Auditing Problems PDF

Preview

Summary

AUDITING PROBLEMS REVIEWERS / TESTBANKSProblem 1 The Christine Manufacturing, which started operations on September 1, 2008, is owned by Sheila Ltd. Sheila Ltd’s accounts at December 31 included the following balances:Machinery (at cost) 91, Accumulated depreciation – machinery 48, Vehicles (at cost...

Description

AUDITING PROBLEMS REVIEWERS / TESTBANKS Problem 1 The Christine Manufacturing, which started operations on September 1, 2008, is owned by Sheila Ltd. Sheila Ltd’s accounts at December 31 included the following balances: Machinery (at cost) Accumulated depreciation – machinery Vehicles (at cost; purchased November 21, 2010) Accumulated depreciation – vehicles Land (at cost; purchased October 25, 2008) Building (at cost; purchased October 25, 2008) Accumulated depreciation – building

91,000 48,200 46,800 19,656 81,000 185,720 28,614

Details of machines owned at December 31, 2011 are as follows: Machine 1 2

Purchase Date Cost useful Life Residual Value October 7, 2008 P 43,000 5 years P 2,500 February 4, 2009P 48,000 6 years P 3,000

Additional information: Sheila Ltd calculates depreciation to the nearest month and balances the records at month-end. Recorded amounts are rounded to the nearest peso, and the reporting data is December 31.  Sheila Ltd uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% p.a.  The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P23,400.  On acquiring the land and building, Sheila Ltd estimated the building’s useful life and residual value at 20 years and P5,000, respectively.



The following transactions occurred from January 1, 2012. 2012 January 3 Bought a new machine (machine 3) for a cash price of P57,000. Freight charges of P442 and installation of P1,758 were paid in cash. The useful life and residual value were estimated at five years and P4,000, respectively. June 22

Bought a second-hand vehicle for P15,200 cash. Repainting cost of P655 and four new tires costing P345 were paid for in cash.

August 28 Exchanged machine 1 for furniture that had a fair value of p12,500 at the date of exchange. The fair value of machine 1 at the date of exchange was P11,500. The office furniture originally cost P36,000 and, to the date of exchange, had been depreciated by P24,100 in the previous owner’s books. Sheila Ltd estimated the office furniture’s useful life and residual value at 8 years and P540, respectively. December 31

Recorded depreciation

1

2013 April 30

Paid for repairs and maintenance on the machinery at a cash cost of P928.

May 25

Sold one of the vehicles bought on November 21, 2010 for P6,600 cash.

June 26

installed a fence around the property at a cash cost of P5,500. The fence has an estimated useful life of 10 years and zero residual value.

December 31

Recorded depreciation

Questions: 1.

The gain on exchange of machine 1 on August 28, 2012 is a. P 1,225 b. P 900 c. P 225 d. P 0

2.

The total depreciation expense in 2012 is a. P 47,572 b. P 47,531 c. P 47,400

3.

4. 5.

The loss on sale of vehicle on May 25, 2013 is a. P 1,543 b. P 457 c. P 186

d. P 47,131

d. P 0

The total depreciation expense in 2013 is a. P 39,144 b. P 39,019 c. P 38,744

d. P 37,662

A weakness in internal accounting control over recording retirements of equipment may cause the auditor to a. Inspect certain items of equipment in the plant and trace those items to the accounting records. b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. c. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used. d. Select certain items of equipment from the accounting records and locate them in the plant.

Problem 2 Mary Joy Company constructs its own buildings. In 2009, a total of P1,228,500 interest was included as part of the cost of a new building just being completed. The following is a summary of construction expenditures in 2010: Accumulated in 2009, including capitalized interest March 1 September 1 December 31 Total

18,228,500 7,000,000 4,000,000 5,000,000 34,228,500

Mary Joy has the following outstanding loans at December 31, 2010:

2

12% note related directly to new building; term, 5 years from beginning of construction P10,000,000. General Borrowings: 10% note issued prior to construction of new building; term 10 years 5,000,000 8% note issued prior to construction of new building; term, 5 years 10,000,000 Questions: 6. 7.

8.

9.

The capitalization rate is a. 8,67% b. 10%

c. 12%

d. 8%

The average accumulated expenditures in 2010 is a. P 25,811,834 b. P 24,166,667 c. P 34,228,500 25,395,167

d.

P

The amount of avoidable interest for 2010 is a. P 3,656,500 b. P 2,500,000 2,534,761

c. P 2,739,517

d.

P

The amount of capitalizable interest in 2010 is a. P 2,500,000 b. P 2,534,761 c. P 2,739,517 1,200,000

d.

P

d.

P

10. The total cost of the new building is b. P 36,728,500 a. P 35,500,000 27,895,167

c. P 36,763,261

Problem 3 in 2001, Honest Corporation acquired a silver mine in Mr. Diwalwal. Because the mine is located deep in the Mr. Diwalwal, Honest was able to acquire the mine for the low price of P50,000. In 2002, Honest constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2002 cost P750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete. During 2003, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2001, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2004, the first year of operations, only 5,000 tons silver ore were removed from the mine. However, in 2005, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 millions tons of silver in addition to the original 4 million tons Improvements of P275,000 were made to the mine early in 2005 to facilitate the removal of the additional silver. Early in2005, an additional building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value.

3

In 2006, 2.5 million tons of silver were mined and costs P1,100,000 were incurred at the beginning of the year for improvement to the mine. Questions: Based on the above and the result of your audit, determine the following: (round off depletion and depreciation rates to two decimal places) 11. Depletion for 2004 a. P 5,550

b. P 6,300

12. Depletion for 2005 a. P 780,000 b. P 870,000 1,820,000 13. Depreciation for 2005 a. P 180,000 b. P 210,000 14. Depletion for 2006 a. P 1,950,000 2,425,000

b. P 2,150,000

15. Depreciation for 2006 b. P 525,000 a. P 450,000

c. P 6,500

d. 7,250

c. P 1,300,000

d.

c. P 250,000

d. P 490,000

c. P 2,275,000

c. P 625,000

P

d.

P

d. 1,225,000

Problem 4 At the beginning of year 1, Charmaine Company grants share options to each of its 100 employees working in the sales department. The share options will vets at the end of year 3, provided that the employees remain in the entity’s employ, and provided that the volume of sales a particular product increases by at least an average of 5 percent per year. If the volume of sales of the product increases by an average of between 5 percent and 10 percent per year, each employee will receive 100 share options. If the volume of sales increases by an average of between 10 percent and 15 percent each year, each employee will receive 200 share options. If the volume of sales increases by an average of 15 percent or more, each employee will receive 300 share options. On grant date, Charmaine Company estimates that the share options have a fair value of P20 per option. Charmaine Company also estimates that the volume of sales of the product will increases by an average of between 10% and 15% per year. The Charmaine Company also estimates, on the basis of weighted average probability that 19% of employees will leave before the end of year 3. By the end of year 1, seven employees have left and the entity still expects that a total of 19 employees will leave by the end of year 3. Product sales have increased by 12% and the entity expects this rate of increase to continue over the next 2 years. By the end of year 2, a further six employees have left. The entity now expects only three more employees will leave during year 3. Product sales have increased by 18%. The entity now expects that sales will average 15% or more over the threeyear period. By the end of year 3, a further two employees have left. The entity’s sales have increased by an average of 16% over the 3 years.

4

Questions: Based on the above and the result of your audit, determine the following: 16. Compensation expense in year 1 a. P162,000 b. P108,000 c. P124,000 d. P0 17. Compensation expense in year 2 a. P228,000 b. P232,000

c. P224,000

d. P0

18. Share options outstanding end of year 2 a. P348,000 b. P340,000 c. P336,000

d. P0

19. Compensation expense in year 3 a. P510,000 b. P174,000

d. P0

20. a. b. c. d.

c. P162,000

Which of the following is ordinarily the best evidence of fair value? Published price quotations in an active market. Discounted cash flow analysis. Comparative transaction model. Intrinsic value.

Solution Year 1 –

100 Employees Year 2 (19) Employees to leave (19%) 81 Employees to avail the option X 200 shares leave in YR 3 16,200 shares the option X P20 fair value on date of grant P 324,000 X 1/3 x P 108,000 Compensation expense

100 Employees ( 7) Leave in YR 1 ( 6) Leave in YR 2 ( 3) Est. employees to 84 Employees to avail x 300 shares 25,200 shares 20 fair value on date of grant P 504,000

x P

2/3 336,000

Total

Expense YR 3 100 employees Compensation expense in YR 1 ( 7) Leave in YR 1 P 228,000 expense in YR 2 ( 6) Leave in YR 2 ( 2) Leave in YR 3 85 Employees to avail the option X 300 shares 25,500 shares X P20 fair value on date of grant P 510,000 Total Compensation Expense - 336,000 Compensation expense in Yr 1 & YR 2 P174,000 Compensation expense in YR 3 Answer:

18. b 19. a 20. c 21. b 22. a

Compensation 108,000 Compensation

5

Problem 5 You gather the following information pertaining to the stockholders’ equity section of the Cleeneth Corporation in connection with your audit of the company’s financial statements for 2009: Common stock, P1 par value; authorized 1,500,000 shares; Issued 750,000 shares; outstanding 700,000 shares 700,000 Additional paid-in capita: Excess of par From treasury stock Total paid-in capital Unappropriated retained earnings Total stockholders’ equity

P 7,000,000 100,000 P 7,800,000 4,050,000 P11,850,000

All of the outstanding common stock and treasury stock were originally issued in 20002 for P11 per share. The treasury stock is common stock reacquired on March 31, 2004. Cleeneth uses the par value method of accounting for treasury stock. During 2009, the following events or transactions occurred relating to Cleeneth’s stockholders equity: Feb. 12 Issued 200,000 shares of unissued common stock for P12.50 per share. June 15 Declared cash dividend of P0.20 per share to stockholders of record on April 1, 2009 and payable on April 15, 2009. This was the first dividend ever declared by Cleeneth. Sept. 20 Cleeneth’s president retired, Cleeneth purchased from the retiring president 50,000 shares of Cleeneth’s common stock for P13 per share, which was equal to market value on this date. This stock was cancelled. Dec. 15 Declared a cash dividend of P0.20 per share to stockholders of record on January 2, 2006 and payable on January 15, 2006. Cleeneth is being by two separate parties for patent infringements. Cleeneth management and outside legal counsel share the following opinions regarding to these suits. Suit #1 #2

Likelihood of losing the suit Reasonable possible Probable

Estimated loss P300,000 200,000

Questions: Based on the above and the result of your audit, answer the following: 21. The issuance of 200,000 shares of common stock on February 12, 2009 caused Cleeneth’s in additional paid-in capital in excess of par increase by a. P200,000 b. P2,300,000 c. P2,500,000 d. P0

6

22. The retirement of 50,000 shares of common stock on September 20, 2009 caused Cleeneth’s additional paid-in capital in excess of par to decrease by a. P50,000 b. P500,000 c. P600,000 d. P0 23. Cleeneth wants to appropriate retained earnings for all loss contingencies that are not properly accurate by a charged to expense. How much of Cleeneth loss contingencies should be appropriated by charged to unappropriated retained earnings P300,000 b. P500,000 c. a. P200,000 d. P0 24. How much cash dividends should Cleeneth charge against unappropriated retained earnings in 2009 a. P350,000 b. P370,000 c. P180,000 d. P170,000 25. How much should Cleeneth show in note to financial statements as restriction on retained earnings because of the acquisition of treasury stock? c. P450,000 d. a. P100,000 b. P600,000 P650,000 Solution: Question no. 21 – b Proceeds from issuance (200,000 x P12.50) 2,500,000 Less par value of common stock (200,000 shares x P1) 200,000 Increase in APIC 2,300,000 Question no. 22 – b Common stock (50,000 shares x P1) APIC – excess over par [50,000 shares x (P11 – P1)] Unappropriated retained earnings Cash (50,000 shares x P13)

50,000 500,000 100,000 650,000

Question no. 23 – a Question no. 24 – a Dividends declared, 6/15/09 [(750,000 + 200,000 – 50,000) x P0.20] Dividends declared, 12/15/09 [(750,000 + 200,000 – 50,000 – 50,000) x P0.20] Total cash dividends

180,000 170,000 350,000

Question no. 25 – c Treasury stock (50,000 shares x P1) 50,000 APIC – excess over par [50,000 shares x (P11 – P1)] 500,000 APIC – from TS transactions 100,000 Cash (balancing figure) 450,000 Reconstruction of the entry made to record the acquisition of treasury stock

7

Problem 6 Kibungan Company has the following information on January 1, 2010 related to its property, plant and equipment: Land Building Accumulated depreciation – building Machinery (2 machines) Accumulated depreciation – machinery Carrying amount

30,000,000 300,000,000 (37,500,000) 400,000,000 (100,000,000) 592,500,000

There were no additions or disposals during 2010. Depreciation is computed using straight line over 20 years for building and 10 years for machinery. On June 30, 2010, all of the property, plant and equipment were revalued as follows: Replacement Cost Sound Value Land 40,000,000 40,000,000 Building 500,000,000 425,000,000 Machinery 650,000,000 455,000,000 On June 30, 2011, building was revalued at P300,000,000, its fair market value at that time. One of the two machines was sold on December 31, 2011 at P250,000,000. Questions: 1. What is the revaluation surplus on June 30, 2010? a. 920,000,000 b. 355,000,000 c. 345,000,000 327,500,000

d.

2. What is the total depreciation for 2010? a. 55,000,000 b. 66,750,000 90,000,000

d.

c. 72,500,000

3. What is the revaluation surplus on December 31, 2010? a. 355,000,000 b. 345,000,000 c. 337,500,000 327,500,000

d.

4. What is the impairment loss on December 31, 2011? a. 160,000,000 b. 100,000,000 c. 60,000,000

d. 0

5. What is the revaluation surplus on December 31, 2011? c. 141,875,000 a. 312,500,000 b. 212,500,000 96,250,000 6. Gain on sale on December 31, 2011 is: a. 71,250,000 b. 123,750,000 60,000,000 HC Bldg

300 M

FMV 500 M

c. (13,750,000)

d.

d.

8

(45 M) 85%

255 M

Mach

400 M (120 M) 280 M

Land Total Surplus

(75 M) 425 M

170 M

650 M (195 M) 455 M

175 M

30 M 40 M 10 M Revaluation 355 M

Depreciation: Bldg

Mach

1/1 6/30 6/30 12/31 1/1 6/30 6/30 12/31

Total

- 7.5 M - 12.5 M - 20.0 M - 32.5 M 72.5 M

425 M / 17 x 6/12

455 M/ 7 x 6/12

Revaluation Surplus 355 M

Unamortized Amortization: Bldg - 170 M / 17 x 6/12 (5 M) (12.5 Mach - 175 M/7 x 6/12 M 337. Balance 5M June 30: Bldg

80%

fmv - fmv before now 500 M (100 M) 400 M

300 M

-

100 M (100 M) 0

Revaluation Surplus - 2011 Beg. Bal 337.5 M

Rev. Surplus Impairment Loss

9

Amortization: Machinery Machinery disposed Bldg Bldg remaining Balance Cash AD Machinery

25. M 68.75 M 100 M 1.875 M 141.875 M 250 M 146.25 M 325 M 71.25 M

Gain on sale Rev. Surplus

68.75 M

Ret. Earnings

68.75 M

Problem 7 Brandy Company has two cash generating units. On December 31, 2010, the assets of one cash generating unit at carrying amount are: Inventory Accounts receivable Plant and equipment Accumulated depreciation Patent Goodwill

200,000 300,000 6,000,000 2,600,000 850,000 100,000

The accounts receivable are regarded as collectible and the inventory’s fair value less cost to sell is equal to the carrying amount. The patent has fair value less cost to sell of P750,000. On December 31, 2010, Brandy Company undertook impairment testing of the cash generating unit and determined the value in use of the unit at P4,050,000. Questions: 7. What is the impairment loss of the cash generating unit on December 31, 2010? a. 800,000 b. 700,000 c. 600,000 d. 0 8. What is the amount of inventory on December 31, 2010? a. P 153,850 b. 167,010 c. 180,000 d. 200,000 9. What is the amount of Accounts Receivable on December 31, 2010? a. 300,000 b. 250,520 c. 256,700 d. 253,850 10. What is the amount of Patents on December 31, 2010? a. 850,000 b. 750,000 c. 709,800 d. 727,320

10

Problem 9 Sabrina Manufacturing Company had several transactions during 2006 and 2007 concerning Plant assets. Several of these transactions are described below followed by the entry or entries made by the company’s accountant.

EQUIPMENT: Several used items were acquired on February 1, 2006, by using a P100,000 noninterest-bearing note. The note is due one year from the date of issuance. No market value of the note or the equipment is available. Sabrina’s most recen barrowing rate was 8%. Feb. 1, 2006

Equipment Notes payable

100,000

100,000 Dec. 31, 2006

Depreciation expense Accumulated Depreciation-Equipment

10,000

10,000

Buildings: A building was acquired on June 1, 2006, by issuing 100,000 shares of the

company s P5 par value ordinary shares. The ordinary share is not widely traded therefore no market price is available. The building was appraised on the transaction date at P650,000. June 1, 2006

Building Ordinary Share (100,000xP5)

500,000

500,000 Dec. 31, 2006

Dep...