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Auditing Problem Test Bank 1 ANS

BS Accountancy (Lyceum of the Philippines University)

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SOLUTION - AUDITING PROBLEMS TEST BANK 1

PROBLEM 1 – TANYING CORP.

1. B Sales (P1,353,000 + P10,500 Freight) P1,363,500

Sales returns and allowances (11,700)
Sales discounts (2,640)
Net sales P1,349,160

2. C Inventory, Jan. 1 P269,100

Purchases P424,800
Purchase returns and allowances (P424,800 x 6%) (25,488)
Freight in (P16,575 + P1,710) 18,285 417,597
Cost of goods available for sale P686,697

3. D Inventory, Dec. 31, 2017

Per books P 61,650
Goods out on consignment 55,800
Per audit P117,450

4. C Distribution costs:
Sales salaries and commissions (P75,000 + [P9,180 x 3%]) P75,275
Advertising expense (P48,270 + [P5,454 x 2/6]) 50,088
Depreciation expense – Sales/delivery equipment (P18,300 + [P23,400 x 10% x 10/12]) 20,250
Freight expense 10,500
Travel expense – sales representatives 13,680
Miscellaneous selling expenses 8,220
Total P178,013

5. B Administrative expenses:
Legal services P 6,675
Insurance and licenses 23,040
Depreciation expense – office equipment 12,600
Utilities 19,200
Telephone and postage 4,425
Office supplies expense (P6,540 – P3,675) 2,865
Officers’ salaries 109,800
Doubtful accounts expense (P783,000 x 2% = P15,660 – P480) 15,180
Total P193,785

6. A Allowance for doubtful accounts (P783,000 x 2%) P15,660

7. D Net sales P1,349,160

Cost of goods sold (P686,697 – P117,450) (569,247)
Gross income 779,913
Interest revenue (P1,650 + P1,680) 3,330
Dividend revenue 15,450
Gain on sale of assets 23,460
Total income P822,153

8. C Total income P822,153

Distribution costs (178,013)
Administrative expenses (193,785)
Interest expense
(13,560)
Loss on sale of equipment (217,800)
Income from continuing operations before tax P218,995

9. B Office supplies inventory P3,675

10. A Income before tax P218,995

Income tax (P218,995 x 30) (65,669)
Income from continuing operations 153,296
Income from discontinued operations, net of tax (P120,000 x 70%) 84,000
Net income P237,296

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PROBLEM 2 – BUNCHING COMPANY

Accounts Accounts
Cash Receivable Inventory Payable
Per books P963,200 P2,254,000 P6,050,000 P4,201,000
AJE 1 (654,600) 310,000 --- ---
2 360,000 --- --- 372,400
3 a --- --- --- (175,000)
b --- --- 130,000 ---
c --- --- (637,500) ---
d --- --- 217,500 217,500
e --- --- 275,000 ---
Per audit P668,600 P2,564,000 P6,035,000 P4,615,900

(11 – C) (12 – B) (13 – A) (14 – B)

AJES
1. Sales 360,100
Accounts receivable (P294,500 / 95%) 310,000
Sales discounts (P310,000 x 5%) 15,500
Cash 654,600
2. Cash (P372,400 – P12,400) 360,000
Purchase discounts 12,400
Accounts payable 372,400
3. a Accounts payable 175,000
Purchases 175,000
b Inventory 130,000
Cost of sales 130,000
c Cost of sales 637,500
Inventory 637,500
d Purchases 217,500
Accounts payable 217,500
Inventory 217,500
Cost of sales 217,500
e Inventory 275,000
Cost of sales 275,000
f No adjusting entry

15. C Current ratio:

Current assets:
Cash P 668,600
Accounts receivable 2,564,000
Inventory 6,035,000 P9,267,600
Current liabilities:
Accounts payable P4,615,900
Accrued expenses 431,000 5,046,900
1.84

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PROBLEM 3 – PAKO COMPANY

16. D Balance, Jan. 1 P1,800,000

June 30 acquisition (P1,080,000 + P48,000) 1,128,000
Sept. 30 sale (150,000)
Dec. 1 trade in: old machine (90,000)
new machine 270,000
Balance, Dec. 31 P2,958,000

17. A Remainder of beginning balance (P1,800,000 – P150,000 – P90,000 =

P1,560,000 x 10%) P156,000
June 30 acquisition (P1,128,000 x 10% x 6/12) 56,400
Sept. 30 sale (P150,000 x 10% x 9/12) 11,250
Dec. 1 trade in: old machine (P90,000 x 10% x 11/12) 8,250
new machine (P270,000 x 10% x 1/12) 2,250
Depreciation expense for 2015 P234,150

GENLUNA COPPERMINES, INC.

18. C Depletion rate per ton (P14,580,000 / 1,620,000) 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

19. D Depreciable cost of machinery (P1,800,000 x 90%) P1,620,000

Estimated copper ore reserve 1,620,000
Depreciation rate per ton P1
Copper ore mined in 2017 90,000
Depreciation expense for 2017 P 90,000
Depreciation per books 120,000
Overstatement of depreciation expense P 30,000

20. D January 1, 2014

Total cost of machine (P300,000 + P3,000 + P12,000) P315,000
Residual value (12,000)
Depreciable cost P303,000
Estimated useful life 10 years
Annual depreciation P30,300
Depreciable cost P303,000
Depreciation, 2016 – 2014 (P30,300 x 3 years) (90,000)
Remaining depreciable cost, Jan. 1, 2017 P212,100
Cost of new parts 37,800
Total P249,900
Remaining useful life (10 years – 3 years) 7 years
Revised annual depreciation P35,700

PROBLEM 4 – HARLINGTON COMPANY

21. A Net income before trading security adjustment P2,700,000

Unrealized loss (P3,465,000 cost – P3,195,000 market value) (270,000)
Net income, as adjusted P2,430,000

22. B Net income before trading security adjustment P2,700,000

Unrealized gain (P3,465,000 cost – P3,564,000 market value) 99,000
Net income, as adjusted P2,799,000

LABADA CO.

23. D Carrying Value Market Value

Ganda Co. P1,710,000 P1,759,500
Waston, Inc. (P135 x 1,800) 243,000 229,500
P1,953,000 P1,989,000

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Unrealized gain (P1,989,000 – P1,953,000) P36,000

24. C Net proceeds (P93 x 15,000 = P1,395,000 – P13,500) P1,381,500
Carrying value (1,251,000)
Gain on sale P 130,500
25. B Trading securities at fair value P1,989,000
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PROBLEM 5 – SAMSON MFG. CO.

26. C Actual borrowing cost:

Specific borrowing (P5 million x 10%) P500,000
General borrowings:
P25 million x 8% P2,000,000
P15 million x 6% 900,000 2,900,000
Total P3,400,000
Capitalization rate (P2,900,000/P40 million) 7.25%
Average expenditures – 2016 P7,250,000
Capitalizable interest – 2016:
Specific borrowing (P5 million x 10%) P500,000
General borrowings (P7,250,000 – P5,000,000 = P2,250,000 x 7.25%) 163,125
Total P663,125

27. B Average expenditures – 2017 P16,163,125

Capitalizable interest – 2017:
Specific borrowing (P5 million 10% x 6/12) P250,000
General borrowings (P16,163,125 – P5,000,000 = P11,163,125 x 7.25% x 6/12) 404,663
Total P654,663

28. A 2014 interest expense (P3,400,000 – P663,125) P2,736,875

29. D 2015 interest expense (P3,400,000 – P654,663) P2,745,337

30. B Accumulated expenditures before interest P19,500,000

Interest capitalized in 2016 and 2017 (P663,125 + P654,663) 1,317,788
Total cost of building P20,817,788

PROBLEM 6
Compensation Cumulative
Expense Compensation
Year Calculation for Period Expense
1 30,000 options x P5 fair value x P 50,000 P 50,000

2 30,000 options x P5 fair value x 50,000 100,000

3 30,000 options x P5 fair value x 50,000 150,000

31. C 32. C 33. D 34. D 35. D

PROBLEM 7 – BRANDY CO.

36. C Ordinary shares issued and outstanding 72,000

Ordinary shares subscribed 72,000
Total 144,000
Ordinary shares issued to acquire land (24,000)
Ordinary shares originally subscribed 120,000
Par value/share x P10
Total par value P1,200,000
Share premium (P2,850,000 – P450,000) 2,400,000
Total subscription price P3,600,000
* P690,000 FV of land – P240,000 PV

37. D Subscription of 12,000 preference shares @ P120/share P1,440,000

Subscription of 60,000 preference shares @ P100/share 6,000,000
Total 7,440,000
Year-end balance of subscriptions receivable – preference (360,000)
Amount collected from subscribers P7,080,000

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38. B Preference Ordinary

Issued P6,600,000 P 720,000
Subscribed 600,000 720,000
Share premium 240,000 2,850,000
Subscriptions receivable (360,000) (1,080,000)
Contributed capital P7,080,000 P3,210,000

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CONDESSA CO.

1. Dividends payable – preference (P8 x 60,000) 480,000

Dividends payable – ordinary (P2 x 600,000) 1,200,000
Cash 1,680,000

2. Treasury shares 3,240,000

Cash (P40 x 81,000) 3,240,000

3. Land 900,000
Treasury shares (P40 x 21,000) 840,000
Share premium – treasury 60,000

4. Cash (P105 x 15,000) 1,575,000

Preference share capital (P100 x 15,000) 1,500,000
Share premium – preference 75,000

5. Retained earnings (P45 x 54,000*) 2,430,000

Stock dividends payable (P5 x 54,000) 270,000
Share premium – ordinary 2,160,000
* 600,000 – 60,000 treasury shares = 540,000 x 10%

6. Stock dividends payable 270,000

Ordinary share capital 270,000

7. Retained earnings 1,788,000

Dividends payable – preference (P8 x 75,000) 600,000
Dividends payable – ordinary (P2 x 594,000*) 1,188,000
* 540,000 + 54,000

8. Income summary 9,900,000

Retained earnings 9,900,000

Preference share capital (P6,000,000 + P1,500,000) P7,500,000

Ordinary share capital (P3,000,000 + P270,000) 3,270,000
Share premium (P3,750,000 + P60,000 + P75,000 + P2,160,000) 6,045,000
Retained earnings (P3,500,000 – P2,430,000 – P1,788,000 + P9,900,000) (39 – A) 9,182,000
Treasury shares (P3,240,000 – P840,000) (2,400,000)
Total (40 – B) P23,597,000

PROBLEM 8 – CABOOM LABORATORIES

41. D Cost to obtain patent (January 2010) P186,150

2010 amortization (P186,150/17) (10,950)
Carrying value, Dec. 31, 2010 P175,200

42. C Carrying value, Jan. 1, 2011 P175,200

Amortization, 2011-2014 (P10,950 x 4 years) (43,800)
Carrying value, Dec. 31, 2014 P131,400

43. C Carrying value, Jan. 1, 2015 P131,400

Amortization, 2015-2017 (P131,400 x 3/5) (78,840)
Carrying value, Dec. 31, 2017 P 52,560

BARTOLO COMPANY

44. A Cost of patent purchased on Jan. 1, 2016 P4,000,000

2016 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2016 3,600,000
2017 amortization (P3,600,000/5) (720,000) P2,880,000
Cost of franchise P960,000
2017 amortization (P960,000/10) (96,000) 864,000

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Total carrying value of intangibles P3,744,000

45. B Amortization of patent – 2017 P720,000

Amortization of franchise – 2017 96,000
Payment to Delco (P5,000,000 x 5%) 250,000
Research and development costs 866,000
Total charges against 2017 income P1,932,000

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PROBLEM NO. 9 – SAMOA COMPANY/CHILE CO.

46. A Over- (Under-)statement

Understatement of 2016 ending inventory P 48,000
Overstatement of 2017 ending inventory 40,500
Prepaid insurance charged to expense in 2016 (P330,000 ÷ 3) 110,000
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect of errors on net income P123,500
47. D Over- (Under-)statement
Overstatement of 2017 ending inventory P 40,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on working capital (P144,500)
48. C Over- (Under-)statement
Overstatement of 2017 ending inventory P 40,500
Understatement of depreciation expense in 2016 11,500
Prepaid insurance charged to expense in 2016 (110,000)
Unrecorded sale of fully depreciated machinery in 2017 (75,000)
Total effect on retained earnings (P133,000)
2016 2017
Pretax income P505,000 P387,000
Sales revenue erroneously recognized in 2016 (191,000) 191,000
Understatement of 2016 ending inventory 43,200 (43,200)
Understatement of bond interest expense (1) (7,250) (7,758)
Ordinary repairs erroneously capitalized (42,500) (47,000)
Overstatement of depreciation (2) 4,250 8,950
Corrected pretax income P311,700 P488,992
(1)
Book Value Nominal Effective Discount
Year of Bonds Interest Interest Amortization
2016 P1,175,000 P75,000 P82,250 P7,250
2017 1,182,250 75,000 82,758 7,758
(2)

2016 (P42,500 ÷ 10) P4,250

2017 (P42,500 ÷ 10) P4,250
(P47,000 ÷ 10) 4,700 P8,950

49. C 50. D

PROBLEM NO. 10 – OMEGA COMPANY/DP, INC.

51. C Containers held by customers at Dec. 31, 2016 from deliveries in 2015 P85,000
Containers returned in 2017 from deliveries in 2015 (57,500)
Revenue from container sales P27,500

52. A Liability for returnable containers, Dec. 31, 2016 P325,000

Deliveries in 2017 430,000
Total 755,000
2017 container returns P354,500
2017 container sales 27,500 (382,000)
Liability for returnable containers P373,000

53. C Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 2/3) P145,800

54. D Parts P18,000

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Labor 36,000
Total warranty expense P54,000

55. B Unearned warranty revenue:

Current (P810 x 270 x 1/3) P72,900
Non-current (P810 x 270 x 1/3) P72,900

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PROBLEM 11 – TGR Company

56. D Trade-in – June 30, 2015

Cost P157,200
Accum. depreciation, 1/1/13 – 6/30/15 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50,400
Sale – Jan. 1, 2016
Cost P132,000
Accum. depreciation, 1/1/13 – 1/1/16 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2017
Cost P120,000
Accum. depreciation, 1/1/13 – 10/1/17 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

57. C Machine acquired on Sept. 30, 2013 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2014 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2016 (list price) 279,000
Total P700,200

58. C Machine acquired on:

Sept. 30, 2013 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2014 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2015 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2017 P462,240

59. B
Date of
Acquisition Cost 2013 2014 2015 2016 2017 Total
1/1/2013 P157,200 P31,440 P31,440 P15,720 P0 P0 P 78,600
120,000 24,000 24,000 24,000 24,000 18,000 114,000
132,000 26,400 26,400 26,400 0 0 79,200
9/30/2013 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/2014 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/2015 279,000 0 0 27,900 55,800 55,800 139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040 P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233 597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)

60. A Depreciation expense (2017) 75,807

Retained earnings (2013 – 2016) 61,215
Accumulated depreciation 137,022

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