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# Auditing Problems Reviewer Solutions

Problem 1 Nos. 1 to 5
Date
Jan. 1
5,026,000
146,000 =
4,880,000
20% to land, 80%
to buildings
Jan. 15
Reconditioning cost
Feb. 15
Proceeds from sale
of scrap
Cost of warehouse
March 1
Exchange of stock
with equipment
April 1
Acquisition of
machinery
May 1
Parking lots and
waiting sheds
(360,000 + 76,800)
TOTAL

1.
Land

2.
Buildings

976,0
00

3,904,00
0

4,880,000

236,800

236,800

(36,000)
540,800

504,800

976,0
00

3. Machinery &
Equipment

4,645,6
00

Problem 2
#6
Depletion per ton = 7,000,000/2,000,000 = 3.5/ton
Depletion expense for the year
(25,000 tons x 7 mos. x 3.5)

612,500

#7
Estimated life of the wasting asset
[2,000,000/(25,000 x 12)] = 6 2/3 years
Depreciable cost
(190,000 10,000)
180,000
Divided by: Life of the wasting asset 6 2/3 yrs
Annual depreciation
27,000
x 7/12
Depreciation expense, 2010
15,750

4. Land
improvements

5. Total PPE

200,000

200,000

360,000

360,000

560,000

436,800
436,800

436,800
6,618,400

Problem 3
#8
Fair value of machinery, 12/31/2010
900,000
Book value of machinery, 12/31/2010
(800,000)
Revaluation surplus, 12/31/2010
100,000

225,000

#11
Carrying value of machinery
(900,000 225,000)
675,000
Carrying value of building
(1,600,000 64,000)
1,536,000
Carrying value of PPE, 12/31/2011
2,211,000
#12
Revaluation surplus, 12/31/2011
(100,000 x 3/4)
75,000
Problem 4
#13

Entry:
Franchise
549,644
Discount on notes payable 130,356
Cash
200,000
Notes payable
480,000

#9
Decrease in fair value of building
400,000
Previous revaluation surplus
(150,000)
Impairment loss, 12/31/2010
250,000
#10
Building depreciation
(1,600,000/25)
64,000
Machinery depreciation
(900,000/4)
Total depreciation for 2011
289,000

Down payment
200,000
Present value of installment
payments (120,000 x 2.9137)
349,644
Cost of franchise
549,644

Amortization expense
(549,644 / 10)
54,964
Interest expense
(349,644 x 14%)
48,950
Payment to franchisor
(8,000,000 x 5%)
400,000
Total expenses related to franchise
503,914
#14
Cost of franchise
Accumulated amortization
(54,964)
Carrying value, 12/31/2010
494,680
#15
Cost of patent
131,200
Amortization for 2010
(131,200 / 8)
Carrying value, 12/31/2010
114,800
#16
Carrying value of trademark,
12/31/2010

549,644

(16.400)

320,000*

## *When the useful life of a trademark is

indefinite, no amortization is recognized.
Problem 5
#17
Notes payable
3,000,000
Bank loans
2,000,000
500,000
4,000,000
Bank overdraft
300,000
Cash dividends payable
1,000,000
Withholding tax payable
100,000
Income tax payable
800,000
Estimated warranty liability
600,000
Estimated damages payable by
reason of breach of
contract
700,000
Accrued liabilities
900,000
200,000
Total current liabilities, 12/31/2010
14,100,000
Problem 6
#18
The best estimate should be recorded at
12/31/2010 because ABC accepted the offer
after the 2010 financial statements were
issued. 500,000

## in excess of taxable sales

income
2,600,000
Taxable income, per audit
10,200,000
Income tax rate
35%
Income tax expense
3,570,000

Problem 8
#20
Loans payable plus interest
(5,000,000 + 1,000,000)
6,000,000
Carrying values of assets given up:
Land
1,500,000
Building
(6M 1.8M)
4,200,000
(5,700,000)
Gain on debt extinguishment
300,000
Problem 9
#21
General checking account
Change fund
Currency and coins
Money order
Bank drafts
Total amount of cash
5,085,000

Problem 7

Problem 10

#19
Taxable income, per client
8,000,000
Tax depreciation in excess of
book depreciation
800,000
Accrual for product liability claim
in excess of actual claim
(1,200,000)
Reported installment sales income

#22
Accounts receivable, 1/1
Credit sales
Sales returns
(150,000)
Accounts written off
(100,000)
Collections from customers
(5,000,000)

5,000,000
30,000
15,000
20,000
20,000

1,300,000
5,500,000

## Accounts receivable, 12/31

1,550,000
Estimated future sales returns
(50,000)
Estimated uncollectible accounts
per aging
(250,000)
Net realizable value of A/R
1,250,000
Problem 11
#23
Estimated selling price
4,050,000
Estimated cost of disposal
(200,000)
Net carrying value of inventory
3,850,000
Problem 12
#24
Market value, AFS, 12/31/2010
1,300,000
Cost
1,500,000
Unrealized loss, equity, 12/31/2010
200,000
Problem 13
#25
Acquisition cost
2,500,000
Share in net income
(1,000,000 x 30%)
300,000
Investment in associate, 12/31/2010
2,800,000
Problem 14
#26
8% preference share
210,000
Ordinary shares, no par
207,000
Subscribed ordinary shares
50,000
Legal capital
467,000

#27
Number of preference shares issued
(210,000 / 100)
shares

2,100

## Preference share capital

210,000
Premium on preference share
18,900
Total
228,900
Divided by: Number of shares issued
2,100
Average issuance price
109
#28
8% preference share
210,000
Ordinary shares, no par
207,000
Subscribed ordinary shares
50,000
Premium on preference share
18,900
Donated capital
20,000
Share warrants outstanding
5,000
Subscriptions receivable OS
(10,000)
Contributed capital
500,900
Problem 15
#29
Balance, 7/1/2009
Dividend paid
(20,000)
Net income for 2009
32,400
Dividend declared in 2010
(30,000)
Net income for 2010
45,100
Correct retained earnings
76,000

48,500

## Compensation expense for 2011

700,000

Problem 16
#30
2010
Number of employees expected
to exercise the options
(300 20 10)
270
Number of options to each employee x
200
Number of options exercisable
54,000
Fair value of each option
x
50
Total compensation expense for 3 yrs
2,700,000
Divided by: Vesting period
3 yrs
Compensation expense for 2010 900,000

2011
Number of employees expected
to exercise the options
(300 20 8 32)
Number of options to each employee
200
Number of options exercisable
48,000
Fair value of each option
x
Total compensation expense for 3 yrs
2,400,000
Expired period
x
2/3
Cumulative compensation expense
1,600,000
Compensation expense recognized
in 2010
(900,000)

240
x

50

Problem 17
#31
Share premium before reorganization
1,500,000
Reduction of par value
(100,000 x 25)
2,500,000
Deficit charged against share premium
(2,100,000)
Share premium after reorganization
1,900,000

Problem 18
#32
Bonds payable, before retirement
5,000,000
Bonds payable retired
(1,000,000)
Adjusted balance of bonds payable
4,000,000
Amortization table
Date

01/02/07
07/01/07
01/01/08
07/01/08
01/01/09
07/01/09
01/01/10
07/01/10
01/01/11

Interest paid
(FV x nominal
rate)

Interest
expense
(PV x effective
rate)

300,000
300,000
300,000
300,000
300,000
300,000
300,000
300,000

#33
Retirement price with interest
Accrued interest (1,000,000 x 12% x 3/12)
Retirement price without interest

312,921
313,826
314,794
315,829
316,937
318,123
319,391
320,749

1,110,000
(30,000)
1,080,000

## Carrying value, 07/01/10

4,582,124
Amortization from July 1 to October 1
(20,749 x 3/6)
10,375
Carrying value, 10/01/10
4,592,499
Ratio of bonds retired
x
1/5
Carrying value of bonds retired
918,500
Retirement price
1,080,000
Loss on bond redemption
161,500
#34
Face value of the remaining bonds
4,000,000
Carrying value of the remaining bonds
at 12/31/2010 (4,602,873 x 4/5)
(3,682,298)
Discount on bonds payable, 12/31/2010
317,702

#35

Amortization

12,921
13,826
14,794
15,829
16,937
18,123
19,391
20,749

PV/CV/BV

4,470,303
4,483,224
4,497,050
4,511,844
4,527,673
4,544,610
4,562,733
4,582,124
4,602,873

## Interest expense from 01/01 to 07/01

Interest expense for the retired bonds
(320,749 x 1/5 x 3/6)
Interest expense for the remaining bonds
(320,749 x 4/5)
Total interest expense for 2010

319,391
32,075
256,599
608,065

#36
Interest payable for the remaining bonds
(4,000,000 x 12% x 6/12)
240,000
#37
Adjusting entry. Nasa answer key naman na yung sagot