Asuncion, Escala & Ngina - Applied Auditing 1 2015 PDF

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A guide in applying auditing procedures to specific accounts of the financial statements. TEACHERS MANUAL 2015 Edition DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA Dear fellow teacher, This should be used solely the teacher and for classroom pu...

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A guide in applying auditing procedures to specific accounts of the financial statements.

TEACHERS MANUAL 2015 Edition By

DARRELL JOE O. ASUNCION, MBA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA

Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization).

If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Raymund Francis A. Escala – 0917-715-1226 Mark Alyson B. Ngina – 0915-510-7281 Email ad: [email protected].

Thanks and God bless.

Sincerely, Darrell Joe O. Asuncion, MBA, CPA Raymund Francis A. Escala, MBA, CPA Mark Alyson B. Ngina, CMA, CPA

Table of Contents CHAPTER 5: CASH TO ACCRUAL................................................................................ 1 CHAPTER 6: CORRECTION OF ERRORS ................................ ................................15 CHAPTER 8: CASH AND CASH EQUIVALENTS ...................................................25 CHAPTER 10: LOANS AND RECEIVABLES ...........................................................46 CHAPTER 12: INVENTORIES ................................................................ .....................83 CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES ............................................................................................ 116 CHAPTER 15: INVESTMENT IN DEBT SECURITIES ................................ ......132 CHAPTER 16 INVESTMENT IN ASSOCIATE ...................................................... 140 CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT....................................154 CHAPTER 19 WASTING ASSETS................................................................ ............180 CHAPTER 20 INVESTMENT PROPERTY ............................................................ 186 CHAPTER 22 INTANGIBLE ASSETS .....................................................................188 CHAPTER 23 REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE ...........................................................................................................200

Chapter 5: Cash to Accrual

CHAPTER 5: CASH TO ACCRUAL PROBLEM 5-1 (Computation of Sales) Accounts receivable/Notes receivable trade Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze)

450,000 350,000 300,000

400,000 340,000 350,000 10,000

Total Sales on Account Add: Cash Sales Total Gross Sales

1,100,000

Balance end – A/R Balance end – N/R Collections Write-off

1,100,000

300,000 300,000 600,000

Suggested answer: B PROBLEM 5-2 (Computation of Purchases) Accounts Payable/Notes payable trade Payments Balance end – A/P Balance end – N/P

200,000 200,000 140,000

250,000 150,000 165,000

Total

565,000

565,000

Purchase on Account Add: Cash Purchases Total Gross Purchases

Beg. Balance – A/P Beg. Balance – N/P Purchases (squeeze)

165,000 500,000 665,000

Suggested answer: A PROBLEM 5-3 (Computation of Income Other Than Sales) Rent Receivable/Rent in advance Beg. Balance - Rent Receivable Balance end - Rent in advance Rent Income(squeeze) Total

15,900

14,500

3,600

2,700

130,000

132,300

149,500

149,500

Suggested answer: A

1

Balance end - Rent Receivable Beg. Balance - Rent in advance Collections

Chapter 5: Cash to Accrual

PROBLEM 5-4 (Computation of Expenses in General) Prepaid Salaries/Accrued Salaries Beg. Balance - Prepaid Salaries Balance end - Accrued Salaries Payments Total

2,200

2,600

1,600

1,800

249,350

248,750

253,150

253,150

Balance end - Prepaid Salaries Beg. Balance - Accrued Salaries Expenses

Suggested answer: C PROBLEM 5-5 (Computation of Cost of Machine Acquired and Sold) Question No. 1 Carrying amount of equipment sold 25,000 Add: Accumulated depreciation 15,000 Cost 40,000 Question No. 2 Equipment Beg. Balance Cost of PPE acquired (squeeze)

100,000 60,000

120,000 40,000

Total

160,000

160,000

Balance end Cost of PPE disposed

Accumulated depreciation Balance end Accumulated depreciation of PPE disposed

18,000

Total

33,000

15,000 18,000

Beg. Balance Depreciation expense

15,000 33,000

SUMMARY OF ANSWERS: 1. D 2. A PROBLEM 5-6 Question No. 1 Prepaid Insurance Beg. Balance Payments

7,500 41,500

6,000 43,000

Total

49,000

49,000

2

Balance end Expenses (squeeze)

Chapter 5: Cash to Accrual

Question No. 2 Interest Receivable Beg. Balance Income (squeeze)

14,500 112,700

3,700 123,500

Total

127,200

127,200

Balance end Collections

Question No. 3 Salaries payable Balance end Payments

61,500 481,000

53,000 489,500

Total

542,500

542,500

Beg. Balance Expenses

Question No. 4 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 1,845,000

Total

2,395,000

2,395,000

Balance end Collections (squeeze)

Question No. 5 Accounts receivable trade Beg. Balance Sales

415,000 1,980,000

550,000 1,820,000 25,000

Total

2,395,000

2,395,000

Balance end Collections (squeeze) Write-off

Question No. 6 Accounts receivable trade Beg. Balance Sales Recoveries

415,000 1,980,000 20,000

550,000 1,840,000 25,000

Total

2,415,000

2,415,000

SUMMARY OF ANSWERS: 1. C 2. B 3. C

4.

A

5.

Balance end Collections (squeeze) Write-off

A

6.

B

PROBLEM 5-7 Question No. 1 Accounts/Notes receivable trade Decrease in A/R Sales on account

100,000 4,260,000

100,000 10,000

3

Increase inN/R Write-off

Chapter 5: Cash to Accrual

(squeeze)

4,200,000 30,000 20,000

Total

4,360,000

Collections Sales discounts Salesret. and allow.

4,360,000

Question No. 2 Accounts payable Cash paid to creditors

2,800,000

Purchase discounts

40,000

Purchase returns

10,000

Total

200,000

Decrease in Accounts payable 2,650,000 Gross purchases (squeeze)

2,850,000

2,850,000

Question No. 3 Merchandise inventory Decrease in Inventory Gross purchases

25,000 2,650,000

40,000 10,000 2,625,000

Total

2,675,000

2,675,000

Purchase discounts Purchase returns Cost of sales (squeeze)

Question No. 4 Rental receivable/Unearned Rent Income Rental (squeeze)

revenue

454,000

14,000 40,000 400,000

Total

454,000

Increase in Rental receivable Decrease in Unearned rental Collections from tenants

454,000

Question No. 5 Prepaid interest/Interest Payable Decrease in interest Increase in payable Interest paid Total

Prepaid

5,500

Interest

8,500

114,000

Interest (squeeze)

100,000 114,000

SUMMARY OF ANSWERS: 1. D 2. D 3. A

4.

114,000

A

4

5.

D

expense

Chapter 5: Cash to Accrual

PROBLEM 5-8 Question No. 1 Accounts Receivable/Notes receivable trade Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze) Total

200,000 300,000 1,000,000

250,000 100,000 20,000 10,000 1,120,000

1,500,000

1,500,000

Bal. end – A/R Bal. end – N/R Salesret. and allow. Sales discount Collections

Question No. 2 Accounts payable/Notes payable Balance end – A/P Balance end – N/P Purchase returns allow Purchase discount Payments

and

Total

25,000 75,000 40,000

50,000 100,000 650,000

Beg. Balance – A/P Beg. Balance – N/P Gross purchases (squeeze)

10,000 650,000 800,000

800,000

Gross purchases Less: Purchase ret and allow Purchase discounts Net Purchases

650,000 40,000 10,000

Question No. 3 Sales Less: Sales ret and allow Sales discounts Net Sales Less: Cost of Sales Merchandise inventory beg. Add: Net Purchases Purchases Add: Freight-in Gross Purchases Less :Purch. Ret and allow Purchase discounts Total goods available for sale Less :Merchandise inventory, end Gross Income / Gross Profit

50,000 600,000

1,000,000 20,000 10,000

30,000 970,000

200,000 600,000 650,000 40,000 10,000

5

600,000 800,000 100,000

700,000 270,000

Chapter 5: Cash to Accrual

Question No. 4 Prepaid/Accrued Salaries Beg. Balance -Prepaid Salaries Balance end - Accrued Salaries Payments

100,000

125,000

50,000

75,000

350,000

300,000

Total

500,000

500,000

Balance end - Prepaid Salaries Beg. Balance - Accrued Salaries Salaries expense (squeeze)

Question No. 5 Accrued rent/Unearned rent Beg. Balance - Accrued rent Balance end - Unearned rent Rent income (squeeze) Total SUMMARY OF ANSWERS: 1. A 2. B 3. C

70,000

40,000

40,000

80,000

490,000

300,000

600,000

600,000

4.

B

5.

Balance end - Accrued rent Beg. Balance - Unearned rent Collection of rent

B

PROBLEM 5-9 Question No. 1 Accounts receivable trade Beg. Balance Recoveries Sales (squeeze)

200,000 8,000 1,570,000

300,000 20,000 1,408,000

50,000 Total Sales Less: Sales discount Net Sales

1,778,000

Balance end Sales discounts Collections including recoveries(1,498,00080,000+20,00-30,000) Accounts written-off

1,778,000

1,570,000 20,000 1,550,000

Question No. 2 Accounts payable trade Payment (1,210,00020,000+30,000) Purchase ret.and allow. Balance end

1,210,000 10,000 100,000

6

150,000 1,170,000

Beg. Balance Purchases(squeeze)

Chapter 5: Cash to Accrual

Total

1,320,000

Purchases Less: Purchases discount Net Purchases

1,320,000

1,170,000 10,000 1,160,000

Question No. 3 Merchandise inventory Beg. Balance Net Purchases (1,170,000-10,000)

380,000 1,160,000

330,000 1,210,000

Total

1,540,000

1,540,000

Balance end Cost of Sales (squeeze)

Question No. 4 Rent Receivable Beg. Balance Rent income (squeeze)

70,000 130,000

80,000 120,000

Total

200,000

200,000

Balance end Collections

Question No. 5 Allowance for Doubtful accounts Accounts written off Balance end

50,000 30,000

20,000 52,000 8,000

Total

80,000

SUMMARY OF ANSWERS: 1. B 2. B 3. B

4.

Beg. Balance Doubtful account expense(squeeze) Recoveries

80,000

A

5.

A

PROBLEM 5-10 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Professional (squeeze) Total

fees

500,000 5,250,000

750,000 5,000,000

5,750,000

5,750,000

7

Balance end Collections

Chapter 5: Cash to Accrual

Question No. 2 Professional Fees (See No. 1) Less : Rent expense (1.2M +100,000) Supplies expense (800,000+300,000-250,000) Other operating expense Interest expense (1M x 12% x 9/12) Depreciation expense(2,500,000/10) Net income Question No. 3 Cash Accounts Receivable Supplies Total Current Assets

5,250,000 1,300,000 850,000 750,000 90,000 250,000

1,500,000 750,000 250,000 2,500,000

Question No. 4 Furniture and fixtures Less: Accumulated Depreciation (125,000 + 250,000) Total Noncurrent Assets

375,000 2,125,000

Question No. 5 Total current assets (See No. 3) Total noncurrent assets (See No. 4) Total Assets

2,500,000 2,125,000 4,625,000

2,500,000

Question No. 6 Notes Payable Accrued rent Accrued interest on notes payable (1,000,000 x 12% x 9/12) Total Current Liabilities

1,000,000 100,000 90,000 1,190,000

Question No. 7 Total assets (See No. 5) Less: Total liabilities (See No. 6) – all are current Total Owner’s Equity SUMMARY OF ANSWERS: 1. B 2. B 3. A

3,240,000 2,010,000

4.

A

8

4,625,000 1,190,000 3,435,000

5.

A

6.

C

7.

B

Chapter 5: Cash to Accrual

PROBLEM 5-11 Question No. 1 Accounts receivable trade Beg. Balance Sales on account (squeeze)

124,000 1,535,000

146,000 13,000 1,500,000

Total

1,659,000

1,659,000

Balance end Sales discount Collections

Sales on account Add: Cash sales Total sales

1,535,000 160,000 1,695,000

Question No. 2 Gross sales (see No. 1) Less: Sales discount Net sales

1,695,000 13,000 1,682,000

Question No. 3 Accounts Payable Payments Balance end

1,206,000 410,000

382,000 1,234,000

Total

1,616,000

1,616,000

Purchases on account Add: Cash purchases Total Purchases

Beg. Balance Purchases (squeeze)

1,234,000 120,000 1,354,000

Question No. 4 Merchandise Inventory Beg. Balance Net purchases

186,000 1,354,000

190,000 1,350,000

Total

1,540,000

1,540,000

Balance end Cost of sales (squeeze)

Question No. 5 Prepaid G&A/Accrued G &A Beg. Balance - Prepaid Interest Balance end – Accrued Interest Payments Total

9,600

8,400

9,000

7,000

204,000

207,200

222,600

222,600

9

Balance end - Prepaid Interest Beg. Balance – Accrued Interest Expenses

Chapter 5: Cash to Accrual

Question No. 6 General and administrative expense (see No. 5) Depreciation expense Warranty expense Total operating expense

207,200 84,000 6,400 297,600

Question No. 7 Selling price of land Less: Book value of land Gain on sale of land

20,000 16,000 4,000

Question No. 8 Selling Price Less Book value Cost Less: Accumulated depreciation Gain on sale of warehouse equipment

12,000 25,000 16,000

Question No. 9 Selling Price Less: Book value Cost Less: Accumulated depreciation Gain on sale of boiler

42,000 48,000 20,000

Question No. 10 Net Sales Less: Cost of Sales Gross Profit Less: Operating expenses Gain on sale (14,000+3,000+4,000) Net income SUMMARY OF ANSWERS: 1. B 2. C 3. D 6. A 7. A 8. C

9,000 3,000

4. 9.

A B

28,000 14,000 1,682,000 1,350,000 332,000 297,600 21,000 55,400

5. 10.

B A

PROBLEM 5-12 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Sales (squeeze)

150,000 800,000

200,000 10,000 740,000

Total

950,000

950,000

10

Balance end Sales returns Collections

Chapter 5: Cash to Accrual

Question No. 2 Sales on account Add: Cash sales Total sales Less: Sales returns and allowances Net sales Less: Cost of sales (squeeze) Gross profit (200,000/40%)

800,000 100,000 900,000 10,000 890,000 390,000 500,000

Merchandise inventory Beg. Balance Net Purchases (squeeze) Total

190,000 420,000

220,000 390,000

610,000

610,000

Balance end Cost of Sales

Question No. 3 Accounts Payable trade Payments (squeeze) Purchase returns and allowances Balance end – Accounts payable Total

470,000

230,000

8,000

428,000

Beg. Balance - Accounts payable Gross purchases (420,000+8,000)

180,000 658,000

658,000

Question No. 4 Total payment of Accounts payableand admin expenses Less: Payment of Accounts payable Payment of admin expenses Question No. 5 Payment of admin expenses Divided by: Percentage of cash expenses to total admin expense Total admin expenses Add: Selling expenses Total selling and administrativeexpense Question No. 6 Total administrative expenses Less: Payment of administrative expense Non-cash administrative expenses Less: Depreciation for building (440,000 x 60% x 5% x 9/12)

11

518,000 470,000 48,000

48,000 80% 60,000 200,000 260,000

60,000 48,000 12,000 9,000

Chapter 5: Cash to Accrual

Depreciation for furniture and fixtures Divided by: Number of months used over 12 months Annual depreciation Divided by: Depreciation rate Cost of Furniture and Fixtures (no residual value) SUMMARY OF ANSWERS: 1. A 2. A 3.

B

4.

A

3,000 6/12 6,000 10% 60,000

5.

C

6.

A

PROBLEM 5-13 Question No. 1 Accounts receivable trade Beg. Balance Sales on (squeeze)

account

800,000 930,000

700,000 30,000 1,000,000

Total

1,730,000

Balance end Sales returns allowances Collections

and

1,730,000

Sales Less: Sales returns and allowances Net sales

900,000 30,000 900,000

Question No. 2 Merchandise inventory Beg. Balance Net Purchases (484,000 – 50,000)

150,000 434,000

144,000 440,000

Total

584,000

584,000

Balance end Cost of Sales

Accounts Payable trade Payments Purchase ret. and allow Balance end

394,000 50,000 200,000

160,000 484,000

Total

644,000

644,000

Payment to suppliers was computed as follows: Reported cost of sales Add: Merchandise inventory, beginning Less: Merchandise inventory, en...