Chapter 10 - Pre-Board Examinations PDF

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CHAPTER 10 Examinations PB Examination No. 1 INSTRUCTIONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED QUESTIONS. USE THE SPECIAL ANSWER SHEET AND DRAW A VERTICAL LINE ACROSS THE LETTERED BOX THAT CORRESPONDS TO YOUR CHOICE. STRICTLY NO ERASURES ARE ALLOWED. Problem 1 You have been engaged for the ...

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CHAPTER 10 – Pre-Board Examinations PB Examination No. 1 I NSTRUCTI ONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED QUESTI ONS. USE THE SPECI AL ANSWER SHEET AND DRAW A VERTI CAL LI NE ACROSS THE LETTERED BOX THATCORRESPONDS TO YOUR CHOI CE.STRI CTLY NO ERASURESARE ALLOWED. ====================================================================== Problem 1 You have been engaged for the audit of the Letecia Company for the year ended December 31, 2007. The Letecia Company is engaged in the wholesale chemical business and makes all sales at 25% over cost. Following are portions of the client’s sales and purchases accounts for the calendar year 2007. SALES Date Reference Amount Bal. Forward Date Reference Amount 12-31 Closing entry P 699,860 P 658,320 12-27 SI # 965 5,195 12-28 966 19,270 12-28 967 1,302 12-31 969 5,841 12-31 970 7,922 _______ 12-31 971 2,010 P 699,860 P 699,860 PURCHASES

Date

Bal. Forward Reference

12-28 12-30 12-31 12-31

RR # 1059 1061 1062 1063

Amount P 360,300 3,100 8,965 4,861 8,120 P 385,346

Date 12-31

Reference Closing entry

Amount P 385,346

_______ P 385,346

SI – Sales Invoice RR – Receiving Report You observed the physical inventory of goods in the warehouse on December 31, 2007 and were satisfied that it was properly taken. When performing a sales and purchases cutoff tests, you found that at December 31, 2007, the last receiving report that had been used No. 1063 and that no shipments have

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been made on any sales invoices with numbers larger than No. 968. You also obtained the following additional information: 1. Included in the warehouse physical inventory at December 31, 2007, were chemicals that had been purchased and received on receiving report No. 1060 but for which an invoice was not received until 2008. Cost was P2,183. 2. In the warehouse at December 31, 2007, were goods that had been sold and paid for by the customer but which were not shipped out until 2008. They were all sold on sales invoice No. 965 and were not inventoried. 3. On the evening of December 31, 2007, there were two cars on the Letecia Company siding: (a) Car BR38162 was unloaded on January 2, 2008, and received on receiving report No. 1063. The freight was paid by the vendor. (b) Car BAE74123 was loaded and sealed on December 31, 2007, and was switched off the company’s siding on January 2, 2008. The sales price was P12,700 and the freight was paid by the customer. This order was sold on sales invoice No. 968. 4. Temporarily stranded at December 31, 2007, on a railroad siding were two cars of chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice No. 966 and the terms were FOB destination. 5. En route in the Letecia Company on December 31, 2007, was a truckload of material that was received on receiving report no. 1064. The material was shipped FOB destination and freight of P75 was paid by the Letecia Company. However, the freight was deducted from the purchase price of P975. 6. Included in the physical inventory were chemicals exposed to rain while in transit and deemed unsalable. Their invoice cost was P1,250, and freight charges of P350 had been paid on the chemicals. Questions: 1.

The inventory at year-end is understated by: b. P 32,096 a. P 23,976 c. P 33,696

d. P 44,714

2. The adjusted sales at year-end is: a. P 664,817 b. P 677,517

c. P 680,590

d. P 712,560

3. The adjusted purchases at year-end is: a. P 377,226 b. P 379,409

c. P 383,163

d. P 387,529

4. The cost of sales at year-end is overstated by: a. P 31,513 b. P 50,991 c. P 52,591

d. P 63,609

5. The sales at year-end is overstated by: a. P 19,270 b. P 22,343

d. P 40,120

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c. P 35,043

Problem 2 During the audit of a new client, Cialette Company, for the year ended December 31, 2007, you learned of the following transactions between Cialette Company and another client, financiers, Inc.: 1.

Cialette completed construction of a warehouse building on its own land in June, 2006 at a cost of P2 million. Construction was financed by a construction loan from the Capital Development Bank.

2.

On July 1, 2006, Financiers, Inc. bought the building from Cialette for P2 million, which Cialette used to discharge its construction loan.

3.

On July 1, 2006, Financiers, Inc. borrowed P2 million from Capital Development Bank, to be repaid quarterly over four years plus interest at 9%. A mortgage was placed on the building to secure the loan, and Cialette signed as a guarantor of the loan.

4.

On July 1, 2006, Cialette signed a noncancelable 20-year lease of the building from Financiers, Inc. The lease specified that Cialette would pay P242,700 per year for 20 years, payable in advance on each July 1, and granted an option exercisable at the end of the 20-year period, permitting Cialette to either (a) purchase the building for P240,000 or (b) renew the lease for an additional 15 years at P30,000 per year and purchase the building for P20,000 at the end of the renewal period. The lease specified that P12,000 of the annual payment would be for insurance, taxes, and maintenance for the following 12 months; if the lease should be renewed, P10,000 of each annual payment would be for insurance, taxes and maintenance.

5.

The building has a useful life of 40 years and is to be depreciated under the straightline method (assume no salvage value).

6.

Cialette and financiers negotiated the lease for a return of 10%. You determine that the present value of all future lease payment is approximately equal to the sales price and that the sale-and-leaseback transaction is in reality only in financing arrangement.

Instructions: For the December 31, 2007, balance sheet of Cialette company, prepare schedules computing the balances for the following items: Questions: 6. The prepaid insurance, taxes, and maintenance at December 31, 2007 is: b. P 6,000 a. P 0 c. P 10,000 d. P 12,000 7. The cost of the warehouse building at December 31, 2007 is: a. P 2,720,000 b. P 2,180,000 c. P 2,192,000

d. P 2,000,000

8. The current liabilities arising from the lease at December 31, 2007 is: a. P 59,147 c. P 230,700 d. P 242,700 b. P 144,923 9. The long-term liabilities arising from the lease at December 31, 2007 is: c. P 1,656,383 a. P 1,769,300 b. P 1,715,530 d. P 1,570,607 10. The accumulated depreciation of the warehouse building at December 31, 2007 is: c. P 75,000 a. P 50,000 b. P 54,800 d. P 82,200

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Problem 3 Charmaine Corporation was incorporated on January 1, 2000, and began operations one week later. Charmaine is a nonpublic enterprise. Charmaine Corporation’s controller prepared the following financial statements for the 11 months ended November 30, 2005: Balance Sheet November 30, 2005 ASSETS Current Assets: Cash Marketable securities, at cost Accounts receivable Allowance for doubtful accounts Inventories Prepaid expenses Total current assets Property, plant and equipment Accumulated depreciation Other Assets Total assets

150,000.00 60,000.00 450,000.00 (59,000.00) 430,000.00 15,000.00 1,046,000.00 426,000.00 (40,000.00) 120,000.00 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITY Current Liabilities Accounts payable & accrued expenses 592,000.00 Income tax payable 0 Total current liabilities 592,000.00 Stockholders’ Equity Common stock, P10 par value 300,000.00 Retained earnings 660,000.00 Total stockholders’ Equity 836,000.00 Total liabilities & Stockholders’ Equity 1,552,000.00

Statement of Income For the year ended November 30, 2005 Net sales Cost & expenses: Cost of sales Selling and Administrative Depreciation Research and Development Income before income taxes

2,950,000.00 1,670,000.00 650,000.00 40,000.00 30,000.00 2,390,000.00 560,000.00

Transactions for the month of December 2005:

1.Purchased merchandise from Abegail Industries, P350,000. Terms: Less 5%, 10%, FOB shipping point, 2/10, n/30. Abegail Industries paid P2,000 for the transportation cost. It is the policy of the company to record the purchases at net of discount. 2. Collected P150,000 accounts receivable less 2% discount.

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3. Sold merchandise on account to Bing Supplies, P300,000. Terms: FOB destination, 3/10, n/30. Charmaine Corporation paid the freight for P3,000. The company records these sales at net of discount. 4. Charmaine Corporation issued check for P100,000 as partial payment of the account to Abegail Industries. 5. Paid various operating expenses, P215,000. 6. Collected in full the account of Bing Supplies within the discount period. 7. Charmaine Corporation issued check for full payment of accounts to Abegail Industries 20 days after the invoice date. 8. Ending inventory, P500,000. Additional Information: a. b.

Income tax rate is 35%. The investment portfolio consist of short-term investments in marketable equity securities with a total market valuation of P75,000 as of December 31, 2005.

b. A P15,000 insurance premium paid on November 30, 2004, on a policy expiring one year later was charged insurance expense. c.

On June 1, 2002, a machine purchased for P45,000 was charged to repairs and maintenance. Charmaine depreciates machines of this type on the straight-line method over a five year life, with no salvage value, for financial and tax purposes.

d.

During November 2005, a competitor company filed suit against Charmaine for patent infringement claiming P200,000 in damages. Charmaine Corporation’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is P50,000.

Questions: 11. Cash a. P 51,230

b. P 62,765

c. P 68,750

d. P 70,250

12. Marketable Equity Securities a. P 50,000 b. P 60,000

c. P 75,000

d. P 80,000

13. Property, Plant, & Equipment a. P 398,750 b. P 399,500

c. P 426,000

d. P 471,000

14. Total Current Assets a. P 899,750

b. P 804,980

c. P 884,750

d. P 908,750

15. Accounts payable and others b. P 642,000 a. P 592,000

c. P 773,775

d. P 765,600

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16. Retained earnings - beg b. P 123,075 a. P 100,000

c. P 135,070

d. P 146,700

17. Sales a. P 3,190,000

c. P 3,247,000

d. P 3,301,000

18. Selling and admin expenses a. P 946,735 b. P 945,485

c. P 937,735

d. P 936,485

19. Research and Development cost a. P 0 b. P 30,000

c. P 45,000

d. P 50,000

20. Depreciation a. P 40,000

c. P 71,500

d. P 72,250

b. P 3,238,000

b. P 49,000

Problem 4 The Vanessa Company engaged Mr. Coliseo, a CPA, in 2007 to examine its books and records and to make whatever adjustments are necessary. The CPA’s examination disclosed the following: a.

Prior to any adjustments, the Retained Earnings account is reproduced below: RETAINED EARNINGS

Date

Particular

Debit

2005 Jan. 1 Balance Dec. 31 Net income for the year 2006 Jan 31 Dividends paid Apr. 3 Paid in capital in excess of par Aug. 30 Gain on retirement of preferred Stock at less than issue price Dec. 31 Net loss for the year 2007 Jan 31 Dividends paid Dec. 31 Net loss for the year

Credit

Balance Debit Credit

310,000

580,000 890,000

90,000

750,000 840,000

140,000

205,000

64,500

904,500 699,500

100,000 165,500

599,500 434,000

b.

Dividends had been declared on December 31, 2005 and 2006 but had not been entered in the books until paid.

c.

The company purchased a machine worth P360,000 on April 30, 2004. The company charged the purchase to expense. The machine has an estimated useful life of 3 years. The company uses the straight line method and residual values are deemed immaterial.

d.

The company received at transportation equipment as donation from one of its stockholders on September 30, 2006. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred

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for registering the transfer of ownership. The company did not record the donation on its books. The expenses paid related to the donated equipment were charged to expense. e.

The physical inventory of merchandise had been understates by P64,000 and by P44,500 at the end of 2005 and 2007, respectively.

f.

The merchandise inventoried at the end of 2006 and 2007 did not include merchandise that was then in transit shipped FOB shipping point. These equipments of P43,400 and P32,600 were recorded a purchases in January 2007 and 2008, respectively.

Questions Based on the above audit findings, the adjusted balances of the following are: (Disregard tax implication) 21. Retained earnings, 12/31/04 a. P 860,000 b. P 850,900

c. P 790,900

d. P 760,900

22. Net income for 2005 a. P 373,100

b. P 369,800

c. P 254,000

d. P 215,800

23. Retained earnings, 12/31/05 a. P 976,700 b. P 974,000

c. P 860,700

d. P 720,700

24. Net loss for 2006 a. P 379,000

b. P 359,700

c. P 349,700

d. P 269,700

25. Retained earnings, 12/31/06 a. P 341,000 b. P 411,000

c. P 481,000

d. P 495,000

26. Retained earnings, 12/31/07 a. P 362,700 b. P 332,700

c. P 302,700

d. P 254,000

Problem 5 You have been engaged to audit the financial statements of Cuajotor Corporation for the calendar year 2007. The company was organized on January 2, 2006 and has not been audited before. The following items relating to equity and income statement accounts appear in your Working Balance Sheet (WBS) and Working Income Statement (WIS) WBS- December 31, 2007: Long- term liabilities Capital Stock issued Additional Paid in capital Revaluation increment- Land Retained Earnings WIS- Year ended December 31, 2007 Income before tax Provision for income tax Income before extraordinary items Extraordinary items(net of tax)

Balance Per Books P240,800 560,000 100,000 90,000 54,000

150,000 45,000 105,000 77,000

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Net income Following are your audit findings: 1.

28,000

Long- term liabilities- This consist Mortgage payable Accrued interest on mortgage payable Reserve for general contingencies Total

P180,000 10,800 50,000 P240,800

The company mortgage its land to the Philippine National Bank for P180,000 on September 1, 2007. The mortgage liability is payable in 18 semi-annual installments of P10,000 plus accrued interest of 18% to date. The first installments due March 1, 2004. The reserve for general contingencies was set up by resolution of the Board of Directors on December 27, 2007. its purpose is to provide for possible future losses due to the risk of an impending business recession. A corresponding charge was made to general contingency losses which is classified as an extraordinary item. 2.

Capital Stock issued- The company is authorized to issue 10,000 shares of P100 par value common stock. Your analysis of the capital stock issued account shows: 2007 Jan. 1 Mar. 1 Nov. 1 Dec. 31

DESCRIPTION

AMOUNT

Balance, 4,500 shares issued Sold 500 shares at P120 per share Assessment on stockholders P10 per share Balance

P450,000 60,000 50,000 P 560,000

3.

Additional paid in capital - The account balance represents the fair value of property donated to the company in 2006. There was no manager’s check account in 2006.

4.

Revaluation increment (Land) – Land was written up to appraised value on December of 2007. The appraised value of P90,000 was determined by the company engineer. The property was acquired in 2006 at a cost of P40,000.

5.

Retained earnings, December 31, 2007 – Analysis of the retained earnings account for 2007 shows: Balance, January 1, 2007 Net income – 2007 Gain on sale of treasury stock Balance, December 31, 2007

6.

Over/Understatement – The following over/understatements were discovered in the course of your audit:

Inventory, end Depreciation expense Accrued expenses payable end

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P18,000 28,000 8,000 P54,000

2006 4,000 under 2,500 under 1,000 under

2007 10,000 under 2,000 under 1,600 over

7.

Extraordinary items – Extraordinary items consists of: General contingency losses Write-off of obsolete inventory Loss due to earthquake Total Less: Tax savings, 30% Extraordinary items, net of tax

8.

P50,000 20,000 40,000 110,000 33,000 77,000

Provision for income tax - The income tax rate is 30%. There are no permanent differences between financial and taxable income.

Required: For each item below, determine the amount per audit that should appear in your working balance sheet and working income statement. Assume that client approves all adjustments. Questions 27. Capital stock issued a. P 580,000

b. P 550,000

c. P 510,000

d. P 500,000

28. Additional paid-in capital a. P 168,000 b. P 150,000

c. P 110,000

d. P 100,000

29. Long-term liabilities a. P 230,000

c. P 180,000

d. P 160,000

30. Current portion of long-term debt b. P 20,000 a. P 80,000

c. P 10,000

d. P 0

31. Revaluation increment – Land a. P 90,000 b. P 50,000

c. P 40,000

d. P 0

32. Retained earnings, 12/31/2006 a. P 21,850 b. P 20,800

c. P 18,350

d. P 18,000

33. Extraordinary items (net of tax) a. P 0 b. 42,000

c. 40,000

d. 28,000

34. Income before tax a. P 96,600

c. 134,600

d. 120,400

35. Provision for income tax a. P 40,980 b. P 40,380

c. P 36,120

d. P 28,980

36. Net income a. P 67,620

c. P 42,280

d. P 24,280

c. 63,080

d. 47,720

b. P 190,800

b. 136,600

b. P 54,220

37. Retained earnings, 12/31/2007 a. P 85,970 b. 72,220

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Problem 6 On January 1, 2006, Kazoo Company acquired a factory equipment at a cost of P150,000. The equipment is being depreciated using the straight line method over its projected useful life of 10 years. On December 31, 2007, a determination was made that the asset’s recoverable amount was only P96,000. Assume that this was properly computed and that recognition of the impairment was warranted. On December 31, 2008, the asset’s recoverable amount was determined to be P111,000 and management believes that the impairment loss previously recognized should be reversed. You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of assets. Questions: 38. a. P0

How much impairment loss should be recognized on Decem...