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Audit - Prelim

PROBLEM 1

Galore Company and its subsidiaries own the following properties that are accounted for in a
cordance with international accounting standards:

• Land held by parent for undetermined use. 5,000,000

• A vacant building owned by parent and to be leased out under an operating lease.
3,000,000

• Property held by the parent for use in production. 4,000,000

•Land leased by the parent to a subsidiary under an operating lease. 2,500,000

• Building owned by a subsidiary and for which the subsidiary provides security and
maintenance services to the lessees. 1,500,000

• Property under construction for use as investment property. 6,000,000

• Land held for future factory site. 3,500,000

Compute for the total investment property that should be reported in the consolidated
statement of financial position of Galore Company and its subsidiaries.

Solution:

Land held for undetermined use. 5,000,000

A vacant building owned by the parent and to be leased out under an operating lease.
3,000,000

Building owned by a subsidiary and for which the subsidiary provides security and maintenance
services to the lessees. 1,500,000

Property under construction for use as investment property. 6,000,000

5,000,000+3,000,000+1,500,000+6,000,000 = 15,500,000
PROBLEM 2

The Paradise Company's accounting policy with respect to investment properties is to measure
them at fair value at the end of each reporting period. One of its investment properties was
measured at P8,000,000 on December 31, 2015.

The property had been acquired on January 1, 2015 for a total of P7600,000, made up of
P6900,000 paid to the vendor, P300,000 paid to the local authority as a property transfer tax
and P400,000 paid to professional advisers. The useful life of the property is 40 years.

What is the amount of gain to be recognized in profit or loss for the year ended December 31,
2015 in respect of the investment property?

a. 400,000
b. 700,000
c. 800,000
d. 590,000

Solution:
Fair Value 8,000,000
Acquisition Cost 7,600,000
Gain from change in fair value 400,000

Payment to vendor 6,900,000


Property transfer tax 300,000
Payment to professional advisers 400,000
Total acquisition cost 7,600,000

PROBLEM 3

PAPASAA Co. had outstanding a 7%, 10-year P5,000,000 face amount bond. The bond was
originally sold to yield 6% annual interest. The entity used the effective interest method to
amortize bond premium. On January 1, 2013, the carrying amount of the bond payable was
P5,250,000. What amount of unamortized premium on bond payable should be reported on
December 31, 2013?

a. P225,000
b. P172,500
c. P215,000
d. P52,500
Solution:

Interest Expense (5,250,000 x 6%) 315,000

Interest Paid (5,000,000 x 7%) 350,000


Premium Amortization for 2013 35,000

Premium on bond payable - January 1, 2013 250,000


Premium Amortization for 2013
(35,000)

Premium on bond payable - December 31, 2013 215,000

PROBLEM 4

On June 30, 20x8, Ada Company sold its investment property for P7,500,000. The Company paid
P500,000 as a transaction cost.

The investment property was acquired five years ago at a cost of P8, 000,000. Its estimated
useful life was 10 years.

Compute for the gain or loss on derecognition assuming the company use Cost Model.

a. 6,000,000
b. 4,000,000
c. 3,500,000
d. 1,500,000

Solution:

Cost 8,000,000
Less: Transaction Cost (500,000)
Net Selling Price 7,500,000
Less: Carrying Amount
Cost 8,000,000
Less: Accum. Depre. (8M/10x5) 4,000,000 4,000,000
Gain on Derecognition 3,500,000
PROBLEM 5

Mercedes-Benz Company owned three properties which are classified as investment property.

Initial cost FV 2015 FV 2016

Property 1 2,700,000 3,200,000 3,500,000

Property 2 3,450,000 3, 050,000 2,850,000

Property 3 3,300,000 3,850,000 3,600,000

Each property was acquired 3 years ago with a useful life of 25 years the accounting policy is to
use the fair value method for investment property

What is the gain or loss to be recognized for the year ended December 31, 2016

a. 189,000 loss
b. 300,000 gain
c. 150,000 loss
d. 450,000 loss

Solution:

Property FV 2015 FV 2016 Gain

1 3,200,000 3,500,000 300,000

2 3,050,000 2,850,000 (200,000)

3 3,850,000 3,600,000 (250,000)

(150,000)

PROBLEM 6

In 2014, Garlian Mining Company purchased property with natural resources for P28,000,000.
The property had a residual value of P5,000,000.

However, the entity is required to restore the property to the original condition at a discounted
amount of P2,000,000.

In 2014, the entity spent P1,000,000 in development cost.

In 2015, an amount of P1,000,000 was spent for additional development on the mine.
The tonnage mined and estimated remaining tons for years 2014-2016 are as follows:

Tons Estimated
Year Extracted Tons Remaining

2014 0 10,000,000

2015 3,000,000 7,000,000

2016 3,500,000 2,500,000

What amount should be recognized as depletion for 2016?

a. 10,150,000
b. 11,025,000
c. 15,750,000
d. 9,450,000

DEPELETION 2015
Cost of land P28,000,000
Estimated restoration cost 2,000,000
Development cost – 2014 1,000,000
Development cost – 2015 1,000,000
Total cost 32,000,000
Residual value ( 5,000,000)
Depletable amount 27,000,000

Tons extracted in 2015 3,000,000


Remaining tons – Dec 31, 2015 7,000,000
Total estimated output - Jan 1, 2015 10,000,000

Rate in 2015 (27,000,000/10,000,000) 2.70


Depletion 2015 (3,000,000 * 2.7) 8,100,000

DEPELETION 2016
Tons extracted in 2016 3,500,000
Remaining tons – Dec 31, 2016 2,500,000
Total estimated output - Jan 1, 2016 6,000,000

Original depletable amount 27,000,000


Depletion in 2015 ( 8,100,000)
Remaining depletable amount 18,900,000

New Rate in 2016 (18,900,000/6,000,000) 3.15

Depletion 2016 (3,500,000 * 3.15) 11,025,000

PROBLEM 7

In connection with your audit of Yeoj Corporation’s financial statements for the year 2017, you
noted the following liability account balances as of December 31, 2016:

12% Notes Payable 3,200,000

10% Notes Payable 2,500,000

Transactions during 2017 and other information relating to Yeoj’s liabilities were as follows:

a) The 12% note is dated May 1, 2016 and is payable in four equal annual installments of
800,000 beginning May 1, 2017. The first principal and interest payment was made on May 1,
2017.

b) The 10% 2,500,000 loan payable will mature on July 1, 2018. Interest on the loan is due every
July 1 and December 31. On December 1, 2017 the company entered into refinancing
agreement with a bank to refinance the loan on a long term basis. The refinancing and roll over
transaction was completed on December 31, 2017.

c) On January 1, 2017 the Company purchased a machinery by paying cash of 400,000 and
issuing a 10% interest bearing note payable of 1,600,000 due in 4 equal annual installments
starting December 31, 2017. The prevailing interest rate for this type of note is 12%.

Question:

1. How much is the carrying amount of the note issued for the machinery on initial recognition?

a) 1,518,650 c) 2,000,000

b) 1,535,823 d) 1,500,000

2. Noncurrent portion of the notes payable as of December 31, 2017?

a) 4,687,000 c) 4,879,337

b) 4,244,995 d) 3,627,987
3. Current portion of notes payable as of December 31, 2017?

a) 1,126,890 c) 1,100,000

b) 1,475,000 d) 1,180,785

4. Accrued interest payable as of December 31, 2017?

a) 200,000 c) 168,000

b) 192,000 d) 175,000

5. Total interest expense for the year 2017?

a) 644,000 c) 750,000

b) 754,299 d) 660,000

Solution:

1. B

Annual Payments PV Factor PV

Y1 - 400,000 + 160,000 .8929

Y2 - 400,000 + 120,000 .7972

Y3 – 400,000 + 80, 000 .7118

Y4 – 400,000 + 40,000 .6355 ___________________

TOTAL 1,535, 823

2. C

12% Note Payable:

Issue Price 3,200,000

Less: Annual Payment 800,000

Carrying Amount 2,400,000

Less: Current Portion 800,000

Non-Current Portion 1,600,000


10% Note Payable

Non-Current Portion 2,500,000

Interest-bearing note:

Date Interest Payable Interest Expense Amortization PV/CV

1/1/17 1,535,823

12/31/17 560,000 184,299 375,701 1,160,122

12/31/18 520,000 139,215 380,785 779,337

12% Note Payable 1,600,000

10% Note Payable 2,500,000

Interest-bearing note 779,337

Total Noncurrent Liability 4,879,337

3. D - (see solution on #2)

12% Note Payable 800,000

10% Note Payable ---

Interest-bearing note 380,785_

Total Noncurrent Liability 1,180,785

4. B

12% Note Payable

Balance, 5/1/16 3,200,000

Less: Annual payment 800,000

Balance, 5/1/17 2,400,000 *(.12 * 8/12) 192,000


5. B

12% NP:

1/1/17 – 5/1/17 3200,000 * .12 * 4/12 128,000

5/1/17 – 12/31/17 (3200, 000 – 800,000) * .12 * 8/12 192,000 320,000

10% NP:

7/1/17 (2500, 000 * .10 /2) 125,000

12/31/17 (2500, 000 * .10/2) 125,000 250,000

Interest – bearing note:

(see solution on #2) 184,299

Total interest expense for year 2017 754,299

PROBLEM 8

On January 2, 2004, the Suns, Inc. issued P2,000,000 of 8% convertible bonds at par. The bonds will
mature on January 1, 2008 and interest is payable annually every January 1. The bond contract
entitles the bondholders to receive 6 shares of P100 par value common stock in exchange for each
P1,000 bond. On the date of issue, the prevailing market interest rate for similar debt without the
conversion option is 10%.

On December 31, 2005, the holders of the bonds with total face value of P1,000,000 exercised their
conversion privilege. In addition, the company reacquired at 110, bonds with a face value of
P500,000.

The balances in the capital accounts as of December 31, 2004 were:

Common stock, P100 par, authorized 50,000 shares, issued


and outstanding, 30,000 shares P3,000,000
Premium on common stock 500,000

Market value of the common stock and bonds were as follows:

Date Bonds Common stock

December 31, 2004 118 40


December 31, 2004 110 42

QUESTIONS: Based on the above and the result of your audit, answer the following

1. How much of the proceeds from the issuance of convertible bonds should be allocated
to equity?
a. P634,000 b. P126,816 c. P221,664 d. P0
2. How much is the carrying value of the bonds payable as of December 31, 2004?
a. P2,000,000 b. P1,389,400 c. P1,796,170 d. P1,900,502
3. How much is the interest expense for the year 2005?
a. P160,000 b. P138,940 c. P179,617 d. P190,050
4. The entry to record the conversion on December 31, 2005 will include a credit to APIC of:
a. P365,276 b. P400,000 c. P307,893 d. P0
5. How much is the loss on bond reacquisition on December 31, 2005?
a. P50,000 b. P96,053 c. P67,362 d. P0

SOLUTION:

Question No. 1
Total proceeds 2,000,000
Less liability component:
Present value of the principal (P2,000,000 x 0.6830) 1,366,000
Present value of the interest [(P2,000,000 x 8% x 3.1699) 507,184 1,873,184
Equity component 126,816

Question 2 & 3

Date Int. exp. Int. paid Amort. CV


Jan. 1, 2004 1,873,184
Dec. 31. 2004 187,318 160,000 27,318 1,900,502
Dec. 31. 2005 190,050 160,000 30,050 1,930,553
Dec. 31. 2006 193,055 160,000 33,055 1,963,608
Dec. 31. 2007 196,361 160,000 36,361 1,999,969
126,785

Question no. 4
Bonds Payable 1,000,000
Discount on bonds payable (P1,000,000 - P965,276) 34,724
Common stock 600,000
APIC 365,276

Carrying value of bonds converted (P1,930,553* x 1/2) 965,276


Par value of common stock received (P1,000,000/P1,000 x 10 x P100) 600,000
Amount to be credited to APIC 365,276

Question no. 5
Reacquisiton price (P500,000 x 110%) 550,000
Carrying value of bonds reacquired (P1,930,553 x 1/4) 482,638
Loss on bond reacquisition 67,362

PROBLEM 9

On June 30, 2017, the GENLUNA MINES, INC. purchased a copper mine for P14,580,000. The
estimated capacity of the mine was 1,620,000 tons. Genluna Copper Mines expects to extract
15,000 tons of ore a month with an estimated selling price of P50 per ton. Production started
immediately after some new machines costing P1,800,000 were bought on June 30, 2017,
These new machines had an estimated useful life of 15 years with a scrap value of 10% of cost
after the ore estimate has been extracted from the property, at which time the machines will
already be useless. Genluna’s vooks show the following expenses for 2017:

Depletion expense ………………………………………………………………. P1,215,000

Depreciation – Machinery……………………………………………………. 120,000

Recorded depletion expense was

A. Overstated by P270,000

B. Understated by P270,000

C. Overstated by P405,000

D. Understated by P405,000

SOLUTION:

Depletion rate per ton (P14,580,000/ 1,620,000 tons) P9


Copper ore mined in 2017 (15,000 x 6 months) x 90,000
Depletion for 2017 P
810,000
Depletion per books 1,215,000
Overstatement of depletion expense P405,000

PROBLEM 10

JC Company has a 10% note receivable dated June 30, 2016, in the original amount of P9 000
000. Payments of P3 000 000 in principal plus accrued interest are due annually on July 1, 2017,
2018 and 2019.
In its June 30, 2018 balance sheet, what amount should JC report as current asset for interest
on the note receivable?

Answer: 9M - 3M = 6M × 10% = 600K

PROBLEM 11

On october 1, 2018, BALANTON Corp. issued a 500,000, 12 month 12% note to ABC Company in
payment of account. On the same date, the company borrowed 1,000,000 from the Asian Bank
by signing a 12-month, non interest bearing, 1,120,000 note.

What is the total/net liability reported in December 31, 2018 for the non-interest bearing note?

Answer: 1,030,000

PROBLEM 12

Crosswind company has a single investment property which


had an original cost of P 5,800,000 on January 1,2019. On
December 31,2012, it had a fair value of P5,900,000. On
acquisition,the property had a useful life of 40 years.
What should be the expense recognized in Crosswind's profit
or loss for the year ended December 31,2012 under the fair
value model and cost model?

Fair value model Cost model


a. 147,500 145,000
b. 100,000 145,000
c. 145,000 100,000
d. 100,000 147,500
Solution:
Fair value model
Fair value - December 31,2012 ₱5,900,000.00
Fair value - Decemeber 31,2011 6,000,000.00
Loss from change in fair value - 100,000.00

Cost model
Depreciation Expense for 2012 (5.8M/40) ₱ 145,000.00

PROBLEM 13

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of
P1,000,000 due January 1, 2015. Interest is payable semiannually on January 1 and July 1.
On the date of issue, investors were willing to accept an effective interest of 6%.

Questions

1. The bonds were issued on January 1, 2007 at


a. A premium c. Book value
b. An amortized value d. A discount

2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective
interest amortization method, LACEA COMPANY recorded interest expense for the 6 months
ended June 30, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884

3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6
months ended December 31, 2007, in the amount of
a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791

4. The carrying value of the bonds on July 1, 2008 is:


a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P 1,053,179

5. A bond issue sold at a premium is valued on the statement of financial position at the
a. Maturity value.
b. Maturity value plus the unamortized portion of the premium.
c. Cost at the date of investment.
d. Maturity value less the unamortized portion of the premium.

Solution
1. B
If nominal rate is less than the yield rate, there is discount

11
PROBLEM 14
If nominal rate is more than the yield rate, there is premium
2. D
Date Interest expense Interest paid Amortization Carrying Value
1,062,809
July 2007 31,884 35,000 3,116 1,059,693
December 2007 31,791 35,000 3,209 1,056,484
July 2008 31,695 35,000 3,305 1,053,179
Interest expense = Carrying value of the note X yield rate x 6/12
Interest paid = Face value of the note X nominal rate x 6/12
Amortization = Interest expense – Interest paid
Carrying value – end = Carrying value – beg. – Amortization
3. D 4. D 5. B

PROBLEM 15

On January 1, 2007, LACEA COMPANY issued 7% term bonds with a face amount of P1,000,000 due
January 1, 2015. Interest is payable semiannually on January 1 and July 1. On the date of issue, investors
were willing to accept an effective interest of 6%. Questions

1. The bonds were issued on January 1, 2007 at

a. A premium

b. Book value

c. An amortized value

d. A discount

2. Assume the bonds were issued on January 1, 2007, for P1,062,809. Using the effective interest
amortization method, LACEA COMPANY recorded interest expense for the 6 months ended June 30,
2007, in the amount of

a. P 70,000 b. P 63,769 c. P 35,000 d. P 31,884

3. Same information in number 2. LACEA COMPANY recorded interest expense for the 6 months ended
December 31, 2007, in the amount of

a. P 70,000 b. P 63,769 c. P 31,884 d. P 31,791

4. The carrying value of the bonds on July 1, 2008 is:

a. P 1,056,578 b. P 1,056,484 c. P 1,053,276 d. P 1,053,179


5. A bond issue sold at a premium is valued on the statement of financial position at the

a. Maturity value.

b. Maturity value plus the unamortized portion of the premium.

c. Cost at the date of investment.

d. Maturity value less the unamortized portion of the premium.

Solutions for 2, 3, & 4:

PROBLEM 16