Frances Coryza D. Magaoay- BSA-3 Auditing Problems Assignment PDF

Preview

Summary

Frances Coryza D. Magaoay BSA-3AAudit of Investment Source: EspenillaKikio Corporation acquired on January 1, 2014 a real property and classified the same as an investment property. The acquisition cost was P10,000,000 and has an estimated life of 10 years. The company paid for a finder’s fee and co...

Description

Frances Coryza D. Magaoay BSA-3A Audit of Investment Source: Espenilla Kikio Corporation acquired on January 1, 2014 a real property and classified the same as an investment property. The acquisition cost was P10,000,000 and has an estimated life of 10 years. The company paid for a finder’s fee and commissions at P500,000. The investment property was appraised at P12,500,000 on December 31, 2014 and P11,000,000 on December 31, 2015. Requirements: Case 1: Assuming that the company uses the Fair value Method: 1. How much should the investment property be presented in the 2014 statement of financial position? 2. How much gain/loss related to the investment should be recognized in the 2014 income statement? 3. How much should the investment property be presented in the 2015 statement of financial position? 4. How much gain/loss related to the investment should be recognized in the 2015 income statement? 5. Assuming that the real property was reclassified as owner-occupied property on June 30, 2016, when the fair value of the investment was at P10M, how much should the property be initially recognized upon transfer? Case 1: Fair Value Method 1. Answer P12,500,000 Fair Market Value 12/31/2014

P12,500,000

2. Answer P2,000,000 Fair Market Value 12/31/2014 12,500,000 Carrying Value (acquisition cost (10,500,000) 1/1/2014) Unrealized holding loss- P&L 2,000,000 3. Answer P11,000,000 Fair Market Value 12/31/2015

P 11,000,000

4. Answer (1,500,000) Fair Market Value 12/31/2015 Carrying Value (FMV, 12/31/2014) Unrealized holding loss- P&L 5. Answer P10,000,000 June 30, 2016 FMV

11,000,000 12,500,000 (1,500,000)

P10,000,000

Audit of Property, Plant and Equipment Source: Caselette Information pertaining to SAILADIN CORPORATION’s property, plant and equipment for 2006 is presented below. Account balances at January 1, 2006 Debit Credit Land 6,000,000 Buildings 48,000,000 Accumulated depreciation – bldg. 10,524,000 Machinery and equipment 36,000,000 Accumulated depreciation – mach. & equip. 10,000,000 Automotive equipment 4,600,000 Accumulated depreciation – auto. Equip. 3,384,000 Depreciation data: Depreciation method Buildings Machinery and equipment Automotive equipment Leasehold improvements

Useful life

150% declining-balance 25 years Straight-line 10 years Sum-of-the-years-digits 4 years Straight-line -

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month. Transactions during 2006 and other information are as follows: (a)

On January 2, 2006, Sailadin Corporation purchased a new car for P800,000 cash and trade-in of a 2-year car with a cost of P720,000 and a book value of P216,000. The new car has a cash price of P960,000; the market value of the trade-in is not know.

(b) On April 1, 2006, a machine purchased for P920,000 on April 1, 2001, was destroyed by fire. Sailadin Corporation recovered P620,000 from its insurance company. (c) On May 1, 2006, costs of P6,720,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2012. (d) On July 1, 2006, machinery and equipment were purchased at a total invoice cost of P11,200,000; additional costs of P200,000 for freight and P1,000,000 for installation were incurred. (e) Sailadin Corporation determined that the automotive equipment comprising the P4,600,000 balance at January 1, 2006, would have been depreciated at a total amount of P720,000 for the year ended December 31, 2006. Questions 1. What is the depreciation on building for 2006? a. P 2,998,080 b. P 2,880,000 d.P1,499,040

c. P 2,248,560

2. What is the book value of the building at December 31, 2006? a. P 35,976,960 b. P 35,227,440 c. P 34,596,000

d. P 34,477,920

3. What is the depreciation on machinery and equipment for 2006? a. P 4,220,000 b. P 4,197,000 c. P 4,151,000 P 4,128,000

d.

4. What is the gain on machine destroyed by fire? a. P 620,000 b. P 460,000 P 160,000

d.

c. P 300,000

5. What is the balance of the Accumulated Depreciation – Machinery and Equipment at December 31, 2006? a. P 13,777,000 b. P 13,760,000 c. P 13,691,000 d. P 13,231,000 Solution 1. C Book Value, 1/1/06 (P48,000,000 - P10,524,000) 150% declining-balance rate (1/25 x 150%) Depreciation on building

P

P 37,476,000 x 6% 2,248,560

2. B Cost of building Less: Accumulated depreciation (P10,524,000 + P 2,248,560) 12,772,560 Book value of building, 12/31/06 35,227,440 3. C Balance, 1/106 Less: Machine destroyed by fire Balance Depreciation Machine destroyed by fire (P920,000 x 10% x 3/12) 23,000 Purchased 7/1/06 (P12,400,000 x 10% x 6/12) Total depreciation on machinery and equipment

4. D Insurance recovery Less: Book value of machine destroyed (Cost 920,000 - Accum. dep’n (P 920,000 x 10% x 5) 460,000 Gain on recovery from insurance company

P 48,000,000

P

P 36,000,000 920,000 P 35,080,000 10% 3,508,000 620,000 P 4,151,000

620,000

160,000

5. C Balance, 1/1/06 Add: depreciation for 2006 4,151,000 Total Less: Machinery destroyed by fire (P920,000 x 10% x 5) 460,000 Accumulated depreciation - machinery and equip. 13,691,000

P

10,000,000

14,151,000 P

Audit of Intangible Assets Source: Macariola, Espenilla The following account balance are excerpt from STU Corporation’s trial balance for the audit period ended December 31, 2013: Patents P4,940,000 Licensing agreement 1,680,000 Trademark 1,606,000 Leasehold improvements 1,300,000 Audit notes: a. Patents for STU’s manufacturing process were acquired January 2, 2013, at a cost of P3,740,000. An additional amount of P1,387,000 was spent on December 30, 2013, for repairs on machinery covered by the patents and charged to Patent account. The repairs were necessarily incurred to bring back the said machinery to its original working condition. STU uses the straight line method for all the depreciation and amortization. The useful life of the patent is its legal life. b. On January 1, 2012, STU purchased the Licensing agreement, which was useful for ten years. The licensing Agreement account balance included the purchase price of P2,160,000 and P240,000 cost to train employees at the inception of the licensing agreement. The license have been amortized over the agreement term which is 10 years. c.

A trademark was purchased by STU for P1,280,000 on July 1, 2012. Expenditures for the successful litigation in defense of the trademark totaled to P326,000 were paid on July 1, 2014 and were charged to the trademark account. The trademark was estimated to have an indefinite life. By the end of 2014, the company estimated to generate annual net future cash flows from the continued use of the trademark at P90,000. The prevailing market rate of interest on this date was at 9%.

d. A 10 year non-renewable lease was signed January 3, 2014, for the leased building that STU used in manufacturing operations. The Leasehold Improvement account includes: P90,000 cost of improvements with a total estimated useful life of 5 years, which was completed on March 1, 2014. P400,000 lease rights paid for the exclusive right to occupy the leased property for the duration of the lease term without the lessor having the right to lease it out to other third parties. Amortization/depreciation is yet to be recognized on lease-related assets.

Based on the above information and on your audit, answer the following requirements: 1. What is the correct carrying value of the Patent as of December 31, 2014? a. 3,553,000 c. 4,680,000 b. 3,366,000 d. 4,753,000 2. What is the correct carrying value of the Licensing Agreement as of December 31, 2014? a. 1,536,000 c. 1,728,000 b. 1,334,000 d. 1,512,000 3. What is the total retroactive adjustment to retained earnings in 2014 related to licensing agreement accounts? a. 216,000 c. 180,000 b. 192,000 d. none 4. What is the correct carrying value of the Trademark as of December 31, 2014? a. 1,606,000 c. 1,000,000 b. 1,280,000 d.768,927 5. What is the total expense to be recognized for 2014 in relation to the lease agreement? a. 220,000 c. 190,000 b. 200,000 d. 180,000 SOLUTIONS 1. Answer B. Patent , Correct Cost, 1/2013 3,740,000 Amortization (2013-2014): P3,740,000*2years/20years (374,000) Carrying Value, 12/31/14

3,366,000

2. Answer D. License, Correct Cost, 1/2012 Amortization (2013-2014): P2,60,000*3years/10years Carrying Value , 12/31/14

2,160,000 (648,000)

1,512,000

(2,160,000- training cost is recognized as outright expense.) 3. Answer B. Training cost, expense in 2012 per audit 240,000 Amortization expense (2012-2013) per audit: P2,160,000*2years/10years 432,000 Prior period expense, per audit 672,000 Amortization expense (2012-2013) per books: P2,400,000*2years/10years 480,000 192,000 Retroactive adjustment, debit, to RE, beg. 2014

4. Answer C. Trademark, Correct CV. 12/31/14 1,280,000 Recoverable value/ Value in use: PV of Future net Cash flows at 9% for an indefinite period: P900,000/9% 1,000,000 280,000 Impairment loss (1,280,000- trademark is with indefinite life, thus no amortization.) -successful defense cost is recognized as outright expense. 5. Answer C. Depreciation on the leasehold improvement P900,000/5years*10/12 Amortization of Leaserights; P400,000/10years Total expense

150,000 40,000

190,000

(150,000- Depreciation is over useful life since it is shorter than remaining lease term)...