CPA REVIEW SCHOOL OF THE PHILIPPINES Manila AUDITING PROBLEMS FEBRUARY 15, 2015 FIRST PREBOARD EXAMINATION SUNDAY, 8:00AM - 11:00AM {i SETA INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. FULLY SHADE ONLY ONE BOX FOR EACH ITEM. STRICTLY NO ERASURES ALLOWED. PROBLEM NO. 1 SABANTE MANUFACTURING COMPANY had several transactions during 2014 and 2015 concerning Property, plant, and equipment. Several of these transactions are described below, followed by the entry or entries made by the company's accountant, EQUIPMENT Several used items were acquired on February 1, 2014, by issuing 2 P300,000 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. Sabante's most recent borrowing rate was 8%. Feb. 1,2014 Equipment 300,000 Notes payable 300,000 Dec. 31,2014 Depreciation expense 30,000 ‘Accumulated depreciation - equipment 30,000 BUILDINGS A building was acquired on June 1, 2014, by issuing 300,000 shares of the company’s PS 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 P1,950,000. June. 1,2014 Building 1,500,000 Ordinary shares 3,500,000 (5 x 1,500) Dec, 31,2014 Depreciation expense 60,000 ‘Accumulated depreciation - bullding 60,000 INVENTORY /FIXTURES Inventory and display fixtures were acquired for P375,000 cash on April 1, 2015, from a competitor who was liquidating her business. The estimated value of the inventory was P255,000 and the value of the fixtures was P165,000. April 1, 2015 Inventory : 255,000 Display ficures 165,000 Cash 375,000 Gain on acquisition of inventory and fixtures 45,000(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION 1G PROBLEMS MACHINERY . On July 1, 2015, Sabante exchanged machines with Bongga Company. The following facts pertain to these assets. Sabante’s Machines Bongga’s Machines Original cost 864,000 990,000 Accumulated depreciation 345,600 468,000 Fair market value at date of exchange 540,000 675,000 ‘Cash paid by Sabante 135,000 Cash received by Bongga 135,000 Although the fair values of the assets involved in the exchange had been reliably determined, certain cash flow calculations made by both companies proved that this exchange transaction lacks commercial substance. SO gpm or WOES SHOMIG 62 ECOGHIZES WE Obs Ok ON OF ANSE Quen UP TAN POND July 1, 2015, Machinery - ee 135,000 Orn CAS REET ‘Cash 135,000 Adgitional information: Sabante uses straight-line depreciation, applied to all assets as follows: 1. A full year’s depreciation taken in the year of 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.) The books for 2015 have not been adjusted or closed. 1, The adjusting entry on December 31, 2015, to correct the 2014 equipment-related errors is (ignore the 2015 depreciation error) A. Interest expense 2,222 Retained eamings 20,370 Equipment 22,592 B Interest expense 1,051 Retained eamings 20,370 Equipment 22,221 C. Retained earnings 22,221 Equipment 22,221 D.) Accumulated depreciation ~ equipment 2,222 Interest expense 1,851 Retained eamings 18,148 Equipment 22,221 2. The adjusting entry on December 31, 2015, to correct the 2014 building-related errors Is jore the 2015 depreciation error) ‘A. \Buildings 450,000 "Retained earnings 48,000 ‘Share premium 450,000 Accumulated depreciation — buildings 18,000 B. Buildings 450,000 ‘Share premium 450,000 C. Retained eamings 18,000 Accumulated depreciation — bu 1D. No adjusting entry is necessary. 18,000* “CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAMINATION 3. The adjusting entry on December 31, 2015, to correct the Inventory and fixtures-related errors is (ignore the 2015 depreciation error) A. Inventory 27,321 Dispiay fixtures 17,679 +. Gain on acquisition of Inventory and fixtures 9,642 B, Gain on acquisition of inventory and fotures 45,000 “Inventory 27/324 Display fixtures: 17,679 C. Retained earnings 45,000 Inventory 27,321 Display fixtures: 17,679 . Gain on acquisition of inventory and fixtures 45,000 . Retained earnings 45,000 4. ‘The adjusting entry on December 31, 2016, to comect the machinery-elated errors is (ignore the 2015 depreciation error) A = new 518,400 Gain on exchange 518,400 B. Accumulated depreciation — machinery 345,600 Loss on exchange 518,400 Machinery — old 864,000 Machinery — new 518,400 Accumulated depreciation - machinery 345,600 Machinery ~ old ‘864,000 D. Machinery = new 464,400 Accumulated depreciation ~ machinery 345,600 Loss on exchange 154,000 Machinery — old 864,000 5. The correct depreciation expense for 2015 is A. P229,050 B. P272,250 Cc. P149,497 PROBLEM NO. 2 The following are independent situations involving the audit of intangible assets. GENESIS RECORDING, INC. has initiated an extensive research program to develop a more efficient method of recording compact discs. Management expects to be able to lease its production facilities, when completely refined, to the many record-producing companies in the area. You have been asked to assist in the preparation of financial statements for the year ended December 31, 2015. Costs related to the project have been accumulated in a master account identified simply as “Recording” since the beginning of the project in early 2015, as follows: DEBITS 555,000 Equipment purchased for use in many research projects over a five-year period. 234,000 Salaries of staff working on research project. 52,500 Computer program services purchased through a contract with another enterprise. 74,400 Legal fees related to the patent acquired on the new production process, which is ‘expected to be useful in producing revenue for ten years.‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR)~ MANILA FIRST PREBOARD EXAMINATION AUDITING PROBLEMS FEBRUARY 15, 2015 / SUNDAY / 8:00AM — 14;00AM CREDITS 264,000 Down payments received from other companies that have contracted to use the few production process in the future, Management has determined that general and administrative expense of P526,500 were incurred during 2015. Based on the time spent on variouis enterprise functions, youl éstimate that 25% of this amount relates to the research project identified as “Recording.” Discussions with corporate officials reveal that all long-lived assets are depreciated with a full year’s amortization taken in the year of aqquisition and none in the year of disposal. You determine that the process began to generate revenue In 2015 and, therefore, the amortization of the patent should begin in this year. 6. What is the total and Development expense for 2015? A. P603,525 (8,)P529,125 C. P536,565 D. P792,375 7. The following should be reported on the statement of financial position at December 31, 2015: Carrying Value Carrying Vatue lon of Equipment -of Patents fa 444,000 66,960 264,000 555,000 74,400 264,000 c 444,000 66,960 237,600 D. 444,000 74,400 237,600 000-— PEDRING INDUSTRIES reports the following patents on its December 31, 2014 statement of financial position. Date of Usefut life Initial Cost Acquisition sition. Patent A 406,000 March 1, 2011 17 years Patent B 150,000 July 1, 2012 10 years % Patent C 14,000 Sept. 1, 2013 4 years The following events occurred during the year ended December 31, 2015. 1. Research and development costs of P245,700 were incurred during the year. These costs ‘were incurred prior to projects achieving economic viability. 2. Patent D was purchased on July 1 for P285,000. It has a remaining life of 9 Y2 years. 3. A possible impairment of Patent b's value may have occurred at December 31, 2015. This is due to a significant reduction in'the demands for certain products protected by Patent B. The ‘company's controller estimates the following future cash flows from Patent B. December 31, 2016 20,000 December 31, 2017 20,000 December 31, 2018 20,000 | The appropriate discount rate to be used for these cash flows Is 8%. . | "8. What is the total carrying value of Pedring’s patents on December 31, 2 A. P794,500 B, P463,542 C. P673,542 524,500(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION nY / 8:00AM. 9, What amount of Impairment loss should be reported by Pedring for the year ended December 31, 2015? . A. P37,500 B. PS1,542 CO pa5,958 D. P240,458 10. What is the total carrying value of Pedring’s patents on December 31, 2015? (Appr. B. P403,542 © P719,500 D. P673,452 -—-==---000000000-- PROBLEM NO. 3 On January 1, 2014, the shareholders’ equity section of BLISS, INC.'s statement of financial position disclosed the following information: 12.5% Conivertible preference shares (P40 par value; 150,000 shares authorized, 60,000 shares issued and outstanding) 2,400,000 Ordinary shares (PS par value; 600,000 shares authorized, 360,000 sharés issued and outstanding) 1,800,000 Share premium 9,000,000 Retained eamings 13,500,000 Total shareholders’ equity P26,700,000 li ns Occ 1. On February 2, 2014, 45,000 ordinary shares were acquired by the company for P33 per share. 2. On September 30, 2014, 15,000 preference shares were converted to ordinary shares. One preference share is convertible into one ordinary share. At the time of conversion, the ‘ordinary shares had a market value of P42 per share. 3. On December 21, 2014, the company placed a share subscription of 30,000 ordinary shares at a subscription price of P33 per share. The subscription contract required a cash down payment equal to 60% of the subscription price, with the balance due on February 2, 2015. 4. On February 1, 2015, 25,500 ordinary shares were issued according to the subscription contract. Because of default by a subscriber, 4,500 shares were not issued. The subscription contract requires the subscriber to forfeit all cash advances. 5. On April 15, 2015, 30,000 shares held as treasury were reissued at P50 per share. 6. On May 16, 2015, a special dividend of preference shares was distributed to ordinary shareholders. One hundred ordinary shares entitled a shareholder to one preference share. ‘The market price of preference shares was P40 per share at the time, 7. Cash dividends are dedared for preference and ordinary shares on October 31 and April 30 of each year, Semiannual cash dividends for ordinary shares are PO.50 per share. Bliss, Inc, reported net Income of P1,980,000 in 2014 and P2,670,000 in 2015. ‘What are the balances of the following accounts on December 31, 2014? 11, Share premium P10,365,000 B. P10,239,000 C. P10,328,100 D. P9,840,000(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION 18 1,008 12. Retained earnings appropriation for treasury shares) A. P14,872,500 14,895,000 —-C. Pl4,740,800 —D..-P14,902,500 What are the balances of the following accounts on December 31, 20157 33. Share premium m A P10,96400 (B.)P10838,100 10,328,100. P10,683,800 14, Retained earings (before appropriation for treasury shares) ‘ A. P17,665,000 8. P17,098,400c. P16,994,862 —_{(D.P16,790,662 5.7 Preference Shares Ordinary Shares |} 1,954,200 2,002,500 ‘E. 1,800,000 2/002,500 c 11954,200 1,875,000 D. 1,800,000 1,875,000 —-000000000—~ 4g PROBLEM NO. 4 ‘The general ledger trial balance of PENTAGON COMPANY includes the following balance sheet accounts at December 31, 2015: Cash P1,584,000 Accounts receivable 1,830,000 Inventory 661,500 Listed investments held for trading purposes at fair value 300,000 Prepaid insurance 75,000 Bank overdraft 150,000 Additional information: Cash ‘* The sales book was left open up to January 5, 2016, and cash sales totaling P225,000 were considered as sales in December. ~ ‘+ Checks of P139,500 in payment of liabilities were prepared before December 31, 2015, recorded in the books, but not mailed or delivered to payees. ‘* Post-dated checks totaling P117,000 are being held by the cashier as part of cash. The company's experience shows that post-dated checks are eventually realized. AR. + Customer's check for P22,500 deposited with but returned by bank, "NSF” on December’ 27,2015. The retum was recorded in the company’s books. +The cash account includes P600,000 of compensating balance against a short-term bank loan. The compensating balance is legally restricted as to withdrawal. + OST 1EGAUIY VEATCH ALT = GUE ABER Burt OG SNM wn wah: Lecyon fOR HEM, — NON CURE OSSEA NOX CAST Pom NK aes fone Accounts recaoxbtd OW cexeacera~ cash ‘The accounts receivable consists of the following: ‘Trade accounts receivable 975,000 Allowance for uncoliectible accounts (30,000) Claim against shipper for goods lost in transit 45,000 Olver Bere ewe,‘CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) ~ MANILA FIRST PREBOARD EXAM eam 15. Selling price of unsold goods sent by PENTAGON on ‘consignment at 130% of cost (included in PENTAGON'S ending inventory at cost) 390,000 ‘Security depostt on lease of warehouse used for storing ceo ny, DETAR HE some inventories 950,000 pier eI PA SG OS Total PL.830,000 Le Yecrancd rind &* TOME NAS Inventory ‘A physical count of inventory at December 31, 2015 revealed that PENTAGON had Inventory on hend at that date with a cost of P661,500. The annual audit disclosed that the following items were excluded from this amount and the related transactions were not recorded. «Merchandise of P91,500 Is held by PENTAGON on consignment. The consignor is Falcon Company. «s - Merchandise costing P57,000 was shipped by PENTAGON, FOB destination, to @ customer on December 31, 2015. ‘The customer was expected to receive the goods on January 6, 2016, «Merchandise costing P69,000 was shipped by PENTAGON, FOB shipping point, to 2 Customer on December 29, 2015. The customer was scheduled to receive the goods on January 2, 2016. «Merchandise costing P124,500 shipped by a vendor, FOB destination, on December 31, 2015 was received by PENTAGON on January 4, 2016. «Merchandise costing P76,500 purchased under FOB shipping point term was shiaped by the supplier on December 31, 2015 and received by PENTAGON on January 5, 2016. asad on the above and the result of your aud, determine the adjusted amounts of the following: 16. Cash . A. P876,000 BY P759,000 1,381,500 © P781,500 17... Net accounts receivable {A1P1151,700 B. P945,000 C. P1,174,200 D, Pi,131,000 18, Trade and other receivables, net ry A, P990,000 B. P1,219,200 ic. 1P1,196,700 D. P1,176,000 19, Inventory CS A. P510,000 B. P1,095,000 C. P676,500 (o,) p795,000 20. Current assets ane A. P3,770,700 B, P3,541,500 c. P3,727,500 — (.D) P3,748,200 --000000000-----— PROBLEM NO. 5 At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the employees remaining in the entity's employ during the vesting period. The shares will vest. at the end of year 1 if the entity's earnings increase by more than 18 percent; at the end of year $f the entitys eamings increase by more than an average of 13 percent per year over the two" year period; and at the end of year 3 if the entity’s eamings increase by more than an averoge: BF 10 percent per year over the three-year period. The shares have a fair value of P10 per share at the start of year 1, which equals the share price at grant date.(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION SUNDAY By the end of year 1, the entity's earings have increased by 14 percent, and 20 employees have left. ‘The entity expects that earings will continue to increase at a similar rate in year 2, and therefore expects that the shares will vest at the end of year 2. The entity expects, on the basis, of a weighted average probability, that a further 30 employees will leave during year 2. By the end of year 2, the entity's earings have increased by only 10 percent and therefore the shares do not vest at the end of year 2, 42 employees have left during the year. The entity expects that a further 15 employees will leave during year 3, and that the entity's earnings wll increase by at least 6 percent, thereby achieving the average 10 percent per year. By the end of year 3, 10 emplayees have left and the entity’s earings had increased by 8 percent, resulting In an average of 10.67 percent per year. Based on the foregoing, answer the following: 21. What amount of compensation expense should be recognized in year 1? ‘A. 240,000 ‘ 8B. “225,000 ©" P150,000 D. 160,000 22. What amount of compensation expense should be recognized in year 2? A.) P57,000 8, P52,000 C. P67,000 D. P122,000 23. What amount of compensation expense should be recognized In year 3 A. 151,000 B. P216,000 -C, P156,000 -)P146,000 24, amount should the entity report as share options outstanding at the end of year 2? P282,000 B. 292,000 @ 272,000 D. P307,000 A. P450,000 B.yP428,000 c. P490,000 D. P500,000 - --000000000-~ 25. What amount should ai report as share options outstanding at the end of year 3? PROBLEM NO. 6 ‘The following are independent situations. Answer the questions at the end of each situation. OMPOT COMPANY sells its products in expensive, reusable containers. The customer is charged a deposit for each container delivered and recelves a refund for each container returned within two years after the year of delivery. Ompot accounts for the containers not returned within the time limit as being sold at the deposit amount. Information for 2015 is as follows: Containers held by customers at December 31, 2014, from deliveries in: 2012 85,000 2014 240,000 325,000 Containers delivered in 2015 430,000. Containers retumed in 2015, from deliveries in: 2013 57,500 2014 140,000 2015 452,000 354,500, A. P427,500 B, P267,500 \P27,500 D. P85,000 26. How much revenue from container sales sees recognized for 2015?(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION. 11:008M 27. What is the total amount of Ompot Companys liability for returnable containers at December 2015? cReps73 00 B, P400,500 C. P267,500 . 430,000 —~000-—~ FC MORENO CORPORATION manufactures and sells food products and food processing machinery. Its balance sheet date is December 31. Relevant extracts from its financial statements at December 31, 2014 are as follows: Current liabilities Provision Provision for warranties 270,000 WNoncurrent liabilities Provision Provision for warranties 180,000 Note 36 - Contingent Liabilities MORENO is engaged in litigation with various parties in relation to allergic reactions to ‘traces of peanuts alleged to have been found in packets of fruit gums. MORENO strenuously denies the allegations and, as at the date of authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any costs or damages that may be payable to the plaintiffs. ‘The provision for warranties at December 31, 2014 was calculated using the following assumptions: There was no balance carried forward from the prior year. Estimated cost of repairs ~ products with minor defects 1,000,000 Estimated cost of repairs — products with major defects 6,000,000 Expected % of products sold during 2014 having no defects in 2015 80% Expected % of products sold during 2014 having minor defects in 2015 15% Expected % of products sold during 2014 having major defects in 2015 5% Expected timing of settiement of warranty payments = those with minor defects Allin 2015 Expected timing of settiement of warranty payments = those with major defects 40% in 2015, 60% in 2016 During the year ended December 31, 2015, the following occurred: 1, In relation to the warranty provision of 450,000 at December 31, 2014, P200,000 was paid ‘out of the provision. OF the amount paid, P150,000 was for products with minor defects and 50,000 was for products with major defects, all of which related to amounts that had been 4. expected to be paid in 2015.’ eapecked na exOoytad i MOT AMD soy GCer! setherrieny i wrrvecse emer, peeanion 6 OEE AUP KAS EWADE, FO, 2. In calculating its warranty RRO, SO1S, MORENO made the following ‘adjustments to the assumptions used for the prior year: Estimated cost of repairs - products with minor defects No change Estimated cost of repairs — products with major defects 5,000,000 Expected % of products sold during 2035 having no defects in 2016 85% Expected % of products sold during 2015 having minor defects in 2016 13% Expected % of products sold during 2015 having major defects in 2016 2% | Expected timing of settlement of warranty payments | “= those with minor defects All in 2036 Expected timing of settlement of warranty payments = those with major defects 20% in 2046, 80% in 2017(CPA REVIEW SCHOOK OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AY / 8: 3. MORENO determined that part of its plant and equipment needed an overhaul - the conveyor belt on one of its machines would need to be replaced in about December 2016 at an estimated cost of P250,000. The carrying amount of the conveyor belt at December 31, 2014 was P140,000. Its original cost was P200,000. 4, MORENO was unsuccessful in its defense of the peanut allergy case and was ordered to pay 1,500,000 to the plaintiffs. As at December 31, 2015, MORENO had paid P800,000, “> “\* BETA OS amour 5. MORENO commenced litigation against one of tts advisers for negligent advice Wen on the ‘original installation of the conveyor belt referred to in (3) above. In October 2015, the court found in favor of MORENO. The hearing for damages had not been scheduled as at the date the financial statements for 2015 were authorized for issue. MORENO estimated that it would receive about P425,000. 6. MORENO signed an agreement with Chocnut Bank to the effect that MORENO would guarantee a loan made by Chocnut Bank to MORENO's subsidiary, Choc Choc Co. Choc Choc’s Toan with Chocrut Bank was P3,200,000 as at December 31, 2015. Choc Choc was in a strong financial position at December 31, 2015. Based on the above and the resuit of your audit, answer the following: 28, The provision for warranties as of December 31, 2015 is A. 580,000 B. 230,000 C. P480,000 @ 410,000 29. The provision for warranties to be reported as current liability as of ber 31, 2015 is A. 220,000 B. P150,000 , “400,000 D,; P330,000 30, Total provisions to be reported in the statement of financial position as of December 31, 2015 Ig POSEN ~YATAT As TO HOIFEV CT MMC A. P480,000 B. 440,000 Af. P4,180,000 D. 1,360,000 00000000-—----— PROBLEM NO. 7 The following data pertain to KUKURUKUKU CORPORATION’s property, plant, and equipment for 2015. Audited balances at December 31, 2014: DESIT CREDIT Land P 7,500,000 Buildings 30,000,000 ‘Accumulated depreciation - Buildings 6,577,500 Machinery and equipment 22,500,000 Accumulated depreciation ~ Machinery and equipment 6,250,000 Delivery equipment 5,750,000 Accumulated depreciation ~ Delivery equipment 4,230,000 Depreciation data: Depreciation Method Useful Life Buildings 150% declining-balance 25 years GT | Machinery and Equipment Straight-line 10 years Delivery Equipment Sum-of-the-years"-digits 4 years Leasehold Improvements Straight-line"CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PRESOARD EXAMINATION S SUNDA Transactions during 2015 and other information are as follows: a) On January 2, 2015, KUKURUKUKU purchased a new truck for P1,000,000 cash and trade-in of a 2-year-old truck with a cost of P900,000 and a book value of P270,000. The new truck has a cash price of P1,200,000; the market value of the trade-in is not known. b) On April 1, 2015, a machine purchased for P575,000 on April 1, 2010, was stolen. KUKURUKUKU recovered P387,500 from its insurance company. c) On May 1, 2015, costs of P8,400,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years, ‘The related lease terminates on December 31, 2021, d) On July 1, 2015, machinery and equipment were purchased at a total invoice cost of 7,000,000; additional costs of P125,000 for freight and P625,000 for installation were incurred. €) KUKURUKUKU determined that the delivery equipment comprising the P5,750,000 balance at January 1, 2015, would have been depreciated at a total amount of P900,000 for the year ended December 31, 2015. ‘The salvage values of the depreciable assets are immaterial. The policy of KUKURUKUKU is to compute depreciation to the nearest month. Based on the preceding information, compute the following: 31. Repreciation expense for 2015 on Buildings ‘AYP1,405,350 B. P929,700 c P1,200,000 D. P1,800,000 32. Depreciation expense for 2015 on Leasehold improvements A. P700,000 B, P1,050,000 (Cay P840,000 D. P933,333 33. Accumulated depreciatiog — Machinery and equipment, December 31, 2015 AL P8,644,375 B,} 8,556,875 C. P8,600,000 D. P8,844,375 34, Accumulated depreciation ~ Delivery equipment, December 31, 2015 A. 5,430,000 . P4,620,000 ‘c. Pa,710,000 690,000 ‘Allowance for doubtful accounts P 5,000 Inventory 547,200 Prepaid rent 360,000 Plant and equipment: 41,600,000 Accumulated depreciation — Plant and equipment 147,400 Accounts payable 113,700(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION 15, 2015/5 Bonds payable 900,000 Ordinary share capital 1,700,000 Retained earnings 971,800 Sales 2,148,000 Cost of goods sold 1,544,000 Freight-out 110,000 Salaries and wages expense 320,000 Interest expense 20,400 Rental income 216,000 Miscellaneous expense 8,900 Insurance expense ~ 410/500 6.201.900 —P6.201,900 Additional data: 4 36. 37, 38. 33, “The balance in the Insurance expense account contains the premium costs of three policies: Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2014) Policy 2, original cost of P72,000, 3-year term, taken out on October 1, 2015; Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2015. ‘On September 30, 2015, Alterado received P2:16,000 rent from its lessee for eighteen-month lease beginning on that date. ‘The regular rate of depreciation is 10% per year, Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2014, the balance of the Plant and equipment account was 2,400,000. (On December 28, 2015, the bookkeeper incorrectly credited Sales for a receipt on account in the amount of P100,000. At December 31, 2015, salaries and wages accrued but unpaid were 4,200,000, Alterado estimates that 1% of sales will become uncollectible. (On August 1, 2015, Alterado purchased, as a short-term investment, 600 P1,000, 7% bonds of Alendog Corp, at par, The bonds mature on August 1, 2016. Interest payment dates are July 31 and January 31. On April 30, 2015, Alterado rented a warehouse for P30,000 per month, paying P360,000 in advance, What are the adjusted balances of the following accounts on December 31, 2015? Prepaid insurance A » 6,000 104,500 8 0 110,500 CG . 54,000 56,500 a 66,000 44,500 ‘What Is the total depreciation expense for the year ended December 31, 2015? A. 120,000 240,000 te) 200,000 D. P160,000 What is the bad debt expense for the year ended December 31, 2015? A. P15,480 B. P25,480 C. P21,480 (@)p20,a80 What amount of interest and rent income should be reported in the income statement for the year ended December 31, 20157(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA, FIRST PREBOARD EXAMINATION BRUAR ty Interest income Rental income A 24,500 P 36,000 B 17,500 180,000 c. 24,500 180,000 @ 17,500 36,000 40. What adjusting entry is necessary on December 31, 2015 for the Prepaid rent account? ‘A Rent expense 270,000 Prepaid rent 270,000 B. Prepaid rent 270,000 Prepaid rent 270,000 C. Prepaid rent 240,000 240,000 240,000 240,000 PROBLEM NO. 9 On April 21, 2015, a fire damaged the office and warehouse of MUNTINLUPA COMPANY. The ‘onty accounting record saved was the general ledger, from which the trial balance below was prepared: Muntinlupa Company: Trial Balance March 32, 2015 Debit Credit Cash P 180,000 Accounts receivable 400,000 Inventory, December 31, 2014 750,000 Land 350,000 Building 4,100,000 Accumulated depreciation 413,000 Other assets 56,000 Accounts payable 237,000 Accrued expenses 180,000 Ordinary share capital, P100 par 1,000,000 Retained eamings 520,000 Sales 1,350,000 Purchases 520,000 Operating expenses 344,900 - Totals P2,200,000 23,700,000 The following data and information have been gathered: a, The company’s year-end is December 31. b. An examination of the April bank statement and cancelied checks revealed that checks ‘written during the period April 1 to 21 totaled 130,000: 57,000 paid to accounts payable ‘as of March 34; P34,000 for Apri merchandise purchases; and P39,000 paid for other expenses. Deposits during the same period amounted to P129,500, which consisted of Teceipts on aécount from customers with the exception of a P9,500 refund from a vendor for merchandise retumed in April. c. Correspondence with suppliers revealed unrecorded obligations at April 21 of P106,000 for April merchandise purchases, including P23,000 for shipments in transit on that date.(CPA REVIEW SCHOOL OF THE PHILIPPINES (PAR) - MANILA FIRST PREBOARD EXAMINATION 2015 8 d. Customers acknowledged indebtedness of P360,000 at April 21, 2015. It wasalso estimated that customers owed another P80,000 that will never be acknowledged or recovered. OF the acknowledged indebtedness, P6,000 will probably be uncollectible. @. The insurance company agreed that the fire loss claim should be based on the assumption that the overall gross profit ratio for the past two years was In effect during the current year. The company’s audited financial statements disclosed the following information: 2034 2013 Net sales 5,300,000 3,900,000 Net purchases 2,800,000 2,350,000 Beginning inventory 500,000 660,000 Ending inventory 750,000 500,000 f Inventory with a cost of P70,000 was salvaged and sold for P35,000. The balance of the Inventory was a total loss. ° - Based on the preceding information, determine the foliowing: 41, Sales for the period “an 1 to April 21, 2015 A. P1,430,000 B,}P1,510,000 Cc. P1,519,500 D. P1,506,000 42, Net purchases for the period January 1 to April 21, 2015 ‘A. P683,000 B. P660,000 * C. P673,500 C /P650,500 43. Cost of sales for the period January 1 to April 23,2015 ‘A. P786,500 8. P835,725 (Eps30500 D. P828,300 44. Estimated inventory on April 21, 2015 A. P579,500 8. 623,500 C. P587,775 ic (D,})P570,000 45. Estimated inventory fire toss it A. P579,500 B. P535,000 c. P477,000 D,/ P512,000 9000 00000--———-==="-~ PROBLEM NO. 10 ‘The following information was obtained from the statement of financial position of LION, INC.: Dec. 31,2015 Dec. 31, 2014 4 Cash 706,600 200,000 Notes receivable o ~ 50,000 Inventory ? 399,750 Accounts payable ? 150,000 All operating expenses are paid by Lion, Inc. with cash and all purchases of inventory are made con account. Lion, Inc. sells only one product. Al sales are cash sales which are made for P100 per-unit. Lion, Inc. purchases 1,500 units of inventory per month and values its inventory using periodic FIFO. The unit cost of inventory during January 2015 was P65.20 and increased PO.20 er month during the year. During 2015, payments to suppliers totaled P943,400 and operating expenses totaled P440,000. The ending inventory for 2014 was valued at P65.00 per unit. Based on the preceding information, determine the following: 46, Number of units sold dying 2015 A. 18,900 B.) 18,400 cc. 16,000 D. 21,400+ CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION. ‘AUDITING PROBLEMS 47. Total cost of purchases during 2015 a A. P1,173,600 B. P1,191,600 P1,213,200 © {.11,193,400 48. Accounts payable balance at December 31, 2015 A. P793,400 B. P393,400 {5 400,000 D. 419,800 49. Inventory quantity at December 31, 2015 A. 35,750 B. 6,550 _@ 5,250 D. 8,150 50. FIFO cost of inventory on December 31, 2015 AL P352,500 B. P439,230 (©. ,P388,900 D. P425,830 PROBLEM NO. 11 SAXOPHONE COMPANY acquires 2 new manufacturing equipment on January 1, 2014, on installment basis. The deferred payment contract provides for a down payment of P300,000 and an 8-year note for P3,104,160. The note is to be paid in 8 equal annual installment payments of 388,020, including 10% interest. The payments are to be made on December 31 of each year, beginning December 31, 2014. The equipment has @ cash price equivalent of P2,370,000. ‘Saxophone's financial year-end is December 31, A. 3,404,260 B. P2,804,160 2,370,000 D. P3,104,160 51. What is the acquisition cost of the coupe (- 52. The amount to be recognized on January 1, 2014, as discount on note payable is (034,160 B, P310,416 C. 827,160 D. PO 53, The amount of interest expense to be recognized in 2024 is o APO B. P188,898 CY P310,416 { p.jp207,000 54. The amount of int ense to be recognized in 2015 is A. P310,416 (8) P188,898 C. P207,000 D. PO 55. The carrying value of the note payable at December 31, 2015, is YP1,689,858 B. P1,888,980 . P1,312,062 D, P1,700,082 -=060000000-~-~--———-=-=--——~ - PROBLEM NO, 12 On January 1, TANYA CO, establishes a petty cash account and designates Orly Reyes as petty custodian, The original amount included in the petty cash fund Is P5,000. The following uursements are made from the fund: Office supplies P1,730 Postage 1120 Entertainment 420 ‘The balance in the petty cash box is P1,630. 156. The person responsible, at all times, for the amount of the petty cash fund is the FA. Chairman of the Board of Directors. | President of the company. i (C) Petty cash custodian. General cashier,(CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA FIRST PREBOARD EXAMINATION AUDITING PROBLEMS. EEBRUARY 15, 2015 / SUNDAY / 8:00AM — 11:00AM 57. _-The foilowing are appropriate procedures for controlling the petty cash fund, except (a "Fo monitor variations in different types of expenditures, the petty cash custodian files petty cash vouchers by category of expenditure after replenishing the fund. B. To replenish the fund, the general cashier issues 2 company check to the petty cash custodian, rather than cash, C. To determine that the fund is being accounted for satisfactorily, surprise counts of the fund are made from time to time by the internal auditor or other responsible official. D. Each Individual to whom petty cash is paid is required to present signed receipts to the petty cash custodian. 58. .The entry to replenish the fund is A. Office supplies expense 1,730 Postage expense 1,120 Entertainment expense 420 Cash 3,270 (2:1 Office supplies expense 1,730 Postage expense 41,120 Entertainment expense 420 Cash over and short 100 Cash 3,370 C. Office supplies expense 1,730 Postage expense 1,120 Entertainment expense 420 ‘Cash over and short 100 Petty cash 3,370 D. Office supplies expense 1,730 Postage expense 1,120 Entertainment expense 420 Petty cash 3,270 59. The objective of establishing a petty cash fund is to ‘A. Cash checks for employees. B. Account for all cash receipts and disbursements. ,, Account for cash sales. Facilitate payment of small, miscellaneous items. 60. What is the effect of not replenishing the petty cash at year-end and not making the appropriate adjusting entry? | A Adetailed audit is essential. | Os petty cash custodian should turn over the petty cash to the general cashier. ‘Cash will be overstated and expenses understated. . Expenses will be overstated and cash will be understated. —- END OF EXAMINATION —