AUDIT PROBS-2nd MONTHLY ASSESSMENT

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ACCOUNTANCY DEPARTMENT

Name:___________________________ Score:___ _

AVOID CHEATING. It is better to fail than to fool yourself. Answer the best way you can. You will reap the rewards for that.
BE STICK TO ONE. It would be better if you choose the answer by avoiding erasures.
LEARN TO LET GO. Do not dwell too much time in one item. Move to the next and go back for it later.

1-5 On January 1, 2017, Tagbilaran Co. issued its 10%, 5-year, P3,000,000 convertible
bonds for the face amount of P3,000,000. The bonds are convertible into P400 par ordinary
shares at a conversion price of P500 per share. The prevailing rate of interest of the bonds
without the conversion option is 12%. Interest is payable every December 31.

On December 31, 2018, after payment of interest, ½ of the bonds were retired at
P1,600,000 when the fair value of the securities is P500. The prevailing rate of interest of
the bonds is 9%.

On January 1, 2019, to induce the holder to convert the convertible debenture promptly,
Tagbilaran reduces the conversion price to P400 if the debenture is converted before March
1, 2019 (i.e. within 60 days). All the bond holders accepted the offer on January 1, 2019. On
the date of conversion, the fair value of the Tagbilaran Co.'s ordinary share is P420 per
share.
1. The amount allocated to equity component on January 1, 2017.
a. Nil c. 360,600
b. 216,287 d. 227,447
2. The loss on the retirement of the bonds on December 31, 2018.
a. Nil c. 162,031
b. 110,024 d. 272,055
3. The net increase (or decrease) in equity as a result of the retirement of the bonds on
December 31, 2018.
a. Nil c. 62,031 decrease
b. 110,024 increase d. 72,055 decrease
4. The interest expense in 2018
a. 159,510 c. 319,019
b. 169,066 d. 338,131
5. The amount to be recognized in profit or loss as a result of the amendment of the terms
on January 1, 2019.
a. Nil c. 315,000
b. 500,000 d. 2,100,000

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

6-11 In connection with your audit of Tanders Corporation's post-retirement benefits


related accounts, the accountant of Tanders Corp. provided you the following information
for the year ended December 31:
Present value of benefit obligation, January 1 P7,500,000
Fair value of plan asset, January 1 7,000,000
Contributions during the year 1,200,000
Current service cost 1,400,000
Actual return on plan asset 840,000
Benefits paid to retirees at scheduled retirement 1,500,000
Decrease in the present value of benefit obligation
due to changes in actuarial assumptions 200,000
Present value of additional defined benefit obligations settled 500,000
Settlement price of the additional defined benefit obligation 400,000
Discount Rate 10%
6. What is the total amount of employee benefit cost (pension cost)?
a. 1,350,000 b. 1,450,000 c. 1,690,000 d. 1,010,000
7. What amount of employee benefit cost should be reported in the profit or loss?
a. 1,350,000 b. 1,450,000 c. 1,690,000 d. 1,010,000
8. What is the net remeasurement gain or loss to be reported in the other comprehensive
income or loss?
a. 100,000 b. 150,000 c. 200,000 d. 340,000
9. What is the fair value of the plan asset as of December 31?
a. 7,000,000 b. 7,140,000 c. 7,540,000 d. 8,200,000
10. What is the present value of the benefit obligation as of December 31?
a. 7,450,000 b. 7,050,000 c. 7,950,000 d. 9,650,000
11. What is the balance of prepaid or accrued pension as of December 31?
a. Prepaid pension 310,000 c. Prepaid pension 650,000
b. Accrued pension 310,000 d. Accrued pension 650,000
12-15 On January 1, 2018, Campos Co. has the following data relating to its defined benefit
plan:
Fair value of plan assets 3,0O0,000
Defined benefit obligation 2,600,000
Surplus 400,000
During the year 2018, Campos Co. recognized the following:
Past service cost 200,000
Current service cost 250,000
Benefits paid during the period 150,000

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

Actual Return on plan assets 340,000

Contributions to the fund 600,000


DBO
Actuarial loss due to increase in DBO 80,000
Discount Rate 10%
The present values of economic benefits available in the form of refunds from the plan are
P300,000 and P350,000 on January 1, 2018 and December 31, 2018, respectively.
12. How much is the fair value of plan assets as of December 31, 2018?
a.3,450,000 b. 3,750,000 c. 3,790,000 d.3,940,000
13. How much is the defined benefit obligation as of December 31, 2018?
a. 2,880,000 b. 3,090,000 c. 3,240,000 d. 3,390,000
14. How much is the defined benefit cost to be recognized in the profit or loss in 2018?
a. 420,000 b. 460,000 c. 550,000 d. 720,000
15. How much is the defined benefit cost to be recognized in the other comprehensive
income in 2018?
a. Nil b. 40,000 c. 130,000 d. 550,000
16-18 On December 31, 2015, Dagupan Co. leased an equipment with a cost of P4,000,000
to Josiah Co. for 5 years which is also the useful life of the asset. The lease agreement
specifies equal annual payment of P959,256 beginning on December 31, 2015. On the same
date, Dagupan Co. paid P66,956 incremental costs that are directly attributable to
negotiating and arranging a lease

At the end of the lease term, the equipment will revert to Dagupan Co.

The rate implicit on the lease is 10% but after considering the initial direct cost the implicit
rate is adjusted at 9%.

16. How much is the total interest income to be earned over the lease term?

a. 729,324
b. 796,278
c. 1,208,975
d. 1,275,931

17. How much is the interest income in 2016?


a. 304,074
b. 400,000
c. 238,556
d. 279,693

18. How much is the leased-related asset to be shown as current in the statement of
financial position on December 31,2015?
a. 3,040,744
b. 655,181
c. 2,385,563
d. 679,563

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

19. On January 1, 2015, TimDuncan Co., a lessor, sold equipment that it had been leasing
under direct financing lease. On the same date, data relating to sale and lease follow:
Sales Price P300,000
Gross Lease Receivable 150,000
Unearned Interest Income 30,000
Implicit Rate 10%

How much is the gain (or loss) on sale of the leased asset on January 1, 2015?
a. Nil
b. 150,000
c. 180,000
d. 210,000

20-24 On December 31, 2020, Sariaya Corp. leased a machine with an economic life of 8
years from Banahaw Corp. with the following terms:

 Lease term, 5 years. Sariaya has an option to extend for additional 3 years that it does
not intend to exercise.

 Equal annual payments, P525,000 (including P25,000 reimbursement to lessor for


annual executory costs) due on December 31 of each year.

 The first payment was made on December 31, 2020 and the second payment was made
on December 31, 2021.

 Sariaya's incremental borrowing rate, 10%. Residual value at the end of the lease term
guaranteed by a third party, P200,000.

 Initial direct costs paid by Sariaya, P120,000.

 Sariaya depreciates its owned assets using straight-line method.

Based on the given information and the result of your audit, determine the following:
(Round off present value factors to four decimal places.)

20. Cost of right-of-use asset

a. 2,084,950
b. 2,204,950
c. 2,309,198
d. 2,329,130

21. Annual depreciation of the right-of-use asset


a. 275,619
b. 416,990
c. 440,990
d. 465,826

22. Interest expense for 2021


a. 158,495
b. 170,913
c. 208,495
d. 220,913

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

23. Current portion of the lease liability at December 31, 2021 applying View A' (preferred
view) in PIC Q&A 2019-11
a. 375,655
b. 394,438
c. 454,545
d. 500,000

24. Current portion of the lease liability at December 31, 2021 applying View B' (other view)
in PIC Q&A 2019-11
a. 375,655
b. 394,438
c. 454,545
d. 500,000

25-29 In connection with your audit Nakar Enterprises, you noted that the company has a
long-standing policy of acquiring company equipment by leasing. In 2021, the company
entered into a lease for a new machine. The lease stipulates that annual payments will be
made for 5 years. The payments are to be made in advance on December 31 of each year. At
the end of the 5-year period, Nakar may purchase the machine. The estimated economic life
of the equipment is years. Nakar uses the calendar year for reporting purposes and straight-
line depreciation for other equipment. In addition, the following information about the lease
is also available:
Annual lease payments
(including executory costs of P5,000) P60,000
Purchase option price 25,000
Estimated fair value of machine after 5 years 75,000
Implicit Rate 10%
Date of first lease payment Jan. 1, 2021

Based on the foregoing and the result of your audit, compute for the following: (Round off
present value factors to four decimal places.)

25. Cost of right-of-use asset


a. 224,017
b. 229,345
c. 244,868
d. 275,913

26. Lease liability as of December 31, 2021


a. 130,919
b. 136,780
c. 153,855
d. 189,868

27. Current portion of the lease liability at December 31, 2021


a. 36,013
b. 39,614
c. 41,322
d. 41,908

28. Interest expense for the year 2021


a. 0
b. 16,902
c. 17,435
d. 18,987

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

29. Depreciation expense for the year 2021


a. 18,668
b. 19,112
c. 20,406
d. 48,974

30-33 The following differences enter into the reconciliation of accounting profit and taxable
profit of Mulanay Company for the year ended December 31, 2021, its first year of
operations.

Life insurance expense 100,000


Excess tax depreciation 2,000,000
Warranty expense 200,000
Litigation accrual 500,000
Unamortized computer software 3,000,000
Unearned rent income deferred on the books but
appropriately recognized in taxable profit 400,000
Interest income from long-term certificate of deposit 200,000

Additional Information:
a. On July 1, 2021 Mulanay paid insurance premium of P200,000 or the life of an officer with
Mulanay Company as beneficiary.

b. Excess tax depreciation will reverse equally over a four-year period, 2022-2025.

c. The warranty liability is the estimated warranty cost that was recognized as expense in
2021 but deductible for tax purposes when actually paid.

d. It is estimated that the litigation liability will be paid in 2025.

e. In January 2021, Mulanay Company incurred P4,000,000 of computer software cost.


Considering the technical feasibility of the project, this cost was capitalized and amorized
over 4 years for accounting purposes. However, the total anount was expensed in 2021 for
tax purposes.

f. Rent income will be recognized during the last year of the lease, year to 2025.

g. Interest income from the from long-tern certificate of deposit (LTCD) is expected to be
P200,000 each year until their maturity at the end of 2025. Interest income from LTCD is tax
exempt.

h. Accounting profit for 2021 is P10,000,000. Ta rate is 35%.

Based on the given information and the result of your audit, compute for the following:
30. Deferred tax liability
a. 1,050,000
b. 1,750,000
c. 1,890,000
d. 2,100,000

31. Deferred tax asset


a. 210,000
b. 245,000
c. 385,000
d. 1,085,000
“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;
IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment
ACCOUNTANCY DEPARTMENT

32. Current tax expense


a. 1,750,000
b. 1,820,000
c. 2,100,000
d. 2,800,000

33. Total tax expense


a. 3,465,000
b. 3,500,000
c. 3,535,000
d. 4,830,000

34-35. On January 1, 2017, Easy Company acquired an equipment for P8,000,000. The
equipment is depreciated using straight- line method based on a useful life of 8 years with
no residual value.

On January 1, 2020, after 3 years, the equipment was revalued at a replacement cost of
P12,000,000 with no change in the useful life.

The pretax accounting income before depreciation for 2020 is P10,000,000. The income tax
rate is 30% and there are no other temporary differences at the beginning of the year.

34. What is the revaluation surplus on January 1, 2020?


A. 2,500,000
B. 1,750,000
C. 4,900,000
D. 2,600,000

35. What is the current tax expense for 2020?


A. 2,700,000
B. 3,450,000
C. 3,000,000
D. 2,972,000

“SUCCESS IS NOT FINAL; FAILURE IS NOT FATAL;


IT IS THE COURAGE TO CONTINUE THAT COUNTS.”
- WINSTON S. CHURCHILL
AUDIT PROBLEMS – 2nd Monthly Assessment

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