AP-PW77-2 CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS PROBLEM 1 ‘You have been asked by a client to review the records of BEBEL COMPANY, a small manufacturer of precision tools and machines. Your client is interested in buying the business, and arrangements have been made for you to review the accounting records. CPA Review Your examination reveals the following: 1, BEBEL commenced business on April 1, 2012, and has been reporting on a fiscal year ending March 31. The company has never been audited, but the annual statements prepared by the bookkeeper reflect the following income before closing and before deducting Income taxes: Year Ended Income 2013 P 143,200 2014 222,800 2015 207,160 2. A relatively small number of machines have been shipped on consignment. These transactions have been recorded as ordinary sales and billed as such. On March 31 of each year, machines billed and in the hands of consignees amounted to: 2013 P 13,000 2014 None 2015 11,180 Sales price was determined by adding 30% to cost. Assume the consigned machines are sold the following year. 3. On March 30, 2014, two machines were shipped to a customer on a C.O.D. basis, The sale was not entered until April 5, 2014, when cash was received for P12,200. The machines were not included in the inventory at March 31, 2014. (Title passed on March 30, 2014.) 4. All machines are sold subject to a five-year warranty. It is estimated that the expense ultimately to be incurred In connection with the warranty will amount to ¥% of 1% of sales. ‘The company has charged an expense account for warranty costs incurred. Sales per books and warranty costs were: Warranty Expense Year Ended For Sales Made In March 31 Sales. 2013 2014 2015. _Total_ 2013 P 1,880,000 ° P 1,520, P 1,520 2014 2,020,000 720 P 2,620 3,340 2015 3,590,000 > 640 3,240 P3820 7,700 5. Badidebts have been recorded on a direct writeoff basis. Experience of similar enterprises insets that losses will approximate Ys of 1% of sales. Bad debts written off were: Bad Debts Incurred on Sales Made In 2013 2014 2015 —Total_ 2013 P 1,500 1,500 2014 1600 P 1,040 2/640 2015 700 3,600 3,400 7,700 6. Commissions on sales have been entered when paid. Commissions payable on March 31 of each year were: " 2013 P 2,800 2014 1,600 | 2015 2;240CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP PWWTT-R 7. Arreview of the corporate minutes reveais the manager is entitled to a bonus of ¥2 of 1% of the income:before deducting income taxes and the bonus. The bonuses have never been recorded or paid. ‘pased! on the preceding Information, determine the foliowingt 1. Correct sales for the year ended March 32, 2013. A. P1,867,000 B. P1,880,000 C. P1,870,000 D. Pi,873,000 2. Correct sales for the year ended March 32, 2014, A. P2,035,200 B. P2,032,200 C. P2,042,200 .D. 2,045,200 3. Correct sales for the year ended March 31, 2015. A. P3,569,200 'B. P3,566,620 C. 73,578,820 D. 3,590,000 4, Additional warranty expense for the year ended March 31, 2015. A. P10,133 8. P24,834 C. 76,886 D. P17,833 5. Additional bad debt expense for the year ended March 31, 2014. AL P2,473 B. P1,217 C. PB,917 D. P6858 6. Additional commission expense for the year ended March 31, 2015. A, P4,600 8, P2,240 C. P4640 D. PeA0 | 7. Manager's bonus expense for the year ended March 31, 2015. A. P92 B, P1781 C. P2,683 D. Piaa9 8 Correct income before income tax for the year ended March 31, 2013. AL P229,841 B. P228,692 Cc. P125,785 D. P126,417 9. Correct income before income tax for the year ended March 31, 2014. LAs P228,692 B. P179,488 C. P125,785 D. P126,417 10. Correct income before income tax for the year ended March 31, 2015. JA. P179,488 B. P229,841 C. P180,390 D. P126,417 PROBLEM 2 MINA MINING CO. has acquired a track of mineral land for 27,000,000. Mina Mining estimates that the acquired property will yield 120,000 tons of ore with sufficient mineral content to make mining and processing profitable. It further estimates that 6,000 tons of ore will be mined the first and last year and 12,000 tons every year in bebween. (Assume 11 years of mining operations.) The iand will have @ residual value of P900,000. Mina Mining builds necessary structures and sheds on the site at a total cost of P1,080,000. The ‘company estimates that these structures can be used for 15 years but, because they must be dismantied if they are to be moved, they have no residual value. Mina Mining does not intend to se the buicings elsewhere. Mining machinery installed at the mine was purchased secondhand at a total cost of P1,800,000. ‘The machinery cost the former owner P4,500,000 and was 50% depreciated when purchased. Mina Mining estimates that about half of this machinery will still be useful when the present mineral resources have been exhausted but that dismantling and removal costs will just about offset its value at that time. The company does not intend to use the machinery elsewhere. The remaining machinery will last until about one-half the present estimated mineral ore has been removed and will then be worthless. Cost is to be allocated equally between these two classes of machinery. 1. What are the estimated depletion and depreciation charges for the first year? Depletion Depreciation A. 2,610,000 189,000 B. 1,305,000 378,000 c 2,610,000 234,000 D. 1,305,000 189,000(CPA REVIEW SCHOOL OF THEPHILIPPINES (CPA) APTA: 2. What are the estimated depletion and depreciation charges for the St year? Depletion Depreciation A 1,305,000 378,000 B. 2,610,000 234,000 c 2,610,000 378,000 D. 1,305,000 234,000 3. What are the estimated depletion and depreciation charges for the 6" year? Depletion Depreciation A 2,610,000 378,000 B. 1,305,000 288,000 c 1,305,000 189,000 D> 2,620,000 288,000 4. What are the estimated depletion and depreciation charges for the 11" year? Depreciation x 305,000 99,000 8 1,305,000 189,000 © 2,610,000 99,000 D. 2,610,000 234,000 5. Whatare the depletion and depreciation charges for the first year assuming actual production ‘of 5,000 tons of mineral ore? (Nothing occurred during the year to cause the company engineers to change their estimates of either the mineral resources or the life of the structures and equipment.) Depletion A 1,087,500 P157,500 B P1,305,000 99,000 ie 1,305,000 P189,000 D. P 1,087,500 P82,500 PROBLEM 3 GATAS, INC. produces milk on its farms. Tt produces 30% of the country’s milk that is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500 heifers. The farms produce & million kilograms of milk a year, and the average inventory held is 150,000 kilograms of milk. However, the company is currently holding stocks of 500,000 kifograms of milk in powder form. At October 31, 2015, the herds are: * 21,000 cows (3 years old), all purchased on or before November 1, 2014 + 7,500 heifers, average age 1.5 years, purchased on April 1, 2015 3,000 heifers, average age 2 years, purchased on November 1, 2014 No animals were bom or sold in the year. ‘The unit fair vaiues less estimated point-of-sale costs were: L-year-old animal at October 31, 2015 3,200 2-year-old animal at October 31, 2015 4,500 LS-year-old animal at October 31, 2015 3,600 3-year-old animal at October 31, 2015 5,000 t-year-old animal at November 1, 2014 and April 1, 2015 3,000 2-year-old animal at November 1, 2014 4,000 ‘The company has had problems during the year: Contaminated milk was sold to customers. As a result, milk consumption has gone down, The goverment has decided to compensate farmers for potential loss in revenue from the sale of milk. This fact was published in the national press. on September 1, 2015. Gatas received an offical letter on Gaober 10, 2015, stating that PS million would be paid to'it on January 2, 2016. The company’s business is spread over different parts of the country. The only region affected by the contamination was Central Visayas, where the government curtailed milk production in the region. The cattle were unaffected by the contamination and were healthy. The company‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) AP PTT estimates that the future discounted cash flow income from the cattle in the Central Visayas) region amounted to P4 million, after taking into account the government restriction order, The! company feels that it cannot measure the fair value of the cows in the region because of the| problems created by the contamination. There are 6,000 cows and 2,000 heifers in the region. All these animals had been purchased on November 1, 2014. A rival company had offered Gatas! P3 milion for these animals after point-of-sale costs and further offered P6 milion for the farms; themselves in that region. Gatas has no intention of selling the farms at present. The company, has been applying PAS 41 since November 1, 2014. i 1. What is the fair value of the cattle (excluding Central Visayas region) at November 1, 20147! A. P93 million B. P64 million C. P63 milion D. P48 milion | 2. What is the fair value of the cattle (excluding Central Visayas region) at October 31, 2015? / A, P1065 million —B, P113,25 million C. P405.6 millon 0. P05.75 milion 3. What isthe Increase in for value ofthe cattle (excluding Central Visayas region) due to| price change? A. P10.7 million B. Pi2.8 million Uf P9.2 million D. P16.7 million 4. What is the increase in fair value of the cattle (excluding Central Visayas region) due to physical change? A. P9.2 million _B. P11.8 million C, P1855 million =D. P9.4 milion 5. On October 31, 2015, the cattie in the Central Visayas region would be valued at ‘A. P39 million B. P3 million P4 million D. P5 milion PROBLEM 4 ‘Your auditing firm was engaged by METEORS CORPORATION to review their accounting records; and books and basad thereon, to submit corrected financial statements. The books of accounts, are in agreement with the following statement of financial position: METEORS CORPORATION Statement of Financial Position December 31, 2015 ‘ASSETS: Cash 40,000 ‘Accounts Receivable £80,000 Notes Receivable 24,000 Tnventories 200,000 Total Assets "344,000 LIABILITIES and SHAREHOLDERS’ EQUITY ‘Accounts Payable P_i6,000 Notes Payable 32,000 Share Capital 80,000 Retained Earnings 216,000 ‘Total Liabilities and Shareholders’ Equity | P 344,000 Your further review of the company’s books indicated that the following omissions and errors had not been corrected during the applicable years: 2012 2013 2014 2015 Ending Inventory — Overstated = P 56,000 |"P 64,000 = Ending Inventory — P 48,000, = + P72,000 Understated Prepald Expense 7,200 5,600 4,000 4,800 Unearned Income = 3,200 = 2,400 ‘Accrued Expense 4,600 600 800) 400 ‘Accrued Income = 1,000 = 1,200(CPA .BEVIEW SCHOOL OF THE PHILIPPINES (CPAR) APPT 2 No dividends were declared during the years 2012 to 2015 and no adjustments were made to retained earnings. The company’s books reported the following net income: Year 2012 2013 2014 2015, Net Income: P60,000 | _P44,000 | _P52,000 | 60,000 Considering the above audit findings, determine the adjusted amounts of the following: (Disregard tax implications) A B. Cc D i [ Net Income in 2012 17,600 | 116,800 99,200 | 113,600 2 | Net income (toss) in 2013 145,200 |” (59,600) | (14,800) | (62,800) 3 | Net income (loss) in 2014 44,4007 44,800 |" (11,600) | - 60,400 4 | Net Income (loss) in 2015 ‘194,400 |" 195,200 "196,000. (76,000) 5 | Retained Earnings as of 12-31-2015 | 147,200] 292,000! 291,200. _ 281,600 PROBLEM 5 The following independent situations relate to the audit of intangible assets. Answer the question/s at the end of each situation. 1 BONSAY CO. reports the following patents on its December 31, 2015 statement of financial position, . Date of Useful life, Initial Cost ‘Acquisition tion) Patent A P408,000 March 1, 2012 17 years PatentB 150,000 July 1, 20137 10 years Patent C 144,000 Sept. 1, 2014 4 years ‘The following events occurred during the year ended December 31, 2016. 1. Research and development costs of P245,700 were incurred during the year. These costs were incurred prior to projects achieving economic viability. 2, Patent.D was purchased on July 1 for P285,000. It has a remaining life of 9 ¥2 years. 3. A possible impairment of Patent 8's value may have occurred at December 31, 2016. This is due to a significant reduction in the demands for certain products protected by Patent B. The company’s controller estimates the following future cash flows from Patent B. December 31, 2017 20,000 December 31, 2018 20,000 December 31, 2019 20,000 ‘The appropriate discount rate to be used for these cash flows is 8%. 1. What is the total carrying value of Bonsay’s patents on December 31, 2015? Ay P524,500 B. P702,000 C. P463,540 D. P794,500 at amount of impairment loss should be reported by Bonsay for the year ended December 31, 2016? A. P97,500 BE P45,958 C. P112,500 D. P51,540 3. What is the total carrying value of Bonsay’s patents on December 31, 2016? P656,360 B. P719,500 Sev PG73,542 D. P734,500 2 In your audit of the books of DOLORES CORP. for the year ended December 31, 2015, you found the following items in connection with the company’s patents account,GPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR} SC et ta a) Dolores had spent P120,000 during the year ended December 31, 2014, for research and development costs. ‘This amount was debited to its patents account. The company’s cost records discloses that it had spent a total of P141,500 for the research and development of its patents, of which P21,500 spent in 2011 had been debited to Research and Development | Expense. . b) The patents were issued on July 1, 2014. In connection with the Issuance of the patents, the company incurred legal expenses of P14,280, which were debited to Legal and Professional Fees Expense. - ©) On January 5, 2015, Dolores paid a retainer of P15,000 for legal services in connection with 2 patent infringement sult brought against it. Deferred Costs was charged for the amount. 4) Inreply to your inquiry about the company's liabilities as of December 31, 2025, you received a letter from the company’s legal counset dated January 20, 2016, which indicated that a settlement of the patent infringement suit had been arranged. The plaintiff will drop the suft ‘and release the company from all future liabilities in exchange for P20,000. Additional lawyer's fees were Incurred amounting to P1,260. . 4, The correcting journal entries (excluding amortization) on December 31, 2015 would include net debit (credif) to Legal and Professional Patents: Fees Expense A (90,720) 21,260 B. (69,460) 0 -€., (105,720) 36,260 D. (84,460) 45,000 3 ‘As the recently appointed auditor for BORDADO COMPANY, you have been asked to examine selected accounts. Your audit client, organized in 2014, has setup a single account for all intangible assets, ‘The following summary shows the debit entries that have been recorded during 2015. Jan. 2 Purchased patent (8-year life) 290,000 April Goodwill ~ 240,000 June 30 Payment of 12 months’ rent on property leased by Bordado 182,000 July 1 Purchased franchise with 10-year life; expiration date, July 1, 2025 300,000 ‘Aug.3. Payment for copyright (5-year life) 404,000 ‘Sep. 1 Research and development costs related to patent (Incurred prior to achieving economic viability) 320,000 1,436,000 5. What is the total carrying value of Bordado’s intangible assets as of December 31, 20157 AL PB74,083 B. PO76,306 C. P975,902 D, P904;417 PROBLEM 6 {In connection with your audit of the financial statements of TANDEM CO, for the year ended December 31, 2015, you obtained the following information on the checking account of the ‘company. ‘The bank statement on November 30, 2015 showed a balance of P306,000. Among the bank credits in November was a customer's note for P100,000 collected for the account of Tandem Co. which was recognized in December among its receipts. Included in the bank debits were cost of checkbooks amounting to P1,200 and a P40,000 check which was charged by the bank in error against Tandem Co. account. Also in November, you ascertained that there were deposits in transit amounting to P80,000 and outstanding checks totaling P170,000. ‘The bank statement on December 31, 2015 showed total credits of P416,000 and total charges ‘oF P204,000. Company books for December showed total recelpts of P735,600 and disbursements Of P407,200. The cash in bank balance on December 31 is P485,600. Bank debit memos forPARI AP-f December were: No. 112 for service charges, P1,600; and No. 113 on a customer's returned check for 24,000. ‘The bank error of P40,000 in November was corrected by the bank In December. On December 29, 2015, Tandem Co. placed with the bank a customer's promissory note with a face value of P120,000 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 P3,960 was recorded in the company cash payments book in December as P39,600- 1. What Is the total outstanding checks on December 31, 2015? (A. P361,960 B. P433,240 C. P337,960 D. P336,360 2. What is the total deposits in transit on December 3, 2015? A. P339,600 B. P179,600 _C. P219,600 D. P319,600 3. What are the adjusted bank balances on November 30 and December 31? November 30 December 31, A 256,000 P375,640, B. 258,400 375,640 c. 256,000 378,840 D. 176,000, 423,640 4. What is the adjusted December book receipts? ‘A. P516,000 B. P715,600 ©. P515,600 D. P595,600 5. What is the adjusted December bank disbursements? A. P395,960 B. P735,960 C. P467,240 D. 396,760 PROBLEM 7 You have been engaged to audit the financial statements of HABAGAT, INC. for the fiscal year ended June 30, 2015. The cost of goods sold section of the income statement prepared by your lient for the year ended Junie 30, 2015 appears as follows: Inventory, July 1, 2014 75,000 Purchases 540,000 Goods available for sale 615,000 Inventory, June 30, 2015 105,000 Cost of goods sold 510.000 ‘Although the books have been closed, your working paper trial balance is prepared showing all accounts with activity during the year. The July 1 and June 30 inventories appearing above were determined through physical count and no reconciling items were considered. All purchases are FOB shipping point. ‘The company usas the periodic inventory system. In the course of your examination of the inventory cutoff, both at the beginning and end of the year, you discovered the following facts: - duly 1.2014 a) June invoices totaling P19,500 were entered in the voucher register in June, but the goods were not received until July. b) Invoices totaling P8,100 were entered in the voucher register in July, but the goods were received during June. Jung. 30, 2015 a) Invoices totaling P27,900 were entered in the voucher register in July, and the goods were ived in July, but the invoices were dated June. b) June invoices totaling P11,100 were entered in the voucher register in June but the goods “— not received until July.7-2 ¢) Invoices totaling 716,200 (the corresponding goods for which were received in June) were entered in the voucher register, July. d) Sales of P26,400 were made on account on June 30 and the goods were delivered at that time, but all entries relating to the sales were made in July. 1. What is the adjusted inventory on July £, 20147 A. PB6,400 ~-B. P94,500 . 63,600 D. P102,600 2. What is the correct amount of purchases for the year ended June 30, 2015? A. P584,100 B. P592,200 CC. P559,800 -D. P576,000 3. What is the correct inventory on June 30, 2015? Ae P144,000 B, P132,900 C. P116,100 D, P135,900 4. The accounts payable balance on June 30, 2015 should be increased by + - A, P44,100 B. P27,900 C. 27,300" D. P55,200 5. The correct cost of goods sold for the year ended June 30, 2015 Is A. 537,600 B. P553,800 .C. P526,500 D. P507,300 PROBLEMS YOKE BANK loaned P16,500,000 to Bargain Company on January 1, 2012. The initial loan repayment terms include a 10% interest rate plus annual principal payments of P3,300,000 on January 1 each year. Bargain made the required interest payment in 2012 but did not make the 3,300,000 principal payment nor the P1,650,000 interest payment for 2013. Yoke Is preparing its annual financial statements on December 31, 2013. Bargain 5 having financiat difficulty, and Yoke has concluded that the loan Is impaired. Analysis of Bargain's financial condition on December 31, 2013, indicates the principal payments will be collected, but the collection of interest is unlikely. Yoke did not accrue the interest on December 31, 2013. ‘The projected cash flows are: December 31, 2014 5,250,000 December 31, 2015 6,000,000 December 31, 2016 5,250,000 26,500,000 1. What is the loan impairment loss on December 31, 2013? 1A, P2,824,500 B. P1,650,000 c. PO D. P16,500,000 2. What is the interest income to be reported by Yoke Bank in 2014? A. P1,506,305 B. 979,305 @ P1,367,550 D. P1,650,000 3. What is the carrying value of the loan recelvable on December 31, 2015? Ae P4,772,355 B, P5,250,000 C. P3,793,050 D. P13,675,500 4, What is the interest income in 2015? A. 477,237 B. PY,650,000 C. P4,367,550 _D; P979,305 5. What is the interest income in 2016? 2A. PA77 645 8. P1,650,000 Cc. P979,305 D. PA,367,550 END ---