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2011 NATIONAL CPA MOCK BOARD EXAMINATIONIn partnership with the Professional Review & Training Center, Inc. and Isla Lipana & Co.A U D I T I N G P R O B L E MSINSTRUCTIONS: Select the best answer for each of the following questions. Mark only one answer for each item on the answer sh...

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2011 NATIONAL CPA MOCK BOARD EXAMINATION In partnership with the Professional Review & Training Center, Inc. and Isla Lipana & Co.

AUDITING PROBLEM S INSTRUCTIONS: Select the best answer for each of the following questions. Mark only one answer for each item on the answer sheet provided. AVOID ERAS URES. Answers wi th erasures may render your examination answer sheet INVALID . Use PENCIL NO .2 o nly. GOODLUCK! PROBLEM NO. 1 You were engaged by Quezon Corporati on for the audit of the co mpany’s fina ncial statements for the year ended December 31, 2010. The company i s engaged in the whole sa le business and makes all s ales at 25% over cos t. The following were accoun ting records:

gathered

S AL E S Ref. Amount Bal an ce forwarded P5,200,000 Dec. SI No. 27 965 40,000 Dec. SI No. 28 966 150,000 Dec. SI No. 28 967 10,000 Dec. SI No. 31 969 46,000 Dec. SI No. 31 970 68,000 Dec. SI No. 31 971 16,000 Dec. Closing 31 entry (5,530,00) P Note: SI = Sales Invoice Inven tory A ccounts rec eiva ble A ccounts payable

from

th e

clien t’s

P U R C H A S E S Da te Dat e Ref. A moun t Bal ance forwarded P2,700,000 Dec. RR No. 27 1057 35,000 Dec. RR No. 28 1058 65,000 Dec. RR No. 29 1059 24,000 Dec. RR No. 30 1061 70,000 Dec. RR No. 31 1062 42,000 Dec. RR No. 31 1063 64,000 Dec. Cl os in g 31 entry (3,000,00 ) P RR = Receiving Repor t P600,000 500,000 400,000

You observed the ph ysic al i nventor y of goods in the warehouse on December 31 and were satisfied that it was proper ly taken . When perfo rm ing 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 s hipments had been made on any Sales Invoice s whose num be r is lar ger than No. 968. You also obtain ed the following additio nal in fo rmation: a)

b)

Incl ud ed in the warehouse p hysical invent ory at December 31 w er e goods which had been pur chased and r eceived on Receiving Report No. 1060 but for which the i nvoice was not received until the following year. Cost was P18,000. On the evening of December 31, there were two trucks in the company si ding: • Truck No. CPA 123 was unload ed on January 2 of the following year and rec eived on Receiving Report No. 1063. The freight was paid by the vend or. • Truck No. ILU 143 was loaded and se aled on December 31 but leave the company prem ises on Ja nuar y 2. Th is order was s old for P100,000 per Sales Invoice No. 968.

Brooks Trading Cor poration . Brooks received the goods, which were s old on S ales Invoice No. 966 terms FOB Destinat ion, the next day. d) Enroute to the c lie nt on December 31 was a truckload of goo ds, which was r eceived on Receivin g Report No. 1064 . The good s were s hipped FOB D esti nation, and f reight of P2,000 was pai d by the cli ent. However , the fr eig ht was deducted from the purchase pr ice of P800 ,000 . QUES TIO NS : Based on the above and the resu lt of your audit, deter min e the f ollowi ng: 1.

Sales for the year ended December 31, 2010 a. P5,250,000 c. P5,400,000 b. P5,150 ,000 d. P5,350 ,000

2.

Purchases for the year ended December 31, 2010 a. P3,000 ,000 c. P3,018,000 b. P3,754 ,000 d. P3,818 ,000

3.

Inventory as of December 31, 2010 a. P864,000 b. P800,000

4.

c. d.

P968,000 P814 ,000

Account s receiva ble as of December 31, 2010 a. P350 ,000 c. P370,000 b. P220,000 d. P120,000

5. Acc ounts payable as of December 31, 2010 a. P418,000 c. P 400,000 b. P354 ,000 d. P1 ,218,000

PROBLEM NO. 2 The Bolinao Company va lues it s inven tory at the lower of FIFO cost or net r ealiz able value (N RV). The inventor y accounts at December 31, 2009, had the following balance s. Raw mate rials Work in process Finished goods

P 650,000 1,200,000 1,640,000

The following are some of the transactions that aff ect ed the inve ntor y of the Boli nao Company during 2010 . Jan. 8

Bolinao purchased raw ma te rials wit h a li st pr ice of P200,000 and was gi ven a trade dis count of 20% and 10%; terms 2/ 15, n/ 30. Bolinao values invento ry at the net invoice p rice

Feb. 14

Bolinao repossessed an inve ntor y item from a customer who was overdu e in making pay me nt. The un paid balan ce on the sale is P15,200. The repossessed

c)

Temporar ily stranded at December 31 at the rail road siding were two deliv ery trucks enroute to

merchandise is to b e refin ished and plac ed on sa le. It is expected that the item can be sold for P 24,000 after est imated refin ishin g costs of P6,800. The no rmal

pr ofit for this item is

Page 1 of 6

con sidered to be P3,200 . Mar. 1

Apr. 3

value) . No charges have been made ag ainst the account before J anuary 1, 2007 .

Refinishing costs of P6,400 w ere incurred on the repossessed item. The repossessed item was resold P24,000 on account, 20% down.

for

Transacti ons betwee n January 1, 2007 and December 31, 2010, and t heir record in the ledger were as foll ows: July 1, 2007

Truck No. 3 was traded for larger on e

Aug. 30

A sale on account was made of fin ished goods that have a list price of P59,200 and a cost P38,400. A red ucti on of P8,000 off the li st pric e was granted as a trade-in allo wance. The t rade-in item is to be priced to sell at P6,400 as is. The n ormal profit on t his type of inventory is 25% of the sales price.

(No. 5), the agr eed pu rch as e p rice of which was P340 ,000. Blue M fg. Co. paid the aut om obile dealer P150 ,000 cash on the transac tion. The entry was deb it t o Semitr ucks and a cr edit to cash, P150,000. Jan. 1, 2008

Truck No. 1 was s old for P35, 000 cash; entry de bited Cash and c redited Semitrucks, P35,000.

July 1, 2009

A new truck (No. 6) was ac qui red for P360,000 cash and was charged at that am ount to Semitrucks account. (Assume truck No. 2 was not retir ed.)

July 1, 2009

Truck No. 4 was damaged in a wreck to such an extent that it was sold as Blue junk for P7,000 cash. Mfg. Co. r eceived P25,000 from the in surance company. The entry made by the bookkeeper was a debit to cash, P32, 000, and cr edits to Miscellan eous Income, P7,000 and S emit rucks P 25,000.

QUEST IONS: Bas ed on the above and the result of your audit, answer the following : (Assume the c lient is using perp etua l inventor y syste m) 6.

The entry on Jan. 8 will include a deb it to R aw Materials Inv ent ory of a. P200,000 c. P141 ,120 b. P144,000 d. P196 ,000

7.

The repossessed invento ry on Feb. 14 is most likely to be v alued at a. P14, 000 c. P17 ,200 b. P24 ,000 d. P14 ,400

8.

The journa l entr ies on April 3 will include a a. Debi t to Cash of P24,000. b. Debit to Cost of Re po ssessed Goo ds Sold of P14,000 . c. Credit to Profit on Sale o f Reposs essed Invent or y of P3,600. d. Cr edit to Repossessed Invent ory of P20,400.

9.

The trade-in inven tor y on Aug. 30 is m ost likely to be valu ed at a. P8, 000 c. P6,000 b. P4,800 d. P6,400

10. How much will be recorded as Sal es on Aug. 30? a. P51,200 c. P57 ,200 b. P56 ,000 d. P57 ,600

QUES TIO NS : Based on the above and the result of yo ur aud it, deter min e the fo llowing: (Disregard tax implicati ons) 11. The carryi ng amount of S emitr uc ks as of December 31, 2010 is a. P885,400 c. P284,000 b. P504,000 d. P354,000 12. The 2010 depr eciation expense is a. P138,000 b. P104,000

PROBLEM NO. 3 You requested a d epre ciation schedule for Sem itruc ks of Blue Manufactu ri ng Company s howi ng the additio ns, retirements, depreciation and other data affecting the income of the Company in the 4-year p eriod 2007 to 2010, inclusiv e. The Semitrucks accoun t cons ist s of t he following as of Januar y 1 , 2007: Truck cost Truck cost Truck cost Truck cost

Entries for d epreciation had been made for the close of each year as fo llows: 2007, P203 ,000; 2008, P211,000; 2009, P244,500; 2010 , P278 ,000.

c. P184,000 d. P140,000

13. The 2007 profit is ove rstated by a. P9,000 b. P31,000

c . P20,000 d. P 0

14. The 2008 profit is under stated by a. P16,000 b. P 50,000

c . P51,000 d. P 0

15. The 2009 profit is under stated by a. P23,500 b. P64,500

c . P94,500 d. P 0

No. 1 purchased Jan. 1 , 2004,

P 180 ,000

No. 2 purchased July 1, 2004,

220 ,000

No. 3 purchased Jan. 1 , 2006,

300 ,000

PROBLEM NO. 4

No. 4 purchased July 1, 2006,

240,00 0

On December 31, 2009, Probe Corpora tion acq uired the following three intangible assets:

P 940 ,00 0 The Semitr ucks – Accu mulat ed Deprec iation accoun t previo usly adj usted to January 1, 2007, and duly entered to the le dger, had a balance on that date of P302 ,000 (dep reci ation on the 4 trucks from r espective date of purchase, based on five-year life, no salvag e

•

A trademark for P300,000. The tr adema rk has 7 years remaining leg al life. It is anticipated that the future, trademark will be rene wed in the inde finit ely, wi thou t problem.

•

Goodwill

for

P1,500,000.

The

goodwill

is

Page 2 of 6

associated with reporting unit. •

Probe’s

N exus

Manufacturin g

A customer list for P220,000. By contract, Probe has exclu sive use of the list for 5 years. Becaus e of market condi tions, it is expected that the li st will have econo mic value for just 3 yea rs.

Addit ion al in form atio n: a.

Cash Building (useful life, 15 years) L and

On December 31, 2010, before any adjusti ng entries for the year were made, the foll owing inform ation was a ssembled about each of th e intangible assets :

a) Becau se of a decline in th e econom y, the trademark i s now expected to generate cash flows of just P10,000 per yea r. T he useful life of trademark still exten ds beyond the fores eeab le hor izon. b)

The cash flows expected to be gen erated by the Nexus Manufactur ing reporting un it is P250,000 per year for the next 22 years . Book va lues and fair va lues of the assets and liabilities of the Nexus Manufactu ring reporting unit are as follow s:

Identifiable assets Goodwill L iabilities c)

Book va l ues P2,700,000 1,500,000 1,800,000

Fa i r va l ues P 3,000 ,000 ? 1,800 ,000

Bas ed on the above and the r esult of your audit, deter mine the following: ( Assume that the appr opr iate discount rate for all items is 6%): 16. Total amor tizat ion for the year 2010 a. P 73,333 c. P141 ,515 b. P116,190 d. P 86 ,857 17. Impairment loss for the year 2010 a. P 90,476 b. P133 ,333

c. P179 ,584 d. P 0

18. Ca rrying am ount of Tr adem ark as of December 31, 2010 a. P300,000 c. P166 ,667 b. P257,143 d. P120 ,416 19. Ca rrying a mount of Goodwill as of D ec ember 31, 2010 a. P1,500, 000 c. P1,431 ,818 b. P1 ,425,000 d. P1,462 ,500 20. Ca rrying am ount of Customer list as of December 31, 2010 a. P220,000 c. P176 ,000 b.

P146,667

d.

P

0

PROBLEM NO. 5 Your audit of Think Posi tive Company disclosed that your c lie nt kept very limited record s. Purchases of merch andise were paid for b y check, but most other item s were out of cash receipts. T he company’s co llect ions were deposited weekly. No record was kept of cash in the bank, nor was a record kept of sales. Accounts rece ivable were recorded only by keeping a copy of the ticket, and this copy was given to

P

600,000 5,400,000 1,800, 00 0 P 7 ,800, 000

b.

An anal ysis of the bank statements showed tot al deposi ts , including the or iginal cash in vestment, of P4,200,000. The balance in the bank statement on December 31, 2010, was P300,000, but there were checks amounting to P60 ,000 dated in December but not paid by the bank until J anuary 2011 . Cash on hand on December 31, 2010 P 150,000 including c ust omers’ deposit of was P90,000.

c.

D uring the year, Think Pos itive Company borrowed P600,000 from the bank and repaid P150,000 and P30,000 intere st.

d.

Disbursemen ts were as follows:

pai d in cash

Utilities Salaries Supplies Div idends

The cash flows expected to be gen erated by the customer li st are P120,000 in 2011 and P80 ,000 in 2012.

REQU IRED:

On Januar y 2, 2010 Think Posit ive Company started b usiness and issue d shar e capital, 72,000 sh ares wit h P100 par, for t he following con si der ations:

during

the year

P120,000 120 ,000 240 ,000 180 ,000 P 660,00 0

e.

An i nve ntory of merchandise taken on December 31, 2010 showed P906 ,000 of merchan di se.

f.

Tickets for accounts receivab le totaled P1 ,080,000 but P60,000 of that a mount may prove uncollectible.

g.

Unpaid suppliers invoices amo unted to P420,000.

h.

Equipment with a cash price of P480,000 was purchased in ear ly January on a one-year in stallment ba sis. D uring the year, checks for the down payment and all maturing ins tallm ents totaled P534,000 . The equipment has a useful life of 5 years.

for

me rc hand ise

QUES TIO NS : Based on the above and the result of yo ur aud it, deter min e the foll owing: (Disregard income taxe s) 21. Payments for mercha ndis e purchases in 2010 a. P2,586 ,000 c. P2,646 ,000 b. P2,436 ,000 d. P3,246,000 22. C ollect ion s from sales in 2010 a. P3,720 ,000 b. P4,320 ,000

c. d.

P3,000,000 P4 ,920,000

23. Net inco me for the year ended December 31, 2010 a. P1,770 ,000 c. P1 ,560,000 b. P1,620 ,000 d. P 960 ,000 24. S hareholders’ eq uit y as of December 31, 2010 a. P9,390 ,000 c. P9,180,000 b. P9,240 ,000 d. P8,580,000 25. Total assets as of December 31, 2010 a. P9,583 ,200 c.

P9,390,000

the customer when he p aid his account.

b. P 9,540,000

d.

P9,450 ,000

Page 3 of 6

PROBLEM NO. 6 In connection with your examination of the financi al statements of Ringo, Inc. for the year ended December 31, 2010, you were able to obtain certain information d uring you r audit of the accounts receivable an d related accounts. •

The December 31, 2010 balance in the Accounts Receivable control accounts is P837,900 .

• An aging schedule of the accounts receivable as of December 31, 2010 is presented b elow: Percentage to be

29. How much is the net adju stment to the D oubtful Acco unt s expense account? a. P14,920 cre dit c. P20,875 cred it b. P14,615 credit d. P15,140 debit 30. All of the following are examples of substantive tests to ve rify v aluation of net accounts rece ivab le except the a. Re- computation of the allo wan ce for bad debts. b. Inspection of a ccounts for current versus noncurrent status in the statement of financial posi tion. c. Insp ection of the agin g schedu le and credit records of past due accounts. d. Compariso n of the allowance for bad debts with past rec ords.

Ag e 60 days & under 61 to 90 days 91 to 120 days

Net debit b a l anc e

P387,800

1 percent

307 ,100

2 percent

89,800

5 percent

Over 120 days

53 ,200 P837,900

•

•

appli ed aft er corrections have been m ade

Definitely uncoll ec tible, P9,000; the remaind er is estimated to be 25% uncollectible.

Two entries made in the Dou btful Accounts Expense account we re: 1. A debit on December 31 for the am ount of the c redit to the Allowan ce for D oubtful Accounts. 2. A c redit for P6 ,100 on November 30, 2010, and a debit to Allo wance for Doubtfu l Accounts because of a ban krupt cy. The related sales took place on October 1, 2010. The Allowance for D oubtful Accounts schedule is presented below: Debit Januar y 1, 2010 November 30, 2010 Dec emb er 31, 2010 ( P837,900 x 5% )

Cre d it

P6, 100

P41,895

PROBLEM NO. 7 On Janu ar y 1, 2010, Pedro Company sol d lan d that originally cost P400,000 to Buyer Company. As payment, Buyer gave Pedro Company a P600,000 note. The note bears an intere st rate of 4% and is to be repa id in three annual installmen ts of P200,000 (plus in terest on the outs tand ing balance). The first payment is due on December 31, 2010. The market price of the land is not reliably deter min abl e. The preva iling rate of interest for notes of t hi s type is 14% on January 1, 2010 and 15% on D ecember 31, 2010. Pedro made the following journal entr ies in relation to the sale of land and the relat ed note r eceiv abl e: Ja nuary 1, 2010 Notes receiv able L and Gain on sale of land

P600,000 P400,000 200,000

Dece mbe r 3 1, 2010

B al a nc e P19,700 13,600

Cash Notes re ceivab le Interest income

P55 ,495

Pedro reported the notes rece ivable in its statement of financial p osition at December 31, 2010 as part of trade and other receivables .

P224,000 P200,000 24,000

QUES TIO NS : •

Ther e is a cr ed it balance in one account receivable (61 to 90 days) of P11,000; it represents an advance on a sales contrac t.

QUEST IONS: Bas ed on the above and the result of your audit, answer the foll owing: 26. How much is the adjus te d b alance of Accounts Receivable as of December 31, 2010 ? a. P837,900 c. P833 ,800 b. P839,900 d. P822 ,800 27. How much is the adjusted b alance of th e Allow ance for D oubtful Accounts as o f December 31, 2010 ? a. P25, 475 c. P25 ,255 b. P25 ,780 d. P41 ,895 28. How much i s the Do ubtfu l Accounts expense for the year 2010? a. P21,180 c. P41 ,985 b. P20 ,655 d. P20,875

Based on the above and the result of yo ur aud it, answer the follow ing: 31. The correct gain on sa le of land is a. P103,105 b. P 94,868

c. d.

P120,061 P200 ,000

32. The correct interest incom e for 2010 is a. P74,230 c. P70,435 b. P72,809 d. P24,000 33. Profit for 2010 is overstated by a. P50,460 b. P31,130

c . P54,902 d. P 0

34. The correct carrying amount of the notes rece ivab le at December 31, 2010 is a. P400,000 c. P368,870 b. P345,098 d. P349,540 35. The enti ty’s workin g capital at December 31, 2010 is overstated by a. P235,765 c. P182,476 b. P 232,936 d. P 0

Page 4 of 6

PROBLEM NO. 8 You were able to obtain the following ledge r d etails o f Tradin g Securi ties in co nnectio n with your audi t of the

Royalty r evenue (exempt from ta xation) Proceeds on sale of building Ent erta inment expense (non d eductible) D epreciation expense - buildings D epreciation expense - plant

P 8,000 75,000 1,700 7,600 22,500

IMBC Corpora tion for the year ended Decembe r 31, 2010: D at e Jan. 10 Feb. 20 Mar. 01 May 31

Aug. 15

Sep. 01

Par ti cul a rs Purchase of 4W ARD Co. – 6,000 shares Purchase of BACK Co. – 7,200 shares Sale of BACK Co. – 2,400 shares Recei pt of 4WARD sha re dividend– Offsett ing Credit to retained earnings Sale of 4WARD Stocks – 4,800 shares Sale of 4WARD Stocks – 1,200 shares

DR

D eclared 01/02 /10 ...