Sol Chap15 ACCOUNTING SUBJECTS FOR ALL COURSES1 PLUS GREAT TOPICS AND ALL FOR ONE SENTENCES AND ALLL YOU ARE THE BEST PDF

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Solutions Manual to accompany Auditing and AssuranceConcepts and Applications 2020 – 2021 EditionCHAPTER 15PHASE II – RISK RESPONSE:AUDIT OF PROPERTY, PLANT AND EQUIPMENT, AND THE RELATEDDEPRECIATION AND DEPLETIONAnswers to Questions1. Factors which facilitate the auditors’ verification of plant and...

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Solutions Manual to accompany Auditing and Assurance Concepts and Applications 2020 – 2021 Edition CHAPTER 15 PHASE II – RISK RESPONSE: AUDIT OF PROPERTY, PLANT AND EQUIPMENT, AND THE RELATED DEPRECIATION AND DEPLETION Answers to Questions 1.

Factors which facilitate the auditors’ verification of plant and equipment but are not applicable to audit work on current assets include the following: (a) High peso amount of individual items. A relatively few transactions may support a large statement of financial position amount. (b) Usually little change in property accounts year to year. Land, buildings, and equipment often remain unchanged for many years; hence there is little accounting activity to verify. In contrast, such current assets as accounts receivable and inventory may have a complete turnover several times a year. (c) Minor effect on net income from cutoff errors. Cutoff errors in recording transactions in plant and equipment are much less likely to have a material effect on net income than are errors in the cutoff of transactions for purchase and sale of merchandise. For example, a cutoff error which causes a P30,000 year-end sales transaction to be recorded a day prior to shipment may cause a P30,000 overstatement of the current year’s pretax income.

2.

The auditors must question the service lives adopted by the client for plant assets. To do otherwise would be to fail in the collection of sufficient competent evidence for the client’s depreciation policies and procedures.

3.

The principal objective of the auditors in analyzing a Maintenance and Repairs expense account is to disclose any capital expenditures which were erroneously recorded as expense.

4.

Documentary evidence usually available in the client’s office to substantiate legal ownership of property, plant, and equipment includes deeds, policies of title insurance or abstract of title and an attorney’s opinion as to title, property tax bills, insurance policies, purchase contracts, purchase orders, invoices, and paid checks. The auditors may also secure written representations from the client as to ownership of these assets.

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5.

The auditors employ the following substantive tests to detect unrecorded retirements of property, plant, and equipment: (a) If major additions of plant and equipment have been made during the year, ascertain whether old equipment was traded in or superseded by the new units. (b) Analyze the Miscellaneous Revenue account to locate any cash proceeds from sale of plant assets. (c) If any of the company’s products have been discounted during the year, investigate the disposition of plant facilities formerly used in manufacturing such products. (d) Inquire of executives and supervisors whether any plant assets have been retired during the year. (e) Examine retirement work orders or other source documents for authorization by the appropriate official or committee. (f) Investigate any reduction of insurance coverage to see whether this was caused by retirement of plant assets.

6.

Kris Corporation (a) This is the first audit of Kris Corporation by Ian and Ronna. Moreover, the company has not been audited by other public accountants during the two previous years of operation. Under these circumstances, the auditors must investigate fully transactions relating to plant and equipment during the two prior years of the company’s existence, as well as the records of the year under audit. The adequacy of internal control over plant acquisitions and disposals would be an important part of this review. Since Kris is a relatively new company, this study of prior years’ transactions can be completed within reasonable time limits. The review of prior years’ transactions relating to plant and equipment would include analysis of the Repairs and Maintenance expense account and should bring to light the erroneous treatment of plant acquisitions as revenue expenditures during Years 1 and 2. If Ian and Ronna did not investigate the property transactions of the two prior years and the internal controls in force, there would be no satisfactory support for the balances of the property accounts at the end of Year 3, or for the depreciation expense of the year under audit. Remember that one of the auditors’ basic objectives for plant and equipment is to determine that the property accounts (including the amounts carried forward from prior years) are fairly stated. (b) Both the statement of comprehensive income and the statement of financial position prepared at the end of Year 3 would be affected by the errors made in Years 1 and 2. In the statement of financial position, the plant and

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equipment and also the total assets would be understated by the undepreciated cost of the assets which were improperly expensed. Current liabilities and total liabilities would be understated by the additional income taxes applicable to the understatement of prior periods’ net income due to the accounting errors. The retained earnings and total shareholders’ equity would be understated by the difference between the understatement of total assets and the understatement of total liabilities. In the Kris statement of comprehensive income, depreciation expense would be understated, income taxes expense overstated, and net income overstated. Answer to Multiple Choice 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13.

D A D A B D D C A B C C B

Answer to Exercises: Briggs, Inc. Adjusting Journal Entries - 12/31/X7 (1)

(2)

(3)

Organization costs Fixed assets

3,000

Discount on bonds payable Interest expense Fixed assets

5,650 350

Land

3,000

6,000 500,00 0

Fixed assets (4)

Organization costs Fixed assets

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500,000 5,000 5,000

(5)

Land

4,000 Fixed assets

(6)

Land

4,000 7,000

Fixed assets (7)

7,000

Interest expense Fixed assets

30,000

Salaries expense Fixed assets

50,000

Organization costs Fixed assets

40,000

(10 Taxes and licenses ) Fixed assets

7,000

(11 Building ) Fixed assets

2,000,0 00

(8)

(9)

30,000

50,000

40,000

7,000

2,000,0 00

Exercise 2: Sparrow Company 1. Change in depreciation method is considered change in accounting estimate --cumulative effect adjustment: a. No correcting entry b. Depreciation Expense 25,750 Accumulated Depreciation: Machine To record depreciation for 20X7.

25,750

Previous depreciation amount 20X5 P400,000 x (2 x 10%) P 80,000 20X6 (P400,000 - P80,000) x (2 x 10%) = 64,000 P144,000 Cost P400,000 Less: Accumulated depreciation 144,000 Carrying value 12.31.X7 P256,000

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256,000 – Depreciation in 20X7 = 50,000 2.

= P25,750

Change in estimate--prospective adjustment: a. No correcting entry b. Depreciation Expense 40,000 Accumulated Depreciation: Machine To record depreciation for 20X7. Original life

Depreciation base = Annual

Remaining life

=

=

40,000

P450,0 00

= 9 years

(9-5) years + 1 year = 5

years Depreciation 3.

Book value – =Residual value =

P250,000 – P50,000

= P40,000 per

Error--prior period adjustment: a. Retained Earnings 8,000 Accumulated Depreciation: Machine Prior period adjustment for error (P80,000 - P72,000).

8,000

Previous depreciation - erroneously calculated (P200,000 – P20,000) x (2 x 20%) = P72,000 Correct depreciation (P200,000) x (2 x 20%) = P80,000 b. Depreciation Expense 48,000 Accumulated Depreciation: Machine To record depreciation for 20X7.

48,000

20X7 correct depreciation (P200,000 – P80,000) x (2 x 20%) = P48,000 Exercise 3

January 1, 20X2 Equipment Cash

5,000,000 5,000,000

December 31, 20X2 Depreciation Expense Accumulated Depreciation

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500,000 500,000

December 31, 20X3 Depreciation Expense Accumulated Depreciation

500,000 500,000

January 1, 20X4 Equipment – Revaluation Increment625,000 Accumulated Depreciation 125,000 Revaluation Surplus 500,000 December 31, 20X4 Depreciation Expense 562,500 Accumulated Depreciation 562,500 Revaluation Surplus Retained Earnings

62,500 62,500

December 31, 20X5 Depreciation Expense Accumulated Depreciation Revaluation Surplus Retained Earnings

562,500 562,500 62,500 62,500

December 31, 20X6 Depreciation Expense Accumulated Depreciation Revaluation Surplus Retained Earnings

562,500 562,500 62,500 62,500

January 1, 20X7 1) Revaluation surplus Accumulated depreciation Equipment

312,500 312,500 625,000

2) Impairment loss / Depreciation expense500,000 Accumulated depreciation 500,000 or Revaluation surplus 312,500 Impairment loss / Depreciation expense500,000 Accumulated depreciation 187,500 Equipment 625,000

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Exercise 4: Sweetie Company Requirement (a) December 31, 20X7 Loss on Impairment / Depreciation.......................................................... 3,200, 000 Accumulated Depreciation— 3,200, Equipment............................................................................................... 000 Cost Accumulated depreciation Carrying amount Fair value Loss in impairment

P9,000,000 1,000,000 8,000,000 4,800,000 P3,200,000

Requirement (b) December 31, 20X8 Depreciation Expense.............................................................................. 1,200,00 0 Accumulated Depreciation— 1,200, Equipment............................................................................................... 000 New carrying amount Useful life Depreciation per year

P4,800,000 4 years P1,200,000

Requirement (c) Carrying value, 12.31.X8 had impairment not been recognized on 12.31.X7 Cost Accumulated depreciation (P1,000,000 + P2,000,000)

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P9,000,000 3,000,000

Net carrying value, 12.31.18

P6,000,000

Fair value, 12.31.X8 Carrying value, 12.31.X8 Recovery of impairment loss

P5,100,000 3,600,000 P1,500,000

Entry will be: Accumulated depreciation 1,500,000 Depreciation expense or Gain on recovery of previously recognized impairment

1,500,000

Answer to Problems Problem 1: Aerospace Company Requirement (1) Machinery (cost) Raw materials used Labor Installation cost Materials used in trial runs Factory overhead (incremental) Total Less: Cash discount on materials Net

P13,600 9,800 1,400 600 2,900 P28,300 400 P27,900

Accumulated depreciation - 12/31/17 (P27,900 x 10% x 4/12)

P

Machine Tools (cost) Less: Amortization for 2017 (4/36 x 2,250) Balance, 12/31/17 Requirement (2) (1) (2)

930

P 2,250 250 P 2,000

Adjusting Journal Entries - 12/31/17

Loss on disposition of machinery Machinery Profit on construction Machinery

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70 70 6,900 6,900

(3) (4)

(5) (6)

Machine tools Machinery

2,250

Machinery Depreciation expense Accumulated depreciation machinery

3,462

2,250

Purchase discount Machinery

400 400

Machinery Factory overhead control

(7)

Tools expense Machine tools Problem 2: XYZ Manufacturing Company Adjusting Journal Entries - 12/31/X7 AJE (1) Retained Earnings Machinery To correct error in recording purchase of machine on installment basis. List Price P60,000 Add: Installation charges 2,000 Total P62,000 Total installments paid & installation 74,000 Financing charges P12,000 (2)

(3)

2,532 930

Retained Earnings Machinery To take up cash discount on machinery purchased on 6/30/X4. Machinery (new) Allowance for depreciation Machinery (old)

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2,900 2,900 250 250

12,000 12,000

1,600 1,600

26,200 26,200 52,400

To write off machinery traded in for a new one. Cost of new machine: Cash payment P50,000 NBV of old machine 26,200 Total P76,200 (4)

(5)

Allowance for depreciation Machinery Retained earnings To correct the recording of sale of machinery on 1/1/X6. Cost P44,000 Less: Acc. Depr. 26,400 NBV 17,600 Proceeds (2,500 - 125) 23,750 Gain P 6,150

26,400

Allowance for depreciation Machinery Gain on sale of machinery

38,000

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20,250 6,150

32,000 6,000

To correct the recording of sale of machinery on 10/1/X7. Cost P40,000 Less: Acc. Depr. 38,000 NBV 2,000 Proceeds 8,000 Gain P 6,000 (6)

(7)

Machinery Allowance for depreciation To set up client’s depreciation provisions from 20X3 to 20X7 erroneously credited to the Machinery acct. (Schedule A). Depreciation expense Retained earnings Allowance for depreciation To correct error in depreciation provisions of client (Schedule B).

199,006 19,9006

21,909 15,365 37,274

XYZ Manufacturing Corporation Machinery 12/31/X7 Balance per ledger (Schedule A) Add (Deduct) Adjustments AJE (1) (2) (3) (4) (5) (6)

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P109, 644 ( 12,000) ( 1,600) 26, 200 ( 52,400) ( 20,250) ( 32,000) 199,0 06

Net

P106,9 56 P216,6 00

Balance as adjusted Composition: Machine acquired on 9/30/X3 Machine acquired on 6/30/X4 Machine acquired on 6/30/X5 Total

P 62,000 78,4 00 76,2 00 P216,6 00

XYZ Manufacturing Corporation Allowance for Depreciation 12/31/X7 Balance per ledger

P 0.00

Add (Deduct) Adjustments AJE (3) (4) (5) (6) (7) Balance as adjusted

Composition: A D - Machine acquired on 9/30/X3 - Machine acquired on 6/30/X4 - Machine acquired on 6/30/X5 Total

Supporting Analysis:

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( 26,200) ( 26,400) ( 38,000) 199,0 06 37,2 74 P145,6 80

P 52,700 54, 880 38, 100 P145, 680

Schedule A Date 1/1/X3

Machinery Account per Ledger

Particulars

Dr

Cr

Purchase

Balanc e

P 52,40 0 40,00 0 44,00 0

9/30/X Purchase on installment 3 Payments from Sept. to Dec. 10/10/ Freight and installation X3 12/31/ Depreciation (20%) X3

24,00 0 2,000 P 32,480

20X4

Installment payments for acquisition on 9/30/X3 6/30/X Purchase 4 12/31/ Depreciation (20%) X4 6/30/X Acquisition - old machine 5 traded in 12/31/ Depreciation (20%) X5 1/1/X6 Sale

48,00 0 80,00 0

50,00 0

12/31/ Depreciation (20%) X6 10/1/X Sale 7 12/30/ Depreciation (20%) X7

Schedule B Date Acquire d 1/1/X3

P136,4 00

160,40 0 162,40 0 129,92 0

177,92 0 257,92 0 51,584 206,33 6 256,33 6 51,267 205,06 .20 8.80 23,750 181,31 8.80 36,263 145,05 .80 5 8,000 137,05 5 27,411 109,64 4

Depreciation Schedule

Cost P 5,240

20X3

20X4 P

P10,48

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20X5

20X6 P

P

20X7 0

P

0

4,000 4,400 9/30/X3 6/30/X4 6/30/X5

10,480 8,000 8,800 6,200 3,100 7,840 0 7,620 0

Total correct depreciation provision Provision by client (Over) Underprovision

0 8,000 8,800 12,400 7,840 0

P P47,520 30,380 32,48 51,584 0 P P (2,100) (4,064)

5,240 8,000 8,800 12,400 15,680 7620

8000 0

6,000 0

12,400 15,680 15,24 0

12,400 15,680 15,24 0

P P51,320 P49,320 57,740 51,26 36,263 27,411 7.20 .80 P P15,056 P21,909 .20 6,472.8 0

Problem 3: Tatty Company Requirement (1) Tatty Company Analysis of Land Account for 20X2 Balance at January 1, 20X2

P 100,000

Land site number 621: Acquisition cost Commission to real estate agent Clearing costs Less: Amounts recovered Total number 621

land

P1,000,0 00 60,000 P15,000 (5,000)

site

Land site number 622: Acquisition cost Demolition cost of building Total number 622

land

10,0 00

site

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1,070,00 0

P 300,000 30,0 00 330,0 00

Balance at 20X2

December 31,

P1,500,0 00

Tatty Company Analysis of Buildings Account for 20X2 Balance at January 1, 20X2

P800,00 0

Cost of new building constructed on land site number 622: Construction costs Excavation fees Architectural design fees Building permit fee Balance 20X2

at

December

P150,00 0 11,000 8,000 1,00 0

31,

170,00 0 P970,00 0

Tatty Company Analysis of Leasehold Improvements Account for 20X2 Balance at January 1, 20X2 Electrical work Construction of extension to current work area (P80,000 x ½) Office space

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P500,00 0 35,000 40,000

65,00 0

Balance at December 31, 20X2

P640,00 0

Tatty Company Analysis of Machinery and Equipment Account for 20X2 Balance at January 1, 20X2

P700,00 0

Cost of new machines acquired: Invoice price Freight costs Unloading charges Balance 20X2

at

December

P75,000 2,000 1,500

31,

78,50 0 P778,50 0

Requirement (2) Items in the fact situation which were not used to determine the answer to Requirement 1 above, and where, or if, these items should be included in Tatty’s financial statements are as follows: a. Land site number 623, which was acquired for P600,000, should be included in Tatty’s statement of financial position as land held for resale. b. Painting of ceilings for P10,000 should be included as a normal operating expense in Tatty’s statement of comprehensive income. c. Royalty payments of P13,000 should be included as a normal operating expense in Tatty’s statement of comprehensive income. Problem 4: Nikko Company Note to Instructor: previous chapters.

This problem includes material from

JOURNAL ENTRIES DURING 20X7: (1)

175,000 a

Land

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Ordinary Shares, P10 par Additional Paid-in Capital a

70,000 105,000

P25 x 7,000

Cash

500,000 Notes Payable

(2)

(3)

500,000

Building Cash

700,000

Machine Accumulated Depreciation Machine Cash Gain on exchange

430,000 135,000

Cash

800,000

700,000

500,000 60,000 5,000

Sales Revenue

(4)

800,000

Cost of Goods Sold Inventory

350,000

Accounts Payable Cash

400,000

Inventory Accounts Payable

480,000

400,000

Dividends Distributed Retained Earnings) Cash a

350,000

480,000 (or 92,500 92,500 a

37,000 x P2.50

ADJUSTMENTS AT END OF 20X7: Interest Expense Building

18,000 42,000 b

Interest Payable

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