Accountancy Department College of Business and Accountancy Notre Dame University Cotabato City, Philippines CPA – MOCK BOARD EXAMINATION AUDITING PROBLEMS MR RONALD GERMO MAMARIL INSTRUCTION: Select the correct answer for each of the following questions Mark only one answer for each item by shading the box corresponding to the letter of your choice on the sheet provided STRICLY NO ERASURES ALLOWED Use pencil no only CASE 1: STOCK INVESTMENT IN SAN MIGUEL The Stock Investment showed the following details during year 2008 STOCK INVESTMENT IN SAN MIGUEL Jan Feb Mar Apr June 1 28 31 30 Audited balance 4,000shares Cash dividend Bought shares Sale of rights Sale of shares Debit P80,000 9,000 10,000 Credit 2,000 6,000 A cash dividend of P0.50 per share were received on Feb 28 The adjusting entry (assuming the use of the cost method) is: a Stock Investment Dividend income b Retained earnings Dividend income c Dividend Income Stock investment d Cash Dividend income 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share Market values on this date were: shares, P20; rights, P5 The adjusting entry to recognize the cost allocated to the rights is: a Stock rights Stock investment b Stock rights Stock investment c Stock rights Stock investment d Stock rights Stock investment 16,000 16,000 20,000 20,000 10,000 10,000 30,000 30,000 On March 31, 600 shares were purchased with the partial exercise of these rights The adjusting entry, after the adjustment in No above has been given effect, is a Stock investment Stock rights b Stock investment Stock rights c Stock rights Stock investment d Stock rights Stock investment 18,000 18,000 12,000 12,000 12,000 12,000 15,000 15,000 On April 1, the remaining rights were sold for P6, 000 The adjusting entry is: a Stock investment Gain on sale of rights b Stock investment Stock rights Gain on sale of rights c Stock investment Loss on sale of rights Stock rights d Stock investment Gain on sale of rights 6,000 6,000 6,000 4,000 2,000 4,000 2,000 6,000 4,000 4,000 On June 30, 460 shares were sold for P10, 000 Using the average cost method, the adjusting entry is: a Cash Stock investment Gain on sale of stock b Stock investment Gain on sale of stock c Stock investment Gain on sale of stock d None of the above 10,000 7,500 2,500 10,000 10,000 2,500 2,500 CASE 2: HOME OFFICE AND ESPERANZA BRANCH The following were found in your examination of the interplant accounts between the Home Office and Esperanza Branch a Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the branch b P10,000 covering marketing expenses of another branch was charged by Home Office to Esperanza c Esperanza recorded a debit note on inventory transfers from Home Office of P75,000 twice d Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from Upi Branch e Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500 Home Office debited that this charge is appropriately Upi Branch’s cost f Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650 The net adjustment in the Home Office books related to the Esperanza Branch current amount is: a b c d P75,700 65,700 86,200 94,820 The net adjustment in Esperanza’s books related to the Home Office account is: a b c d P33,335 31,450 20,950 10,450 Before the above discrepancies were given effect, the balance in the Home Office books of its Esperanza Branch Current account was debit balance of P165, 920 The unadjusted balance in the Esperanza Branch books of its Home Office Current account must be: a P92,336 b 98,230 c 104,500 d 111,170 page The adjusted balance of the reciprocal account is: a b c d P84, 90, 99, 109, 807 220 200 120 CASE 3: LEILA MAE’S FLOWER SHOP (ACCRUAL) The following information pertains to Leila Ma’s Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year Leila Ma’s Flower Shop TRIAL BALANCE December 31, 2008 Debit Cash P 102, 400 Accounts receivable 64, 800 Inventory, 12/31/2007 248, 000 Furniture & fixtures 472, 800 Land improvements 180, 000 Accumulated depreciation, 12/31/2007 Accounts payable, 12/31/2007 Leila Mae’s, Drawings Leila Mae’s, Capital, 12/31/2007 Sales Purchases 1, 220, 400 Salaries 696, 000 Payroll taxes 49, 600 Insurance 34, 800 Rent 136, 800 Utilities 50, 400 Living expenses 52, 000 P3, 308, 000 Credit P129, 600 68, 000 498, 400 2, 612, 000 P3, 309, 000 Leila Mae’s has developed plans to extend into wholesale flower market and is in the process of negotiating a bank loan to finance the expansion The bank is requesting 2008 financial statements prepared on the accrual basis of accounting from Leila Mae’s During the course of a review engagement, Marion, Leila Mae’s accountant, obtained the following additional information Amounts due from customers totaled P128, 000 at December 31, 2008 An analysis of the above receivables revealed that an allowance for uncollectible accounts of P15, 200 should be provided Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at December 31, 2008, and December 31, 2007, respectively The inventory totaled P291, 200 based on a physical count of the goods at December 31, 2008 The inventory was priced at cost, which approximates market value On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive insurance coverage for year The premium on the previous policy, which expired on April 30, 2008, was P31, 200 On January 2, 2008, Leila Mae entered into 25-year operating lease for the vacant lot adjacent to Baron’s retail store for use as a parking lot As agreed in the lease, Leila Mae paved and fenced in the lot at a cost P180, 000 The improvements were completed on April 1, 2008, and have an estimated useful life of 15 years No provision for depreciation or amortization has been recorded Depreciation on furniture and fixtures was P48, 000 for 2008 Accrued expenses at December 31, 2007 and 2008, were as follows: Utilities Payroll taxes P3, 4, P8, 0 600 400 000 0 P 6, 000 6, 400 P12, 400 page Leila Mae is being sued for P16, 000 The coverage under the comprehensive insurance policy is limited to P1, 000, 000 Leila Mae’s attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000 The salaries account includes P16, 000 per month paid to the proprietor Leila Mae also receives P1, 000 per week for living expenses Required: You are to convert the balances of the nine (9) accounts below to the accrual basis MULTIPLE CHOICE QUESTIONS: a 10 11 12 13 14 15 16 17 18 Accounts receivableP64, Inventory 291, Accounts payable 54, Sales 2, 612, Purchases 1, 274, Salaries 888, Payroll taxes 51, Insurance 34, Utilities 50, b c d 800 P63, 200 P128, 000 P192, 800 200 248, 000 43, 200 334, 400 000 68, 000 122, 000 176, 000 000 2, 548, 800 2, 500, 000 2, 675, 200 400 1, 220, 400 1, 166, 400 1, 250, 000 000 696, 000 600, 000 504, 000 600 47, 600 49, 600 50, 000 800 33, 600 36, 000 35, 000 400 48, 000 50, 000 52, 800 CASE 4: J& M CO (BONDS) The J & M Co sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus accrued interest The bonds were dated July 1, 2001; interest payable semiannually on January and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows  Until June 30, 2006, at the rate of shares for each P1, 000 bond  From July 1, 2006 to June 30, 2009, at the rate of shares for each P1, 000 bond  After June 30, 2009, at the rate of shares for each P1, 000 bond The bonds mature 10 years from their issue date The company adjusts its books monthly and closes its books as of December 31 each year The following transactions occur in connection with the bonds: 2007 July P2, 000, 000 of bonds were converted into stock 2008 Dec 31 P1, 000, 000 face value of bonds were reacquired at 99-1/4 plus accrued interest These were immediately retired 2009 July The remaining bonds were called for redemption and accrued interest was paid For purposes of obtaining funds for redemption and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97 These bonds are dated July 1, 2009, and are due in 20 years 19 What are the carrying value of bonds payable at December 31, 2001? a P5, 747, 280 b P6, 000, 000 c P5, 753, 760 d P5, 749, 440 20 What is the total interest expense for 2001? a P128, 520 b P 47, 160 c P141, 480 d P135, 000 21 In recording the bond conversion on July 1, 200, how much should be credited to the additional paid-in capital account? a P1, 796, 320 b P1, 965, 440 c P1, 845, 440 d P1, 865, 440 page 22 What is the gain or loss on bond conversion on July 1, 2007? a P0 c P1, 865, 440 b P1, 796, 320 d P 34, 560 23 What is the carrying value of the bonds reacquired on December 31, 2008? a P989, 200 b P957, 880 c P1, 010, 800 d P 981, 700 24 What is the gain (loss) on bond reacquisition on December 31, 2008? a P3, 300 b (P3, 300) c P34, 620 d P (P34, 620) 25 What is the carrying value of the bonds retired on July 1, 2009? a P3, 000, 000 b P2, 974, 080 c P2, 873, 640 d P3, 025, 920 26 What is the gain (loss) on bond retirement on July1, 2009? a (P25, 920) b P25, 920 c (P12, 960) d P0 CASE 5: BLUE ICE CO (R/E) BLUE ICE COMPANY’S stockholders’ equity account balance at December 31, 2008 were as follows: Common Stock Additional Paid-in capital Retained Earnings The following 2009 transactions stockholders’ equity accounts: 800, 000 1, 600, 000 1, 845, 000 and other information relate to the a BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares were issued and outstanding b On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to hold as treasury stock The shares were originally issued at P15 per share BLUE ICE uses the cost method to account for treasury stock Treasury stock is permitted in BLUE ICE’s state of incorporation c On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory The inventory had a P75, 000 carrying value and a P60, 000 fair market value d On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of BLUE ICE’s common stock at P18 per share, which was the market on that date The option may be exercised all 20, 000 options when the market value of the stock was P25 per share BLUE ICE issued new shares to settle the transaction e BLUE ICE’s net income for 2009 was P240, 000 Instruction: Based on the information necessary, answer the following question above and other analysis 27 BLUE ICE’s Common Stock balance at December 31, 2009 is; a P1, 160, 000 b P900, 000 c P800, 000 d P1, 300, 000 28 BLUE ICE’s Additional Paid-in capital balance at December 31, 2009 is; a P1, 860, 000 c P2, 000, 000 b P1, 960, 000 d P2, 100, 000 29 BLUE ICE’s Retained Earnings balance at December 31, 2009 is; a P2, 085, 000 b P2, 010, 000 c P2, 025, 000 d P1, 770, 000 30 BLUE ICE’s Treasury Stock balance at December 31, 2009 is; a P50, 000 b P75, 000 c P0 d P125, 000 page 31 BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is; as a P4, 910, 000 b P4, 820, 000 c P4, 720, 000 d P4, 735, 000 CASE 6: LETICIA’S CO (PPE) Information pertaining to LETICIA equipment for 2009 is presented below COMPANY’S property, plant and Account balances at January 1, 2009: Debit 000, 000 000, 000 Land 6, Buildings 48, Accum Depreciation – Bldg Machinery and equipment 36, Accum Depreciation – Mach/Equip Automotive equipment 4, Accum Depreciation – Auto Equip Depreciation data: Building Machinery/Equip Automotive Equip Leasehold improvements 000, 000 600, 000 Credit 10, 524, 000 10, 000, 000 3, 384, 000 Depreciation Method 150% declining balance SLM SYD SLM Useful Life 25 years 10 years years - Depreciation is computed to the nearest month Transactions during 2009 and other information are as follows: • On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-old car with a cost of P720, 000 and a book value of P216, 000 The new car has a cash price of P960, 000; market value of the trade-in is not known • On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises The leasehold improvements have a useful life of years The related lease terminates on December 31, 2008 • On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000, 000 for installation were incurred • LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at January 1, 2009, would have been depreciated at a total amount of P720, 000 for the year ended December 31, 2009 Instruction: Based on the information necessary, answer the following question: above and other analysis as 32 What is the depreciation on building for 2009? a P1, 499, 040 b P2, 880, 000 c P2, 998, 080 d P2, 248, 557 33 What is the book value of the building at December 31, 2009? a P34, 596, 000 b P35, 976, 960 c P34, 477, 920 d P35, 227, 393 34 What is the depreciation on machinery and equipment for 2009? a P4, 128, 000 b P4, 151, 000 c P4, 220, 000 d P4, 197, 000 35 What is the gain on machine destroyed by fire? a P620, 000 b P300, 000 c P160, 000 d P460, 000 page 36 What is the balance of the accumulated depreciation – machinery and equipment at December 31, 2009? a P13, 231, 000 b P13, 777, 000 c P13, 760, 000 d P13, 691, 000 37 What is the depreciation on automotive equipment for 2009? a P1, 104, 000 b P816, 000 c P720, 000 d P960, 000 38 What is the gain (loss) on car traded in? a P (240, 000) b P240, 000 c P (56, 000) d P56, 000 39 What is the depreciation on leasehold improvement for 2009? a P756, 000 b P672, 000 c P560, 000 d P630, 000 40 What is the book value of leasehold improvements at December 31, 2009? a P6, 160, 000 b P6, 048, 000 c P6, 090, 000 d P5, 964, 000 CASE 7: ST JOHN AND ST THERESE Financial Statements for St John and St follows: Income Statements for the year ended 12/31/02 Therese on December St John St Therese Sales Cost of sales Gross Margin Depreciation and interest expense Other operating expenses Net income from operations Gain on sale of equipment Gain on bonds Equity in subsidiary’s income Net income 750, 581, 169, 28, 117, 23, 3, 420, 266, 154, 16, 128, 9, 01/01/02 Retained Earnings Net Income (from above) Total Dividends 12/31/02 Balance 48, 000 35, 060 83, 060 (15, 000) 68, 060 ========= 000 000 000 400 000 600 000 31, 000 000 000 200 400 400 8, 460 35, 060 9, 400 ======== ======== Statement of Retained Earnings for the year ended 12/31/02 41, 000 9, 400 50, 400 (4, 000) 46, 400 ======== Balance Sheet as of December 31, 2009 Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation Investment in stock of St John Investment in bonds of St Therese Patents 45, 43, 38, 195, (35, 125, 300 700 300 000 200) 460 Accounts payable Bonds payable Capital Stock Additional paid-capital Retained earnings (from above) 8, 900 100, 000 154, 000 81, 600 68, 060 412, 560 ======== 412, 560 ========= 6, 12, 20, 57, (18, 400 100 750 000 900) 44, 000 9, 000 130, 350 ======== 18, 950 50, 000 15, 000 46, 400 130, 350 ========= page St John acquired 90% of the common stock of St Therese for P120, 600 on January 1, 2009 2009 The following additional information is available in the first year after the acquisition During 2009, St John sold merchandise to St Therese that originally cost St John P15, 000, and the sale was made for P20, 000 On December 31, 2008, St Therese’s inventory included merchandise purchased from St John at a cost to St Therese of P12, 000 Also, during 2009, St John acquired P18, 000 of merchandise from St Therese St Therese uses normal markup of 25% above cost St John’s ending inventory includes P10, 000 of the merchandise acquired from St Therese St Therese reduced its intercompany account payable to St John to a balance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on December 30 This P1, 000 payment was still in transit on December 31, 2009 On January 2, 2009, St Therese acquired equipment from St John for P7, 000 The equipment was originally purchased by St John for P5, 000 and had a book value of P4, 000 at the date of sale to ST Therese The equipment had an estimated remaining life of years as of January 2, 2009 On December 31, 2009, St Therese purchased for P44, 000, 50% of the outstanding bonds issued by St John The bonds mature on December 31, 2005, and were originally issued at par The bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately before St Therese’s purchase of bonds QUESTION: Assume that the combination is accounted for as PURCHASE 41 What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary? a Equity in subsidiary’s income 8, 460 Investment in stock of St Therese 8, 460 b Equity in subsidiary’s income 8, 460 Dividends declared – St Therese 3, 600 Investment in stock of St Therese 4, 860 c Equity in subsidiary’s income 12, 060 Investment in stock of St Therese 12, 060 d No Eliminating Entry 42 What is the eliminating entry for St Therese’s stockholders’ equity? a Capital stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Goodwill 25, 200 Investment in stock of St Therese 120, 600 b Capital; stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Investment in stock of St Therese 95, 400 c Capital stock – St Therese 50, 000 Additional paid-in capital 15, 000 Retained earnings – St Therese 46, 400 Goodwill 14, 060 Investment in stock of St Therese 125, 460 d Capital stock – St Therese 50, 000 Additional paid-in capital – St Therese 15, 000 Retained earnings – St Therese 46, 400 Investment in stock of St Therese 111, 400 43 To eliminate the sales made by St John to St Therese, the entry is: a Sales Inventory – St Therese (B/S) Purchases Inventory – St Therese (I/S) b Sales Cost of sales Inventory – St Therese c Sales Inventory – St Therese Cost of sales 20, 000 3, 000 20, 000 3, 000 20, 000 17, 000 3, 000 20, 000 3, 000 23, 000 Page d Retained Earnings Sales Inventory – St Therese 3, 000 20, 000 3, 000 Cost of sales 20, 000 44 To eliminate the entry made by St Therese to St John, the entry is: (assume that Equity in subsidiary income has not been recorded by parent) a Sales 18, 000 Inventory 2, 000 Cost of sales 16, 000 b Sales 18, 000 Investment in stock of St Therese 1, 600 Retained earnings – St Therese 400 Cost of sales 18, 000 Inventory 2, 000 c Sales 18, 000 Retained earnings 2, 000 Cost of sales 18, 000 Inventory 2, 000 d Sales 18, 000 Inventory 2, 000 Cost of sales 20, 000 45 To record the items in transit and to eliminate the payable/receivable, the entry is: a Accounts payable 4, 000 Accounts receivable 4, b Accounts receivable 4, 000 Cash 1, 000 Accounts payable 5, c Cash 1, 000 Accounts payable 3, 000 Accounts receivable 4, d Cash 1, 000 Accounts payable 4, 000 Accounts receivable 5, inter-company’s 000 000 000 000 46 To eliminate the acquisition made by St Therese from St John, the entry is: a Equipment 2, 000 Accumulate depreciation 1, 000 Gain on sale of equipment 3, 000 b Gain on sales of equipment 3, 000 Equipment 2, 000 Accumulated depreciation 250 Depreciation expense 750 c Gain on sale of equipment 3, 000 Equipment 2, 000 Accumulated depreciation 1, 000 d Gain on sale of equipment 3, 000 Equipment 2, 000 Depreciation expense 1, 000 47 The depreciation recorded by St John at December 31, 2009 is: a Overstated by P750 c Overstated by P1, 750 b Overstated by P250 d Understated by P1, 000 48 The entry to eliminate the bonds purchased by is: a Bonds payable 50, Investment in bonds of St John Gain on extinguishments of debt b Investment of St John 44, Loss on extinguishments of debt 6, Bonds payable c Bonds payable 44, Investment in bonds of St John Retained earnings d Bonds payable 50, Investment in bonds of St John Retained earnings St Therese from St John 000 000 000 000 000 44, 000 6, 000 50, 000 44, 000 6, 000 44, 000 6, 000 page For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST 49 What is the eliminating entry for the Equity in dividends declared by the subsidiary? a Equity in subsidiary’s income 8, Investment in stock of St Therese b Equity in subsidiary’s income 8, Dividends declared – St Therese Investment in stock of St Therese c Equity in subsidiary’s income 12, Investment in stock of St Therese e No eliminating Entry subsidiary’s income and 460 460 8, 460 3, 600 4, 860 060 12, 060 50 What is the eliminating entry for St Therese’s stockholders’ equity? a Capital stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Goodwill 25, 200 Investment in stock of St Therese 120, 600 b Capital stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Investment in stock of St Therese 95, 400 c Capital stock – St Therese 50, 000 Additional paid-in capital – St Therese 15, 000 Retained earnings – St Therese 46, 400 Goodwill 14, 060 Investment in stock of St Therese 125, 460 d Capital stock – St Therese 50, 000 Additional paid-in capital – St Therese 15, 000 Retained earnings – St Therese 46, 400 Investment in stock of St Therese 111, 400 Page 10 ... a Capital stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Goodwill 25, 200 Investment in stock of St Therese 120, 600 b Capital;... Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Investment in stock of St Therese 95, 400 c Capital stock – St Therese 50, 000 Additional paid-in capital 15, 000... a Capital stock – St Therese 45, 000 Additional paid-in capital – St Therese 13, 500 Retained earnings – St Therese 36, 900 Goodwill 25, 200 Investment in stock of St Therese 120, 600 b Capital