AUDITING PROBLEMS (CPA REVIEW) PDF

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PROBLEM NO. 1The trail balance of Snookeroo Corporation does not balance.Cash Debit Credit Accounts Recievable P5, Supplies on Hand 5, Furniture and Equipment 2, Accounts Payable 6,100 P7, Share capital 8, Retained Earings 2, Service Revenue 5, Office Expense 4,320 _______ P24,539 P22,An examination...

Description

CPA REVIEW

AUDITING PROBLEMS

R.R. OCAMPO

PREWEEK DRILL2

OCTOBER2013

PROBLEM NO. 1 The trail balance of Snookeroo Corporation does not balance. Cash Accounts Recievable

Debit

Credit

P5,912

Supplies on Hand

5,240

Furniture and Equipment

2,967

Accounts Payable

6,100

Prepaid rent P7,044 8,000

Retained Earings

2,000

Office Expense

5,200 4,320

_______

P24,539

P22,244

An examination of the ledger shows these errors. 1. Cash received from a customer on account was recorded (both debit and credit) as P1,380 instead of P1,830. 2. The purchase on account of a computer costing P3,200 was recorded as a debit to Office Expense and a credit to Accounts Payable. 3. Services were performed on account for a client, P2,250, for which Accounts Receivable was debited P2,250 and service Revenue was credited p225. 4. A payment of P95 for telephone charges was entered as a debit Office Expenses and a debit to Cash. 5. The Service Revenue account was totaled at P5,200 instead of P5,280. Required: After preparing all the necessary adjustments based on the above audit findings, determine the best choice for the following: 1. The correct Cash balance is a. P6,172 b. P5,912 c. P5,722 d. P6,362 2. Audited balance of Accounts Receivable is a. P5,240 b. P4,790 c. P3,215 d. P3,665 3. Furniture and Equipment, would have an audited balance of a. P9,300 b. P6,100 c. P3,200 d. P3,900 4. Service Revenue would have an audit balance of a. P7,305 b. P5,200 c. P7,225 d. P7,350 5. The net income for the year is a. P6,185 b. P6,285 c. P6,850 d. P6,815 PROBLEM NO. 2

Accounts receivable Notes receivable

Share capital

Service Revenue

Antipolo Company had the following selected account balances as of December 31, 2013. P250,000 75,000 168,000

Supplies

60,000

Inventory

420,000

Equipment (historical cost)

640,000

Accounts payable

176,000

Salaries payable Accumulated depreciation

15,000 174,000

The following information was received from Antipolo’s accountant. Adjusting entries have not been made. 1. It is estimated that P16,000 of accouints will not be collectible. A provision for uncollectible accounts has never been made by Antipolo. 2. Supplies remaining at the ened of the year were P37,000. 3. Equipment is depreciated over 20 years with a P60,000 Salvage value. 4. Accrued salaries at 12/13/13 were P37,500. 5. The note receivable was signed by the customer on November 1, 2013. It is a 6-month note with an interest rate of 12% with the principal and interest paid at maturity. 6. Rent was paid on August 1, 2013, for 24 months and recorded in a prepaid rent account. The adjusted balances in the selected accounts after adjusting entries are made on December 31, 2013 would be as follows: Questions: 7. Accounts receivable (net) a. P234,000 b. P2150,000 c. P16,000 d. P48,000 8. Prepaid rent a. P133,000 b. P168,000 c. P24,000 d. P48,000 9. Accumulated depreciation – Equipment a. P203,000 b. P174,000 c. P200,000 d. P189,000 10. Salaries payable a. P52,500 b. P15,000 c. P55,000 d. P51,000 11. Supplies a. P37,000 b. P60,000 c. P33,700 d. P37,300

PROBLEM NO. 3 You have been appreciated as auditor of My Harmony Inc. its bookkeeper repots the following balance sheet amounts as of June 30, 2013.

Preferred shares: P150,000 shares outstanding (P20 par value)

Current assets

P2,953,000

Other assets

6,306,000

Current liabilities

1,674,200

Owners' Equity

5,584,800

Ordinary shares: 1,750,000 shares at P1 stated value Share premium

P595,000

Investment recivable

400,000

Inventories, including

683,000

1,275,000 P2,953,000

(b)

Other assets include the following:

Propery, plnt and equipment Depreciated book value (cost, P7,750,000)

P5,545,000

Deposit with supplier for merhandise ordered for August delivery

107,000

Goodwill recoreded on the books to cancel losses incurred by the company in prior years

654,000 P6,306,000

(c)

834,800

Current liabilities include the following: Payroll payable

P125,500

Taxes payable

88,700

Rent payable

77,000

Accounts payable (net of a P50,000 6-month note received from a supplier who purched some used equipment on June 29, 2013)

1,063,000

Notes payable

(f)

Common shares were originally issued for P4,950,000 but the losses pf the company for the past years were charged against share premium.

As June 30, 2013, the audited balance of the following would be:

advertising supplies of P35,000

1,750,000

P5,584,800

A review of account balances reveals the following data. (a) An analsis of current assets discloses the following: Cash

P3,000,000

320,000 P1,674,200

(d)

Other liabilities include P2,000,000 10% mortgage on property, plant and equipment, payable in semi-annual installments of P200,000 through June 30, 2018.

(e)

Owners’ equity includes the following:

Questions: 12. Total current assets a. P3,110,000 b. P3,075,000 c. P3,100,000 d. P3,060,000 13. Property, plant and equipment net of accumulated depreciation a. P7,750,000 b. P6,306,000 c. P5,545,000 d. P5,540,000 14. Total current liabilities a. P1,833,000 b. P2,124,000 c. P1,724,200 d. P2,142,200 15. Total owners’ equity a. P7,950,000 b. P4,950,000 c. P4,930,800 d. P4,390,000 16. Total liabilities and owners’ equity a. P4,930,800 b. P8,655,000 c. P3,724,200 d. P8,650,000 PROBLEM NO. 4 On January 4, 2013, Raffles Corp. paid P1, 296,000 for 40,000 ordinary shares of butter Company. The investment represents a 30% interest in the net assets of Butter and gave Raffles the ability to exercise significant influence of Butter’s operating and financial policy decisions. Raffles received dividends of P3 per share on December 4, 2013, and Butter reported net income of P640,000 for the year ended December 31, 2013. The market value of Butter’s ordinary share at December 31, 2013, was P32 per share. The book value of Butter’s net assets was PP3, 200,000 and:  The fair value of Butter’s depreciable assets, with an average remaining useful life if 8 years, exceeded their book value by P320, 000.  The remainder of the excess of the cost of the investment over the book value of assets purchased was attributable to goodwill.

Questions: 17. What amount of the investment cost is attributable to goodwill? a. P240,000 b. P96,000 c. P366,000 d. P144,000 18. What amount of investment revenue should be reported in Raffles income statement for the year ended December 31, 2013? a. P120,000 b. P108,000 c. P180,000 d. P192,000 19. What is the carrying value of the investment in Butter ordinary shares on December 31, 2013? a. P1,280,000 b. P1,356,000 c. P1,296,000 d. P1,368,000 20. Assume that the 40,000 shares represent 10% interest in the net assets of Butter rather than a 30% interest. What amount of investment revenue should be reported in Raffles income statement for the year ended December 31, 2013? a. P120,000 b. P64,000 c. P60,000 d. P180,000 21. Assume that the 40,000 shares represent 10% interest in the net assets of Butter rather than a 30% interest. What is the carrying value of the investment in Butter ordinary shares at December 31, 2013? a. P1,296,000 b. P1,356,000 c. P1,280,000 d. P1,236,000 PROBLEM NO. 5 Green Company acquires a new manufacturing equipment on January 1, 2012, on installment basis. The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of P388,020, including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2012. The equipment has a cash price equivalent of P2,370,000. Green’s financial year-end is December 31. Questions: 22. What is the acquisition cost of the equipment a. P3,404,160 b. P2,804,160 c. P2,370,000 d. P3,104,100 23. The amount to be recognized on January 1, 2012, as discount on note payable is a. P1,034,160 b. P310,416 c. P827,160 d. P0 24. The amount of interest expense to be recognized in 2012 is a. P0

b. P188,898 c. P310,416 d. P207,000 25. The amount of interest expense to be recognize in 2013 is a. P310,416 b. P188,898 c. P207,000 d. P0 26. The carrying value of the note payable at December 31, 2013 is a. P1,689,858 b. P1,888,980 c. P1,312,062 d. P1,700,082 PROBLEM NO. 6 On an audit engagement for 2013, you handled the audit of fixed assets of Mongol Copper Mines. This mining company bought the exploration right of Haven Mineral Exploration on June 30, 2013 for P14, 580,000. Of this purchase price, P9,720,000 was allocated to copper ore which had remaining reserves estimated at 1,620,000 tons. Mongol Copper Mines expects to extract 15,000 tons of ore a month with an estimated selling price of P50 per ton. Production started immediately after some new machineries costing P1, 200,000 were bought on June 30, 2013. These new machineries had an estimated useful life of 15 years with a scrap value of 10% of cost after the ore estimate has been extracted from the property, at which time the machineries will be useless. Among the operating expenses of Mongol Copper mines at December 31, 2013 were: Depletion expenses Depreciation, machineries

P810,000 80,000

Questions: 27. Recorded depletion expense was a. Overstated by P180,000 b. Understated by P180,000 c. Overstated by 270,000 d. Understated by 270,000 28. Recorded depreciation expense was a. Overstated by P20,000 b. Understated by P20,000 c. Overstated by P40,000 d. Understated by P40,000 29. The audited carrying value of the machinery as of December 31, 2013 is a. P1,140,000 b. P1,080,000 c. P1,120,000 d. P1,280,000 30. The audited carrying value of the copper ore (wasting asset) as of December 31, 2013 is a. P9,720,000 b. P9,210,000 c. P9,810,000 d. P9,180,000 31. The appropriate depreciation method that should be used for the machineries is a. Straight-line method b. Unit of production method

c. d.

Double-declining balance Composite life

PROBLEM NO. 7 Maybe Company is constructing a building Construction began on January 1 and was completed on December 31. Expenditures were P2,400,00 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. 32. What are the weighted-average accumulated expeditures? a. P4,380,000 b. P3,155,000 c. P7,380,000 d. P3,690,000 33. What I the weighted-average interest rate used for interest capitalization purposes? a. 11% b. 10.85% c. 10.5% d. 10.65% 34. What is the avoidable interest for Maybe Company? a. P144,000 b. P463,808 c. P164,281 d. P352,208 35. What is the actual interest for Maybe Company? a. P879,000 b. P891,000 c. P735,000 d. P352,208 36. What amount of interest should be charged to expense? a. P382,792 b. P735,000 c. P526,792 d. P415,192 PROBELEM NO. 8 You have been engaged to audit the financial statements of Denmark Company. Upon inspecting the books and records for Denmark Company for the year ended December 31, 2013, you find the following data. Items 1 A receivable of P6,400 from Hamilo Realty is determined to be uncollectible. The company maintains an allowance for bad debts for such losses. Items 2 A creditor, Joya Company has just been awarded damages of P35,000 as result of breach of contract by Denmark Company during the current year. Nothing appears on the books in connection with this matter. Items 3 A fire destroyed part of a branch office. Furniture and fixtures that cost P123,000 and had a book value of P82,000 at the time of the fire were completely destroyed. The insurance company has agreed to pay P70,000 under the provisions of the fire insurance policy.

Items 4 Advances of P9,500 to sales persons have been previously recorded as sales salaries expense. Items 5 Machinery at the end of the year shows a balance of P199,600. It is discovered that additions to this account during the year totaled P44,600, but of this amount, P7,600 should have been recorded as repairs. Depreciation is to be recorded at 10% on machinery owned throughout the year but at one-half this rate on machinery purchased or sold during the year. Questions; 37. Audit findings described in ITEM 1 would require a. No adjusting entry. b. An adjusting entry crediting Bad debts expense account. c. An adjusting entry debiting Bad debts expense account. d. And adjusting entry crediting the Accounts receivable account. 38. Audit findings describe ITEM 2 would require a. No adjusting entry. b. Only disclosure in the notes to financial statements. c. An adjusting entry crediting Lawsuit payable – Joya Company d. An adjusting entry debiting retained Earings. 39. Audit findings described in ITEM 3 would require a. No adjusting entry. b. Only disclosure in the notes to financial statements. c. An adjusting entry crediting furniture and fixtures for P82,000 d. An adjusting entry debiting Loss from fire for P12,000. 40. Audit findings described in ITEM 5 would require a. No adjusting entry. b. Only disclosure in the notes to financial statement. c. An adjusting entry debiting Machinery for P76,000. d. An Adjusting entry debiting Depreciation expense Machinery for P17, 350. 41. If adjusting entries are made on audit findings described in ITEMS 1 through 5, Income before taxes would a. Be reduced by P62, 450. b. Be increased by P9,500 c. Not change. d. Be reduced by P71,950 PROBLEM NO.9 Knicks Corporation asked you to review its records and prepare corrected financial statements. The books of accounts are in agreement with the following statement of financial position:

Knicks Corporation Statement of Financial Position December 31,2013 Assets

Cash

P40,000

Accounts

80,000

receivable Notes receivable

24,000

Inventories

200,000

Total assets

P344,000

Liabilities and owners's Equity Accounts payable

P16,000

Notes payable

32,000

Capital stock

80,000

Retained earnings

216,000

Total liabilities and owners' equity

344,000

A review of the company’s books indicates that the following errors and omissions had not been corrected during the applicable years: 2010 2011 2012 2013 Ending inventory overstated

P

- P56,000 P64,000

P

-

Ending inventory understated

48,000

-

-

72,000

Prepaid expense

7,200

5,600

4,000

4,800

-

3,200

Unearned income

-

2,400

Accrued income expense Accrued income

1,600

600

800

400

-

100

-

1,200

No dividends were declared during the years 2010 to 2013 and no adjustments were made to retained earnings. The company’s books reported the following profit: 2010 P60,000 2012 P52,000 2011 44,000 2013 60,000

QUESTIONS: Determine the adjusted amounts of the following: (disregard tax implications) 42. Net income in 2010 a. P99,200 b. P116,800 c. P113,600

d. P17,600 43. Net income (loss) in 2011 a. (P62,800) b. (P14,800)

c. (59,600) d. P145,200 44. Net income (loss) in 2012 a. P60,400 b. P44,800 c. P44,400 d. (P11,600) 45. Net income (loss) in 2013 a. (P76,000) b. P194,400 c. P195,200 d. P196,000 46. Retained earnings as of December 31, 2013 a. P281,600 b. P291,200 c. P292,000 d. P147,200 PROBLEM NO. 10 Selected pre adjustment account balances and adjusting information of Lakers Inc. for the year ended December 31, 2013, are as follows: Retained earnings, January 1, 2013 Sales salaries and commissions Advertising expense Legal service Insurance and licenses Travel expense - sales representative Depreciation - sales/delivery equipment Depreciation - office equipment Interest income Utilities Telephone and postage Supplies inventory Miscellaneous selling expenses Dividends paid Dividends eceived Interest expense Allowance for doubtful accounts Officers' salaries Sales Sales returens and allowances Sales discounts Gain on sale of assets Inventory, January 1 Inventory, December 31 Purchases Freight in Accounts receivable, December 31 Gain from discontinued operations (before income taxes) Loss on sale of equipment

Adjusting information: a)

Goods amounting to P18,600 in the possession of consignees as of December 31, 2013 was not included in the ending inventory balance.

P440,670 25,000 16,090 2,225 7,680 4,560 6,100 4,200 550 6,400 1,475 2,180 2,740 33,000 5,150 4,520 160 36,600 451,000 3,000 880 7,820 89,700 20,550 141,600 5,525 261,000 40,000 72,600

b)

c)

d)

e)

f)

g) h) i)

j)

k)

After preparing an analysis of aged accounts receivable, a decision was made to increase the allowance for doubtful accounts to 2% of the ending accounts receivables balance. Purchase returns and allowance were unrecorded. They are computed as 6% of purchases (not including freight in). Sales commission for the last day of 2013 had not been accrued. Total sales for that day amounted to P3,050. Average sales commission is 3% of sales. No accrual had been made for a P570 freight bill received on January 3, 2014, for goods received on December 29, 2013. An advertising campaign was initiated on November 1, 2013. P1,818 was recorded as “prepaid advertising” and should be amortized over a six-month period. No amortization was recorded. Freight charges of P3,500 paid during 2013 on sold merchandise were netted against sales. P560 interest earnedat the end of 2013 was not accrued. A forklift with a useful life of 10 years was purchased on March 1, 2013 for P7,800. Depreciation had not been recognized. Supplies on hand amounted to P1,225 at December 31, 2013. A “real” account is debited upon receipt of supplies. Income tax rate on all items is 30%.

QUESTIONS: Based on the above and the result of your audit, compute for the following for the year ended December 31, 2013: 47. Net sales a. P454,500 b. P449,720 c. P451,000 d. P447,500 48. Cost of goods sold a. P208,399 b. P208,499 c. P210,149 d. P189,749 49. Selling expenses a. P59,338 b. P55,838 c. P58,688 d. P58,596 50. General and administrative expenses a. P64,595 b. P64,915 c. P66,140 d. P68,095 51. Net income a. P79,099 b. P70,099 c. P83,429 d. 72,098

PROBLEM NO. 11 This caselette is designed to test your competence in the preparation of audit report.

You are the audit partner of five clients and will have to make a decision as to the appropriate type of audit opinion that should be issued relative to their financial statements. The pertinent data for these clients follow: Client No. 1 – DEF Co. DEF holds a note receivable consisting of principals and accrued interest payable in 2012. The note’s maker recently filed a voluntary bankruptcy petition but DEF failed to reduce the...