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AUDITING PROBLEMS REVIEWERS / TESTBANKS

Problem 1
The Christine Manufacturing, which started operations on September 1, 2008, is
owned by Sheila Ltd. Sheila Ltds 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, 2009 P 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 buildings 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 owners books. Sheila Ltd estimated the office furnitures
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.

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.

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.

d.

10. The total cost of the new building is


a. P 35,500,000
b. P 36,728,500
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


a. P 450,000
b. P 525,000

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

d.

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 entitys 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 entitys 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:

Compensation
108,000
Compensation

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


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 companys 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 Cleeneths
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 Cleeneths president retired, Cleeneth purchased from the retiring
president 50,000 shares of Cleeneths 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 Cleeneths 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 Cleeneths 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
a.
P300,000
b. P500,000
c.
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?
a.
P100,000
b. P600,000
c. P450,000
d.
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?


a. 312,500,000
b. 212,500,000
c. 141,875,000
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

c. (13,750,000)

d.

d.

FMV
500
M
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

Rev. Surplus
Impairment
Loss

Revaluation Surplus - 2011


Beg. Bal
337.5 M
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 inventorys 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

11. What is the amount of Plant and Equipment, net at December 31, 2010?
a. 3,400,000
b. 2,909,280
c. 2,839,180
d. 2,800,000

Recoverable
Cost

4,050,00
0
4,850,00

Carrying Value

0
(800,00

Impairment Loss

0)
100,00

Goodwill
IL allocated
other assets

0
to

(700,00
0)
800,00

Impairment loss

0
100,00

Goodwill

0
100,00

Patent
Plant and
Equipment

0
600,00
0

Problem 8
Ollie Company began its operation in 2007 and has two classes of share capital
outstanding: 12% P100 par value preference share and P50 par value ordinary
share. Balances on January 1, 2008 are as follows:
Preference share capital
Ordinary share capital
Share premium Preference
Share premium Ordinary
Accumulated profits

P500,000
2,500,000
200,000
500,000
2,000,000

*All the preference shares issued and ordinary shares issued were issued as one
lot in 2007.
The following reflects the transactions for the year 2008, in chronological order:
a. Issued 20,000 ordinary shares at P70 per share
b. Reacquired, but not retired, 5,000 ordinary shares at P60
c. Ordinary shares were split on a 2 for 1 basis
d. Reissued 3,000 treasury shares at P40
e. Received 10,000 ordinary shares from stockholders as a donation and
immediately retired the same
f. Reported p1,500,000 net income for the year
g. Declared the preferential dividends and p6 dividend per ordinary shares
Requirements:
12. How much is the total dividends declared to ordinary shares?
11

a.

780,000

b. 738,000

c. 390,000

d. 348,000

13. What is the balance of the Ordinary shares account as of December 31,
2008?
a.
3,075,000
b. 3,250,000
c. 6,150,000
d.
6,500,000
14. What is the total Accumulated-paid-in capital as of December 31, 2008?
a.
1,380,000
b. 1,290,000
c. 1,130,000
d.
1,100,000
15. What is the correct Accumulated profits-unappropriated balance as of
December 31, 2008?
a.
2,702,000
b. 2,660,000
c. 2,492,000
d.
2,450,000
16. What is the correct Stockholders equity balance as of December 31, 2008?
a.
7,622,000
b. 7,832,000
c. 7,592,000
d.
7,790,000
Preference
Share
5,0
00

Ordinary
Shares

500,0 50,00 2,500,


00
0
000

SP PS

SP OS

Accm. Treasury
Prof
Share

SP - SP TS retire

200,0 500,0 2,000,


00
00
000

20,00 1,000,
0
000

400,0
00
(5,00 (300,0
0)
00)

70,00
0
-

(5,00
0)
3,00
0

(10,0
00)

(250,0
00)

30,0
90,000 00

(50,0
00)

300,0
00
1,500,
000
(60,00
0)

5,0
00

500,0 130,0 3,250,


00
00
000

(738,0
00)

200,0 850,0 2,702,


00
00
000

(7,00 (210,0
0)
00)

30,0
00

300,0
00
12

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 companys 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. Sabrinas most recent
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
companys 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

Depreciation Expense
Accumulated Depreciation-Building

20,000

20,000
Inventory/Fixtures:
Inventory and display fixtures were acquired for P125,000 cash on April 1, 20007,
from a competitor who was liquidating her business. The estimated value of the
inventory was P85,000 and the value of the fixtures was P55,000.
April 1, 2007

Inventory
Display Fixtures
Cash
Gain on Acquisition of Inventory

85,000
55,000
125,000
& Fixtures

15,000
Land:
Land was donated to Sabrina by the City of Cagayan in September 2007 as an
inducement to build a facility there. Plans call for construction at an undetermined
future date. The land was appraised at P48,500. No entry was made.
Machinery:
13

Machinery was acquired an exchange for similar equipment on October 12, and
were appraised at P45,000 on the date of the exchange. Sabrina received
machinery valued at P40,000 and P5,000 in cash in the transaction.
October 12, 2006
Machinery
45,000
Cash
5,000
Accumulated Depreciation-Machinery
16,000
Machinery
52,500
Gain on Exchange of Machinery
13,500
December 31, 2006

Depreciation Expense
Accumulated Depreciation-Machinery

4,500

4,500
Additional information:
Sabrina uses straight-line depreciation, applied to all assets as follows:
1.

A full years depreciation taken in the year acquisition and no


depreciation taken in the year of disposal.
2.
Estimated life: 25 years for buildings; 10 years on all other assets (no
salvage values are assumed.)
Compute for the net adjustments to the following account balances as of December
31, 2007:
A
B
C
D
17. Equipment
1,358
16,666
7,404
6,049
18. Buildings
156,000
144,000
124,000
150,000
19. Inventory/Fixtures
5,893
15,000
9,107
10,089
20. Land
48,500
50,000
98,500
38,500
21. Machinery
6,800
5,000
7,556
10,800
What is the correct depreciation expense for the year 2007 for the following items?
22.
23.
24.
25.

Equipment
Buildings
10,000
Inventory/Fixtures
Machinery

9,259
26,000

10,000
13,500

4,911
4,000

8,500

5,500
4,500

9,000
20,000
9,107

3,556

10,089
5,400

Problem 10
The Maria Lovella Mining Company purchased for P13,000,000 mining property
estimated to contain 1,000,000 tons of ore. The residual value of the property is
P1,000,000.
Buildings used in mine operations costs P1,000,000 and have an estimated life of
ten years with no residual value. Mine machinery costs P2,000,000 with an
estimated residual value of P400,000 after its physical life of 4 years.
14

Following is the summary of the companys operations for the first two years:
First Year
Second Year
Tons mined
100,000 tons
130,000 tons
Tons sold
80,000 tons
120,000 tons
Unit selling price per ton
P 44.00
P 45.00
Direct labor
P 800,000
P 840,000
Miscellaneous mining overhead
P 160,000
P 240,000
Operating expenses
P 720,000
P 760,000
Inventories are valued on a first-in, first-out. Depreciation on the building is to be
allocated as follows: 20% to operating expenses, 80% to production. Depreciation
on machinery is chargeable to production.
Question:
26. The cost of inventory (ore) in the first year is:
a. P 532,000
b. P 528,000
c. P 512,000

d. P 480,000

27. The cost of inventory (ore) in the second year is:


a. P 735,790
b. P 725,540
c. P 713,590

d. P 697,846

28. Net income in the first year is:


a. P 672,000
b. P 668,000

d. P 620,000

29. Net income in the second year is:


a. P 1,695,234
b. P 1,677,790
1,655,590

c. P 652,000
c. P 1,667,540

d.

30. The total amount that may be paid as dividends by the company in the first
year is:
a. P 1,580,000
b. P 1,612,000
c. P 1,628,000
d.
P
1,632,000
31. The total amount that may be paid as dividends by the company in the
second year is:
a. P 3,135,234
b. P 3,117,790
c. P 3,107,540
d.
P
3,095,590

Problem 11
In the course of your first time audit of MISAMIS INC.s stockholders equity
accounts for the audit year 2007, the following schedule of the companys
stockholders equity accounts as of December 31, 2006 were presented by the
client:
Ordinary share capital, P100 par; 200,000 shares authorized; 50,000 shares
Issued and outstanding; options to purchase 10,000 shares at P100 per
Share are held by employees, no value having been assigned to these options
P5,000,000
15

Share premium from ordinary shares


1,000,000
Accumulated profits
3,000,000
Further investigation and inquiry revealed the following information:
a. The options referred to above were granted to each of its 100 employees on
January 1, 2005 which shall vest three year thereafter provided employees
remain in the companys employ and provided further that sales increase at least
by an average of 5% per year. If the sales increase by an average of at least 5%
per year each year, employees shall receive 100 share options. If the sales
increased by an average of least 10% per year, each employee shall receive 300
options
The fair market value of each share option on the grant date was P30 per share.
No employee left the company during the said vesting period. Records show that
average sales increase over the inclusive vesting period are: 2005, 8%; 2006,
10%, and 2007, 12%
b. On May 1, 2007, the company issued bonds of P5,000,000 at 120 giving each
P1,000 bond a warrant enabling the holder to purchase4 shares at P120 per
share for a one year period. Shares were selling for P140 at this time. The
market value of bond ex-warrant is 105.
c. On June 1, 2007, half of the warrants issued with bonds were exercised.
d. On August 1, the company issued rights to shareholders, permitting holders to
acquire for a 60-day period, 1 share at P130 with every 5 rights submitted.
Shares were selling for P150 at this time. All but 5,000 of these rights were
exercised and additional shares were issued
e. The company declared a P5 per share cash dividends on December 15, 2007
payable to stockholders as of December 31, 2007 on January 31, 2008
f. Net income before any adjustments amounted to P2,500,000 in 2007.
Required:
1. What is the retroactive adjustment to the beginning accumulated profits account
related to the options granted in 2005?
a.
P600,000
b. P400,000
c. P200,000
d. No
adjustment necessary
2. What is the correct credit to the share premium account as a result of the
exercise of rights referred to in item d?
a.
250,000
b. 270,000
c. 285,000
d. 330,000
3. What is the total Additional Paid in Capital to be presented in the stockholders
equity portion of the balance sheet as of December 31, 2007?
a.
3,180,000
b. 3,505,000
c. 2,530,000
d.
2,155,000
16

4. What is the correct Accumulated Profits as of December 31, 2007?


a.
5,145,000
b. 4,900,000
c. 4,745,000
4,245,000

d.

SOLUTION:
Number of options estimated to vest (100*100)
10,000
Accumulated
profits, beginning P3,000,000
Multiply by Market value of Options
30
Retroactive
adjustment to retained (200,000)
Total options outstanding
300,000
earnings (number 17)
Multiply by (2005&2006)
2/3
Appropriation
for
dividends (71,000*5)
(355,000)
Total Accum. Comp. Exp. As of 12.31.2006
200,0001.ans. B
Net income,
2007 (2,500,000-700,000) 1,800,000
P4,245,000 4. ans. D
Proceeds from exercise of rights (60,000 5,000)/5*130
P1,430,000
Par value of Ordinary share issued (11,000*100)
1,100,000
Share premium
P330,000 2. ans. D
Share premium from ordinary shares
P1,000,000
Share premium from exercise of warrants
575,000
Share premium from exercise of rights
330,000
P1,905,000
Ordinary share options from outstanding (20,000*30)
900,000
Ordinary share warrants outstanding (750,000*50%)
375,000
Total APIC
P3,180,0003. ans. B

Problem 12
Bugle Companys property, plant, and equipment and related accumulated
depreciation accounts had the following balances at December 31, 2006:
Class of PPE
Land
Buildings
Machinery and equipment
Transportation equipment
Lease improvements
Class of PPE
Land improvements
Buildings
Machinery and equipment
Transportation equipment
Lease improvements

Cost

Accumulated
Depreciation

P3,900,000
36,000,000
23,250,000
3,960,000
6,630,000

P7,962,000
5,886,000
2,586,000
3,315,000

Depreciation method
Useful Life
Straight-line
12 years
150% declining balance
25 years
Straight-line
10 years
150 % declining balance
5 years
Straight-line
8 years

Bugle computes depreciation to the nearest month. The salvage values of the
depreciable assets are considered immaterial.
Transactions during 2007 and other information are described below:
17

1.
2.
3.

4.
5.
6.
7.

On January 5, 2007, a plant facility consisting of land and a building was


purchased from Torotot Company for P18,000,000. Of this amount, 20% was
allocated to land.
On April 3, 2007, new parking lots, streets, and sidewalks at the purchased
plant facility were completed at a total cost of P5,760,000. These expenditures
had an estimated useful life of 12 years.
The lease hold improvements were completed on December 31, 2003, and
had an estimated useful life of 8 years. The related lease, which would have
terminated on December 31, 2009, was renewable for an additional 4-year term.
On April 30, 2007, Bugle exercised the renewal option.
On July 1, 2007, machinery and equipment were purchased at a total invoice
cost of P7,500,000. Additional costs of P300,000 for delivery and P900,000 for
installation were incurred.
On August 31, 2007, Bugle purchased a new automobile for P450,000.
On September 29, 2007, a truck with a cost of P720,000 and a carrying
amount of P243,000 on the date of sale was sold for P345,000. Depreciation for
the 9 months ended September 30, 2007, was P70,560.
On December 22, 2007, a machine with a cost of P510,000 and a carrying
amount of P89,250 at date of disposition was scrapped without cash recovery.

Based on the preceding information, calculate the 2007 depreciation expense on


each of the following classes of PPE:
5. Land improvements
a. 480,000
b. 360,000
6. Buildings
a. 2,546,280

c. 320,000

b. 3,024,000

d. 923,000

c. 2,762,280

7. Machinery and equipment


a.
2,325,000
b. 3,195,000
2,760,000

d. 1,682,280

c. 1,597,500

8. Transportation equipment
a.
363,132
b. 454,860

c. 433,962

d. 527,760

9. Leasehold improvements
a.
828,750
b. 552,500

c. 663,000

d. 1,326,000

SOLUTION
1. 2007 DEPRECIATION EXPENSE-LAND IMPROVEMENTS:
(P5,760,000/12 years x 9*/12)
Ans. B.
*April 1-December 31
2. 2007 DEPRECIATION EXPENSE-BUILDINGS
Book value, Jan. 1, 2007 (P36,000-P7,962,000)
P28,038,000
Building acquired, Jan. 5, 2007 (P18,000,000 x 80%)
14,400,000
Total

d.

P360,000

42,438,000
18

150% declining balance rate (1/25 x 150%)


X6%
Depreciation
A.

P2,546,280

3. 2007 DEPRECIATION EXPENSE-MACHINERY AND EQUIPMENT:


Machinery and equipment, Jan. 1, 2007 (P36,000,000-P7,962,000)
P2,325,000
Purchased July 1, 2007 (P8,700,000/10 x 6/12)
435,000
Total
P2,760,000
D.

Ans.

Ans.

4. 2007 DEPRECIATION EXPENSE-TRANSPORTATION EQUIPMENT:


Book value, Jan. 1, 2007 (P3,960,000-P2,586,000)
P1,374,000
Less: Book value on Jan. 1, 2007, of truck sold Sept. 29, 2007
(P243,000 + P70,560)
313,560
Amount subject to depreciation
1,060,440
150% declining balance rate (1/5 x 150%)
X30%
P318,132
Truck sold Sept. 29, 2007
70,560
Automobile purchased Aug. 31, 2007 (P450,000 x 30% x 4/12)
45,000
Total
P433,692
Ans. C.
5. 2007 DEPRECIATION EXPENSE-LEASEHOLD IMPROVEMENTS:
Book value, Jan. 1, 2007 (P6,630,000-P3,315,000)
P3,315,000
Useful life of leasehold improvements (8-3)
/
5years
Depreciation
P663,000
Ans.
C.
The useful life of leasehold improvements is used because it is shorter than the
extended lease term of 6 years (2 years remaining lease term + 4 years renewal
option exercised).

Problem 13
The following transactions appear on the Available-for-sale Marketable Securities
account of Elvisor Company for the year 2007;
April 1
July 1
Nov. 5

Purchased 1,000 shares of SMC at P15/share


And 2,000 shares of Atlas Cons. At P10/share
P35,000
Purchased 5-year Treasury Notes at P96; face
Value P100,000. Interest dates, July 1 and Jan.
1; Interest rate, 9%
96,000
Sold 400 shares of SMC at P14/share and 800
19

Shares of Atlas Cons at P12/share


15,200
Dec. 31
101,500

Sold the treasury notes at P97 plus accrued interest

Note: Disregard brokers commissions and taxes in your computation.


The company received 20% stock dividends from SMC on September 1 and 10%
stock dividend from Atlas Cons on December 1.
SMC shares and Atlas Cons shares were selling at P15 and P12, respectively on
December 31, 2007.
Compute for the adjusted balances of the following account balances as of
December 31, 2007:
A

B
800

10. SMC Shares


1,000
1,200
600
11. investments ion SMC at cost
15,000
10,000
7,500
12. Atlas Shares
2,000
1,200
2,120
13. Investment in Atlas at cost
20,000
11,780
15,000
12,000
14. Treasury Notes
96,000
0
40,000
15. Carrying value of SMC
15,000
12,000
8,000
16. Carrying value of Atlas
15,840
11,780
15,000
17. unrealized gain/loss on the balance
sheet
5,840
3,840
3,000

12,500
1,320

56,000
10,000
20,000
2,000

Problem 14
On January 1, 2010, Reyes Company borrowed P5,000,000 from a bank at a
variable rate of interest for 4 years. Interest will be paid annually to the bank on
December 31 and the principal is due on December 31, 2013.
Under the agreement, the market rate of interest every January 1 resets the
variable rate for that period and the amount of interest to be paid on December 31.
In conjunction with the loan, Reyes Company entered into a receive variable, pay
fixed interest swap agreement with another bank speculator as a cash flow hedge.
The market rates of interest are 6% on January 1, 2010, 10% on January 1, 2011
and 8% on January 1, 2012.
Questions:
18. What is the notional amount of the interest rate swap?
a. P 0
b. P 2,000,000
c. P 2,500,000
5,000,000

d.

P
20

19. What is the derivative asset or liability on December 31, 2010?


a. P 200,000 asset
b. P 200,000 liability c. P 498,000 asset
498,000 liability

d.

20. What is the derivative asset or liability on December 31, 2011?


a. P 100,000 asset
b. P 100,000 liability c. P 178,000 asset
178,000 liability

d.

Problem 15
On January 1, 2007, Juliet Company sold equipment to Joed Company of Japan for
1,000,000 with payment to be received in two years on January 1, 2009. On
January 1, 2007, the exchange rate is 0.50 = P1. On the same date, Juliet enters
into forward contract and agrees to sell 1,000,000 on January 1, 2009 at the rate
of 0.50 = P1.
On December 31, 2007, the exchange rate is 0.47 = P1. On December 31, 2008,
the exchange rate is 0.55 = P1. The appropriate discount rate throughout this
period is 10%.
Questions:
Based on the above and the result of your audit, answer the following: (Round off
present value factors to four decimal places)
21. The amount of sales revenue to be recognized in 2007 is
a.
P2,127,660
b. P2,000,000
c. P1,758,298
P1,652,800

d.

22. The carrying amount the accounts receivable on December 31, 2007 is
a.
P2,127,660
b. P2,000,000
c. P1,934,255
d.
P1,758,298
23. The gain on foreign currency in 2007 is
a.
P281,455
b. P127,660
P105,498

c. P116,175

d.

24. The derivative liability (forward contract payable) on December 31, 2007 is
a.
P127,660
b. P116,055
c. P105,498
d. P0
25. The derivative asset (forward contract receivable) on December 31, 2008 is
a.
P309,478
b. P181,812
c. P165,291
d. P 0
Solution & Answer
29.
30.
31.

D
Y 1,000,000/0.50 x .8264 PV factor
= P 1,652,800
C
Y 1,000,000/0.47 x .9091 PV factor
= P 1,934,255
C
Accounts Receivable 1/1/07
1,652,800
Interest Income (amort. 2007)
165,280
Accounts Receivable @ Y0.50 P1
1,818,080
Accounts Receivable @ Y0.47 P1 ( 1,934,255)
Gain on Foreign Currency
116,175
21

32.

33.

B
Peso equivalent of Futures 12/31/07
(Y 1,000,000/0.47)
2,127,660
Notional Value
2,000,000
Future Contract Payable
127,660
X PV factor
.9091
Future Contract
116,055
B
Peso equivalent of Futures 12/31/08
(Y 1,000,000/0.55)
1,818,182
Notional Value
2,000,000
Future Contract Receivable
181,812

22