did not include work in process inventory costing P12,000, sent to an outside processor on November 29, 2015.

349

d. A P3,000 insurance paid on November 30, 2015 on a policy expiring one year later was charged to insurance expense. e. Bryant adopted a pension plan on June 1, 2015 for eligible employees to be administered by a trustee. Based upon actuarial computations, the first twelve months’ normal pension was estimated at P45,000. f. On June 1, 2015, a production machine purchased for P24,000 was charged to repairs and maintenance. Bryant depreciates machines of this type on the straight-line method over a five-year life with no salvage value, for financial and tax purposes. g. Research and development costsof P150,000 were incurred the development of a patent, which Bryant expects to be granted during the fiscal year ending November 30, 2016. Bryant initiated a five-year amortization of the P150,000 total cost during the fiscal year ended November 30, 2015. h. During December 2015, a competitor company filed suit against Bryant for patent infringement claiming P200,000 damages. Bryant’s legal counsel believes that an unfavourable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is P50,000. i. The 40% effective tax rate was determined to be appropriate for calculating the provision for income taxes for the fiscal year ended November 30, 2015. Ignore computation of the deferred portion of income taxes. QUESTIONS: Based on the above and the result of your audit, determine the following as of and for the fiscal period ended November 30, 2015: 36. Net income a. P253,260 b. P283,260

c. P235,260 d. P239,760

37. Current assets a. P1,084,000 b. P1,061,000

c. P1,079,000 d. P1,073,000

38. Total assets a. P1,484,200 b. P1,486,600

c. P1,489,200 d. P1,491,600

39. Total liabilities a. P833,340 b. P783,340

c. P855,840 d. P805,840 350

40. Total equity a. P683,260 b. P635,260

c. P639,760 d. 653,260

PROBLEM NO.9 Hot Company was started by Chika Babes early in 2015. Initial capital was acquired by issuing ordinary shares to various investors and by obtaining a bank loan. The company operates a retail store that sells records, tapes, and compact discs. Business was so good during the first year of operations that June is considering operating a second store on the other side of town. The funds necessary for expansion will come from a new bank loan. In order to approve the loan, the bank requires financial statements. Chika asks for your help in preparing the balance sheet and presents you with the following information for the year ending December 31, 2015. a. Cash receipts consisted of the following: From customers From issue of ordinary shares From bank loan

P3,600,000 1,000,000 1,000,000

b. Cash disbursements were as follows: Purchase inventory P3,000,000 Rent 150,000 Salaries 300,000 Utilities 50,000 Insurance 30,000 Purchase of equipment and furniture 400,000 c. The bank loan was made on March 31, 2015. A note was signed requiring payment of interest and principal on March31, 2016. The interest rate is 12%. d. The equipment and furniture was purchased on January 3, 2015, and have an estimated useful life of 10 years with no anticipated salvage value. Depreciation per year is P40,000. e. Inventories on hand at the end of the year cost P1,000,000. f. Amounts owed at December 31, 2015, were as follows: To suppliers of inventory P200,000 To the utility company 10,000 g. Rent on the store building is P10,000 per month. On December 1, 2015, four months’ rent was paid in advance.

351

h. Net income for the year was P760,000. Assume that the company is not subject to the income tax. i. One million shares of no par ordinary shares are authorized, of which 200,000 shares were issued and are outstanding. QUESTIONS: After preparing all the necessary adjustments based on the above audit findings, determine the best choice for the following: 41. The correct cash balance as of December 31, 2015 is a. P1,670,000 b. P1,760,000

c. P1,690,000 d. P1,696,000

42. Net income (loss) for the year is a. P760,000 b. P780,000

c. P750,000 d. P(760,000)

43. Total accounts payable as of December 31, 2015 is a. P200,000 b. P210,000

c. P250,000 d. P201,000

44. Total liabilities as of December 31, 2015 would amount to a. P300,000 c. P1,300,000 b. P1,000,000 d. P1,210,000 45. Total current assets as of December 31, 2015 would amount to a. P2,700,000 c. P1,030,000 b. P2,670,000 d. P1,670,000 PROBLEM NO. 10 Presented below is the statement of financial position of Simple Corporation prepared by the chief accountant for the current year, 2015. Simple Corporation Statement of Financial Position December 31, 2015 Current assets Investments Property, plant and equipment Intangible assets

P 435,000 640,000 1,720,000 305,000 P3,100,000

352

Current liabilities Long-term liabilities Shareholders’ equity

P 330,000 1,000,000 1,770,000 P3,100,000

Consider the following information: 1. The current assets section includes: cash P100,000, accounts receivable P170,000 less P10,000 for allowance for doubtful accounts, inventories P180,000, and unearned revenue P5,000. The cash balance is composed of P114,000, less a bank overdraft of P14,000. Inventories are stated on the lower of FIFO cost or market. 2. The investments section includes: the cash surrender value of a life insurance contract P40,000; investment in ordinary shares, short-term (trading) P80,000 and long-term (available-for-sale) P270,000; and bond sinking fund P250,000. The cost and fair value of investments in ordinary shares are the same. 3. Property, plant and equipment includes: buildings P1,040,000 less accumulated depreciation P360,000; equipment P450,000 less accumulated depreciation P180,000; land P500,000; and land held for future use P270,000. 4. Intangible assets include: a franchise P165,000; goodwill P100,000; and discount on bonds payable P40,000. 5. Current liabilities include: accounts payable P90,000; notes payable-short term P80,000 and long-term P120,000; and taxes payable P40,000. 6. Long-term liabilities are compose solely of 10% bonds payable due 2022. 7. Shareholders’ equity has: preference shares, no par value, authorized 200,000 shares, issued 70,000 shares for P450,000; and ordinary shares, P1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of P10. In addition, the corporation has retained earnings of P320,000. 8. The company’s management does not elect to use the fair value option for any of its financial assets or liabilities. QUESTIONS: Based on the above and the result of your audit, compute the adjusted amount of the following to be reported on the company’s statement of financial position as of December 31, 2015: 46. Current assets a. P548,000 b. P574,000

c. P588,000 d. P534,000 353

47. Noncurrent investments a. P830,000 b. P520,000

c. P560,000 d. P790,000

48. Property, plant and equipment a. P1,720,000 b. P1,885,000

c. P1,615,000 d. P1,450,000

49. Total assets a. P2,814,000 b. P2,979,000

c. P3,079,000 d. P3,093,000

50. Current liabilities a. P224,000 b. P229,000

c. P210,000 d. P215,000

XI – SIMULATED BOARD EXAMINATIONS 1 LETTER ANSWERS ANSWERS: 1. D 2. A 3. D 4. D 5. B 6. C 7. A 8. D 9. B 10. B

11. B 12. D 13. C 14. A 15. C 16. B 17. B 18. D 19. D 20. B

21. B 22. D 23. D 24. A 25. C 26. C 27. C 28. D 29. A 30. D

31. D 32. C 33. C 34. D 35. C 36. A 37. C 38. B 39. A 40. D

41. A 42. A 43. B 44. C 45. A 46. D 47. A 48. D 49. C 50. B

354

X – SIMULATED BOARD EXAMINATION II

PROBLEM NO. 1 You were asked by Something Corporation to audit its financial statements for the years ended December 31, 2014 and 2015. While reviewing the entity’s records for 2014 and 2015, you discover that no adjustments have yet been made for the items below. Item no. 1 Insurance premiums of P300,000 for the three-year period beginning January 1, 2014, had been paid and fully expensed in 2014. Item no. 2 The merchandise inventories at the end of 2014 and 2015 did not include merchandise that was then in transit and to which the company had title. These shipments of P50,000 and P30,000 were recorded as purchases in January 2015 and 2016, respectively. Item no. 3 Rental of P60,000 on an equipment, applicable for six months, was received on November 1, 2014. The entire amount was reported as income upon receipt. Item no. 4 The entity purchased a machine on January 2, 2014 at a cost of P120,000. An additional of P50,000 was spent for installation, but this amount was charged erroneously to repairs expense. The machine has a useful life o five years and residual amount of P20,000. Item no. 5 The entity received P360,000 from a customer at the beginning of 2014 for services that it is to perform evenly over three-year period beginning in 2014. None of the amount received was reported as unearned revenue at the end of 2014. Questions: Based on the above and the result of your audit, answer the following: 1. In relation to Item no. 1, which of the following is correct? a. The 2014 profit is overstated b. The 2015 profit is overstated c. The December 31, 2014 retained earnings is correctly stated d. The December 31, 2015 retained earnings is correctly stated 2. In relation to Item no. 2, which of the following is incorrect? a. The 2014 profit is understated b. The 2015 profit is correctly stated 355

c. The December 31, 2014 retained earnings is correctly stated d. The December 31, 2015 retained earnings is correctly stated 3. In relation to Item no. 3, which of the following is correct? a. The 2014 profit is overstated by P60,000. b. The 2015 profit is understated by P60,000. c. The 2015 profit is understated by P40,000. d. The December 31, 2014 retained earnings is correctly stated. 4. In relation to Item no. 4, which of the following is correct? a. Retained earnings at December 31, 2015, was understated by P30,000 and 2015 income was overstated by P6,000 b. Retained earnings at December 31, 2015, was understated by P38,000 and 2015 income was overstated by P6,000 c. Retained earnings at December 31, 2015, was understated by P30,000 and 2015 income was overstated by P10,000 d. 2014 income was understated by P50,000 5. In relation to Item no. 5, which of the following is incorrect? a. The 2014 profit is overstated by P240,000 b. The 2015 profit is understated by P120,000 c. The December 31, 2014 retained earnings is overstated by P240,000 d. The December 31, 2015 retained earnings is correctly stated

PROBLEM NO. 2 The general ledger trial balance of Calamba Corporation includes the following balance sheet accounts at December 31, 2015: Cash Accounts Receivable Inventory Trading securities Available for sale investments Prepaid insurance Deferred tax asset Bank overdraft

P1,056,000 1,220,000 441,000 200,000 500,000 50,000 150,000 100,000

Additional information: Cash 356

    

The sales book was left open up to January 5, 2016, and cash sales totaling P150,000 were considered as sales in December. Checks of P93,000 in payment of liabilities were prepared before December 31, 2015, recorded in the books, but not mailed or delivered to payees. Post-dated checks totaling P78,000 are being held by the cashier as part of cash. The company’s experience shows that post-dated checks are eventually realized. Customer’s check for P15,000 deposited with but returned by Bank, “NSF” on December 27, 2015. Return was recorded in the books. The cash account includes P400,000 of compensating balance against a short-term bank loan. The compensating balance is legally restricted as to withdrawal.

Accounts receivable The accounts receivable consists of the following: Trade accounts receivable Allowance for uncollectible accounts Claim against shipper for goods lost in transit Selling price of unsold goods sent by Calamba on consignment at 130% of cost (included in Calamba’s ending inventory at cost) Security deposit on lease of warehouse used for storing some inventories Total

P650,000 (20,000) 30,000

260,000 300,000 P1,220, 000

Inventory A physical count of inventory at December 31, 2015 revealed that Calamba had inventory on hand at that date with a cost of P441,000. The annual audit identified that the following items were excluded from this amount and the related transactions were not recorded:     

Merchandise of P61,000 is held by Calamba on consignment. The consignor is Laguna Company. Merchandise costing P38,000 was shipped by Calamba FOB destination to a customer on December 31, 2015. The customer was expected to receive the goods on January 6, 2016. Merchandise costing P46,000 was shipped by Calamba FOB shipping point to a customer on December 29, 2015. The customer was scheduled to receive the goods on January 2, 2016 Merchandise costing P83,000 shipped by a vendor FOB destination on December 31, 2015 was received by Calamba on January 4, 2016. Merchandise costing P51,000 purchased FOB shipping point was shipped by the supplier on December 31, 2015 and received by Calamba on January 5, 2016.

Questions: Based on the above and the result of the audit, determine the adjusted amount of the following as of December 31, 2015

357

6. Cash a. P921,000 b. P521,000 c. P584,000 d. P506,000 7. Net accounts receivable a. P630,000 b. P782,800 c. P767,800 d. P754,000 8. Trade and other receivables, net a. P797,800 b. P812,800 c. P660,000 d. P784,000 9. Inventory a. P730,000 b. P340,000 c. P451,000 d. P530,000 10. Current assets a. P2,361,000 b. P2,498,800 c. P2,485,000 d. P2,513,800

PROBLEM NO. 3 The following data were taken from your current working papers in connection with your audit of the Pacers Company’s financial statements for the year ended December 31, 2015 Cash account consists of the following items: Petty cash fund Security Bank checking account Allied Bank current account

P25,000 (37,500) 344,250 P331,750

358

a. The count of the cashier’s accountability on January 2, 2016, revealed total bills and coins of P9,000. Unreplenished vouchers for various expenses totaled P16,000, of which P3,000 pertains to January 2016. b. On December 29,2015 a check for P87,500 was drawn against Security Bank current account resulting in bank overdraft of P37,500. The check was picked up by the supplier on January 3, 2016. c. Bank reconciliation statement prepared by the cashier for the Allied Bank account follows: Bank Balance Add: Deposit in transit Bank services charges

P310,500 P61,250 1,250

Total

62,500 373,000

Less: Outstanding checks Check no.

Amount

214

P 2,500

219

20,750

225

6,000

228

8500

Book balance

28,750 P344,250

*Check certified by the bank in December 2015 All reconciling items were traced to the bank statement. Further investigation indicated that the deposits in transits include a customer’s post-dated check amounting to P40,000. The check represents a collection from account customer for sales made in the middle of October 2015. Questions: Based on the application of the necessary audit procedures and appreciation of the above data, you are to provide the answers to the following: 11. How much is the adjusted balance of petty cash fund as of December 31, 2015? a. P12,000 b. P 9,000 c. P13,000 d. P16,000

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12. How much is the adjusted Allied Bank current account as of December 31, 2015? a. P336,500 b. P296,500 c. P305,500 d. P330,250 13. How much is the cash shortage as of December 31, 2015 a. P46,500 b. P 9,000 c. P 6,500 d. P 0 14. How much is the adjusted cash as of December 31, 2015? a. P355,500 b. P367,500 c. P398,500 d. P358,500 15. An auditor suspects that a client’s cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the a. Date checks are deposited per bank statements with dates remittance credits are recorded. b. Daily cash summaries with the sums of the cash receipts journal entries. c. Individual bank deposit slips with the details of the monthly bank statements. d. Dates uncollectible accounts are authorized to be written off with the dates the writeoffs are actually recorded.

PROBLEM NO. 4 In connection with your examination of the financial statements of Seven, Inc for the year ended December 31, 2015, you were able to obtain the following information from the results of your confirmation of the entity’s accounts receivable: Customer James

Customer’s Comments

Audit Findings

The goods sold on December 1 were The client failed to record credit memo returned on December 16, 2015 no. 23 for P12,000. The merchandise was included in the ending inventory at cost.

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Wade

We do not owe this amount, we did not Investigation revealed that goods sold for receive any merchandise from your P16,000 were shipped to Wade on company. December 29, 2015, terms FOB shipping point. The goods were lost in transit and the shipping company has acknowledged its responsibility for the loss of the merchandise.

Bosh

I am entitled to a 10% employee Bosh is an employee of Seven. Starting discount. Your bill should be reduced November 2015, all company employees by P1,200 were entitled to a special discount

Allen

We have not yet sold the goods. We Merchandise billed for P18,000 were will remit the proceeds as soon as the consigned to Allen on December 30, goods are sold 2015. The goods cost P13,000. The inventory was determined by physical count at the client’s warehouse.

Lewis

We do not owe you P20,000. We The sale of merchandise on December 18, already paid our accounts as evidenced 2015 was paid by Lewis on January 6, by OR #1234 2016.

Chalmers

Reduce your bill by P1,500

The amount represents freight paid by the customer for the merchandise shipped on December 17, 2015, terms, FOB destination-collect.

Questions: Based on the above and the result of your audit, answer the following: 16. In relation to customer Wade, the necessary adjusting entry includes a. A debit to Sales of P16,000 b. A credit to Accounts receivable of P16,000 c. Both a and b d. Neither a nor b 361

17. In relation to customer Allen, the necessary adjusting entry does not include a. A debit to Sales of P18,000 b. A debit to inventory of P13,000 c. A credit to Accounts receivable of P18,000 d. None of the above 18. In relation to customer Lewis, the necessary adjusting entry includes a debit to a. A debit to Cash of P20,000 b. A credit to Accounts receivable of P20,000 c. Both a and b d. Neither a nor b 19. Accounts receivable as of December 31, 2015 is overstated by a. P32,700 b. P47,500 c. P48,700 d. P68,700 20. Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following? a. Accounts receivable and tracing them to cash receipts. b. Recorded sales transactions and tracing them to the general ledger c. Shipping documents and tracing them to the sales journal. d. Inventory records and tracing them to the shipping documents.

PROBLEM NO. 5 You obtained the following information from the balance sheet of Caloocan Company in connection with your audit of the Company’s financial statements for the year 2015: Dec 31, 2015

Dec 31, 2014

P706,600

P200,000

Notes receivable

0

50,000

Inventory

?

399,750

Accounts payable

?

150,000

Cash

All operating expenses are paid by Caloocan with cash and all purchases of inventory are made on account. Caloocan sells only on product. All sales are cash sales which are made for P100 per unit. Caloocan purchases 1,500 units of inventory per month and values its inventory using periodic FIFO. The unit cost of inventory during January 2015 was P65.20 and increase P0.20 per month 362

during the year. During 2015, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending inventory for 2014 was valued at P65.00 per unit. Questions: Based on the above and the result of your audit, determine the following: 21. Number of units sold during 2015 a. 18,900 b. 18,400 c. 8,268 d. 8,768 22. Accounts payable balance at December 31, 2015 a. P400,000 b. P380,200 c. P150,000 d. P383,500 23. Inventory amount at December 31, 2015 a. P 385,900 b. P1,055,183 c. P 352,500 d. P1,022,483 24. Which of the following audit procedures would provide the least reliable evidence that the client has legal title to inventories? a. Confirmation of inventories at locations outside the client’s facilities b. Observation of physical inventory counts c. Examination of paid vendor’s invoices d. Analytical review of inventory balances compared to purchasing and sales activities 25. An auditor generally tests physical security controls over inventory by a. Test counts and cutoff procedures b. Examination and reconciliation c. Inquiry and observation d. Inspection and recomputation

PROBLEM NO. 6 In 2010, Hawks Corporation acquired a silver mine in bengue. Because the mine is located deep in the Benguet mountains, Hawks was able to acquire the mine for the low price of P50,000. In 2011, Hawks constructed a road to the silver mine costing P5,000,000. Improvement to the mine made in 2011 cost P750,000. Because of the improvents to the mine surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete.

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During 2012, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2010, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2013, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2014, workers mined 1 million tons of silver. During the same yeaer, geologists discovered that the mine contained 3 millio tons of silver ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2014 to facilitate the removal of the additional silver. Early in 2014, an additional building was constructed at a cost of P225,000 to the house the additional workers needed to excavate the added silver. This building is not expected to have any residual value. In 2015, 2.5 million tons of silver were mined and costs of P1,100,000 wew incurred at the beginning of the year for improvements to the mine. Questions: Based on the above and the result of your audit, determine the following: (Round off depletion and depreciation rates to two decimal places) 26. Depletion for 2013 a. P6,300 b. P7,250 c. P6,500 d. P5,550 27. Depletion for 2014 a. P1,300,000 b. P780,000 c. P1,820,000 d. P870,000 28. Depreciation for 2014 a. P250,000 b. P180,000 c. P490,000 d. P210,000 29. Depletion for 2015 a. P1,950,000 b. P2,425,000 c. P2,150,000 d. P2,275,000 30. Depreciation for 2015 a. P525,000 b. P1,225,000 c. P625,000 d. P450,000 364

PROBLEM NO. 7 Perseverance Corporation was authorized at ehe beginning of 2013 with 300,000 authorized shares of P100, par value ordinary shares. At December 31, 2013, the shareholder’s equity section of Perseverance was as follows: Share capital, par value P100 per share; authorized 300,000 shares; issued 30,000 shares P3,000,000 Share premium

300,000

Retained earnings

_450,000

Total shareholders’ equity

P3,750,000

On June 15, 2014, Perseverance issued 50,000 ordinary shares for P6,000,000. A 5% share dividend was declared on September 30, 2014 and issued on November 10, 2014 to shareholders of record on October 31, 2014. Market value of ordinary share was p110 per share on declaration date. The profit of Perseverance for the year ended December 31, 2014 was P475,000. During 2015, Perseverance had the following transactions; Mar. 1

Perseverance reacquired 3,000 shares of it ordinary shares for P95 per share.

May 31

Perseverance sold 1,500 treasury shares for P120 per share.

Aug. 10

Issued to shareholders one right for each share held to purchase two additional ordinary shares for P125 per share. The rights expire on December 31, 2015.

Sep. 15

25,000 rights were exercised when the marker value of ordinary share was P130 per share.

Oct. 31

40,000 rights were excercised when the market value of the ordinary share was P140 per share.

Dec. 10

Perseverance declared a cas dividend of P2 per share payable on January 5, 2016 to shareholders of record on December 31, 2015.

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Dec. 20

Perseverance retired 1,000 treasury shares and reverted them to an unissued basis. On this date, the market value of the ordinary share was P150 per share.

Dec. 31

Profit for 2015 was P500,000.

Questions: Based on the above and the result of your audit, determine the following as of December 31, 2015: 31. Share capital a. P21,400,000 b. P21,300,000 c. P14,800,000 d. P21,250,000 32. Share premium a. P4,627,500 b. P3,007,500 c. P4,632,500 d. P4,592,500 33. Total retained earnings a. P600,000 b. P565,000 c. P557,000 d. P560,000 34. Total equity a. P26,397,500 b. P25,932,500 c. P26,492,500 d. P26,445,000 35. An auditor usually obtains evidence of shareholder’s equity transactions by reviewing the entity’s a. Canceled stock ceertificates. b. Transfer agent’s records. c. Treasury stock certificate book. d. Minutes of board of directors meetings. PROBLEM NO. 8 Your firm has been engaged to examine the financial statements of Ten Corporation for the year 2015. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation. The client provides you with the information below. 366

Assets Current assets Other assets



Ten Corporation Statement of Financial Position December 31, 2015 Liabilities P1,881,100 Current liabililities 5,171,400 Long-term liabilities ________ Capital P7,052,500

P 962,400 1,439,500 4,650,600 P7,052,500

An analysis of current assets discloses the following: Cash (restristed in the amount of P400,000 for plant expansion)

P 571,000

Investment if land

185,000

Accounts receivable less allowance of P30,000

480,000

Inventories

645,100 P1,881,100



Other assets include: Prepaid expenses Plant and equipment less accumulated depreciation of P1,430,000 Cash surrender value of life insurance policy

P

47,400

4,130,000

84,000

Unamortized bond discount

49,500

Notes receivable (short term)

162,300

Goodwill

252,000

Land

446,200 P5,171,400 367



Current liabilities include: Accounts payable

P510,000

Notes payable (due 2017)

157,400

Income tax payable

145,000

Share premium reserve

150,000 P962,400



Long-term liabilities include: Unearned revenue

P 489,500

Dividends payable

200,000

8% bonds payable (due May 1, 2017)

750,000 P1,439,500



Capital includes: Retained earnings Share capital, par value P10, authorized 200,000 shares, 184,000 shares issued

P2,810,600

1,840,000 P4,650,600

The supplementary information below is also provided: a. On May 1, 2015, the company issued at 93.4, P750,000 of bonds to finance plant expansion. The long term bond agreement provided for the annual payment of the interest every May 1. The existing plant was pledged as security for the loan. Use straight-line method for discount amortization. b. The bookkeeper made the following mistakes: 1. In 2013, the ending inventory was overstated by P183,000. The ending inventories for 2014 and 2015 were correctly computed. 368

2. In 2015, accrued wages in the amount of P275,000 were omitted from the balance sheet and these expenses were not charged on the income statement. 3. In 2015, a gain of P175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings. c. You learned on January 28, 2016, prior to completion of the audit, of heavy damage because recent fire to one of the entity’s two plants; the loss will not be reimbursed by insurance. The plant has a carrying amount of P1,200,000 on the date of fire. Questions: Based on the above and the result of the audit, answer the following: 36. The adjusted current assets as of December 31, 2015 is a. P1,296,100 b. P1,505,800 c. P1,690,800 d. P1,553,200 37. The adjusted current liabilities as of Decemeber 31, 2015 is a. P1,619,500 b. P1,130,000 c. P1,659,500 d. P1,419,500 38. The adjusted noncurrent liabilities as of Decemeber 31, 2015 is a. P907,400 b. P864,500 c. P857,900 d. P1,554,00 39. The adjusted equity as of December 31, 2015 is a. P4,525,600 b. P4,519,000 c. P4,329,000 d. P4,479,000 40. An auditor passes on several errors discovered during the audit. Which of the following represents the best reason for the auditor not requesting that the adjustments be made by management? a. Management has properly disclosed the extent of the errors in the fottnotes to the consolidated financial statements of the year under audit. b. The attorney’s response to audit inquiry includes the statement that counsel is unaware of any errors and can make no such estimates. c. The auditor is not required to discover all material errors in the financial statements under the concept of reasonable assurance.

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d. The errors are not material in aggregate after considering the reversing, effects of passed entries from previous periods. PROBLEM NO. 9 The following trial balance related to Imagine Corporation at 31 March 2015: P’000

P’000

Debit

Credit

Closing inventories – 31 March 20 (note (i))

18,900

Land and building – at valuation (note (iii))

113, 400

Plant and equipment – cost (note (iii))

64,800

Accumulated depreciation 1 April 2014 – plant and equipment

30,240

Investment property – valuation 1 April 2014 (note (iii))

28,800

Trade receivables

38,700

Cash in Bank

1,620

Trade payables

21,240

Ordinary shares of P0.25 each

36,000

10% Redeemable preference shares of P1 each

18,000

Revaluation reserve (note (iii)

37,800

Retained earnings – 1 April 2014

31,500

Profit or loss summary

_______ 88,200 264,600

264,600

The following notes are relevant: (i)

At 31 march 2015, an inventory list based on a physical count had a total cost of P18.9 million. Some damaged goods that had cost P1.44 million were included in 370

(ii)

(iii)

there. The realizable value of these goods is expected to be P1.71 million, provided a remedial work costing P0.81 million is done before they could be sold. Included in the computation of profit or loss are finance costs consisting of interest on overdraft, the full year’s preference dividend and an ordinary dividend of P0.04 per share that was paid in September 2014. Non-current assets: Land and building A professional valuer submitter a report on 1 April 2014, revaluing the land at P27 million and building at P86.4 million. The directors decided to incorporate these values in the accounts. On that date the land and building had a carrying value of P75.6 million and the building had a remaining life of 15 years. Charge depreciation on a straight-line basis. Imagine does not make a transfer to retained earnings in respect of excess depreciation. Plant All plant is depreciated at 12.5% on the reducing balance basis. Investment property On 31 March 2015 the investment property was revalued at P24.3 million. Imagine uses the fair value model.

Questions: Based on the above and the result of your audit, answer the following: (Ignore income taxes). 41. The adjusted profit or loss for the year ended 31 March 2015 is a. P78,840,000 b. P79,380,000 c. P73,080,000 d. P80,640,000 42. The comprehensive income for the year ended 31 March 2015 is a. P117,180,000 b. P79,380,000 c. P118,440,000 d. P116,640,000 43. The total assets as of 31 March 2015 is a. P219,240,000 b. P219,780,000 c. P217,620,000 d. P218,160,000 371

44. The total liabilities as of 31 March 2015 is a. P22,860,000 b. P40,860,000 c. P39,240,000 d. P21,240,000 45. The retained earnings balance as of 31 March 2015 is a. P107,100,000 b. P98,820,000 c. P104,580,000 d. P105,120,000 PROBLEM NO. 10 Snow White Company began operations on January 1, 2015. The accountant prepared the following: Statement of Financial Position (Cash Basis) January 1, 2015 Assets Cash Parts inventory Equipment

P 49,600 24,000

Liabilities and equity Accounts payable Share capital, P100 par

P 28,000 265,600

220,000

Total assets

P293,600

Total liabilities and equity

P293,600

The company has developed plans to expand its business is in the process of negotiationg a bank loan to finance the expansion. The bank is requesting of negotiating 2015 financial statements prepared on the accrual basis of accounting. As the company’s external auditor, you were called upon to assist in preparing the financial statements. During the course of your engagement, you obtained the following information: Transactions for 2015 Cash sales

P232,000

Collections from credit customers

80,000

Payments on account for parts

80,800

Wages paid to employees Payments to the utility company

124,000 22,000

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         

Uncollected customers’ bills totaled P69,800 at December 31, 2015. On March 1, 2015, a supplier advanced the company P40,000 on a 1-year, 12% note payable with semiannual interest payments to be made on September 1, 2015 and at maturity on March 1, 2016. Unpaid bills to suppliers totaled P11,200 at December 31, 2015. Parts costing P8,000 were on hand at year-end. Wages owed at year-end were P5,600. Utility expense of P1,950 was unpaid at year-end. The P18,000 insurance premium was paid for a 1-year policy effective February 1, 2015. The rent of P3,000 was paid on the first day of every month. The company’s equipment, purchased at the time the company was founded, should be depreciated over its useful life of 10 years using straight-line depreciation with no residual value. The effective tax rate is 40%. No taxes have been paid.

Questions: Baseed on the above and the result of your engagement, you are asked to provide the following information under the accrual basis: 46. The net income for 2015 was a. P69,750 b. P55,050 c. P46,380 d. P41,850 47. The total current assets at year-end equaled a. P220,000 b. P198,000 c. P197,700 d. P196,200 48. The total assets at year-end equaled a. P417,700 b. P395,700 c. P307,450 d. P197,700 49. The total equity at year-end was a. P395,700 b. P335,350 c. P307,450 d. P265,600 50. The total current liabilities at year-end equaled a. P90,650 373

b. P88,250 c. P60,350 d. P48,250

XI – SIMULATED BOARD EXAMINATIONS 2 LETTER ANSWERS ANSWERS: 1. B 2. A 3. C 4. C 5. D 6. B 7. C 8. A 9. D 10. B

11. A 12. B 13. B 14. D 15. A 16. D 17. D 18. D 19. A 20. C

21. B 22. A 23. A 24. D 25. C 26. C 27. B 28. D 29. B 30. A

31. B 32. C 33. D 34. D 35. D 36. B 37. C 38. B 39. D 40. D

41. A 42. D 43. A 44. B 45. C 46. D 47. C 48. B 49. C 50. B

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