ACCOUNTING 502|QUIZ 1 MAY 6, 2018

THEORY PART A. Internal control system adopted by the client is not

Use the choices below for items 1-7 (Letters only) performing as expected
P – Presentation and Disclosure B. Fraud exists in the relevant account balances
C – Completeness C. Additional audit tests of account balances are
E – Existence/Occurrence necessary
V – Valuation/Measurement D. The auditor has to communicate immediately with
1. Recalculation of amortization expense of Intangible the client management
Assets.
2. A major consideration in verifying the ending balances 14. A client erroneously recorded a large purchase twice.
Which of the following internal accounting control
of long lives assets is the possibility of existing legal
measures would be most likely to detect this error in a
encumbrances. Tests to identify possible legal timely and efficient manner?
encumbrances. A. Footing the purchases journal
3. Cross referring amount from subsidiary ledger to trial B. Reconciling vendors’ monthly statements with
balance. subsidiary payable ledger accounts
C. Tracing totals from the purchases journal to the
4. Analysis if all retired property, plant and equipment
ledger accounts
are recorded. D. Sending confirmation letters to suppliers
5. Auditing additional intangibles recorded for the period.
6. Examining documentation of the purchase of 15. Which of the following is the least likely procedure to
intangible assets. search unrecorded liabilities?
7. In assessing control risk for purchases, an auditor A. Examine purchase invoices
B. Examine receiving reports
vouches a sample of entries in the voucher register to
C. Examine cash disbursement entries before the end
the supporting documents. of the reporting period
D. Examine statements of accounts received after the
True or False end of the reporting period
For items 8-10, write T if the statement is correct and F if
the statement is wrong. FFT SHORT PROBLEMS
8. If internal control is properly designed, the same No need for solutions, just write your answer on your
employee should not be permitted to prepare worksheet.
disbursement vouchers and sign checks.
9. The accounts payable department generally should PROBLEM 1
Doraemon Inc. recorded the following in one account,
stamp and cancel supporting documentation after
“intangibles.” The senior auditor asked you to check each
payment is mailed. of the transactions.
10. The same employee most likely would match vendor’s 1. Legal fees to obtain patent P50,000
invoices with receiving reports and also recomputed 2. Duplication of product masters for computer 80,000
software
the calculations on vendor’s invoices. 3. Labor and material costs incurred in 55,500
producing a prototype of computer software
Multiple Choice 4. Costs incurred for coding and testing to 60,000
11. It is ordinarily not necessary to examine supporting establish technological feasibility of computer
documentation for each addition to long-lived asset, software
but it is customary to verify; I. All large transactions, 5. Coding costs after establishment of 220,000
technological feasibility of computer software
II. All unusual transactions, III. A sample of typical
6. Computer software acquired in order for the
additions computer to be used
A. I only 7. Packaging of the product 110,000
B. III only 8. Cost of conference for the introduction of this 90,000
C. I and II new product
D. I, II and III 9. Equipment purchased for current and future 30,000
projects’ research and development (3yrs
useful life)
12. Which of the following is the least likely procedure to 10. Testing costs after establishment of 25,000
search unrecorded liabilities technological feasibility of computer software
A. Examine cash disbursement entries before the end 11. Other cost of registering patent 58,000
of the reporting period 12. Salaries of employees doing the research of 33,500
B. Examine billing of suppliers computer software
13. Equipment purchased for current project’s 200,000
C. Examine receiving reports research and development and be thrown
D. Examine statements of accounts received after the away after such (5yrs useful life)
end of the reporting period 14. Modification to the formulation of the program 45,000
15. Advertising expense to introduce a new 33,000
13. Several liability accounts were discovered to have product
unexpected balances and several relationships (ratios)
were considered not normal based on the auditor’s Requirements:
performance of analytical procedures. These results Compute for the balance of the following:
would most likely indicate that
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ACCOUNTING 502|QUIZ 1 MAY 6, 2018

16. Patent Transactions during 2017 and other information are as

17. Computer Software follows:
18. Amount to be reported as Expense  On January 6, 2017,a plant facility consisting of land
19. Property, plant and equipment and a building was acquired from Atlas Corp. for
P16,000,000. Of this amount, 20% was allocated to
PROBLEM 2 land.
Naruto Company is considering to buy an entity and  On April 1, 2017, new parking lots, streets and
came up with the following information relative to the
sidewalks at the acquired plant facility were
acquiree on December 31, 2017:
completed at a total cost of P1,920,000. These
Carrying values of assets amounted to P800,000 and expenditures had an estimated useful life of 12 years.
liabilities for P300,000 while the Fair values of the assets  The leasehold improvements were completed on
amounted to P950,000 and liabilities for P350,000. December 31, 2013, and had an estimated useful life
of 8 years. The related lease, which would have
Net earnings after elimination of unusual or infrequent
terminated on December 31, 2019 was renewable for
items:
2013 P200,000 an additional for-year term. On April 30, 2017
2014 150,000 Malabon exercised the renewal option.
2015 225,000  On July 1, 2017,machinery and equipment were
2016 180,000 purchased at a total invoice cost of P250,000.
2017 210,000 Assitional costs of P10,000 for delivery and P30,000
for installation were incurred.
Requirement:
Using the above formation, under direct method,  On August 30, 2017, Malabon purchased a new
compute for the goodwill under the following: automobile for P650,000.
20. A return of 20% is considered normal on net assets at  On September 30, 2017, a truck with a cost of
fair value. Excess earnings are capitalized at 15% P2,400,000 and a carrying amount of P810,000 on
21. A return of 18% is considered normal on net assets at the date of sale was sold for P1,150,000. Depreciation
fairvalue. Goodwill is measured at 10 years excess for the 9 months ended September 30, 2017 was
earnings. P235,200.
22. A return of 15% is considered normal on net assets at
 On December 20, 2017, a machine with a cost of
fair value. Excess earnings are expected to continue for
10 years. Goodwill is measured by the present value P170,000 and a carrying amount of P29,750 at date
method using a 15% rate. of disposition was scrapped without cash recovery.
23. Using the residual approach, if the Company will pay
P930,000 to acquire the Company, how much will be Requirement:
the goodwill? Determine the adjusted carrying values of the
following as of December 31, 2017:
PROBLEM 3 24. Land
At December 31, 2016, Malabon Company’s property, 25. Land Improvements
plant and equipment account and accumulated 26. Buildings
depreciation and amortization accounts had balances as 27. Machinery and Equipment
follows: 28. Automobiles and Trucks
Category Cost of Accumulated 29. Total Depreciation Expense
Asset Deprecation 30. Total Accumulated Depreciation
Land P13,000,000
Buildings 12,000,000 P2,654,000
Machinery and Equipment 7,750,000 1,962,000 LONG PROBLEMS
Automobiles 13,200,000 8,620,000 Solve the problems with complete solution.
Leasehold Improvements 2,210,000 1,105,000
PROBLEM I
Category Cost of Asset Accumulated You are auditing Kabunyan Corporation and you
Deprecation discovered the following transactions relating to the
Buildings 150% dec. bal 25 years Company’s intangible assets.
Machinery and Straight line 10 years  During 2013, the Company incurred costs to develop
Equipment
and produce computer software product as follows:
Automobiles 150% dec. bal 5 years
Leasehold Straight line 8 years  On January 1, 2008, the Company spent P400,000 to
Improvements apply for and obtain a patent on a newly developed
Land Improvements Straight line 12 years product. The patent had an estimated useful life of 10
years. At the beginning of 2013, the Company paid
Depreciation is computed to the nearest month. The P100,000 for a competitive patent, with 7 years useful
salvage value of the depreciable assets is considered
life, to protect its own from the market. Also, on
immaterial.
January 1, 2013, the Company spent P60,000 in

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ACCOUNTING 502|QUIZ 1 MAY 6, 2018

successfully prosecuting an attempted patent

infringement. At the beginning of 2014, the Company
purchased for P250,000, a patent that was expected
to prolong the life of its patent by 4 years.
 On January 2, 2014, the Company signed an
agreement to operate as a franchise of Potang, Inc. for
an initial fee of P500,000. The agreement requires
payment of P200,000 on January 1, 2014, with the
balance payable in three equal annual instalment of
P100,000 payable at the end of each year starting
December 31, 2014. Discount rate for similar
transaction is 10%. The agreement also specifies that
Kabunyan will pay 5% of its annual revenue to
Potang. 2013 Revenue P300,000 and 2014 Revenue
P380,000. Also, the Company paid P50,000 cost of
training employees.
The franchise will benefit the Company for 10 years.

Requirements:
Compute for the following
1. Initial value of Computer Software
2. Carrying value of Patent as of December 31, 2014
3. Total expense related to the franchise
4. Total expense for 2014

PROBLEM II
Sakura Company has been monitoring the value of his
favorite machinery that he uses for his manufacturing
operations. The machinery was acquired on January 1,
2010 for a price of P380,600. The Company should have
availed of P20,000 discount if they have paid it on time
but such was forfeited by the seller due to late payment.
Freight charges of P17,000 and installation costs of
P120,000 were also paid. Sakura tested the machinery
and incurred P5,000 for the sample products and sold it
for P2,600. Salvage value was estimated to be P50,000
and useful life is 10 years.

On December 31, 2011, the machinery was tested for

impairment. The fair value on such date is P290,000 and
its cost to sell is P30,000. Additionally, it was estimated
also that it will generate annual P50,000 net cash inflow
for its remaining years, effective rate is 8%.

On December 31, 2015, the recoverable value increased.

The Company remeasured the asset and came out with
accurate estimate. Net inflows to be generated from such
machinery increased to P73,000 for each of the remaining
years with 8% effective rate and the fair value less cost to
sell is increased to P235,000.

Requirements:
5. Compute for the initial cost of machinery
6. Compute for the depreciation expense for 2012
7. Compute for the gain on remeasurement for 2015
8. Compute for the depreciation expense for 2016