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DE LA SALLE LIPACollege of Business, Economics, Accountancy and Management Accountancy Department Final Examination Auditing Problem Questionnaire 2 nd Semester, AY 2013- Prepared by: Mr. Reginald L. Laco Name:__________________________________Section: Subject:_______________________________Date:Dir...

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DE LA SALLE LIPA College of Business, Economics, Accountancy and Management Accountancy Department Final Examination Auditing Problem Questionnaire 2nd Semester, AY 2013-2014 Prepared by: Mr. Reginald L. Laco Name:____________________________________________________Section:__________________ Subject:___________________________________________________Date:____________________ Direction: The questionnaire contains 20 pages while the answer sheet contains 1 page. The total number of items is 100. Read and solve the following problems. Shade the letter of the best answer in the answer sheet. Problem I. Cenation Inc. is on a calendar year basis. The following balances were obtained from the trial balance of the entity on December 31,2010: Inventory P1,100,000 Accounts receivable 580,000 Accounts payable 690,000 Net sales 5,050,000 Net purchases 2,300,000 Net income 510,000 Additional audit data were found during your audit: a. Goods in transit FOB destination by a supplier, in the amount of P100,000, had been excluded from the inventory, and further testing revealed that the purchase had been recorded. b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase. However, upon your inspection the goods were found to be defective and would be immediately returned. c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB destination. d. Goods costing P70,000 was out on consignment with 3:16 Company. Since the monthly statement from 3:16 Company listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at P80,000. e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 2010. f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December 31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as FOB destination. The sale had not been recorded. g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet. However, these materials costing P170,000 had been included in the inventory count, but no entry had been made for their purchase. h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31. Required: Based on the above and the result of your audit, determine the adjusted balances of following as of December 31,2010: 1. Inventory a. 1,230,000 c. 1,550,000 b. 1,650,000 d. 1,480,000 2. Accounts payable a. 710,000 c. 810,000 b. 540,000 d. 760,000 3. Net sales a. 4,550,000 c. 4,730,000 b. 4,650,000 d. 4,970,000 4. Net purchases a. 2,370,000 c. 2,150,000 b. 2,420,000 d. 2,320,000 5. Net income a. 220,000 c. 540,000

b. 290,000

d. 550,000

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 1 of 20

Problem II. Viper Inc. carries a wide variety of musical instruments, sound reproduction equipment, recorded music and sheet music. To promote the sale of its products, Viper uses two promotion techniques – premiums and warranties. PREMIUMS The premium is offered on the recorded and sheet music. Customers receive a coupon for each P10 spent on recorded music and sheet music. Customers may exchange 200 coupons and P200 for a CD player. Viper pays P340 for each CD player and estimates that 60% of the coupons given to customers will be redeemed. A total of 6,500 CD players used in the premium program were purchased during the year and there were 1,200,000 coupons redeemed in 2010. WARRANTIES Musical instruments and sound reproduction equipment are sold with a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, is 2% of sales. Replacement parts and labor for warranty work totaled P1,640,000 during 2010. Additional data are also provided: Viper Inc. uses the accrual method to account for the warranty and premium costs for financial reporting purposes. Viper’s sales for 2010 totaled P72,000,000: P54,000,000 from musical instruments and sound reproduction equipment and P18,000,000 from recorded music and sheet music. The balances in the accounts related to warranties and premiums on January 1,2010 were as shown below: Inventory of premium CD players Estimated premium claims outstanding Estimated liability from warranties

P399,500 448,000 1,360,000

Required: Based on the preceding information, determine the amounts that will be shown on the December 31,2010 Financial Statement for the following: 6. Warranty expense a. 1,640,000 b. 1,080,000

c. 800,000 d. 360,000

7. Estimated liability from warranties a. 1,920,000 b. 1,080,000

c. 240,000 d. 800,000

8. Premium expense a. 1,836,000 b. 840,000

c. 756,000 d. 2,189,500

9. Inventory of premium CD players a. 399,500 b. 569,500

c. 2,210,000 d. 739,500

10. Estimated premium claims outstanding a. 364,000 b. 840,000

c. 756,000 d. 672,000

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 2 of 20

Problem III. In connection with your audit of The Rock Inc.’s financial statements for the year 2010, you noted the following transactions affecting the property and equipment items of the company: Jan. 1 – Purchased real property for P5,026,000, which included a charge of P146,000 representing property tax for 2010 that had been prepared by the vendor; 20% of the purchase price is deemed applicable to land and the balance to buildings. A mortgage of P3,000,000 was assumed by The Rock on the purchase. Cash was paid for the balance. Jan. 15 – Previous owners had failed to take care of normal maintenance and repair requirements on the buildings, necessitating current reconditioning at a cost of P236,800. Feb. 15 – Demolished garages in the rear of the building, P36,000 being recovered on the lumber salvage. The company proceeded to construct a warehouse. The cost of such warehouse was P540,800, which was P90,000 less than the average bids made on the construction by independent contractors. Upon completion of construction, city inspectors ordered extensive modifications to the building as a result of failure on the part of the company to comply with building safety code. Such modifications, which could have been avoided, cost P76,800. Mar. 1 – The company exchanged its own shares with a fair value of P320,000 (par P24,000) for a patent and a new equipment. The equipment has a fair value of P200,000. Apr. 1 – The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer of the machinery. Payment was made by issuing bonds with a face value of P400,000 and by paying cash of P144,000. The value of the franchise is set at P160,000 while the machine’s fair value is P360,000. May 1 – The company contracted for parking lots and waiting sheds at a cost of P360,000 and P76,800, respectively. The work was completed and paid for on June 1. Dec. 31 – The business was closed to permit taking the year-end inventory. During this time, required relocating and repairs were completed at a cost of P60,000. Required: Based on the above and the result of your audit, determine the cost of the following: 11. Land a. 940,000 b. 1,005,200

c. 976,000 d. 1,052,800

12. Buildings a. 4,645,600 b. 5,005,600

c. 4,762,400 d. 4,681,600

13. Machinery and equipment a. 360,000 b. 560,000

c. 576,615 d. 659,692

14. Land improvements a. 360,000 b. 76,800

c. 436,800 d. zero

15. Total property, plant and equipment a. 6,764,400 b. 6,731,200

c. 6,718,092 d. 6,618,400

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 3 of 20

Problem IV. In connection with your audit of the Shemus’ Company, you noted the following transactions during 2010: Jan. 2 – Paid legal fees of P450,000 and stock certificate costs of P249,000 to complete organization of the corporation. Jan. 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 entity. Clown cost, P30,000; pamphlets and candy, P15,000. Apr. 1 – Patented a newly developed process with costs as follows: Legal fees to obtain patent Patent application and licensing fees Total

P1,287,000 190,500 P1,477,500

It is estimated that in 6 years other companies will have developed improved processes, making the company’s 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 18,000 shares of Shemus’ nopar ordinary shares selling for P50 per share. The license is worth twice as much as the trademark, both of which may be used for 6 years. Jul. 1 – Constructed a shed for P3,930,000 to house prototype of experimental models to be developed in future research projects. Dec. 31 – Incurred salaries for an engineer and chemist involved in product development totaling P750,000 in 2010. Note: 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: 16. Cost of Patent a. 1,477,500 b. 190,500

c. 1,287,000 d. zero

17. Cost of license a. 450,000 b. 300,000

c. 600,000 d. zero

18. Cost of trademark a. 450,000 b. 300,000

c. 600,000 d. zero

19. Carrying amount of Intangible assets as of December 31,2010 a. 2,031,250 c. 1,981,250 b. 2,026,250 d. zero 20. Total amount resulting from the foregoing transactions that should be expensed

when incurred a. 2,971,500 b. 1,494,000

c. 5,424,000 d. zero

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 4 of 20

Problem V. Your audit of CM Punk Inc.’s property, plant and equipment disclosed the following data at December 31,2010: A Original cost Year purchases Useful life Salvage value Dep. method Acc. Dep. up to 2009

S

J E P70,000 P102,000 2004 2005 10 years 15,000 hrs. P6,200 P6,000 SYD method Unit method P46,400 P70,400

S

E

R P160,000 2006 15 years P10,000 STL method P30,000

T

I P160,000 2008 10 years P10,000 DDB method P32,000

Your noted that the client’s policy on depreciation is that no depreciation is recorded in the year an asset is purchased, and full year depreciation is provided in the year an asset is disposed of. The following transactions occurred during 2010: a. On May 5, Asset J was sold for P26,000 cash. The company’s bookkeeper recorded this retirement in the following manner in the cash receipts journal: Cash 26,000 Asset J 26,000 b. On December 31, it was determined that Asset E had been used 2,100 hours during 2010. c. On December 31, before computing depreciation expense on Asset R, the management of Punk decided the useful life remaining from January 1,2010 was 10 years. d. On December 31, it was discovered that a plant asset purchased in 2009 had been expensed completely in the year. This asset costs P44,000 and has a useful life of 10 years and no salvage value. Management has decided to use the DDB method for this asset, which can be referred to as “Asset C.” Required: Based on the result of your audit, determine the following: 21. 2010 depreciation expense on Asset J a. 6,960 b. 18,229

c. 6,364 d. 5,800

22. Gain to be reported on the sale of Asset J a. 8,200 b. 9,360

c. 8,674 d. zero

23. 2010 depreciation expense on Asset E a. 17,600 b. 19,440

c. 13,440 d. 14,280

24. 2010 depreciation expense on Asset R a. 17,143 b. 12,000

c. 13,000 d. 5,455

25. Total depreciation expense in 2010 on the above-mentioned PPE items a. 65,640 c. 66,800 b. 63,880 d. 66.640

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 5 of 20

Problem VI. The noncurrent liabilities of Edge Inc. at December 31,2009 included the following: Note payable, bank Liability under finance lease Note payable

P3,600,000 2,623,200 1,500,000

Transactions during 2010 and other information relating to Edge’s liabilities were as follows: a. The note payable to the bank bears interest at 20% and is dated May 1,2009. The principal amount of P3,600,000 is payable in four equal annual installments of P900,000 beginning May 1,2010. The first principal and interest payment was made on May 1,2010. b. The financial lease is for a ten-year period. Equal annual payments of P750,000 are due on December 31 of each year. The interest rate implicit in the lease is 18%. The amount of P2,623,200 represents the present value of the six remaining lease payments (due December 31,2010 through December 31,2015) discounted at 18%. c. The note payable to supplier bears interest at 19% and matures on September 30,2011. On February 25,2011, after the end of the reporting period, but before the 2010 statements were authorized for issue, Edge consummated a noncancelable agreement with a lender to refinance the 19%, P1,500,000 on a long-term basis, on readily determinable terms that have not yet been implemented. Both parties are financially capable of honoring the agreement, and there have been no violations of the agreement’s provisions. d. On April 1,2010, Edge issued for P7,005,675, P6,000,000 face amount of its 20%, P100,000 bonds. The bonds were issued to yield 15%. The bonds are dated April 1,2010 and mature on April 1,2015. Interest is payable annually on April 1. Required: Based on the above and the result of your audit, determine the following: 26. Liability under finance lease as of December 31,2010 a. 1,873,200 c. 2,017,544 b. 2,345,376 d. 1,123,200 27. Carrying amount of bonds payable as of December 31,2010 a. 6,893,813 c. 6,856,527 b. 7,417,536 d. 7,117,536 28. Total noncurrent liabilities as of December 31,2010 a. 12,211,357 c. 10,711,357 b. 10,154,190 d. 9,817,014 29. Current portion of long-term liabilities as of December 31,2010 a. 3,150,000 c. 2,727,832 b. 2,812,824 d. 2,169,864 30. Total interest expense for the year 2010 a. 2,145,314 b. 2,408,028

c. 1,673,139 d. 2,273,139

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 6 of 20

Problem VII. In connection with your audit of the Taker Inc, the company’s bookkeeper prepared a balance sheet at December 31,2008 which was presented with total assets aggregating P1,965,500 and total liabilities and equity for the same amount. Your audit disclosed the ff: ASSETS Cash (including paid expenses of P100 and a P4,000 contribution to a special fund for the acquisition of fixed assets) P 80,000 Advances to employees 1,000 Certificate of PLDT preference shares (not held for trading) 2,000 Petty cash fund 1,000 Marketable securities intended for long-term income earnings 52,000 Promissory note from a corporate officer (renewed for the next two years) 14,000 Merchandise inventory (including P1,000 worth of obsolete items and P4,000 merchandise received on consignment which was included in accounts payable 489,500 Accounts Receivable (including P3,000 ascertained to be uncollectible. Of the amount collectible, a provision for bad debts of 1% should be set up) 188,000 CPA Corporation Shares, at cost 10,000 Prepaid Insurance (including P800 cash surrender value of life insurance on the president; the company is the beneficiary 2,000 Prepaid rental (covering the period of Jan. 1,2009 to Dec. 31,2010) 6,000 Building (net of P60,000 accumulated depreciation; current year’s depreciation of P5,000 not yet entered) 1,000,000 Equipment, at cost (prior and current year’s depreciation amounted to P10,000) 120,000 Total Assets P1,965,500 LIABILITIES AND EQUITY Serial Bonds (ten-year bonds issued on 1/1/06 maturing on 12/31/15 at P25,000 a year) P 150,000 Accounts Payable (of this total, P2,000 pertains to creditors with debit balances deducted there-from) 210,000 Notes Payable (due 7/1/11) 10,000 Accrued Taxes 5,500 Premiums on Share Capital 10,000 Appropriated retained earnings for plant expansion 20,000 Cash dividends payable 30,000 Share dividends payable 30,000 Share capital, at par value 1,000,000 Retained earnings 500,000 Total Liabilities and Equity P1,965,500 Required: Based on the above and the result of your audit, compute the adjusted amount of the following as of December 31,2008: 31. Total Current Assets A. P749,750 B. P746,750

C. P753,750

D. P751,750

32. Total Noncurrent Assets A. P1,177,800 B. P1,175,800

C. P1,117,800

D. P1,180,800

33. Total Current Liabilities A. P268,500 B. P298,500

C. P269,500

D. P272,750

34. Total Liabilities A. P407,500

B. P403,500

C. P433,500

D. P404,500

35. Total Equity A. 1,521,050

B. P1,529,150

C. P1,526,050

D. P1,496,050

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 7 of 20

Problem VIII. The December 31,2008 adjusted trial balance of HBK Company shows the following: Debit Credit P50,000 P2,000

Accounts Receivable Allowance for Bad Debts Additional Information:

a. Cash Sales of the company represents 10% of Gross Sales. b. 90% of the Credit Sales Customers do not take advantage of the 2/10. n/30 terms. c. It is expected that cash discount of P300 will be taken on accounts receivable outstanding at December 31,2009. d. Sales Returns in 2009 amounted to P20,000. All returns were from charge sales. e. During 2009, accounts totaling P2,200 were written off as uncollectible; bad debt recoveries during the year amounted to P150. f. The allowance foe bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31,2009 is 150% of the rate used on December 31,2008.

Required: Based on the above and the result of your audit, determine the following: 36. Accounts Receivable as of December 31,2009

A. P150,000

B. P122,200

C. P16,667

D. P15,000

37. Allowance for bad debts as of December 31,2009

A. P1,000

B. P6,000

C. P9,000

D. P7,332

38. Allowance for sales discounts as of December 31,2009 A. P1,000

B. P300

C. P500

D. P150

39. Net Realizable Value of Accounts Receivable as of December 31,2009 A. P15,367

B. P140,700

C. P143,700

D. P114,568

40.. Bad Debts Expense for the year ended 2009 A. P9,050

B. P6,050

C. P1,050

D. P7,382

Auditing Problem (2nd Sem. A.Y. 2013-2014) Page 8 of 20

Problem IX. CIA Inc. had the following statements prepared as of December 31,2010: CIA INC. Comparative Statements of Financial Position December 31,2010 and 2009

Cash Accounts receivable AFS (current) Inventories Prepaid rent Machinery and equipment Acc. Dep. – Machinery and Equipment Total Assets

Dec. 31,2010 P 30,000 540,000 175,000 161,688 25,000 770,000 (175,000) P1,526,688

Dec. 31,2009 P 35,000 505,000 90,000 300,000 20,000 650,000 (125,000) P1,475,000

Accounts payable Income taxes payable Wages payable Short-term loans payable Long-term loans payable Ordinary shares, P10 par Share premium Retained earnings Total liabilities and equity

P 230,000 20,000 40,000 40,000 300,000 500,000 150,000 246,688 P1,526,688

P 200,000 30,00...