AUDITING PROBLEMS PROBLEM NO. 1 In connection with your examination of the financial statements of the Anne Corporation for the year 2012, the company presented to you the Property, Plant and Equipment section of its statement of financial position as of December 31, 2011 which consists of the following: Land P_ 400,000 Buildings 3,200,000 Leasehold improvernents 2,000,000 Machinery and equipment 2,800,000 ‘The following transactions occurred during 2012: + Land site number 102 was acquired for P4,000,000. Additionally, to acquire the land Anne paid a 240,000 commission to a real estate agent. ‘Costs of P60,000 were incurred to clear the land, During the course of clearing the land, timber and gravel were recovered and sold for P20,000. © Assecond tract of land (site number 103) with a building was acquired for P1,200,000. The closing statement indicated that the land value was P800,000 and the building value was P400,000. Shortly after acquisition, the building was demolished at a cost of P120,000. A new building was constructed for P600,000 plus the following costs: Excavation fees P 44,000 Architectural design fees 32,000 Building permit fee 4,000 ‘The building was completed and occupied on September 1, 2012. + A third tract of land (site number 104) was acquired for P2,400,000. The entity is undecided regarding its future use. + Extensive work was done to a bullding occupied by Anne under a lease agreement. The total cost of the work was P500,000, which consisted of the following: Particulars Amount Useful life Painting of cellings P 40,000 One year Electrical work 140,000 Ten years Construction of extension to current working area 320,000 Thirty years ‘The lessor paid one-half of the costs incurred in connection with the extension to the current working area. + During December 2012, costs of P260,000 were Incurred to improve leased office space. The related lease will terminate on December 31, 2014, and is not expected to be renewed. + A group of new machines was purchased under a royalty agreement which provides for payment of royalties based on units of production for the machines. The invoice price of the machines was 300,000, freight costs were P8,000, unloading charges were P6,000, and royalty payments for 2012 were P52,000.NAQDOWN Reviewer Based on the above and the result of your audit, determine the adjusted balance of the following as of December 31, 2013 1. Land a. P8,400,000 cc. P5,480,000 e.) P6;000,000 d, 5,900,000 2. Bulldings a. P3,800,000 cc. P4,200,000 b. P4,280,000 4d.) 3,880,000 3. Leasehold improvements a. 2,600,000 .” P2,560,000 b. 2,300,000 d. 2,720,000 4, Machinery and equipment (Cad 3,114,000 cc. P3,166,000 b. P3,100,000 d.P3,108,000 5. An auditor is verifying the existence of newly acquired fixed assets recorded in the accounting records. Which of the following is the best evidence to help achieve this objective? ‘a. Documentary support obtained by vouching entries to subsidiary records and invoices. bs, Oral evidence obtained by discussions with operating management. ‘¢: Physical examination of a sample of newly recorded fixed assets. d. Documentary support obtained by reviewing titles and tax returns. PROBLEM NO. 2 (On December 31, 2011, Joy Corporation acquired the following three intangible assets: + Atrademark for P450,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem. + Goodwill for P2,250,000. The goodwill is associated with Joy's Manufacturing reporting unit. + A.customer list for P330,000. By contract, Joy has exclusive use of the list for 5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years. (On December 31, 2012, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets: a) Because of a decline in the economy, the trademark is now expected to generate cash flows of Just P15,000 per year. The useful life of trademark still extends beyond the foreseeable horizon. b) The cash flows expected to be generated by the Manufacturing reporting unit Is P375,000 per year for the next 22 years. Carrying amounts and fair values of the assets and liabilities of the Manufacturing reporting unit are as follows: nt Fair values Identifiable assets 4,050,000 P4,500,000 Goodwill 2,250,000 2 Liabilities 2,700,000 2,700,000 ©) The cash flows expected to be generated by the customer list are P180,000 in 2013 and P120,000NAQDOWN Reviewer in 2014, QUESTIONS: Based on the above and the result of your audit, determine the following: (Assume that the appropriate discount rate for all items is 6%. Round off present value factors to 4 decimal places): 6. Total amortization for the year 2012 a. P110,000 c. P212,273 b. P174,285 d. P130,285 7. Impairment loss for the year 2012 a. P135,714 200,000 b. P269,376 P 0 8. Carrying amount of Trademark as of December 31, 2012 a 450,000 cc. P385,715 (b) 250,000 d. P180,624 9. Carrying amount of Goodwill as of December 31, 2012 3. 2,250,000 c. P2,147,727 “b. P2,137,500 d. P2,193,750 10. Carrying amount of Customer list as of December 31, 2012 a. P330,000 .) P220,000 b. 264,000 a P 0 PROBLEM NO. 3 You are examining the financial statements of Merlyn, Inc., for the year ended December 31, 2012. Your analysis of the 2012 entries in the Notes Receivable account follows: Merlyn, Inc. Analysis of Notes Receivable For the Year Ended December 31, 2012 Date 2012 Debit Credit Jan. 1 Balance Forwarded 118,000 Received P25,000 6% note due 10/29/12 from Anna whose trade account was past due Feb. 28 Discounted Anna note P 24,960 Mar. 31 Received non interest-bearing demand note from Julia, the corporation’s treasurer for a loan 6,200 ‘Aug. 30 Received principal and interest due from Robinson in ‘accordance with agreement, two principal payments in advance 34,200 Sept. 4 Paid protest fee on note dishonored by Pepper : 00 Nov. 1 Received check dated 2/1/13 in settlement of Tripper note. The check was included in cash on hand 12/31/12 8,120 Nov. 4 Paid protest fee and maturity value of Anna note toNAQDOWN Reviewer Date 2012 Debit Cred bank. Note discounted 2/28/12 was dishonored, 26,031 Dec. 27 Accepted equipment with a fair market value of P24,000 in full settlement from Anna 24,000 Dec. 31 Received check dated 1/2/13 from Julia in payment of 3/31/12 note. (The cash was included in petty cash Until’ 1/2/13 when it was returned to Julia in exchange for new demand note for the same amount.) 6,200 Dec. 31 Received principal and interest on Pepper note 42,437 Dec. 31. Accrued interest on Robinson note 1,200 PAS1931 P132,917 ‘The following information is available: (1) Balances at January 1, 2012, were a debit of P1,400 in the Accrued Interest Receivable account and a credit of P40 in the Unearned Interest Income account. ‘The P118,000 debit in the Note Receivable account consisted the following three notes: Robinson note of 8/31/08 payable in annual installments of P10,000 principal plus accrued interest at 6% each August 31 70,000 Tripper note discounted to Merlyn, Inc. at 6% 11/1/11 due 11/1/12 8,000 Pepper note for P40,000 plus 6% interest dated 12/31/11 due on 9/1/12 40,000 (2) No entries were made during 2012 to the Accrued Interest Receivable or the Unearned Interest Income account and only one entry for a credit of P1,200 on December 31, appeared in the Interest Income account. (3) All notes were from the trade customers unless otherwise indicated. (4) Debits and credits affecting Notes Receivables were correctly recorded unless the facts indicate otherwise. QUESTIONS: Based on the above and the result of your audit, answer the following: LL. The adjusting journal entry to correct the entry made on February 28 would include 2 a. | Debit to notes receivable P25,000 b.) Debit to loss on discounting of P250 Credit to notes receivable ~discounted P24,960 d. Credit to interest income P40NAQDOWN Reviewer 12, The adjusting journal entry to correct the entry made on August 30 would include @ a. Debit to cash P34,200 b. Debit to notes receivable P2,800 Credit to interest receivable P4,200 d) Credit to interest income P2,800 13, The correct journal entry to record the transaction on November 1 would include a a, Debit to notes receivable P8,120 b. Credit to cash P8,120 Both a and b 4.) Neither a nor b 14, The adjusted balance of trade notes receivable as of December 31, 2011 is ‘2, P48,000 c. P40,000 b. P54,200 d. 46,200 15. The total interest income for the year ended December 31, 2011 is a, P7,667 c. P5,867 b. P6017 d) P6267 PROBLEM NO. 4 The shareholders’ equity section of the Jerely Corporation's statement of financial position as of December 31, 2011 is presented below: 12% Preference share capital, P100 par P. 270,000 Ordinary share capital, P20 par 1,598,400 Share premium ~ preference 36,800 Share premium ~ ordinary 235,200 Share premium ~ treasury shares 3,200 Retained earnings 1,585,840 Total shareholders’ equity 3,729,440 Jerely had 65,000 ordinary shares as December 31, 2010. ‘The following shareholders’ equity transactions were recorded in 2011 and 2012: 201 May 1 ~ Sold 9,000 ordinary shares for P24, par value P20. July 1 = Sold 700 preference shares for P124, par value P100. Jul. 31 - Issued an 8% share dividend on ordinary shares. The market value of ordinary share was P30 per share. Aug. 30 - Declared cash dividends of 12% on preference shares and P3 per share on ordinary shares. Dec. 31 - Profit for the year amounted to P1,345,040. 2012 Feb. 1 = Sold 2,200 ordinary shares for P30. May 4 ~ Sold 600 preference shares for P128. May 31 = Issued a 2-for-1 split of ordinary shares. The par value of the ordinary share was reduced to P10 per share. Sep. 1 - Purchased 1,000 ordinary shares for P18 to be held as treasury shares. Oct. 1 = Declared and paid cash dividends of 12% on preference shares and P4 per shareNAQDOWN Reviewer on ordinary shares. Nov. 1 - Sold 1,000 shares of treasury shares for P22, Dec. 31 = Profit for the year amounted to P991,520. (QUESTIONS: Determine the amounts, as required, in Jerely Corporation's comparative financial statements as of and for the years ended December 31, 2011 and 2012. 16. Dividends paid to ordinary shareholders in 2012 erase eso (©) ves2,960 Bi pea Seo & ese9c0 17. Retained earnings as of December 3, 2012 Soret seoa0 «. P2,892,000 Ay br Saeeps &. Pi'se8 000 fe eerie we peconeer lant ayes Te io . 4,182,400 & pastri 200 &. palis7-200 Pe ace pa ae acid ose B pass b. P 8.21 “d. P18.49 20. Basic earnings per share for 2012 a. P7.40 c. 5.86 b. P7.34 gi P5.81