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Fast Track | Audit of Investing CycleProblem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proc...

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Fast Track | Audit of Investing Cycle Problem 1 The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery account). Company policy on depreciation which you accept, provides an annual rate of 10% without salvage value. A full year’s depreciation is charged in the year of acquisition and none in the year of disposition. Question 1 The adjusted balance of the Machinery account at December 31, 2006 is: a P 290,000 b. P 370,000 c. P 260,000 d. P 300,000 2

The correct depreciation expense for the machinery for the year ended December 31, 2006 is: a P 37,000 c. P 30,000 d. P 26,000 b. P 29,000

Problem 2 Two independent companies, KAYA and MUYAN, are in the home building business. Each owns a tract of land for development, but each company would prefer to build on the other’s land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the report and the companies records, the following information was obtained: KAYA Co.’s Land MUYAN Co.’s Land Cost (same as book value) P 800,000 P 500,000 Market value, per appraisal 1,000,000 900,000 The exchange of land was made and based on the difference in appraised values, MUYAN Company paid P100,000 cash to KAYA Company. Question 1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the exchange in the amount of: a P 20,000 b. P 60,000 c. P 100,000 d. P 200,000 2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the exchange in the amount of: a P0 b. P 100,000 c. P 300,000 d. P 400,000 3. After the exchange, KAYA Company record its newly acquired land at: d. P 900,000 a P 700,000 b. P 720,000 c. P 800,000 4. After the exchange, MUYAN Company record its newly acquired land at: a

P 1,000,000

b. P

900,000

c. P 600,000

d. P 500,000

Problem 3 In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002, the corporation purchased a building site for its proposed research and development laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in service on January 1, 2004. The estimated useful life of the building for depreciation purposes was 20 years; the straight-line method of depreciation was to be employed and there was no estimated salvage value. Management estimates that about 50% of the projects of the research and development group will result in long-term benefits to the corporation. The remaining projects either benefit the current period or are abandoned before completion. A summary of the number of projects and the direct costs incurred in conjunction with the research and development activities for 2004 appears below. No. of Salaries and Other expenses Projects employees benefits (excluding dep’n.) Completed projects with long-term benefits 60 3,600,000 2,000,000 Abandoned projects that benefit the current year 40 2,600,000 600,000 Projects in process – results indeterminate 20 1,600,000 480,000 Upon the recommendation of the research and development group, Bing-Bong Corporation acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was acquired on March 31, 2003, and has an economic life of 10 years. Questions 1 Carrying value of the patent as of December 31, 2004 is: a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 2

3

4

d. P 2,640,000

Carrying value of the building as of December 31, 2004 is: b. P 10,640,000 a. P 5,320,000 c. P 10,080,000

d. P 0

Carrying value of the land as of December 31, 2004 is: b. P 2,400,000 a. P 1,200,000 c. P 2,160,000

d. P 0

Research and development expense for 2004 is: a. P 5,280,000 b. P 10,880,000 c. P 11,440,000

d. P 11,760,000

Problem 4 On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a building to be used as its office headquarters. The building was completed on June 30, 2004. Expenditures on the project were as follows: January 3, 2003 March 31, 2003 June 30, 2003 October 31, 2003

P 500,000 600,000 800,000 600,000

January 31, 2004 March 31, 2004 May 31, 2004

300,000 500,000 600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10% interest rate. The loan was outstanding all of 2003 and 2004. The company’s other interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31. Questions 1 The interest capitalized at the end of December 31, 2003 is: a P 113,100 b. P 145,000 c. P 150,000 2

3

4

5

d. P 200,000

The interest capitalized at the end of December 31, 2004 is: a P 145,132 b. P 159,632 c. P 290,263

d. P 319,263

The total cost of the Building at December 31, 2004 is: a P 3,535,132 b. P 4,190,131 c. P 4,480,263

d. P 4,535,263

The total interest expense at the end of December 31, 2003 is: b P 780,000 b. P 635,000 c. P 630,000

d. P 560,000

The total interest expense at the end of December 31, 2004 is: a P 460,737 b. P 489,737 c. P 620,368

d. P 634,868

Problem 5 The following information pertains to Marlisa Company’s delivery trucks: Date 1/1/04 3/15/05 7/1/05 7/10/05 9/1/05 10/1/05 4/1/06 5/2/06 6/30/06 12/1/06

Particulars Trucks 1, 2, 3, & 4 Replacement of truck 3 tires Truck 5 Reconditioning of truck 4, which was damaged in a collision Insurance recovery on truck 4 accident Sale of truck 2 Truck 6 Repainting of truck 4 Truck 7 Cash received on lease of truck 7

Debit 3,200,000 25,000 800,000

Credit

35,000

1,000,000 27,000 720,000

33,000 600,000 150,000

22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT Date 12/31/04 12/31/05 12/31/06

Particulars Depreciation expense Depreciation expense Depreciation expense

Debit

Credit 300,000 300,000 300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the selling party allowed a P50,000 trade in value for the old truck.

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000 being given for the new truck. c. The depreciation rate is 20% by unit basis. d. Unit cost of Trucks 1 to 4 is at P800,000 each. Questions 1. What is the loss on trade-in of truck 3? a. P 50,000 b. P 430,000

c. P 510,000

d. P 560,000

2. The correct cost of truck 5 is a. P 560,000 b. P 610,000

c. P 800,000

d. P 850,000

3. The book value of truck 5 at December 31, 2006 is a. P 850,000 b. P 595,000 c. P 560,000

d. P 510,000

4. What is the loss in trade-in of Truck 1? a. P 150,000 b. P 250,000

d. P 410,000

c. P 290,000

5. The correct cost of truck 6 is a. P 590,000 b. P 800,000 c. P 850,000 6. The carrying value of Truck 6 at December 31, 2006 is a. P 501,500 b. P 680,000 c. P 850,000

d. P 1,100,000

7. The gain (loss) on sale of truck 2 is a P 80,000 b. P 331,600

c. P 495,000

d. P 496,200

8. The book value of truck 4 at December 31, 2006 is a. P 320,000 b. P 331,600 c. P 495,000

d. P 496,200

9. The 2006 depreciation expense is understated by a. P 92,000 b. P 252,000 c. P 292,000

d. P 372,000

d. P 1,000,000

10. The cost of repainting truck 4 should have been charged to: a. Claims receivable - insurance company b. Retained earnings c. Accumulated depreciation d. Repairs and maintenance 11. Which of the following controls would most likely allow for a reduction in the scope of the auditor’s tests of depreciation expense? a. Review and approval of the periodic property depreciation entry by a supervisor who does not actively participate in its preparation. b. Comparison of property account balances for the current year with the current year budget and prior-year actual balance. c. Review of the miscellaneous revenue account for salvage credits and scrap sales of partially depreciated property. d. Authorization of payment of vendors’ invoices by a designated employee who is independent of the property receiving functions.

Problem 6 You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year ended December 31, 2006. You gathered the following information pertaining to the company’s Equipment and Accumulated Depreciation accounts. EQUIPMENT 1.1.06 Balance P 446,000 9.1.06 No. 6 sold 6.1.06 No. 12 36,000 12.31.06 Balance 3 Dismantling of No. 6 1,000 P 483,000

P

9,000 474,000

______ P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT 12.31.06 Balance P 271,400 1.1.06 Balance P 224,000 ______ 12.31.06 2006 Dep’n 47,400 P 271,400 P 271,400

The following are the details of the entries above: 1

The company depreciates equipment at 10% per year. The oldest equipment owned is seven years old as of December 31, 2006.

2

The following adjusted balances appeared on your last year’s working papers:

3

Equipment P 446,000 Accumulated depreciation 224,000 Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on September 1, 2006, for P9,000.

4

Included in charges to the Repairs Expense account was an invoice covering installation of Machine No. 12 in the amount of P2,500.

5

It is the company’s practice to take a full year’s depreciation in the year of acquisition and none in the year of disposition.

Questions 1. The gain/(loss) on sale of Machine 6 is: a P 1,000 b. P 500

c. P (1,000)

d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is: c. P 454,500 a P 446,000 b. P 452,000 d. P 475,500 3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31, 2006 is: a P 45,200 c. P 46,525 d. P 53,525 b. P 45,450 4. The entry to correct the sale of Machine 6 is: a. Loss on sale of equipment 1,000

Accumulated depreciation Equipment

21,000 22,000

b. Accumulated depreciation 22,500 Equipment 22,000 Gain on sale 500 c. Accumulated depreciation 21,500 loss on sale of equipment 500 Equipment 22,000 d. Accumulated depreciation 23,000 Equipment 22,000 Gain on sale of equipment 1,000 5. The Depreciation Expense at December 31, 2006 is: a. Overstated by P6,125 c. Understated by P1,950 d. Overstated by P1,950 b. Understated by P6,125

Problem 7 On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of Crame Corporation. Plant assets consists of: Land Leasehold improvements Equipment Total per WBS

P 100,000 190,000 450,000 P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal annual installments of P100,000. The first interest and principal payment is due on October 1, 2004. No interest has been accrued as of December 31, 2003. In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which was charged to operating expenses. You ascertained that due to obsolescence, computer equipment with an original cost of P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a permanent impairment in value and, as a result, should have a carrying value of only P40,000 at the beginning of the year. In addition, the remaining useful life of the equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For 2003, the company recorded depreciation of P16,000 for the said equipment. At present, Crame Corporation’s office and warehouse are located in a rented building. The rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install walls and fixtures. The leasehold improvements have a useful life of five years. No amortization has been booked as of December 31, 2003. Questions 1. The adjusted cost of land amounted to: a P 528,000 b. P 510,000

c. P 500,000

d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to: a P 190,000 b. P 183,000 c. P 180,500 d. P 180,000 3

Audit adjustments will increase depreciation/amortization expense by: a P 38,000 b. P 24,000 d. P 13,500 c. P 14,000

4. Loss due to impairment in value amounted to: c. P 24,000 a P 30,000 b. P 28,000

d. P 20,000

Problem 8 You are engaged to examine the financial statement of the Rabago Manufacturing Corporation for the year ended December 31, 2004. The following schedules for property, plant, and equipment and the related accumulated depreciation accounts have been prepared by your client. The opening balances agree with your prior year’s audit working papers. Rabago Manufacturing Corporation Analysis of Property, Plant, and Equipment and Related Accumulated Depreciation Accounts Year Ended December 31, 2004 COST Final 12/31/03 Additions Land P 450,000 P 100,000 Buildings 2,400,000 350,000 Machinery/Equip 2,770,000 808,000 P 5,620,000 P1,258,000 ACCUMULATED DEPRECIATION Final 12/31/03 Buildings P 1,200,000 Machinery/Equip 546,500 P 1,746,200

Additions P 103,000 313,600 P 416,600

Retirements P 520,000 P 520,000

Retirements

Per Books 12/31/04 P 550,000 2,750,000 3,526,000 P 6,826,000

Per Books 12/31/04 P 1,303,000 860,100 P 2,163,100

Further investigation revealed the following: a. All equipment is depreciated on the straight-line basis (with no salvage value) based on the following estimated lives: Building – 25 years, all other items 10 years. b. The company entered into a 10-year lease contract for a derrick machine with annual rental of P100,000, payable in advance every April 1. The parties to the contract stipulated that a 30-day written notice is required to cancel the lease. Estimated useful life is 10 years. The derrick was recorded under machinery and equipment at P808,000 and P60,000 applicable to the machine was included in the depreciation expense during the year. c. The company finished construction of a new building wing in June 30. The useful life of the main building was not prolonged. The lowest construction bid was P350,000 which was the amount recorded. Company personnel constructed the building at a total cost of P330,000.

d. P100,000 was paid for the construction of a parking lot which was completed on July 1, 2004. The expenditure was charged to land. e. The P520,000 equipment under retirement column represent cash received on October 1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper recorded depreciation expense of P72,000 on this machine in 2004. f.

Mr. Rabago, the company’s president donated land and building appraised at P200,000 and P400,000 respectively to the company to be used as plant site. The company began operating the plant on September 30, 2004. Since no money was involved, the bookkeeper did not make any entry for the above transaction.

Questions 1. The balance of rent expense as of December 31, 2004 is: c. P 75,000 a P0 b. P 25,000

d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is: a. P 0 c. P 75,000 b. P 25,000

d. P 100,000

3. The life of the building wing is a 25 years b. 11 years

d. 13 years

c. 12 years

4. The carrying value of the building as of December 31, 2004 is a P 1,447,000 b. P 1,816,250 c. P 1,820,250

d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004 is: c. P 650,000 a P 450,000 b. P 545,000 d. P 750,000 6. The loss on the disposal of the machinery sold for P520,000 is a P0 b. P 30,000 c. P 56,000

d. P 152,000

Problem 9 Siacor Inc. acquired 30% of Lozano Co.’s voting stock for P200,000 on January 2, 2007. Siacor’s 30% interest in Lozano gave Siacor the ability to exercise significant influence over Lozano’s operating and financial policies. During 2007, Lozano earned P80,000 and paid dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June 30, 2008, and P200,000 for the year ended December 31, 2008. On July 1, 2008, Siacor sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on October 1, 2008. 1. Before income taxes, what amount should Siacor include in its 2007 income statements as a result of investment? b. P24,000 a. P15,000 c. P50,000 d. P80,000 2. In Siacor’s December 31, 2007 balance sheet, what should be the carrying amount of this investment? b. P209,000 a. P200,000 c. P224,000 d. P230,000 3. In its 2008 income statement, what amount should Siacor report as gain from the sale of half of its investment? b. P30,500 a. P24,500 c. P35,000 d. P45,500

Problem 10 In connection with your audit of the financial statement of the William Company for the year 2007, the following investment in stock and dividend income accounts were presented to you: Investment in Stock Debit Credit June 18, 2006 10,000 shares common par value P50, Samson Company 390,000 April 30, 2007 5,000 shares Samson Company received as stock dividend 250,000 May 20, 2007 Sold 5,000 shares @ P25 125,000 Dec. 10, 2007 Sold 2,000 shares @ P60 120,000

April 30, 2007 Nov. 30, 2007

Dividend Income Stock dividend Samson Company common

250,000 50,000

The following information was obtained during your examination: 1.

The balance in the investment in stock account at December 31, 2006 per your last year‘s working papers, was P390,000.

2. From independent sources, you determine the following dividend information: Type of Dividend Stock Cash Cash

Date Declared March 15, 2007 Nov. 1, 2007 Dec. 1, 2007

Date of Record April 1, 2007 Nov. 15, 2007 Dec. 15, 2007

Date of Payment April 30, 2007 Nov. 28, 2007 Jan. 2, 2008

Rate 50% P5/share 20%

3. Closing market quotation as at December 31, 2007: Bid Asked Samson Company common 13¾ 16½ Questions: Based on the above and the result of your audit, answer the following: 1. How much is the gain (loss) on the May 20, 2007 sale? a. P (70,000) c. P 5,000 b. P (5,000)

d. P 0

2. How much is the gain on the December 10, 2007 sale? a P 68,000 b. P 48,000 c. P 42,000

d. P 0

3. How much is the total dividend income for the year 2007? c. P 150,000 a. P 400,000 b. P 300,000

d. P

50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007? a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000

5. How much is the Allowance for Unrealized loss as of December 31, 2007? d. P 0 a. P 98,000 b. P 35,000 c. P 7,000