AUDIT PROBS-2nd MONTHLY ASSESSMENT
AUDIT PROBS-2nd MONTHLY ASSESSMENT
AUDIT PROBS-2nd MONTHLY ASSESSMENT
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
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
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
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.
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.
Based on the given information and the result of your audit, determine the following:
(Round off present value factors to four decimal places.)
a. 2,084,950
b. 2,204,950
c. 2,309,198
d. 2,329,130
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.)
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.
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.
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.
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
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.