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Advanced Auditing 2016 Solution Guide

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CHRISTOPHER T. ESPENILLA, CPA MBA FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY, MANILA AUDITING (2016 EDITION) CTESPENILLA CHAPTER 1: THE AUDIT PROCESS PROBLEM 1: CLIENT ACCEPTANCE AND CONITINUANCE 1 D 11 B 2 D 12 C 3 D 4 A 5 D 6 B 7 B 8 A 9 D 10 D PROBLEM 2: UNDERSTANDING THE BUSINESS AND THE INDUSTRY 1 D 11 C 2 D 12 B 3 C 13 B 4 D 14 D 5 D 15 D 6 D 16 B 7 A 8 D 9 C 10 E PROBLEM 3: INTERNAL CONTROL C 1 11 E 21 B D 2 C 3 12 B 13 D 22 A 23 C C 4 14 C 24 B A 5 15 C 25 C D 6 16 C 26 A 7 C 17 C 8 D 18 D 9 D 19 D 10A 20A PROBLEM 4: RISK BASED AUDIT PLANNING 1 D 11 C 2 C 12 B 3 D 4 B 5 B 6 B 7 C 8 A 9 D 10 C CHAPTER 1: THE AUDIT PROCESS SOLUTIONS GUIDE 1 of 155 AUDITING (2016 EDITION) CTESPENILLA PROBLEM 5: SUBSTANTIVE TESTING 1 B 21 B 2 A 22 D 3 C 23 B 4 C 24 D 5 C 25 C 6 D 26 C 7 C 27 B 8 D 28 B 9 C 29 B 10C 30B 11A 12B 31D 32A 13B 33A 14 A 15 A 16 B 17 A 18 A 19 D 20 A PROBLEM 6: AUDIT REPORTING 1 C 2 B 3 B 4 B 5 B 6 C 7 A 8 B 9 C 10 C 11 A 12 C CHAPTER 1: THE AUDIT PROCESS SOLUTIONS GUIDE 2 of 155 AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 3 of 155 CHAPTER 2: AUDIT OF CASH DISCUSSION PROBLEMS CHAPTER 2-PROBLEM 1 1 B 2 D 3 A 4 B 5 D 6 D 7 D 8 D 9 D 10 D 11 D 12 B 13 C 14 B 15 B 16 17 18 19 20 21 22 23 24 25 C B D D B C D C D B AP02-PROBLEM 2: MAPERA CORPORATION 1. Ans. P3,445,000 CurrentaccountatMetrobank 3,250,000 Post-dated disbursement check - adjusted to AP 75,000 Undelivered disbursement check - adjusted to AP 120,000 Adjust ed curr en t ac count at Me troban k 3, 44 5, 000 2. Ans. P2,250,000 Savings accountatRural Bank Compensating balance - legally restricted Adjust ed sa vings acc ount at Rura l B ank 2,750,000 (500,000) 2, 25 0, 000 3. Ans. Zero The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset, that is the company has no bank account with BDO. 4. Ans. P738,000. Undeposited collections, unadjusted balance Customer stale check - adjusted to AR 1,278,000 (180,000) Customer post-dated check - adjusted to AR Customer DAUD check - Adjusted to AR Officer's NSF check - Ad justed to AR-nontrade A d j u s t e d u n d e p o s i t e d c o l l e c t io n s (125,000) (155,000) (80,000) 73 8 ,0 0 0 5. Ans. P18,500 Bills and coins Replenishmentcheck Adjus t ed pet t y c as h f und as of 1 2/31 /14 7,000 11,500 18 , 50 0 6. Ans. P613,500 Travel fund 50,000 Interestanddividendfund 120,000 Payroll fund 400,000 Change fund 25,000 Petty cash fund 18,500 Adjust ed ca sh fun d - Cas h and c ash eq uivale 613,500 7. Ans. P900,000 Debt security investment due 3/31/15 purchased 12/31/14 Preference shares redeemable on 2/28/15 purchased 12/1/14 De bt and e quit y s ec ur it ie s - C as h an d c as h e quiv alent 8. Ans. P7,946,500 AdjustedcurrentaccountatMetrobank Adjusted savings accountatRural Bank Adjustedundepositedcollections Adjusted cash fund - Cash and cash equivalent Debt and equity securities - Cash and cash equivalent C a s h a n d c a s h e qu i v a l e n t s , a dju s t e d ba l a n c e 600,000 300,000 900, 000 3,445,000 2,250,000 738,000 613,500 900,000 7, 94 6 ,5 0 0 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 4 of 155 9. Ans. P1,874,500 Customerstalecheck-adjustedtoAR 180,000 Customer post-dated check - adjusted to AR 125,000 CustomerDAUDcheck-AdjustedtoAR 155,000 Officer's NSF check - Adjusted to AR-nontrade 80,000 Petty cash fund shortage - Adjusted to AR-custodian 1,500 *alternatively, this can be charged to other expense Postagestamps-Officesupplies 3,000 IOUfromakeyofficer-AR-nontrade 30,000 Investment in debt security due 1/31/15 purchased 1/1/14 900,000 *classified as short-term investment Ordinary shares - Trading securities/FA at FMV through P&L 400,000 Curren t ass ets ( other th an ca sh an d cas h eq uiv ale nts) 1,874, 500 10. Ans. P1,700,000 Rural bank - compensating balance - Adjusted to Other assets Pensionfund-AdjustedtoLong-termInvestment Bond sinking fund - Adjusted to Long-term Investment Cash in closed bank at recoverable value - Adjusted to Other assets Ordinary shares - A vailable-for-sale security/FA at FMV through OCI/L Non-current assets 11. Ans. P495,000 CurrentaccountatBDO-Bankoverdraft Post-dated disbursement check - adjusted to AP Undelivered disbursement check - adjusted to AP Credit memo for a purchase return - adjusted to AP C u r r e nltia b ilit ie s 240,000 75,000 120,000 60,000 4 95 , 00 0 CHAPTER 2-PROBLEM 3: MANNY CO. Accountability: PettyCashFund,Imprestbalance 40,000 Returnofanexpenseadvance(a) 900 T ot aA l c c o u n t a b il i t y Valid supporting items: Bills and coins 13,400 Unreplenishedpaidvouchers 3,700 Accomodated checks Dated 12/30 2,000 Dated11/30-markedNSF 1,000 Replenishmentcheck 10,000 P e t t yc a s hf u n dsh o r t a ge (a) Should be subsequently deposited to the bank. Cash items as of December 31, 2014 Bills and coins Return of excess travel expense advance (a) Unreplenished paid voucher dated 1/2 Accomodatedcheck12/30 Replenishmentcheck A dju s t e dpe t t yc a s hf un d 500,000 250,000 500,000 150,000 300,000 1,700,000 40 , 91. 0 0Ans. 30,100 10 , 80 0 2. Ans. 13,400 (900) 1,000 2,000 10,000 2 5 , 53. 0 0Ans. (a) Should be subsequently deposited to the bank. 4. Adjusting entries: 1 Transportationexpense Repairsandmaintenanceexpense Entertainment, amusement and representation ex Due to employees Petty cash fund To record unreplenished paid vouchers. 2 Receivablefromemployee Petty cash fund To record NSF accomodated check. 3 Receivablefromemployee Petty cash fund To record petty cash fund shortage. Pettycashfund,imprestbalance 1. AJE 2. AJE AJE 3. A dju s t e dpe t t yc a s hf un d 500 300 900 1,000 2,700 1,000 1,000 10,800 10,800 40,000 (2,700) (1,000) (10,800) 2 5 ,5 0 0 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 5 of 155 CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY Ans. P1,630 Accountability: Totalcollections,10/1-10/11(perOR) Total bank credits, 10/1-10/11 (per bank statement) Septemberdepositintransit September bank charge error (corrected in October) UndepositedcollectionsasofOctober11 Valid supporting items: Currency and coins Customer collection checks 9/30/14-BaguioCorp. 10/3/14 L. -Reyes 10/4/14-La.UnionCorp. Unusedpostage(adjustedtosupplies) Vouchers paid out of receipt (adjusted to expense) O v e r a ge CHAPTER 2-PROBLEM 5: BETTY CO. Accountability Pettycashfund,imprestbalance Undeposited collections Cash collections (per cash sales invoices) Customer collection checks (depositable only) T o t aAl c c ou n t a bilit y Valid supporting items Currenciesandcoins Customer collection checks (depositable only) 12/30ErrolCorp.,Customer 1/2R.Rarr,Customer Accomodated checks (whether depositable or not) 12/30D.Dong,VicePresident 1/2 Junior, Employee UnreplenishedVouchers Employee IOU's P e t tC ya sS hh o r t a ge 28,840 16,550 (4,500) (1,400) 10,650 18,190 12,310 2,350 1,960 1,590 5,900 110 1,500 19,820 1, 6 30 10,000 1,670 2,500 4,170 14 , 11. 7 0Ans. 5,980 1,300 1,200 1,220 312 850 700 11,562 2 , 60 82. Ans. AJEs to the Petty Cash Fund: (a) Expenses 730 Petty Cash Fund 730 To record unreplenished expense vouchers as of Dec. 31 only. (b) Receivablefromemployee Petty Cash fund To record employee . 700 700 (c) Receivablefromemployee Petty Cash fund 2,608 2,608 To record the petty cash fund shortage. Imprest balance (a) AJE (b) AJE AJE (c) A dju s t e d P e t t y C a s h F u n d a s o f D e c . 3 1 10,000 (730) (700) (2,608) CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO. Bank Reconciliation Statement 10/31/2014 BANK Unadjusted Balance, per Bank Statement 144,975 Undeposited collections, excluding missapprop. 10,770 Oustandingchecks (50,550) Bank error (unrecorded bank charge) (1,250) C or re ct cash in ban k balance (2. A ns . ) 103 , 94 5 (4,038) 3. Ans. 5 , 964. 2 Ans. BOOK 125,245Unadjusted Balance per Books 8,000 Unrecorded Bank Credits (2,300) Unrecorded Bank Debits: NSF Check (1,250)Unrecorded Bank Debits: Bank Service Charge 129,695Adjusted balance per books (25,750) Cash shortage (1. Ans. ) 103,945 Correct cash balance CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 6 of 155 3 Adjusting Entries: (a) Cash bank in Accounts receivables 8,000 8,000 (b) Accountsreceivables Cash bank in 2,300 (c) Bank service charge/Other expenses Cash bank in 1,250 2,300 1,250 CHAPTER 2-PROBLEM 7: JADE CORPORATION Bank Reconciliation 12/31/2014 Unadjustedbalance Deposit in transit Outstandingcheck Bank error C o r r e c t c a s h ba l a n c e ( 1 . A n s . ) BANK 792,285 10,500 (75,975) 2,250 72 9 ,0 6 0 BOOK 726,600 Unadjusted balance 20,000 Unrecorded credit (5,000) Unrecorded debit 31,500 Book errors (audit note a.) 773,100 (44,040) Shortage (3. Ans. ) Unadjustedbalanceperbooks Correctcashbalance N e t a dj u s t e m e n t t o c a s h ( 1 2 / 3 1 ) 726,600 729,060 ( 2,2. 46Ans. 0) 729,060 Adjusted balance AccountabilityasofJanuary15 Unrecordedcreditasof12/31 Book errors in Janaury(auditnote bandc) Adjustedaccountability 180,500 (20,000) 19,500 180,000 January deposits from January collections Januraybankcredits Correction of Dec. bank charge error Dec.depositintransit Cash hand on Expense vouchers CashshortagefromJan.2-Jan.15 Add:CashshortageasofDec.31 T o t a l c a s h s h o r t a ge a s o f J a n . 1 5 , 2 0 1 5 143,895 (2,250) (10,500) 131,145 10,125 1,125 37,605 44,040 81 , 64 4.5 Ans. CHAPTER 2-PROBLEM 8: PIRA CO. Proof of Cash, 6/30/2014 May3 1, Unadjusted balances per bank statement 1,836,000 Depositintransit,May 480,000 Deposit in transit, June (SQUEEZE) 4. Ans. Outstandingchecks,May (1,020,000) Outstanding checks, June (SQUEEZE) 5. Ans. Receipt Disbursement June3 0, 2,496,000 1,224,000 3,108,000 (480,000) 1,317,600 1,317,600 (1,020,000) 2,171,760 (2,171,760) Bank error, May Overstated disbursement Adjusted balances (240,000) 3,093,600 240,000 1,536,000 2. Ans. Un adjust ed bala nces pe r book (1. Ans . ) Unrecordedbankcredit:May Unrecorded bank debits: BSC, May Unrecordedbankdebits:BSC,June Unrecordedbankdebits:NSFCheckJune Bank error, May Overstated disbursement Bookerror,June O verstatedcollection Bookerror,June Overstateddisbursement Adjustedbalances 2,375,760 May3 1, Receipt Disbursement 538, 20 0 4,818,600 2,443,200 600,000 (600,000) (7,200) (7,200) 9,600 144,000 405,000 (405,000) (720,000) (213,840) 1,536,000 3,093,600 2,375,760 2,253,840 6. Ans. June3 0, 2,913,600 (9,600) (144,000) (720,000) 213,840 2,253,840 3. Ans. No shortage. CHAPTER 2-PROBLEM 9: KRAME INC. Proof of Cash Unadjustedbalances,perbank Undepositedcollections-Aug U n de po sit e dc o lle c t io ns-S e pt Outstandingchecks-Aug O u t s t a n di n g c h e c ks S - e pt Bank error Aug - Unadjustedbalances,perbook Unrecordedcredit-Aug Unrecordedcredit-Sept Unrecordeddebit-Aug Unrecorded debit Sept Book Error Aug BookError-Sept/Correction-Sept Shortage/Overage Augsut 31: 485,000 450,000 Receipt Disbursemen September 30: 1,955,000 1,655,000 785,000 (450,000) 2 40 , 00 0 240,000 2. Ans. (180,000) (180,000) 2 2 0, 0 00 (220,000) 3. Ans. (80,000) (80,000) 675,000 1,745,000 1,615,000 805,000 A 1n . s. A 4n . s. June 30: Receipt Disbursemen July 31: 640,000 1,795,000 1,800,000 635,000 200,000 (200,000) 250,000 (120,000) 80,000 (45,000) (45,000) (100,000) (100,000) 675,000 1,745,000 1,615,000 - 250,000 (120,000) (80,000) 805,000 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 7 of 155 CHAPTER 2-PROBLEM 10: MANGO COMPANY Proof of Cash, 4/30/2014 Unadjusted balances per bank statement Undepositedreceipts,March Undepositedreceipts,April Outstandingchecks,March Outstandingchecks,April (excludingcertifiedcheck) Bankerror,AprilOverstateddisbursement Adjusted balances March 31, 21,560 9,060 (2,675) 27,945 March 31, 16,545 Unadjustedbalancesperbook Book receipts usedto paycreditors in cash Unrecordedbankcredit:March Unrecordedbankcredit:April Unrecorded bank debits: NSF check, returned in April recorded in April 12,150 Receipt Disbursement 220,450 218,970 (9,060) 10,120 (2,675) 1,430 (950) 221,510 216,775 April 30, 23,040 Receipt Disbursement 222,190 216,055 (1,210) (1,210) (12,150) 11,640 April 30, 22,680 1,040 NSFcheck,returnedinAprilnotyetrecorded Unrecorded bank debits: BSC, March Unrecordedbankdebits:BSC,April Bankerror,AprilUnderstateddisbursement Adjusted balances (1,430) 950 32,680 11,640 1,040 860 (750) 27,945 1. Ans. 10,120 221,510 2. A ns . (860) (750) 420 360 216,775 3. A ns . (420) (360) 32,680 4. Ans. MULTIPLE CHOICE EXERCISES CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY Unadjustedcashbalance 105,600 1. January 5 collection recorded in December (15,000) 2. Undelivered check disbursements 9,300 3. Post-dated customer collection check (7,800) 4.NSFcustomercollectioncheck (1,500) 5. Cash fund for non-current purpose (40,000) *classifed as LT Fund Investment A dju s t e d c a s h b a l a n c e - c u r r e n t a s s e t 5 0Ans. , 6 0 0 B. CHAPTER 2-EXERCISE 2: BIG BROTHER CORP. Current account at Bank of the Philippine Islands Current account at Equitable PCI Bank Payroll account Foreign bank account – restricted (in USD) ** Postage stamps Employee’s post dated check IOU from a key officer Credit memo from a vendor for a purchase return Traveler’s check Customer’s not-sufficient-funds check Money orders Petty cash fund, currencies only Treasury bills, due 3/31/15 (purchased 12/31/14) Treasury bills, due 1/31/15 (purchased 1/1/14) Change fund Bond sinking fund 6,000,000 (300,000) 1,500,000 60,000 3,000 12,000 30,000 60,000 150,000 45,000 90,000 12,000 600,000 900,000 10,000 1,000,000 Equivalent 6,000,000 *no right of off-set, classified as current liabi 1,500,000 3,000,000*Other Asset at current exchang price *prepaid expense *other receivables *other receivables *debited to accounts payable 150,000 *accounts receivable 90,000 12,000 600,000 *current investment 10,000 8, 362, 00 0 1. A ns .C . CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY Accountability: Pettycashfund,imprestbalance Undeposited collections Cash sales invoices (17903-18112) 100,500 Official receipts 39,537 Customer collection check, n ot yet included 5,707 Othercollections:Returnofexpenseadvance Other collections: Contribution for Christmas Party T o t aA l c c o u n t a bi l i t y Valid supporting items: Bills and coins Customer collection checks 12/30 Otis T. 12/26 R. Eyes 1/2 O. Liever 12/21 F. Rancisco Accomodated check 12/29 O. Camp (return of expense advance) ExpensevouchersandIOUs P e t tcya ss hh or t a ge Asset 1,000,000 *LT fund investment 4, 000, 000 2. A ns . B. 15,000 145,744 260 9,500 1 70 , 50 4 105,174 11,920 12,505 5,707 13,350 310 260 6,775 156,001 14 , 50 3 1. Ans. B. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 8 of 155 Cash on hand as of January 5, 2015 Bills and coins 105,174 Customercollectionchecks 43,482 Accomodated check 310 Returnofexpenseadvancecheck 260 Cash that does not belong to the petty cash fund Undeposited collections: Collectionchecks 43,482 Cash collections (100,500+560+1,202) 102,262 Returnof expense advance Excess collection from Christmas Party (9,500-6,290) Cash on hand as of January 5, belonging to the Petty Cash VoucherspaidafterDecember31:1/2/15,PNR P e t t yc a s hf u n daso fDe c e mbe r3 1,20 1 5 AJEs: (a) Officesuppliesexpense(150-80) Unused office supplies Receivablefromemployee Petty cash fund 149,226 (145,744) (260) (3,210) 12 35 4 7 3. Ans. B. 70 80 300 450 To record unreplensihed expense vouchers as of December 31. (b) Receivablefromemployee Petty cash fund To record petty cash shortage 14,503 14,503 Reconciliation: Pettycashfund,imprestbalance (a) AJE AJE (b) P e t t yc a s hf u n d,a d ju st e dba lan c e 15,000 (450) (14,503) (14,953) 2. ans. B. 4 7 3. Ans. B. Notes: 1. The unused portion of the collection from the Christmas Party does not belong to the company and should not be reflected in the books of the company. Should it be recorded as part of the cash of the company, the same shall be regarded as a payable to whoever owes the excess collectoins (e.g. the employees who made the contribution). 2. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31, 2014 since the disbursement was made only on 1/2, thus the same was not included among the adjustments to petty cash as of December 31. 3. The return of expense advance amounting to P260 shall be included as part of accountability, and since it is still in check the same was also part of the valid supporting items. As an additional audit procedure,return of expense advance shall be traced to eventual deposit to the bank after the count date since the amount no longer belongs to the fund and should be returned backto the general cash of the company. CHAPTER 2-EXERCISE 4: SILVER COMPANY Bank Reonciliation Statement 12/31/2014 Unadjusted balance per Bank Statement Undeposited collections (as being reported) Outstanding checks (as per complete list) Corr ec t c ash b alan ce pe r au dit ( 4. Ans. B .) BANK BOOK 12,300 15,000Unadjusted balance per books 3,000 150 Unrecorded bank credit (850) 14 ,450 15,150Unadjusted balance per books (700) Shortage 1. Ans. D. 14,450Adjusted balance per books 2. Ans. D. Undeposited collections (as being reported) Shortage A c c o u n t a b il i t y f o r c a s h o n h a n d 3. Ans. B. Correctcashbalanceperaudit Cash on hand/Undeposited collection C a s h i n B a n k ( e x c lu d i n g C a s h o n H a n d ) 3,000 700 3 ,7 00 14,450 (3,000) 1 1 ,4 5 0 CHAPTER 2-EXERCISE 5: HOME CORP. Bank Reconciliation 12/31/2014 Unadjustedbalance Deposit in transit Outstandingcheck Bank error C o r r e c t c as h b a l a n c e ( 1 6 . A ns . D ) BANK 1,548,570 21,000 (151,950) 4,500 1 ,4 2 2, 1 20 AccountabilityasofJanuary10 Unrecordedcreditasof12/31 Book errors in Janaury(auditnote aandb) A dju s t e da cc o u nt a bilit y BOOK 1,239,200 Unadjusted balance 200,000 Unrecorded credit (10,000) Unrecorded debit 63,000Book errors (audit note) 1,492,200 (70,080) Shortage (17. Ans. C ) 1,422, 120 Adjusted balanc e 521,000 (200,000) 39,000 3 60 , 00(18. 0 Ans. B.) January deposits from January collections Januraybankcredits Correction of Dec. bank charge error Dec.depositintransit CashandChecksonhand(Depositable) Expense vouchers C a s hs ho r t ag ef r o mJ a n.2-J a n.10 322,790 (4,500) (21,000) 297,290 23,475 22,250 16 , 98 5 (19. Ans. B) CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 9 of 155 CHAPTER 2-EXERCISE 6: CARRERA INC. Proof of Cash, July 31, 2014 June 30, 172,590 18,000 Unadjusted b alances p er bank s tatement Depositintransit,June D e p os itint r a n s it ,J u ly( S Q U EE Z E) Outstandingchecks,June O u t s t a n dingc h e c ks ,J u ly( S Q U E EZ E ) Bankerror,JulyOverstateddisbursement Adjusted balances (52,260) 138,330 March 31, 140,330 Unadjustedbalancesperbook Unrecorded bank debits, July Payment of AP Unrecorded bank debits, July BSC Unrecorded bank debits, July Payment of NP Unrecordedbankdebits,JulyNSF Adjusted balances 140,330 C a s h i n ba n k , s h o r t a ge J u n e 3 0 Receipt Disbursement 751,680 903,390 (18,000) 30 , 00 0 (52,260) 4 1, 8 20 (11,880) 763,680 881,070 Receipt Disbursement 763,680 654,330 31,800 2,610 183,000 9,330 763,680 881,070 July 31, 20,880 30,000 2. Ans. B. (41,820) 1. Ans. C. 11,880 20,940 3. Ans. A. April 30, 249,680 (31,800) (2,610) (183,000) (9,330) 22,940 2 , 0 004. Ans. C. CHAPTER 2-EXERCISE 7: EDILBERTO INC. Proof of Cash, December 31, 2014 November 30, 535,410 41,005 Receipt Disbursement December 31, 1,245,540 1,091,865 689,085 (41,005) 64,400 64,400 (138,590) (138,590) 150,560 (150,560) 1437,825 , 26 8 ,9 3 5 1 ,1 03 , 83 5 6 0 2, 9 25 4. A n s . A . 5 . An s . B . 6. A n s . B . Unadjusted b alances p er bank s tatement Undepositedcollections,Nov. Undepositedcollections,Dec. Outstandingchecks,Nov. Outstanding checks, Dec. Adjusted balances Unadjustedbalancesperbook Unrecorded bank credit: Note Col., Nov. Unrecordedbankcredit:NoteCol.,Dec. Unrecorded bank debits: BSC, Nov. Unrecordedbankdebits:BSC,Dec. NSF Check, return and redeposit, same month* Adjusted balances November 30, 82,350 359,075 Receipt Disbursement December 31, 1, 182, 26 0 1, 063, 185 201,425 1. An s. B . (359,075) 404,500 404,500 (3,600) (3,600) 3,000 (3,000) 41,250 41,250 1437,825 , 26 8 ,9 3 5 1 ,1 03 , 83 5 6 0 2, 9 25 3. Ans. B. 2. A ns . B . CHAPTER 2-EXERCISE 8: HALALAN CORP. Proof of Cash, June 30, 2014 Unadjusted b alances p er bank s tatement Depositintransit,May Deposit in transit, June Outstandingchecks,May Outstanding checks, June Bank error,June correctedalso in June(a) Adjustedbalances Unadjustedbalancesperbook Unrecordedbankcredit:May Unrecordedbankdebits:BSC,May Unrecorded bankdebits: BSC,June Unrecordedbankdebits:NSF,June13(b) Unrecordedbankdebits:NSF,June30 Adjustedbalances May3 1, 652,000 10,000 Receipt Disbursement 88,000 63,200 (10,000) 70,000 (20,000) (20,000) 17,600 (1,000) 60,800 2. A ns . D. 642,000 May3 1, 570,800 72,000 (800) 642,000 (1,000) 148,000 1. A ns . B. Receipt Disbursement 219,000 57,400 (72,000) (800) 200 1,000 1,000 3,000 148,000 60,800 4. A ns . D. 5. A ns . B . June3 0, 676,800 3. Ans. A. 70,000 (17,600) 729,200 June3 0, 732,400 6. Ans. C. (200) (3,000) 729,200 Notes: (a) the error committed by the bank in June was also corrected in June, thus both receipts and disbursements per bank shall be in excess by P1,000 if compared to receipts and disbursements per books. To reconcile, the same had been deducted from both receipt and disbursements. (b) the NSF check on June 13 had been redeposited immediately. No entry had been made by the company to reflect the receipt and redeposit while on the bank side, theNSF check had beenrecorded both as disbursement (upon learning that it is NSF) and receipt as (upon redeposit). Thus, to reconcile, the same has been added to both receipts anddisbursements per books. CHAPTER 2-EXERCISE 9: SALUYOT CORP. Proof of Cash, September 30, 2014 Unadjusted b alances p er bank s tatement Depositintransit,August Depositintransit,September Outstandingchecks,August Outstandingchecks,September Bankerror,Sept.correctedalsoinSept. Bankerror,Sept.,Overstatedreceipt Adjustedbalances August 31, 156,000 2,700 (12,000) 146,700 Receipt Disbursement September 30, 76,020 29,220 202,800 1. Ans. D. (2,700) 28,200 28,200 (12,000) 10,800 (10,800) (300) (600) 100,620 (300) 27,720 (600) 219,600 5. Ans. B. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 10 of 155 August 31, 120,000 27,000 (300) Unadjustedbalancesperbook Unrecordedbankcredit:August Unrecorded bank debits: BSC, August Unrecordedbankdebits:BSC,September Unrecordedbankdebits:NSF,Sept.12 Unrecordedbankdebits:NSF,Sept.30 Adjustedbalances 146,700 CHAPTER 2-EXERCISE 10: WISE COMPANY 1. Ans. B. December actual collections from customers Deposit credited by bank in Decemeber Less:DIT,November December collections credited in December DID T ,e ce mbe r Receipt Disbursement September 30, 127,200 25,380 221,820 4. Ans. A. (27,000) (300) 1,320 (1,320) 420 420 900 (900) 100,620 27,720 219,600 2. A ns . C . 3. A ns . B. 152,500 145,000 (12,500) (132,500) 20 , 00 0 2. Ans. B. NovemberBankServiceCharge DecemeberBankServiceCharge Bank Service Charge recorded per books in Dec. U n r e c o r de d B a n k S e r v i c e C h a r ge , D e c . 3. Ans. A. Actual company collections in December Book error, underfooting cash receipts B o okr e c e ipt s ,D e c e mb e r 152,500 (2,500) 15 0 ,0 0 0 4. Ans. C. Outstanding checks, December 31 Add: Checks paid by bank in December Total Less: Outstanding checks, November 30 C h e c ks is s u e d in De c e mb e r 12,500 130,000 142,500 (16,250) 1 2 6, 25 0 5. Ans. D. C hecksissuedinDecember(4) 126,250 2,500 1 2 8, 7 50 B oo k dis bu r s e me n t s in D e c e mb e r 6. Ans. A. Bookbalance,December31 Add: Book disbursements in December (5) T otal B 1,500 3,250 (2,500) 2 ,2 50 37,500 128,750 166,250 (150,000) 1 6, 2 50 oo kba la nc e ,N o v e mbe r30 Proof of Cash, December 31, 2014 November 30. Un adjust ed bala nces pe r ba nk st at emen t Depositintransit,November Depositintransit,December Outstandingchecks,November Outstandingchecks,September Bankerror,Dec.OverstatedDisbursement Adjusted balances Unadjustedbalancesperbook Unrecorded bank debits: BSC, November Unrecordedbankdebits:BSC,December Bookerror,Dec.UnderstatedReceipt Adjusted balances CHAPTER 2-EXERCISE 11: I-BOT INC. 1. Ans. A Total checks issued and recorded in December NovemberBSC recordedin Decemeber T ot a l bo o k dis burs e me nt s , D e c e mb e r 2. Ans. D. Balanceperbooks,November30 Totalbookreceipts,December Total book disbursements, December B a l a n c e pe r b o o k s , D e c e m be r 3 1 , 18 ,500 12,500 Receipt 145,000 (12,500) 20,000 (16,250) 14,750 7. A n s . B . November 30. 16,250 (1,500) 14,750 152,500 8. A n s . C . Disbursement December 31, 137,000 26,500 (SQUEEZE) 20,000 (16,250) 12,500 (3,750) 129,500 9 . An s D. (12,500) 3,750 37,750 1 0 . An s . B . Receipt Disbursement December 31, 150,000 128,750 37,500 (1,500) 2,250 (2,250) 2,500 2,500 152,500 129,500 37,750 377,632 36 37 7 ,6 6 8 15,698 371,766 (377,668) 9 ,7 96 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 11 of 155 3. Ans. C. Check number 3408 Check number 3418 Check number 3419 O u t s t a n di n g c h e c k s , D e c e m be r 3 1 , 440 2,814 5,788 9 ,0 42 Proof of Cash, December 31, 2014 November 30. 24,298 3,648 Unadjusted balances per bank statement Depositintransit,November Depositintransit,December Outstandingchecks,November Outstanding checks, September Bankerror,Dec.OverstatedDisbursement Bankerror,Dec.UnderstatedDisbursement Adjusted balances Receipt Disbursement December 31, 373,502 380,284 17,516 (3,648) 5,912 5,912 (11,214) 9,042 (9,042) (480) 480 42 (42) 375,766 377,674 14,824 (11,214) 16,732 4. Ans. B. Unadjustedbalancesperbook Unrecordedbankcredits:NoteColl,Dec. Unrecorded bank debits: BSC, November Unrecordedbankdebits:BSC,December Book error, Nov. Over. check 3413 (not yet corr.) Book error, Nov. Over. Check 3417 (not yet corr.) Adjusted balances November 30. 15,698 (36) 270 800 16,732 Receipt Disbursement December 31, 371,766 377,668 9,796 4,000 4,000 (36) 42 (42) 270 800 375,766 377,674 14,824 5. A n s . D. 6 . An s . C. 7 . A ns . A . CHAPTER 2-EXERCISE 12: HALAL CORP. Proof of Cash, December 31, 2014 November 30. 685,180 15,260 Unadjusted b alances p er bank s tatement Depositintransit,November Depositintransit,December Outstandingchecks,November Outstandingchecks,September Bank error, Nov. Overstated Disbursement Bankerror,Dec.OverstatedDisbursement Adjusted balances (64,140) 1,500 637,800 4.A n s .C . Receipt Disbursement December 31, 308,120 356,080 637,220 2. Ans. B (SQUEEZE) (15,260) 16,140 16,140 (64,140) 74,080 (74,080) (1,500) (180) 180 307,500 365,840 579,460 6 .A n s .B . November 30. 637,860 Unadjustedbalancesperbook Unrecordedbankcredits:NoteColl,Dec. Unrecorded bank debits: BSC, November Bookerror,December,OverstatedDisbursement Reversalofcheck(stop-payment)** Adjustedbalances Receipt Disbursement December 31, 306,220 367,660 576,420 1. Ans. A. (SQUEEZE) 2,060 2,060 (60) (980) 980 (780) (780) 307,500 365,840 579,460 (60) 637,800 3. Ans. D. Checks issued prior to Dec.(P64,140- P26,140) Checks issued in Dec. not yet clearing the bank To t al o ut s t a n ding c h e cks , D e c e mbe r 3 1 5.A n s .A . 7 .A ns .D. 38,000 36,080 7 4, 0 80 **Note that the entry to record the reversal of the dibursement check in which the company released a stop-payment order to the bank will result both as a credit and debit in the company's books and will never be reflected as debit and credit on the bank records. Thus, to reconcile, the same has been deducted both in the receipt and disbursement columns per books. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 12 of 155 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES DISCUSSION PROBLEMS CHAPTER 3-PROBLEM 1 1 A 2 B. 3 A. 4 A. 5 D. 6 B. 7 D. 8 D. 9 D. 1 0 D. 11 A. 1 2 C. 1 3 B. 14 A. 15 A. 1 6 D. 1 7 C. 1 8 B. 1 9 B. 20 A. 21 A. 2 2 D. CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION 1. Ans. P124,500 January 1, balance (credit balance to be adjusted to Advances) Charge sales Recoveryofpreviouswrite-offs Collections from customers (overpayment credited to Advances) Write-off of receivables Salesreturndsandallowances(P5,500+P3,000) Gr o s sA cc o u n t sRe ce i v a b l eba l a n c e 2. Ans. P107,537 Gross Accounts Receivable Allowance for Sales Discount (P124,500*50%*25%)*5% Alowance for Bad Debts: 60 Days past due (P124,500*30%)*10% past A m>120 o r t i zDays e dc o s t1 , 2due / 31(P124,500*20%)*50% /14 115,000 1,250,000 5,000 (1,230,000) (7,000) (8,500) 124,500 124,500 (778) (3,735) (12,450) 3. Adjusting Journal Entries: (a) Accountsreceivable-trade Advancesfromcustomers 9,000 (b) Sales Accountsreceivable-trade 25,000 (c) Subscriptions receivable (AR-nontrade) Accountsreceivable-trade 60,000 (d) Advancesfromcustomers Accountsreceivable-trade 5,000 (e) Claimsr eceivable( AR-nontrade) Accountsreceivable-trade 5,000 (f) Advances to employees (AR-nontrade) Accountsreceivable-trade 1,000 (g) Advances to affiliates (Investment) Accountsreceivable-trade (h) Advancestosuppliers Accountsreceivable-trade (i) Accountsreceivable-trade Advancesfromcustomers (j) Accountsreceivable-trade Claimsreceivable(AR-nontrade) 1 0(16,185) 7,537 9,000 25,000 60,000 5,000 5,000 1,000 50,000 50,000 10,000 10,000 10,000 10,000 2,000 2,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA (k) SOLUTIONS GUIDE 13 of 155 Accountsreceivable-trade Subscriptions receivable (AR-nontrade) 45,000 45,000 CHAPTER 3-PROBLEM 3: DELL COMPANY 1. Ans. P366,000 PerGL PerSL Under30d 30-60d 61-120d 121-180d Over180d Balances 360,000 360,000 240,000 48,000 36,000 24,000 12,000 Accounts definitely uncollectible (6,000) (6,000) (6,000) Advancesfromcustomers 12,000 12,000 12,000 366,000 366,000 Adjusted balances 252,000 48,000 36,000 24,000 6,000 Uncollectible % % 15% 3 30% 60% AllowanceforDoubtfulAccounts 17,640 1,440 5,400 7,200 3,600 2. Ans. P22,320; 3. Ans. P17,640 A l l o w a n c e f o r Do u b t f u l A c c o u n t s , E n d Less: Allowance for Doubtful Accounts, Beginning Add: Write-of off Accounts B a dd eb te x pe n s ef o rt h ey e a r 17,640 (1,320) 6,000 22,320 4. Ans. P330,720 Gross Accounts Receivable AllowanceforDoubtfulAccounts Allowance for Sales Discounts (P252,000*20%)*10% AllowanceforSalesReturns(P252,000*5%) A m o r t i z e dC o s t1 , 2/31/14 366,000 (17,640) (5,040) (12,600) 330,720 5. Ans. P25,320 A l lo w a n c ef o rDo u b t f u lA c c o u n t s ,E n d Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance Write-of off Accounts B a dd eb te x pe n s ef o rt h ey e a r 17,640 1,680 6,000 25,320 CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION PerGL PerSL Nov-Dec Jul-Oct Jan-Jun PriortoJan Balances 2,270,000 2,270,000 1,140,000 600,000 400,000 130,000 Accounts definitely uncollectible (30,000) (30,000) (30,000) Adjustedbalances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000 Uncollectible % 1.5% 8% 35% 70% A l l o w a n c e f o r Do u b t f u l A c c o u n t s 275,100 17,100 48,000 140,000 70,000 2. Ans. Per books: AllowanceforDA,Jan.1 65,000 Add:Interim provisions (P4.5M*2%) Recoveries ofprevious write-off Less: Write-off of receivables Additionalwrite-off AllowanceforDA,Dec.31perbooks AllowanceforDA,peraudit AdditionalDAExpensefortheyear 1. Ans. Entry: D o u b t f u l A c c o u n t s E x p e n se Allowance for DA 90,000 7,500 (45,000) (30,000) 87,500 275,100 187,600 1 87 , 6 0 0 187,600 3. Ans. P1,960,700 GrossAccountsReceivable Allowance for DA Allowance for Sales Discount (P700,000*30%)*2% A m o r t i z e dC o s t ,1 2 / 3 1 / 1 4 2,240,000 (275,100) (4,200) 1,960,700 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 14 of 155 CHAPTER 3-PROBLEM 5: MAHOGANNY CORP. Customer InvoiceDate Amount ZuluInc. WhiskeyCo. UniformInc. TangoCorp. Romeo Co. Current 1-60 d past 61-120 d pas >120 d past Credit bal Nov-Dec Sept-Oct Jul-Aug Juneandprior 41,993 550,000 550,000 41,974 1,200,000 1,200,000 41,923 950,000 950,000 41,855 420,000 420,000 41,963 2,000,000 2,000,000 41,886 900,000 900,000 41,853 500,000 500,000 41,983 1,750,000 1,750,000 41,916 600,000 600,000 41,825 500,000 500,000 41,891 2,600,000 2,600,000 41,830 1,250,000 1,250,000 41,703 900,000 900,000 41,974 ( 500,000) (500,000) 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000) Reconciliation of GL and SL PerGL PerSL Current 1-60dpast 61-120dpas >120dpast Creditbal Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000) AdvancesfromReomeoCo. 500,000 500,000 500,000 Posting error 600,000 (600,000) Adjsutedbalances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 Unre co ncil ed di ffer en ce (1 . Ans. ) (30,000) A dj u s t e d b a l a n ce ( 2 . A n s . ) 1 4 ,1 2 0 , 0 0 0 Required allowance for Bad Debt as % 2% 5% 20% 50% RequiredallowanceforBadDebt 1,328,500 122,000 222,500 534,000 450,000 3. Ans. P378,500 AllowanceforBD,ending Less: Allowance for BD, beg Ba dDe btE x pe n s e 4. Ans. P12,791,500 Gross Accounts Receivable AllowanceforBD A m o r t i ze d C o s t , 1 2 / 3 1 / 1 4 1,328,500 (950,000) 3 78 , 5 0 0 14,120,000 (1,328,500) 1 2 ,7 9 1 , 5 0 0 CHAPTER 3-PROBLEM 6: BONIFACIO INC. ADJUSTING ENTRIES: (a) Credit balance: Accounts receivable 7,500 Allowancefor bad debts 7,500 (b) Customer Aye: No AJE necessary since the remmittan ce is still in transit as of December 31, 2014. (c) Customer Bee: Sales Returns Accountspayable Accounts receivable (1-60 days) Purchases 13,800 13,800 13,800 13,800 (d) Customer See and Dee: (1. Ans.) Payment of customer See for a 61-120 days receivable has been deducted from customer Dee's 1-60 days receivable. Posting error only. No AJE necessary. (e) Customer Eee: Sales Accountsreceivable(1-60days) Inventory Incomesummary/Costofsales (f) Customer Eff: Sales Accountsreceivable(1-60days) Advancesfromcustomers 11,600 11,600 8,000 8,000 18,000 14,000 4,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA (g) (h) Customer Jeeh: Sales Accountsreceivable(1-60days) SOLUTIONS GUIDE 15 of 155 6,000 6,000 Customer Eych: Salesreturnsandallowance Accountsreceivable(61-120days) 1,200 1,200 Unadustedbalances (a)Creditbalance (c)CustomerBee (d) Customer See and Dee (e)CustomerEee (f)CustomerEff (g)CustomerJeeh (h)CustomerEych A d j u s t e d b a l a n c e s (2 . A n s . ) Required allowance for BD in % Re q u i r e d a l l o w a n c e f o r B D ( 3 . A n s . ) 4. Ans. P1,844 AllowanceforBD,ending Less: Allowance for BD, beg. AJE a) Recovery of write-off Ba dDe btE x pe n s e PerGL 221,250 7,500 (13,800) PerSL 1-60days 61-120days >120days Creditbal. 110,625 66,375 51,750 (7,500) 7,500 (13,800) 16,600 (16,600) (11,600) (11,600) (14,000) (14,000) (6,000) (6,000) (1,200) (1,200) 182,150 81,825 48,575 51,750 2% 10% 20% 16,844 1,636.50 4,857.50 10,350.00 221,250 7,500 (13,800) - (11,600) (14,000) (6,000) (1,200) 1 82 , 1 5 0 16,844 (7,500) (7,500) 1,844 CHAPTER 3-PROBLEM 7: ABC COMPANY 1. Ans. P1,034,711 PrincipalAmount 1,000,000 Originationcost 57,851 Originationfee (23,140) FMV of Loa n/Initi al measurement 1,034,711 2. Ans. P1,018,182 Amortization table: Loans Receivable/Notes Receivable Correct Int. Nominal Int. Amortization Balance January 2014: 1, 1,034,711 December 31, 2014: 103,471 120,000 (16,529) 1,018,182 December31,2015: 101,818 120,000 (18,182) 1,000,000 3. Ans. P373,944 Carrying value/Amortized cost 12/31/15 Accured Total interest,12/31/15 Present value of new future cashflows at 10% for 3 periods with annuity P300,000*2.48685 Im pa i r m e n tl o s s1 2 / 3 1 / 1 5 4. Entries 12/31/16 to 12/31/18 Amortization table after impairment loss: Correct Int. December 2015: 31, December31,2016: 74,606 December31,2017: 52,066 December31,2018: 27,273 12/31/16:Cash 12/31/17:Cash 12/31/18:Cash 1,000,000 120,000 1,120,000 1 2.48685 746,056 373,944 Nominal Int. - 300,000 Interest income Notes r eceivable/Loans r eceivable 74,606 225,394 300,000 Interest income Notes r eceivable/Loans r eceivable 52,066 247,934 300,000 Interest income Notes r eceivable/Loans r eceivable 27,273 272,727 Amortization 74,606 52,066 27,273 Principal Coll. Balance 746,056 (300,000) 520,661 (300,000) 272,727 (300,000) 0 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 16 of 155 CHAPTER 3-PROBLEM 8: ABC CORP. 1. Ans. P4,754,134 and P4,908,330 (a) DEF Corp, 10% - Trade receivable,Term, Interest-bearing CORRECT ENTRIES: Jan. 1, 2013: Cash 4,754,134 Loans receivable 4,754,134 Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods) Principal: (5,000,000*0.704961) 3,524,803 0.704961 Interest:( 250,000*4.917324) 1,229,331 4.917324 To tal 4,754,134 Amortization table: Loans receivable, DEF Corp. Correct Int. Nominal Int. Amortization Balance January 2013: 1, 4,754,134 June30, 2013: 285,248 250,000 35,248 4,789,382 December31,2013: 287,363 250,000 37,363 4,826,745 June30, 2014: 289,605 250,000 39,605 4,866,349 December 31, 2014: 291,981 250,000 41,981 4,908,330 June30, 2015: 294,500 250,000 44,500 4,952,830 December31,2015: 297,170 250,000 47,170 5,000,000 June 30, 2013: Cash Interest income Loansreceivable Interest income December 31, 2013: Cash Interest income Loansreceivable Interest income 250,000 ash 35,248 250,000 ash 37,363 2. Ans. Retroactive adjustement: Retainedearnings,beg 173,255 Loans receiavable Face value Less: Proceeds Add:Nominalinterest Interest income in2013, per books Interest income in 2013, per audit (see amo.) Overstatement in interest income in 2013 June 30, 2014: C 250,000 250,000IntrestIncome Loansreceivable 35,248Interestincome 250,000 39,605 39,605 December 31, 2014: C 250,000 250,000IntrestIncome Loansreceivable 37,363Interestincome 250,000 41,981 41,981 173,255 5,000,000 (4,754,134) 500,000 745,866 572,611 173,255 3. Ans. P2,000,000 and P2,000,000 (b) GHI, 12% - Non-trade receivable (Advances to associate), Term and Interest-bearing CORRECT ENTRIES January 1, 2014: Cash 2,000,000 Loansreceivable-Nontrade 2,000,000 *note that the nominal interest and effective interest are the same thus, the face value is also the proceeds (fmv) December 31, 2014: Cash 240,000 Interestincome(2M*12%) 240,000 *note that since nominal interest and effective interests are the same and since there are no principal collections yet, the carrying value/amortized cost at 12/31/14 remains the face value. 4. Ans. P2,483,684 and P3,305,785 (c) KLM - Trade receivable, Term and Non-interest-bearing CORRECT ENTRIES Janaury 1, 2012: Cash 2,483,685 Loans receivable 2,483,685 Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods) Principal: P4,000,000*0.6209213) 2,483,685 0.6209213 Amortization table: Loans receivable, KLM Correct Int. Nominal Int. Amortization Balance January 2012: 1, 2,483,685 December31,2012: 248,369 248,369 2,732,054 December31,2013: December31,2014: December31,2015: December31,2016: 273,205 300,526 330,579 363,636 - 273,205 300,526 330,579 363,636 3,005,259 3,305,785 3,636,364 4,000,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 17 of 155 December 31, 2012: Loansreceivable Interest income 248,369 December 31, 2013: Loansreceivable Interest income 273,205 December 31, 2014: Loansreceivable Interest income 300,526 248,369 273,205 300,526 5. Ans. Retroactive adjustement: Retainedearnings,beg 994,741 Loans receivable Principalamount Less:Proceeds Interest income rececognized in 2012 Correct interest income in 2012 (see amo.) Correct interest income in 2013 (see amo.) Overstatement in interest income in '12 and '13 994,741 4,000,000 (2,483,685) 1,516,315 (248,369) (273,205) 994,741 6. Ans. P4,780,007 and P4,350,818 (d) NOP, 10% - Trade, Serial and Interest-bearing CORRECT ENTRIES January 1, 2014: Cash 4,780,007 Loans receivable 4,780,007 Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 10 semi-annual periods) Cash to be collected on: Principal Interest Total PVfactor PresentValue July 1, 2014: 500,000 250,000 750,000 0.943396 707,547 January1,2014: 500,000 225,000 725,000 0.889996 645,247 July 1, 2015: 500,000 200,000 700,000 0.839619 587,733 January1,2015: 500,000 175,000 675,000 0.792094 534,663 July 1, 2016: 500,000 150,000 650,000 0.747258 485,718 January1,2016: 500,000 125,000 625,000 0.704961 440,600 July 1, 2017: 500,000 100,000 600,000 0.665057 399,034 January1,2017: 500,000 75,000 575,000 0.627412 360,762 July 1, 2018: 500,000 50,000 550,000 0.591898 325,544 January1,2018: 500,000 25,000 525,000 0.558395 293,157 TOTAL 4,780,007 Amortization table: Loans receivable, NOP January 2014: 1, July 1, 2014: January1,2015: July 1, 2015: January1,2016: July 1, 2016: January1,2017: July 1, 2017: January1,2018: July 1, 2018: January1,2019: July 1, 2014: Loansreceivable Interest income Cash Interest income Loans receivable December 31, 2014: Loansreceivable Interest income Interestreceivable Interest income Correct Int. 286,800 259,008 231,049 202,912 174,587 146,062 117,326 88,365 59,167 29,717 Nominal Int. 250,000 225,000 200,000 175,000 150,000 125,000 100,000 75,000 50,000 25,000 Amortization 36,800 34,008 31,049 27,912 24,587 21,062 17,326 13,365 9,167 4,717 Princ. Coll.4,780,007 Balance (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) (500,000) 4,316,808 3,850,816 3,381,865 2,909,777 2,434,364 1,955,425 1,472,751 986,116 495,283 (0) 36,800 36,800 750,000 250,000 500,000 34,008 34,008 225,000 225,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA Proceeds from issue 1/1/14 July1,2014amortization July 1, 2014 principal collection Dec31,2014amortization De ce m b e r 3 1 , a m o r t i ze d c o s t SOLUTIONS GUIDE 18 of 155 4,780,007 36,800 (500,000) 34,008 4 ,3 5 0 , 8 1 6 *note that the next P500,000 principal collection shall be made on Jan. 1, 2015 SUMMARY Interest Interest Current Non-current Income Recevable LoansRec. LoansRec. 581,586 4,908,330 240,000 2,000,000 300,526 3,305,785 545,809 225,000 4,350,816 1,667,920 225,000 12,564,932 2,000,000 6. Ans. 7. Ans. 8. Ans. 9. Ans. Note that as per PAS 1, a receivable that is expected to be realized as part of the normal operating cycle is always current, thus trade receivables are always current. (a)DEFCorp,10%-trade (b)GHI,12%-nontrade (c) KLM trade (d) NOP trade Total CHAPTER 3-PROBLEM 9: DWARF CORP. Noncurrent (a) Note receivable from sale of plant - nontrade Dec.31,2013balance 4,500,000 Apr. 1, 2 014, pr incipal collection (1,500,000) Dec.31,2104balance 3,000,000 Int. Receivable: P3,000,000*12%*9/12 Int.Income:(P4.5M*12%*3/12)+(P3M*12%*9/12) 1,500,000 Current Int. Receivabl Int. Income 1,500,000 270,000 405,000 (b)Notereceivablefromofficer-nontrade Int. Income (P1,200,000*10%) 1,200,000 - 120,000 (c) Note receivable from sale of equipment - nontrade Apr. 1, 2014 @FMV=PV of future cash flows at 12% for 2 periods (P600,000*0.797) 478,200 Dec. 31, 2014: Amo. (478,200*12%*9/12) 43,038 Dec.31,2014amortizedcost 521,238 (d) Note receivable from sale of land - nontrade Jul. 1, 2014 @ FMV=Face (Nominal%=Effective%) Dec.31,2014balance=Face Current portion: Periodic payment (on Jul. 1, 2015) 676,875 Interest expense (upto Jul. 1, 2015) 231,000 Long-term portion: Interest receivable (P2.1M*11%*6/12) Interst income (P2.1M*11%*6/12) To t a l 43,038 521,238 - - 2,100,000 445,875 1,654,125 445,875 1,654,125 115,500 115,500 4 , 9, 8 47 55 ,8, 3 76 53 1 3 8 5, 5 0 0 683,538 1. Ans . 2. Ans . 3. A ns . 4. Ans . Note that per PAS 1, a nontrade receivable is current if it is realizable within 12 months after the reporting period or balance sheet date. CHAPTER 3-PROBLEM 10: WHISKEY INC. 1. JORNAL ENTRIES (a) Pledging of AR June 30, 2014: Cash (P4M*80%)-(P4M*5%) 3,000,000 Interest expense (P4M*5%) 200,000 Loanspayable(P4M*80%) 3,200,000 2014: 31,July Cash Salesdiscount Accountsreceivable Interest expense (P3.2M*12%*1/12) Loanspayable(balance) C ash Sales returns Accounts receivable 1,200,000 120,000 1,320,000 32,000 1,168,000 1,200,000 80,000 Jul. Payment 80,000 SUMMARY: 2. Ans. P1,450,000 ACCOUNTS RECEIVABLE Jun. 30, bal 4,000,000 1,320,000 Jul. Coll 80,000 Jul Returns 950,000 Aug. Coll 200,000 Aug. Write-o Aug. 31 , bal 1,450,000 3. Ans. P1,152,320 LOANS PAYABLE 3,200,000 Jun. Loan 1,168,000 2,032,000 Jul 31. bal Aug.P aymen 879,680 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES 1,152,320 Au g. 31, b AUDITING (2016 EDITION) CTESPENILLA August 31, 2014: Cash Sales discount Accounts receivable SOLUTIONS GUIDE 19 of 155 900,000 50,000 950,000 Interest expense (P2,032K*12%*1/12) Loanspayable(balance) Cash AllowanceforBD Accounts receivable 20,320 879,680 2,032,000 900,000 200,000 200,000 (b) Discounting of NR Cash(Proceeds) Notes receivable Interestincome(P2M*10%*4/12) Gain on discounting Maturity Value: PrincipalAmount Interest(P2M*10%) 2,082,667 2,000,000 66,667 16,000 2,000,000 200,000 2,200,000 Proceeds: (Maturity value - Discount) Maturity Value Less: Discount: (Maturity value*Discount rate*Remaining term) (P2,200,000*8%*8/12) Proceedsfromdiscounting 2,200,000 (117,333) 2,082,667 4. Ans. 0 Since discounting was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis), the notes receivable has been derecognized/transferred. 5. Ans. P16,000. Proceedsf romd iscounting/Salesp roceeds Less: Carrying value of Notes Receivabl Interest from Jan. 1 to May 1 (4 mo.) (P2,000,000*10%*4/12) Ga i n on di s co u n t i n g 2,082,667 2,000,000 66,667 2,066,667 16,000 CHAPTER 3-PROBLEM 11:VICTORY INC. 1. JORNAL ENTRIES (a) Assignement of AR November 2014: 1, SUMMARY: Cash (P1.5M*95%) Interest expense (P1.5M*5%) Loans payable 1,425,000 75,000 Accounts receivable-Assigned Accountsreceivable 2,000,000 November 30, 2014: Cash Sales discount Accountsreceivable-Assigned Interest expense (P1.5M*12%*1/12) Loanspayable(balance) Cash Sales returns Accountsreceivable-Assigned August 31, 2014: Cash Sales discount Accountsreceivable-Assigned 1,500,000 2,000,000 Jun. 30, bal 2. Ans. P470,000. ACCOUNTS RECEIVABLE-ASSIGNED 2,000,000 650,000 Jul. Coll 60,000 Jul Returns 740,000 Aug. Coll 80,000 Aug. Write-o A ug. 3 1, b al 4 7 0,0 0 0 600,000 50,000 650,000 15,000 585,000 Jul. Payment 600,000 60,000 3. Ans. P224,150 LOANS PAYABLE 1,500,000 Jun. Loan 585,000 915,000 Jul 31. bal Aug.P aymen 690,850 224,150 Aug. 31, b 60,000 700,000 40,000 740,000 Interest expense ( P915K*12%*1/12) Loanspayable(balance) Cash 9,150 690,850 AllowanceforBD Accountsreceivable-Assigned 80,000 915,000 700,000 80,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 20 of 155 (b) Factoring of AR Cash, net (350,000-10,000) 340,000 Receivablefromfactor 50,000 AllowanceforBD 20,000 LossonFactoring 90,000 Accounts receivable 500,000 Since factoring was recognized as a sale, where there is transfer of significant risk and rewards (e.g. without recourse basis), the accounts receivable factored has been derecognized/transferred. 4. Ans. (P90,000) Net proceeds from factoring (350,000-10,000) Add: Factor's holdback Total/NetSalesproceedsfromAR Carrying value of AR Gross Accounts receivable factored 500,000 AllowanceforBD (20,000) Lo s s oF f ac to ri ng 340,000 50,000 390,000 480,000 (9 0 , 0 00 ) MULTIPLE CHOICE EXERCISES CHAPTER 3-EXERCISE 1: DKNY COMPANY Trade Other - current Total trade & other 1,550,000 750,000 12%Tradenotesreceivable 200,000 Installments receivable, normally due 1 year to two yea 600,000 300,000 Claimfrominsurancecompany 30,000 Subscription receivable due in 60 days, 600,000 Accruedinterestreceivable 20,000 3,100,000 950,000 4,050,000 1A . n s .B. 2 .A n s D . . 3. Ans. C. ProceedsfromARfactored 250,000 Carrying value of AR factored (300,000) Lo s sf r o mf a ct o r i n g (5 0 , 0 00 ) Trade accounts receivable , Proceeds from NR discounted: Maturity value: (Principal + Interest) Principal 300,000 Interest (P300,000*20%*6/12) 30,000 Less: Discount (MV*disc%*remaining term) (P330,000*40%*6/12) ProceedsfromNRdiscounted: (66,000) 264,000 CarryingvalueofNR(nointerest) Lo s sf r o md i s co u n t i n g 300,000 (3 6 , 0 00 ) To t a l l o s s f r o m r e c e i v a bl e fi n a n c i n g 330,000 (8 6 , 0 00 ) Note: (a) The credit balances from customer accounts at P60,000 and P40,000 shall be presented as advances from customers (current liab.) unless there is right of offset. (b) The cash advances to subsidiary amounting to P800,000 shall be presented as an addition to the investment in subsidiary account in the parent-company financial statements, thus is presented as LT Investment. (c) The deposit on contract bids amounting to P500,000 shall be presented as Other Assets in the noncurrent asset portion of SFP. (d) The advances to stockholders amounting to P2,000,000 is a non-trade, noncurrent receivable, thus is presented as Other Asset. CHAPTER 3-EXERCISE 2: MORGAN INC. 1. Ans. A. Allowance for DA, Dec. 31, 2014 (per aging) Less: AllowanceforDA,Jan.1,2014 Recovery of previously written-off accounts Add: Write-off of accounts during the year Co r r e ctBa dDe b tEx p e n s e 700,000 (600,000) (100,000) 375,000 375,000 2. Ans. B. GrossAccountsReceivable Less: Allowance for DA, Dec. 31, 2014 (per aging) Amor ti ze d c os t/Ca rryi ng valu e, De c. 31, 2 014 2,375,000 (700,000) 1,675,000 3,225,300 (169,000) 3,056,300 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA CHAPTER 3-EXERCISE 3: INUYASHA INC. 1. Ans. C. Year Current 2013 1% 2012 2% 2011 1% 2010 3% 2009 3% A v e r a geu n co l l e c t i bl ea cco u n t si n 2% 2. Ans. C. Ageofaccounts Current 1to30dayspastdue 31to60dayspastdue 61to90dayspastdue Over90dayspastdue Total Amount 1,686,400 922,000 384,800 153,300 78,800 3,225,300 3. Ans. A. GrossAccountsReceivable Allowanceforuncollectibleaccounts A m o r t i z e d c o s t / Ne t r e a l i z a b l e v a l u e SOLUTIONS GUIDE 21 of 155 1 – 30 days PD 6% 8% 4% 5% 2% 5% A llow in % 2% 5% 10% 20% 50% 9% 10% 11% 12% 8% 10% 23% 18% 16% 22% 21% 20% 55% 60% 45% 45% 45% 50% Required Allow. In Amount 33,728 46,100 38,480 30,660 39,400 188,368 3,225,300 (188,368) 3,036,932 CHAPTER 3-EXERCISE 4: MEXICAN CORP. Reconciliation of GL and SL with Aging of AR PerGL PerSL 0-60days 61-90days 91-120days >120days 1,230,000 1,223,000 825,000 220,000 50,000 128,000 WriteoffofAR (40,000) (40,000) (40,000) Balance 1,190,000 1,183,000 825,000 220,000 50,000 88,000 U n l o ca t e ddi ff e r e n ce * (7 , 0 0 0 ) AdjustedGrossAR 1,183,000 Required Allowance for BD in % 2% 10% 30% 40% RequiredAllowanceforBDinAmounts 88,700 16,500 22,000 15,000 35,200 1. Ans. C. *Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail. The adjusting entry shall be: S ales 7,000 Accounts receivable 7,000 2. Ans. B. RequiredallowanceforBD,Dec.31 88,700 Less: Allowance for BD, per unadjusted balance Add:Additional write-off audit Additionalbaddebtexpenseperaudit Bad debt expense per books (P12.8M*2%) To t a l ba d de bt e x pe n s e p e r a u di t 3. Ans. C. GrossAccountsReceivable Less:AllowanceforBD A m o r t i z e d c o s t / Ne t r e a l i z a b l e v a l u e (106,000) 40,000 22,700 256,000 278,700 1,183,000 (88,700) 1,094,300 CHAPTER 3-EXERCISE 5: ROVERS INC. Dec. Nov. Oct. Sept. Aug.andpri Customer Invoicedate Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days Gudang 9/12/14 1 39,200 139,200 Tisoy 12/12/14 153,600 153,600 12/2/14 99,200 99,200 Gusoy 11/17/14 185,120 185,120 10/8/14 176,000 176,000 Naning 12/8/14 160,000 160,000 10/25/14 44,800 44,800 8/20/14 40,000 40,000 Nanong 9/27/14 96,000 96,000 Balong 8/20/14 71,360 71,360 Peejong 12/6/14 112,000 112,000 11/29/14 169,440 169,440 Total 1,446,720 524,800 354,560 220,800 235,200 111,360 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 22 of 155 Reconciliation between GL and SL with Aging of AR analysis PerGL PerSL 0-30days 31-60days 61-90days 91-120days >120days Unadjustedbalances 1,466,720 1,446,720 524,800 354,560 220,800 235,200 111,360 (a)Write-off of AR-Balong (71,360) (71,360) (71,360) (b) Posting error (99,200) 99,200 Adjustedbalances 1,395,360 1,375,360 425,600 453,760 220,800 235,200 40,000 Unreconcileddifference (20,000) Adjustedbalance 1,375,360 Required allowance for BD % in 2% 5% 10% 20% 50% Required allowanc for BD in amount 120,320 8,512 22,688 22,080 47,040 20,000 1. Ans. D. AllowanceforBD,ending Less: Allowance for BD, unadjusted Add:WriteoffofAR-Balong Ba dDe btE x pe n s e 120,320 (46,720) 71,360 1 44 , 9 6 0 2. Ans. C. 3. Ans. C. Write-offofAR-Balong Unlocated difference (debited to S ales) T o t a l a d j u s t m e n t s t o A R- G L 4. Ans. A. Gross Accounts Receivable AllowanceforBadDebts A m or t ized c o st / Ca r r y in g v a lu e (71,360) (20,000) (9 1 , 3 6 0 ) 1,375,360 (120,320) 1 ,2 5 5 ,0 4 0 5. Ans. B. AJE to record unreconciled difference: Sales Accounts receivable 20,000 20,000 CHAPTER 3-EXERCISE 6: NATASHA INC. Reconciliation between GL and SL with Aging of AR analysis PerGL PerSL 0-1Month 1-3Months 3-6Months >6Months Unadjustedbalances 788,000 792,960 372,960 307,280 88,720 24,000 (b) Additional write-off (GL only) (800) (c) Additional write-off per aging sched. (4,000) (4,000) (4,000) (d)ARwithcreditbalances 10,000 10,000 8,000 2,000 793,200 798,960 380,960 309,280 88,720 20,000 Unreconcileddifference 5,760 8,000 A dj u% sin t e d b a l a n c e s (3 . A n s . C . ) 7 98 , 9 6 0 Allowance BD for A l l o w a n c e f o r BD i n A m o u n t ( 4 . A n s . A . ) 1% 19,057 2% 3,810 3% 6,186 50% 2,662 20% 4,000.00 12,000 2,400.00 Adjusting entries: (a) Baddebtexpense 1,296 Allowance for bad debt 1,296 To adjust the entry made upon recovery of previously written-off account, credited by the client to Bad Debt Expense account. (b) Allowanceforbaddebt 800 Accounts receivable To record additional accounts written-off per SL. 800 (c) Allowanceforbaddebt 4,000 Accounts receivable 4,000 To record additional accounts written-off per the aging schedule. (d) Accountsreceivable 8,000 Advancesfromcustomers 8,000 To reclassify the credit balances in customer accounts at (0-1 mo.) P8,000 and (1-3 mo.) P2,000. (e) Allowanceforbaddebts Bad debt expense AllowanceforBD,ending Less: Allowance for BD, beginning Recovery of previous write-off Add: Write off of accounts receivable 10,297 Additional write-off per audit Ba d D e b t E x p e n s e p e r a u d i t BadDebtExpenseperbooks Overstatement in Bad Debt Expense 4,000 13,34 1. 3 Ans. C. 23,640 (10,297) 10,297 19,057 (15,250) (1,296) 6,832 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA (f) S SOLUTIONS GUIDE 23 of 155 Accounts receivable 5,760 a les To adjust the unlocated difference (SL should prevail over GL). 5. Ans. D. GrossAccounts Receivable AllowanceforBD A m o r t i ze d c o s t / C a r r y i n g v a l u e 2. Ans. B. 5,760 798,960 (19,057) 7 79 , 9 0 3 CHAPTER 3-EXERCISE 7: SAYOTE INC. Reconciliation between GL and SL with Aging of AR analysis PerGL PerSL Under1mo. 1-6mo. Over6mo. Creditbal. Unadjustedbalances 1,270,000 1,260,000 540,000 552,000 228,000 (60,000) Credit balance - Kamote (Advances) 12,000 12,000 12,000 Credit balance - Kutchay (Posting error (21,000) 21,000 Credit balance - Kalachuchi (Advances) 27,000 27,000 27,000 Write-offofaccounts (72,000) (72,000) (72,000) 1,237,000 1,227,000 540,000 531,000 156,000 Unlocateddifference (10,000) 36,000 120,000 A d j u s t e d b a l a n c e ( 2 . A n s . B) 1 ,2 2 7 , 0 0 0 Allowance % BD for 1% 2% 50% 10% A l l o w a n c e f o r BD i n A m o u n t ( 3 . A n s A ) 46,020 5,400 10,620 18,000 12,000 1. Ans. A. Sales 10,000 Accounts receivable 10,000 To record the unlocated difference (SL should prevail over GL) 4. Ans. D. AllowanceforBD,ending Less: Allowance for BD, beg. Add:WriteoffofAR Additional write-off per audit Ba d d e b t e x p e n s e p e r a u d i t Baddebtexpenseperbooks Additional bad debt expense per audit AJE: Baddebtexpense Allowanceforbaddebt 5. Ans. C. Accounts receivable, Gross Allowanceforbaddebts Amortized cost/Carrying vallue 46,020 (30,000) 24,000 72,000 1 12 , 0 2 0 72,000 40,020 40,020 40,020 1,227,000 (46,020) 1,180,980 CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY 1. Ans. C. P30,000*20% = P6,000 - Income is overstated by the gross profit on the sales. 2. Ans. A. The credit memo should be recorded as of December 31, 2014. 3. Ans. B. Actual number of units sold to Mr Lazo was 320 (P48,000/P150) 4. Ans. D. (320*P100) – P48,000 = P16,000. 5. Ans. A. Receivable from Mr. Sia is correctly stated because the goods are considered sold in 2014 16. Ans. D. CHAPTER 3-EXERCISE 9: MILK CORP. Dec. Customer Invoicedate InvoiceAmount 1-30 days Zulu Inc. 12/6/14 42,000 42,000 11/29/14 63,540 Yankee Co. 9/27/14 36,000 8/20/14 26,760 XylonInc. 12/30/14 20,000 20,000 12/8/14 40,000 40,000 WhiskeyCo. VictoryCorp. UniformInc. 10/25/14 11/17/14 10/9/14 12/12/14 8/20/14 9/12/14 31,800 69,420 66,000 57,600 37,200 52,200 542,520 Nov. 31-60 days Oct. 61-90 days Sept. 91-120 days Aug.andpri more than 1 63,540 36,000 26,760 69,420 31,800 66,000 57,600 37,200 159,600 132,960 97,800 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES 52,200 88,200 63,960 AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 24 of 155 Reconciliation of GL and SL with Aging of AR analysis PerGL Unadjustedbalances 550,000 Yankee&Victory:Postingerror Xylon:FOBDestination (20,000) Uniform:Write-off (52,200) Adjustedbalances 477,800 Unreconcileddifference (7,480) Adjustedbalance 470,320 Allowance %in BD for A l l o w a n c e f o r BD i n A m o u n t s ( 1 . A n s . A . ) PerSL 2. Ans. D. GrossAccountsReceivable AllowanceforBD A m o r t i z e d co s t / Ca r r y i n g v a l u e 470,320 (31,413) 4 38 , 9 0 7 3. Ans. A. AllowanceforBD,end Add: Write off Debit unadjusted balance Bad debt expense 31,413 52,200 16,500 100,113 1-30days 31-60days 61-90days 91-120days morethan1 159,600 132,960 97,800 88,200 63,960 26,760 (26,760) (20,000) (20,000) (52,200) (52,200) 470,320 166,360 132,960 97,800 36,000 37,200 542,520 1% 31,413 2% 1,664 5% 2,659 10% 4,890 4. Ans. B. Sales 7,480 Accounts receiavable 7,480 To adjust the unreconciled difference. (SL should prevail over GL) CHAPTER 3-EXERCISE 10: BROCOLI CORP. Adjusting entries a. Accounts payable Cash METREBANK - b. A ccounts receivable (current) Cash METREBANK - 67,500 67,500 189,000 189,000 c. Cash-METREBANK Accounts payable 107,550 d. Cash-METREBANK Accounts payable 115,650 -METREBANK Ee. Cash xpense Loans payable 258,000 42,000 f. A ccounts receivable (current) Cash BADO – g.Cash–BADO Overdraft(Liability) 107,550 115,650 300,000 57,900 57,900 3,207,900 3,207,900 h. Advancestosupplier P urchases 60,000 i. Sales Accountsreceivable (no adjustment to subsidiary- aging) 4,500,000 j. Sales return Accountsreceivable (no adjustment to subsidiary – aging) k. Baddebtexpense Allowanceforbaddebts 60,000 4,500,000 225,000 225,000 880,763 880,763 Gen Ledger 63,219,000 189,000 57,900 Customerpost-datedcheck(AJEb) Customerpost-datedcheck(AJEf) Collections Received on Dec. 31, 2014 (adj to SL only) ConsignedgoodstoNITZ(adjtoSLonly) Undelivered sales (adj to GL only/ AJE i) Unrecorded sales returns (adj to GL only/AJE j) A d j u s t e dBa l a n c e s Subs. Ledger Current Past due 65,045,790 35,550,000 29,495,790 189,000 189,000 57,900 57,900 (2,626,290) (3,925,500) (4,500,000) (225,000) 58,740,900 58,740,900 3. Ans. D. (1,000,000) (3,925,500) (1,626,290) 30,871,400 27,869,500 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES 50% 3,600 18,600 AUDITING (2016 EDITION) CTESPENILLA Current Past Due Re qu i r e dA l l o wa n cee , nd Add: Write-offs Less: Allowance, beg Interimprovision/Baddebtperbooks A d di t i o n a lba dd e bte x pe n s e SOLUTIONS GUIDE 25 of 155 30,871,400 % 617,428 27,869,500 % 1,950,865 2 7 2 , 5 6 8 , 2 93 521,565 (1,773,195) (435,900) 880,763 l.Inventory Cost of sales (3,925,500+4,500,000+225,000)*80% 6,920,400 6,920,400 1. Ans. D. Cash,Unadjustedbalance (a) (b) (c) (d) (e) (f) (g) Ca s h , a d j u s t e d b a l a n c e (90,000) (67,500) (189,000) 107,550 115,650 258,000 (57,900) 3,207,900 3 ,2 8 4 , 7 0 0 2. Ans. C. Cash in bank, BADO (3,150,000) (f) (57,900) Cash in ba nk, BADO (tota l overdr af (3,207,900) 4. Ans. C. Bad debtexpenseper books Additional bad debt expense per audit' Ba d d e b t e x p e n s e p e r a u d i t 435,900 880,763 1 ,3 1 6 , 6 6 3 5. Ans. C. Gross Accounts Receivable Allowanceforbaddebt Amor ti ze d co st /Carryin g va lu e 58,740,900 (2,568,293) 56,172,6 07 6. Ans. D. Inventory, unadjusted balance (l) In ve n t o r y, a dj u s t e d b a l a n ce 55,558,140 6,920,400 6 2 ,4 7 8 , 5 4 0 CHAPTER 3-EXERCISE 11: MYBAGS INC. NR - total Recievable-Curr Interest Inco Interest Rec. (a) NR discounted as a sale (b) NR 30 days 900,000 900,000 (c)NR-90days(SubscriptionReceivable) 500,000 Int.Inc.(P500,000*16%*2/12) 13,333.33 13,333 (d) NR-dishonored (collection w/in 12 months is doubtf 16,000 (e)NR-90days(AdvancestoOfficer) 160,000 (f) NR 120 - days 120,000 120,000 Int. Inc. (P120,000*16%*108/360) 5,760 5,760 To t a l 1,020,000 1,680,000 35,093 19,093 1 . A n s . C. 2. A n s . C . 3 . A n s . D. 4. Ans . A. CHAPTER 3-EXERCISE 12: YZA INC. 1. Ans. A. Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods) Principal (1,000,000*0.793832) 793,832 0.793832 Interest (60,000*2.577097) 154,626 2.577097 948,458 Principalamount A dd : O r i g i n a t i o n c o s t ( S q u e e z e ) Less:Originationfee Netproceeds/Fairvalue Amortization table: Loans receivable Janaury 2014: 1, December31,2014: December31,2015: December31,2015: 1,000,000 28,458 (80,000) 948,458 Correct Int. 75,877 77,147 78,519 Nominal Int. 60,000 60,000 60,000 Amortization Balance 948,458 15,877 964,335 17,147 981,481 18,519 1,000,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 26 of 155 2. Ans. C. Carrying value/Amortized cost (12/31/15) Accruedinterest(asof12/31/15) Totalreceivablesasof12/31/15 Present value of new cash flows at srcinal eff. % (8%) Due 12/2016: P300,000*0.925926 277,778 Due 12 /2018: P3 00,000*0.793832 238,150 Im pa i r m e nlto s s 981,481 60,000 1,041,481 0.925926 0.793832 515,927 525,554 3. Ans. C. CHAPTER 3-EXERCISE 13: ISIAH COMPANY Principalamount 4,000,000 Add:Originationcost 248,000 Less:Originationfees (374,000) Initial amount/Fair value/Proceeds 3,874,000 1. Ans. B. Amortization table: Loans receivable Correct Int. December 31, 2013: December31,2014: December31,2015: December31,2016: 358,345 361,892 365,763 Nominal Int. Amortization Balance 3,874,000 38,345 3,912,345 41,892 3,954,237 45,763 4,000,000 320,000 320,000 320,000 2. Ans. D. Amortizedcost/Carryingv alue( 12/31/15) 3,954,237 Accruedinterest(12/31/15): 320,000 Totalreceivablesasof12/31/15 4,274,237 Less: Present value of new future cash flows at 9.25% Due 12/31/2017: (1.4M*0.837832) 1,172,965 Due 12/31/2018: (P1M*0.766895) 766,895 Due 12/31/2019 (P600K*0.701963) 421,178 Due 12/31/2020: (P400K*0.642529) 257,012 2,618,049 Im pa i r m e nlto s s 1,656,188 3. Ans. B.; 4. Ans. C. Amortization table: Loans receivable after impairment loss Correct Int. Nominal Int. December 31, 2015: December31,2016: 242,170 December 31, 2017: 264,570 December31,2018: 159,543 December December31, 31,2019: 2020: 81,801 33,867 CHAPTER 3-EXERCISE 14: VISAGE CORP. 1. Ans. A. Net cash proceeds from factoring (P350,000-P10,000) Factors holdback Total/NetsalespriceofARfactored Less: Carrying value of AR (P500,000-P20,000) Lo s sf r o mf a ct o r i n g 0.915332 0.837832 0.766895 0.701963 0.642529 Amortization -- 242,170 264,570 159,543 81,801 33,867 Principal Coll. Balance 2,618,049 2,860,219 1,400,000 1,724,789 1,000,000 884,332 600,000 400,000 366,133 (0) 340,000 50,000 390,000 (480,000) (9 0 , 0 00 ) 2. Ans. D. Assignment is only a loan transaction, thus there is no transfer of receivable. 3. Ans. A. Accountsreceivable-assigned May collection with sales discount (P200,000+P5,000) June collection with sales discount (P150,000+P4,000) Sales returns Accountswritten-offasworthless A cco u n t s r e ce i v a bl e - a s s i gn e d - J u n e 3 0 800,000 (205,000) (154,000) (30,000) (20,000) 391,000 4. Ans. B. Payment Loans payable balance, May 1 May31remittance June31remittance 200,000 150,000 Interest Principal Balance (Bal*24%*1/12 (Payment-Int) 500,000 10,000 6,200 190,000 143,800 310,000 166,200 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA 5. Ans. B. Proceedsfromdiscounting** Less:CarryingvalueofNotes Interest receivable up to Oct. 31 (P600K*12%*4/1 Ga i n on Di s co u n t i n g ** Proceeds from discounting Maturity value Principalamount 600,000 Interest (P600,000*12%*6/12) 36,000 Discount(P636,000*10%*2/12) Proceedsfromdiscounting SOLUTIONS GUIDE 27 of 155 625,400 (600,000) (24,000) 1,400 636,000 (10,600) 625,400 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 28 of 155 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES DISCUSSION PROBLEMS CHAPTER 4-PROBLEM 1 1 B. 2 D. 3 D. 4 C. 5 B. 6 7 1 A 2 D 3 C 4 B 5 6 7 8 9 10 11 12 13 A B D D B B D A C CHAPTER 4-PROBLEM 2: NOKIA CORP. (c) (d) (e) (f) (g) (h) (i) (j) Unadjustedbalances Purchintransit-FOB,Dest. Unrecordedp urch.r eturns/allowance "BillandHold"Sales Goodsoutonconsignment Salesintransit-FOB,SP Goods segregated but not yet sold Purchintransit-FOB,SP Purchintransit-FOB,SP Inventory 1,200,000 Acc. Payable Net Sales Net Purch. Net Income 790,000 6,050,000 3,300,000 610,000 (120,000) (120,000) 120,000 (70,000) (70,000) (70,000) (224,000) (224,000) 70,000 (100,000) (30,000) (105,000) (105,000) 98,000 98,000 170,000 170,000 (170,000) 200,000 200,000 1 ,16 9,0 00 5 ,7 97 50 ,0 0 0 3 ,28 0,0 00 499,000 1 .A n s . 2 . A ns . 3 . A ns . 4 . A n s. 5 . A ns . CHAPTER 4-PROBLEM 3: INGGO CORP. (a) (b) (c) (d) (e) (f) (g) (h) Unadustedbalances Goods held on consignment, recorded as purchases Credit balance - FoxInc.(Advancesto supplier) Saleonapproval-notyetvalidsale Sales in transit - FOB Seller (FOB, SP) - no adjustment Goods out on consignment, recorded as sales Purchase in transit, FOB Seller (FOB, SP) Unrecordedfreightcost Purchase discount - Beta Corp. (P795,000*2%) Inventory financing - Loan to Hote Inc. (not purch) Inventory 3,750,000 (465,000) 66,000 630,000 75,000 3,000 (15,900) (100,000) 3,943,100 ,6 0 0,10 0 1 . A ns . Acc.Payable Sales Net Income 3,075,000 27,000,000 (465,000) 25,000 (84,000) (18,000) (750,000) 75,000 6,000 (15,900) (100,000) 2 2 6,1 66 ,00 0 2 . A n s. 3 . A n s. (120,000) (3,000) (141,000) 4 . A ns . CHAPTER 4-PROBLEM 4: TOUR COMPANY Unadjustedbalances RR #11204 RR #11210 RR #11211 RR #11212 RR #11214 RR #11215 Total/Net Adjustment Adjustedbalances Purchases 2,543,900 (7,800) 4,000 9,700 12,840 25,640 28,400 72,780 2,616,680 Inventories 354,500 4,000 25,640 28,400 58,040 412,540 2. Ans. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA 1. Adjusting journal entries: Purchases Accounts payable Inventory Income summary SOLUTIONS GUIDE 29 of 155 72,780 72,780 58,040 58,040 3. Ans. P2,439,140 Inventory,Nov.1,2013 Net Purchases, as adjusted Cost of goods avaialble for sale Inventory, Oct. 31, 2014, as adjusted C o sto fS a l e s 235,000 2,616,680 2,851,680 (412,540) 2 ,43 9,1 40 CHAPTER 4-PROBLEM 5: ABC CORP. 1. Ans. P156,000. MerchandiseInventory,Jan.1 Purchaes(Jan.1 to Oct.31) Transportation-in Purchase returns and allowances Actual cost ofgoodsavailable forsale Less:Estimatedcostofsale* Estimatedinventory,October31 Inventorynotdamagedbyfire I nv e n t o ryl o ssdu et of ire *Estimated cost of sale Gross Sales Sales returns Employeediscount Multiplybycost%(100%-30%) Estimatedcostofsale 2. Ans. P48,000. MerchandiseInventory,Jan.1 Purchaes(Jan.1 to Oct.31) Transportation-in Purchase returns and allowances Actual cost ofgoodsavailable forsale 120,000 830,000 20,000 (10,000) 1,096,000 (40,000) 24,000 1,080,000 70% 756,000 120,000 830,000 20,000 (10,000) Less:Estimatedcostofsale* Estimatedinventory,October31 Inventorynotdamagedbyfire I nv e n t o ryl o ssdu et of ire *Estimated cost of sale Gross Sales Sales returns Employeediscount DividebySellingPrice%(100%+25%) Estimatedcostofsale 840,000 960,000 (756,000) 204,000 48,000 156 ,00 0 840,000 960,000 (864,000) 96,000 48,000 48 ,00 0 1,096,000 (40,000) 24,000 1,080,000 125% 864,000 CHAPTER 4-PROBLEM 6: KAGOME COMPANY 1. Ans. P2,225,000. CollectiononAR 1,825,000 Add:AR,December31, 270,000 Sales returns 25,000 Salesdiscounts 30,000 Accountswritten-off 20,000 Less:AR,January1 (295,000) GrossSalesonaccount 1,875,000 GrossCashSales 350,000 G r o ssS a l e s 2 ,22 5,0 00 2. Ans. P1,850,000. Gross Sales Less:Salesreturns S a l e s f o r i n v e nt o r y e s t i m a t io n 2,225,000 (25,000) 2 ,20 0,0 00 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 30 of 155 3. Ans. P400,000. Inventory,December31,2013 320,000 Purchases 1,410,000 Unrcordedpurchases 10,000 Advances to suppliers recorded as purch. (20,000) 1,400,000 Costofgoodsavailableforsale 1,720,000 Less: Estimated cost of sales (P2.2M*60%) (1,320,000) E st i m a t e d I nv e nt o r y , D e c e m b e r 3 1 , 2 0 1 4 400 ,00 0 4. Ans. P80,000. Estimated Inventory per audit Inventoryperbooks I nv e n t o rysh o rt a ge 400,000 320,000 80, 000 CHAPTER 4-PROBLEM 7: JIM CORPORATION Unadjustedbalances a) May purchases recorded only in June b) Unrecorded purch. returns/allow. c)Advancestosuppliers d) May purch in transit, FOB Dest. Adjustedbalances Inventory,July1,2013 Purchases,11monthsasadjusted Cost of goods available for sale, 11 months Inventory,May31,2014 d) May purch in transit, FOB Dest. Costofsales,11months 11 Mo. Purch 12 Mo. Purch 675,000 800,000 7,500 (1,000) (1,500) (2,000) (2,000) (5,500) 674,000 796,500 87,500 674,000 761,500 95,000 (5,500) 1. Ans. 20%. Sales,11months Costofsales,11months Grossprofit,11months 840,000 672,000 168,000 2. Ans. P98,000. Sales,12months Sales,11months SalesforthemonthofJune 960,000 (840,000) 120,000 e)SalesinJuneat0%GP SalesforJuneat20%GP Multiply by Cost% Cost of sales (Sales at 20%GP) Add: Cost of sales (Sales at 0%GP) T o t a l C o s t o f S a le s f o r J une 89,500 672,000 100% 80% 20% (10,000) 110,000 80% 88,000 10,000 98, 000 3. Ans. P114,000. Inventory,July1,2013 Purchases, 12 months Cost of goods available for sale, 12 months Less: Cost o f sales, 12 months (P672,000+P98,000) E st i m a t e d I nv e nt o r y , J u ne 3 0 , 2 0 1 4 87,500 796,500 884,000 (770,000) 114 ,00 0 CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION 1. Ans. P50,750. Purchases,Jan.1-March31 42,000 Payments to suppliers, Apr. 1 - 15 Cash purchases 2,000 Purchases on account (P8,500-P1,300) 7,200 Purchase returns (450) 8,750 P u rc ha se s,J a n .1t oA prl1 5 50 ,75 0 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 31 of 155 2. Ans. P105,000. Sales, Jan 1 March 31 Collections from customers, Apr. 1 - 15 Add:AR, April15 Write-off of receivables Less:AR,March31 S a l e s,J a n .1-A pr.1 5 90,400 10,200 26,400 5,000 (27,000) 14,600 105 ,00 0 3. Ans. 45% TotalSales2012and2013 Cost ofsales2012and 2013 Gross profit 2012 and 2013 700,000 385,000 315,000 4. Ans. P43,000. Inventory,Dec.31,2013 Purchases,Jan.1-Apr.15 50,000 50,750 Cost of goods available for sale Estimated cost of sales (105K*55%) E s t i m a t e d I n v e n t o r y , A pr . 1 5 5. Ans. P39,650. Estimated Inventory,Apr.15 NRVofremaininginventory I nv e n t o ryL o ss 100% 55% 45% 100,750 57,750 43, 000 43,000 (3,350) 39, 650 CHAPTER 4-PROBLEM 9: DIOSAH INC. Inventory, October 1, 2013 Purchases Transportationin Purchasereturn Purchase allowance Purchasediscounts Departmental transfer out Departmental transfer in NetMarkup(P290,000-40,000) Cost 372,000 2,910,000 55,000 (27,000) (18,500) (15,960) (135,500) 125,500 3,265,540 Net Mark down (P283,000-P40,000) Cost of goods available for sale 3,265,540 Less: Inventory, October 1, 2013 COGAS-Inventory,Beg (372,000) 2,893,540 Cost of goods available for sale at retail Less: COGAS at retail/Sales Gross sales Salesreturns Normalbreakages Discountstoemployees Inventory,Endatretailprice Retail 620,000 4 ,452,000 (45,000) (175,000) 165,000 250,000 5,267,000 (243,000) 5,024,000 (620,000) 4,404,000 62 % Co nservat iv e 6 5% Av er age 66 % FI FO Reta il 5,024,000 4,872,000 (355,000) 50,500 75,500 1. Ans. P236,220. Inventory, End at retail price Conservative Cost % I nv e n t o ry ,E n da tc o st 381,000 62% 2 36, 220 2. Ans. P247,645. Inventory, End at retail price Average Cost % I nv e n t o ry ,E n da tc o st 381,000 65% 2 47, 645 2. Ans. P251,460. Inventory, End at retail price FIFO Retail Cost % I nv e n t o ry ,E n da tc o st 381,000 66% 2 51, 460 (4,643,000) 381,000 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 32 of 155 CHAPTER 4-PROBLEM 10: GLORIA CORPORATION 1. Ans. P540,000; P527,000; P430,000. Finishedgoods Item M ItemP Item Q Cost 550,000 540,000 NRV: Est. Selling Price - Cost to Sell 540,000 527,000 Required allowance for write-down 10,000 13,000 Lower Cost ofNRV or 2. Ans. P240,000; P148,000; P320,000. Work-in-process Cost NRV: Est. Selling Price - Cost to Sell - Cost to Compl. Requiredallowanceforwrite-down Lower NRV Cost or of 430,000 1,520,000 697,000 (23,000) 1,497,000 Item M Item P Item Q 240,000 188,000 240,000 148,000 40,000 320,000 550,750 708,000 748,000 (40,000) 3. Ans. P1,105,000. Cost Cost Cost Since finished goods M has been written down to NRV, RM of item M shall be tested for possible write-down. A B C 250,000 500,000 400,000 1,150,000 Current purchase price 250,000 480,000 375,000 Required allowance for write-down 20,000 25,000 (45,000) 1,105,000 4. Ans. P855,000. Since finished goods P has been written down to NRV, RM of item P shall be tested for possible write-down. X Y Z 400,000 300,000 200,000 900,000 Current purchase price 450,000 275,000 180,000 Required allowance for write-down 25,000 20,000 (45,000) 855,000 5. Ans. P825,000. Since finished goods Q has not been written-down, the RM for item Q shall not be tested for possible write down. D E 375,000 450,000 825,000 6. Ans. P103,000. Allowance forWD-FG,ending Less: Allowance for WD-FG, beg. Loss onwrite-down FG Allowance for WD-WIP,ending Less: Allowance forWD-WIP,beg. Lossonwrite-down-WIP Allowance forWD-RM,ending Less: Allowance for WD-RM, beg. Lossonwrite-down-RM T o t a l lo s s o n i nv e n t o r y w r it e - d o w n 23,000 (10,000) 13,000 40,000 40,000 90,000 (40,000) 50,000 103 ,00 0 MULTIPLE CHOICE EXERCISES: CHAPTER 4-EXERCISE 1: 1. Ans. A. Cost of goods out on consignment at another company’s store Goods in transit purchased FOB shipping point Cost of goods sold with repurchase agreement/Inventory financing Freightchargesongoodspurchased Factory labor costs incurred on goods still unsold Materials on hand not yet placed into production Raw materials on which the company has started production Factory supplies Costs identified with units completed but not yet sold Cost of goods in transit sold FOB destination T o tain l v e nt o rie s 2,400,000 360,000 900,000 240,000 150,000 1,050,000 840,000 60,000 780,000 120,000 6, 900 ,0 00 CHAPTER 4-EXERCISE 2: SILANG CORP. Unadjustedbalances (a) Cash Acc. Rec. 963,200 2,254,000 (654,600) 310,000 Merch. Invty Acc. Payable Accrued Exp. Cost of Sales 6,050,000 4,201,000 60,400 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA (b) (c-1) (c-2) (c-3) (c-4) (c-5) Adu st e dba la nc e s SOLUTIONS GUIDE 33 of 155 360,000 372,400 275,000 217,500 (637,500) 130,000 (175,000) 2,564,000 6, 035 ,0 00 4 ,61 5,9 00 2 .An s.C . 3 .A ns.C . 5 .A ns .C . 6 68, 600 1 .A n s.D . 6. Ans. B. Current Assets C ash Accountsreceivables Merchandiseinventory Current Liabilities Accountspayable Accruedexpense W o r ki ng C a pit aR l atio (275,000) 637,500 (130,000) (175,000) 60,400 57,500 4 .An s.A . 217,500 668,600 2,564,000 6,035,000 9,267,600 4,615,900 60,400 4,676,300 1.9 8 CHAPTER 4-EXERCISE 3: IVY INC. a.Goods out on consignment b.Purchintransit(FOBSP) c.Salesintransit (FOBSP) d.Salesintransit (FOBDest) e. Purch in transit (FOB Dest) f.Goods held on consignemnt g.Salesintransit(FOBDest) Net adjustments: I nv e nt o r y 100,000 33,000 (40,000) 16,000 Sale s (140,000) AP P ur c ha s e s N e tI nc o m e (40,000) (40,000) 16,000 (22,000) 22,000 (50,000) (112,000) 11,000 (204,000) 4 .A ns .D . 33,000 33,000 (22,000) (50,000) (112,000) 59,000 (252,000) 1 .A ns.A . 2 .A ns .B. CHAPTER 4-EXERCISE 4: LONE STAR CORP. Sales 2,815,000 1024 SI (23,000) 1025 SI (34,000) 1026 SI (8,000) 1115 RR 1118 RR 1023 SI (50,000) 1021 SI 1119 RR Adj sut e dba la n c e AR (140,000) (75,000) Purchases 1,500,000 (112,000) (252,000) 11,000 3 .A ns .C . Inventory 300,000 9,000 32,000 40,000 2 ,62 5,0 00 1 . A ns. A . 60,000 400,000 400,000 1,9 09, 000 832,000 2 . A ns . B . 3 . A n s. A . Invty, e nd 200,000 Purchases 3,200,000 Accts Rec. Acc.Payable 250,000 200,000 (23,000) (34,000) (8,000) 9,000 (50,000) (75,000) 60,000 4 . A n s. D . 401,000 610,000 5 . A ns . A . CHAPTER 4-EXERCISE 5: SOFIA INC. Unadjustedbalance Beginning of the year: a.D ec.purchasesrecordedinJan. b.Dec.purchasesnotincludedinInvty End of the year: Unrecorded a. Dec. sale b.Dec.purchasesrecordedinJan. c. Dec. purchases not included in Invty d.Dec.purchases Adj ust e dba la n c e s (50,000) Cost o f S ales Net Income 3,160,000 (50,000) 26,400 50,000 (26,400) 86,000 30,000 (30,000) (36,000) 36,000 24,000 3,204,000 , 130 ,4 00 3 1 15, 600 2 . A ns. D . 3 . A n s. B . 4 . A n s. D . 30,000 36,000 24,000 2 60, 000 1 . A ns . C . CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 34 of 155 CHAPTER 4-EXERCISE 6: BIRD COMPANY Inventory 1,870,000 Unadjusted balances Adjustments: A B C D E F G H Adj ust e dba la n c e s Accts Payable 1,415,000 Net Sales 9,693,400 (78,500) 93,000 93,000 27,000 49,000 17,000 31,200 (67,800) 36,000 16,000 1,5 60, 000 2 . A ns . B . 8,000 2 ,09 5,2 00 1 . A ns. A . 9,547,100 3 . A ns . D . CHAPTER 4-EXERCISE 7: Accts Receiv 276,500 December recorded sales: In-tansitFOB,Dest. Sipmenttoconsignee In-tansitFOB,Dest. In-transit FOB, SP Sipmenttoconsignee January recorded sales: In-transitFOB,SP Adj ust e dba la n c e Inventories 425,000 (8,680) (14,200) (10,000) 7,240 12,500 Sales 1,320,000 (8,680) (14,200) (10,000) (6,100) (14,000) (1,440) (1,700) (10,000) (6,100) (14,000) 6,100 (18,200) 21,000 18,200 ,420,440 294 ,1 20 1 8 46, 560 2 . A ns . B . 3 . A n s. A . 4 . A ns . C . CHAPTER 4-EXERCISE 8: KAMPT COMPANY Sales 9) 12) N e tAdj ust m e nt (7,240) (12,500) (14,000) 21,000 2 50, 620 1 . A ns B . December 2014 recorded sales 1) 3) 4) 5) 7) 8) January 2015 recorded sales Cost of Sales Gross profit 842,000 478,000 2,800 447,560 5 . A ns. D . Inventories (2,000) (2,000) (6,900) (600) (4,000) (10,000) 6,000 8,000 (8 ,9 0 0 ) 1 . A ns. A . (4,000) (5,500) (12,100) 2 . A ns . A . CHAPTER 4-EXERCISE 9: MALAGUKU CO. Unadjustedbalances 631 No. RR RR No. 632 633 No. RR 634 No. RR RR No. 635 RR No. 636 RR No. 638 RR No. 641 Adj ust e dba la n c e s Purchases 1,750,000 Inventories 175,000 2,000 (4,000) 9,000 8,000 (6,000) 7,200 4,100 1 ,75 1,3 00 1 . A ns. A . 194 ,00 0 2 . A ns . C CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 35 of 155 CHAPTER 4-EXERCISE 10: KULA INC. Inventories 27,000 December 2014 entries Invoice No. 9176 Invoice No. 0010 Invoice No. 6609 Invoice No. 6610 Invoice No. 0481 Invoice No. 3671 Invoice No. 6098 January 2015, entries Invoice No. 7711 Invoice No. 9001 Invoice No. 4678 Invoice No. 9981 Purchases 650,000 310 180 690 420 (750) 290 (350) 460 460 770 315 595 Invoice No. 7263 Goodsheldonconsignment Deliveries made to customers after count date A dj su t e dba la n c e s 610 (750) (1,900) 28, 220 1 . A ns . B . CHAPTER 4-EXERCISE 11: FLORES COMPANY 1. Ans. D. Per Count Unadjusted balances 342,400 1 2 3 4 5 6 7 (900) 8 2,100 9 10 700 11 30,000 Adj sut e dba la n c e s 3 74, 300 315 595 610 651,650 2 . A n s. D . Per GL Per "Tab Run" 384,900 403,300 (500) (23,900) (600) (800) (800) 4,400 (7,500) (7,500) (1,200) 374,300 (1,200) 374,300 2. Ans. D. CHAPTER 4-EXERCISE 12: ALDER PAINTS RM Inventory, beg Purchases Freight-in RM available for use Less:RMInventory,end uRsM ed Direct labor Factoryoverhead (45% ofDirect labor) Totalmanufacturingcost Add: WIP, beg T o t a lgo o dspla c e din t opro c e ss le ss :WI P ,e nd( S que e z e ) C o s t o f g o o ds m a n u f a c t u r e d ( S q u e e z e ) Add:Finishedgoods,beg. Cost of goods available for sale le ss :F i nis he dgo o ds,e nd Costofsales(estimated)** ** Sales Multiply by Cost rate (100%-32.5%) Estimatedcostofsales 15,000 50,000 5,000 55,000 70,000 (30,000) 4 0 , 0 0 0 2. 40,000 18,000 98,000 50,000 1 4 8 , 0 0 03. 5 6 , 7 5 0 4. 9 1 , 2 51. 0 70,000 161,250 ( 60, 000 ) 101,250 Ans C. Ans. D. Ans. A. Ans. D. 150,000 68% 101,250 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 36 of 155 CHAPTER 4-EXERCISE 13: NATURAL CORPORATION Inventory, Jan. 1 80,000 Purchases 400,000 Less:Purchasediscounts (40,000) Purchase returns and allowance (30,000) 330,000 Costofgoodsavailableforsale 410,000 Estimated cost of sale S ales 380,000 Less:Salesreturns (20,000) Sales for GP method purposes 360,000 Divide by: Selling price % 120% 300,000 E st i m a t e de n di ngi nv e n t o ry 1 1 0 , 0 0 1. 0 Ans. C. Less: Inventory not damaged by fire (in-transit) (40,000) I nv e n t o rly o ss 7 0 , 0 0 02. Ans. C. CHAPTER 4-EXERCISE 14: BAGUIO CORP. 1. Ans. C. Sales GrossProfit Grossprofit%basedonsales years 3 Divide by: Av e ra ggero spsro fria t te 2011 5,008,000 1,502,400 2012 5,640,000 1,466,400 2013 Total 5,440,000 1,849,600 30% 26% 34% 90% 3 30 % 2. Ans. A. Collections from customers Jan. 1 to Sept. 1 Add: AR, Sept. 1 Less: AR, Jan. 1 G r o sssa l e s( a c c r ua lba si s) 6,030,400 1,031,120 (1,044,720) 6,0 16, 800 3. Ans. Payments to suppliers Jan. 1 to Sept. 1 Add: AP, Sept. 1 Less: AP, Jan. 1 G r o s s pu r c h a s e s ( a c c r u a l ba s i s ) 3,900,000 982,800 (705,120) 4,1 77, 680 4. Ans. Inventory, Jan. 1 Purchases 1,150,800 4,177,680 Costofgoodsavailableforsale Less: Estimated cost of sales S ales Multiply by: Cost % (100%-30%) E st i m a t e dI nv e nt o r y ,S e pt .1 5. Ans. A. EstimatedInventory,Sept.1 Goodsoutonconsignment Goods in transit as of Sept.1 I nv e n t o rlyo ss CHAPTER 4-EXERCISE 15: AB CORP. 1. Ans. B. Sales for 10 months (Jan to Oct) (a) Cost of Sales 10 months (Jan to Oct) (b) G r o sspr o fi t 5,328,480 6,016,800 70% (4,211,760) 1,1 16, 720 1,116,720 390,000 139,000 4,590,000 (2,295,000) 2,2 95, 000 (a)Sales10months,unadjusted Less: Delivery in transit (FOB Dest.) AdjustedSales10months Less: Sales returns and allowance Add: Employeediscounts Normalbreakages Sales 10 months, adjusted (for GP comp only) 529,000 587 ,72 0 100% 50% 50% 4,765,000 (75,000) 4,690,000 (300,000) 150,000 50,000 4,590,000 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 37 of 155 (b) Beg Inventory Net purchases(as adjusted:)(c) Cost of Goods Available for sale (10 months) Less: Inventory, end (550,00+90,000) CostofSales(10months) 450,000 2,485,000 2,935,000 (640,000) 2,295,000 (c)Purchases,unadjusted Add: Purchase in transit FOB shipping point Freight in Less:Purchasediscount Purchase returns and allowance Netpurchases(asadjusted) 2. Ans. A. Sales (12 months), as adjusted (for GP Method)(d) Sales (10 months), as adjusted (for GP Method) 2,450,000 90,000 60,000 (45,000) (70,000) 2,485,000 6,575,000 (4,590,000) Gross Sales for 2 months (for GP Method) Less: Sales in Dec. at 10% mark-up on cost Sales in Dec. at normal 50% mark-up Multiply by normal Cost %, u nder normal GP% CostofsalesatnormalGPrate Add: Cost of sales 10% markup on cost T o t a l c o s t o f s a le s f o r 2 m o n t hs 1,985,000 (110,000) 1,875,000 50% 937,500 100,000 1, 037 ,5 00 (d)Sales12months,unadjusted Less: Sales returns and allowance (12 months) Add: Employee discounts (12 months) Add: Normal breakages (12 months) Sales 12 months, adjusted 6,750,000 (375,000) 150,000 50,000 6,575,000 3. Ans. D. , 2,295,000 1,037,500 3,3 32, 500 , T o t a lC o sto fS a le s 4. Ans. B. Inventory,beginning Add: Net Purchases (12 months) Gross Purchases Freight in 450,000 3,410,000 90,000 Purchasediscount (70,000) Purchase returns and allowance (100,000) Cost of Goods Available for Sale (12 months) Cost of Sales 12 months (see number 3 solution) E st i m a t e de n di ngi nv e n t o ry 3,330,000 3,780,000 (3,332,500) 44 7, 500 CHAPTER 4-EXERCISE 16: SURETY CORP. Cost Retail Cost % 598,400 1,500,000 3,048,400 5,500,000 80,000 (140,000) (180,000) Mark-ups 600,000 Mark-up cancellations (100,000) Cost of goods available for sale - Conserv. 3,586,800 7,320,000 49% Mark-downs (1,300,000) Mark-down cancellations 385,000 Cost of goods available for sale - Average 3,586,800 6,405,000 56% Less: Beginning inventory (598,400) (1,500,000) Purchases - FIFO Retail 2,988,400 4,905,000 61% Beginning inventory Purchases Freight in Purchase returns Cost of goods available for sale at Retail Less: Cost of sales at Retail/Sales Sales Sales returns Employee discount EstimatedInventoryatRetail 6,405,000 4,470,000 (150,000) 400,000 (4,720,000) 1,685,000 1. Ans. B. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 38 of 155 Estimated Inventory at Retail Multiply by Cost % - Conservative Estimated Inventoryat Cost Less:Inventorypercount I nv e n t o rysh o rt a ge 1,685,000 49% 825,650 (649,600) 1 76, 050 2. Ans. C. Estimated Inventory at Retail Multiply by Cost % - Conservative Estimated Inventoryat Cost Less:Inventorypercount I nv e n t o rysh o rt a ge 1,685,000 56% 943,600 (649,600) 2 94, 000 3. Ans. C. Estimated Inventory at Retail Multiply by Cost % - Conservative 1,685,000 61% Estimated Inventory at Cost Less:Inventorypercount I nv e n t o rysh o rt a ge 1,027,850 (649,600) 3 78, 250 CHAPTER 4-EXERCISE 17: TITANIUM CORP. Cost Retail Cost % Beginning inventory 1,020,000 1,920,000 Purchases 13,072,500 22,155,000 Freight in 300,000 Purchase returns (450,000) (750,000) Purchase allowance (270,000) Departmental transfer debit 300,000 425,000 Departmental transfer credit (600,000) (1,200,000) Abnormal spoilages and breakages (120,000) (200,000) Net markup 450,000 Cost of goods available for sale - Conserv. 13,252,500 22,800,000 58% Net markdown (1,425,000) Cost of goods available for sale - Average 13,252,500 21,375,000 62% Less: Beginning inventory (1,020,000) (1,920,000) Purchases - FIFO Retail 12,232,500 19,455,000 63% Cost of goods available for sale at Retail Less: Cost of sales at Retail/Sales Sales Sales returns Employee discount Normal Spoilage EstimatedInventoryatRetail 21,375,000 19,800,000 (450,000) 300,000 600,000 (20,250,000) 1,125,000 1. Ans. B. Estimated Inventory at Retail Multiply by Cost % - Conservative Estimated Inventory at Cost Less: Inventorypercount I nv e n t o rysh o rt a ge 1,125,000 58% 652,500 (400,000) 2 52, 500 2. Ans. A. Estimated Inventory at Retail Multiply by Cost % - Conservative Estimated Inventoryat Cost Less:Inventorypercount I nv e n t o rysh o rt a ge 1,125,000 62% 697,500 (400,000) 2 97, 500 3. Ans. C. Estimated Inventory at Retail Multiply by Cost % - Conservative Estimated Inventoryat Cost Less:Inventorypercount I nv n t o rysh o rt a ge 1,125,000 63% 708,750 (400,000) 3 08, 750 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 39 of 155 CHAPTER 4-EXERCISE 18: NANCY INC. 1. Ans.A. Item Quantity Unit Cost Z-01 10,000 Z-02 15,000 Z-03 20,000 Z-04 25,000 Z-05 30,000 Y-01 20,000 Y-02 22,000 Y-03 28,000 Y-04 25,000 Y-05 30,000 2. Ans. Total Cost NRV 25 22 26 35 30 23 25 30 25 25 Lower of Cost or NRV 20 200,000 22 330,000 26 520,000 32 800,000 30 900,000 22 440,000 25 550,000 25 700,000 25 625,000 15 450,000 5,515,000 20 25 30 32 35 25 22 26 35 30 TotalCost TotalNRV LCorNRV 200,000 250,000 375,000 330,000 600,000 520,000 800,000 875,000 1,050,000 900,000 3,025,000 2,875,000 2,875,000 22 28 25 30 15 23 25 30 25 25 20 25 30 32 35 22 28 25 30 15 5,981,000 LowerofCostorNRV L o s s o n i nv e n t o ry w r it e - d o w n 5,515,000 4 66, 000 3. Ans. B. Class Z: Quantity Unit Cost Z-01 10,000 Z-02 15,000 Z-03 20,000 Z-04 25,000 Z-05 30,000 NRV Class Y: Y-01 Y-02 Y-03 Y-04 Y-05 2. Ans. Total Cost LowerofCostorNRV L o s s o n i nv e n t o ry w r it e - d o w n 20,000 22,000 28,000 25,000 30,000 440,000 616,000 700,000 750,000 450,000 2,956,000 460,000 550,000 840,000 625,000 750,000 3,225,000 5,981,000 5,831,000 1 50, 000 CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION Markers Pens Pencils Historical cost 24,000 18,880 30,000 Selling price 36,000 21,800 38,000 Estimated cost to complete (3,000) (2,620) (6,200) Estimated cost to sell (1,800) (2,180) (3,800) Netrealizablevalue 31,200 17,000 28,000 LowerofcostorNRV 24,000 17,000 28,000 1. Ans. B. Total Cost LowerofcostorNRV Lo s so nw rit e- d o w n 72,880 69,000 3, 880 2. Ans. B. Total Cost LowerofcostorNRV Allowance forwrite-down,end Allowance for write-down, beg. Lo s so nw rit e- d o w n 72,880 69,000 3,880 2,000 1, 880 3. Ans. B. Total Cost LowerofcostorNRV Allowance forwrite-down,end Allowance for write-down, beg. Gaino nre c o v e ry 72,880 69,000 3,880 5,000 (1 , 1 2 0 ) 69,000 4. Ans. C. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES 2,956,000 5,831,000 AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 40 of 155 CHAPTER 4-EXERCISE 20:OCTOBER INC. 1. Ans. B. Finishedgoods Item A ItemB Item C Cost 500,000 1,200,000 800,000 NRV (Selling price - Cost to sell) 800,000 1,050,000 1,080,000 LowerofCostorNRV 500,000 1,050,000 800,000 2. Ans. B. Work-in-process DirectMaterials Direct Labor Overhead Total Cost Selling price upon completion Costtocomplete Cost to sell (% of Sellin price) NRV LowerofcostorNRV ItemA ItemB ItemC 30,000 45,000 75,000 50,000 65,000 35,000 25,000 40,000 80,000 105,000 150,000 190,000 200,000 250,000 240,000 (50,000) (40,000) 110,000 105,000 (60,000) (75,000) 115,000 115,000 (40,000) (24,000) 176,000 176,000 3. Ans. B. RM - Item A (FG not written-down, thus RM - Item A shall not be tested anymore. RM A-01 RM A-02 Cost 120,000 95,000 RM Item - B Cost NRV(Replacementcost) 2,350,000 RM B-01 RM B-02 80,000 100,000 80,000 RM B-03 105,000 98,000 98,000 110,000 100,000 100,000 396,000 215,000 278,000 RM - Item C (FG not written-down, thus RM - Item C shall not be tested anymore. RM C-01 RM C-02 Cost 175,000 40,000 215,000 T o taLlo w eorCfo sotN r RV 7 08, 000 4. Ans. D. FG 2,500,000 2,350,000 Cost LowerofCostorNRV Lo s so nw rit e- d o w n 1 50, 000 5. Ans. B. Cost LowerofCostorNRV AllowanceforWD,ending AllowanceforWD,beginning LossonWD(Recoverygain) 2,500,000 2,350,000 150,000 60,000 90,000 WIP RM 445,000 396,000 725,000 708,000 49,000 17,000 216,000 445,000 396,000 49,000 70,000 (21,000) 725,000 708,000 17,000 17,000 86,000 CHAPTER 4-EXERCISE 21:SOLSONS COMPANY Quantity A 360 units B2 4 units C 28 units D4 3 units E 400 units F 70 dozens G 95 grosses Cost NRV 3.60/dozen 3.64/dozen 4.70 each 4.80 each 16.50 each 16.50 each 5.15 each 5.20 each 9.10 each 8.10 each 2.00 each 2.00 each . 144.00/gross Amount at Lower of Cost or NRV 108.00 - 360/12per dozen*P3.60 112.80 462.00 221.45 3,240.00 1,680.00 - 70*12 per dozen*P2 12,540.00 18,364.25 Ans. A. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 41 of 155 CHAPTER 5: AUDIT OF INVESTMENTS DISCUSSION PROBLEMS CHAPTER 5-PROBLEM 1 1 D 2 A 3 C 4 C 5 C 6 D 7 A 8 A CHAPTER 5-PROBLEM 2: KILALA CORP. CASE 1: FA at Amortized Cost 1. Ans.P1,038,896. January 1, 2014: Financial asset at amortized cost 1,038,896 Cash Quotedprice(P1M*95%) 950,000 Transactioncost 88,896 I n i t i a lc o s t 1,038, 896 1,038,896 Amortization table: FA at Amortized Cost Correct Int. (Bal*eff%) January 2014: 1, December 31, 2014: December 31, 2015: December 31, 2014: Cash Interest income Interest income FA at amortized cost 2. Ans. P93,501. December 31, 2015: Cash Interest income Interest income FA at amortized cost 3. Ans. P92,916. Nominal Int. Amortization Balance (Princ*nom%) 1,038,896 93,501 100,000 (6,499) 1,032,397 92,916 100,000 (7,084) 1,025,312 100,000 100,000 6,499 6,499 100,000 100,000 7,084 7,084 4. Ans. P1,025,312. 5. Ans. P24,688 gain Salesproceeds(1/1/16) Less: Carrying Value/Amortized cost R e a l i z e dg a i no nsa l e 1,050,000 1,025,312 24 ,688 CASE 2: FA at FMV through Profit or Loss 1. Ans. P950,000. January 1, 2014: F Aa tF M V ( P 1 M *9 5 % ) 95 0,000 Expense 88,896 Cash December 31, 2014: Cash InterestIncome(P1M*10%) FMV FA at Unrealizedholdinggain Fair Value (12/14): P1M*120% Carrying value Unrealized holding gain -P/L 2. Ans. P261,104. Transactioncost(Expense) Interestincome Unrealizedholdinggain N e ti n v e s t m e n ti n c o m e 1,038,896 100,000 100,000 250,000 250,000 1,200,000 950,000 250,000 (88,896) 100,000 250,000 26 1,104 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA December 31, 2015: Cash InterestIncome(P1M*10%) Unrealizedholdingloss FMV at FA F a i r V a l u e ( 1 2 / 1 5 ): P 1 M * 1 0 5 % Carryingvalue Unrealized holding loss - P/L 3. Ans. (P50,000) Interestincome Unrealizedholdingloss N e ti n ve s t m e n tl o ss SOLUTIONS GUIDE 42 of 155 100,000 100,000 150,000 150,000 1,050, 000 1,200,000 (150,000) 100,000 (150,000) (50,0 00) 4. Ans. P1,050,000. 5. Ans.0 Salesproceeds(1/1/16) Less: Carrying Value/FMV, 12/31/15 R e a l i z e dg a i no nsa l e 1,050,000 1,050,000 - CASE 3: AVAILABLE FOR SALE SECURITY 1. Ans.P1,038,896. January 1, 2014: Availableforsalesecurity 1,038,896 Cash Quotedprice(P1M*95%) 950,000 Transactioncost 88,896 I n i t i a lc o s t 1,038, 896 1,038,896 Amortization table: Available for sale security Correct Int. Nominal Int. Amortization Balance (Bal*eff%) (Princ*nom%) January 2014: 1, 1,038,896 December 31, 2014: 93,501 100,000 (6,499) 1,032,397 December 31, 2015: 92,916 100,000 (7,084) 1,025,312 December 31, 2014: Cash Interest income Interest income Availableforsalesecurity Availableforsalesecurity Unrealizedholdinggain-OCI Fair Value (12/14): P1M*120% Amortizedcost(12/14) Unrealized holding gain - OCI of SCI 2. Ans. P93,501 Interestincome-P/L(2014) December 31, 2015: Cash Interest income Interest income Availableforsalesecurity Unrealized holding loss - OCL of SCI Availableforsalesecurity Fair Value (12/15): P1M*105% Amortizedcost(12/15) Unrealized holding gain - SHE, end Unrealized hoding gain - SHE, beg Unrealized holding loss - OCL of SCI 3. Ans. (P142,916) Unrealized holding loss - OCL of SCI (201 4. Ans. P24,688. Unrealized holding gain - SHE, end 100,000 100,000 6,499 6,499 167,603 167,603 1,200,000 1,032,397 167,603 93,501 100,000 100,000 7,084 7,084 142,916 142,916 1,050,000 1,025,312 24,688 167,603 (142,916) (142,916) 24,688 5. Ans. P1,050,000. CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 6. Ans. P24,688 gain Salesproceeds(1/1/16) Less: Carrying Value/Amortized cost R e a l i z e d g a i no n s a l e SOLUTIONS GUIDE 43 of 155 1,050,000 1,050, 000 CHAPTER 5-PROBLEM 3: SOTA CORPORATION CASE 1: FA at Amortized Cost 1. Ans. P10,758,157. January 1, 2014: Financial asset at amortized cost 10,758,157 Cash 10,758,157 FMV = Present value of future cash flows at 10% effective rate for 5 periods. Principal (P10,000,000*0.620921) 6,209,213 0.620921 Interest (P1,200,000*3.790787) 4,548,944 3.790787 Initialcost 10,758,157 Amortization table: FA at Amortized Cost January 2014: 1, December 31, 2014: December 31, 2015: June 30, 2016: December 31, 2014: Cash Interest income Interestincome FA at amortized cost 2. Ans. P1,075,816. December 31, 2015: Cash Interest income Interestincome FA at amortized cost 3. Ans. P1,063,397. Correct Int. Nominal Int. (Bal*eff%) (Princ*nom%) 1,075,816 1,063,397 524,869 1,200,000 1,200,000 600,000 Amortization Balance 10,758,157 (124,184) 10,633,973 (136,603) 10,497,370 (75,131) 10,422,239 1,200,000 1,200,000 124,184 124,184 1,200,000 1,200,000 136,603 136,603 4. Ans. P10,497,370. 5. Ans. P622,239 loss Salesproceeds(6/30/16) Less: Ca rrying Value/Amortized cost Accruedinterest R e a l i z e dl o sso nsa l e 10,400,000 (10,422,239) (600,000) (622, 239) CASE 2: FA at FMV through Profit or Loss 1. Ans. P10,758,157. January 1, 2014: FA at FMV 10,758,157 Cash 10,758,157 FMV = Present value of future cash flows at 10% effective rate for 5 periods. Principal (P10,000,000*0.620921) 6,209,213 0.620921 Interest (P1,200,000*3.790787) 4,548,944 3.790787 Initialcost 10,758,157 December 31, 2014: Cash InterestIncome(P10M*12%) 1,200,000 1,200,000 FMV FA at 213,759 Unrealizedholdinggain 213,759 FairValue(12/14)** 10,971,916 Carryingvalue 10,758,157 Unrealized holding gain -P/L 213,759 **FMV = Present value of remaining cash flows at 9% for 4 periods. Principal: (P10,000,000*0.708425) 7,084,252 Interest: ( P1,200,000*3.239720) 3,887,664 FMV(12/14) 10,971,916 2. Ans. P1,413,759. Interestincome Unrealizedholdinggain N e t i nve s t m e nt inc o m e 0.708425 3.239720 1,200,000 213,759 1,413, 759 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA December 31, 2015: Cash InterestIncome(P10M*12%) SOLUTIONS GUIDE 44 of 155 1,200,000 1,200,000 FMV at FA 58,923 Unrealizedholdinggain-P/L 58,923 FairValue(12/15)** 11,030,839 Carryingvalue 10,971,916 Unrealizedholdinggain-P/L 58,923 **FMV = Present value of remaining cash flows at 8% for 3 periods. Principal: (P10,000,000*0.793832) 7,938,322 Interest: ( P1,200,000*2.577097) 3,092,516 FMV(12/15) 11,030,839 3. Ans. P1,258,923. Interestincome Unrealizedholdinggain N e t i n ve s t m e n t i n c o m e 0.793832 2.577097 1,200,000 58,923 1,258, 923 4. Ans. P11,030,839. 5. Ans. P1,230,839 loss Salesproceeds(6/30/16) Less: Ca rrying Value/Amortized cost Accruedinterest R e a l i z e d l o ss o n sa l e 10,400,000 (11,030,839) (600,000) (1, 230,839 ) CASE 3: AVAILABLE FOR SALE SECURITY 1. Ans. P10,758,157. January 1, 2014: Availableforsalesecurity 10,758,157 Cash 10,758,157 FMV = Present value of future cash flows at 10% effective rate for 5 periods. Principal (P10,000,000*0.620921) 6,209,213 0.620921 Interest (P1,200,000*3.790787) 4,548,944 3.790787 Initialcost 10,758,157 Amortization table: Available for sale security Correct Int. Nominal Int. Amortization Balance (Bal*eff%) (Princ*nom%) January 2014: 1, 10,758,157 1,075,816 December 31, 2014: 1,200,000 (124,184) 10,633,973 1,063,397 December 31, 2015: 1,200,000 (136,603) 10,497,370 December 31, 2014: Cash Interest income Interestincome Availableforsalesecurity 1,200,000 1,200,000 124,184 124,184 Availableforsalesecurity 337,943 Unrealizedholdinggain-OCI 337,943 FairValue(12/14)** 10,971,916 Amortizedcost(12/14) 10,633,973 Unrealized holding gain - OCI of SCI 337,943 **FMV = Present value of remaining cash flows at 9% for 4 periods. Principal: (P10,000,000*0.708425) 7,084,252 Interest: ( P1,200,000*3.239720) 3,887,664 FMV(12/14) 10,971,916 2. Ans. P1,075,816. Interest income - P/L (2014) December 31, 2015: Cash Interest income Interestincome Availableforsalesecurity Availableforsalesecurity Unrealizedholdinggain-OCIofSCI Fair Value (12/15): P1M*105% Amortizedcost(12/15) Unrealized holding gain - SHE, end Unrealized hoding gain - SHE, beg Unrealized holding gain - OCI of SCI 0.708425 3.239720 1,075,816 1,200,000 1,200,000 136,603 136,603 195,526 195,526 11,030,839 10,497,370 533,468 337,943 195,526 **FMV = Present value of remaining cash flows at 8% for 3 periods. Principal: (P10,000,000*0.793832) 7,938,322 Interest: ( P1,200,000*2.577097) 3,092,516 FMV(12/15) 11,030,839 0.793832 2.577097 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 3. Ans. P195,526. Unrealized holding gain - OCI of SCI (201 4. Ans. P533,468 Unrealized holding gain - SHE, end SOLUTIONS GUIDE 45 of 155 195,526 533,468 5. Ans. P11,030,839. 6. Ans. P622,239 loss Salesproceeds(6/30/16) Less: Carrying Value/Amortized cost Accruedinterest R e a l i z e d l o ss o n sa l e 10,400,000 (136,603) 10,263, 397 CHAPTER 5-PROBLEM 4: ABC COMPANY 1. Ans. P35,479. FMV(12/31/14) 6,229,862 Carryingvalue U nr eal iz ed hol d i ng g a in - P/L 6,194,383 35 ,479 2. Ans. P6,229,862. 3. Ans. 0. The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period. Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. Instead what shall be recognized is the unrealized holding gain or loss from the FA's remeasurement since it will still be treated as FA at FMV at the end of 2015. December 31, 2015: Entry upon remeasurement as FA at FMV Unrelizedholdingloss-P/L 15,870 FMV atFA 15,870 January 1, 2016: Entry upon transfer to FA at Amortized Cost FA at amortized cost (FMV 12/15) 6,213,992 FA at FMV (CV) 6,213,992 4. Ans. P6,213,992. (As FA at FMV) 5. Ans. P6,111,111. Amortization table: FA at Amortized cost at 8% effective rate: Correct Int. Nominal Int. Amortization Balance (Bal*eff%) (Princ.*nom%) December 31, 2015: 6,213,992 December31,2016: 497,119 600,000 (102,881) 6,111,111 December31,2017: 488,889 600,000 (111,111) 6,000,000 CHAPTER 5-PROBLEM 5: ABC COMPANY 1. Ans. P6,151,877. Amortization table: FA at amortized cost at 9% Correct Int. (Bal*eff%) January 2014: 1, December31,2014: 557,494 December31,2015: 553,669 2. Ans. (P138,865) Proceeds f rom sa le ( P5,897,249*4/6) Carryingv alue( P6,105,546*4/6) R e a l i z e d l o ss o n p a r t i a l sa l e 1 2 5,144,032.92 1,069,958.85 6,213,992 Nominal Int. Amortization Balance (Princ.*nom%) 6,194,383 600,000 (42,506) 6,151,877 600,000 (46,331) 6,105,546 3,931,499 4,070,364 (138, 865) 3. Ans. 0. The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period. Thus, there shall be no gain or loss resulting from transfer on December 31, 2015. 4. Ans. P7,345. Unrealized gain/loss on transfer on Janaury 1, 2016: FMV of remaining investment (P5,897,249*2/6) 1,965,750 Carrying value of remaining i nv. ( P6,105,546*2/6) 2,035,182 Unrealized gain/loss on remeasurement on December 31, 2016: FMV (12/31/16) 1,973,094 CV(FMVat12/31/15) 1,965,750 Net unre al iz ed ho ld ing ga in or loss in th e 20 16 pr ofit or loss (69,432) 7,345 (62, 088) 5. Ans. P1,973,094. CHAPTER 5-PROBLEM 6: BET CO. Amortization table: FA at amortized cost at 10%. Correct Int. (Bal.*Eff%) January 2014: 1, December31,2014: 924,184 December31,2015: 936,603 Nominal Int. Amortization Balance (Princ*Nom%) 9,241,843 800,000 124,184 9,366,027 800,000 136,603 9,502,630 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 46 of 155 1. Ans. P4,667,769. Amortized cost, December 31, 2015: 9,502,630 Accrued interest, December 31, 2015: 800,000 Present value of new future cash flows at 10% Principal:(P10M*75%)*0.751315 I mp a i r m e nlto ss 10,302,630 5,634,861 4,667, 769 0.7513148 2. Ans. P6,198,347. Amortization table: FA at amortized cost after impairment: Correct Int. Nominal Int. Amortization Balance (Bal.*Eff%) (Princ*Nom%) December31,2015:AfterImpairment 5,634,861 December31,2016: 563,486 563,486 6,198,347 3. Ans. P1,239,669. Amortizedcost,December31,2016 Present value of revised cash flows at 10% Principal(P10M*90%)*0.826446 I mp a i r m e n tr e c o ve r yg a i n 6,198,347 7,438,017 1,239, 669 0.826446 4. Ans. P8,181,818. Amortization table: FA at amortized cost after impairment recovery: Correct Int. Nominal Int. Amortization Balance (Bal.*Eff%) (Princ*Nom%) December31,2016:AfterImpairmentrecovery 7,438,017 December31,2017: 743,802 743,802 8,181,818 CHAPTER 5-PROBLEM 7: ABC CORPORATION 1. Ans. FMV at FA 25,000 Unrealizedholdinggain FMV (12/14) Alpha 300,000 Beta 475,000 Total 775,000 Unrealizedholdinggain -P&L 25,000 2. Ans. Unrealized holding loss - OCL of SCI FAatFMVthroughOCI/L Charlie,FMV(12/14) Carrying value, including transaction cost Unrealized holding loss - OCL of SCI 25,000 CV (excluding transaction cost) 250,000 500,000 750,000 30,000 30,000 850,000 880,000 (30,000) 3. Ans. No entry to remeasure investment in associate to FMV since Investment in Assoc. is accounted for under equity method. 4. Ans. FMV FA at Unrealizedholdinggain-P&L 100,000 Alpha Beta Total Unrealized holding gain -P&L 5. Ans. Unrealized holding loss - OCL of SCI FAatFMVthroughOCI/L Charlie,FMV(12/15) Carryingvaluu(FMV12/14) Unrealized holding loss - OCL of SCI FMV (12/15) 350,000 525,000 875,000 100,000 100,000 CV (FMV 12/14) 300,000 *reclassification is not allowed, thus Alpha is still 475,000 regarded as FA at FMV through OCI/L. 775,000 100,000 100,000 750,000 850,000 (100,000) 6. Ans. P875,000. 7. Ans. P750,000. 8. Ans. P3,260,000. Delta Securities - Investment in Associate Acquisition cost, i ncluding transaction cost Sharefromnetincome(P2.5M*25%) Sharefromforexloss(P500K*25%) Sharefromdividends(P200K*25%) Carryingvalue,12/31/14 AdditionalInvestment Sharefromnetincome(P1.9M*30%) Sharefromforexgain(P600K*30%) Sharefromdividends(P300K*30%) C a r r y i n gva l u e ,1 2 / 3 1 / 1 5 1,650,000 625,000 (125,000) (50,000) 2,100,000 500,000 570,000 180,000 (90,000) 3,260, 000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 47 of 155 CHAPTER 5-PROBLEM 8: ETC INC. Case 1: PAS 39 1. Ans. P51,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng l o s s - S HE 2. Ans. (P30,000) Proceeds from sale (15,000*P8) Original cost (P300,000/30,000)*15,000 R e a l i z e dl o sso nsa l e FMV ( 12/13) Cost 50,000 45,000 250,000 300,000 30,000 36,000 330,000 381,000 (51,0 00) 120,000 150,000 (30,0 00) 3. Ans. (P72,000) Bee Inc. Corp. Si I mp a i r m e n tl o ss-P & L FMV ( 12/14) 90,000 24,000 Cost 114,000 (72,0 00) 150,000 36,000 186,000 4. Ans. P15,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng g a in - S HE FMV (12/14) Cost/Impaired value 60,000 45,000 90,000 90,000 24,000 24,000 174,000 159,000 15 ,000 5. Ans. P174,000. Case 2: PFRS 9 1. Ans. P51,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng l o s s - S HE FMV (12/13) CV 50,000 250,000 30,000 330,000 (51,0 00) 45,000 300,000 36,000 381,000 2. Ans. None. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment shall be transferred directly to RE. 3. Ans. None No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether permanent or temporary shall be recognized in the OCI/L. 4. Ans. P15,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng l o s s - S HE FMV ( 12/14) Cost 60,000 45,000 90,000 150,000 24,000 36,000 174,000 231,000 (57,0 00) 5. Ans. P174,000. CHAPTER 5-PROBLEM 9: ETC INC. Case 1: PAS 39 1. Ans. None. Once equity security investment categorized as financial asset through OCI/L has been impaired due to permanent decline, any recovery from the previous impairment shall not be recognized in the profit or loss, but shall be recognized as unrealized holding gain in the OCI/L. 2. Ans. P300,000 and P141,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng g a in - S HE FMV (12/15) Cost/Impaired value 75,000 45,000 175,000 90,000 50,000 24,000 300,000 159,000 14 1,000 Case 2: PFRS 9 1. Ans. No gain on impairment recovery shall be recognized since the permanent decline was regarded simply as unrealized holding loss in the OCI/L. CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 48 of 155 2. Ans. P300,000 and P69,000. Aye Co. Bee Inc. Corp. Si U nr e al iz e d ho l d i ng g a in - S HE FMV ( 12/15) Cost 75,000 45,000 175,000 150,000 50,000 36,000 300,000 231,000 69 ,000 CHAPTER 5-PROBLEM 10: SHIPO CO. 1. Ans. P2,000,000. Acquisition price Book value of net assets acquired (P48M*25%) Total excess Identifiable asset: Depreciable asset: (P1.2M*25%) 300,000 Land(P6M*25%) 1,200,000 Unidentifiableasset/Goodwill Divide by: 14,000,000 (12,000,000) 2,000,000 1,500,000 500,000 25% To ta l G oodwil l b ased on 25% i nt er est o f S hi po 2. Ans. P2,670,000 Share from net income (P10.8M*25%) Less: Understated Depr (P300,000/10y) S h a r e f r o m n e t i n co me 3. Ans. P16,345,000. Initial cost Sharefromnetincome Share f rom U HGain-OCI ( P800K*25%) Share from dividends (P2.1M*25%) C ar r y in g va l ue , 1 2 / 3 1 / 1 4 2,000, 000 2,700,000 (30,000) 2,670, 000 14,000,000 2,670,000 200,000 (525,000) 16,345, 000 4. Ans. P805,000. Realized 6,750,000 Proceeds from portion sold (25,000*40%)*(P680-P5) Fair value of remaining portion to be reclassified: (25,000*60%)*P680 Carrying value of Investment in Associate: Sold(P16,345,000*40%) Reclassified(P16,345,000*60%) Gain on cessation before recycling of OCI/L Recycling of OCI to P&L Sold (P200,000*40%) Reclassified(P200,000*60%) T o t a lc e ssa t i o ng a i n-P & L Unrealized Total 6,750,000 10,200,000 10,200,000 (6,538,000) 212,000 (9,807,000) 393,000 80,000 29 2,000 5 . A n s. 120,000 513,000 6 . A n s. (6,538,000) (9,807,000) 605,000 80,000 120,000 805,000 7. Ans. P171,000. Proportionate interest before dilution Proportionate interest after dilution Decrease interest in #shares 25,000 25,000 Share from increase in capital due to share issuance: (25,000sh*P680)*20% Prorated CV of portion deemed sold: P16,345,000*(5%/25%) Gain on dilution before recycling of OCI/OCL Recycling of OCI to P&L: P200,000*(5%/25%) Gai n on d i l u tion #shares outs. 100,000 125,000 % interest 25% 20% 5% 3,400,000 (3,269,000) 131,000 40,000 17 1,000 CHAPTER 5-PROBLEM 11: ANALEN INC. Case 1: “Cost-Based Approach, with Catch-up Adjustment”: 1. Ans. P110,000. Share from Net income, Jan to Jun, 2015 (P300,000*10%) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) S h a r efr o mN e tI n c o m ei n2 0 1 5 30,000 80,000 110,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 49 of 155 2. Ans. P3,176,000. January 1, 2014 Cost (10%) SharefromNetIncome,2014(P400,000*10%) Sharefrom Dividends, Oct.1, 2014 (10,000*P0.90) Carrying value, 12/31/14 had equity method been used Share from Net income, Jan to Jun, 2015 (P300,000*10%) Share from Dividends, Apr. 1, 2015 (10,000*P1.10) Additionalinvestment,July1,2015(30%) Share from Dividends, Oct. 1, 2015 (40,000*P1.35) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 700,000 40,000 (9,000) 731,000 30,000 (11,000) 2,400,000 (54,000) 80,000 3,1 76,000 Case 2: “Cost-Based Approach, without Catch-up Adjustment”: 1. Ans. P91,000. DividendsIncome,April1,2015(10,000*P1.10) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) S h a r efr o mN e tI n c o m ei n2 0 1 5 2. Ans. P3,126,000. January1,2014OriginalCost(10%) Additionalinvestment,July1,2015(30%) Share from Dividends, Oct. 1, 2015 (40,000*P1.35) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 11,000 80,000 91,000 700,000 2,400,000 (54,000) 80,000 3,1 26,000 Case 3: ““Fair Market Value Approach, without Catch-up Adjustment” 1. Ans. P91,000. DividendsIncome,April1,2015(10,000*P1.10) 11,000 Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 S h a r efr o mN e tI n c o m ei n2 0 1 5 91,000 2. Ans. P3,226,000. Original Investment at prevailing FMV on July 1, 2015 (10%) 10,000sh*(P2.4M/30K) Additionalinvestment,July1,2015(30%) Share from Dividends, Oct. 1, 2015 (40,000*P1.35) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) C a r r y i n gva l u e ,1 2 / 3 1 / 2 0 1 5 800,000 2,400,000 (54,000) 80,000 3,2 26,000 - the prevailing FMV is based on the current selling price of the additional shares. CHAPTER 5-PROBLEM 12: KIKIO CORPORATION Case 1: Fair Value Method 1. Ans. P12,500,000. Fair Market Value 12/31/2014 12,500,000 2. Ans. P2,000,000. Fair Market Value 12/31/2014 Carrying value (Acquisition cost 1/1/2014) U nr eal iz ed h ol d i ng l oss - P & L 12,500,000 10,500,000 2,000, 000 3. Ans. P11,000,000. Fair Market Value 12/31/2015 11,000,000 4. Ans. (P1,500,000) Fair Market Value 12/31/2015 Carrying value (FMV, 12/31/2014) U nr eal iz ed hol d i ng l oss - P& L 11,000,000 12,500,000 (1, 500,000 ) 5. Ans. P10,000,000. June30,2016FMV 6. Ans. (P1,000,000) June 30, 2016 FMV upon reclassification Carrying value (FMV 12/31/15) U nr eal iz ed hol d i ng l oss - P& L 7. Ans. (P1,000,000) Proceedsfromsale Carrying value (FMV 12/31/15) R e a l i z e d l o ss f r o m sa l e Case 2: Cost Method 1. Ans. P9,450,000. Cost Accum Depr: (P10.5M/10)*1yr C a r r y i n gva l u e P10,000,000 10,000,000 11,000,000 (1, 000,000 ) 10,000,000 (11,000,000) (1, 000,000 ) 10,500,000 (1,050,000) 9 , 4 5 0 , 0 0 0 *lower than FMV, P12.5M, thus not impaired. CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 50 of 155 2. Ans. P8,400,000. Cost Accum Depr: (P10.5M/10)*2yrs C a r r y i n gva l u e 10,500,000 (2,100,000) 8 , 4 0 0 , 0 0 0 *lower than FMV, P10.5M, thus not impaired. 3. Ans. P7,875,000 and None. Cost Accum Depr: (P10.5M/10)*2.5yrs C ar r y in g va l ue , J ul y 1 , 2 0 1 6 10,500,000 (2,625,000) 7 , 8 7 5 , 0 0 0 *lower than FMV, P10M, thus not impaired. 4. Ans. P2,125,000. Proceedsfromsale Carrying value, July 1, 2016 R e a l i z e d g a i n f r o m sa l e 10,000,000 (7,875,000) 2,125, 000 CHAPTER 5-PROBLEM 13: PULITZER INC. January 1, 2010: Lifeinsuranceexpense Cash 180,000 January 1, 2011: Lifeinsuranceexpense Cash 180,000 January 1, 2012: Lifeinsuranceexpense Cash 180,000 December 31, 2012: Cashsurrendervalue Retainedearnings(180,000*2/3) Life insurance expense January 1, 2013: Lifeinsuranceexpense Cash July, 2013: Cash Life insurance expense December 31, 2013: Cashsurrendervalue Life insurance expense CSV,Dec.31,2013 CSV,Dec.31,2012 IncreaseinCSVfor2013 January 1, 2014: Lifeinsuranceexpense Cash August, 2014: Cash Life insurance expense September 30, 2014: Cashsurrendervalue Life insurance expense CSV,12/31/2014 CSV,12/31/2013 Increasefortheyear Multiply by: 9months/12months Increaseupto9/30/14 December 1, 2014: Cash Cashsurrendervalue(9/30/14) Lifeinsuranceexpense(180,000*3/12) Gain on life insurance policy settlement 180,000 180,000 180,000 180,000 120,000 60,000 180,000 180,000 5,000 5,000 60,000 60,000 240,000 180,000 60,000 180,000 180,000 7,000 7,000 37,500 37,500 290,000 240,000 50,000 75% 37,500 5,000,000 277,500 45,000 4,677,500 *unexpired portion as of date of death 1. Ans. P180,000; P120,000; P115,000. Annualinsurancepremium Increaseincashsurrendervalue Dividends from CSV Li f ei n su r a n c ee x p e n se 2011 180,000 - 2012 180,000 (60,000) 2013 180,000 (60,000) (5,000) 18 0,000 120,000 115,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 51 of 155 2. Ans. P0; P180,000; P240,000 3. Ans. P90,500. Annualinsurancepremium Unexpired insurance premium as of date of death Dividend from CSV IncreaseinCSVuptodateofdeath Li f ei n su r a n c ee x p e n se ,2 0 1 4 180,000 (45,000) (7,000) (37,500) 90 ,500 4a) Ans. P4,677,500 4b) Ans. None. MULTIPLE CHOICE EXERCISES: CHAPTER 5-EXERCISE 1: 1. Ans. C. Equity securities of another company where no control nor significant influence exist. The company elected to report gains or losses in the profits/losses Debt security of another company quoted in an active market. Business model of the company has an objective to hold debt securities for shortterm profits. T o t a lf i n a n c i a la s s e ta tF M Vt h r o u g hP& L 100,000 100,000 20 0 , 0 00 2. Ans. A. Equity securities of another company where no control nor significant influence exist. The company elected to report gains or losses in the other comprehensive income/losses 150,000 3. Ans. B. Debt security of another company quoted in an active market. Business model of the company has an objective of collecting contractual cashflows from the bonds which are primarily in the form of interests and principal. 500,000 4. Ans. B. 20% Equity securities of another company quoted in an active market 500,000 5. Ans. D. 51% Equity securities of another company quoted in an active market 1,400,000 6. Ans. B. Realpropertyheldforspeculationpurposes 700,000 Real property of a manufacturing business being leased out to another party under operating lease 900,000 Landheldforundeterminedfutureuse 800,000 Real property being developed asan investment property 300,000 T o t aIl n v e st m e nP t r op er ty 2 ,700,0 00 CHAPTER 5-EXERCISE 2: PINAY CORP. 1. Ans. A. Proceeds(50,000*58) Carrying Value (50,000*55) R e a l i z e dg a i n 2. Ans. C. Proceeds(15,000*59) OriginalCost(15,000*60) R e a l i z e dl o ss 3. Ans. D. Proceeds Accruedinterest Carrying Value (P2,035,182/2) R eal i zed g ai n 2,900,000 2,750,000 15 0,000 885,000 900,000 (15,0 00) 1,100,000 (50,000) (1,017,591) 32 ,409 FMV=Present value of future cash flows at 9% yield rate Principal (P2,000,000*0.84168) 1,683,360 Interest (P200,000*1.759111) 351,822 CV/FMV12/31/2013 2,035,182 4. Ans. A. Proceeds Accruedinterest Carrying Value (P1,973,866/2) R eal i zed g ai n Amortization table: 1/1/13: 12/31/13: 6/30/14: 1,100,000 (50,000) (986,933) 63 ,067 *half of the carrying value which is the fair value on 12.31.13 2,000,000 200,000 0.8416800 1.7591112 **half of the carrying value which is the amortized cost on 6/30/14 Correct interst Nominal Inters Amortization 214,624 108,116 5. Ans A. Alpha shares (FMV through P/L) - (50,000sh*62) 200,000 100,000 14,624 8,116 Balance 1,951,126 1,965,750 1,973,866 3,100,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 52 of 155 6. Ans. B. Alphasahres(FMVthroughP/L) Deltabonds(FMVthroughP/L) T o t a lC u r r e n tI n v e st m e n t 3,100,000 982,143 *** 4,082, 143 FMV=Present value of remaining future cash flows at yield rate 12% Principal (P1,000,000*0.892857) 892,857 1,000,000 Interest (P100,000*0.892857) 89,286 100,000 982,143 CHAPTER 5-EXERCISE 3: BENSHOPPE INC. 1. Ans. C. 2. Ans. C. FMV 12/14 AyeCorp.Shares 700,000 BeeInc.Shares 1,000,000 SeeCo.10%,2MBonds* CV/Cost 540,000 1,080,000 0.892857 0.8928571 (29.50-2-0.50)*20,000sh (27.50-.50)*40,000sh 1,964,948 3,664,948 U n r e a l i z e dh o l d i n gg a i n-I S F i n a n c i a l a sse t s a t F M V t h r o u g h P & L See Co. 10%, 2M Bonds (FMV/PV of Cash Principal(2M*0.8072) Interest(100,000*3.5052) * 3. Ans. C. Investment in Dee Shares (Associate) Intialcost(6/30/14) Sharefromdividends Sharefromnetincome I n v e st m e n t i n A sso c B a l a n c e 1,923,000 (1,973,000-50,000) 3,543,000 12 1,948 3,664, 948 flows using 5.5% semi-annual prevailing effective rate) 1,614,433 1 350,515 1,964,948 2,400,000 (250,000) 280,000 (2,240,000*6/12)*25% 2,430, 000 4. Ans. B. Transactions costs - Expense AyeCorp.Shares BeeInc.Shares Dividendincome-BeeInc. Interestincome-SeeCo. Unrealizedholdinggain-FA Share from net income - Dee Corp. T o t a l / Ne t I n v e st me n t i n c o m e (10,000) (20,000) 120,000 50,000 121,948 280,000 54 1,948 5. Ans. D. See Co Bonds at amortized cost DeeCorp.Shares-Assoc. T o t a l n o n c u r r e n t i n v e st m e t n s 1,930,690 2,430,000 4,360, 690 Amortization table: Financial asset at amortized cost, See Co at effective rate 10% Correct Int. Nominal Int. Amortization Balance October 2014: 1, 1,923,000 *excluding accrued interest December31,2014: 57,690 50,000 7,690 1,930,690 Alternative Solution: Financial asset atamortized cost: SeeCo 10%, 2M Bonds Amortized cost shall be PV of cash flows using srcinal effetive rate (6% semi-annually) Principal( 2,000,000*0.7921) 1,584,187 0.7921 Interest(100,000*3.4651) 346,511 3.4651 Amortized cost, 12/31/14 1,930,698 6. Ans. D. Transactions costs - Expense AyeCorp.Shares BeeInc.Shares Dividendincome-BeeInc. Interestincome-SeeCo. Unrealizedholdinggain-FA Share from net income - Dee Corp. T o t a l / Ne t I n v e st me n t i n c o m e (10,000) (20,000) 120,000 57,690 *(1,923,000*12%*3/12) 80,000 UHG from Aye and Bee only 280,000 50 7,690 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 53 of 155 CHAPTER 5-EXERCISE 4: SITAW CORP. 1. Ans. A. Proceeds from sale of half of SIBUY bonds 51,250,000 Amortized cost October 16, (face value) 50,000,000 R e a l i z e d g a i no n s a l e 1,250, 000 2. Ans. B. PATATAS(1M*P64) BAWA(250,000*P74) U nr e al iz e d ho l d i ng g a in - S HE FMV Cost 64,000,000 62,000,000 18,500,000 20,000,000 82,500,000 82,000,000 50 0,000 *reclassification to FA through P&L not allowed. 3. Ans. C. Interest from SIBUY bonds (Apr. 15 to Oct. 15): P100M*10%*6/12 Interest from remaining SIBUY bonds (Oct. 15 - Dec. 31): P50M*10%*2.5/12 Cash dividends from PATATAS T o t a li n t e r e sta n dd i vi d e n d si n c o m e ,2 0 1 3 4. Ans. A. Proceeds from sale of half o f PATATAS (500,000sh*P65) Originalcost(P62,000,000/2) R e a l i z e d g a i n o n sa l e , u n d e r P A S 3 9 5,000,000 1,041,667 1,500,000 7 ,541,6 67 32,500,000 31,000,000 1,500, 000 5. Ans. D. Proceeds from sale of all BA WA shares (250,000sh*P78) Original cost R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 19,500,000 20,000,000 (500, 000) CHAPTER 5-EXERCISE 5: MARIAH CORP. 1. Ans. A. Proceeds from sale (9,000*65) 585,000 Original cost 441,000 R e a l i z e d g a i n o n sa l e ( P AS 3 9 ) 14 4,000 2. Ans. C. DEFCorp.Shares GHICorp.Shares JKL Shares U nr e al iz e d ho l d i ng g a in - S HE FMV ( 12/14) Cost 1,140,000 1,080,000 348,000 360,000 323,400 325,400 1,811,400 1,765,400 46 ,000 3. Ans. A. IF SHARES ARE FIN. ASSET AT FMV THROUGH PROFIT/LOSSES FMV (12/14) CV (FMV 12/13) DEFCorp.Shares 1,140,000 1,050,000 GHICorp.Shares 348,000 369,600 JKL Shares 323,400 315,000 1,811,400 1,734,600 U nr e al iz e d ho l d i ng g a in - S HE 76 ,800 4. Ans. B. IF JKL SHARES IS INVESTMENT IN ASSOCIATE: Initialcost(including transaction cost) Sharefromdividends(0.75*4200) Sahre from net income (450,000*20%*8/12) C a r r y i n gVa l u e ,1 2 . 3 1 . 1 4 325,400 (3,150) 60,000 38 2,250 CHAPTER 5-EXERCISE 6: ANGEL CORP. 1. Ans. D. Fair Value Dec. 31, 2014 Dec. 31, 2014 Total FMV Uno shares 10,000 160 1,600,000 Dos shares 11,000 105 1,155,000 Tres shares 18,000 140 2,520,000 Quatrobonds 2,000,0008% yield 2,071,331 * 7,346,331 **FMV=Presentvalueofcashflowsat8% 2,000,000 Principal(P 2,000,000*0.85734) 1,714,678 200,000 Interest( P200,000*1.783265) 356,653 TotalFairValue 2,071,331 Carrying values before year-end remeasurement # of shares Uno shares 10,000 Dos shares 11,000 Tres shares Quatrobonds Total Carrying Value CV Dec. 31, 145 72.73 18,000 2,000,000 12% yield 0.85734 1.783265 1,450,000 800,000 100 1,800,000 1,903,927 5,953,927 ** CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 54 of 155 **Acquisitioncost=Presentvalueofcashflowsat12% Principal(P 2,000,000*0.711780) 1,423,560 Interest( P200,000*2.401831) 480,366 TotalFairValue 1,903,927 Unrealized holding gain - P&L 2. Ans. B. Fair market value, Dec. 31, 2014 Carryingvalue U nr eal iz ed h ol d i ng g a in - P& L 3. Ans. B. Proceeds from sale: Dosshares(10,000*P100) Tresshares(18,000*140) Carrying value of shares sold: Dosshares(10,000*80) Tresshares(18,000*100) 2,000,000 0.711780 200,000 2.401831 2,000,000 200,000 0.85734 1.783265 7,346,331 5,953,927 1,392, 404 1,000,000 2,520,000 3,520,000 800,000 1,800,000 2,600,000 Realized gain on sale - P&L 920,000 4. Ans. A. AggregateFairValue(12/31/14)EquitySecuritiesonly Original Cost of Equity Securities: # of shares Cost including Dec. 31, 2014 Trans. Cost Uno shares 10,000 150 Dos shares 11,000 74.55 Tres shares 18,000 108 Total Cost Unrealized holding gain - OCI Total cost 1,500,000 820,000 1,950,000 4,270,000 1,005,000 5. Ans. B. Amortized cost of Quatro bonds (12/31/12) Correct Interes Nominal Inter 1/1/12:OrigCost(12%yieldrate) 12/31/12: 228,471 200,000 Amortization Balance 1,903,927 28,471 1,932,398 5,275,000 CHAPTER 5-EXERCISE 7: DUMBO INC. 1. Ans. B. Proceeds from sale plus accrued interest (P500,000*98%)+(P500,000*12%*11/12) 545,000 Carrying value (Initial cost, excluding accrued interest and transaction cost) Total cash consideration paid 1,044,258 Accrued interest (P1M*12%*6/12) (60,000) Transaction cost (rec. as expense) (10,000) 974,258 Prorata: portion sold 50% (487,129) Accruedinterest:(P500,000*12%*11/12) (55,000) R e a l i z eg da ionsna l e 2,871 2. Ans. C. Proceeds from sale: ABC (15,000*P15) XYZ(5,000*P13) Carrying value: ABC:15,000*(P21.50-P1.50) XYZ: 5,000*(20,000*(P13-P1.50))/23,00 R e a l i z e dl o sso nsa l e 225,000 65,000 300,000 50,000 290,000 350,000 (60,0 00) 3. Ans. D. ABC (25,000sh*P18) XYZ (18,000sh*P15) DEF at 11% yield rate Principal (P500,000*0.9009009) Interest (P60,000*0.9009009) FMV 12/31/14 CV 450,000 270,000 450,450 54,054 U n r e a l i z e dh o l d i n gg a i n-P & L (a) Initial cost ABC (40,000*P20) CVof15,000sharessold Effect of cash div. in lieu of stock div. CVABC,12/31/14 800,000 (300,000) (83,333) 416,667 (b) CV of ABC before cash div. in lieu of stock div. Divide by: # of shares (25,000+5,000) CV of ABC after cash div. in lieu of stock div. (a) (c) 0.9009009 504,505 1,224,505 14 0,709 487,129 1,083,796 (b) 500,000 30,000 16.67 Multiplyby:Remainingshares Carryingvalue,12/31/14 (c) Initial cost DEF (20,000*P11.50) CVofsharessoldon8/5 CVDEF12/31/14 416,667 180,000 25,000 416,667 230,000 (50,000) 180,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 55 of 155 4. Ans. B. Interest income (6/30 to 12/1): P1,000,000*12%*5/12) Interest i ncome ( 12/1 - 1 2/31): P500,000*12%*1/12 I n t e r e st i n c o m e f r o m b o n d i n v e st m e n t 50,000 5,000 55 ,000 5. Ans. A. Stock dividend does not result to dividend income and accounted only through memo entry. Cash in lieu of share dividends is accounted through the "as if" approach, that is, as if shares were received and were as if sold for the cash dividend received. 6. Ans. D. FMV 12/31/14 450,000 270,000 ABC (25,000sh*P18) XYZ (18,000sh*P15) DEF at 11% yield rate Principal (P500,000*0.9009009) Interest (P60,000*0.9009009) T ot al 450,450 54,054 CHAPTER 5-EXERCISE 8: NYU CORP. 1. Ans. D. Proceeds from sale on 11/5 SMC:(400sh*P230) ABI:(800sh*P325) Original cost: SMC:(400sh*P260) ABI:(800sh*P330) R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 504,505 1,224, 505 92,000 260,000 352,000 104,000 264,000 368,000 (16,0 00) 2. Ans. A. Proceeds from sale on 12/31 (P300,000*95%) Amortizedcost(P551,033*3/5) R e a l i z e dl o sso nsa l eo fb o n d s *Amortized cost: 12/31/14 March 2014: 31, December31, 2014:(9months) 285,000 330,620 (45,6 20) Correct Int. (Bal*9%) * Nominal Int. Amortization (Princ*12%) 37,688 45,000 Balance 558,345 (7,312) 551,033 3. Ans. B. SMC(600sh*P275) ABI(1,200sh*P340) TDI(P200,000*95%) U n r e a l i z e d h o l d i n g l o s s -OC I FMV 12/31/14 Cost/Amortized cost 165,000 156,000 (600sh*P260) 408,000 396,000 (1,200sh*P330) 190,000 220,413 (P551,033*2/5) 763,000 772,413 (9,4 13) 4. Ans. C. CHAPTER 5-EXERCISE 9: VEGAS CORP. 1. Ans. C. Proceeds from sale of DEF (4,000sh*P138) CV (FMV 12/31/13): 4,000sh*(P1,056,500/8,000sh) R e a l i z e dg a i no nsa l e 552,000 528,250 23 ,750 2. Ans. D. Proceeds from sale of JKL (4,000sh*P124) Cost:4 ,000sh*(P1,180,000/10,000) R e a l i z e dg a i no nsa l e 496,000 472,000 24 ,000 132 3. Ans. D. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment shall be transferred directly to RE. 4. Ans. D. FAatFMVthroughP&L ABC(13,000*P153.20) DEF(4,000*P137) GHI(P500,000*82.22%) PQR(P400,000*98%) U nr eal iz ed hol d i ng g a in - P& L FMV(12/31/14 CV 1,991,600 548,000 411,100 392,000 3,342,700 84 ,950 1,984,000 528,250 373,500 372,000 3,257,750 (P1,525,000+P459,000) (4,000sh*(P1,056,500/8,000sh)) (P400,000*93%) CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 5. Ans. D. FA at FMV through OCI/L JKL(6,000sh*P110.50) MNO(20,000sh*P44) U nr e al iz e d ho l d i ng l o s s - S HE SOLUTIONS GUIDE 56 of 155 FMV (12/31/14 Cost 663,000 708,000 880,000 980,000 1,543,000 1,688,000 (145, 000) CHAPTER 5-EXERCISE 10: JACK CORP. 1. Ans. C. Proceeds from sale of Wan shares (5,000sh*P60) CV:(P1,145,000/20,000sh)*5,000sh R e a l i z e dg a i no nsa l e-P & L 6,000sh*(P1,180,000/10,000sh) 300,000 286,250 13 ,750 2. Ans. C. Proceeds from sale of Tri shares (25,000sh*P30) Cost: (25,000sh*P35) R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 750,000 875,000 (125, 000) 3. Ans. D. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment shall be transferred directly to RE. 4. Ans. C. FMV of Poor shares Cost I m p a i r m e n t l o s s -P & L 800,000 1,400,000 (600, 000) 5. Ans. D. No impairment loss shall be recognized in the profit or loss under PFRS 9. The decline in the value of the investment, whether permanent or temporary shall be recognized in the OCI/L. 6. Ans. C. Proceeds from sale of Seeks shares (10,000*P45) Cost(P1,000,000/20,000sh)*10,000sh R e a l i z e d l o ss o n sa l e , u n d e r P A S 3 9 450,000 500,000 (50,0 00) 7. Ans. A. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9. The investment shall be remeasured at FMV on the disposal date, recognizing any increase/decrease in the OCI/L. Proceeds from disposal shall be equal to the carrying value, thus no gain or loss shall be recognized in the profit or loss from its disposal. Any OCI/L related to the sold investment shall be transferred directly to RE. 8. Ans. C. FA at FMV through P&L Wanordinaryshares Toopreferenceshares U nr eal iz ed hol d i ng l oss - P& L 9. Ans. C. FA at FMV through OCI/L, under PAS 39 Poorpreferenceshares Fiveordinaryshares Seeksordinaryshares U nr e al iz e d ho l d i ng g a in - S HE 10. Ans. A. FA at FMV through OCI/L, under PFRS 9 Poorpreferenceshares Fiveordinaryshares Seeksordinaryshares U nr e al iz e d ho l d i ng l o s s - S HE FMV 12/31/14 CV (FMV 12/31/13) 825,000 858,750 (P1,145,000/20,000sh)*5,000sh 650,000 700,000 1,475,000 1,558,750 (83,7 50) FMV 12/31/14 COST 800,000 800,000 1,500,000 1,250,000 900,000 1,000,000 3,200,000 3,050,000 15 0,000 FMV 12/31/14 COST 800,000 1,400,000 1,500,000 1,250,000 900,000 1,000,000 3,200,000 3,650,000 (450, 000) *Impaired value under PAS 39 *No impairment loss under PFRS 9 11. Ans. C. 12. Ans. C. CHAPTER 5-EXERCISE 11: EBC CO. 1. Ans. C. Fair Market Value, 12/31/2013 Fair Market Value last remeasurement date, 12/31/2012 (see 1. below) 10% BS Treasury bond at cost (purchased in the current year) U n r e a l i z eHdo l d i nLgo ss *Cost (P25,250 + 32,450) P57,700 FMV adjustment credit balance (500) P160,300 P57,200 103,250 160,450 P150 57,200 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 57 of 155 2. Ans. B. FairMarketValue,12/31/2014 Fair Market Value, last remeasurement date 12/31/2013 U n r e a l i z e dH o l d i n gLo ss 3. Ans. A. Face Value, 10% BS Treasury Bonds Multiplyby:Interestrate Annual interest Mulitiplyby: Monthsoutstanding I n t e r e sti n c o m e P161,100 160,300 (800) 2009 P100,000 10% 10,000 2/12 P1, 667 2010 P100,000 10% 10,000 12/12 P10, 000 4. Ans. C. F air Market Value of the Inv. portfolio, 12/31/2014 P161,100 CHAPTER 5-EXERCISE 12: HART CORP. 1. Ans. C. July 5 sale Proceeds from sale (450*1,000) CV of shares sold (570,000/2,000)*1,000 Oct. 11 sale Proceeds from sale (150*1,000) CV of shares sold (285,000/3,000)*1,000 P450,000 (285,000) 165,000 P150,000 (95,000) 2. Ans. C. June 1 sale Proceedsfromsale(195*20,000) Cost of sharessold (P3,000,000-P90,000) Nov. 20 Proceeds from sale (3,700,000 – 300,000) Cost of shares sold (7,500,000/50,000)*20,000 55,000 220,000 P3,900,000 2,910,000 P3,400,000 3,000,000 3. Ans. D. BLACK INC. FMV(12/31/2014)2,000*150 Carryingvalue(285,000/3,000)*2,000 WHITE INC. FMV(12/31/2014)30,000*190 Carrying value (7,500,000/50,000)*30,000 U N R E A LI Z E DHOLD I N GGA I N–P & L 300,000 190,000 5,700,000 4,500,000 4. Ans. D. BLACK INC.: FMV (12/31/2014) 2,000*150 WHITE INC.: FMV (12/31/2014) 30,000*190 300,000 5,700,000 CHAPTER 5-EXERCISE 13: CSI INC. 1. Ans. B. Acquisitioncost,excluding transaction cost Less: Dividends recievable (shares acquired "Div.-on") I n i t i a lc o st-A B CS h a r e s 200,000 (20,000) 18 0,000 2. Ans. B. Acquisitioncost(1,500sh*P150) Add: Transaction cost I n i t i a lc o st-D E FS h a r e s 225,000 30,000 25 5,000 990,000 400,000 1,390,000 110,000 1,200,000 1,31 0,000 6,000,000 3. Ans. D. No dividend income shall be recognized from the share dividends received from DEF. 4. Ans. B. #ofGHIsharesaftersharesplit Multiplyby:cashdiv.pershare D i v i d e n d i n c o me f r o m c a s h d i v i d e n d s 5,000 5 25 ,000 5. Ans. B. Shares in lieu of cash dividends (4,000sh/4) Fair value shares of D i v i d e n d i n c o me ( sh a r e s i n l i e u o f ca sh ) 6. Ans. C. Financial asset at FMV through P&L ABC(2,000sh*P105) GHI(5,000sh*P75) U nr eal iz ed hol d i ng l oss - P& L 1,000 55 55 ,000 FMV, 12/31 CV 210,000 375,000 585,000 (5,0 00) 180,000 410,000 (P285,000+(5,000sh*P25)) 590,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 7. Ans. C. Financial asset at FMV through OCI/L DEF(1,500sh+300sh)*P160 JKL(4,000sh+1,000sh)*P60 U nr e al i z e d ho l d i ng g a i n - S HE SOLUTIONS GUIDE 58 of 155 FMV, 12/31 Cost 288,000 300,000 588,000 78 ,000 8. Ans. B. Investment in Associate - MNO shares Initialcost,January1,2014 Sharefrom netincome(P600,000*20%) Sharefromforexloss(P100,000*20%) Sharefrom dividends(10,000sh*P12) Carrying value, 12/31/14 255,000 255,000 510,000 (P200,000+(1,000sh*P55) 850,000 120,000 (20,000) (120,000) 830,000 CHAPTER 5-EXERCISE 14: PRINCE INC. 1. Ans. A. Di vi de n d i nc o me fr o m Qu ee n Co rp . in 2 0 1 4 (3 0 0 , 00 0 *1 0 % ) P 3 0, 0 0 0 *note: Queen shares is only 10% (100,000/1,000,000), thus shall be accounted for as AFS. Investment income for investment in AFS shall be through dividends declared by Queen. 2. Ans. C. Share from net income of King Inc. 2013 (650,000*25%) 162,500 Understatement in Depr expense ( 500,000/5)*25% (25,000) S h a r efr o mn e ti n co meo fK i n gI n c .2 0 1 3 137,500 *note: King shares is only 25% (250,000/1,000,000), thus shall be accounted for as Associate Investment under equity method. 3. Ans. C. Fa ir Va lue of Queen Corp sh ar es 12/31/20 14 (10 0,00 0*6.50) 4. Ans. C. Acquisition cost (January 1, 2013) (250,000*10) Sharefromnetincome:2013 CVofInvestment(12/31/13) Sharefromnetincome:2014 Share from dividends: 2014 (100,000*25%) C Vo fI n ve st me n t( 1 2 / 3 1 / 1 4 ) 2,500,000 137,500 2,637,500 37,500 (25,000) 2,650, 000 P650 ,000 vs Rec. Value (FV:250,000*12) P3,000,000 – no imp. vs Rec. Value (FV:250,000*15) P3,750,000 – no imp. 5. Ans. C. Fair value of Queen Shares (AFS), 12/31/14 (100,000*6.50) Fair value of Queen Sahres (AFS), 12/31/13 (100,000*7.00) U n r e a l i z e dHo l d i n gLo ss–S CI P650,000 700,000 P50,000 6. Ans. C. FairvalueofQueenShares(AFS),12/31/14 Originalcost of Queen Shares, 1/1/13 (100,000*5) U n r e a l i z e d H o l d i n g Ga i n ( C u m u l a t i v e ) - S H E / B S 650,000 500,000 1 50,000 CHAPTER 5-EXERCISE 15: ISUZU CORP. 1. Ans. A. Acquisition cost BV of Net Assets acquired (P6.4M*30%) Total excess of acqusition cost over book value Excess attributable to D epreciable a sset (P640K*30%) E x c e ssa t t r i b u t a b l et oGo o d wi l l 2. Ans. C. Share from the net income of associate (P1,280K*30%) Understatement in depr: (P192,000/8yrs) I n ve st m e nI t ncome 3. Ans. A. Acquistion cost Sharefromdividends(P6*40,000sh) Share from net income Carryingvalue,12/31/14 Recoverable amount/Fair value less cost to sell: (40,000shares*P64) Impairment loss 2,592,000 1,920,000 672,000 192,000 48 0,000 384,000 (24,000) 36 0,000 2,592,000 (240,000) 360,000 2,712,000 2,560,000 152,000 4. Ans. B. Share from net income 360,000 Impairment loss (152,000) Net amount t o be rep ort ed i n the in come statement 208,000 5. Ans. B. Dividendincome(P6*40,000sh) 240,000 Unrealizedholdingloss-P&L (32,000) Net amount t o be rep ort ed i n the in come statement 208,000 FMV, 12/31/14 (40,000*P64) 2,560,000 Carryingvalue(Cost) 2,592,000 Unrealized holding loss-P&L (32,000) CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 59 of 155 6. Ans. C. CHAPTER 5-EXERCISE 16: PACQUIAO CORP. 1. Ans. D. Net income 2,500,000 Less: PS share in net income (10%*P50*100,000) 500,000 OSshareinnetincome 2,000,000 Multiply by: Proportionate interest (50,000sh/200,000sh) 25% Share from net income before adjustments 500,000 Understatement in Depr: (P4M*25%)/5yrs (200,000) A d j u st e d sh a r e f r o mN e t I n c o m e 30 0,000 2. Ans. D. Acquisition cost, January, 20 14 ( 50,000sh*P325) Sharefromnetincomein2014 C ar r y i n g va l ue , De c m e b e r 3 1 , 2 0 1 4 16,250,000 300,000 16,550, 000 3. Ans. C. Net income Multiply by: Proportionate interest (50,000sh/200,000sh) Share from net income before adjustments Understatement in Depr: (P4M*25%)/5yrs A d j u st e d sh a r e f r o mN e t I n c o m e 4. Ans. C. Acquisition cost, January, 20 14 ( 50,000sh*P325) Sharefromnetincomein2014 C ar r y i n g va l ue , De c m e b e r 3 1 , 2 0 1 4 CHAPTER 5-EXERCISE 17: IFFY CORP. 1. Ans. Share from net income (P4.8M*30%) Understatement depr. (P1.6M/5)*30% I n v e st m e n t I n c o m e - P & L 2,500,000 25% 625,000 (200,000) 42 5,000 16,250,000 425,000 16,675, 000 1,440,000 (96,000) 1,344, 000 2. Ans. D. Sh a re fro m o t h er co m p . lo ss (8 0 0 , 0 0 0 *30 %) 3. Ans. C. Acquisition price Share from net income (4.8M*30%) Understatement depr. (1.6M/5)*30% Share from other comp. loss (800,000*30%) Share from dividends (1,500,000*30%) C a r r y i n gV a l u e ,1 2 / 3 1 / 1 4 (2 4 0 ,0 0 0 ) 5,000,000 1,440,000 (96,000) 1,344,000 (240,000) (450,000) 5,654, 000 4. Ans. B. CESSATION: Proceedsfromsale(18,000*210) 3,780,000 FMV of remaining share rel assified to FA at FMV (12,000*210) 2,520,000 Total 6,300,000 Less: Carrying Value of Investment in Assoc. before cessation 5,654,000 GainbeforerecyclingofOCLoss 646,000 Recycling of OCloss (240,000) T o t acl e ssa t i o n l o sIs -S 406,000 5. Ans. D. 6. Ans. D. DILUTION: # shares held #sharesoutstanding interest of % Before Dilution After Dilution 30,000 30,000 100,000 125,000 30% 24% Share from increase in Assoc.'s net assets (25,000*210)*24% Carrying value of Investment as if given up (5,654,000*6/30) GainondilutionbeforerecyclingofOCLoss RecyclingofOcloss(240,000*6/30) T o t acl e ssa t i o n l o sI-sS 1,260,000 (1,130,800) 129,200 (48,000) 81,200 CHAPTER 5-EXERCISE 18: BLACK CORP. 1. Ans. A. Acquistionc ost( 300,000sh*P20) 6,000,000 BV of Net Asset (P16M*30%) Excess of acq. cost over book value Excess attrib. to identifiable assets Land(P800,000*30%) Building (P1,200,000*30%) E x c e s s a t t r i b t o Go o d w i l l 4,800,000 1,200,000 240,000 360,000 60 0,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 2. Ans. A. Share from net income (P2.5M*30%) Understatement in Depr: (360,000/5yrs) I n v e st m e n t i n c o m e - P & L SOLUTIONS GUIDE 60 of 155 750,000 (72,000) 67 8,000 3. Ans. D. Investmentincome-P&L Share from Unrealized holding loss - OCL (P500K*30%) Net amoun t t o b e r e p or t ed in the SC I 4. Ans. B. Acquisitioncost Share from dividends (P800,000*30%) Sharefromnetincome Sharefrom OCL(P500,000*30%) C ar r y in g va l ue , 1 2 / 3 1 / 1 4 678,000 (150,000) 52 8,000 6,000,000 (240,000) 678,000 (150,000) 6,288, 000 5. Ans. B. Before Dil. Numberofsharesowned Totaloutstandingshares After Dil. 300,000 1,000,000 30% Decrease 300,000 1,200,000 25% 5% Share from the increase in White's capital as a result of share issue: (200,000sh*P30)*25% 1,500,000 CV of investment deemed sold: (P6,228,000*(5%/30%)) (1,048,000) DilutiongainbeforerecyclingofOCL 452,000 Recycling of OCL(P150,000*(5%/30%)) (25,000) A d j u st e d d i l u t i o n g a i n ( T r u e S a l e ) 42 7,000 6. Ans. B. Share from the increase in White's capital as a result of share issue: (200,000sh*P30)*25% 1,500,000 CV of investment, excluding goodwill deemed sold: (P6,228,000-P600,000)*(5%/30%) (948,000) DilutiongainbeforerecyclingofOCL 552,000 Recycling of OCL(P150,000*(5%/30%)) (25,000) Adjusted dilution gain 527,000 7. Ans. C. Numberofsharesowned Totaloutstandingshares Before Cess. After Cess. 300,000 180,000 1,000,000 1,000,000 30% 18% Proceeds f rom p oriton s old ( 120,000shares*P30) FMV of remaining portion to be reclassified to FA at FMV Less: CV of portion sold (P6,228,000*120/300) CVo fp ortionr eclassified( P6,228,000*180/300) Cessation g ain/loss b efore recycling of OCI/L Recycling of OCL: Portionsold(P150,000*120/300) Portionreclassified(P150,000*180/300) A d j su t e dc e ssa t i o ng a i n Realized 3,600,000 Unrealized 5,400,000 (2,515,200) 1,084,800 (3,772,800) 1,627,200 (60,000) 1,024, 800 (90,000) 1,537,200 Total 3,600,000 5,400,000 (2,515,200) (3,772,800) 2,712,000 (60,000) (90,000) 2,562,000 8. Ans. A. CHAPTER 5-EXERCISE 19: GREENDAY INC. Case 1: “Cost-Based Approach, with Catch-up Adjustment”: 1. Ans. C. Share from net income under Equity Method in 2014 (P1,250,000*15%) Dividend income recognized under FMV Method in 2014 (P3.50*7,500sh) Rertroactive adjustment to RE, beg 2015 2. Ans. A. Share from net income (Jan. 1 - June 30, 2015): P700,000*15% Share from net incoem (Jul. 1 - Dec. 31, 2015): P800,000*25% T o t a li n ve st me n ti n c o m ei n2 0 1 5 3. Ans. A. Acquistioncost,January1,2014 Share from dividends, Aug. 1, 2014 (P3.50*7,500sh) Share from net income in 2014 (P1,250,000*15%) Carrying value, Dec. 31, 2014 (Equity Method) Share from dividends, Apr. 5, 2015 (P4.50*7,500sh) Share from net income (Jan. 1 - Jun. 30, 2015) Acquisitioncost,July1,2015 Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) Share from net incoem (Jul. 1 - Dec. 31, 2015) C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 187,500 26,250 161,250 105,000 200,000 305,000 1,400,000 (26,250) 187,500 1,561,250 (33,750) 105,000 1,000,000 (68,750) 200,000 2,763, 750 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 61 of 155 Case 2: “Cost-Based Approach, without Catch-up Adjustment”: 4. Ans. A. No retroactive adjustment to RE,beg under the Cost-based approach without catch-up adjustement.Instead, whatever is the srcinal cost of the srcinal investment before gaining significant influence shall be its deemed cost. 5. Ans. D. Dividendincome,Apr.5,2015(P4.50*7,500) 33,750 Sharefromnetincoem(Jul.1-Dec.31,2015) 200,000 Tot al investment income in 2015 (Cost-based w/o catch-up adj .) 233,750 6. Ans. D. Acquistion cost, January 1, 2014 (deemed cost) Acquisitioncost,July1,2015 Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) Share from net incoem (Jul. 1 - Dec. 31, 2015) C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 1,400,000 1,000,000 (68,750) 200,000 2,531, 250 Case 3: “Fair Market Value Approach, without Catch-up Adjustment”: 7. Ans. A. No retroactive adjustment to RE, beg under the FMV-based approach without catch-up adjustement. Instead, the srcinal investment shall be remeasured at prevailing fair value at the date significant influence is gained. 8. Ans. D. Dividendincome,Apr.5,2015(P4.50*7,500) 33,750 Sharefromnetincoem(Jul.1-Dec.31,2015) 200,000 To ta l in vest ment i ncome in 2015 FM V-ba sed w/ o ca tc h-up a dj .) 233,750 9. Ans. C. FMV of original investment, July 1, 2015 (7,500sh*P200) Acquisitioncost,July1,2015 Share from dividends, Oct. 1, 2015 (P5.50*12,500sh) Share from net incoem (Jul. 1 - Dec. 31, 2015) C a r r y i n g v a l u e ,D e c .3 1 ,2 0 1 5 *FMV/Acq. Price of new i nvestment (10%) Divide by: # of shares AssumedFMV,July1,2015 1,500,000 1,000,000 (68,750) 200,000 2,631, 250 1,000,000 5,000 200 CHAPTER 5-EXERCISE 20: ORION CORP. 1. Ans. C. Investments in Bonds: Proceeds (PV of future cash flows, effective rate: 10%) Principal: (4,000,000*0.6830) 2,732,054 Interest: (480,000*3.1699) 1,521,535 Intialfairvalue(1/1/13) 4,253,589 0.6830 3.1699 Correct Interes Nominal Inter January 2013: 1, December31,2013: D e c e m b e r3 1 ,2 0 1 4 : December31,2015: December31,2016: * 425,359 41 9,895 413,884 407,273 2. Ans. A. Face Value of bonds Considerationgivenup(FMV) Debit to/Reduction in interest income per books Nominal interest collected/Credited to interest income Interestincomein2013perbooks: Correct interst income (see amortization table) U n d e r st a t e m e n t i n i n t e r e st i n co me i n 2 0 1 3 480,000 480,000 480,000 480,000 Amortization 4,253,589 (54,641) 4,198,948 (60,105) 4,138,843 7. C. (66,116) 4,072,727 (72,727) 4,000,000 4,000,000 4,253,589 (253,589) 480,000 226,411 425,359 19 8,948 3. Ans. A. FMV of bonds, Dec. 31, 2014 at 9% effective rate: (a) 4,211,093 FMV of bonds, Dec. 31, 2013 at 11% effective rate: (b) 4,097,749 U n r e a l i z e dh o l d i n gg a i n-P & L 11 3,345 (a) FMV of bonds, Dec. 31, 2014 = PV of remaining cash flows at 9% effective rate for 2 periods. Principal: P4,000,000*0.841680 3,366,720 0.841680 Interest:P480,000*1.759111 844,373 1.759111 4,211,093 (b) FMV of bonds, Dec. 31, 2013 = PV of remaining cash flows at 11% effective rate for 23periods. Principal: P4,000,000*0.731191 2,924,766 0.731191 Interest:P480,000*2.443715 1,172,983 2.443715 4,097,749 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA 4. Ans. C. Investment in Associate (20%) Acquisition cost BV of net assets acquired (P25M*20%) Excess of Acquisition cost (Attrib. to Depr. Asset) September30,2013AcquisitionCost Share from Dividends, 2013 Sharefrom NI, 2013 (3.8M*20%)*3/12 *Understatement in Depr (800K/10)*3/12 December31,2013CarryingValue Share fromDividends,2014 SharefromNI,2014(5.2M*20%) *Understatemetn in Depr(800K/10) SharefromOCL(400,000*20%) Share fromOCI (300,000*20%) D e c e m b e r3 1 ,2 0 1 3Ca r r yi n gVa l u e SOLUTIONS GUIDE 62 of 155 5,800,000 5,000,000 800,000 * 5,800,000 (80,000) 190,000 (20,000) 170,000 5,890,000 (160,000) 1,040,000 (80,000) 960,000 (80,000) 60,000 6,6 70,000 5. Ans. A. Dividendincome(2*40,000) Unrealized holding gain (155-145)*40,000 Investmentincomeperbooksin2013 Investment income per audit in 2013 (see analysis) R e t r o a c t i v e a d j u st e m e n t t o R E , b e g 80,000 400,000 480,000 170,000 31 0,000 6. Ans. B. CESSATION: Numberofsharesowned Number of outstanding shares BeforeCess. AfterCess. 40,000 30,000 200,000 200,000 20% 15% Realized Unrealized Total Proceedsfromsale(169*10,000) 1,690,000 1,690,000 Fair value of remaining Investment (169*30,000) 5,070,000 5,070,000 CV of investment Portion sold: (6,670,000*10/40) (1,667,500) (1,667,500) Portion reclassified:(6,670,000*30/40) (5,002,500) (5,002,500) Cessation gain, before recycling of OCI/L 22,500 67,500 90,000 Recycling of OCI 15,000 45,000 60,000 Recycling of OCL (20,000) (60,000) (80,000) Total cessation gain/loss 17,500 52,500 70,000 7. Ans. B. Fair Valueon Reclassdate(6/30/14) Carrying Value/Depreciation Cost (6/30/14) R e v a l u a t i o n S u r p l u s ( OC I ) o n R e c l a ss 3,600,000 3,250,000 35 0,000 8. Ans. D. FMV,Investmentproperty,12/31/14 CV,(FMVupon reclasson 6/30/2014) U n r e a l i z e dh o l d i n gl o s s-P & L 3,200,000 3,600,000 (400, 000) CHAPTER 5-EXERCISE 21: JUDE CORPORATION 1. Ans. C. Present value of the installment payments at 12% effective rate: D ownpayament 1 1,000,000 Balance (P4,000,000/4yrs)*3.037349) 3.0373493 3,037,349 Option money related to property acquired 314,779 Property taxes in arrears as of January 1, 2012 147,872 I n i t i a lc o sto ft h ep r o p e r t y 4,500, 000 2. Ans. D.; 3. Ans. B. Cost (Jan. 1, 2012) Accum depr, Dec. 31, 2013 (4.5M/25yrs)*2yrs. Depreciated cost R e c o v e r a b l e a mo u n t / F a i r m a r k e t v a l u e I mp a i r m e nlto ss 4,500,000 360,000 4,140,000 4,100, 000 40 ,000 4. Ans. A.; 5. Ans. C. Recoverableamount12/31/13 4,100,000 Depr2014:P4.1M/23years (178,261) Carrying value, before impairment recovery 3,921,739 Carrying value had there been no impairment: P4 ( . 5 M *2 2 / 2 5 ) 3,960, 000 I mp a i r m e n tr e c o ve r y-P & L 38 ,261 6. Ans. A. PPE to IP If a property is transferred from PPE to IP, and the FMV method is used to value IP, any decrease on the reclassification date shall be recognized as impairment loss in the profit or loss. Any increase in the value, however, on the reclassification date shall be recognized in the OCI as Revaluation Surplus, following PAS 16, PPE.' FMV,12/31/14uponreclasstoIP 4,300,000 Carryingv alue( Depr.C ost:P4.5M*22/25) 3,960,000 R e va l u a t i o nsu r p l u s-OCI 34 0,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 63 of 155 7. Ans. D. IP to PPE If a property is transferred from IP to PPE, and the FMV mehtod is used to value IP, any decrease or increase in the value of the property on the transfer date shall be recognized in the profit or loss. FMV,12/31/14uponreclasstoPPE 4,300,000 Carryingvalue(FMV12/31/13) 4,100,000 G a i no nt h et r a n s f e r-P & L 20 0,000 CHAPTER 5-EXERCISE 22: DADO COMPANY 1. Ans. B. Annualpremium,2014:(P8,000*12mo) Less: Increase in CSV for 2014: (P25,200*1/3) L i f ei n s u r a n c ee x p e n s e ,2 0 1 4 2. Ans. D. Annualpremium,2015:(P8,000*12mo) Less: Increase in CSV for 2015 (P30,000-P25,200) Dividend from CSV L i f ei n s u r a n c ee x p e n s e ,2 0 1 5 3. Ans. C. Annualpremium,2016:(P8,000*12mo) Less: Increase in CSV for 2016 (P39,600-P30,000) Dividend from CSV L i f ei n s u r a n c ee x p e n s e ,2 0 1 6 96,000 (8,400) 87 ,600 96,000 (4,800) (8,000) 83 ,200 96,000 (9,600) (9,600) 76 ,800 4. Ans. D. Insurance premium up to date of death (P8,000*10mo) Less: Increase in CSV up to date of d eath (P50,400-P39,600)*10/12 Dividend from CSV in 2017 L i f ei n s u r a n c ee x p e n s e ,2 0 1 7 80,000 (9,000) (11,200) 59,800 5. Ans. A. Lifeinsurancepolicy 4,000,000 CV of CSV as of October 31, 2017: CSV,Dec.31,2016 39,600 Increase up to Oct.31, 2017: 9,000 48,600 G a i n o n l i fe i n su r a n ce po l i cy se t t l e me n t 3,951, 400 Observe that since the insurance premium are payable monthly, it is assumed that after death on October 31, 2017, no additional insurance premium had been paid. CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 64 of 155 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT DISCUSSION PROBLEMS CHAPTER 6-PROBLEM 1 1 C. 2 C. 3 D. 4 A. 5 D. 6 C. 7 D. 8 B. 9 A. 10 C . 11 B . 12 A. 13 C . 14 D . 15 C . 16 D . 17 C . 18 C . CHAPTER 6-PROBLEM 2: BACOLOD INC. Land 15,600,000 208,000 24,000 Purchase of land Land survey Feesforsearchoftitleforland Building construction permit fee Temporaryquartersforconstructionworkers Paymentstotenantsoftheoldbuilding Cost of to raze the old building Excavation the of land Special assessment of the gov. for road projects Cost construction of Cost of paving parking lot, driveway and sidewalks ListpriceofMachineryandequipmentpurchased Trade discount taken on the machinery Cost freight of and handling Cost testing of the equipment Income from the testing of machinery LandImpr. Buidling Mach.&Eq. 140,000 430,000 184,000 940,000 400,000 80,000 78,000,000 1,600,000 4,567,000 (127,000) 50,000 125,000 (65,000) 1 5, 912 ,0 00 1 ,6 00 ,0 00 80,094,000 4,550,000 1 .A ns . 2 .A n s . 3 .A ns . 4 .A n s . Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012-012. (b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building. The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building. CHAPTER 6-PROBLEM 3: MIRAM COMPANY Land Organizationfees-outrightexpense LandandBuilding(Prorata)* Option payments (P250K-50K)* Broker's fees* Remodellingcostofthebuilding Salaries of executives Stockbonus-Organizationexpense Property taxes - in arrears (P240K*6/12)* Propertytaxes-2014expense(P240K*6/12) *FMV of Land FMV of Building Total Building 1,512,000 160,000 88,320 378,000 40,000 22,080 60,000 96,000 24,000 Adj.toNI (120,000) (50,000) (360,000) (300,000) 1,856,320 1 .A ns . 1,800,000 450,000 2,250,000 524,080 2 .A ns . 1 0 1 (120,000) (950,000) 3 .A n s . CHAPTER 6-PROBLEM 4: ABC CORPORATION a. Land Initial cost, Jan., 2014 Present value of installment payments at 10% effective rate: D ownpayment Balance:( P8M/5yrs)*3.790787 3.790787 2,000,000 6,065,259 8,065,259 2.a. Ans. CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 65 of 155 b. Building Initial cost, Jan., 2014 FMVof sharesissued(100,000sh*P70) Accum. Depr, Dec. 31, 2014: (P7M*10%) C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 7,000,000 (700,000) 1.a. Ans. 6 , 3 0 0 , 02.b. 0 0 Ans. c.1. Equipment A Initial cost, Jan., 2014 Cashpriceequivalent(P2M*90%) Accum. Depr., Dec. 31, 2014: (P1.8M-P180K)*5/15 C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 1,800,000 (540,000) 1.b. Ans. 1 , 2 6 0 , 02.c. 0 0 Ans. c.2. Equipment B Initial cost, July 1, 2014 Purchase price Importdutiesandnonrefundabletaxes Installation cost PV of future retirement cost at 10% effective % for 5 yrs (P161,051*0.6209213) Intialcost,July1,2014 Accum. Depr., Dec. 31, 2014: (P4.4M-440K)*5/15*6/12 C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 4,000,000 250,000 50,000 100,000 0.6209213 4,400,000 (660,000) 1.c. Ans. 3 , 7 4 0 , 02.d. 0 0 Ans. c.3. Equipment C Initial cost, September 1 Fair valueof asset accepted as donation 1,200,000 Accum. Depr., Dec. 31, 2014 (P1.2M-120K)*5/15*4/12 (120,000) 1.d. Ans. C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 1 , 0 8 0 , 02.e. 0 0 Ans. *note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is credited, any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost. d. Furniture and fixture Initial cost, Jan., 2014 Cashpriceuponacquistion Accum Depr., Dec. 31, 2014 (P3.2M-P320K)/10yrs C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 CHAPTER 6-PROBLEM 5: Case 1: ABC CORP. 1. Ans. P39,792. Actual borrowing cost (Jul. 1 - Nov. 31): P1M*12%*5/12 Income from temporary investments (Jul. 1 - Nov. 31) July:(P1,000,000-P100,000)*5%*1/12 August:( P1,000,000-P250,000)*5%*1/12 September (P1,000,000-P550,000)*5%*1/12 October( P1,000,000-P750,000)*5%*1/12 November( P1,000,000-P900,000)*5%*1/12 N e tc a p it a li z a b leb o rr o w i ngc o s t 3,200,000 (288,000) 1.e. Ans. 2 , 9 1 2 , 02.f. 0 0 Ans. 50,000 3,750 3,125 1,875 1,042 417 2. Ans. P70,000. Interest expense (Jan. 2 - Jun. 30): P1M*12%*6/12 Interest expene (Dec. 1 - Dec. 31): P1M*12%*1/12 I nt e re s te xp e n s ef o r2 0 1 4 60,000 10,000 7 0, 00 0 Case 2: PAN CORP. 1. Ans. P4,856,223. Actual borrowing cost from Specific Borrowing: 1st Quarter:P34M*12%*3/12 2ndQ uarter:( P35.020M*12%*3/12) 3rd Qu arter: (P 36,070,600*12%*3/12) 4th Qu arter: ( P37,152,718*12%*3/12) 4,267,300 Borrowing cost from General Borrowing Weighted average actual expenditure* Less: Proceeds from specific borrowing WAAE f inanced by general borrowing Multiply by: Weighted Ave. Gen Borr. %** C a pi t a l i z a bl eb o r r o w i ngc o s t *January 1 April 1 July 31 October 1 December 31 Total 1,020,000 1,050,600 1,082,118 1,114,582 39,316,667 (34,000,000) 5,316,667 11.08% Cost incurred 8,000,000 19,000,000 24,400,000 27,600,000 14,000,000 (10,208) 39 ,7 92 588,923 4 ,8 56 ,2 23 #mo. to 12/31 Peso*Mos. 12 96,000,000 9 171,000,000 5 122,000,000 3 82,800,000 471,800,000 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 66 of 155 Divide months by: 12 Weightedaverageactualexpenditure 12 39,316,667 **Actual General Borrowing Cost 24,000,000*10% P 2,400,000 P28,000,000*12% 3,360,000 Divide by: Proceeds from Gen. Borr. (P24M+P28M) Weightedaveragegenearlborrowing% 5,760,000 52,000,000 0 2. Ans. P5,171,077. Actual General Borrowing Cost 5,760,000 Less: Capitalizable Gen. Borr. Cost (588,923) Ge n . B o r r . C o s t . - I n t e r e s t E x p e n s e 5, 17 1, 077 *note that the entire actual borrowing cost from specific borrowing had been entirely capitalized. 3. Ans. P97,856,223. *January 1 April 1 July 31 October 1 December 31 Capitalizableborrowingcost C a rr y in g v a lu e, 1 2/ 31 /1 4 8,000,000 19,000,000 24,400,000 27,600,000 14,000,000 4,856,223 9 7, 85 6, 22 3 CHAPTER 6-PROBLEM 6: KELSON CORP. 1. Ans. P254,628 Depreciation of Old Buildings (3,600,000-796,200)*6% Depreciation of New Building (1,800,000-360,000)*6% D e p r e c i a t i o ne xp e ns e–B U I L D I N GS 2. Ans. P36,000. Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12 3. Ans. P276,000. DepreciationofOldMachinery(2,325,000/10) DepreciationofNewMachinery(870,000/10)*6/12 D e p r e c i a t i o n e x p e n s e – M A C HI N E R Y A N D E Q U I P ME N T 4. Ans. P66,300. Leasehold improvement carryingvalue (12/31/2013) Divide by: Remaining useful life: 8yrs-3yrs=5yrs (shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) D e p r e c i a t i o n e x p e n s e – L E A S E HO L D I MP R O V E ME N T 5. Ans. P43,369. DeliveryEquipment:B ookvalue,Jan.1,2014 Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014 Balancesubjecttodepreciation Multiplyby150%decliningrate(1/5)*150% DepreciationontheRemainingDeliveryEquipment Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 Depn on truck sold on Sept. 30, T o t a l D e p r e c i a t i o n e x p e n s e – D E L I V ER Y EQ U I P M EN T 168,228 86,400 25 4,6 28 36,000 232,500 43,500 27 6,0 00 331,500 5 66 ,3 00 137,400 (31,356) *P24,300+P7,056 106,044 30% 31,813 4,500 7,056 43 ,3 69 CHAPTER 6-PROBLEM 7: GANADO CORPORATION 1.a. P56,214. Buidling,CVJan.1,2014 936,900 Multiply by: 150%Dbrate over 25 years 6% D ep r ec i at i on e xp e ns e - B ui ld i ng 5 6, 21 4 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 67 of 155 1.b. Ans. P103,775. Depr. on Disposed Mach.: P23,000/10yrs*3/12 Depr. on New Mach.:P310,000/10yrs*6/12 Depr. on Remaining Mach.: P877,000/10yrs D e p r e c i a t i o n e x p e n s e - Ma c h & E q p t 575 15,500 87,700 10 3, 77 5 1.c. Ans. P21,000. Depr.onNew Auto:P12,000*4/10 Depr. on Remaining Auto:** DepronAutohadtherebeennochange Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) D e p rExp e ns e-A u t o m o t iv eEq u ip m e nt 2.a. Ans. P319,314. Accum. Depr - Building, Jan. 1, 2014 Depr for the year A cc um . D epr - Bu ild ing, De c. 3 1, 2 01 4 2.b. Ans. P342,275. Accum. Depr - Mach&Eqpt, Jan. 1, 2014 Accum. Depr of M&E disposed on Apr 1, Depr for the year A c c u m . D e pr - M & E D e c . 3 1 , 2 0 1 4 4,800 18,000 (1,800) 16,200 21 ,0 00 263,100 56,214 3 19 ,3 14 250,000 (11,500) 103,775 34 2, 27 5 2.c. Ans. P99,300. Accum. Depr - Auto. Eqpt. Jan. 1, 2014 Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, Depr for the year A c c u m . D e pr - M & E D e c . 3 1 , 2 0 1 4 84,600 (6,300) 21,000 9 9, 30 0 3. Ans. P11,500. CV on the date of fire (P23,000*5/10) 11,500 Recoverable value I mp a ir me nt lo s s d ue t o fi r e 1 1, 50 0 Note: The reimbursement received from insurance company is recognized as a separate transaction, thus income from insurance settlement shall be recognized separately. 4. Ans. (P700) Fairvalueofassetreceived Cash paidtoequalizeexchange Assumed fair value of asset given-up CV ofassetgiven up Los s on t ra d e- i n 12,000 (10,000) 2,000 2,700 ( 70 0) CHAPTER 6-PROBLEM 8: MALIK CORP. 1.a. Ans. P732,000. Replacementofwoodenrooftobrickroof 300,000 Majorimprovementonelectricalwiringsystem 70,000 Stormwindowsandscreensinstallation 162,000 Automaticdoor-openingsysteminstallation 200,000 Tota l am ount ca pi ta liza bl e to Buildi ng or Buildi ng Im pr ovem ents 73 2, 00 0 1.b. Ans. P690,000. Replacementofretiredfactoryequipment Rearrangement cost to ensue a more efficient production Overheadcraneintheassemblydepartment T o t a la m o u ntc a p i t a l iz a b l et oEq ui p m e nt 1.c. Ans. A c q u is ti o no ff u rn i tu r e 500,000 120,000 70,000 6 90 ,0 00 5 0, 00 0 2. Ans. P1195,000. Repaintingofbuilding Routinaryrepairstobuilding Replacementsofminorgears Service contract of office equipment Sealing of roof leaks in the factory Tota l re pa irs an d ma inte na nce e xp ense 60,000 50,000 20,000 40,000 25,000 19 5, 00 0 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 68 of 155 CHAPTER 6-PROBLEM 9: BONBON COMPANY 1. Ans. P3,640,000. Cost, Jan. 2005 Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30 C a rr y in gv a lu e ,D e c .3 1 ,2 0 1 4 5,200,000 (1,560,000) 3 ,6 40 ,0 00 2. Ans. P1,645,700. Present value of future net cash flows at 10% effective rate for 15 years remaining life: From continued use: P200,000*7.60608) 7.606080 1,521,216 From eventual disposal: P520,000*0.239392) 124,484 Value in Use 0.239392 1,645,700 3. Ans. P1,645,700. V al u e in Us e 1, 64 5, 700 FMVlessCosttosell 1,560,000 Recoverable value shall be the Value in Use, since it is higher. 4. Ans. P1,994,300. Carryingvalue,Dec.31, 2014 Recoverableamount I m p a ir m e ntlo s s 3,640,000 1,645,700 1, 99 4, 300 5. Ans. P75,047. Carrying value, Dec. 31, 2014 after impairment Less: Salvage value Depreciable cost Divideby:remainingusefullife D ep r ec i at i on e xp e ns e 1,645,700 520,000 1,125,700 15 7 5, 04 7 CHAPTER 6-PROBLEM 10: LEGASPI CORP. 1. Ans. P5,518,855. Present value of future net cash flows at 5% effective rate for 4 years remaining life: From continued use: 7.606080 2015: (P4,500,000-P1,680,000)*0.952381 2,685,714 0.952381 2016: (P4,800,000-P2,520,000)*0.907029 2,068,027 0.907029 2017: (P3,900,000-P3,300,000)*0.863838 518,303 0.863838 2018:( P1,200,000-P900,000)*0.822702 246,811 0.822702 From eventual disposal: 0 Value in Use 0.239392 5,518,855 2. Ans. P5,518,855. V al u e in Us e 5, 51 8, 855 FMVlessCosttosell 5,070,000 Recoverable value shall be the Value in Use, since it is higher. 3. Ans. P1,861,145. Carryingvalue,Dec.31, 2014 Recoverableamount I m p a ir m e ntlo s s 7,380,000 5,518,855 1, 86 1, 145 CHAPTER 6-PROBLEM 11: NAIA COMPANY 1. Ans. P150,000. Replacementcost Mulitply by condition % (7yrs/10yrs) Fair value/Sound value/Depr. Repl. Cost Fairvalue,12/31/14 Divideby:remaininglife D ep r ec i at i on e xp e ns e , 20 15 2. Ans. P180,000. Fairvalue,12/31/14 Carrying value, 12/31/14 (P1.2M*7/10) Revaluationsurplus,12/31/14 Transferred to RE in 2015 (210K/7yrs) R ev al ua t io n s u rp l us , 12 /3 1/ 15 3. Ans. P900,000. Fairvalue,12/31/14 Depr in 2014 C a rr y i n gv a l u e , 1 2 / 3 1 / 1 5 1,500,000 70% 1,050,000 1,050,000 7 15 0, 00 0 1,050,000 840,000 210,000 (30,000) 18 0, 00 0 1,050,000 (150,000) 90 0, 00 0 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 69 of 155 4. Ans. P50,000 and P150,000. Proceedsfromsale Carrying value, 12/31/16 (P1,050,000*5/7) Ga ino ns a le-P & L 800,000 (750,000) 5 0, 00 0 Revaluation sur plus bala nce , 12/ 31/ 16 (2 10,000 *5/7) 5. Ans. P565,714. Fair marketvalue,12/31/14 Carryingvalue,12/31/14 Revaluationsurplus,12/31/14 Divideby:remaininglife AnnualtransfertoRE R ev al ua t io n s u rp l us , 12 /3 1/ 15 1,500,000 840,000 660,000 7 94,286 56 5, 71 4 CHAPTER 6-PROBLEM 12: PEPSI CORP. 1. Ans. P2,000,000. Carrying value, 12/31.2012 (P24M-P8M) Recoverable amount (higher)* I m p a ir m e ntlo s s 16,000,000 14,000,000 2, 00 0, 000 Value is use FMVlesscosttosell 14,000,000 13,500,000 2. Ans. P1,750,000. Carrying value, 1/1/13 after impairment Divideby:remainingusefullife Annual de pr ecia ti on af te r im pa irme nt 150,00 0 -provide additional depr. for 2012 (P18M/9yrs) higher 14,000,000 8 1, 75 0, 000 3. Ans. P1,500,000. Recoverable amount/FMV 15,000,000 Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12,000,000 Incr ea se o ve r CV h ad t he re b ee n no i mp arim ent is i gn ored u nd er c os t me th od. 3, 00 0, 00 0 Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method. Carrying value had there been no impairment: (P16M*6yrs/8yrs) Carrying value based on the impaired value: (P14M*6yrs/8yrs) Ga ino ni m p a i r m e n tr e c o ve ry-P & L - whether under cost or FMV method, the gain on impairment 4. Ans. P2,000,000. Carrying value had there been no impairment (cost method) Divideby:remainingusefullife Annual de pr ecia ti on af te r re co ve ry, co st me thod 12,000,000 10,500,000 1 ,5 00 ,0 00 recovery is recognized in the P&L. 12,000,000 6 2, 00 0, 00 0 5. Ans. None. The property had been transferred from PPE to Investment property, where the property is measured under FMV model. Under the FMV model of valuing investment properties, no depreciation is provided, instead the propety is remeasured at each balance sheet date at their prevailing FMV. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss. CHAPTER 6-PROBLEM 13: RAM CORP. 1. Ans. P500,000. Fair Value/Soud Value, 1/1/2014 Carrying Value, 1/1/2014 (P5 M*8yrs/10yrs) R ev al ua t io n S u r p lu s , 1 /1 /2 01 4 4,500,000 4,000,000 50 0, 00 0 2. Ans. P562,500. Carrying value after revaluation, 1/1/14 Divideby:remainingusefullife An n ua l d ep r . a ft er r ev a lu at i on 4,500,000 8 56 2, 50 0 3. Ans. P700,000. Carrying value based on revalued amount, 1/1/17 (P4.5M*5yrs/8yrs) 2,812,500 Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) 2,500,000 ReversalofrevaluationsurplusintheOCI 312,500 Incidentally, this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus to retained earnings. (P500,000*5yrs/8yrs) Carrying value had there been no revaluation, 1/1/17 (P4M*5yrs/8yrs) Recoverablevalue/FMV,1/1/17 I m p a ir m e nlto sP-s& L 2,500,000 1,800,000 7 00 ,0 00 4. Ans. P360,000. Carrying value after impairment loss, 1/1/17 Dividebyremainingusefullife: R ev is e d a nn u al d e p r. a f t er im p ai r men t l os s 1,800,000 5 36 0, 00 0 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 70 of 155 MULTIPLE CHOICE EXERCISES: CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY 1. Ans. C.; 2. Ans. C. Land Building Landandbuildingacquisitionprice 1,308,000 Property taxes in arrears, Jan. 1, 2014: (P20,000*1yr/2yrs) 10,000 Optionpaymentonproperty acquiredonly 15,000 Cost of removal of old buidling 22,000 Partialpaymentonconstructedbuilding 700,000 Legal fees 4,000 1,500 Insuranceduringconstructiononly:(P24,000*4/12) 8,000 Secondpaymentonconstructedbuilding 600,000 Generalexpense-relatedtoconstruction 12,000 Finalpaymentonconstructedbuilding 200,000 1,337,000 1,543,500 2. Ans. D. Correct cost of Building, July 1, 2014 Divide by: useful life Annualdepreciation Multiply by: 6months/12 months in 2014 D e p r e c i a t i o nf o r2 0 1 4 1,543,500 25 61,740 6/12 3 0, 87 0 CHAPTER 6-EXERCISE 2: MILDEN COMPANY 1. Ans. C.; 2. Ans. C. Land 2,500,000 Acquisition price Cost of razing old building Proceeds from sale of salvaged materials Title insurance and legal fees to purchase land Architect’s fees Newbuildingconstructioncost 150,000 600,000 15,000,000 2,650,000 15,870,000 CHAPTER 6-EXERCISE 3: BOND COMPANY 1. Ans. B. Actual borrowing cost from Specific Borrowing: P10M*12% Borrowing cost from General Borrowing Weighted average actual expenditure* 25,395,167 Less: Proceeds from specific borrowing (10,000,000) WAAE f inanced by general borrowing 15,395,167 Multiply by: Weighted Ave. Gen Borr. %** 8.67% Capitalizableborrowingcost A c t u a l b o r ro wi n g c o st ( P 1 .2 M+ P 5 0 0 K+ P 8 0 0 K) *January 1 March 1 September 1 December 31 Total Divide months by: 12 Weightedaverageactualexpenditure Building 300,000 (30,000) Cost incurred 18,228,500 7,000,000 4,000,000 5,000,000 **Actual General Borrowing Cost P5,000,000*10% 500,000 P10,000,000*8% 800,000 Divide by: Proceeds f rom Gen. Borr. (P10M+P5M) Weightedaveragegenearlborrowing% 1,200,000 1,334,248 2,534,248 2 , 5 0 0 , 0 0 0lower #mo. to 12/31 Peso*Mos. 12 218,742,000 10 70,000,000 4 16,000,000 304,742,000 12 25,395,167 1,300,000 15,000,000 0 2 .Ans. A. Since actual borrowing cost was fully capitalizable, no borrowing cost shall be recognized as outright expense for 2014. CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA 3. Ans. B. January 1 March 1 September 1 December 31 Capitalizableborrowingcost C a rr y in g v a lu e, 1 2/ 31 /1 4 SOLUTIONS GUIDE 71 of 155 18,228,500 7,000,000 4,000,000 5,000,000 2,500,000 3 6, 72 8, 50 0 CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION Machine A: Carrying Value, 1/1/14 (P30,000*80%*80% 19,200 Salvage value (5,000) Depreciablecarryingvalue 14,200 Divide by: years 8 8 D e p r e c i a t i o ne xp e ns e 1Ans. , 7 7 5 B. Machine B: Carrying value, 1/1/4/14 (P50,000-P25,000) Salvage value Depreciablecarryingvalue Divide by: remaining useful life (4yrs+2yrs) D e p r e c i a t i o ne xp e ns e 25,000 (5,000) 20,000 6 3Ans. , 3 3 3 B. Machine C: Depreciation expense, 2014 (P20,000*60%*40%) CHAPTER 6-EXERCISE 5: DELITE CORP. 1. Ans. A. Machinery AB001 Carrying Value 1/1/14 (6M*10/20) Less:Salvagevalue Depreciablecarryingvalue Divideby:Extendedremaininglife D ep r ec i at i on e xp e ns e i n 20 14 3,000,000 (600,000) 2,400,000 15 16 0, 00 0 2. Ans. C. Machinery DE020 Cost 1/1/12 Less:Salvagevalue Depreciablecost Divide by: Useful life AnnualDepreciation 6,790,000 (500,000) 6,290,000 20 314,500 Capitalizablecoston1/1/14 Divideby:Remaininglife AdditionalDepreciation Tot a l D ep r ec i at i on i n 2 01 4 486,000 18 27,000 34 1, 50 0 3. Ans. C. Machinery GH033 Cost 7/1/14 Down payment: Balance:(3M*2.577097) Initial Cost (Cash Price/Present Value) Multplyby:DoubleDecl.Balrate Multiplyby(6months/12months) D ep r ec i at i on i n 2 01 4 ( 6 mo.) 4. Ans. A. Wasting Asset Cost Restorationcost Salvagevalue Depletablecost Divide by: Useful life (output) Depletion rate: Mulitply by: Actual production T o t a lD e p l e t i o n 4,800 Ans. B. 1,000,000 7,731,291 8,731,291 25% 1/2 1, 09 1, 411 18,000,000 2,000,000 (1,000,000) 19,000,000 7,600,000 2.50 1,200,000 3, 00 0, 000 5. Ans. B. Depletion rate: Mulitplyby:Actualsales D e p l e t i o ne x p e n s e 2.50 900,000 2, 25 0, 000 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 72 of 155 CHAPTER 6-EXERCISE 6: JERSEY CORP. 1. Ans. D. Cost 6,100,000 2,550,000 1,030,000 9,680,000 Building Machinery Equipment Total Depreciationexpense Divideby:Totalcost C om p os i t e d ep r ec ia t io n r at e 2. Ans. A. Depreciablecost Divide by: Depreciation expense C o m p o s i tlei f e Salvage 1 00,000 50,000 3 0,000 Depr. Cost 6,000,000 2,500,000 1,000,000 9,500,000 Life in years Depr. Exp. 20 300,000 5 500,000 10 100,000 900,000 900,000 9,680,000 9 .3 0 % 9,500,000 900,000 1 0 .5 6 3. Ans. B. Total cost Multiply by: Compositedepr. rate D e p r e c i a t i o ne xp e ns e 9,680,000 9.30% 90 0, 00 0 4. Ans. C. Building Equipment Total Multiply by: Compositedepr. rate D e p r e c i a t i o ne xp e ns e 6,100,000 1,030,000 7,130,000 9.30% 66 2, 91 3 CHAPTER 6-EXERCISE 7: GRANNY INC. 1. Ans. B. Tools disposed, 2014 Cost of earlier purchase (From beg. Invty) Total Less: P roceeds from sale (300*10) D ep r ec i at i on 300 40 12,000 (3,000) 9, 00 0 Tools disposed, 2015: 700 Cost of earlier purchases (500*40) Cost of next earlier purchase (200*60) Less: P roceeds from sale (700*14) D ep r ec i at i on 20,000 12,000 (9,800) 2 2, 20 0 2. Ans. D. Tools disposed, 2014 Cost of later purchase (2006 purchase) Total Less: P roceeds from sale (300*10) De p r e c i a t i o n 300 60 18,000 (3,000) 1 5, 00 0 Toolsdisposed,2015:700 Cost of latest purchases (2015 purchase) Total Less: Proceeds from sale (700*14) Depreciation 700 80 56,000 (9,800) 46,200 3. Ans. C. 2014 32,000 24,000 56,000 (40,000) 16,000 (3,000) 1 3, 00 0 Beginning inventory Purchases Cost of tools available for use Ending inventory Balance Less:Proceedsfromsale D e p r e c i a t i o ne xp e ns e CHAPTER 6-EXERCISE 8: COCO COMPANY 1. Ans. A. ProceedsfromsaleofMach.Aye Carrying Value as of date of disposal Original Cost **Accum. Depr.: 638,000*(45/55) Gao sin a le 2015 40,000 72,000 112,000 (35,000) 77,000 (9,800) 67,200 260,000 700,000 (522,000) 178,000 8 2, 00 0 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA 2. Ans. A. MachineryBee(Cost) Accum Depr (1/1/14) 9 ( 60,000/15,000hrs)*11,000hrs CarryingValue,1/1/14 SOLUTIONS GUIDE 73 of 155 1,020,000 (704,000) 316,000 Mach. Bee (Depr Carrying Value): (316,000-36,000) Div. by: Revised remaining useful life (18,000-11,000) Depreciationrateperhour Multiplyby:Actualhoursusedin2014 D e p r e c i a t i o nE xp e n s ei n2 0 1 4 280,000 7,000 40.00 2,100 8 4, 00 0 3. Ans. B. Mach.See(Cost) 1,600,000 Accum Depr (1/1/14) **(1.5M/15)*3yrs (300,000) CarryingValue(1/1/14) 1,300,000 **as per policy, no depreciation on year of acquisition; full on year of disposal Mach See (Depr Carrying Value): 1.3M-100,000 Divideby:Revisedremainingusefullife D e p r e c i a t i o nE xp e n s ei n2 0 1 4 4. Ans. C. Carrying Value of remaining machineries: Cost: Machinery Bee Machinery See Machinery Dee Machinery Eff Accum. Depr: Bee:(704,000+84,000) See:(300,000+120,000) Dee:( 1.6M*20%)+(1,280K*20%) Eff: (440K*20%) C a rr y in g v a lu e as of D e c emb e r 31 , 2 01 4 CHAPTER 6-EXERCISE 9: PQR CORP. 1. Ans. A. Building,CV1/1/14 Multiply by: Double decl. bal. rate (20yrs) D ep r ec i at i on e xp e ns e - B ui ld i ng 2. Ans. A. Depreciation - Machinery Disposed Mach: P2.4M/10yrs*6/12 NewMach:P1.45M/10yrs*6/12 Remaining Mach: P12.6M/10yrs D e p r e c i a t i o n e x p e n s e - Ma c h i n e r y 3. Ans. B. Depreciation - Furniture and Fixture DisposedF&F: P1.8M*6/55*2/12 NewF&F:P2.2M*10/55*6/12 RemainingF&F:P4.2M*6/55 D e p r e c i at i o n e xp e ns e - F& F 1,200,000 10 12 0, 00 0 1,020,000 1,600,000 1,600,000 440,000 (788,000) (420,000) (576,000) (88,000) 5. Ans. D. Proceedsfromsale (1,872,000) 2 ,7 88 ,0 00 5,904,900 10% 59 0, 49 0 120,000 72,500 1,260,000 1, 45 2, 500 32,727 200,000 458,182 69 0, 90 9 Present value of installment price at 8% effective rate: P 2.4M/3yrs*2.577097 2,061,678 Freightandhandlingcost 138,322 TotalinitialcostofnewF&F 2,200,000 4. Ans. D. Fair market value of asset given-up Carrying value of asset given-up, 6/30/14 P2.4M*5.5yrs/10yrs) ( L o s so nt ra d e - i n 4,660,000 2.577097 1,250,000 (1,320,000) ( 70 ,0 00 ) 400,000 Carrying value of F&F sold, 3/1/14 L o s so ns a l eo fF & F Cost Accum Depr, 1 2/31/13 ( P1.8M*34/55) Depr. up to 3/1/14 (P1.8M*6/55*2/12) Carryingvalue,3/1/14 (654,545) (2 54 , 5 45 ) 1,800,000 (1,112,727) (32,727) 654,545 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 74 of 155 CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP. 1. Ans. C. Debit January1,2010(A,B,C) 409,200 September 30, (D) (18,000+6,000) 24,000 October 31, (D) 18,000 November 30, (D) 18,000 December 31, (D) 18,000 December31,Depreciation(20%ofbal) January31,2011(D) 18,000 February 28, (D) 18,000 March 31, (D) 18,000 April 30, (D) 18,000 May 31, (D) 18,000 June 30, (D) 18,000 June 30, (E) 240,000 July 31 (D) 18,000 August 30, (D) 18,000 December 31, Depreciation (20%of bal) June 30, 2012 (F) (P279,000-P129,000) 150,000 December 31, Depreciation (20%of bal) January1,2013:(P75,000-P3,750) December 31, Depreciation (20%of bal) October 1, 2014: December31,Depreciation(20%ofbal) Credit Balance 409,200 433,200 451,200 469,200 487,200 389,760 407,760 425,760 443,760 461,760 479,760 497,760 737,760 755,760 773,760 619,008 769,008 615,206 543,956 435,165 411,165 328,932 (97,440) (154,752) (153,802) (71,250) (108,791) (24,000) (82,233) 2. Ans. A.; 6. Ans. C. Correct cost Equipment A Equipment B Equipment C Equipment D: C ash price equiv.+Trans. Cost Equipment E: Cash price equiv. (net of disc.) EquipmentF:atFMV C o r r eCc1V t2, / 3 1 / 1 4 3. Ans. B. ProceedsfromsaleofC,net CV of C, 1/1/2013: P132,000*2yrs/5yrs Ga i n on s a le oC f 1/1/10: 157,200 1/1/10: 120,000 132,000 /1/10: /30/14: 186,000 6/30/11: 235,200 279,000 /30/12: Date of Acq Date of Disp 6/30/12: 10/1/14: 1 1/1/13: 9 6 - Cond. % as of 12/31/14: - 0.75yrs/5yrs 1.5yrs/5yrs 2.5yrs/5yrs CV as of Depr. Exp. 12/31/14: 2014 18,000 27,900 37,200 70,560 47,040 139,500 55,800 2 37 ,9 60 158,040 71,250 52,800 1 8, 45 0 4. Ans. D. ProceedsfromsaleofB CV of B, 10/1/14: P120,000*0.25yrs/5yrs Ga i n on s a le oB f 24,000 (6,000) 1 8, 00 0 5. Ans. C. FMV of A, (Asset given-up): CV of A, 6/30/12: P157,200*2.5yrs/5yrs Ga ino nt ra d e - i n CHAPTER 6-EXERCISE 11: ROLLING CORP. 1. Ans. B. Proceeds CarryingV alue( 1.5M*80%*80%*80%)-64,000** L os s on d i s p os al o f ol d F ac t o ry eq u ip me nt 2. Ans. A. Downpayment PV of Balance, at 10% for f our periods: P250,000*3.169865 Incidentalcosts(freight and installation) PV of future retirement cost, at 10% for 10 period: P227,041*0.385543 I ni t i al c o s t o f n e w Fa c t o r y e q u i p me n t 3. Ans. C Fair value of asset given up (1,200,000-500,000) *Book value of asset given up Gain on trade-in 129,000 (78,600) 5 0, 40 0 250,000 704,000 **depreciation for 5 months in 2014 (4 54 , 0 00 ) P1,000,000 792,466 120,000 87,534 P2 ,00 0, 00 0 700,000 Cost 355,000 Accum Depr (3 yrs + 7 mo. 345,000 Carrying Value 4. Ans. D. Building (10,000,000*90%)*12/120 Building Improvement (780,000*12/78) T o t a l D e p r . – B u i l d i n g & I m pr o v. 1,000,000 645,000 355,000 900,000 - building being deprecated on its 4 th year. 120,000 - over the remaining life of building which is 12 years. 1 ,0 20 ,0 00 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 75 of 155 5. Ans. C. Disposed: (1,500,000*80%*80%*80%*20%)*5/12) New: (2,000,000*20%*7/12) Balance: (6,500,000**80%*80%*80%*20%) T o t a l D e p r e c i a t i o n – F a c t o r y Eq u i p m e n t 6. Ans. C. Disposed: (1,000,000*90%)/5*7/12 New: (1,200,000*90%)/5*5/12 Balance (4,000,000*90%)/5 Total Depreciation – Automotive 64,000 233,333 665,600 9 62 ,9 33 105,000 90,000 720,000 915,000 7. Ans. D. Cost Land Building and Improvements FactoryEquipment AutomotiveEquipment Total Accum Depr. CV 5,000,000 5,000,000 10,780,000 4,170,000 6,610,000 8,500,000 4,070,933 4,429,067 5,200,000 2,970,000 2,230,000 18,269,067 CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY 1. Ans. C. Equipment per audit: (P100,000*0.92593) 92,593 0.92593 Equipment per books, Feb. 1, 2014 100,000 A d j u s t m e n t t o Eq u i p m e n t a c c o u n t ( 7 ,4 07 ) 2. Ans. D. Buildingperaudit:atFMV Buidling per books, June 1, 2014 A d j us t m e n t t o B ui ld i n g a c co un t 650,000 500,000 15 0, 00 0 3. Ans A. Inventory Fixtures Total Per audit: Prorata based on relative FMV 75,893 49,107 125,000 Perbooks,Apr.1,2015 85,000 55,000 140,000 Adjustement to Inventory and Fixtures (9,107) (5,893) (15,000) 4. Ans. A. Peraudit,LandatFMV Perbooks,September,2015 A d j us t m e n tt oL a n d 48,500 4 8, 50 0 5. Ans. B. Peraudit,MachineryatFMV Perbooks,October12,2015 A d j us t m e n tt oMa c hi ne ry 40,000 45,000 ( 5 ,0 00 ) 6. Ans. A. Equipment, Correct cost (see #1) Divide by: Useful life D ep r ec i at i one xp e ns e ,20 15 92,593 10 9, 25 9 7. Ans. A. Building,Correct cost (see #2) Divide by: Useful life D ep r ec i at i on e xp e ns e , 20 15 650,000 25 2 6, 00 0 8. Ans.A. Fixtures,Correctcost(see#3) Divide by: Useful life D ep r ec i at i one xp e ns e ,20 15 49,107 10 4, 91 1 9. Ans. A. Machinery,Correct cost (see #5) Divide by: Useful life D ep r ec i at i one xp e ns e ,20 15 40,000 10 4, 00 0 CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY 1. Ans. D.; 2. Ans. C. Allocation of lump sum price in proportion to fair values: Land A (135/1,350 x P12,300,000) Building A (1,215/1,350 x P12,300,000) Total P1,230,000 11,070,000 P12,300,000 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 76 of 155 3. Ans. B. Cost of Building A Less: Salvage value Depreciable cost Divide by: Annual depreciation Estimated life P11,070,000 (600,000) 10,470,000 261,750 40 years 4. Ans. A. Depreciation expense on Building A for the year Ended September 30, 2016 261,750 Same as prior year because straight-line method is used in depreciating Building A. 5. Ans. D. F a ir va l ue o f L an d o n ac q u is i t i o n d a te = FM V o f s ha re s *Demolition cost shall be charged to the cost of the new constructed Building. P1 ,1 25 ,0 00 6. Ans. D. Since Builidng B is not yet available for use as of September 30, 2016, no depreciation shall be provided yet. 7. Ans. A. Donated equipment, at fair value P450,000 8. Ans. D. Depreciation expense—Donated equipment, for the year ended September 30, 2015: Cost P450,000 150% declining balance rate (1/10 x 150%) X 15% Depreciation expense P67,500 9. Ans. C. Depreciation expense—Donated equipment, for the year ended September 30, 2016: Book value, Oct. 1, 2015 (P450,000-P67,500) P382,500 150% declining balance rate (1/10 x 150%) X 15% Depreciation expense P57,375 10. Ans. B. Total cost as recorded Less: Normal repairs and maintenance Correct cost of Machinery A P2,473,500 223,500 P2,250,000 11. Ans. C. Depreciation expense—Machinery A for the year ended September 30, 2015: (P2,250,000-P90,000=P2,160,000 x 8/36) P480,000 12. Ans. A. Depreciation expense—Machinery A, for the year ended September 30, 2016: (P2,160,000 x 7/36 x 4/12) P140,000 13. Ans. C. Down payment First installment payment on October 1, 2015 Present value of succeeding 10 nstallment payments (P90,000 x 6.710) Total cost of Machinery B P86,000 90,000 603,900 P780,000 14. Ans. B. Depreciation expense-Machinery B, for the year ended Septmeber 30, 2016: (P780,000/20years) 39,000 CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC. 1. Ans. D. Book value of plant and equipment, En d o f 2 0 1 6 ( P 1 2 0 m i l l i o n x 5 / 8 ) P7 5 mi l li on 2. Ans. A. Book value of purchased technology (Patent) ( P 6 0m i l li o nx3 / 6 ) P 3 0m i l li o n 3. Ans. D. Plant and equipment: Book value Recoverablevalue(FMV) I m p a ir m e ntlo s s 4. Ans. C. Purchased technology: Book value Recoverable value (FMV) I m p a ir m e ntlo s s P75 million 50million *cash flow is undiscounted, thus not useful P 2 5m i l li o n P30 million 10 million*c ash flow is undiscounted thus not useful P 2 0m i l li o n CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 77 of 155 CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION 1. Ans. A. Factory: (P1,800,000*24/30) 1,440,000 Building: (P10,000,000*14/20) 7,000,000 2. Ans. B. Present value of future net cash flows from the CGU's: Continued use: P1,050,000*4.9676 5,215,980 3. Ans. A. Carrying value of CGU: Factory:(P1,800,000*24/30) Building:( P10,000,000*14/20) Total Recoverable value/Value in use I m p a ir m e ntlo s s 1,440,000 7,000,000 8,440,000 5,215,980 3, 22 4, 020 *FMV not determinable 4. Ans. B. Factory Machinery Carryingvaluebeforeimpairment loss: 1,440,000 7,000,000 Impairment allocated, prorata (relative book value before impairment) Factory (1,440,000/8,440,000)*P3,224,020 (550,070) Building( 7,000,000/8,440,000)*P3,224,020 (2,673,950) C a rr y in g v a lu e af t er i mp a ir me nt lo s s 88 9, 93 0 4,326,050 5. Ans. B. Factory Machinery Carryingvaluebeforeimpairment loss: 1,440,000 7,000,000 Impairment allocated, prorata (relative book value before impairment) Factory (1,440,000/8,440,000)*P3,224,020 (550,070) Building( 7,000,000/8,440,000)*P3,224,020 (2,673,950) Carryingvalueafterimpairmentloss 889,930 4,326,050 *lower than FMV P4.5M AdditionalimpairmenttoFactory (173,950) 173,950 Ca rrying v alue a ft er re allo ca tion o f im pa irme nt l os s 71 5, 98 0 4,500,000 Observe that the carrying value of the individual assets comprising the CGU should not result to an amount that is lower than the higher between the individual assets' Recoverable Value or Zero. CHAPTER 6-EXERCISE 16: MARGOT CORPORATION 1. Ans. A. Costofmachineries 609,000 Accum. Depr. (609,000-49,000)*3yrs/8yrs (210,000) C a rr y in g v a lu es , 1 2/ 31 /1 4 39 9, 00 0 2. Ans. B. Present value of future net cash flows from: Use:2015:P141,000*0.909091 2016:P114,000*0.826446 2017:P30,000*0.751315 2018:P15,000*0.683013 2019:P10,000*0.620921 Disposal:2019:P49,000*0.620921 V al u in e se 3. Ans. C. Value in use F MVl e s sc o s tt os e l l 4. Ans. D. Carrying value Recoverableamount I m p a ir m e ntlo s s 5. Ans. B. V a l uieu ns e FMVlesscosttosell 6. Ans. D. Carrying value Recoverableamount I m p a ir m e ntlo s s 128,182 94,215 22,539 10,245 6,209 291,816 30 0, 00 0 261,391 30,425 29 1, 81 6 0.909091 0.826446 0.751315 0.683013 0.620921 higher 399,000 (300,000) 9 9, 00 0 29 1, 81 6 275,000 higher 399,000 (291,816) 10 7, 18 4 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 78 of 155 CHAPTER 6-EXERCISE 17: REVO CORP. 1. Ans. C. FairMarketValue Cost (Impairment loss)/Revaluation Surplus LandA LandB 8,000,000 16,000,000 (10,000,000) (12,000,000) (2,000,000) 4,000,000 P&L OCI 2. Ans. C. FairMarketValue Cost (Impairment lo ss)/Revaluation S urplus FairMarketValue CV Total increase/decrease in value Impairment loss fromLand B RecoverygainfromLandA N e tg a i nf r o mL a nd s LandA LandB 12,000,000 11,000,000 (10,000,000) (12,000,000) 2,000,000 (1,000,000) OCI P&L 12,000,000 11,000,000 (8,000,000) (16,000,000) 4,000,000 (5,000,000) 2,000,000 (4,000,000) Recovery gainReversal of RS (1,000,000) 2,000,000 1, 00 0, 000 3. Ans. B. FairMarketValue Cost (Impairmentl oss)/RevaluationS urplus FairMarketValue CV Totali ncrease/decrease invalue Revaluation surplus from Land B Reversal of revaluaiton surplus for Land A N e tO C If o rt hey e a r LandA LandB 11,000,000 15,000,000 (10,000,000) (12,000,000) 3,000,000 OCI OCI 11,000,000 15,000,000 (12,000,000) (11,000,000) (1,000,000) 4,000,000 (1,000,000) 1,000,000 Reversal of RS Recovery gain 3,000,000 (1,000,000) 2, 00 0, 000 CHAPTER 6-EXERCISE 18: LABANOS CORP. 1. Ans. C. Carrying value (P500,000-P90,000) Recoverablevalue I m p a ir m e ntlo s s 410,000 (338,000) 7 2, 00 0 2. Ans. B. CVafterimpairmentloss 2014 Depr: (338,000-50,000)/8yrs C V1, 2 / 3 1 / 1 4 338,000 (36,000) 30 2, 00 0 3. Ans. C. Replacement depreciable cost (P555,000-50,000) Multiplyby:Conditionpercent(6yrs/10yrs) Depreciable FMV, Depreciable Sound Value Salvage value F a i rv a l u e / S o u ndv a l ue 505,000 6/10 303,000 50,000 35 3, 00 0 4. Ans. A. Fair value/Sound Value CV had there been no impairment (P500,000-P180,000) Revaluation surplus 353,000 320,000 33,000 CV had there been no impairment (P500,000-P180,000) CV based on impaired value (P338,000-P72,000) R ec ov erg y a iP n - &L 320,000 266,000 5 4, 00 0 5. Ans. C. R S, 1 2/ 31 /1 6: ( P 33 ,0 00 *7 ye ar s /8 y e a rs ) 2 8, 87 5 *note that the remaining life of the asset after revaluation is (12years-4years) 8 years. CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 79 of 155 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS DISCUSSION PROBLEMS CHAPTER 7-PROBLEM 1 1 A. 2 B. 3 C. CHAPTER 7-PROBLEM 2: Ans. P3,700,000. Purchaseofafranchise Goodwill acquired in the purchase of a business Legal costs incurred in securing a patent Cost of purchasing a patent from an inventor Costofpurchasingacopyright Costofpurchasingatrademark 1,200,000 640,000 70,000 500,000 900,000 290,000 100,000 T o t alI nt ang i b l eA s s e t s 3 ,7 0 0 ,0 0 0 CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP. 1. Ans. 2008: Research and development expense 2009: Research and development expense 2010: Patent ABC amo. (P100,000/20yrs)*9/12 3,750 Research and development expense 125,000 2011: Patent ABC amo. (P100,000/20yrs) 5,000 Research and development expense 450,000 2012: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Research and development expense 500,000 Legal fees-successfuldefense 42,600 2013: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Patent GHI amo. (P350,000/16yrs)*6/12 10,938 2014: Patent ABC amo. (P100,000/20yrs) 5,000 Patent DEF amo. (P375,000/12.5yrs) 30,000 Patent GHI amo. (P350,000/16yrs) 21,875 Research and development expense 360,000 418,000 520,000 128,750 455,000 577,600 45,938 416,875 2. Ans. P680,938. Patent ABC Patent DEF Patent GHI T o t al Cost 4/1/2010: 100,000 12/31/2011: 375,000 7/1/2013: 350,000 Acq.Date 15.75y/20y 9.5y/12.5y 14.5y/16y Condition% 12/31/14: 78,750 285,000 317,188 CV 12/31/14: 680,938 CHAPTER 7-PROBLEM 4: GARY INC. 1. Ans. 2 0 1 1 : A m o r t i z at i o n ( P 6 4 0 , 0 0 0 / 1 0 y r s ) 2 0 1 2 : A m o r t i z at i o n ( P 6 4 0 , 0 0 0 / 1 0 y r s ) 2013: Amortization: Original Patent (P640,000-P128,000)/12 years RelatedPatent(P120,000/12years) T o t aA l m o r t i z at i o n 2014: Amortization: Original Patent (P640,000-P128,000)/12 years RelatedPatent(P120,000/12years) T o t aA l m o r t i z at i o n 64,000 64,000 42,667 10,000 52,667 42,667 10,000 52,667 2. Ans. P386,565.; 3. Ans. (P140,102). Value in use/Present value of future net cash flows at 8% for 3 years. P 150,000*2.577097 3 8 6 , 5 6 5 2.577097 Carrying value, 12/31/14 Original and Related patent cost 760,000 Amortization,12/31/14 I m p ai r m e nlto s s (233,333) 526,667 (1 4 0 , 1 0 2 ) CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA 4. Ans. P128,855. CV,1/1/15afterimpairment Divideby:Remaininglife A m o r t i z at i o n,2 0 1 5 SOLUTIONS GUIDE 80 of 155 386,565 3 128,855 CHAPTER 7-PROBLEM 5: COLGATE COMPANY Case 1: 1. Ans. P1,439,756. Franchise, Jan. 1, 2014 D ownpayment 600,000 PV of Balance a 14% for 4 periods. P2.4M/4yrs*2.913712 1,748,227 2,348,227 Less:Amo,2014(2,348,227/10yrs) (234,823) Carryingvalue,12/31/2014 2,113,405 Value in use/PV of net cash flows at 10% for 9yrs: P250,000*5.759024 5.759024 1,439,756 Impairment loss 673,649 2. Ans. P476,000. Patent,Jan.,2014 Amortization, 2014 (544,000/8yrs) C ar r y i ng v al u e , 1 2 / 3 1 / 1 4 2.913712 544,000 (68,000) 476,000 3. Ans. P389,474. Trademark,Jan.,2012 Amortization,2012(P1M/10yrs) Carryingvalue,12/3/12 Value in use/PV of net cash flows at 9% for 9yrs: P200,000*5.995247 5.995247 Impairment loss Trademark, Jan., 2013 Amortization,2013(P1M/10yrs) Carryingvalue,12/3/13 Value in use/PV of net cash flows at 9.5% for 8yrs: P200,000*5.433436 5.433436 Impairment loss 1,000,000 (100,000) 900,000 1,199,049 900,000 (100,000) 800,000 1,086,687 - Trademark, Jan., 2014 800,000 Amortization,2014(P1M/10yrs) (100,000) Carryingvalue,12/3/14 700,000 Value in use/PV of net cash flows at 10% for 7yrs: P80,000*4.868419 4.868419 389,474 Impairment loss 310,526 4. Ans. P2,858,150. Fanchise: Amortization Impairmentloss Interest expense (P1,748,227*14%) Continuing franchise fee (P18M*5%) Patent: A mortization Trademark: Amortization Impairmentloss Legal fees - successful defense T o t ael x p e ns e s 234,823 673,649 244,752 900,000 2,053,223 68,000 100,000 310,526 326,400 736,926 2 ,8 5 8 ,1 5 0 Case 2: 1. Ans. P2,348,227. Franchise, Jan. 1, 2014 D ownpayment 600,000 PV of Balance a 14% for 4 periods. P2.4M/4yrs*2.913712 1,748,227 2,348,227 C ar r y i ngv al u e ,1 2 / 3 1 / 2 0 1 4 2 ,3 4 8 ,2 2 7 Value in use/PV of net cash flows at 10% for an indefinite period: P250,000/10% 5.759024 2,500,000 Impairment loss 2. Ans. P476,000. Patent,Jan.,2014 Amortization, 2014 (544,000/8yrs) C ar r y i ng v al u e , 1 2 / 3 1 / 1 4 544,000 (68,000) 476,000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 81 of 155 3. Ans. P800,000. Trademark,Jan.,2012 1,000,000 Carryingvalue,12/3/12 1,000,000 Value in use/PV of net cash flows at 9% for an indefinite period: P200,000/9% 5.995247 2,222,222 Impairment loss Trademark,Jan.,2013 1,000,000 Carryingvalue,12/3/13 1,000,000 Value in use/PV of net cash flows at 9.5% for an indefinte period: P200,000/9.5% 5.433436 2,105,263 Impairment loss Trademark,Jan.,2014 1,000,000 Carryingvalue,12/3/14 1,000,000 Value in use/PV of net cash flows at 10% for an indefinite period: P80,000/10% 4.868419 800,000 Impairment loss 200,000 4. Ans. P1,739,152. Fanchise: Interest expense (P1,748,227*14%) Continuing franchise fee (P18M*5%) Patent: A mortization Trademark: Impairmentloss Legal fees - successful defense T o t ael x p e ns e s 244,752 900,000 1,144,752 68,000 200,000 326,400 526,400 1 ,7 3 9 ,1 5 2 CHAPTER 7-PROBLEM 6: PJ CORP. 1. Ans. P1,500,000. AcquisitionCost FMVofNetAssets Go o dw i l l 8,000,000 6,500,000 1 ,5 0 0 ,0 0 0 2. Ans. P1,950,000; Ans. P8,450,000. FMVofNetAssets Excessearningsin%(12%-9%) Excess earings 6,500,000 3% 195,000 Go o dw i l l (P 1 9 5 ,0 0 0 * 1 0 yr s ) FMVofNetAssets A c q u is i t i o nc o s t 1 ,9 5 0 ,0 0 0 6,500,000 8 ,4 5 0 ,0 0 0 3. Ans. P1,625,000; Ans. P8,125,000. Go o dw i l l (P 1 9 5 ,0 0 0 / 1 2 %) FMVofNetAssets A c q u is i t i o nc o s t 1 ,6 2 5 ,0 0 0 6,500,000 8 ,1 2 5 ,0 0 0 4. Ans. P1,200,000; Ans. P7,800,000. Average/Normal Earnings of DA Inc. (P6.5M*12%) Divideby:Capitalizationrate A c q u is i t i o n co s t FMV of Net Assets Go o dw i l l 780,000 10% 7 ,8 0 0 ,0 0 0 6,500,000 1 ,3 0 0 ,0 0 0 5. Ans. P1,198,191; Ans. P7,698,191. Present value of excess earnings at 10% for 10 years: Go o d w i l l : P 195, 000*6. 144567 1 ,1 9 8 ,1 9 1 6.144567 FMVofNetAssets 6,500,000 A c q u is i t i o nc o s t 7 ,6 9 8 ,1 9 1 CHAPTER 7-PROBLEM 7: KAREN CORPORATION Accumulatedprofits2010-2014 Less:Gain on sale of equipment in 2012 Accum.OperatingProfits2010-2014 by: Divide Annualaverageoperatingprofits Add:Annualpresidentsbonus Less: Inrease in depr. exp. (P350,000/5yrs) Projectedaverageoperatingprofits Less: Average/Normal earnings of industry (P2.6M*10%) Projectedexcessearnings 1,800,000 (200,000) 1,600,000 5 320,000 50,000 (70,000) 300,000 (260,000) 40,000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 82 of 155 FMV Current Asset Noncurrent Asset (excluding GW) L and Depr. Asset Liabilities Net Assets BV 700,000 950,000 1,850,000 (900,000) 2,600,000 1. Ans. P200,000; P160,000; P400,000; P151,631. a) Purchase of excess earnings G oo d w i l l ( P4 0 , 0 0 0 * 5 y r s ) 200,000 b) Capitalization of excess earnings Goo d w i l l (P4 0 , 0 0 0 / 2 5 %) 160,000 c) Capitalzation of average earnings Projected annual average oper. Profits 300,000 Divideby:Capitalizationrate 10% Acquisitioncost/price 3,000,000 Less:FMVofNetAsset (2,600,000) G oo d w i l l 400,000 d) Present value method G oo d w i l l : ( P4 0 , 0 0 0 * 0 . 3 . 7 9 0 7 9 ) 151,631 2. Ans. a) Purchase of excess earnings FMVofNetAssets Goodwill A c q u i s i t i o n c o s t / pr i c e b) Capitalization of excess earnings FMVofNetAssets Goodwill(P40,000/25%) A c q u i s i t i o n c o s t / pr i c e c) Capitalzation of average earnings Projected annual average oper. Profits Divideby:Capitalizationrate A c q u i s i t i o n c o s t / pr i c e d) Present value method FMVofNetAssets Goodwill:( P40,000*0.3.79079) A c q u i s i t i o n c o s t / pr i c e 550,000 950,000 1,500,000 (900,000) 2,100,000 Difference 150,000 350,000 - 3.79079 2,600,000 200,000 2 ,8 0 0 ,0 0 0 2,600,000 160,000 2 ,7 6 0 ,0 0 0 300,000 10% 3 ,0 0 0 ,0 0 0 2,600,000 151,631 2 ,7 5 1 ,6 3 1 3. Ans. Option d) For the acquiring company, the best option is that which will yield the least acquistion price and least goodwill. CHAPTER 7-PROBLEM 8: ABC CORPORATION 1. Ans. P1,000,000. ABC Acquisition price FMVofnetassets(4CGUs) Goodwill (prorated)** 800,000 200,000 DEF 1,500,000 375,000 GHI 700,000 175,000 JKL 1,000,000 250,000 5,000,000 4,000,000 1,000,000 Before impairment, 12/31/14 Cash* shall be excluded in determining the CV of the CGU (not included in the " other assets" within the scope of PAS 36) Factoryequipment 100,000 240,000 100,000 200,000 OfficeEquipment 250,000 490,000 120,000 200,000 Building 500,000 900,000 400,000 700,000 200,000 375,000 175,000 250,000 Goodwill** CarryingvalueofCGU 1,050,000 2,005,000 795,000 1,350,000 Value in use: ABC:P149,726*6.144567 920,000 6.144567 DEF:P289,242*7.606080 2,200,000 7.606080 GHI: P76,490*6.144567 470,000 6.813692 JKL: P161,440*6.813692 950,000 Impairment loss 130,000 325,000 400,000 CGU-ABC Impairment loss ChargeabletoGoodwill-ABC CGU-DEF Impairment loss 130,000 (130,000) - CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 83 of 155 CGU-GHI Impairment loss ChargeabletoGoodwill-GHI Balancetoallocatedtootherassets Factory equipment (100,000/620,000) Office equipment (120,000/620,000) Building (400,000/620,000) CV, after impairment CGU-JKL Impairment loss ChargeabletoGoodwill-GHI Balancetoallocatedtootherassets Factory Equipment (200,000/1,100,000) Office equipment (200,000/1,100,000) Building (700,000/1,100,000) 100,000 120,000 400,000 325,000 (175,000) 150,000 (24,194) (29,032) (96,774) 200,000 200,000 700,000 400,000 (250,000) 150,000 (27,273) (27,273) (95,455) 75,806 90,968 303,226 CV, after impairment 2. Ans. P395,000. After impairment, 12/31/14 Cash Factory equipment Office Equipment Building Goodwill** CarryingvalueofCGU ABC 50,000 100,000 250,000 500,000 70,000 970,000 3. Ans. P605,000. Goodwill, before impairment Goodwill,afterimpairment Im pair m ent l os s c harge d t o g oo d wi ll 1,000,000 445,000 55 5, 00 0 DEF 100,000 240,000 490,000 900,000 375,000 2,105,000 172,727 172,727 604,545 GHI 75,806 90,968 303,226 470,000 JKL 172,727 172,727 604,545 950,000 TOTAL 150,000 588,534 1,003,695 2,307,771 445,000 4,495,000 4. Ans. P258,064. 5. Ans. P604,546. CHAPTER 7-PROBLEM 9: EDD CORP. 1. Ans. P510,000. 2014Rentalexpense 2014 Amortization of leaserights ( P300,000/10yrs) 480,000 30,000 2. Ans. P63,158. Cost of leasehold improvement Divide by: Remaining lease term: 9.5yrs Annualdepreciation Multiply by: 1,200,000 9.50 126,316 6/12 D e p r e c i a t i o n e x p e ns e , 2 0 1 4 510,000 *remaining lease term, 9.5yrs is shorter than improvement's life, 15 yrs. 63,158 3. Ans. P60,150. Carrying value, 1/1/2019 (P1,200,000*5yrs/9.5yrs) Divide by:Remainingusefullife D e p r e c i a t i o n e x p e ns e , 2 0 1 9 631,579 10.50 *remaining life (15-4.5yrs), 10.5yrs, is now shorter than the extended 60,150 remaining lease term (10-5yrs+10yrs), 15yrs. CHAPTER 7-PROBLEM 10: MUSAR CORP. 1. Ans. P139,375. Salaries of staff working on research project Computerprogramservices Allocated general expenses (P175,500*25%) T o t al r e s e ar c h an d d e v e l o p m e nt e x p e n s e 78,000 17,500 43,875 139,375 2. Ans. P2,480. Patent,initialcost Divide by: useful life A m o r t i z at i o ne x p e ns e 24,800 10 2,480 3. Ans. P22,320. P at e n t( 2 4 , 8 0 0 - 2 4 8 0 ) 22,320 CHAPTER 7-PROBLEM 11: BITS AND BYTES INC. 1. Ans. P1,253,600. Salaries and wages of programmers doing research Expenses prior to establishment of tech. feasibility T o t al r e s e ar c h an d d e v e l o p m e nt e x p e n s e 940,000 313,600 1 ,2 5 3 ,6 0 0 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 84 of 155 2. Ans. P330,000. Ex pe ns es afte r tec hnical fe as ib il it y is es tabl is he d 33 0, 00 0 3. Ans. P100,500. Amortization o f computer s oftware ( 330,000/3yrs) Cost to produce and prepare software for sale Costof goodsproduced Portionofgoodsremainingonhand C o s to fe nd i ngi nv e nt o r y 110,000 225,000 335,000 30% 100,500 4. Ans. P117,000. Amortization of computer software: P 330,000*(P2,000,000/P4,000,000) Cost to produce and prepare software for sale Costof goodsproduced Portionofgoodsremainingonhand C o s to fe nd i ngi nv e nt o r y 165,000 225,000 390,000 30% 117,000 CHAPTER 7-PROBLEM 12: HARRY CORP. Prepayment Rent Security Deposit 1-year rent Lease bonus Inurance Fire insurance Propertyinsurance Advertising Office supplier Advances to officers Idle office equipment Bond redemption fund Exp.-2014 Miscellaneous 50,000 - Receivable 220,000 55,000 12,500 56,250 25,000 25,000 20,000 5,000 37,500 18,750 50,000 90,000 135,000 25,000 545,000 393,750 2 .A n s . - Receivable/Other asset - Other asset - LT Investment 221,250 1 . A ns . MULTIPLE CHOICE EXERCISES: CHAPTER 7-EXERCISE 1: Purchasedrecipesandsecretformulas Licensing,royalty,andstandstillagreement Operating and broadcastrights Goodwillpurchasedinabusinesscombination A license to manufacture a steroid by means of a government grant Initial franchise fees paid Costofpurchasingapatentfromaninventor Legal cost in securing a patent Cost ofpurchasing a trademark Amount paid to a lessor for the exclusive right to rent a facility under an operating lease agreement for a period of 10 years T o t ali nt ang i b l e si nc l u d i ngg o o d w i l l CHAPTER 7-EXERCISE 2: DOHA CORPORATION 1. Ans. A. C V , P at e nt , 1 2 / 3 1 / 1 4 : P 4 4 4 , 0 0 0 * 9 y r s / 1 0 y r s 20 4, 75 0 3. Ans. B. P r e p ai d re nt , 12 / 3 1 / 1 4 : P1 6 8 , 0 0 0 * 0 . 7 5 y r s / 2 y rs 63,000 5. Ans. B. Amortization of franchise, 2014 (P252,000/8yrs) Rentexpense,2014(P168,000/2yrs) Amortization of patent, 2014 (P444,000/10yrs) Costtodevelopasecretformula Legalfees-successfuldefense Research and development expense, 2014 T o t ale x p e ns ei n2 0 1 4 100,000 1,944,000 399,600 2. Ans. C. CV , F ranchis e, 12 /3 1/ 14 : P 25 2, 00 0* 6. 5y rs /8 yrs 4. Ans. D. Amortization of franchise, 2013 (P252,000/8yrs)*6/12 Rent expense, 2013 (P168,000/2yrs)*3/12 Net loss including organization expense in 2013 Re t r o ac t i v e ad j u s t m e nt t o R E , b e g . 2 0 1 3 150,000 300,000 112,000 500,000 150,000 175,000 137,000 70,000 250,000 15,750 21,000 96,000 132,750 31,500 84,000 44,400 450,000 75,900 960,000 1 ,6 4 5 ,8 0 0 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA CHAPTER 7-EXERCISE 3: ALYSSA CORP. 1. Ans. B. Franchise: Carrying Value/Cost (no definite life) Recoverable value/Value in use: ( 180,000/12%) Impairmentlossin2014 Carrying Value/Cost (no definite life) Recoverable value/Value in use: (1 5 0 , 0 0 0 / 1 2 % ) Impairmentlossin2014 SOLUTIONS GUIDE 85 of 155 1,260,000 1,500,000 - no impairment in 2013 1,260,000 1 ,2 5 0 ,0 0 0 10,000 2. Ans. B. Patent: Cost (1/1/14) Amortization: (2,220K/10yrs) CarryingValue(12/14) Recoverable value/Value in use (337,822*5.32825) Impairment loss 1 ,8 0 0 ,0 0 0 198,000 3. Ans. A. 2013 expenses: Rent expense (840,000/2)*3/12 Netlossfortheyear Re t r o ac t i v e a d j u s t m e nt t o R E , B e g 105,000 480,000 585,000 4. Ans. A. 2014 expenses: ImpairmentlossonFranchise Rentexpensefor2014 AmortizationonPatent ImpairmentlossonPatent Costofdevelopingrecepe Legalfeesonpatentdefense T o t ale x p e ns e 2,220,000 (222,000) 1,998,000 0 5.328250 10,000 420,000 222,000 198,000 2,250,000 379,500 3 ,4 7 9 ,5 0 0 CHAPTER 7-EXERCISE 4: STU CORPORATION 1. Ans. B. Patent,CorrectCost,1/2013 Amortization(2 013-2014):P3 ,740,000*2yrs/20yrs C ar r y i ngv al u e ,1 2 / 3 1 / 1 4 3,740,000 (374,000) 3 ,3 6 6 ,0 0 0 2. Ans. D. License,CorrectCost,1/2012 Amortization(2 012-2014):P2 ,160,000*3yrs/10yrs C ar r y i ngv al u e ,1 2 / 3 1 / 1 4 2,160,000 (648,000) 1 ,5 1 2 ,0 0 0 3. Ans. B. Trainingcost,expensein2012peraudit Amortization e xpense (2 012-2013) pe r au dit: P2 ,160,000*2yrs/10yrs Priorperiodexpense,peraudit Amortization expnse (2 012-2013) per books: P2,400,000*2yrs/10yrs Re t r o ac t i v e ad j u s t m e nt , d e b i t , t o RE , b e g . 2 0 1 4 240,000 432,000 672,000 480,000 192,000 4. Ans. C.; Trademark,CorrectCV,12/31/14 1,280,000 Recoverable value/Value in use: PV of Future net cash flows at 9% for an indefinite period: P90,000/9% 1 ,0 0 0 ,0 0 0 Impairment loss 280,000 5. Ans. C. Depreciation on the Leasehold Improvement P900,000/5yrs*10/12 Amortization of Leaserights; P400,000/10yrs To ta elx p e ns e CHAPTER 7-EXERCISE 5: NICOLE CORP. 1. Ans. D. Legal and other professional fees to process the patent application (useful life is 15 years), Jan., 2007 -Training cost is recognized as outright expense. 150,000 40,000 190,000 - Trademark is with indefinite life, thus no amortization. - Successful defense cost is recognized as outright expense. - Depr. is over useful life since it is shorter than remaining lease term. 660,000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 86 of 155 2. Ans. B. CV, Dec. 31, 2007: P660,000*14/15 616,000 3. Ans. C. Amortization expense 2012: Original Patent: P660,000/15yrs Competing Patent: P220,000/11yrs T o t a l a m o r t i z a t i o n ,2 0 1 2 44,000 20,000 64,000 4. Ans. A. Original Patent, CV, Dec. 31, 2011: P660,000*10/15 Competing Patent, CV, Dec. 31, 2011: P220,000*10/11 440,000 200,000 5. Ans. D. OriginalPatent,CV,1/1/2012 CompetingPatent,CV,1/1/2012 RelatedPatent,1/1/2012 Total Patent, 1/1/2012 Divide by: Extended remaining life (10yrs+3yrs) Re v i s e d am o r t i z at i o n e x p e ns e , 2 0 1 2 640,000 440,000 200,000 335,000 975,000 13 75,000 6. Ans. B. CV, 12/31/13 (P975,000*11/13) 825,000 7. Ans. B. CV, 12/31/14 (P975,000*10/13) Recoverable value I m p ai r m e ntl o s s 750,000 750,000 CHAPTER 7-EXERCISE 6: DEF CORP. 1. Ans. D. Patent, 12/31/14 (before amortization), per books CV of Repairs cost capitalized in 1/1/2011 P75,000*6yrs/9yrs Patent, 12/31/14 (before amortization), per audit CV of Patent with revised useful life: P 210,000*6yrs/14yrs CV of remaining Patent with the same useful life 550,000 (50,000) 500,000 90,000 410,000 Amortization of patent with revised life: (P90,000/2yrs) Amortization of patent w/o change in life: (P410,000/6yrs) T o t alam o r t i z at i o ne x p e ns e ,2 0 1 4 45,000 68,333 113,333 2. Ans. A. Patent, 12/31/14 (before amortization), per audit Correctamortizationfor2014 P at e n t , 1 2 / 3 1 / 1 4 af t e r am o r t i z at i o n 500,000 (113,333) 386,667 3. Ans. B. The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011. CHAPTER 7-EXERCISE 7: AMFURST CORP. AC 1.s n .. FRANCHISE:TERM10YEARS Initialfranchisefee(PV) Down payment Balance( 800,000*2.321632) Less:Amortization: CV 12/31/14 Recoverable Value/Value in Use (400,000*5.32825) Impairment loss Amortization(2,457,306/10) Impairment loss Interest expense (1,857,306*14%) Continuing franchise fee (12M*5%) T o t ale x p e ns e 3. Ans. B. PATENT: 8 YEARS: Cost 1/1/2014 Amortization(545,000/8) C ar r y i ng V al u e 1 2 / 3 1 / 2 0 1 4 Recoverable value (120,000*4,563757) Impairment loss AC 2.s n .. FRANCHISE:INDEFINITE Initialfranchisefee(PV) 600,000 Down payment 1,857,306 Balance 1 (800,000*2.321632) 2,457,306 2.321632 245,731 Recoverable amount/Value in use (400,000/12%) 2,211,575 3,333,333 Impairment loss 2,131,300 0 80,275 5.3282498 mortization A Impairment loss 245,731 Interest expense (1,857,306*14%) 80,275 Continuing franchise fee (12M*5%) 260,023 To t ae l x p e ns e 600,000 1 ,1 8 6 ,0 2 8 545,000 68,125 476,875 547,651 - 600,000 1,857,306 2,457,306 260,023 600,000 860,023 517,750 0 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 87 of 155 4. Ans. C. LEASE AGREEMENT: Rentexpensefor2014 Amortizatin of lease rights (150,000/5yrs) Depr of improvement (450,000/4.5yrs)*6/ T o t ae l xp en se 200,000 30,000 50,000 280,000 CHAPTER 7-EXERCISE 8: SAHARA CORP. 1. Ans. D. *No capitalizable internally developed intangible yet since one of criteria for capitalization (i.e. how future economic benefits shall be derived) has not been met. Under PAS 38, Intangibles, the following criteria should be strictly complied with if to capitalize development cost of an internally generated intangible: 1. Establishment of technical feasibility 2. Intention to complete the project and to either sell/use the result of the project. 3. Ability to complete the project and to either sell/use the result of the project. 4. Availability of resources to complete the project. 5. How probable future economic benefits can be derived from the intangible. 6. Ability to reliably estimate future cost to be incurred to complete the intangible. 2. Ans D. Salaries and other employee benefits Other expenses Depreciation on Building (11.2M/20yrs) T o t a lR& DE x p e n s e 3. Ans. B. Patent cost Useful life A m o r t i z a t i o nf o r2 0 1 4 7,800,000 3,080,000 560,000 1 1 , 4 4 0 ,0 0 0 3,200,000 10 320,000 4. Ans. A Building cost AccumDepr(11.2M/20) C V1 2 / 3 1 / 1 4 11,200,000 (560,000) 1 0 , 6 4 0 ,0 0 0 5. Ans. B. Patent cost Amortization in 2013: (3.2M/10yrs)*9/12 Amortizationin2014 C V1 2 / 3 1 / 1 4 3,200,000 (240,000) (320,000) 2 ,6 4 0 ,0 0 0 CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES 1. Ans. B. Franchise,CV,12/31/14 550,000 Recoverable value/ Value in use ( P6 7 , 5 0 0 / 1 5 % ) Impairment loss *No definite life, thus no amortization *Continuing franchise fee is recgonized as outright expense. 450,000 100,000 *PV of future net cash flows from continued use at 15% for an indefinite period. 2. Ans. 0. Organization cost is recognized as outright expense. 3. Ans. C. Ex ce ss o f c o st o v e r n e t a ss e ts o f e n tr pri se a cq u ir e d i n 2 0 1 2 2 0 0 ,0 0 0 *No indication of impairment of CGU with which the Goodwill is allocated to, thus the CV remains to be the initial cost. CHAPTER 7-EXERCISE 10: CAN CORP. Projected profits for the next four years: 2014:(6M*1.2) 7,200,000 2015:(7.2M*1.2) 8,640,000 2016:(8.64M*1.2) 10,368,000 2017:(10.368M*1.2) 12,441,600 Total 38,649,600 Divide by: 4 Projectedaverageearnings 9,662,400 Average/Normal earnings at industry rate: Fair market Value of Net Assets Current Asset (9M+4.8M) 13,800,000 InvestmentsatFMV 9,000,000 PPE, net 24,000,000 Currentliabilities (4,800,000) Noncurrentliabilities (6,000,000) FMVofnetassets 36,000,000 Multiply by: industry rate of return 18% Average/Normal earnings at i ndustry rate 6,480,000 Projectedaverageexcessearnings 9,662,400 6,480,000 3,182,400 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 88 of 155 1. Ans. D. Projected average excess earnings Divideby:Capitalizationrate Goodwill: Add: Fair value of net assets A c q u i s i t i o npr i c e 3,182,400 18% 17,680,000 36,000,000 5 3 , 6 8 0 ,0 0 0 2. Ans. A. Projected average excess earnings Multiply by: # of years Goodwill Add: Fair value of net assets A c q u i s i t i o npr i c e 3,182,400 4 12,729,600 36,000,000 4 8 , 7 2 9 ,6 0 0 3. Ans. A. Projectedaverageearnings Divideby:Capitalizationrate A c q u i s i t i o npr i c e 9,662,400 20% 4 8 , 3 1 2 ,0 0 0 4. Ans. C. Projected average excess earnings Multiply by: PV factor at 15%, 4 periods Goodwill Add: Fair value of net assets A c q u i s i t i o npr i c e 3,182,400 3 9,085,683 36,000,000 4 5 , 0 8 5 ,6 8 3 CHAPTER 7-EXERCISE 11: T CORPORATION 1. Ans. B. Total Acquisition Price, January 1, 2013 10,000,000 FMV of Identifiable Net Asset 8,000,000 Goodwill (Allocated, Prorata: FMV of NA) 2,000,000 Country A 2,000,000 500,000 Country B 1,500,000 375,000 Country C 4,500,000 1,125,000 2. Ans. A. Value in use=Present value of future net cash flows from CGU Country C: Estim. Future net cash flows before impairment event 1,500,000 Effect of new legislation (cutting by 40% imports to Country C) 60% Estim. Future net cash flows after impairment event 900,000 Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.771584 Va l u in s ee 4,294,426 *observe that there is no salvage value of net asset of Country C, thus no cash flows from eventual disposal. 3. Ans. A. Carrying Value of Country C's, Assets Factoryequipment StoreEquipment Building Goodwill P ayables Valueinuse/Recoverablevalue I m p a i rm e nlto s s 2,700,000 1,125,000 (700,000) 4. Ans. C.; 5. Ans. C. Impairment loss Allocation of loss: Goo d w i l lo fC o u n t ryC Balancetootherasset,prorata: Factoryequipment Storeequipment B uilding P ayables Building 2,500,000 1,500,000 **observe that payables is deducted since, estimate of cashflows 7,125,000 also included cash flows related to payable. 4,294,426 2 ,8 3 0 ,5 7 4 2,830,574 (1,125,000) 1,705,574 2,500,000 (636,408) 1,500,000 (381,845) 2,700,000 (687,321) (700,000) 6. Ans. D. Impairment loss Allocation of loss: GoodwillofCountryC Balancetootherasset,prorata: Factoryequipment StoreEquipment 2,700,000 Payables 1,863,592 CV 1,118,155 CV 2,012,679 (700,000) after impairment after impairment CV after impairment *liabilities are not impaired. 2,830,574 (1,125,000) 1,705,574 1,800,000 (458,214) 1,500,000 (381,845) (687,321) (700,000) 1,341,786 1,118,155 Should not be lower than its Rec. Value, P1.4M 2,012,679 (700,000) *liabilities are not impaired. CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA Building SOLUTIONS GUIDE 89 of 155 Reallocation of impairment loss: Impairment loss Allocation of loss: G o o d w i l lo fC o u nt ryC Balancetootherasset,prorata: Cash Factoryequipment StoreEquipment 2,700,000 P ayables 2,830,574 (1,125,000) 1,705,574 700,000 1,800,000 (642,230) 1,500,000 (100,000) (963,345) (700,000) 700,000 1,157,770 CV 1,400,000 1,736,655 (700,000) *no impairment allocated to cash after impairment Should not be lower than its Rec. Value, P1.4M CV after impairment *liabilities are not impaired. Observe that the CV of the asset after the impairment should not be lower than the higher between the assets' own recoverable amount or zero. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property and equipment, prorata. 6. Ans. C. C Building ash Allocation of loss: GoodwillofCountryC Balancetootherasset,prorata: Factoryequipment StoreEquipment 2,700,000 P ayables (100,000) (100,000) 1,800,000 (458,214) 1,500,000 (381,845) (687,321) (700,000) CHAPTER 7-EXERCISE 12: ABC CORPORATION 1. Ans. B. F ai rv al u el e s sco s tt os e l l 5 ,2 5 0 ,0 0 0 Value in use/PV of future net cash flows at 8% for 5 periods: Use:P1,252,282*3.992710 3.992710 5,000,000 2. Ans. A. Carrying value of CGU Factory equipment Office equipment Building Goodwill Recoverable value/FMV less cost to sell I m p ai r m e nlto s s 1,750,000 1,475,000 2,725,000 500,000 6,450,000 5,250,000 1 ,2 0 0 ,0 0 0 1,200,000 (500,000) 700,000 Factory equipment Office equipment Building Building higher included in the determination of the fair value less cost to sell. 3. Ans. C. Impairment loss Allocated to: G oodwill Balancetootherassets,prorata 4. Ans. C. Impairment loss Allocated to: G oodwill Balancetootherassets,prorata Factory equipment Office equipment 1,341,786 1,118,155 Not be lower than its Rec. Value, P1M 2,012,679 (700,000) *liabilities are not impaired. 1,750,000 1,475,000 2,725,000 (205,882) (173,529) (320,588) 1,544,118 1,301,471 2,404,412 1,200,000 (500,000) 700,000 1,750,000 (205,882) 1,544,118 *Should not be lower than 1.6M 1,475,000 (173,529) 1,301,471 Office Equipment CV should not be lower than P1.4M 2,725,000 (320,588) 2,404,412 Reallocation of Impairment loss Impairment loss Allocated to: G oodwill Balancetootherassets,prorata Factory equipment Office equipment Building 1,200,000 1,750,000 1,475,000 2,725,000 (500,000) 700,000 (150,000) 1,600,000 (75,000) 1,400,000 (475,000) 2,250,000 CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY 1. Ans. B. Cos t incurred pri or to est abl ishment of capital iza tio n crit eria on Nov. 1, 2014 2. Ans. C. Capi tal iz ab le co st , af te r No v . 1, 20 14 Recoverable amount, Dec. 31, 2014 Impairment loss 540 ,00 0 60 ,0 00 500,000 - CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA 3. Ans. D.; 4. Ans. C. Capitalizable cost, after Nov. 1, 2014 Additional capitalizable cost, 2015 Total cost as of Dec.31, 2015 Re co ve rabl e amou nt, De c. 31 , 20 15 I m p ai r m e ntl o s s SOLUTIONS GUIDE 90 of 155 60,000 1,200,000 1,260,000 1,14 0,00 0 120,000 CHAPTER 7-EXERCISE 14: LAS VEGAS INC. 1. Ans. C. AmortizationofPatent(600,000/10) Amortizationo fC opyright( 1,200,000*1.5M/5M) Total amortization (Patent and Copyright) P60,000 360,000 P420,000 2. Ans. A. Amortization of Software( 300,000/240)*100 AmortizationofFranchise(480,000/10) Continuing franchise fee (2,500,000*.05) Total expenses related to c omputer software and franchise P125,000 48,000 125,000 P298,000 3. Ans. A. Total research and development costs (all costs in item f) P433,000 4. Ans. C. Patent(600,000*9/10) Copyright(1,200,000-360,000) Tradename Computersoftware(300,000-125,000) Franchise(480,000*9/10) Goodwill Total carrying value of intangible, 12/31/15 P540,000 840,000 1,050,000 175,000 432,000 2,700,000 P5,737,000 CHAPTER 7-EXERCISE 15: BOHOL CORPORATION 1. a) Ans. A.; b) Ans. D.; c) Ans. B.; d) Ans. B. Project 123 is entirely research and development, thus no capitalizable intangible, unless qualified under PAS 38 capitalization criteria. The first Patent is useful solely for 1 project only, thus is fully recognized to that project only, since the project has not qualified yet for capitalization under PAS 38, the entire cost of the first Patent is recognized as R&D Expense. The second Patent is useful for many projects, thus only t he amortization is recognized as R&D Expense. The balance shall be reflected as Intangible asset. P at e nt , C V , J u ne 3 0 , 2 0 1 4 : ( P 1 6 , 2 0 0 * 9 / 1 0 ) 14,580 Copyright: Copyright ABC Copyright XYC Cost Acq. Date 1/2/2010: 30,000 20.5yrs/25yr /15/2011: 33,000 Condition % 6/30/2014: 24,600 712yrs/15yrs 26,400 CV 6/30/2014: 51,000 Goodwill Acquisitioncost 1,582,000 FMV,NetAssetsacquired 1,560,000 G o o d w i l l , i n i t i a l r e c o g ni t i o n 22,000 Note that since there are no indication of GW impairment from acquisition date to 6/30/14, GW is assumed not to be impaired. 2. Ans. D. Salariesofstaffdoingresearch PatentsolelyforProjectAM123 Depr. on Equipment for various projects (10,000/5yrs) Amo. on Patent for various projects (16,200/10yrs) Cost of pilot models T o t aRl & D E x p e ns e 3. Ans. A. Amortization Expense:ABC (30,000/25yrs) AmortizationExpense:XYC(33,000/15yrs) T o t al am o r t i z at i o n e x p e ns e o n c o p y r i g ht s 18,500 12,000 2,000 1,620 8,950 43,070 1,200 2,200 3,400 4. Ans. A. CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 91 of 155 CHAPTER 7-EXERCISE 16: TAILOR CORP. Searching for applications of new research findings Radical modification of the formulation of a glassware production Laboratory research aimed at discovery of new knowledge Testingforevaluationofnewproducts Materials consumed in research and development projects Consulting fees paid to outsiders for research and projects Personnel costs of persons involved in research and devt projects Indirect costs reasonably allocable to research and devt projects Design, construction, and testing of preproduction prototypes and models 57,000 78,000 204,000 72,000 177,000 300,000 384,000 150,000 870,000 2,292,000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 92 of 155 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES DISCUSSION PROBLEMS CHAPTER 8-PROBLEM 1 1 B. 2 C. 3 B. 4 C. 5 D. 6 C/ B . 7 B. 8 D. 9 A. 1 0 A. 11 B. 12 C. 13 D. 14 D. 15 16 17 18 19 B. B. B. B. C. CHAPTER 8-PROBLEM 2: MERMAID COMPANY Accounts payable, adjusted for the debit balance (Advances to suppliers) Note payable trade - only Salaries payable payable SSS Pag-ibig payable Medicare payable Wittholding taxes payable payable VAT Advancefromcustomers(ARwithcreditbalances) Serialbondspayable,payableP1M,semi-annyally Accruedinterestonbondspayable Estimated warranties payable Estimatedliabilityforenvironmentadamages Unearned rental income, for 3 years starting Jan.1, 2015 Cash advances from shareholders T o ta l Current 660,000 500,000 800,000 30,000 5,000 15,000 60,000 120,000 50,000 2,000,000 300,000 420,000 50,000 50,000 Noncurrent 8,000,000 5 ,0 60 ,0 0 0 1 .A n s . 100,000 200,000 8,300,000 2 .A n s. CHAPTER 8-PROBLEM 3: JOJO INC. Current Noncurrent 1,000,000 500,000 20,000 480,000 1,000,000 100,000 2,620,000 480,000 1 .A n s. 2 .A n s . Notes: For item a, there was no indication that the right to refinance already existed as of the balance sheet date. Thus, while there was a LT-refinancing agreement completed after the balance sheet date, the liability is still current as of Dec. 31, 2014. For item b, the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date. For item c, the right existed already as of the balance sheet date, however, since the amount of the loan to be used to refinance the currently maturing obligation is expected only at 80% of P600,000, that is P480,000 only P480,000 of the currently maturing obligation is expected to be refinanced on a long-term basis. For item d, while the grace period was agreed upon as of the balance sheet date (Dec. 31), the grace period is short-term only. a) P1M short-term notes payable, due Feb. 7, 2015 b) P500,000 short term debt, due June 1, 2015 c) P500,000 notes payable, due June 15, 2015 d) P1M bonds payable, due Dec. 31, 2018 Interest on the bondspayableP1M*10% CHAPTER 8-PROBLEM 4: TARBUCK INC. Ans. P4,120,000. Unadjusted balances GoodsreceivedonDec.30(validpurch.) Goodsin-transit,FOBDest(notvalidpurch.) Payments to suppliers, checks released Dec. 30 (valid payment) Payments to suppliers, checks not yet released as of Dec. 31 (not valid) Purchasereturns(validDec.transaction) Creditbalance(Advancestosuppliers) A d j u s t eb da l a n c e s PerGL 4,450,000 PerSL 4,020,000 400,000 (300,000) (520,000) 200,000 (50,000) 40,000 4 ,1 20 ,0 0 0 4,120,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 93 of 155 CHAPTER 8-PROBLEM 5: RONNIE COMPANY Required Estimated Expense (500u*80%*P8,000) Less:Actualcostincurred Estimatedwarrantiespayable 1. Ans.: W a r r a n t i e se x p e n s e E s t im a t e dw a r r a n t i e sp a y a b l e 3,200,000 (1,250,000) 1,950,000 1, 9 50 ,0 00 1, 95 0 ,0 00 2. Ans. P3,200,000. 3. Ans. P1,950,000. CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND Analysis 2014 Estimatedwarrantiespayable,beg. Required estimated expense: 2014:5,000units*30%*P500 2015:6,000units*30%*P500 Actual cost incurred for the year E sti mat e d w a r ra nt i es p a y a b l e, e n d 2015 425,000 750,000 (325,000) 4 25 , 00 0 1. Ans. Audit adjusting entry in 2015: Re ta in e d e a rn in gs (a dd 'l exp. in 2 01 4 ) W a r r a n t i e se x p e n s e E s t im a t e dw a r r a n t i e sp a y a b l e 900,000 (650,000) 675,000 42 5, 0 00 2 50 , 00 0 6 75 ,0 00 2. Ans. P750,000. 3. Ans. P900,000. 4. Ans. P425,000. 5. Ans. P675,000. CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP. Analysis: Required estimated expense: Vacuum Cleaners: (P45M*30%)/P15,000*(P2,250-P500) StandFan:(P45M*40%)/P12,500*(P1,500-P300) Actual cost incurred/Actual redemption: Vacuum Cleaners:(1,000u-175u)*(P2,250-P500) StandFan:(1,500u-125u)*(P1,500-P300) E s t i m at e dp r e m i u m sp a y ab l e ,e n d VC SF 1,575,000 Total 1,728,000 3,303,000 (1,443,750) 1 3 1, 25 0 (1,650,000) 78,000 (3,093,750) 209,250 1. Ans. P3,303,000. 2. Ans. P209,250. CHAPTER 8-PROBLEM 8: NOKIA CORP. 2014 Collection for unearned service contract 25% earned in the first contract year: months 6 2014 in months 6 2015 in 30% earned in the second contract year: months 6 2015 in months 2016 6in 45% earned in the third contract year: months 2016 6in 2017 months in6 Servicecontractearnedforeachyear B al a n c e u ne a rn ed a t t he en d of e ac h y ea r : 2015 2016 2017 400,000 100,000 50,000 50,000 120,000 60,000 60,000 180,000 90,000 50,000 3 50 ,0 00 1 .A n s. 110,000 240,000 2 .A n s . 90,000 150,000 90,000 3 .A n s. 90,000 - CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 94 of 155 CHAPTER 8-PROBLEM 9: SAN MIG CORP. 1. Ans. P337,500. 2013 leaves: 5 5employees*4weeks*5days 2 5employees*2weeks*5days Total 2013 unused leaves: Multiplyby:Salaryratein2013 Liability for compensated absences/Salaries payable 1,100 250 1,350 250 337,500 days days days 2. Ans. P453,750. 2013 leaves: 5 5employees*4weeks*5days 2 5employees*2weeks*5days Total 2013 unused leaves: Less: Exercised in 2014 Unexercised in 2014, thus forfeited by year-end 2014 1,100 250 1,350 925 425 days days days days days 900 days 2014 leaves: 3 0employees*6weeks*5days 2 5employees*5weeks*5days 3 0employees*3weeks*5days 1 0employees*2weeks*5days Total cummulative unused leaves by 12/31/2014 Less:Expiredunusedleavesfrom2013: Unusedleavesstillexerciseable Mulitplyby:Currentsalaryrate,2014 Liab il it y fo r co mp en sate d absen ce s/ Sa laries pa ya bl e unaccrued, thus expense in 2013 was understated. 625 days 450 days 100 days 2,075 days (425) 1,650 275 45 3, 75 0 2. Ans. CHAPTER 8-PROBLEM 10: BARO CORP. 1. Ans. B. Damages occurred in 2014, thus is a present obligation. The outflow of benefits is probable and the most reliable estimate is P400,000. Since the lawyers estimate that the reasonably possible outflow may be upto P700,000, additional contingent liabiltiy should be disclosed at P300,000. 2. Ans. C. The purchase commitment is non-cancellable. Since as of the balance sheet date the unavoidable cost to fulfill the contract (10,000*P100=P1,000,000), already exceed the expected benefit (10,000*P60=P600,000), the contract is rendered onerous as of the balance sheet date. PAS 37, requires the recongition of the loss and provision when the contract is rendered onerous. Entry: Loss on purchase commitment (P100-P60)*10,000 400,000 Estimatedliabilityonpurchasecommitment 400,000 3. Ans. D. The virtually certain reimbursement from probable loss shall be presented as an offset against the loss and provision (PAS 37) while virtually certain reimbursement from the impaired asset shall be recongized as a separate asset and income (PAS 16) 4. Ans. C. The contingent asset that is probable is disclosed. CHAPTER 8-PROBLEM 11: MOATS COMPANY Proceeds from issue of bonds=PV of future cash flows at 4% semi-annual effective rate for 10 periods: Principal: P1,000,000*0.675564 675,564 0.675564 Interest:P50,000*8.110896 405,545 8.110896 1,081,109 Amortization tabe: Bonds payable: Correct Int. Nominal Int. Amortization Balance (CV*4%) (P1M*5%) March 2014: 1, 1,081,109 September1,2014: 43,244 50,000 (6,756) 1,074,353 March 1, 2015: 42,974 50,000 (7,026) 1,067,327 September1,2015: 42,693 50,000 (7,307) 1,060,021 March 1, 2016: 42,401 50,000 (7,599) 1,052,421 Correct entries: March 1, 2014: Cash Bonds payable Premiumonbondspayable 1,081,109 1,000,000 81,109 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 95 of 155 September 1, 2014: Interest expense 50,000 Cash Premiumonbondspayable 6,756 Interest expense December 31, 2014: Interest expense 33,333 Interest payable (P1,000,000*10%*4/12) Premiumonbondspayable 4,684 Interest expense Correctinterest(P1,074,353*8%*4/12) Nominal i nterest a ccrued (P1,000,000*10%*4/12) Amortization 1. Ans: Adjusting Entries: Bonds payable Premiumonbondspayable Interest expense 4,684 28,649 33,333 (4,684) 69,669 11,440 33,333 33,333 2. Ans. P71,894. Interest expense (Mar. 1 - Sept. 1) P1,081,109*8%*6/12 Interst expense (Sept. 1 - Dec. 31) P 1,074,353*8%*4/12 I n t e r e s te x p e n se ,2 0 1 4 43,244 28,649 71 ,8 9 4 3. Ans. P1,069,669. Amortized cost, Sept. 1, 2014 (see table) Amortization up to Dec. 31, 2014 (see entries) A m o r t i z e dc o st ,D e c .3 1 ,2 0 1 4 4. Ans. P10,021. Retirementprice Amortized cost, Sept. 30, 2015: Accruedinterst(P1M*10%*1/12) Ga in o n r et i r e m e nt o f b o nd s 1,074,353 (4,684) 1, 06 9 ,6 69 1,050,000 (1,058,754) (1,267) (1 0 ,0 21 ) Amortized cost, Sept. 1, 2015 (see table) Amortization up to Sept. 30: Correct interest (P1,060,021*8%*1/12) Nominal interest (P1,000,000*10%*1/12) Amortizedcost,Sept.1,2015 CHAPTER 8-PROBLEM 12: MNO INC. 1. Ans. P1,245,000. Accounts payable, unadjusted balance RR2903-onconsignment RR2904-intransit,FOBSP Ac cou n ts p ay a b l e, ad j ust ed 33,333 81,109 Interest expense Interest payable Entry: Bonds payable Premiumonbondspayable Interest expense Cash Gainonretirementofbonds 50,000 6,756 1,060,021 7,067 (8,333) (1,267) 1,058,754 1,000,000 58,754 1,267 1,050,000 10,021 1,240,000 (30,000) 35,000 1, 2 45 ,0 00 2. Ans. P720,000. Required warranty expense, 2013: (2,500u*40%*P900) Actual cost Warrantiesliability,Dec.31,2013 Required warranty expense, 2014: (3,000u*40%*P900) Actual cost W a r r a n t i e sl i a b i l i t y , D e c . 3 1 , 2 0 1 4 900,000 (560,000) 340,000 1,080,000 (700,000) 7 20 ,0 00 3. Ans. P2,099,474. Proceeds from bond issue/FMV 1/1/13 = PV of fu ture cash flows at 10% for 5 years. Principal: P2,000,000*0.620921 1,241,843 Interest:P 240,000*3.790787 909,789 2,151,631 0.620921 3.790787 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 96 of 155 Amortization table: Bonds payable Correct Int. (Bal*10%) January 2013: 1, December31,2013: December31,2014: 215,163 212,679 4. Ans. P78,505. Netincomebeforeanyadjustments: Understatedaccountspayable/purchases Understated warranties payable/warranties expense Overstatement in interestexpensein 2014 Adjusted netincome2014,beforebonus Nominal Int. (Face*12%) 240,000 240,000 Amortization Balance 2,151,631 (24,837) 2,126,795 (27,321) 2,099,474 1,557,679 (5,000) (380,000) 27,321 1,200,000 B = 10% (NI - Tx - B); Tx = 30%(NI - B) B = 10% (1.2M - (30%(1.2M - B) - B) B = P78,505. 5. Ans. P785,046. Adjusted netincome2014,beforebonus Less: Bonus Netincomebefore30%tax Income tax expense N eIt n c o m e a fte r t ax 1,200,000 (78,505) 1,121,495 (336,448) 7 85 ,0 46 CHAPTER 8-PROBLEM 13: MAMALOLA CORP. 1. Ans. P443,000. Accountspayable,unadjustedbalance Shipmentsfromconsignor(recorded) Shipments-in-transit, F OB D estination ( recorded) Shipment-in-transit, FOB SP (not yet recorded) A c c o u n t sp a y a b l e ,a d j u st e d 460,000 (42,000) (30,000) 55,000 4 43 ,0 00 2. Ans. P248,700. Warranty expense in 2013 (1,250*70%)*P350 Less: Actual warranty cost incurred in 2011 Warrantiespayable,2013 Warranty expense in 2014 (1,410*70%)*P350 Less: Actual warranty cost incurred in 2014 W a r r a n t i e sp a y a b l e ,2 0 1 2 AJE 1: Accounts Payable Purchases 306,250 (153,000) AJE 2: Warranties Expense 153,250 Warrantiespayable 345,450 (250,000) 2 48 ,7 00 17,000 17,000 95,450 95,450 3. Ans. P222,750. 2013 unused leaves forwarded to 2015 (625-(700-200))* 125 2014unusedleavesforwardedto2015 550 AJE3:Salariespayable 45,750 Total unused leaves that may be forwarded to 2053 675 Salariesexpense 45,750 Multiply by current salary rate in 2014: (268,500/895days)*1 330 (268,500-222,750) Sa la ri es pa ya bl e (Lia b fo r co mp en sa te d ab se nc es) 22 2, 75 0 *any unused prior to 2013 leaves are forfieted by the end of 2014 4. Ans. P1,600,000. *There is a right/option to refinance the obligation on a long-term basis as of December 31, 2014. However, based on the probable proceeds from the issuance of long-term debt security P1.6M (P2M*80%), only P1.6M may probably be refinanced on a long-term basis. 5. Ans. P130,841. Unajdustednetincome AJE1:Overstatedpurchases AJE 2: Understated warranty expense AJE 3: Overstated salaries expense Adjustednetincome B = 10% (NI - B - TX) TX = 30% (NI - B) 2,032,700 17,000 (95,450) 45,750 2,000,000 B = 10% (2,000,000 - B - 30%(2,000,000 - B)) B = 140,000 - .07B 1.07B = 140,000 Bonus = P130,841 CHAPTER 8-PROBLEM 14: SANTOS CORP. 1. Ans. P402,104. Proceedsfromconvertiblebondissue(P8M*110%) Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 10% for 3 years: Principal:P8,000,000*0.751315 6,010,518 Interest:P960,000*2.486852 2,387,378 R e s i d u a l a m o u n t / A P I C f r o m b o n d c o v e r si o n p r i v i l e g e 8,800,000 8,397,896 4 0 2, 10 4 0.751315 2.4868520 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 97 of 155 2. Ans. P8,277,686. Amortization table: Bonds payable Correct Int. (Bal.*10%) January 2014: 1, December31,2014: December31,2015: December31,2016: 839,790 827,769 814,545 3. Ans. Entry upon conversion: Alt1 Bondspayable Premiumonbondspayable Ordinaryshares(8,000*50*P10) S h a rp e r e mi u m 8,000,000 277,686 Alt2 Bondspayable Premiumonbondspayable APIC-Bond conversion privilege 8,000,000 277,686 402,104 Nominal Int. Amortization (Face*12%) 960,000 960,000 960,000 Balance 8,397,896 (120,210) 8,277,686 (132,231) 8,145,455 (145,455) 8,000,000 4,000,000 4, 27 7 ,6 86 Ordinaryshares(8,000*50*P10) S h a rp e r e mi u m 4,000,000 4, 67 9 ,7 90 Note: Both alternatives are acceptable under PAS 39. 4. Ans. P65,455. Total Retirementprice CV,Bondspayable,1/1/16 CV,APIC-Bondcoversionprivilege Gain on retirement of convertible bonds 8,320,000 Entry: Bonds payable Premiumonbondspayable APIC -Bond conversion privilege Cash Gain on retirementofbonds(profit/loss) APIC/Share premium BondsPayabl APIC-BCP (at FMV, 102) (Residual) 8,080,000 240,000 8,145,455 402,104 65,455 162,104 to pr ofit/los to A PIC 8,000,000 145,455 402,104 8,320,000 65,455 162,104 CHAPTER 8-PROBLEM 15: DIRT CORP. 1. Ans. P379,264. Proceeds from bond with warrants issue Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 5% for 8 semi-annual periods: Principal:P2,000,000*0.676839 1,353,679 Interest:P80,000*6.4632128 517,057 R e s i d u a l a m o u n t / Or d i n a r y S h a r e W a r r a n t s O u t s t a n d i n g 2. Ans. P1,898,486. Amortization table: Bonds payable Correct Int. (Bal.*10%) January 2014: 1, July 1, 2014: January 1, 2015: 93,537 94,214 3. Ans. P257,559. Entry upon exericise of warrants: Cash(2,000*5w)*60%*P55 Ordinary share warrants outstanding(60%) Ordinaryshares(6,000shares*P50) Share premium 1,870,736 3 7 9, 26 4 Nominal Int. Amortization (Face*12%) 80,000 80,000 0.676839 6.4632128 Balance 1,870,736 13,537 1,884,273 14,214 1,898,486 330,000 227,559 4. Ans. Entry upon expiration of remaining warrants: Ordinary share warrants outstanding(40%) Share premium/APIC -Expiredwarrants 300,000 257,559 151,706 151,706 CHAPTER 8-PROBLEM 16: CASE 1: Periodic rentals (March to December); (40,000*10mo) Amortization of lease bonus (120,000/5yrs)*10/12 R en Etx p e n se 400,000 20,000 4 20 ,0 00 CASE 2: Annual rental Amortization of lease bonus (100,000/8yrs) Contingentrental(P2.5M-P2M)*5% R en Etx p e n se 300,000 12,500 25,000 3 37 ,5 00 CASE 3: Total lease payments: P30,000*(60mo - 9mo) 2,250,000 1,530,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 98 of 155 Divide years by: 5 Annual rental expense Mulitply by: 11mo/12mo Rent expense for 2014 Less: Amount paid for the year (Nov. and Dec.) A c c r u e dr e n te x p e n se ,1 2 / 3 1 CASE 4: Total lease payments: P40,000*(120mo-3mo) Divide by: 10 years Annualrentalexpense Multiplyby:4mo/12mo Rent expense for 2014 Leaseholdimprovementcost Divide by: years 5 Annualdepreciationexpense Mulitplyby:3mo/12mo T o tae l x p e n s ef o r2 0 1 4 CASE 5: Total lease collection: First two years: (P2,000*100*2yrs) Last two years: (P3,000*100*2yrs) Divide years by: 4 Annual rental income Multiply by: 9mo/12mo Rentincomefor theperiod ended 9/30/14 Amountcollectedin2014 U n e a r n e dr e n t a li n c o m e 5 306,000 11/12 280,500 (60,000) 2 20 ,5 00 4,680,000 10 468,000 4/12 156,000 300,000 5 60,000 3/12 400,000 600,000 CASE 6: Gross rental income Amortization o f d irect l ease e xpense ( 150,000/5years) Depreciation expense Property taxes N erte n t ailn c o m e CHAPTER 8-PROBLEM 17: CASE 1: Minimumleasepaymentsinarrears Multiply by: PV factor of 1 at 10% for 10 periods in arrears I n i t i a lc o s to ft h ea s s e t CASE 2: Minimumleasepaymentinadvance Multiply by: PV factor of 1 at 10% for 8 period in advance Initial cost of the asset Divide by: 12 yrs (life since title passes to the lessee) D ep r ec ia t io n e x p e n se 15,000 1 71 ,0 00 1,000,000 4 250,000 9/12 187,500 200,000 (1 2, 50 0 ) 500,000 (30,000) (120,000) (90,000) 2 60 ,0 00 200,000 6.1450 1, 22 9 ,0 00 96,000 5.8680 563,328 12 46 ,9 44 CASE 3: Minimum lease payment Periodicpaymentsinadvance 400,000 Multiply by: PV factor of 1 at 14% for 10 period in advance 5.9500 2,380,000 Bargainpurchaseoption 200,000 Multiply by: PV factor of 1 at 14% for 10 period without ann 0.2700 54,000 Initial cost of the asset 2,434,000 Less:Depreciation(2,434,000/12years) (202,833) * C a r r y i n gv a l u ea so f1 2 / 3 1 / 1 4 2 ,2 31 ,1 6 7 *note that the depreciation is based on the useful life since ownership will be transferred to the lessee CASE 4: Amortization table: Periodic Payme Dec.31,2014:(P3,165,000-P500,000) Dec. 31, 2015: Dec. 31, 2016: 500,000 500,000 Interest 316,500 298,150 CHAPTER 8-PROBLEM 18: ANGLO INC. Entries made, under finance lease: December 31, 2013: Building* 3,379,512 Cash 500,000 Lease liability 2,879,512 *PV of MLP 10% for 10 years in advance: (lower than FMV of asset) (P500,000*6.7590238) 0 Principal Balance 3,165,000 183,500 2,981,500 201,850 2,779,650 5.759024 6.7590238 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 99 of 155 Amortization table (per books): Finance Lease Periodic Payme December 31, 2013: December31,2014: 500,000 December 31, 2014: Interest expense Lease liability Cash Correct Int. Principal 287,951 Balance 2,879,512 212,049 2,667,463 287,951 212,049 500,000 Depreciationexpense AccumulatedDepreciation (P3,379,512/10years) 337,951 337,951 AUDIT ANALYSIS: 1. There is no transfer of ownership. 2. There is no bargain purchase option. 3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset. 4. The PV of MLP (P3,379,512) is not substantially all (at least 90%) of the FMV of the leased asset (P4,000,000) The lease agreement does not qualify as finance, thus should have been accounted for o nly under operating lease. Correct entries, under operating lease. December 31, 2013: Prepaid rent Cash 500,000 500,000 January 1, 2014: Rent expense Prepaid rent 500,000 December 31, 2014: Prepaid rent Cash 500,000 500,000 500,000 1. Ans. P125,902. Expenses per books Interest on finance lease liability 287,951 Depreciationexpense 337,951 Expense per audit Over st ate me nt in ex pe ns e /U n de r st ate me n t in N I 625,902 500,000 12 5, 90 2 2. Ans. None. CHAPTER 8-PROBLEM 19: LACTUM INC. Entries made per books, operating lease: January 1, 2014: Rent expense Cash 150,000 150,000 April 1, 2014: Rent expense Cash 150,000 July 1, 2014: Rent expense Cash 150,000 October 1, 2014: Rent expense Cash 150,000 150,000 150,000 150,000 AUDIT ANALYSIS: 1. There is no transfer of ownership. 2. There is no bargain purchase option. 3. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset. 4. The PV of MLP (P4,185,388) is substantially all (at least 90%) of the FMV of the leased asset (P4,185,388) The lease agreement does qualify as finance, thus should have been accounted for only under finance lease. Correct entries per audit, finance lease January 1, 2014: Building* 4,185,388 Cash 150,000 Lease liability 4,035,388 *PV of MLP at 2% for 40 quarters in advance. (P150,000*27.9025888) 26.9025888 0.4619482 27.9025888 Amortization table: Finance lease liabilty: Periodic Payme January 2014: 1, April 1, 2014: July 1, 2014: October 1, 2014: 150,000 150,000 150,000 Correct Int. 80,708 79,322 77,908 Principal Balance 4,035,388 69,292 3,966,096 70,678 3,895,418 72,092 3,823,326 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA Janaury 1, 2015: April 1, 2015: July 1, 2015: October 1, 2015: SOLUTIONS GUIDE 100 of 155 150,000 150,000 150,000 150,000 April 1, 2014: Interest expense Lease liability Cash 80,708 69,292 July 1, 2014: Interest expense Lease liability Cash 79,322 70,678 October 1, 2014: Interest expense Lease liability Cash 77,908 72,092 December 31, 2014: Interest expense Interest payable 76,467 76,467 74,996 73,496 71,966 73,533 75,004 76,504 78,034 3,749,793 3,674,789 3,598,285 3,520,250 150,000 150,000 150,000 76,467 Depreciationexpense 418,539 Accumulateddepreciation 418,539 (P4,185,388/10years) * no transfer of ownership, thus depr shall be over term. 1. Ans. P132,943. Expense per books Rentexpense(P150,000*4qtrs) 600,000 Expense per audit: Interestexpense 314,405 Depreciationexpense 418,539 732,943 Understatement in Expense/Overst atement Net Income (132,943) 2. Ans. P3,823,326. Le a sel i a b i l i t y ,1 2 . 3 1 . 1 4 Interestpayable,12.31.14 3, 82 3 ,3 26 76,467 3. Ans. P303,076. Principal due from January 1, 2015 to December 31, 2015 (see amortization table) Janaury 1, 2015: 73,533 April 1, 2015: 75,004 July 1, 2015: 76,504 October 1, 2015: 78,034 C u r r e n t p o r t i o n o f l e a se l i a b i l i t y 3 03 , 07 6 CHAPTER 8-PROBLEM 20: CASE 1: 1. Ans. P60,000. Sales price Fairmarketvalue D e f e r r e dg a i n o nsa l e Fair market vaue Carrying value R e a l i z e dg a i no ns a l e 2. Ans. 40,000. Sales price Fairmarketvalue D e f e r r e dg a i no nsa l e Fair market vaue Carrying value R e a l i z e dg a i no ns a l e 3. Ans. 100,000. Sales price Fairmarketvalue D e f e r r e dg a i no nsa l e Fair market vaue Carrying value R e a l i z e dl o sso ns a l e 4. Ans. 60,000. Sales price Fairmarketvalue Ig n o r e d Sales price 420,000 (420,000) 420,000 (360,000) 60 ,0 0 0 420,000 (380,000) 40 ,0 0 0 380,000 (360,000) 20 ,0 0 0 420,000 (320,000) 1 00 , 00 0 320,000 (360,000) (4 0 ,0 00 ) 420,000 (450,000) (3 0 ,0 00 ) 420,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA Carrying value R e a l i z e dl o sso ns a l e SOLUTIONS GUIDE 101 of 155 (360,000) 60 ,0 0 0 CASE 2: 1. Ans. P80,000. Sales price Fairmarketvalue D e f e r r e dl o s so nsa l e 400,000 (480,000) (8 0 ,0 00 ) Fair market vaue Carrying value R e a l i z e dl o sso ns a l e 480,000 (540,000) (6 0 ,0 00 ) 2. Ans. P40,000. Sales price Fairmarketvalue Realizedlossonsale 400,000 (480,000) (80,000) Fair market vaue 480,000 Carrying value Realizedlossonsale (540,000) (60,000) T o t a lr e a l i z e dl o ss * since the future rentals is below rent, there is an expected future benefit from the asset being sold at a loss. * since the future rentals is at mark et rate of rent, there is no expected future benefit from the asset sold at a loss. (14 0 ,0 00 ) CASE 3: 1. Ans. 626,667. Interest expense on finance lease liab (600,000*10%) 60,000 Depreciation on the leased-back asset (600,000/3yrs) 600,000 Amortization of deferred gain on sale (100,000/3yrs) (33,333) - gain on a sale and leaseback (finance) is fully deferred and Ne t a mo u nt r e c og n i ze d in th e p r of i t o r l oss 6 26 ,6 67 amortized over lease term. *note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life. 2. Ans. 141,269 Rent expense 241,269 Realized gain on s ale (P600,000 - P 500,000) (100,000) *Selling price is at FMV Ne t a mo un t r ec og ni ze d i n t he pro fi t/ lo ss 14 1, 26 9 *note that the lease back agreement is acconted for as o perating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs. CASE 4: 1. Ans. 115,000. Interest expense on finance lease liab (150,000*10%) 15,000 Depreciation o n t he l eased-back a sset ( 150,000/3yrs) 50,000 Realized loss on sale 50,000 *loss on sale is fully realized since it is an indication of Ne t a mo u nt r e c og n i ze d in th e p r of i t o r l oss 1 15 ,0 00 asset impairement. *note that the lease back agreement is acconted for as finance lease since the term, 3yrs is 100% of the remaining life. 2. Ans. P158,205. Rent expense 58,205 Realized loss on sale (P200,000 - P150,000) 100,000 *Selling price is at FMV (no expected future benefit) Ne t a mo un t r ec og ni ze d i n t he pro fi t/ lo ss 15 8, 20 5 *note that the lease back agreement is acconted for as o perating lease since the term, 3yrs is less than 75% of the remaining life, 8 yrs. CHAPTER 8-PROBLEM 21: CASE 1: Minimumleasecollections Multiply by: PV factor of 1 a t 12% for 5 y ears with annuity Presentvalueofminimum leasecollection 200,000 3.604776 720,955 Cost of the asset/FMV of asset (Under Direct Finance) Add:Directfinanceleasecost Initial investment on thelease agreeement 700,000 20,955 720,955 1 Amortization table: January 2015: 1, December31,2015: December31,2016: December31,2017: December31,2018: December31,2019: Periodic Coll. Interest Inc. Principal Balance (CV 12%) * 720,955 200,000 86,515 113,485 607,470 200,000 72,896 127,104 480,366 200,000 57,644 142,356 338,010 200,000 40,561 159,439 178,571 200,000 21,429 178,571 (0) 1. Ans. 0. Under a Direct Finance Lease, the only source of income shall be interest. No profit shall be recognized from the sale of the asset since under Direct Finance Lease, the cost of the asset on the company's books shall be equal to its selling price to the customer. *Direct lease costs incurred under direct finance lease is added to the initial investment on lease, thus increasing the amoun t receivable. Entry upon inception/Sale of asset: Financeleasereceivable Asset Cash 720,955 700,000 20,955 2. Ans. 72,896. CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 102 of 155 Entry upon periodic collections: Dec. 31, 2015: Cash Interest income Financeleasereceivable 200,000 86,515 113,485 Dec. 31, 2016: Cash Interest income Financeleasereceivable 200,000 72,896 127,104 3. Ans. 480,366. See amortization table above. CASE 2: Minimumleasecollections Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance Present value of minimum lease collection = Sales Price 200,000 4.169865 833,973 Cost of the asset G r o ss p r o f io tn sa l e 1 600,000 2 33 ,9 73 Amortization table: Periodic Coll. Interest Inc. Principal Balance (CV 10%) * 633,973 200,000 63,397 136,603 497,370 200,000 49,737 150,263 347,107 200,000 34,711 165,289 181,818 200,000 18,182 181,818 0 January 2015: 1, January 1, 2016: January 1, 2017: January 1, 2018: January 1, 2019: 1. Ans. 233,973. Under a Sales Type Lease, the manufacturer/dealer shall recognize gross profit from the sale of the asset which shall be the difference between the Sales Price of the asset and its Cost on the company's books. *Direct lease costs incurred under sales type lease is recognized as outright expense Entry upon inception/Sale of asset: Financeleasereceivable Sales 833,973 833,973 Entry to recognize cost of sales, if perpetual inventory is used: Cost of sales 600,000 Inventory Entry to recognize the direct lease expense: Expense Cash 20,000 20,000 2. Ans. 49,737. Entry upon accrual of interest and periodic collections: Dec. 31, 2015: Interestreceivable 63,397 Interest income Jan. 1, 2016: Cash Interest receivable Financeleasereceivable Dec. 31, 2016: Interestreceivable Interest income Jan. 1, 2017: Cash Interest receivable Financeleasereceivable 600,000 63,397 200,000 63,397 136,603 49,737 49,737 200,000 49,737 150,263 3. Ans. 497,370. See amortization table CASE 3: Minimumleasecollections Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity Presentvalueofminimumleasecollection Guaranteedresidualvalue Multiply by: PV factor of 1 at 10% years w/o annuity Presentvalueoftheguaranteedresidualvalue Total Sales Price of the asset = Total Lease Receivable 400,000 3.790787 1,516,315 100,000 0.620921 62,092 1,578,407 Amortization table: Periodic Coll. January 1, 2015: December31,2015: December31,2016: 400,000 400,000 Interest Inc. Principal Balance (CV 10%) * 1,578,407 157,841 242,159 1,336,248 133,625 266,375 1,069,872 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 103 of 155 December31,2017: December31,2018: December31,2019: December 31, 2019: Guaranteed RV 400,000 400,000 400,000 100,000 106,987 77,686 45,455 293,013 322,314 354,545 100,000 776,860 454,545 100,000 0 1. Ans. P1,578,407. Under Sales Type Lease, where residual value is guaranteed, that portion of the asset is deemed sold, thus the PV of the guaranteed residual value is added to the total sales price of the asset. *Direct lease expense under sales type lease is recognized as outright operating expense. Entry upon inception/Sale of asset: Financeleasereceivable Sales 1,578,407 1,578,407 2. Ans. P1,000,000. Entry to recognize cost of sales, if perpetual inventory is used: Cost of sales 1,000,000 Inventory Entry to recognize the direct lease expense: Expense Cash 50,000 50,000 3. Ans. 578,407. TotalSalesPriceoftheAsset Less: Cost of the asset/FMV of asset Gross Profit on Sale 4. Ans. P133,625. Entry upon periodic collections: Dec. 31, 2015: Cash Interest income Financeleasereceivable Dec. 31, 2016: Cash Interest income Financeleasereceivable 1,000,000 1,578,407 (1,000,000) 578,407 400,000 157,841 242,159 400,000 133,625 266,375 CASE 4: Minimumleasecollections 400,000 Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity 3.790787 Present value of minimum lease collection = S ales Price of the asset 1,516,315 *Since the residual value is unguaranteed, that portion of the asset is not deemed sold. Thus was not included in the sales price. Minimumleasecollections 400,000 Multiply by: PV factor of 1 a t 10% for 5 y ears with annuity 3.790787 Presentvalueofminimumleasecollection 1,516,315 Guaranteedresidualvalue 100,000 Multiply by: PV factor of 1 at 10% years w/o annuity 0.620921 Presentvalueoftheguaranteedresidualvalue 62,092 Total Lease receivable. 1,578,407 *Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership), the unguaranteed residual value which will be received at the expiration of the lease term is still added to the receivable. Totalcostof the asset 1,000,000 Less: Present value of the u nguaranteed residual value (62,092) Netcostoftheassetsold 937,908 *Since the residual value is unguaranteed, that portion of the aset is not deemed sold. The PV of the unguaranteed residual value is therefore deducted from the cost of the inventory sold. Amortization table: Periodic Coll. January 1, 2015: December31,2015: December31,2016: December31,2017: December31,2018: December31,2019: December 31, 2019: Guaranteed RV 1. Ans. P1,516,315. Entry upon inception/Sale of asset: Financeleasereceivable Sales 400,000 400,000 400,000 400,000 400,000 100,000 Interest Inc. Principal Balance (CV 10%) * 1,578,407 157,841 242,159 1,336,248 133,625 266,375 1,069,872 106,987 293,013 776,860 77,686 322,314 454,545 45,455 354,545 100,000 100,000 0 1,516,315 1,516,315 2. Ans. P937,908. Entry to recognize cost of sales, if perpetual inventory is used: Financeleaserecievable 62,092 Cost of sales 937,908 Inventory 1,000,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 104 of 155 Entry to recognize the direct lease expense: Expense Cash 50,000 50,000 3. Ans. 578,407. TotalSalesPriceoftheAsset Less: Cost of the asset/FMV of asset Gross Profit on Sale 4. Ans. P133,625. Entry upon periodic collections: Dec. 31, 2015: Cash Interest income Financeleasereceivable Dec. 31, 2016: Cash Interest income 1,516,315 (937,908) 578,407 400,000 157,841 242,159 400,000 133,625 Financeleasereceivable CHAPTER 8-PROBLEM 22: ABC CO. Reconciliation: Netincomebeforeanydifferences Permanent Differences: Nondeductibleexpenses Nontaxable income Netincomeafterpermanentdifferences Temporary Differences: Future Deductible amounts Accruedwarranties Advancesfromcustomers Provisionforprobablelosses Future Taxable Amounts Prepaid rent Taxable income 1. Ans. P4,340,000. Taxableincome Mulitplyby:Currenttaxrate C u r r e n tt axe x p e n s e 266,375 10,000,000 100,000 (500,000) 9,600,000 250,000 500,000 900,000 400,000 1,650,000 (400,000) 10,850,000 10,850,000 40% 4, 3 40 ,0 00 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA 2. Ans. P3,840,000. Net income after permanent differences Multiplyby:Constanttaxrate T o t a lt a xe x p e n se 3. Ans. P660,000. Futuredeductibleamounts Mulitplyby:Constanttaxrate D e f e r r e dt axa ss e t SOLUTIONS GUIDE 105 of 155 9,600,000 40% 3, 8 40 ,0 00 1,650,000 40% 6 60 , 00 0 4. Ans. P160,000. Futuretaxableamounts Mulitplyby:Constanttaxrate D e f e r r e dt axl ia b i l i t y To reconcile: Currenttaxexpense Add: Deferred tax expense (FTA) Less: Deferred tax benefit (FDA) Totaltaxexpense 400,000 40% 1 60 , 00 0 4,340,000 160,000 (660,000) 3,840,000 5. Ans. P3,902,500. If tax rate in the future is expected to change (at 35%): Currenttaxexpense(P10.85M*40%) Add: Deferred tax expense (FTA:P400,000*35%) Less: Deferred tax benefit (FDA:P1,650,000*35%) T o t atla x e x p e n se 6. Ans. P140,000. Futuretaxableamounts Mulitplyby:Futretaxrate D e f e r r e dt axl ia b i l i t y 7. Ans. P577,500. Futuredeductibleamounts Mulitplyby:Constanttaxrate D e f e r r e dt axa ss e t 4,340,000 140,000 (577,500) 3, 90 2 ,5 00 400,000 35% 1 40 , 00 0 1,650,000 35% 5 77 , 50 0 CHAPTER 8-PROBLEM 23:XYZ CO. Reconciliation: Netincomebeforeanydifferences Permanent Differences: Nondeductibleexpenses Nontaxable income Netincomeafterpermanentdifferences Temporary Differences: Increase in Future Deductible for the year: CummulativeFDA,ending 1,600,000 CummulativeFDA, beginning 1,200,000 Decrease in Future Taxable Amount for the year: CummulativeFTA,ending 500,000 CummulativeFTA,beginning 800,000 Taxable income 1. Ans. P2,320,000 Taxable income Mulitplyby:Currenttaxrate C u r r e n tt axe x p e n s e 5,800,000 40% 2, 3 20 ,0 00 2. Ans. P2,040,000. Net income after permanent differences Multiplyby:Constanttaxrate T o t a lt a xe x p e n se 5,100,000 40% 2, 0 40 ,0 00 3. Ans. P660,000. Cummulative Future Deductible Amt, end Mulitplyby:Constanttaxrate D e f e r r e dt axa ss e t 4. Ans. P200,000. Cummulative Future Taxable Amt, end Mulitplyby:Constanttaxrate D e f e r r e dt axl ia b i l i t y To reconcile: Currenttaxexpense Less: Deferred tax benefit ( dec in F TA) Less: Deferred tax benefit (inc in FDA) Totaltaxexpense 5,000,000 150,000 (50,000) 5,100,000 400,000 300,000 5,800,000 1,600,000 40% 6 40 , 00 0 500,000 40% 2 00 , 00 0 2,320,000 (120,000) (decrease in deferred tax liability) (160,000) 2,040,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 106 of 155 CHAPTER 8-PROBLEM 24: JAPS CORP. 1. Ans. P1,270,000. Service costs Current service cost Pastservicecostrecognized fortheyear Loss on settlment: Paymentstoearlyretirees CV of ac crued benefits of early ret. Net interest (income)expense InterestonABO(P10,080,000*12%) IntersetonPA(P9,450,000*12%) P e n si o ne x p e n s e( P r o f i to rl o s s) 855,000 120,000 800,000 650,000 150,000 1,209,600 (1,134,000) Net remeasurement gain/loss (Other comprehensive Income/loss) ActuarialgainonPA(a) (216,000) ActuariallossonABO(b) 285,400 T o t apl e n si o n e x p e n se 1,125,000 75,600 1 , 2 0 0 , 62. 0 0Ans. 69,400 3. Ans. 1 ,2 70 ,0 0 0 (a) Actuarial gain/loss on Plan asset Plan asset, beginning balance Add:Contribution fortheyear Interest on PA (P9,450,000*12%) Less: Settlements at scheduled retirement Settlements to early retirees Balance Plan asset, at FMV at the year-end Actuarialgainonplanasset 9,450,000 1,200,000 1,134,000 (1,400,000) (800,000) 9,584,000 9,800,000 216,000 (b) Actuarial gain/loss on Accumulated Benefit Obligation ABO,beginningbalance 10,080,000 Add:Currentservicecost 855,000 Pastservicecostfor theyear 120,000 Interest on A BO (P10,080,000*12%) 1,209,600 Less: Benefits settled, at scheduled ret. (1,400,000) Benefits settled, early retirees (650,000) Balance 10,214,600 ABO, present value, ending balance 10,500,000 ActuariallossonAB0 285,400 4. Ans. P700,000. To reconcile: Accruedpension,beg Pensionexpense(total) Total Contribution t o the p lan f or the year Accruedpension,end 630,000 1,270,000 1,900,000 (1,200,000) 700,000 ABO, end Planasset,end Accruedpensionend 10,500,000 (9,800,000) 700,000 CHAPTER 8-PROBLEM 25: IRELAND CORP. 1. Ans. P620,000. Service costs Current service cost Net interest (income)expense InterestonABO(P2,980,000*8%) IntersetonPA(P3,200,000*8%) P e n si o ne x p e n s e( P r o f i to rl o s s) 480,000 238,400 (256,000) Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial loss on PA 80,000 Actuarial loss on ABO 30,000 Effect of ceiling** 47,600 T o t aple n si oe nx p e n se (17,600) 4 6 2 , 42. 0 0 Ans. 157,600 3. Ans. 6 2 0, 00 0 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 107 of 155 Plan asset, beginning balance Add:Contributionfortheyear Interest on PA (P3,200,000*8%) Less: Settlements a t scheduled re tirement Balance Less: Actuarial loss on PA Planasset,FMV,end ABO,beginningbalance Add:Currentservicecost Interest on ABO (P2,980,000*8%) Less: Benefits settled, at scheduled ret. Balance Add:ActuariallossonABO ABO,presentvalue,end 3,200,000 750,000 256,000 (560,000) 3,646,000 (80,000) 3,566,000 2,980,000 480,000 238,400 (560,000) 3,138,400 30,000 3,168,400 Planassetatfairvalue,end ABOatpresentvalue,end Prepaidpension,end 3,566,000 3,168,400 397,600 AssetCeiling(lower) Remeasurement loss/Effect of ceiling 350,000 47,600 4. Ans. P350,000. To reconcile: Prepaid pension, beg (ceiling was higher) Pensionexpense(total) Total Contribution to the plan for the year Pr ep ai d p en si on , e nd (cei li ng is lo we r) ** (220,000) 620,000 400,000 (750,000) (350 ,0 00 ) MULTIPLE CHOICE EXERCISES: CHAPTER 8-EXERCISE 1: PROBE INC. ITEM a. A ccounts payable – trade, P170,000 + 30,000 b. Notespayable–trade,P70,000 InterestonNotes: 50,000*15%*4/12 0,000*15%*2/122 500 c. Advancereceiptsfromcustomers, d. Containers deposit e. Notespayable–BPI,P200,000/5 i. Convertible bonds j. Notes payable – officers k. S alariesandwages(68,000*15/30) m. O utput VAT, net of Input (246,000 – 164,000) n. Accountsreceivable,creditbalance 0. Ca sh in banks (overdraft) 115,000 – (125,000+55,000) r. E stimatedwarrantycostson goodssold s. Installmentnotespayable,P75,000*1/3 t. P rovision for losses (25,000 +75,000) / 2 u.Deferred tax liability TOTAL P200,000 70,000 2,500 100,000 50,000 40,000 160,000 1,000,000 40,000 34,000 82,000 12,300 65,000 46,000 25,000 50,000 P8 17 ,3 0 0 1 . A n s. C . 50,000 150,000 P1 , 36 0, 00 0 2 . A ns. B . P2 ,1 7 7, 30 0 3 . An s. A. CHAPTER 8-EXERCISE 2: CUT INC. Bonds payable: Noncurrent Current 7/1/2008:(P4,000,000*98%) 3,920,000 Cummulative discount amortization: P80,000/10yrs*5.75yrs 46,000 3,966,000 Accruedinterestonbonds(P4M*7%*3/12) 70,000 Accruedinterestonnotes payable 90,000 Currentportionofnotes payable 600,000 Noncurrentportionofnotespayabe 2,400,000 Warrantiesliability(P55,000+P145,000-P130,000) 70,000 Trade payables 325,000 Payroll related items 193,000 Taxes payable 535,000 Other accruals 50,000 Cash dividendspayable(P0.40*2,500,000shares) 1,000,000 6,366,000 2,933,000 1 . A n s. B . 2. A ns. A . Note: Stock dividends payable is classifed as capital and n ot as liability. CHAPTER 8-EXERCISE 3: RADO INC. Ans. A. Estimated Warranties Payable, beginning balance Required Estimated Expense (7,250,000-150,000)*5% Less: Actual cost incurred for theyear Esti m at e d W a r r a n ti e s Pa y a b l e, e n d in g b a l a n c e P225,000 355,000 (415,500) P1 64 ,5 0 0 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 108 of 155 CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT 1. Ans. C.; 2. Ans. B. Totalsales–homefurniture Divide by: Totalpremiumdistributable Multiplyby:estimatedredemption Estimated redemption Multiply by, net cost of premiums (340-50) 28,800,000 2,000 14,400 60% 8,640 290 E s t i m at e dp r e m i u me x p e n s e 2, 5 05 ,6 00 Premiumsliability,beg Total Actual redemption (9,600,000/2,000)*290 716,000 3,221,600 (1,392,000) E sti mat e d p r emi ums l ia b i l it y , e nd 1, 8 29 ,6 00 3. Ans. B. Estimatedwarrantyliability,beginning Totalsales–kitchenapplicances Multiply by: 2,176,000 86,400,000 5% Estimatedwarrantiesexpense Actualwarrantycostsduringtheyear` 4,320,000 (2,624,000) E s t i m at e dw a r r a n t yl i a b i l i t y ,e n d 3, 87 2, 0 00 CHAPTER 8-EXERCISE 5: ABRA COMPANY 1. Ans. C. 2013 unused leaves by the end of 2014 (850days-550days) 2014unusedleavesbytheendof2014 Totalunusedleavesbytheendof2014 Multiplybyprobableexerciserate Leavesthatwillprobablymaterialize Multiplyby:2014currentsalaryrate A c c r u e d c o m p e n sa t e d a b se n c e s p e r a u d i t 300 500 800 80% 640 400 2 56 ,0 00 2. Ans. D. Unadjustednetincome Understatement in accrued comp. abs./salaries expense Adjusted net income B = 15% (NI - B - Tx); Tx = 35% (NI - B) B=15%(NI-B-35%(NI-B) 818,675 65% B = P111,892. 1,277,500 (18,000) 1,259,500 1,147,608 745,945 122,801 0.09750 1.0975 111,892 111,892 CHAPTER 8-EXERCISE 6: ASCOT INC. Audit notes: a. Since there is no right of offset, the advances to sppliers should be reclassifed as an asset: AJE 1: Advancestosuppliers 55,000 Accounts payable 55,000 1. Ans. C. b. Required premiums expense: (40,000*75%)/5*(P95-P25) Actual cost/Actual redemption (5,000-1,250)*(P95-P25) 420,000 (262,500) E s t i m at e dp r e m i u m sl ia b i l it y ,p e ra u d i t Estimatedpremiumsliabilty,perbooks Net adjustment AJE 2: Premiums expense Estimatedpremiumsliability 1 5 7, 50 0 118,750 38,750 38,750 38,750 2. Ans. A. c. Cummulativeunusedleaves12/31/14 Less: 2012 leaves (forfeited Leavesthatcanbecarriedforwardto2015 Exerciserate(per pastexperience) Cummulativeleavesthatwillprobablybeexercised Multiplyby:2014currentsalaryrate 750 (50) 700 80% 560 400 A c c r u e d s a l a r i e s - c o m p e n sa t e d a b se n c e s , p e r a u d i t Accruedsalaries-compensatedabsences,perbooks Net adjustment AJE 3: Accrued salaries Salaries expense 2 2 4, 00 0 300,000 (76,000) 76,000 76,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 109 of 155 3. Ans. A. Unadjusted net income before bonus and tax AJE2:Understatedpremiumsexpense AJE3:Overstatedsalariesexpense Ad j uste d ne t i n co me b e f o r e b o n us a n d ta x B = 15% (NI - Tx - B) Tx = 30% (NI - B) B = 15%(NI - 30%(NI - B) - B) B = 15%(1,052,381 - 30%(1,052,381 - B) - B) B = 110,500/1.105 B = 100,000 AJE 4: Accrued salaries Salaries expense (100,000-96,460) 1,015,131 (38,750) 76,000 1, 05 2 ,3 81 5,540 5,540 4. Ans. A. Net Income before tax (1,052,381 - 100,000) L e ss : I n c o m e t a x ( 9 5 2 , 3 8 1 *3 0 % ) 952,381 ( 28 5, 71 4 ) N eIt n c o m e a fte r t ax 6 66 ,6 67 AJE 5: Incometaxexpense(current) 285,714 Income tax payable 285,714 d. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity. ENTRY: Incometaxexpense(deferred) 250,000 Deferred tax liability 250,000 5. Ans. B. e. The refinancing agreement was completed as of December 31, 2014, thu s there is a right to refinance the liablity on a long-term basis as of December 31, 2014. However, since the amount of the long-term loan to refinance the note is up to 75% of the fair value of the asset offered as collateral, only P450,000 (P600,000*75%) shall be refinanced on a long term basis. The balance of the note, P50,000 (P500,000 - P450,000) is not expected to be refinanced on a long-term basis, thus will still be presented as current as of December 31, 2014 . CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC. 1. Ans. A. AccountsPayable,unadjusted Receiving report number 2634 (Unrecorded purchase) Receiving report number 2636 (Purchase in transit) Accounts Payable, adjusted 2. Ans. D. Warrantiesliability,unadjusted Warranty expense, 2014 (10,550,000*6%) Total Less:Actualwarrantiespaid 250,000 12,500 10,000 272,500 10,000 633,000 643,000 (310,000) Warranties liability, adjusted (12/2014) 333,000 3. Ans. A. Legal services Medicalservices Payroll (12/21/ - 12/31) : 14,400 *8/12 Royalties 4,600 5,500 9,600 3,900 24,000 47,600 * * Total accruals 4. Ans. A. Amortization Table: Lease Liability 13.59032634 Payment * Present value of MLP, at 4%, for 20 semi-annual periods (P250,000*13.590326) June30,2014: 250,000 135,903 December31,2014: 250,000 131,339 June30,2015: 250,000 126,593 December31,2015: 250,000 121,657 Principal Balance 3,397,582 114,097 3,283,485 118,661 3,164,824 123,407 3,041,417 128,343 2,913,074 Current portionLong-term Portion 5. Ans. A. Amortization Table: Bonds Payable Nominal Balance September30, 2014: March31,2015: 42,585 42,315 Carrying value as of Dec. 31, 2014: Balance,September30,2014 Amortization up to 12/31/14:P5,685*3/12: A m o r t i z e d c o st a s o f D e c e m b e r 3 1 , 2 0 1 4 : Effective 48,000 48,000 Amortization (5,415) (5,685) Balance 851,706 846,291 840,606 846,291 (2,843) 8 43 ,4 49 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 110 of 155 CHAPTER 8-EXERCISE 8: DETOX INC. 1. Ans. D. AccountsPayable,unadjusted RR# 1015 (purchase in transit – FOB Destination) RR# 1013 (goods received on December 30, 2014) RR# 1016 (purchase in transit – FOB Shipping point) A c c o u n t sp a y a b l e ,a d j u s t e d 534,000 (35,000) 65,000 40,000 6 04 ,0 00 2. Ans. C. Required estimated expense2013:(50,000/5)*40%*(P160-P50) Actual cost of redeemed premiums 2013: (3,000-1,200)*(P160-P50) Estimatedpremiumspayable,12/31/2013 Required estimated expense2014:(60,000/5)*40%*(P160-P50) Actual cost of redeemed premiums 2014: (1,200+6,000-2,100)*(P160-P50) E s t i m a t e dp r e m i u m sp a y a b l e ,1 2 / 3 1 / 2 0 1 4 3. Ans. D. Proceeds from issuance of bonds on 1/1/2013 Fair value of bonds at 12% effectiverate* 440,000 (198,000) 242,000 528,000 (561,000) 2 0 9, 00 0 P2,050,000 1,903,927 APIC–BondConversionPrivilege *PV of future cash flows at 12% for 3 periods: Principal: 2,000,000 * 0.711780 Interest:200,000*2.40183 Totalpresentvalue=Fairvalue P146,073 P1,423,560 480,366 P1,903,927 Amortization table: Bonds payable Correct Int. Jan. 1, 2013: Dec.31, 2103: Dec. 31, 2014: 228,471 Nominal Int. 200,000 231,888 Amortization 28,471 200,000 Balance 1,903,927 1,932,398 31,888 1,964,286 4. Ans. A. Entry upon conversion of half of the bonds (P1,964,286*50% = P982,143) on 12/31/14: DR: Bonds payable 1,000,000 DR:APIC–Bondconv.priv. 73,036 CR: Discountonbondspayable 17,857 CR: Ordinaryshares(10,000*50) 500,000 C R : S ha r e p r e mi u m 5 55 ,1 79 5. Ans. B. Present value of the minimum lease payment at implicit lease rate, 8% for 5 per iods: (600,000*3.9927) Fair ma rket value of the leased asset at in ception of l ease P2,395,626 2,400,000 *100%, thus Finance lease Amortization table: Lease liability Date Jan. 1, 2014: Dec. 31, 2014: 600,000 191,650 408,350 Dec. 31, 2015: 600,000 158,982 441,018 Periodic Paymts 6. Ans. C. Present value of MLP on 1/1/14 Divide by: Term (no transfer of ownership) D e p r e c i a t i o n e x p e n se i n 2 0 1 4 , Principal Balance 2,395,626 1,987,276 1,546,258 P2,395,626 5 years P4 79 ,1 2 5 CHAPTER 8-EXERCISE 8: PIPINO CORP. 1. Ans. C. Amortization table: Notes Payable Date Correct Interest 2012: April 1, March31,2013: 1,079,250 March31,2014: 1,097,138 December31,2014: 838,281 *9 months only up to December 31, 2014 2. Ans. D. Interest Amortization 960,000 960,000 720,000 Balance P7,195,000 119,250 7,314,250 137,138 7,451,388 118,281 P7,569,669 P2,240,000 4,800,000 P7,040,000 Amortization table: Finance Lease Liability Date December 31, 2011: December 31, 2011: December31,2012: December31,2013: December31,2014: December31,2015: Payment 1,200,000 1,200,000 1,200,000 1,200,000 Principal 584,000 522,400 545,640 380,104 Balance P7,040,000 1,200,000 5,840,000 616,000 5,224,000 677,600 4,546,400 745,360 3,801,040Liab. balance 81 9 ,8 96 2 ,9 8 1, 14 4 Current Noncurrent CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 111 of 155 3. Ans. C. Notes payable Liability under capital lease – Long term** Deferred tax liability T o t a ll o n gt e r ml i a b i l i t i e s P7,569,669 2,981,144 250,000 P1 0 ,8 00 ,8 13 4. Ans. B. Accountspayable,unadjustedbalance RR# 65218, purchase in transit, FOB Destination RR# 65219, purchase in transit, FOB Buyer (Destination) RR# 65220, goods received only after the December 31 Ac cou n ts p ay a b l e, ad j ust ed b a l a n ce 5. Ans. D. 2014 Sales P1,840,500 (19,000) (30,500) (41,000) P 1 ,7 50 ,0 00 P31,650,000 8% P 2 ,5 32 ,0 00 W a r r a n t i e se x p e n s ei n2 0 1 4 6. Ans. B. Accounts payable Warranties payable (2,532,000 – 1,950,000) Interest payable on notes (8,000,000*12%*9/12) Current portion of Long term liability under capital lease Total current liabilities 1,750,000 582,000 720,000 819,896 P3,871,896 CHAPTER 8-EXERCISE 9: ADELAIDA INC. 1. Ans. D. Totebagsactuallydistributedin2014 Estimated premiums liability at the end of 2013, in tote bags Estimated premiums liability at the end of 2014, in tote bags Estimated premiums expense in 2014, in tote bags Multiply by: Net expense per totebag (P25 – P5) E s t i m a t e d p r e m i u m s e x p e n se i n 2 0 1 4 19,000 (7,000) 5,000 17,000 P20 P 3 40 ,0 00 2. Ans. C. The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset: Estimated premiums payable, 2014 (5,000 * P20) P100,000 Multiply by tax rate: 30% Deferredtaxasset(NoncurrentAsset) P30,000 The temporary difference from excess tax depreciation over financial depreciation is future taxable amount creating Deferred Tax Liability: D e f e r r e d t a x l i a b i l i t y ( N o n c u r r e n t Li a b i l i t y ) : P 1 5 0 , 0 0 0 * 3 0 % P4 5, 00 0 3. Ans. D. Accounts payable, as adjusted (P540,000 + P50,000) Estimated premiums payable, 2014 (5,000 * P20) C u r r e nlti a b i l i t i e s P590,000 100,000 P 6 90 ,0 00 4. Ans. A. Proceeds from bond issuance (the amount credited per entry made) Fair value of bonds without the conversion option (at 8% effective rate)* Equity component/ APIC from Bond Conversion Privilege Present value of Principal: P8,000,000*0.680583 P3,402,916 Present value of Interest: 500,000*3,99271 1,996,355 Fair value of the bonds without the conv. Option P5,399,271 P5,500,000 5,399,271 P100,729 Amortization Table: Bonds Payable Correct Int. January 2014: 1, December31,2014: December31,2015: Upon assumed conversion: 1/2016: 431,942 426,497 5. Ans. D. Carrying value of bonds up to 12/31/2015 APIC- Bond Conversion Priv. Total Par Value of Shares (5,000*10*50) Share Premium from conversion Nominal Int. 500,000 500,000 Amortization Balance 5,399,271 (68,058) 5,331,213 (73,503) 5,257,710 5,257,710 100,729 (2,500,000) 2,858,439 6. Ans. B. Upon assumed retirement: 1/2016: Carrying value of bonds up to 12/31/2015 Fair value of bonds without the conversion option at 12% effective rate: Present value of principal: P5,000,000*0.711780 3,558,901 Present value of interest: 500,000 2.401831 1,200,916 Ga i no nr e t i r e m e n to fb o n d s( p r o f i to rl o s s) 5,257,710 4,759,817 4 9 7, 89 3 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 112 of 155 CHAPTER 8-EXERCISE 11: Ans. C. Case 1: a. The obligating event is the damages occurring in 2014, thus is present obligation. b. The outflow of economic benefits is probable. c. The amount of liability is reliably measurable given a range of amounts without best estimate. Thus, accrue obligation at the mid-range (P500,000+P1,500,000)/2 = P1,000,000. Case 2: a. The obligating event is the guarantee agreement completed in 2014, thus is pr esent obligation. b. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance sheet date, but before the issuance of the FS. This is considered a Type 1 (Adjusting) subsequent event. c. The amount of liability is reliably measurable at the principal amount owed by the principal debtor. Thus, accrue obligation at best estimate P2,000,000. Case 3: a. The obligating event is the damages incurred when the plant exploded in 2014, thus is present obligation, even if there are no claims yet. b. The outflow of economic benefit is probable. c. The best estimate of the probable amount of liability is P2.5M, with a reasonably possible additional liabilty of P2.5M. However, since there is a virtually certain reimbursement from the insurance company, the virtually certain reimbursement shall be a reduction from the recognized probable loss (as per PAS 37), given that the company is no longer principally liable over the portion to be reimbursed by the insurance company. Thus, acccrue obligation at P1,000,000 since the deductible clause is P1,000,000, meaning the insurance company will be reimbursing the company for anything in excess of the deductible clause. Case 4: a. The obligating event which is the damages incurred happened only after the balance sheet date, thus there is no present obligation yet. Thus, the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event. CHAPTER 8-EXERCISE 12: LABANDERA INC. 1. Ans. B. Class A Laundry appliance sales (280,000,000*60%) Divide by Numberofcouponsdistributed Multiplyby:probableredemption Couponsthatwillprobably beredeemed Divide by: number of coupons to acquire 1 premium Estimated number of premiumsto be redeemed Number of premiums actually redeemed (1,680,000/400) Liabilityforpremiumsinunits L i a b i l i t y f o r p r e m i u m i n p e so ( 8 4 0 *4 , 1 0 0 ) P168,000,000 P50 3,360,000 60% 2,016,000 400 5,040 (4,200) 840 3, 44 4 ,0 00 2. Ans. D. Class B Laundry appliance sales (280,000,000*40%) Multiply by: Estimated warranty cost as % of sales P112,000,000 3% E sti mat e d w a r ra nt y ex p e nse f o r 20 1 4 3. Ans. C.; 4. Ans. A.; 5. Ans. A. Unadjustednetincome Adjustment for additional premium expense Adjustment for additional warranties expense Adjustednetincome L e ss :Bo n u s I n c o me t a x ( 3 5 % ) N eitn c o m e P 3, 36 0 ,0 00 80,164,000 (3,444,000) (1,720,000) 75,000,000 ( 2, 48 0, 91 6 ) (2 5, 38 1, 67 9 ) 4 7 ,1 37 ,4 05 Bonus = 5% (75,000,000 – 35%(75,000,000 – B)) B = 5% (48,750,000 + .35B) B = 2,437,500 + .0175B 0.9825B = 2,437,500 B = 2,480,916 CHAPTER 8-EXERCISE 13: LUZON COMPANY 1. Ans. B. Estimated warranty expense (30,000u*60%*P1,500) Actualcostincurred E s t i m at e dw a r r a n t i e sp a y a b l e Tax = 35% (75,000,000 -2,480,916) T = 25,381,679 27,000,000 (19,500,000) 7, 50 0 ,0 00 2. Ans. D. a. The obligating event is the environmental damages occuring in 2014, thus is present obligation. b. The outflow of future economic benefits is probable. c. The amount of obligation is reliably measurable and that the best etsimate is the final amount of liability as per the final decision of the court given after the balance sheet date but before the issue of FS (Type 1, Adjusting Subsequent Event) CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 113 of 155 3. Ans. B. PV of MLP at 12% for 6 periods in advance: (P800,000*4.604776) Fairmarketvalueofleasedassetatinception: Amortizationtable: Present value MLP of January 1, 2012: January 1, 2013: January 1, 2014: Janaury 1, 2015: Periodicpaymt 800,000 800,000 800,000 800,000 4. Ans. B. PV of MLP, Jan. 1, 2012 (Asset capitalized) Multiply by condition percent (over term), Dec. 31, 2014: C a r r y i n g v a l u e o f l e a s e d a ss e t , D e c . 3 1 , 2 0 1 4 3,683,821 4.604776 4,000,000 92% More than 90%, thus Finance InterestExp. Principal Balance 3,683,821 800,000 2,883,821 346,059 453,941 2,429,879 291,586 508,414 1,921,465 Liab balance 230,576 569,424 1,352,041 Accrued interest 3,683,821 3/6 1, 84 1 ,9 10 5. Ans. A. Allocation of issue price on January 1, 2014: Total issue price 4,250,000 FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods: Principal:P4,000,000*0.7049605 2,819,842 Interest:P200,000*4.9173243 983,465 Residual amount allocated to APIC-Bond conversion privilege 3,803,307 446,693 0.7049605 4.9173243 Amortization table: Bonds payable Correct Int. January 2014: 1, June 30, 2014: December31,2014: Nominal Int. 228,198 229,890 Amortization 200,000 200,000 Carrying value of converted bonds, Dec. 31, 2014 (P3,861,396*3/4) Carrying value of APIC-Bond conversion privilege (P446,693*3/4) Less: Par value of issuable shares: (50,000sh*3/4)*P50 S h a rp er e m i u m / A P I C Balance 3,803,307 28,198 3,831,505 29,890 3,861,396 2,896,047 335,020 (1,875,000) 1 ,3 56 ,0 6 7 CHAPTER 8-EXERCISE 14: MNO INC. 1. Ans. B. Proceedsfromissuanceofconvertiblebonds FMV of bonds w/out conv. option at 5% for 10 semi-annual periods: PVof Principal:P5,000,000*0.613913 3,069,566 PVofInterest: 300,000*7.721734 2,316,520 E q u i t yp o r t i o n( A P I C-B o n dC o n v .P r i v . ) 5,500,000 5,386,086 11 3, 91 4 2. Ans. C. Retirement Price Carrying Value** (5,289,319*50%);(113,914*50%) Total 2,500,000 Bonds @ FV* [email protected] 2,365,267 134,733 2,644,659 56,957 P &LLo ssC /a pG.a i n (2 79 ,3 92 ) profit/loss 77,776 APIC/Share premium *FMV of half of the bonds w/out the conv. priv. at 7% for 7 semi-annual remaining periods. PVofPrincipal 2,500,000*0.62275 1,556,874 PVofInterest: 150,000*5.389289 808,393 Fairvalue of bonds w/outconv. priv 2,365,267 Amortization Table: Bonds Payable June 2013: 30, December31,2013: June 30, 2014: December31,2014: 3. Ans .C. Interest from Bonds Payable from 1/1 -6/30 (seeamortiz.) from 7/1 -12/31(seeamortiz.) Interest from Notes Payable from 1/1 - 8/31 (2.5M*10%*8/12) from 9/1 -12/31(2M*10%*4/12) T o t a iln t e r e ste x p e n s e 4. Ans. B. Fin.Inc.afterpermanentdiff FDAAB for the period FTALE for the period Taxable income Mulitply by tax rate C u r r e nT t ax E x p e n se Correct 269,304 267,770 266,158 267,770 266,158 166,667 66,667 Nominal Amortization 300,000 300,000 300,000 Balance 5,386,087 (30,696) 5,355,391 (32,230) 5,323,161 89,319 (33,842) ** 5,2 533,928 233,333 7 67 ,2 6 1 1,000,000 100,000 (500,000) 600,000 40% 2 40 ,0 0 0 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 114 of 155 5. Ans. D. Cum.TempDiff(FTALE) Multiply tax rate D e f e r r e dT a xL i ab i l i t y 1,550,000 40% 6 20 ,0 0 0 6. Ans. D. BondsPayable(half-seeamor.) Notespayable-longterm Deferred tax liabilty Total noncurrent liability 2,644,659 1,500,000 620,000 4,764,659 CHAPTER 8-EXERCISE 15: KURT CORP. 1. Ans. C. Proceeds from issuance (at face value) 4,000,000 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4,000,000*0.772183 3,088,734 of PVInterest: 240,000*2.531295 607,511 3,696,245 Equity component/APIC-Bond Conversion 303,755 2. Ans. D. Amortization table: Bonds Payable Correct Int. Nominal Int. January1,2014: (Princ.*6%) (CV*9%) December 31, 2014: 332,662 240,000 December 31, 2015: 341,002 240,000 December 31, 2016: 350,092 240,000 Total 3. Ans. B. Bonds Payable, CV at 1/1/2016 (see amortization table) APIC-Bonds Conversion Privilege 4,193,663 Multiply by exercise rate: (3,000/4,000) Prorated CV of BP and APIC-Bond Conv. Priv. Less:Par value of issuable shares (3,000*40) *P10 Share premium from assumed conversion Amo. 92,662 101,002 110,092 Balance 3,696,245 3,788,907 3,889,908 4,000,000 53. Ans. D. 3,889,908 303,755 3/4 3,145,247 (1,200,000) 1,945,247 4. Ans. A. Proceeds from issuance (at face value, net of transaction cost) P3,848,531 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4,000,000*0.741162 2,964,648 PV of Interest: P240,000*2.465123 591,630 3,556,278 Equity component/APIC-Bond Conversion P292,253 5. Ans. B. Total P4,000,000 RetirementPrice Carrying Value P&L Loss/ Cap. Gain Bonds @ FV* APIC (Res. Val.) 3,889,908 110,092 3,837,104 292,253 52,804 (182,161) retirement loss capital gain *FMV of half of the bonds w/out the conv. priv. at 9% for 1 remaining period. PV of Principal 4,000,000*0.917431 P3,669,725 PVofInterest: 240,000*0.917431 220,183 Fair value of bonds w/out conv. priv P3,889,908 Amortization table: Bonds Payable January 1, 2014: December 31, 2014: December 31, 2015: December 31, 2016: Correct Int. 373,409 387,417 402,896 CHAPTER 8-EXERCISE 16: TRY CORP. Reconciliation: Netincomebeforeanydifferences Permanent Differences: Nondeductible expenses: Life insurance expense Nontaxableincome:Dividendincome Netincomeafterpermanentdifferences Temporary Differences: Future Deductible amounts Estimatedlitigationloss 600,000 Unearnedretnalincome 300,000 Future Taxable Amounts Installmentreceivable 1,200,000 Taxable income 1. Ans. A. Net income after permanent differences Multiplyby:Constanttaxrate T o t a lt a xe x p e n se 9,800,000 33% 3, 2 34 ,0 00 2. Ans. C. Taxable income Mulitplyby:Currenttaxrate 9,500,000 33% Nominal Int. 240,000 240,000 240,000 Amo. 133,409 147,417 162,896 Balance 3,556,278 3,689,687 3,837,104 4,000,000 10,000,000 300,000 (500,000) 9,800,000 900,000 (1,200,000) 9,500,000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 115 of 155 C u r r e n tt axe x p e n s e 3, 1 35 ,0 00 3. Ans. A. Futuredeductibleamounts Mulitplyby:Constanttaxrate D e f e r r e dt axa ss e t 900,000 33% 2 97 , 00 0 4. Ans. B. Futuretaxableamounts Mulitplyby:Constanttaxrate D e f e r r e dt axl ia b i l i t y 1,200,000 33% 3 96 , 00 0 To reconcile: Currenttaxexpense Add: Deferred tax expense (FTA) Less: Deferred tax benefit (FDA) Totaltaxexpense 3,135,000 396,000 (297,000) 3,234,000 5. Ans. B. Currenttaxexpense;P9,500,000*33% Add: Deferred tax expense (FTA): P1,200,000*35% Less: Deferred tax benefit (FDA): P900,000*35% T o t atla x e x p e n se CHAPTER 8-EXERCISE 17: COSINE CORP. Reconciliation: Netincomebeforeanydifferences Permanent Differences: Nondeductible expenses: Life insurance expense Nontaxableincome:Dividend income Net income after permanent differences Temporary Differences: Future Deductible amounts Warrantyprovision Future Taxable Amounts Prepaidadvertising Excess tax depr. over finanicial depr. Taxable income 1. Ans. B. Taxableincome Mulitplyby:Currenttaxrate C u r r e n tt axe x p e n s e 3,135,000 420,000 (315,000) 3, 24 0 ,0 00 12,000,000 400,000 (1,200,000) 11,200,000 600,000 500,000 400,000 600,000 (900,000) 10,900,000 10,900,000 32% 3, 4 88 ,0 00 2. Ans. A. Futuredeductibleamounts Mulitplyby:Constanttaxrate D e f e r r e dt axa ss e t 600,000 33% 1 98 , 00 0 3. Ans. D. Futuretaxableamounts Mulitplyby:Constanttaxrate D e f e r r e dt axl ia b i l i t y 900,000 33% 2 97 , 00 0 4. Ans. D. To reconcile: Currenttaxexpense Add: Deferred tax expense (FTA) Less: Deferred tax benefit (FDA) T o t a lt a xe x p e n se 3,488,000 297,000 (198,000) 3, 5 87 ,0 00 CHAPTER 8-EXERCISE 18: BONCHON CORP. Service costs Current service cost Net interest (income)expense InterestonABO(P3,000,000*6%) IntersetonPA(P2,800,000*6%) P e n si o ne x p e n s e( P r o f i to rl o s s) 160,000 180,000 (168,000) Net remeasurement gain/loss (Other comprehensive Income/loss) ActuarialgainonPA(a) (106,000) ActuariallossonABO(b) 442,000 T o t aple n si oe nx p e n se 12,000 1 7 2 , 0 0 02. Ans. B. 336,000 3. Ans. C. 5 0 8 , 0 0 01. Ans. D. CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 116 of 155 (a) Actuarial gain/loss on Plan asset Plan asset, beginning balance Add:Contributionfortheyear Interest on PA (P2,800,000*6%) Less: Settlements a t scheduled re tirement Balance Plan asset, at FMV at the year-end Actuarialgainonplanasset 2,800,000 210,000 168,000 (300,000) 2,878,000 2,984,000 106,000 (b) Actuarial gain/loss on Accumulated Benefit Obligation ABO,beginningbalance 3,000,000 Add:Currentservicecost 160,000 Interest on ABO (P3,000,000*6%) 180,000 Less: Benefits settled, at scheduled ret. (300,000) Balance 3,040,000 ABO, present value, ending balance 3,482,000 ActuariallossonAB0 442,000 4. Ans. B. To reconcile: Accruedpension,beg Pensionexpense(total) Total Contribution to the plan for the year Accruedpension,end 200,000 508,000 708,000 (210,000) 498,000 ABO, end Planasset,end Accruedpensionend 3,482,000 (2,984,000) 498,000 CHAPTER 8-EXERCISE 19: DEE CORP. Service costs Current service cost Settlement gain: Settlement price other ben. settled PVof otherbenefitssettled Net interest (income)expense InterestonABO(P7,500,000*10%) IntersetonPA(P7,000,000*10%) P e n si o ne x p e n s e( P r o f i to rl o s s) 1,400,000 400,000 (500,000) (100,000) 750,000 (700,000) Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial gain on PA Actualreturnonplanasset 840,000 Estimated return (Interest on PA) (700,000) (140,000) Actuarial gain on ABO (200,000) T o t apl e n si o n e x p e n se 7,000,000 1,200,000 700,000 (1,500,000) (400,000) 7,000,000 140,000 7, 1 40 ,0 00 5. Ans. A. ABO,beginningbalance Add:Currentservicecost Interest on ABO (P7,500,000*10%) Less: Benefits settled, at scheduled ret. PV ofa dditional benefits settled Balance Add:ActuarialgainonABO A B O ,p r e s e n tv a l u e ,e n d 7,500,000 1,400,000 750,000 (1,500,000) (500,000) 7,650,000 (200,000) 7, 4 50 ,0 00 To reconcile: Prepaid pension, beg Pensionexpense(total) Total Contribution t o the p lan f or the year A c c r u e dp e n si o n ,e n d 50,000 1 , 3 5 0 , 0 0 02. Ans. A. (340,000) 3. Ans. D. 1 ,0 10 ,0 0 0 1. Ans. D. 4. Ans. B. Plan asset, beginning balance Add:Contribution fortheyear Interseto nPA (P7,000,000*10%) Less: Settlements at scheduled retirement Settlement price of addl ben. Settled Balance Less: Actuarial gain on PA P l a na ss e t ,F M V ,e n d 4. Ans. B. Planassetatfairvalue,end ABOatpresentvalue,end A c c r u e d p e n si o n e x p e n s e , e n d 1,300,000 7,140,000 7,450,000 (31 0 ,0 00 ) 500,000 1,010,000 1,510,000 (1,200,000) 3 10 , 00 0 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 117 of 155 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY DISCUSSION PROBLEMS CHAPTER 9-PROBLEM 1 1 A 2 D 3 D 4 B 5 C 6 B CHAPTER 9-PROBLEM 2: SB CORP. Correct entries to record transactions in 2013: (a)C ash(50,000*P150) 7,500,000 Ordinaryshares(50,000*P100) Share premium-OS 5,000,000 2,500,000 (b) Building Preferenceshares(20,000*P50) Share premium-PS 1,000,000 200,000 1,200,000 (c) Incomesummary Retained earnings 5,540,000 5,540,000 Correct entries to record transactions in 2014: (a) Treasury shares (20,000*P160) Cash 3,200,000 3,200,000 (b) Cash 2,800,000 Ordinaryshares(10,000*P100) Share premium-OS (P1,960,000-P1,000,000) Preferenceshares(10,000*P50) Share premium-PS (P840,000-P500,000) (c) C ash, net (5,000*P85)-P25,000 Preferenceshares(5,000*P50) Share premium-PS 1,000,000 *Allocation: FMV (total) rdinary 960,000 1,750,000 O 0% reference 500,000 P 750,000 0% otal 340,000 2,500,000 T Rato Amount Allocated 1,960,000 7 840,000 3 2,800,000 400,000 250,000 150,000 (d) Cash 5,000,000 Bonds payable Premium on bonds payable (P2,200,000-P2,000,000) Ordinaryshares(15,000*P100) Share premium-OS (P2,800,000-P1,500,000) 2,000,000 *Allocation: AmountAllocated 200,000 Bonds pay. @ Fair value 2,200,000 1,500,000 Ordinary @ Residual 2,800,000 1,300,000 5,000,000 (e)C ash(8,000*P185) Treasuryshares(8,000*P160) Share premium-TST 1,280,000 200,000 (f) Ordinary shares( 7,000*P100) Share premium-OS (7,000*P50) Sharepremium-TST Treasuryshares(7,000*160) (g)I ncomesummary Retained earnings 1,480,000 700,000 350,000 70,000 *share premium from srcinal issuance (P150-P100) 1,120,000 4,530,000 (h)R etainedearnings 800,000 Retained earnings appropriated for Treasury 4,530,000 800,000 Summary (a) Ordinary share issuance in 2013 (b) Preferenceshareissuancein2013 (c) Net income 2013 in (a) Treasury shares reacquired 2014 in (b) Ordinary and Preference shares issue (c) Preferencesharesissuancein2014 (d) Or dinary shares issued with Bonds (e) Treasury shares reissuance in 2014 (f) Treasury s hares r etirement i n 2 014 (g) Net income 2014 in (h) Appropriation for treasury Adjusted 12/31/14 balances Share capital: OrdinaryShares PreferenceShares Additional paid-in capital: Sharepremium-OS Sharepremium-PS Sharepremium-TST T o t a lC o n t r i b u t e dC a p i t a l Retainedearnings-appropriated Retainedearnings - unappropriated Treasurysharesatcost T o t a lS t o c k h o l d e r s 'Eq ui t y Ordinary Sh, 5,000,000 Preference Sh. Sh. Prem-OS Sh. Prem-PS Sh. Prem-TST RE-unapp 2,500,000 1,000,000 200,000 5,540,000 RE-app TS (3,200,000) 1,000,000 500,000 250,000 960,000 1,500,000 1,300,000 (700,000) 6,800,000 1 .A n s . 6,800,000 1,750,000 4,410,000 690,000 130,000 340,000 150,000 200,000 (70,000) 4,530,000 (800,000) 4,410,000 690,000 130,000 9,270,000 3 .A ns . 4 .A n s . 7 .A n s . 1,280,000 1,120,000 (350,000) 1,750,000 2 .A n s . 8,550,000 5,230,000 5. Ans. 1 3 ,7 8 0 6. , 0Ans. 00 800,000 9,270,000 (800,000) 2 3 ,0 5 0 8. , 0Ans. 00 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY 800,000 800,000 (800,000) AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 118 of 155 CHAPTER 9-PROBLEM 3: GLORIETTA INC. Correct entries to record transactions in 2013: (a) Land 1,400,000 Ordinaryshares(100,000*P10) Share premium-OS 1,000,000 400,000 (b)C ash(50,000*P50) Preferenceshares(50,000*P20) Share premium-PS 2,500,000 1,000,000 1,500,000 (c)Incomesummary Retained earnings 540,000 540,000 Correct entries to record transaction in 2014: (a) Preference shares (20,000*P20) Sharep remium-PS( 20,000*P30) Ordinaryshares(80,000*P10) Share premium-OS 400,000 600,000 *Share premium from the srcinal issuance of preference shares in 2013 800,000 200,000 (b) Building(@fairvalue) 1,200,000 Ordinaryshares(25,000*P10) Share premium-OS (P625,000-P250,000) Preferenceshares(20,000*P20) Share premium-PS (P575,000-P400,000) (c) C ash, net (5,000*52)-P12,000 Preferenceshares(5,000*P20) Share premium-PS 248,000 (d) Treasury shares (10,000*P22) Cash 220,000 (e)C ash(2,000*P20) Retainedearnings Treasuryshares(2,000*P22) 40,000 4,000 (f) Ordinaryshares (5,000*P10) Share premium-OS Retainedearnings Treasuryshares(5,000*P22) 50,000 20,000 40,000 *Allocation: 250,000 Ordinary @Fair value (25,000*P25) 625,000 375,000Preference @Residual amount 575,000 400,000 FairvalueofBuilding 1,200,000 175,000 Note that the Building's fair value was more clearly determinable that the fair value of the securities issued, since while the fair value of ordinary shares were determinable at P25, the fair value of preference shares is not clearly 100,000 determinable since it is highly speculative or volatile. 148,000 220,000 44,000 *Share premium from srcinal issuance computed as: (P400,000/100,000)*5,000 110,000 (g)I ncomesummary Retained earnings 830,000 830,000 (h)R etainedearinings Retained earinings appropriated for Treasury 66,000 66,000 Summary (a) Ordinary share issuance in 2013 (b) Preferenceshareissuancein2013 (c) Net income 2013 in (a) Conversion of PS to OS in 2014 (b) Ordinary and Preference shares issue (c) Preferencesharesissuancein2014 (d) Reacquisition Treasury of (e) Treasury shares reissuance in 2014 (f) Treasury shares retirement in 2014 (g) Net income 2014 in (h) Appropriation for treasury Adjusted 12/31/14 balances Share capital: OrdinaryShares PreferenceShares Additional paid-in capital: Sharepremium-OS Sharepremium-PS T o t a lC o n t r i b u t e dC a p i t a l Retainedearnings-appropriated Retainedearnings - unappropriated Treasurysharesatcost T o t a lS t o c k h o l d e r s 'Eq ui t y Ordinary Sh, 1,000,000 800,000 250,000 RE-app TS (220,000) (50,000) 2,000,000 1 . An s. 2,000,000 1,100,000 955,000 1,223,000 CHAPTER 9-PROBLEM 4: BULACAN CO. Correct entries: 1. Ans. P450,000. (a) Cash 5,700,000 Bonds payable Premiumonbondspayabe Ordinaryshare warrantsoutstanding (b)C ash(4,000sh*P70) Accumulatedprofits Treasuryshares(4,000sh*P75) Preference Sh. Sh. Prem-OS Sh. Prem-PS RE-unapp 400,000 1,000,000 1,500,000 540,000 (400,000) 200,000 (600,000) 400,000 375,000 175,000 100,000 148,000 (20,000) 1,100,000 2. Ans . 955,000 3 . A ns . (4,000) (40,000) 830,000 (66,000) 1,223,000 1,260,000 4. A n s . 7 . An s. 44,000 110,000 66,000 66,000 3,100,000 2,178,000 5. Ans. 5 , 2 7 86. , 0Ans. 00 66,000 1,260,000 (66,000) 6 , 5 3 88. , 0Ans. 00 5,000,000 250,000 450,000 280,000 20,000 300,000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY (66,000) AUDITING (2016 EDITION) CTESPENILLA Ordinaryshares (1,000*P50) Share premium-OS (P250K/50Ksh)*1K Accumulatedprofits Treasuryshares(1,000sh*P75) SOLUTIONS GUIDE 119 of 155 50,000 5,000 20,000 75,000 (c) Memo: 49,000share rights were issued to 49,000 shares outstanding. 2. Ans. P276,000. (d) Cash(5,000*60%)/5w*P60 Ordinary share warrants (P 450K*60%) Ordinaryshares(600sh*P50) Share premium-OS 3. Ans. P45,000. (e)C ash(40,000/10)*P55 Ordinaryshares(4,000*P50) Share premium-OS (f) Incomesummary Accumulatedprofits 36,000 270,000 30,000 276,000 220,000 200,000 20,000 1,250,000 1,250,000 Summary: Balances, January 1, (a) Warrants issuance (b) Treasury reissue Tresauryretirement (c) Share rights issue (memo entry) (d) Warrants exercise (e) Rights exercise net Income (f) Balances,December31, Prefence Sh 1,000,000 30,000 200,000 1,000,000 CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES. (a) Entry made: Cash 130,000 Treasury shares Correct entry: Cash Sharepremium-TST Treasuryshares(P363,000/605)*325 1. Ans. Adjusting entry: Sh a r ep r e m i um - T S T T r e a s u rs yh a r e s (b) Entry mad e: Cash Preferenceshares(6,000sh*50) Share premium-PS 3. Ans. Adjsuting entry: O rd i na ry s h a r e s s u b s c ri b e d S h a r ep r e mi u m - O S 130,000 65 , 00 0 650,000 300,000 350,000 Allocation: Prorata 300,000 Pref. Sh. (6Ksh*P80) 220,000 Warrants (12Kw*P10) 130,000 480,000 120,000 600,000 80% 20% 1 30 , 0 00 123,200 184,800 308,000 123,200 184,800 14,000 294,000 2 94 , 0 00 2 94 , 0 00 158,400 Correct entry: Cash Subscriptionsreceivable 158,400 4. Ans. Adjusting entry: O r d i na r ys h a r e ss u b s c r i b e d O r d i n a rs yha r e s - 36,000 220,000 1,250,000 8,311,000 6 A.ns . 195,000 (d) Entry mad e: Cash Subscriptionsreceivable Ordinary shares subscribed (600sh*P20) Ordinary shares 300,000 75,000 - Total 6,075,000 450,000 280,000 - 65 , 00 0 2. Ans. Adjusting entry: Sh a r ep r e m i um - P S 1 30 , 0 00 O r d i n a r y s ha r e w a r ra nt s o ut s t a n d i n g Correct entry: Cash(700sh*P440)*40% Subscriptionreceivable Ordinary shares subscribed (700sh*P20) Share premium-OS 2,680,000 4 A.ns . 6,000 20,000 1,250,000 971,000 3,660,000 5 A.n s . Treasury 130,000 65,000 Correct entry: Cash 650,000 Preference shares Sharepremium-PS(P650K*80%)-PAR Ordinary share warrants outstanding (P650K*20%) (c) Entry made: Cash(700sh*P440)*40% Subscriptionreceivable Orinarysharessubscribed Ordinary Sh APIC/Sh Prem. Accum. Prof. 2,500,000 2450000 500,000 (375,000) 450,000 (20,000) (50,000) (5,000) (20,000) 158,400 158,400 12,000 12,000 12 , 00 0 12 , 00 0 (e) Entry made: CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA Cash(4,000*2sh*P400) Ordinary shares Correct entry: Cash Ordinary share warrants (P130K*4/12) Ordinaryshares(4,000*2sh*P20) Share premium-OS SOLUTIONS GUIDE 120 of 155 3,200,000 3,200,000 3,200,000 43,333 160,000 3,083,333 5. Ans. Adjusting entry: O r d i na r ys h a r e s 3, 0 40 , 0 00 Or di na ry s ha re w ar ra nt s ou ts ta nd in 43 ,3 33 S h a r ep r e mi u m - O S 3 ,0 8 3 ,3 3 3 6. Ans. (f) Correct entry/Ad justing entry Ca sh(P1 84 ,8 00 -P 15 8, 40 0) +P 5, 00 0 M i s c e l l a n e o u se x p e n s e S u b s c r i p t i o nr e c e i v a b l e 31 ,4 00 5 ,0 0 0 2 6 ,4 0 0 O rd i na ry s h a r e s s u b s c ri b e d O r d i n a r ys ha r e s( 1 0 0 * P 2 0 ) CHAPTER 9-PROBLEM 6: PUNK INC. 1. Ans. P83,333. FMV of options (100emp*100opt)*P25 Divideby:Vestingperiod Sa l a r i e s e x p e n s e , 2 0 1 4 2, 0 00 2 ,0 0 0 250,000 3 8 3, 3 33 Entry: Salariesexpense 83,333 Ordinary share options outstanding 83,333 2. Ans. P58,333. RevisedF MVo fo ptions( 85emp*100opt)*P25 Multiplyby:2years/3years Cummulative salaries expense as of Dec. 31, 2015 Less:Prioryear'ssalariesexpense Sa la r i e se x p e n s e ,2 0 1 5 212,500 2/3 141,667 Entry: (83,333) Salariesexpense 58,333 5 8 ,3 3 3 Ordinary share options outstanding 58,333 3. Ans. P33,333. Final FMV of options (70emp*100opt)*P25 Less: Prior years' cummulative salaries expense Sa la r i e se x p e n s e ,2 0 1 6 175,000 Entry: (141,667) Salariesexpense 33,333 3 3 ,3 3 3 Ordinary share options outstanding 33,333 4. Ans. P210,000. Entry upon exercise of all options: Cash(7,000sh*P25) Ordinary share options oustanding Ordinaryshares(7,000sh*P20) Share premium 140,000 210,000 175,000 175,000 CHAPTER 9-PROBLEM 7: PUNK INC. 1. Ans. P66,667. Estimated FMV of options (100-20emp)*100opt*P25 Divide by: Vesting period Sa la r i e se x p e n s e ,2 0 1 4 200,000 Entry: 3 Salariesexpense 66,667 6 6 ,6 6 7 Ordinary share options outstanding 66,667 2. Ans. P58,333. Revised FMV of options (100-25emp)*100opt*P25 Multiplyby:2years/3years Cummulative salaries expense as of Dec. 31, 2015 Less:Prioryear'ssalariesexpense Sa la r i e se x p e n s e ,2 0 1 5 187,500 2/3 125,000 Entry: (66,667) Salariesexpense 58,333 5 8 ,3 3 3 Ordinary share options outstanding 58,333 3. Ans. P50,000. Final FMV of options (70emp*100opt)*P25 Less: Prior years' cummulative salaries expense Sa la r i e se x p e n s e ,2 0 1 6 175,000 Entry: (125,000) Salariesexpense 50,000 5 0 ,0 0 0 Ordinary share options outstanding 50,000 4. Ans. P50,000. Note that the market-based condition has no bearing in the recognition of the salaries expense. That is, wether the market basedcondition is achieved or not, as long as the employees stayed with the company until the vesting period ends, in principle the services were received, thus, salaries expense shall be recognized. Entry: Salariesexpense 50,000 Ordinaryshareoptionsoutstanding 50,000 Since the condition was not achieved however, the options are not exerciseable and are therefore reverted back to equity. Entry: Ordinary share options outstanding 175,000 Retained e arnings/APIC-Unexercised o ptions 175,000 5. Ans. P120,833. Note that since the market-based condition (FMV of shares) was achieved by the end of 2015, the vesting of the options are accelerated. The options are exerciseable by the end of 2015, thus the vesting period has been revised from 3 years to 2 y ears. Final FMV of options, Dec. 2015 (75emp*100opt)*P25 187,500 Less: Prior years' cummulative salaries expense (66,667) Sa la r i e se x p e n s e ,2 0 1 5 12 0 , 83 3 CHAPTER 9-PROBLEM 8 : PUNK INC. 1. Ans. P62,500. Dec. 31, 2014: Is the non-market based condition achievable? Actualsales,2014 75,000,000 Multiply by: 120% estimated increase 120% Projectedsales,2015 90,000,000 Multiply by: 120% estimated increase 120% Projectedsales,2016 108,000,000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 121 of 155 Minimum required sales 100,000,000 Thus, achievable. Note that the estimated sales in 2016 is P108M, thus the estimated number of options per employee shall be 100. Est. FMV of options vested (100-25emp)*100opt.*P25 Divide by: Vesting period Sa la r i e se x p e n s e ,2 0 1 4 187,500 Entry: 3 Salariesexpense 62,500 6 2 ,5 0 0 Ordinary share options outstanding 62,500 2. Ans. P137,500. Dec. 31, 2015: Is the non-market based condition achievable? Actualsales,2015 110,000,000 Multiply by: 120% estimated increase 120% Projectedsales,2016 132,000,000 Minimum required sales 100,000,000 Thus, achievable. Note that the estimated sales in 2016 is P132M, thus the estimated number of options per employee shall be 150. Revised FMV of options (100-20emp)*150opt*P25 Multiplyby:2years/3years Cummulative salaries expense as of Dec. 31, 2015 Less:Prioryear'ssalariesexpense Sa la r i e se x p e n s e ,2 0 1 5 300,000 2/3 200,000 Entry: (62,500) Salariesexpense 137,500 13 7 , 50 0 Ordinary s hare o ptions o utstanding 137,500 3. Ans. P220,000. Dec. 31, 2016: Has the non-market based condition been achieved? Actualsales,2016 150,000,000 Minimum required sales 100,000,000 Thus, achieved, therefore options are exercisable. Note that the actual sales in 2016 is P150M, thus the final number of options per employee shall be 200. FinalF MV o fo ptions ( 100-16emp)*200opt*P25 Less: Prior years' cummulative salaries expense Sa la r i e se x p e n s e ,2 0 1 6 4. Ans. P504,000. Entry upon exercise of all options: Cash(16,800sh*P25) Ordinary share options outstanding Ordinaryshares(16,800sh*P20) Share premium 420,000 Entry: (200,000) Salariesexpense 220,000 22 0 , 00 0 Ordinary s hare o ptions o utstanding 220,000 420,000 420,000 336,000 504,000 CHAPTER 9-PROBLEM 9 : PUNK INC. 1. Ans. P100,000. Dec. 31, 2014: Has the non-market based condition been achieved at the end of 2014? Actual i ncrease in sales, 2014 (P81M-75M)/75M 8% Minimum required increase in sales, 2014 10% Thus, not achieved. Is the non-market based condition achievable by the end of 2015? Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 Minimum required average increase in sales (2014 -2015) Est. FMV of options vested (10-2emp)*1,000opt.*P25 Divide by: Vesting period Sa la r i e se x p e n s e ,2 0 1 4 12% 12% Thus, achievable, VP is 2 years. 200,000 Entry: 2 Salariesexpense 100,000 10 0 , 00 0 Ordinary s hare o ptions o utstanding 100,000 2. Ans. P33,333. Dec. 31, 2015: Has the non-market based condition been achieved at the end of 2015? Actual i ncrease in sales, 2014 (P81M-75M)/75M 8% Actualinrease ins ales, 2015( P92.23M-81M)/81M 14% Actual average increase in sales (2014 and 2015) 11% Minimum required average increase in sales (2014 - 2 01 12% Thus, not achieved. Is the non-market based condition achievable by the end of 2015? Estimated average increase in sales in 2014 and 2015: (8%+14%+20%)/3 Minimum required average increase in sales (2014 - 2016) Revised FMV of options (10-2emp)*1,000opt*P25 Multiplyby:2years/3years Cummulative salaries expense as of Dec. 31, 2015 Less:Prioryear'ssalariesexpense Sa la r i e se x p e n s e ,2 0 1 5 200,000 2/3 133,333 Entry: (100,000) Salariesexpense 33,333 3 3 ,3 3 3 Ordinary share options outstanding 3. Ans. P41,667. Dec. 31, 2016: Has the non-market based condition been achieved? Actual increase in sales, 2016 (P110.8M-92.34M)/92.34M Actual average increase in sales (2014-2016) (8%+14%+20%)/3 Minimum required average increase in sales (2014 - 2016) Final F MV of options (10-3emp)*1,000opt*P25 Less: Prior years' cummulative salaries expense Sa la r i e se x p e n s e ,2 0 1 6 14% 14% Thus, achievable, VP is 3 years. 33,333 20% 14% 14% Thus, the condition has bee achieved. Options are exercisable. 175,000 Entry: (133,333) Salariesexpense 41,667 4 1 ,6 6 7 Ordinary share options outstanding 41,667 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA 4. Ans. P210,000. Entry upon exercise of all options: Cash(7,000sh*P25) Ordinary share options outstanding Ordinaryshares(7,000sh*P20) Share premium SOLUTIONS GUIDE 122 of 155 175,000 175,000 140,000 210,000 CHAPTER 9-PROBLEM 10 : MYX CO. 1. Ans. P603,333. End of 2014: Is the non-market based condition achievable? Projected 2016 sales: (P210M*120%*120%) 328,125,000 Minimumrequired2016sales 250,000,000 Estimated FMV of SARS, 2014 (10,000sars*P74) Divide by: Vesting period Salariesexpense,2014 Achievable, number of SARs is 10,000. 740,000 Entry: 3 Salariesexpense 246,667 SAR payable End of 2015: Is the non-market based condition achievable? Projected 2016 sales: (P410M*120%) 640,625,000 Minimumrequired2016sales 250,000,000 Estimated FMV of SARS, 2015 (15,000sars*P85) Multiplyby:2years/3years Cummulative salaries expense as of Dec. 31, 2015 Less:Prioryear'ssalariesexpense Sa la r i e se x p e n s e ,2 0 1 5 Final FMV of SARS(20,000sars*P95) Less: Prior years' cummulative salaries expense Sa la r i e se x p e n s e ,2 0 1 6 246,667 Achievable, number of SARs is 15,000. 1,275,000 2/3 850,000 Entry: (246,667) Salariesexpense 60 3 , 33 3 SAR payable 2. Ans. P1,050,000. End of 2016: Has the non-market based condition been achieved? Actual2016sales 760,000,000 Minimumrequired2016sales 250,000,000 246,667 603,333 603,333 Achieved, number of SARs is 20,000. 1,900,000 Entry: (850,000) Salaries expense 1 ,0 5 0 ,0 0 0 SAR payable 1,050,000 1,050,000 3. Ans. Entry upon exercise in 2017 at prevailing FMV P98. SA Rp a y a b l e 1, 9 00 , 0 00 Sa la r i e se x p e n s e 6 0, 0 00 C a s h( 2 0 , 0 0 0 s a r s * P 9 8 ) 1 ,9 6 0 ,0 0 0 4. Ans. P1,800,000. SAR pay able at p rev aii ng FMV ( 20, 000 sar s*P 90) Entry to remeasure the SAR at the end of 2017: SAR payable 100,000 Salaries expense/Income from SAR reversal (P95 - P90)*20,000SARS CHAPTER 9-PROBLEM 11 : DARK COMPANY 1. Ans. Retained earnings (10%*90,000sh)*P14 126,000 Share dividends payable (9,000sh*P10) Share premium Sharedividendspayable Ordinary shares 2. Ans. Retained earnings (25%*99,000sh)*P10 Share dividends payable (24,750sh*P10) Sharedividendspayable Ordinary shares 1,8 00, 000 100,000 90,000 36,000 90,000 90,000 247,500 247,500 247,500 247,500 3. Ans. P1,337,500. Ordinaryshares,beginning balance 10% share dividends (90,000sh*10%)*P10 25% share dividends (99,000sh*25%)*P10 O rd i na ry s h a r e s , e n d in g b a l a n c e 1,000,000 90,000 247,500 1 ,3 3 7 ,5 0 0 CHAPTER 9-PROBLEM 12 : CHRIS COMPANY 1. Ans. Retained earnings (10%*500,000)*P25 2,500,000 Stock dividends payable (50,000sh*P10) Share premium 500,000 2,000,000 2. Ans. Stockdividendspayable 500,000 Ordinaryshares(46,000sh*P10) Fractional warrants outstanding (4,000*P10) 3. Ans. Fractional warrants outstanding Ordinaryshares(3,600sh*P10) 460,000 40,000 36,000 36,000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 123 of 155 4. Ans. Fractional warrants outstanding Share premium - Expired fractional warrants 5. Ans. P1,099,200. Oustanding shares, beginning Ordinary share dividends distributed Shares issued from fractional warrants Totaloutstandingshares Multiplyby:Cashdividends Di v i d e n d s f r o m e a r n i n g s 4,000 4,000 500,000 46,000 3,600 549,600 2 1, 0 99 , 2 00 Entry: Retainedearnings 1,099,200 Capital liquidated (549,600*P1) 549,600 Dividends payable 1,648,800 Note that the Capital liquidated accounts is a contra-capital account, that is, deducted from total SHE. CHAPTER 9-PROBLEM 13 : ABC INC. 1. Ans. P900,000. Declaration: Retainedearnings Propertydividendspayable Noncurrent asset h eld for d isposal Accum. depr (P800,000*1/10) Building (PPE) 2. Ans. P700,000. Balance sheet date: December 31, 2014 Property dividends payable Retained earnings FMVat12/31/14 Dividendspayable,CV AdjustmenttoRE Loss Noncurrentassetheldfordisposal FMV less cost to sell, NCAHFD CV,uponreclass Loss on remeasurement - P&L 900,000 900,000 720,000 80,000 800,000 200,000 200,000 700,000 900,000 (200,000) 20,000 20,000 700,000 720,000 (20,000) 3. Ans. None. Note that the increase or decrease in the property dividends payable is charged to RE. 4. Ans. P100,000. Distribution: Retainedearnings Propertydividendspayable FinalFMV,1/31/2015 Dividends payable, CV (FMV 12/201 AdjustmenttoRE 100,000 100,000 800,000 700,000 100,000 Property dividends payable 800,000 Noncurrentassetheldfordisposal Gain on settlement of property dividends - P&L CHAPTER 9-PROBLEM 14: JKL CORP. Correct entries: (a) Accumulatedprofits,beg Cash Preference shares (40,000*P1) Ordinary shares (20,000*P0.50) Totalcashdividends (b) Treasury shares (80,000/4,000= P20) Cash 700,000 100,000 50,000 50,000 40,000 10,000 50,000 80,000 80,000 (c) Memo: Share split up 1 is to 2: From 20,000 shares issued to 40,000 shares issued; From P5 par to P2.50 par From 4,000 treasury shares to 8,000 treasury shares; From P20 cost per treasury to P10 per treasury (d) Equipment Treasuryshares(2,800*P10) Share premium-TST (e)C ash(10,000*P15) Preferenceshares(10,000*P10) Share premium-PS (f) Accumulated profits (34,800*10%)*P6 Share dividends payable(3,480*P2.50) Share premium-OS Sharedividendspayable Ordinary shares 1. Ans. NO EFFECT. 50,000 28,000 22,000 150,000 100,000 50,000 20,880 2. Ans. 8,700 12,180 8,700 8,700 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 124 of 155 (g)A ccumulatedprofits Cashdividendspayable Preference shares (50,000*P1) Ordinary shares (38,280*P0.25) Totalcashdividends 59,570 (h)I ncomesummary Accumulated profits -- 940,000 940,000 Accumulatedprofits 52,000 Accumulated profits a ppropriated f or t reasury Summary: January1,2014balances (a) Retroactive adjustment, 2013 dividends (b) Treasury shares reacquisition (c) Share split - No Effect (d) Treasury shares reissue (e) Preferencesharesissue (f) 10% stock dividends (g) 2014 cash dividends (h)income 2014 net -- Appropriation for treasury December 31, 2014 balances Preference Sh 400,000 c) Retainedearnings Accountspayable/Liabilities d) Ordinary shares (P5*100,000sh) Share premium e) Sharepremium Retained earnings 28,000 50,000 12,180 (20,880) (59,570) 940,000 500,000 108,700 50,000 204,180 22,000 52,000 52,000 (52,000) 1,957,550 4. Ans. 17,400 17,400 100,000 50,000 50,000 150,000 150,000 500,000 500,000 550,000 550,000 Liabilities 300,000 Balances, before quasi-reorganization a)Write-downofPPE b) Write-downofInventory c)AccrualofadditionalLiability 150,000 Recapitalization d) Write-off e) deficit of Balances, after quasi-reorg anizat ion 1,000,000 450,000 1 .A n s . CASE 2: Entries: PPE-AppraisalIncrease AccumDepr-AppraisalIncrease Revaluation surplus Accum. P.-App Accum. Prof Treasury 1,200,000 (50,000) (80,000) 22,000 Assets 1,150,000 (100,000) (50,000) a) Sh. Prem-OS Sh. Prem-TS 192,000 8,700 CHAPTER 9-PROBLEM 15: TRUST CORPORATION CASE 1: Entries: a) Retainedearnings 100,000 Accum Depr Retainedearnings Inventories 52,000 Ordinary Sh Sh. Prem-PS 100,000 100,000 5. Ans. Accumulated profits Share dividends payable Computed as: (34,800*20%*P2.50) b) 3. Ans. 59,570 50,000 9,570 59,570 1,000,000 b) Retainedearnings Inventories c) Retainedearnings Accountspayable/Liabilities 175,000 d) Revaluationsurplus Retained earnings 500,000 850,000 (100,000) (50,000) (150,000) 550,000 2 .A n s . OrdinaryS h. 1,000,000 ShareP rem. Ret.E arnings 100,000 (250,000) (100,000) (50,000) (150,000) (500,000) 500,000 (550,000) 550,000 500,000 50,000 3 .A n s . 4 .A n s . Repl. Cost 2,500,000 400,000 Repl AD (1,000,000) 600,000 Sound Value 1,500,000 1,500,000 Cost (600,000) AD 900,000 Carrying Value 75,000 75,000 175,000 500,000 Assets Liabilities Balances, before quasi-reorganization 1,150,000 300,000 a)Write-downofPPE 600,000 b) Write-downofInventory (75,000) c)AccrualofadditionalLiability 175,000 Write-off d) deficit of Balances, after quasi-reorg anizat ion 1,675,000 475,000 1 .A n s . CHAPTER 9-PROBLEM 16: SPURS INC. 1. Ans. Dr. P150,000. DebittoRE,perbooks Debit to RE, per audit (15%*100,000sh)*P110 A d j u s t m e nt t o R E ( a d d i t i o n a l d e b i t ) SHE SHE 850,000 600,000 (75,000) (175,000) 1,200,000 2 .A n s . OrdinaryS h. 1,000,000 ShareP rem. Rev.S urplus Ret.E arnings 100,000 (250,000) 600,000 (75,000) (175,000) (500,000) 500,000 1,000,000 100,000 100,000 3 .A n s . 4 .A n s . 5 .A n s . 1,500,000 1,650,000 (1 5 0 ,0 0 0) CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY (52,000) AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 125 of 155 2. Ans. P9,100,000. Unadjusted Net Income, per books Inventoryfireloss ImpairmentlossonPPE LossonsaleofEquipment Gainonretirement ofbonds Unrealized holding gain on FA Increase in beg. Inventory under FIFO Increase in end. Inventory under FIFO A d ju st ed Ne t I nc om e, pe r a ud it 9,000,000 (150,000) (750,000) (200,000) 300,000 700,000 (100,000) 300,000 9 ,1 0 0, 00 0 3. Ans. P6,400,000. Retainede arnings,b eginning 7,800,000 Correction of prior period error (1,500,000) Change in policy (Ave to FIFO) 100,000 Ret ain ed ea rni ngs, beg . as res tate d 6,4 00, 000 4. Ans. P10,650,000. Retainedearnings, beg. as restated 15%stockdividenddeclaration Loss on retirement of Treasury (P1,050,000-P850,000) Reserveforplantexpansion AdjustedNetIncome R e t a i n e d e a r n i n g s ,e n d i n g b a l a n c e 6,400,000 (1,650,000) (200,000) (3,000,000) 9,100,000 1 0 ,6 5 0 ,0 0 0 5. Ans. P1,100,000. Excess over par on share dividends (P1,650,000-P1,500,000) Lossonretirementoftreasury Excessoverparonshareissuance Proceedsfromsaleofdonatedshares N e t / To t a l a d j u s t m e n t t o A d d i t i o n a l P a id - i n C a p i t a l 150,000 (850,000) 1,000,000 800,000 1 ,1 0 0 ,0 0 0 MULTIPLE CHOICE EXERCISES: CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC. 1. Ans. A. Ordinary shares issued (40,000sh*P20) Ordinary shares subscribed (5,000sh*P20) Preferences haresi ssued( 6,000sh*P100) Preference shares subscribed (900sh*P100) Share premium from ordinar shares I ssued 920,000 Subscribed( P56-P20)*5,000sh 180,000 Share premium from preference shares I ssued 224,000 Subscribed (P140-P100)*900 36,000 Sharepremiumfromtreasuryshares Ordinarysharewarrantsoutstanding T o t a lc o n t r i b u t e dc a p i t a l 260,000 8,000 40,000 2 ,9 9 8 ,0 0 0 2. Ans. A. Revaluation surplus Unrealizedholdinggain-AFS Translationreserves(credit) 240,000 6,000 100,000 800,000 100,000 600,000 90,000 1,100,000 Unre al iz ed cap it al /O th er co mp re he ns iv e i nc om e 3. Ans. B. Contributedcapital Accum. other comprehensive income Accumulatedprofits St o c k h o l d e r s ' e q u i t y CHAPTER 9-EXERCISE 2: ALPHA CORPORATION 1. Ans. D. Authorized ordinary shares at P10 par value Unissuedordinaryshares O r d i na r ys h a r e si s s u e d 2. Ans. D. Authorized preference shares at P50 par value Unissuedpreferenceshares P r e f e r e nc es h a r e sis s u e d , , . Total Capital T o t aAdditional lC o n t r i bPaid-in u t e dC a pit a l . , 900,000 (500,000) P 40 0 ,0 0 0 400,000 100,000 P 30 0 ,0 0 0 3. Ans. C. Additional paid-in capital on ordinary shares Additional paid-in capital on preference shares Additional paid in capital on sale of treasury shares Ordinarysharewarrantsoutstanding Donated capital To t a l A d di t i o n a l P a i d- i n C a p i t a l 4. Ans. D. Ordinarysharesissued Preferencesharesissued 34 6, 00 0 2,998,000 346,000 820,000 4, 1 64 , 0 00 460,000 112,000 4,000 20,000 25,000 P 62 1 ,0 0 0 , P400,000 300,000 30,000 30,000 P621,000 1 ,3 8 1 ,0 0 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 126 of 155 5. Ans. C. Ordinarysharesissued P400,000 Preferencesharesissued 300,000 Ordinarysharessubscribed 50,000 Preferencesharessubscribed 45,000 Total Legal Capital (Par value of issued and subs.) P795,000 6. Ans. C. TotalContributedCapital 1,381,000 Unrealizedholdinggain-AFS Revaluationincrementinproperties Accumulated profits: Accumulated profits – unappropriated Reserveforbondsinkingfund T o t a lS t o c k h o l d e r ’ se q u i t y 3,000 100,000 410,000 220,000 P 2 ,1 1 4 ,0 0 0 CHAPTER 9-EXERCISE 3: TABUK CORPORATION Entry Made Correct Entry Cash 900,000 Cash 900,000 300,000 O.S. 300,000 450,000 P.S. 450,000 Retained earnings 150,000 SharePrem – PS 117,000 Share Prem – OS 33,000 O.S. P.S. Cash Other expense Treasury Stock 225,000 Cash 225,000 Share Prem – TS 37,500 Treasury Stock 262,500 37,500 262,500 O.S. 600,000 Treasury Stock 350,000 Retained Earnings 250,000 O.S. 600,000 Share Prem – OS 90,000 Treasury Stock 350,000 SharePrem – TS 340,000 Cash Subs Rec. No entry Opex Interest income 425,000 350,000 50,000 25,000 Adjusting Journal Entry Retained Earnings 150,000 Share Prem – PS 117,000 Share Prem – OS 33,000 1. Ans. C. Share Prem. – TS 37,500 Retained Earnings 37,500 *books are already closed. 2. Ans. D. Share Prem. – OS 90,000 Retained Earnings 250,000 Share Premium – TS 340,000 3. Ans. C. Cash 425,000 Subs Rec. 350,000 Retained earnings 75,000 *books are already closed. 4. Ans. A. CHAPTER 9-EXERCISE 4: NEVADA SQUARE 1. Ans. D. Retainedearnings,Jan.1,2014 P30,000,000 Cash dividends (2,800,000) Stockdividends (100,000*P68) (a) (6,800,000) Propertyd ividends( 800,000/2)*P25( b) (10,000,000) Netincomefortheyear 60,000,000 Re t a i n e d e a r n i n g s , De c . 3 1 , 2 0 1 4 P1 6 ,4 0 0 ,0 0 0 (a) The stock dividends is small dividends (100,000/700,000 = 14%), thus valued at fair market v alue. (b) The property dividends’ valuation (debit to RE) shall be final at the settlement date. 2. Ans. B. Ordinaryshares,January1,2014 P14,000,000 Stock dividends issuance (100,000*20) 2,000,000 O rd i na ry s h a r e s , D e c e m b e r 3 1 , 2 0 1 4 P1 6 ,0 0 0 ,0 0 0 *share split is accounted through memo entry only, aggregate par value remains the same. 3. Ans. C. Share premium, January 1, 2014 P8,000,000 Share premium from share dividends (6,800,000 – 2,000,000) 4,800,000 Share Prem ium, Decem ber 31, 2014 P12,8 00,000 4. Ans. B. Preferenceshares Ordinary shares Share premium Retained earnings Ret ain ed ear nin gs, Dec. 31, 201 4 P10,000,000 16,000,000 12,800,000 16,400,000 P55 ,20 0,0 00 CHAPTER 9-EXERCISE 5: MISAMIS INC. 1. Ans. B. Number o f options estimated to v est (2 00opt*100emp) MultiplybyMarketvalueofOptions TotalOptionsOutstanding Multiply by (2012 & 2013) T o t a l A c c u m . C o m p . Ex p . a s o f 1 2 . 3 1 . 2 0 1 3 2. Ans. D. Proceeds from ex ercise of righ ts (60, 000–5,000)/5*130 Par value of Ordinary shares issued (11,000*100) Share premium 20,000 30 600,000 2/3 4 00 , 00 0 P1,430,000 1,100,000 P330,000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA 3. Ans. B. Share premiumfromordinary shares Share premium from exercise of warrants Share premium from exercise of rights Ordinaryshareoptions outstanding (20,000*30) Ordinary share warrants outstanding (750,000*50%) T o tA aP l IC SOLUTIONS GUIDE 127 of 155 P1,000,000 575,000 330,000 4. Ans. D. Accumulatedprofits,beginning Retroactive adjustment to retained earnings Appropriation for dividends (71,000 *5 ) Net income, 2014 (2,500,000 – 200,000) A c c u m u l a t e dp r o f i t s ,e nd P1,905,000 600,000 375,000 P 2 ,8 8 0 ,0 0 0 P3,000,000 (400,000) (355,000) 2,300,000 P4 ,5 4 5 ,0 0 0 CHAPTER 9-EXERCISE 6: SANTIAGO INC. 1. Ans. B. The share options are under a variable option plan with a non-market based condition, thus: 2014: VP 1 year achieved if 2014 Rev>=15M; Actual 2014 Rev, P14.5M – not achieved. VP 2 years achievable if 2015 Rev>=18M; Estimated 2014 Rev, (P14.5M*125%) = 18.125M – achievable. Number of options:(68-8)*500 30,000 Fair value of options on grant date P18 Estimated value of services over 2 years P540,000 Divideby:Vestingperiod 2years Sa l a r i e s e x p e n s e , 2 0 1 4 P 2 70 , 0 00 2. Ans. D. 2015: VP 2 years achieved if 2015 Rev>=18M; Actual 2015 Rev, P17.5M – not achieved. VP 3 years achievable if 2016 Rev>=20M; Estimated 2016 Rev, (P17.5M*125%) = 21.875M – achievable. Numberofoptions:(65-5)*500 30,000 Fairvalueofoptionsongrantdate P18 Estimated value of services over 3 years P540,000 Multiply by: 2/3 2/3 P360,000 Less:Prior years’ salaries expense (270,000) Sa la r i e se x p e n s e ,2 0 1 5 P9 0 ,0 0 0 3. Ans. C. 2016: VP 3 years achieved if 2016 Rev>=20M; Actual 2016 Rev, P20.5M –achieved. Finalnumberofoptions:63*500 31,500 Fairvalueofoptionsongrantdate P18 Fi n a l v a l u e o f s e r v i c e s o v e r 3 y e a r s P5 6 7 ,0 0 0 Multiply by: 3/3 3/3 Accumulated salaries expense as of 2016 P567,000 Less:Prior years’ salaries expense (360,000) Salariesexpense,2016 P207,000 4. Ans. A. Finalnumberofoptions:63*500 Options exercised in2017:45*500 Optionsforfeitedin20173*500 Remainingoptionsasof12/31/17 Multiplybyfairvalueongrantdate Ca rr ying va lu e of op ti ons o ut st an ding 12 /3 1/ 17 31,500 (22,500) (1,500) 7,500 P18 P1 35 ,0 00 5. Ans. C. Entry upon exercise of 45*500 = 22,500 options: Cash(22,500*P35) 787,500 Ordinary share options outstanding (22,500*18) 405,000 Ordinaryshares(22,500*P20) 450,000 Share premium 742,500 CHAPTER 9-EXERCISE 7: PANDORA CORP. 1. Ans. B. The share options are under a variable option plan with a market based condition, thus the achievability of the condition is not a matter to consider in determining annual salaries expense: 2014: Numberofoptions:(600-5-45)*100 55,000 Fairvalueofoptionsongrantdate P5 Estimated value of services over 3 years P275,000 Divideby:Vestingperiod 3years Sa la r i e se x p e n s e ,2 0 1 4 9 1 ,6 6 7 2. Ans. A.; 3. ans. C. 2015: Numberofoptions:(600-5-20-35)*100 Fairvalueofoptionsongrantdate Estimated value of services over 3 years Multiply by: 2/3 A c c u m u l a t e d s a l a r i e s e x p e n s e a s o f 20 1 5 Less:Prior years’ salaries expense Sa la r i e se x p e n s e ,2 0 1 5 54,000 P5 P270,000 2/3 P1 8 0 ,0 0 0 (91,667) P8 8 ,3 3 3 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA 4. Ans. A. 2016: Final number of options: (600-5-20-30)*100 Fairvalueofoptionsongrantdate Finalvalueofservicesover3years Multiply by: 3/3 Accumulated salaries expense as of 2016 Less:Prior years’ salaries expense Sa la r i e se x p e n s e ,2 0 1 6 SOLUTIONS GUIDE 128 of 155 54,500 P5 P272,500 3/3 P272,500 (180,000) P9 2 ,5 0 0 CHAPTER 9-EXERCISE 8: JUBEE CORP. 1. Ans. B. The share options are under a variable option plan with a non-market based condition, thus: 2014: Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. 12% – achievable. Numberofoptions:(100*80%)*200 16,000 Fairvalueofoptionsongrantdate P40 Estimated value of services over 3 years 640,000 Divideby:Vestingperiod 3years Sa la r i e se x p e n s e ,2 0 1 4 P2 1 3 ,3 3 3 2. Ans. C. 2015: Condition achievable if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+20)/3=17.3% – achievable. Numberofoptions:(100*85%)*300 25,500 Fairvalueofoptionsongrantdate P40 Estimated value of services over 3 years 1,020,000 Multiply by: 2/3 2/3 Accumulated salaries expense as of 2015 P680,000 Less:Prior years’ salaries expense (213,333) Sa la r i e se x p e n s e ,2 0 1 5 P4 6 6 ,6 6 7 3. Ans. D. 2016: Condition achieved if if Sales Vol. Inc.>=5%; Estimated Sales Vol. Inc. (12+20+16)/3=16% – achived. Finalnumberofoptions:(100-14)*300 25,800 Fairvalueofoptionsongrantdate P40 Final value ofservices over3years P1,032,000 Multiply by: 3/3 3/3 Accumulateds alariesexpense aso f2 016 P1,032,000 Less: Prior years’ salaries expense (680,000.0) Sa la r i e se x p e n s e ,2 0 1 6 P3 5 2 ,0 0 0 4. Ans. A. Entry upon exercise of 60% of the options (25,800*60% = 15,480 options): Cash(15,480*P120) 1,857,600 Ordinary share options outstanding (15,480*40) 619,200 Ordinaryshares(15,480*P100) 1,548,000 Share premium 928,800 5. Ans. B. Entry upon expiration of 40% of the options (25,800*40% = 10,320 options): Ordinary share options outstanding (10,320*40) 412,800 Sh a re p re m i u m – Ex p i r e d o p t i o n s 41 2 ,8 0 0 CHAPTER 9-EXERCISE 9: KALINGA CO. 1. Ans. A. The share appreciation rights are under a variable plan with a non-market based condition, thus: 2014: Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable. Estimated number of SAR: (20-4)*10,000 160,000 EstimatedFMVofSARatyear-end P6 Estimated value of services over 3 years P960,000 Divideby:Vestingperiod 3years Sa la r i e se x p e n s e ,2 0 1 4 P3 2 0 ,0 0 0 2. Ans. D. 2015: Condition is achievable if Ave Rev Growth >=10%; Estimated Ave Rev Growth, 12.5% – achievable Estimated number of SAR: (20-4)*10,000 160,000 EstimatedFMVofSARatyear-end P6.75 Estimated value of services over 3 years P1,080,000 Multiply by: 2/3 2/3 Accumulated salaries expense as of 2015 P720,000 Less:Prior years’ salaries expense (320,000) Sa la r i e se x p e n s e ,2 0 1 5 40 0 ,0 0 0 3. Ans. B; 4 Ans. D. 2016: Condition is achieved if Ave Rev Growth >=10%; Actual Ave Rev Growth (10+15+25)/3=16.7% – achieved. FinalnumberofSAR15*20,000 300,000 Fairvalueofoptionsongrantdate P7 Es t . v a l u e o f s e r v i c e s o v e r 3 y e a r s P 2 ,1 0 0, 0 0 0 Multiply by: 3/3 3/3 Accumulateds alariesexpense aso f2 016 P2,100,000 Less:Prior years’ salaries expense (720,000) Sa la r i e se x p e n s e ,2 0 1 6 P 1 ,3 8 0, 0 0 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 129 of 155 CHAPTER 9-EXERCISE 10: SANS CORP. CORRECT ENTRIES: Land(1.8M*30%) Building(1.8M*70%) Ordinary Shares Share premium Subsriptionreceivable Ordinarysharessubscribed Share premium C Treasuryshares(5,000sh) ash Cash Subscriptionreceivable Ordinarysharesubscribed Ordinary shares 540,000 1,260,000 500,000 1,300,000 420,000 200,000 220,000 125,000 125,000 252,000 252,000 120,000 120,000 MEMO: SPLIT: 62,000 shares into 248,000 shares; P10 par value to P2.50 par 8,000 shares subs into 32,000 shares subs; P21 subs price to P5.25 subs price 5,000 TS into 20,000 TS; P25 cost per unit to P6.25 cost per unit Cash RE Treasuryshares(10,000*6.25) 2. Ans. C. Compensationexpense S APRa y a b l e (7*4,000*P15)/5years 3. Ans. C. RE CashDividendsPayable SharesOutstanding SharesSubscribed Total Multiplybycashdivrate T o t a lC a s hd i v i d e n d s R IncomeSummary E Summary January15, March 1, 1,June July15, September 2, December 30, December 31, Appropriation for TS A d jB . a la nc e s 40,000 22,500 62,500 84,000 8 4 ,0 0 0 270,000 270,000 238,000 32,000 270,000 1 2 7 0, 0 00 1,500,000 1,500,000 OS 500,000 OS-Subs 200,000 SharePrem. 1,300,000 220,000 RE TS TOTAL (125,000) 120,000 6 2 0, 0 00 1 .A n s .B . CHAPTER 9-EXERCISE 11: ROXXY CORP. 1. Ans. D. Ordinary Sh. Prior to 2013: A.Shareissueforcash B.Shareissueforland C.Sharesubsription/issue D.Cashdividenddeclaration(Dec.15,2012) 3,800,000 200,000 400,000 2013 transactions: A.Cashdividenddeclaration(June15,2013) B.Shareissueforcash C.ReacquisitionofTreasuryShares D. Stock Dividend Declaration 80,000 (120,000) (22,500) 6 2,500 (270,000) 1,500,000 (62,500) 80,000 1, 52 0, 00 0 1, 14 5, 00 0 (62,500) 3,365,000 4 .A n s .C . 5 .A ns .C 6 .A n s .D. Sh Prem - OS Sh Prem- TS reasury Share Shares Outstanding 7,980,000 680,000 1,280,000 380,000 20,000 40,000 440,000 440,000 288,000 312,000 220,000 924,000 2014 transaction: Reissue A. TS of Ba l a n c e s : J u n e 3 0 , 2 0 1 4 4, 7 00 , 0 00 6,000 11,152,000 2. Ans. C. Sharepremium-OS Sharepremium- Treasury-OS To t a l Sh a r e p r e mi u m 11,152,000 6,000 1 1, 1 58 , 0 00 6,000 (78,000) 234,000 8,000 (8,000) 22,000 462,000 2,000 464,000 3. Ans C. Retainedearnings,June30,2013 2,760,000 NetIncomefor2014fiscalyear 160,000 Stock Dividends to OS (Dec. 2013) (440,00sh*5%*P52) (1,144,000) Cash Dividends to PS (Dec. 2013) ( 200,000*P1) (200,000) Voluntaryapprop.forsinkingfund (200,000) Legal approp. for treasury shares (equal to cost) (234,000) Ret ain ed ear nin gs, unap pro priate d June 30 , 2014 1,1 42, 000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA 4. Ans. A. OrdinaryShares PreferenceShares SharePremium-OS SharePremium-PS Share Premium - Treasury (OS) RE,appropriated RE,unappropriated TreasurySharesatcost To t a l SHE, J un e 3 0 , 2 0 14 SOLUTIONS GUIDE 130 of 155 4,700,000 5,000,000 11,152,000 3,800,000 6,000 434,000 1,142,000 (234,000) 2 6, 0 00 , 0 00 CHAPTER 9-EXERCISE 12: GLORIA CORPORATION ENTRIES: a)OS(30,000*5) 150,000 Sharepremium-OS 150,000 Treasury shares Share premium TST 1. Ans. C. b )R E( 1 0, 0 00 * 7 0 ) Property dividends payable RE (10,000*5) Propertydividendspayable 2. Ans. A. Property dividends payable [email protected] Ga i n / I n co m e 270,000 30,000 7 0 0 ,0 0 0 700,000 50,000 50,000 750,000 680,000 70 , 00 0 c) Memo: 1M share rights were received; 1 OS: 4 SR plus P11 Cash(840K/4)*11 2,310,000 OS (210K*5) 1,050,000 Sharepremium-OS 1,260,000 d)RE(100,000*2) O SWO Cash(80,000*8) OSWO(200,000*80%) OS (80,000*5) Share premium OS e)RE(1.8M*10%) Dividends payable 200,000 200,000 640,000 160,000 400,000 400,000 180,000 180,000 f) Available for sale securities 110,000 UHGain-OCI(SCI/SHE) UHLoss-AFS12/31/13 UHLoss-AFS12/31/14 Decrease in UHL or UHGain for the year 110,000 245,000 (135,000) 110,000 g) RE, beg Incometaxexpense Rent income 500,000 h)Incomesummary R E SUMMARY January1balances a)Treasurysharesretirement Property b) dividends c)Stockrightsexerise d)Options(priorperioderror) Options exercise Cash e) dividends f) UHGain AFS - for the year g)Prior period error h) Net Income for the year December31,balances 5. Ans. A; 7. Ans. C. Preferenceshare Ordinaryshares APIC C o n t ri b ut e d C a p i t a l Unrealized holding loss – SHE Accumulated profits - Total T o t al S t o c k h o l d e r s ’ Eq ui t y 275,000 225,000 2,600,000 2,600,000 PS OS 1,800,000 5,150,000 (150,000) APIC UHLoss 3,590,000 (120,000) RE (245,000) 4,000,000 TS (270,000) 270,000 (750,000) 1,050,000 400,000 1,260,000 200,000 240,000 (200,000) (180,000) 110,000 1,800,000 6, 4 50 , 00 0 5, 1 70 , 00 0 3 .A n s .B. 4 .A n s .B. (275,000) 2,600,000 ( 13 55 ,0, 1 00 95 ) ,0 0 0 6 .A n s .D. - 1,800,000 6,450,000 5,170,000 1 3, 4 20 , 0 00 (135,000) 5,195,000 P 18 , 4 80 , 00 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 131 of 155 CHAPTER 9-EXERCISE 13: RAJA CORPORATION OS Sh.Prem. RE-app RE-unapp TS TOTAL Beginningbalance 4,000,000 1,700,000 6,000,000 11,700,000 Jan. 5 100,000 60,000 160,000 16 Jan. (164,000) (164,000) 20 Feb. (1,000,000) (1,000,000) Feb. 25 200,000 280,000 480,000 Mar. 1 1,140,000 (1,140,000) entry) (no Split1Apr. May. 30 200,000 500,000 700,000 Jul. 1 778,500 2,335,500 (3,114,000) 1 Aug. (238,740) (238,740) Dec. 31 2,150,000 2,150,000 Appropriation for TS (500,000) 500,000 Ending balance 6,218,500 4,575,500 2,993,260 500,000 (500,000) 13,787,260 1 .A ns .A . 2 .A n s .A . 3 .A n s .C . 4 .A n s .C . CHAPTER 9-EXERCISE 14: APAYAO CORPORATION ASSETS Cash and cash equivalents (325,000 + 75,000) Accounts receivable(275,000 +100,000) Marketable securities, at FMV as of 12/31/06 (955,000 – 600,000) Prepayments 400,000 375,000 355,000 50,000 1,180,000 1. Ans. B. Land 900,000 Building(600,000–50,000) 550,000 Machinery and equipment (330,000 – 110,000) 220,000 1,670,000 TOTAL 2,850,000 5. Ans. A. LIABILITIES AND CAPITAL Current liab. (325,000+75,000+100,000+3,000–50,000–100,000) 353,000 2. Ans. B Non-current liabilities (250,000 + 50,000) 300,000 653,000 Ordinary shares, (50,000 – 5,000 + 4,000) * 25 1,225,000 Share premium (750,000 – 75,000 + 140,000) 815,000 Contributed capital 2,040,000 3. Ans. A. Reserveforselfinsurance 75,000 Reservefortreasuryshares(50*5,000) 250,000 Accum.profits (625,000–3,000–100,000–140,000–50,000–250,000) 82,000 4. Ans. D. Treasuryshares(50,000*5,000) (250,000) 2,197,000 TOTAL 2,850,000 CHAPTER 9-EXERCISE 15: WHISPER INC. May, 2012 balances income, Net2012 July 23, 2013 share issue October2stockdividends(800,000*5%) income, Net 2013 February,2014treasurystock June, reissuanceoftreasury October, i ssuance of s tocks t hru r ights exercise ( 250,000*2) November, issuance of stacks thru rights exercise (400,000*2) De c e m b e r1 5 ,c a s hd i v i d e n d s :( 2 , 1 2 5 , 0 0 0 * . 3 0 ) December 31, retirement of TS income, Net 2014 Balances 4. Ans. A. Ordinarysharesissued Additional paid-incapital Retainedearnings Treasuryshares(5,000*9) To t a l s t o c k h o ld e rs ’ e q u i t y CHAPTER 9-EXERCISE 16: GREY CO. 1. Ans. A. Contributed capital in excess of par value Donatedcapital(fromstockholder) Recapitalization (reduction in par value) A d d it io n a lp a i di nc a p it a l #ofShares OrdinarySh. Outstanding Issued 300,000 3,000,000 P P300,000 500,000 40,000 5,000,000 400,000 (30,000) 15,000 5.000,000 500,000 800,000 Retained Earnings P125,000 1,250,000 40,000 (440,000) 350,000 45,000 1,500,000 8,000,000 (100,000) 2,125,000 APIC P21,300,000 2,400,000 ( 6 3 7 , 5 01. 0 )Ans. C. 10,000 800,000 P5,545,000 P197,500 2. A n s . A . 3. A n s . C . P21,300,000 5,545,000 197,500 (45,000) P 2 6, 9 97 , 5 00 P18,000 15,000 1,500,000 P 1 ,5 3 3, 0 0 0 2. Ans. D.; 3. Ans. A. 2010–2013Netincome P2,400,000 2010–2013Cashdividends (1,560,000) Correctionoferror(note2) 6,000 Refundofprioryear’sincometax 27,000 Net income, 2014 510,000 50%sharedividend,2014 (750,000) Retainedearnings,total P633,000 Re ta in ed ea rn in gs, ap pr op ri at ed (6 0, 00 0* 4) 24 0, 00 0 Re t a i n e d e a r n i n g s , u n a p p r o p r i a t e d P3 9 3 ,0 0 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 132 of 155 CHAPTER 9-EXERCISE 17: SCURBS CORPORATION ADJUSTING JOURNAL ENTRIES a.Ordinary shares 180,000 Share premium b. Retainedearnings Sharedividendspayable 150,000 c. Allowanceforbaddebt Bad debt expense 30,000 h.PPE Retained earnings 150,000 i. Retainedearnings AccumulatedDepr. 30,000 d. Marketablesecurities Retained earnings 9,000 9,000 P e. Unrealizedloss(IS) Marketablesecurities 57,000 f.Retained earnings Income summary 12,000 g.Incomesummary Inventory, end 18,300 36,000 180,000 j. Depreciationexpense Accumulated Depr k. Accumulateddepr PE GainonsaleofPPE 57,000 l.Prepayment Insuranceexpense Retained earnings 12,000 36,000 3,300 3,300 3,300 3,300 52,500 45,000 7,500 2,700 2,700 5,400 18,300 SUMMARY: 1. Ans. A. Totalassets,2014unadjusted (c)D ecreaseinallowanceforbaddebt (d) Increase in value of marketable sec. in 2013 (e) Decrease in value of marketable sec. in 2014 (g)Decreaseininventory,end2014 (h)UnderstatementinPPEin2013 (i) Depreciation of PPE in item h, in 2013 (j) Depreciationof PPE intemh, in2014 (k) Correction error: PPE d isposal in 2014 (l)Correcrionoferror:prepayment T o t a la s s e t s ,2 0 1 4a d j u s t e d 2,545,200 30,000 9,000 (57,000) (18,300) 36,000 (3,300) (3,300) 7,500 2,700 2 ,5 4 8 ,5 0 0 2. Ans. B.; 3. Ans. D. Unadjusted net income, (c)Decreaseinbaddebtsin2014 (d) Increase in value of marketable sec. in 2013 (e) Decreaseinvalue of marketablesec. in2014 (f) Overstatement in inventory, end 2013 (g)Understatementininventory,end2014 (h) Overstatement of repairs expense in 2013 (i)Understatement in depreciation in 2013 (j)Understatementindepreciationin2014 (k) Understatement in gain on sale of equipment, 2014 (l) Overstatement of insurance expense, 2013 Understatementofinsruanceexpense,2014 A d j u s t e dN e tIn c o m e 4. Ans. D. UnadjustedRetainedEarnings,end2014 Priorperioderrors:(P585,000-P620,100) Overstatemetn in 2014 Net Income (P660,000-P628,200) Unrecordeddividenddeclaration(b) A d j u s t e d Re t a i n e d E a r n i n g s , e n d 2 0 1 4 2013 2014 585,000 660,000 30,000 9,000 (57,000) (12,000) 12,000 (18,300) 36,000 (3,300) (3,300) 7,500 5,400 (2,700) 62 0 , 10 0 628,200 1,401,000 35,100 (31,800) (150,000) 1 ,2 5 4 ,3 0 0 CHAPTER 9-EXERCISE 18: GBC INC. 1. Ans. D. Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends. 2. Ans. B. Shares issued Less:treasury(1,000,000/50) Outstanding shares Multiply by Dividendsdistributable,small Multiply by fair value A p p ro p r i a t i o n f o r s h a r e d i v i d e nd s 100,000 (20,000) 80,000 10% 8,000 42 3 36 , 00 0 3. Ans. B. a. Totalnetincomesinceincorporation b.Total cash dividends paid c. Im pairment on property declared as dividend (600,000 – 450,000) Appropriationfor property dividend at impaired value e. Correct valuation of share dividends h.Appropriatedforplantexpansion i. Loss on treasury share reissue, net of gain from TST (375,000 – 515,000) l. Appropriated for remaining treasury shares at cost P50/share Correct Unappropriated Accumulated Profits balance P3,200,000 (150,000) (150,000) (450,000) (336,000) (700,000) (140,000) (1,000,000) P274,000 4. Ans. A. 5. Ans. D. d. Proceeds from sale of donated stocks e. Share premium from share dividends f. Gain on treasury share transaction i. Loss on treasury share reissue (debit j. Share premium in excess of par from k. S hareissuanceexpense A P IC 150,500 136,000 375,000 (375,000) 215,000 (45,000) 4 5 6, 5 0 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 133 of 155 CHAPTER 9-EXERCISE 19: MAMA CORP. ENTRIES: PROPERTY DIVIDENDS Dec lar at ion : R et ai ned ea r ni ng s Di v i d e n d s p a y a b l e Noncurrent Asset Held Loss Equipment Payment: Retained earnings Dividendspayable 90 0 ,0 00 9 0 0 , 01. 0 0Ans. A. 900,000 300,000 1,200,000 100,000 100,000 Dividends payable 1,000,000 Noncurrent Asset Held for Disposal Ga in 900,000 1 0 0 , 0 2. 0 0 Ans. D. ENTRIES STOCK DIVIDENDS Declaration: Retained earnings ( 20 0 ,0 0 0 * 1 0 % )* 4 2 8 4 0, 0 0 0 3. Ans. A. Dividends payable (20,000*25) 500,000 Sharepremium 340,000 Payment: Dividends payable Ordinaryshares 500,000 500,000 4. Ans. D. a.Totalnetincomesince2013 6,400,000 b.Cashdividendssince2013 (300,000) c. P ropertyDividends(seeentriesabove) (1,000,000) Adjustments to Net income in relation to the property dividends Loss on reclassification of Equipment to held for disposal (300,000) Gain on settlement of the property dividends 100,000 d. Capital loss from treasury shares reissue (300,000-400,000) (100,000) e.Stockdividends(seeentriesabove) (840,000) g.Appropriationforplantexpansion (700,000) *Appropriation for treasury stock (30,000*P40) (1,200,000) A c c um u l a t e d p ro f i t s - u n a p p ro p ri a t e d b a l a n c e 2 ,0 6 0 ,0 0 0 CHAPTER 9-EXERCISE 20: TAR CO. 1. Ans. A. Netincome,unadjusted Profit sharing ofemployees Proceeds from life insurance Gainonsaleofproperty N ET IN C O M E 300,000 (30,000) 150,000 23,000 4 4 3, 0 0 0 2. Ans. A. Accumulatedprofits,b eginning Correction of prior period error Dividendstoordinary Dividendstopreference Appropriation for bond redemption Correctnetincome A C C U M P R O FI T S , U N A P P . 200,000 (15,000) (50,000) (40,000) (20,000) 443,000 5 1 8, 0 0 0 3. Ans. A. APIC,unadjusted Gainonsaleoftreasury,net Donationfromstockholder Gainonsaleofownshares A P IC 100,000 3,000 52,000 12,000 1 6 7, 0 0 0 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 134 of 155 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION DISCUSSION PROBLEMS CHAPTER 10-PROBLEM 1: ABC CORPORATION Cash Accountsreceivable Allowance for doubtful accounts Dividend receivable (a) Prepaidexpenses Inventory Financial assets at fair value (a) Land (b) Buildinginprocess(b) Patent Machinery and equipment Accumulated depreciation 800,000 750,000 50,000 160,000 1,000,000 690,000 Current Asset 800,000 750,000 (50,000) 40,000 160,000 1,000,000 400,000 Current Liabilities Noncurrent Liabilities SHE 525,000 4,950,000 200,000 1,500,000 (300,000) 5,500,000 200,000 1,500,000 300,000 Discountonbondspayable Accountspayable Accruedexpenses Note payable, 10% (c) Accrued interest on notes payable (c) Bondspayable Accrued interest on bonds payable (d) Share capital Accumulated profits (b), (c), (d) Treasury shares (a) Adjusted balances Noncurrent Asset 200,000 900,000 150,000 250,000 900,000 150,000 250,000 52,500 2,000,000 (200,000) 2,000,000 60,000 3,000,000 4,150,000 3,100,000 1A . n s. Audit notes: (a) Financial asset at fair value, unadjusted Treasury shares Dividendreceivable Financial asset a t fair value, a djusted 690,000 (250,000) (40,000) 400,000 (b) Building in progress, unadjusted Land including property taxes in arrears Propertytaxexpense Building in progress, adjusted 5,500,000 (525,000) (25,000) 4,950,000 (c) Notespayable,principal 6,875,000 2A . n s. 1,412,500 3A . n s. 3,000,000 4,012,500 (250,000) 1,800,000 6,762,500 5A . n s. *charged to RE 250,000 Interestin 2013 (P250,000*10%) Interestin 2014 (P275,000*10%) Totalinterestpayableonnotes 25,000 27,500 52,500 *charged to RE *charged to RE (d) Accrued interest on bonds payable (P2,000,000*12%*3/12) 4. Ans. P3,762,500. Accumulatedprofits,unadjusted (b)Propertytaxesforthecurrentyear (c)Interestonnotesin2013 Interestonnotesin2014 (d)Unaccruedinterestonbondsin2014 AppropriationforTreasuryshares A c c u m . P r o f i t s, u n a p p r o p r i a t e d , a d j u st e d 60,000 4,150,000 (25,000) (25,000) (27,500) (60,000) (250,000) 3, 76 2, 5 00 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 135 of 155 CHAPTER 10-PROBLEM 2: RCW CORP. Current Asset Cash Accountsreceivable Allowance for doubtful accounts Inventories at cost (NRV is P900,000) Land,plantsite Land, for speculation at FMV (Note a) Building Accumulated depreciation – building Equipment Accumulated depreciation – equipment Investment in associate Prepaidexpenses Notespayable Accountspayable Incometaxpayable Accruedexpenses 400,000 800,000 50,000 1,000,000 500,000 1,200,000 3,800,000 2,000,000 3,400,000 1,300,000 1,300,000 100,000 750,000 350,000 50,000 60,000 Mortgage payable, P100,000 quarterly Estimated liability for damages Retained earnings app. for plant expansion Retained earnings app. for contingencies Sharecapital Share premium Retained earnings, unappropriated Trademark Secret processes and formulas Bank loan payable – June 30, 2015 (Note b) Def. tax asset, net def. tax liability, P50,000 Ad j u ste d b al a nc es 2,000,000 140,000 1,000,000 100,000 3,000,000 300,000 1,350,000 150,000 200,000 500,000 100,000 Noncurrent Asset Current Liabilities Noncurrent Liabilities 400,000 800,000 (50,000) 900,000 (100,000) 500,000 1,200,000 3,800,000 (2,000,000) 3,400,000 (1,300,000) 1,300,000 100,000 750,000 350,000 50,000 60,000 400,000 140,000 1,600,000 1,000,000 100,000 3,000,000 300,000 1,350,000 150,000 200,000 2, 15 0, 0 00 1 .A n s. 150,000 7,400,000 2 .A n s. 1,750,000 3 .A n s. 500,000 50,000 2,150,000 4 .A n s . CHAPTER 10-PROBLEM 3: SCR COMPANY Unadjustedbalances Restrictedforeigndeposit Investment property atcost Lossoninventorywrite-down Treasury shares Store supplies Financial asset at fair value through profit/loss Share premium Unearnedleaseholdincome-currentportion Stock dividends payable Serialbondspayable-currentportion A d j u s t e db a l a n c e s Current Asset 6,200,000 (600,000) (1,000,000) (200,000) (600,000) 100,000 800,000 Noncurrent Asset 11,800,000 600,000 1,000,000 Current Liabilities 2,000,000 Noncurrent Liabilities 2,000,000 SHE 14,000,000 (200,000) (600,000) (100,000) (800,000) (500,000) 140,000 4, 70 0, 0 00 1 .A n s. (140,000) (300,000) 100,000 (100,000) 12,500,000 1,740,000 1,460,000 2 .A n s. 3 .A n s. 4 .A n s. 500,000 300,000 14,000,000 5 .A n s . CHAPTER 10-PROBLEM 4: ABC COMPANY Statement of Comprehensive Income (Expenses according to function) Note # Net Sales Note 1 12,230,000 Less: Cost of Sales Note 2 (6,560,000) Gross profit 5,670,000 Sharefromnetincomeofassociate Note3 170,000 Other income Note 4 210,000 Total income 6,050,000 Less: Operating expenses Sellingexpenses Note5 1,820,000 General and administrative expenses Note 6 850,000 Interest expense 400,000 Unrealized holding loss from financial asset 400,000 (3,470,000) Net income before tax 2,580,000 Income tax expense (30%) (774,000) Net income after tax 1,806,000 4. Ans. Other comprehensive income/loss: Unrealized holding gain on financial asset, net of tax Revaluationsurplus,netoftax Foreigntranslationgain,netoftax Total comprehensive income 140,000 350,000 70,000 560,000 2,366,000 5. Ans. Statement of Comprehensive Income (Expenses according to nature) Note # Net Sales Note 1 Sharefromnetincomeofassociate Note3 Other income Note 4 SHE 12,230,000 170,000 210,000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION 5,650,000 5 .A n s. AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 136 of 155 Total income before expenses Less: Operating expenses (Increase)Decreasein inventories Net purchases Depreciation Salaries Supplies Utilities Rent Advertising Freight-out Interest expense Unrealized holding loss on financial asset Net income before tax Income tax expense (30%) Net income after tax 12,610,000 3. Ans Note7 Note 2 Other comprehensive income/loss: Unrealized holding gain on financial asset, net of tax 390,000 5,140,000 1,200,000 900,000 600,000 400,000 200,000 150,000 250,000 400,000 400,000 (10,030,000) 2,580,000 (774,000) 1,806,000 4. Ans. 140,000 Revaluationsurplus,netoftax Foreigntranslationgain,netoftax 350,000 70,000 Total comprehensive income SUPPLEMENTARY NOTES: Note 1: Net Sales Gross sales Less: Sales returns and allowances Salesdiscounts Net Sales 13,000,000 (520,000) (250,000) 12,230,000 Note 2: Cost of Sales Rawmaterialsinventory,January1, Add: Net purchases Grosspurchases Add: Freight-in Less: Purchase returns and allowances Purchasediscounts Rawmaterialsavailableforuse Less:Rawmaterials,December31, Raw materials used Directlabor(P900,000*30%) Factory overhead: Depreciation (P1,200,000*40%) Supplies(P600,000*20%) Utilities(P400,000*40%) Totalmanufacturingcost Add:Work-in process inventory, January 1,. Costofgoodsplacedintoprocess Less: Work-in process inventory, December 31 Costofgoodsmanufactured Add:Finished goods inventory, January 1, Costofgoodsavailableforsale Less: Finished goods inventory, December 31, C o so tg f oo d sol d Note 3: Share from Net Income of Associate XYZI nc.NetIncomefor2014 Proportionate share Share from net income of associate Note 4: Other income Rent income Royalty income Totalotherincome 560,000 2,366,000 5. Ans. 1,150,000 5,400,000 200,000 (310,000) (150,000) 480,000 120,000 160,000 5,140,000 6,290,000 (800,000) 5,490,000 270,000 760,000 6,520,000 920,000 7,440,000 (1,100,000) 6,340,000 1,200,000 7,540,000 (980,000) 6 , 5 6 0 , 0 0 01. Ans. 850,000 20% 170,000 120,000 90,000 210,000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 137 of 155 Note 5: Selling Expenses Depreciation (P1,200,000*35%) Salaries(P900,000*40%) Supplies(P600,000*50%) Utilities(P400,000*35%) Rent expense Advertisingexpense Freight out T o t a ls e l l i n g e x p e n s e s 420,000 360,000 300,000 140,000 200,000 150,000 250,000 1 , 8 2 02. , 0 0Ans. 0 Note 6: General and Administrative Expenses Depreciation (P1,200,000*25%) Salaries(P900,000*30%) Supplies(P600,000*30%) Utilities(P400,000*25%) Total general and administrative expenses 300,000 270,000 180,000 100,000 850,000 Note 7: Increase/Decrease in Inventories Inventories, January 1: Raw materials Work-in process Finishedgoods Inventories, December 31: Raw materials Work-inprocess Finished goods Decrase in inventories 1,150,000 920,000 1,200,000 800,000 1,100,000 980,000 3,270,000 2,880,000 390,000 CHAPTER 10-PROBLEM 5: UTV CORP. Cashandcashequivalents Bankoverdraft Accountsreceivable Allowance for doubtful accounts Rawmaterials Goodsinprocess Finishedgoods Financial assets at fair value through OCI Land, at fair market value 12/31/14 Building Accumulated depreciation – building Plant and equipment Accumulated depreciation – Plant and Eqpt. Patent Goodwill, recognized in Jan. 2013 Note payable, bank – due June 30, 2015 400,000 100,000 900,000 40,000 560,000 600,000 1,400,000 2,500,000 1,000,000 6,000,000 1,600,000 2,400,000 400,000 800,000 1,400,000 1,300,000 Note payable, bank – due June 30, 2016 2,100,000 Accountspayable 1,000,000 Employee benefit provisions 180,000 Warrantyliabilities 80,000 Incometaxpayable 120,000 Deferredtaxliability 280,000 Accumulated profits, January 1, 2014 3,600,000 Revaluation surplus on Land, January 1, 2014 360,000 Unrealized gain on financial assets, 1/1/14 280,000 Share capital 5,000,000 Sharepremium, 1,000,000 Sales 10,000,000 Revaluation surplus on Land during the year 140,000 Unrealized gain on financial asset for the year 100,000 Cost of sales 6,000,000 Sellingexpenses 1,960,000 Administrativeexpenses 500,000 Finance cost 100,000 Incometaxexpense 160,000 Dividend declared and paid Ba l a nc es N eItn c o m e Current Asset 400,000 Noncurrent Assets Current Liabilities Noncurrent Liabilities 100,000 900,000 (40,000) 560,000 600,000 1,400,000 2,500,000 1,000,000 6,000,000 (1,600,000) 2,400,000 (400,000) 800,000 1,400,000 1,300,000 2,100,000 1,000,000 180,000 80,000 120,000 280,000 3, 82 0, 0 00 12,100,000 2,780,000 2,380,000 1A.n s. 2A.n s. 3A.n s. 4A.n s . CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 138 of 155 Continued… Total Compre. Income Net Income Accum. Profits SHE Cash and cash equivalents Bank overdraft Accounts receivable Allowance for doubtful accounts Raw materials Goods in process Finished goods Financial assets at fair value through OCI Land, at fair market value 12/31/14 Building Accumulated depreciation – building Plant and equipment Accumulated depreciation – Plant and Eqpt. Patent Goodwill, recognized in Jan. 2013 Note payable, bank – due June 30, 2015 Note payable, bank – due June 30, 2016 Accounts payable Employee benefit provisions Warranty liabilities Income tax payable Deferred tax liability Accumulated profits, January 1, 2014 RevaluationsurplusonLand,January1,2014 Unrealizedgainonfinancialassets,1/1/14 Share capital Share premium, Sales RevaluationsurplusonLandduringtheyear Unrealizedgainonfinancialassetfortheyear Cost of sales Sellingexpenses Administrative expenses Finance cost Incometaxexpense Dividend declared and paid Balances N eItn c o me T o t a lC o mp r e h e n s iv eI n c o me Accumulated Profits St oc k h o l d e rs E'q u i t y 3,600,000 360,000 280,000 5,000,000 1,000,000 10,000,000 140,000 100,000 (1,000,000) 1, 28 0, 0 00 1,280,000 1, 52 0 ,0 00 6A . n s. CHAPTER 10-PROBLEM 6: THEODORE COMPANY 1. Ans. P7,485,000. Sales revenue Increase in accounts receivable (P1,800,000-P1,350,000) Collectionsfromcustomers 2. Ans. P2,025,000. Cost of goods sold Increase in inventory (P2,700,00-P1,575,000) Purchases Increase in accounts payable (P2,250,000-P1,350,000) Cashdisbursedforpurchases Cash paid for operating expenses 3. Ans. P4,185,000. Collectionsfromcustomers Cash disbursed for purchases Cash paid for operating expenses Cash provided by operating activities 4. Ans. P2,160,000. Purchase of equipment Sale land of Sale of equipment Cash used in investing activities , Add:Costofequipmentsold Purchaseofequipment 3,880,000 10 ,7 60 ,0 0 0 7A . n s. P7,935,000 (450,000) P7,485,000 P1,800,000 1,125,000 2,925,000 (900,000) P2,025,000 P1,500,000 (225,000) P1,275,000 P7,485,000 (2,025,000) (1,275,000) P4,185,000 P2,700,000 495,000 45,000 (P2,160,000) , 1,280,000 3,880,000 5A . n s. Operatingexpenses 140,000 100,000 (6,000,000) (1,960,000) (500,000) (100,000) (160,000) 1 P1,800,000 900,000 P2,700,000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 139 of 155 Increase in lease-liability—Land , , P450,000 225,000 225,000 270,000 P495,000 Carryingvalueoflandsold Add:Gainonsaleofland Proceedsfromsaleofland P90,000 45,000 45,000 Less:Lossonsaleofequipment Proceedsfromsaleofequipment 5. Ans. P1,350,000. (P1,350,000) CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY 1. Ans. P920,000. Net income Adj: Non-operating (gain)/loss Gain on sale of LT investment (P135,000-P100,000) Adj: Non-cash (income)/expenses Depreciation expense Adj: Decrease/(Increase) in Working Capital Inventory, increase Accounts payable and accrued liabilities, decrease C a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s 2. Ans. P1,005,000. ProceedsfromsaleofBuilding ProceedsfromsaleofLTInvestment Purchase of P lant a ssets ( P700,000+600,000-110,000) PurchaseofAvailablefor salesecurities C a sh u s e d i n i n v e st i n g a c t i v i t i e s 3. Ans. P205,000. Proceedsfromshareissuance Proceedsfromshort-termbankdebt Payment of dividends (P500,000-160,000) C a sh p r o v i d e d b y f i n a n c i n g a c t i v i t i e s 790,000 (35,000) 250,000 (80,000) (5,000) 9 20 ,0 00 350,000 135,000 (1,190,000) (300,000) (1 ,0 0 5, 00 0) 220,000 325,000 (340,000) 2 05 ,0 00 Summary: Cashprovidedbyoperatingactivities Cashusedininvestingactivities Cashprovidedbyfinancingactivities Increaseincashfortheyear 920,000 (1,005,000) 205,000 120,000 CHAPTER 10-PROBLEM 8: ABC CORP. STATEMENT OF CHANGES IN EQUITY January1,balances Share issuance Treasury shares reaquisition Treasurysharesretirement Dividends declaration: Share dividends (20%*65,000sh)*P50 Cashdividends(P12*5,000)+(P3*78,000) Appropriations: Plant expansion Treasury shares Comprehensive income income Net Othercomprehensiveincome December 31, balances Share Capital 3,000,000 1,000,000 (100,000) Reserves 2,540,000 Accumulated Profits-Unapp 4,000,000 (300,000) 120,000 (20,000) 650,000 Treasury Shares (650,000) (294,000) 400,000 180,000 (200,000) 2,900,000 2A . n s. (400,000) (180,000) 3,676,000 3A . n s. 9,540,000 1,000,000 (300,000) (294,000) - 1,200,000 4,550,000 1A . n s. Total SHE (180,000) 1,200,000 (200,000) 10,946,000 4A . n s. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 140 of 155 CHAPTER 10-PROBLEM 9: GLORIA CORPORATION STATEMENT OF CHANGES IN EQUITY Share Capital January1,balances Prior period adjustment: Unrecorded2011-2013options Overstatementinrentincomein2013 Share issuance from exercise of rights Share issuance from exercise of options Treasurysharesretirement Dividends declaration: Propertydividends(10,000sh*P75) Cashdividends(P10%*P100*18,000sh) Reversal of appropriation Treasury shares Comprehensive income income Net Othercomprehensiveincome December 31, balances 6,950,000 Reserves 3,615,000 200,000 1,050,000 400,000 (150,000) Accumulated Profits-Unapp 3,730,000 Treasury Total SHE Shares (270,000) 14,025,000 (200,000) (275,000) 1,260,000 240,000 (120,000) 270,000 (750,000) (180,000) (270,000) (750,000) (180,000) 270,000 - 2,600,000 8,250,000 1 .A n s. 110,000 5,035,000 5,195,000 2 .A n s. 3 .A n s. (275,000) 2,310,000 640,000 - - 2,600,000 110,000 18,480,000 MULTIPLE CHOICE EXERCISES: CHAPTER 10-EXERCISE 1: KALAMANSI INC. 1. Ans. A. Cash(184,920–101,920) Accounts receivable (84,480 – 4,125) InventoryatNRV(90,000 80%) Prepaid Insurance T o t a lc u r r e n ta s se t s 2. Ans. A. Land Building,net(375,000 –45,000) Furniture and fixtures, net (114,600 – 34,600) T ot a PlP E 3. Ans. C. Accounts payable Interest payable Advances Shortterm portion of serialbonds T o t a lC u r r e n tl i a b i l i t i e s 9. c. 4. Ans. C. Unappropriated retained earnings – Appropriated forbondtreatment T o t a lr e t a i n e de a r n i n g s 5. Ans. B. Sharecapital(4,0001 0) Paid-incapitalinexcessofpar Totalretainedearnings T ot a SlH E P83,000 80,355 72,000 12,000 P2 47 ,3 5 5 P167,000 330,000 80,000 P5 77 ,0 0 0 P23,595 8,405 12,000 50,000 P 94 ,0 0 0 P295,000 (3,125) 50,000 P3 41 ,8 7 5 P40,000 430,00 341,875 P8 11 ,8 7 5 CHAPTER 10-EXERCISE 2:ETT INC. Current Asset Assets Liabilities Liabilities SHE Accum. Profits Unadjustedbalances 8,000,000 3,600,000 3,000,000 200,000 8,400,000 2,000,000 Bank overdraft 200,000 200,000 Allowance for bad debts/bad debt expense (260,000) (260,000) (260,000) Increase in FMV of financial asset at fair value 150,000 150,000 150,000 Inventory write-down (to NRV which is lower) (100,000) (100,000) (100,000) Goodwill (200,000) 200,000 Salariespayable/Salariesexpense 500,000 (500,000) (500,000) Mortgage payable 4,000,000 4,000,000 Interest payable 400,000 400,000 Accumulateddepreciation on thebuilding (600,000) (600,000) (600,000) Current tax payable 200,000 (200,000) A d j u s t e db a l a n c e s 7, 79 0, 0 00 7,600,000 4,300,000 4,000,000 7,090,000 690,000 1 . A n s. D . 2 . An s. B . 3 . A n s. D . 4 . A ns. B . 5 . A n s. C . 6 . An s. C. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 141 of 155 CHAPTER 10-EXERCISE 3: JACOB CORPORATION ASSETS Cashandcashequivalents(325,000+75,000) Accountsreceivable(275,000+100,000) Marketablesecurities(955,000-600,000) Prepayments T O T A LC U R R E N TA S S E T S Land Building Reservefordepreciation–Building Machinery and equipment Reserve for depreciation – Machinery and equipment TOTALNONCURRENT ASSETS T O T AA L SS ET S LIABILITIES AND CAPITAL Current liabilities (325,000+75,000+100,000+3,000-50,000-100,000) Non-current liabilities (250,000+50,000) TOTAL LIABILITIES Ordinary shares, P25 par, 45,000 shares issued (1,250,000-125,000) Sharedividendspayable(4,000sh*25) Share premium (750,000+(4,000sh*(60-25))-((750,000/50,000)*5,000sh) TOTALCONTRIBUTEDCAPITAL Reserve for self insurance Reserve for treasury shares Accumulated profits (625,000-3,000-100,000-140,000-50,000-250,000) Treasuryshares(500,000-250,000) T O T ASLH E TOTAL 400,000 375,000 355,000 50,000 P 1 , 1 8 0 , 0 0 0 1 .A n s .B . 900,000 600,000 (50,000) 330,000 (110,000) 1,670,000 2 , 8 5 0 , 0 0 02A. n sA. . 353,000 3. Ans. B. 300,000 4. Ans. C. P653,000 1,125,000 100,000 815,000 2,040,000 75,000 250,000 82,000 (250,000) 2 , 1 9 7 , 0 0 05 A.n A s .. 2,850,000 CHAPTER 10-EXERCISE 4: REESE CORP. 1. Ans. B. Cash 775,000 Accountsreceivable(net) 2,695,000 Inventory 2,085,000 T o t a lc u r r e n ta s se t s 5 ,5 55 ,0 0 0 Note that the installment receivable from customer is classified as current since it is a trade payable. 2. Ans. A. Accounts payable and accrued liabilities Income taxes payable (654,000-525,000) T ot a l c ur re nt l i a b il i ti e s 3. Ans. C. Retainedearnings,1/1/14 Net sales and other revenues Costsandexpenses Netincomebeforetax 1,701,000 129,000 1 ,8 30 ,0 0 0 3,450,000 13,360,000 11,180,000 2,180,000 Incometaxexpense(30%) Net Income for the year Retained earnings, 12/31/14 (654,000) 1,526,000 4,976,000 CHAPTER 10-EXERCISE 5: TORRES COMPANY Current 1,765,000 (300,000) (600,000) (500,000) 365,0001. Ans. D. Cash Compensatingbalance Bondretirement C ontingencyfund Accountreceivable Credit balance Advances to officers (past due) Current portion of past due: 2015:(P100,000x.917431)) Non-current portion: ! 2016:(P200,000 . 84168) 2017: (P300,000 ! .77218) Mdse. sent on consignment: (P100,000 ! 1 25%) Due from consignee: (P75,000 !125% !9 2%-P3,000) Non-current 300,000 Other Assets 600,000 LT Investment 500,000 LT Investment 930,007 45,000 (600,000) 91,743 Other 168,336 Assets 231,654 Other Assets (125,000) 83,250 Inventory On consignment (P100,000 25%)! 750,000 25,000 Investment Financial Asset at Fair value through P&L Prepaid expense Increase in value of AFS Tot a l 425,0002. Ans. A. 775,000 170,0003. Ans B. 30,000 1, 76 5, 0 00 4A.n s B.. 763,000 (150,000) (30,000) 50,000 633,000 LT Investment 2,432,990 5A.n s D.. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 142 of 155 CHAPTER 10-EXERCISE 6: KATZ CORP. Cost of Sales Sales Purchases Salesdiscount Purchasediscount Sales returns and allowance Purchase returns and allowance Correction of merchandise inventory, beginning error, net of income tax – credit Merchandise Inventory, January 1 (adjusted) Merchandise Inventory, December 31 Distributioncosts General and administrative expenses Interestexpense , – 53,000,000 32,000,000 2,000,000 1,200,000 1,000,000 800,000 Investment income – equity method Gain on expropriation of asset Incometaxexpense Dividendsdeclared Accumulated profits, January 1, 2014 C o soS tfa l e s Net Income Ot h e rC o m p r e h e n s i v eI n c o m e T o t aC l o m p r e h e n s i v eI n c o m e Accumulated Profits, Dec. 31, 2014 Accumulated Profits (2,000,000) (1,000,000) (800,000) 400,000 3,400,000 (3,500,000) (5,000,000) (4,000,000) (2,000,000) 500,000 1,250,000 700,000 550,000 3,000,000 2,000,000 5,000,000 4,800,000 1,300,000 4,200,000 2 9, 90 0 ,0 00 1 . A ns. B . CHAPTER 10-EXERCISE 7: NAM COMPANY 1. Ans. B. Net income Depreciation(seenotebelow) Gain on sale of equipment (P100,000-P87,500) Share from net income of associate (P300,000*25%) Decreaseinaccountsreceivable Increase ininventories Increaseinaccountspayable Decreaseinincometaxespayable N e t c a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s (550,000) 3,000,000 2,000,000 (5,000,000) (500,000) (1,300,000) 4,200,000 (29,900,000) 9 ,1 0 0, 00 0 9,100,000 2 .A n s .B . 1 ,4 00 ,0 0 0 1,400,000 3A . n sB .. 1 0 ,5 00 ,0 0 0 4 . A n s. C . P925,000 375,000 (12,500) (75,000) 100,000 (337,500) 150,000 (50,000) P 1, 07 5, 00 0 Increase in accumulated depreciation (2,912,500-2,600,000) 312,500 Accumulated depreciation of equipment sold (150,000-87,500) Depreciation for 2014 2. Ans. D. Proceedsfromsaleofequipment Loan Ari to Co. Principalcollectionofloanreceivable N e t c a sh u s e d i n i n v e s t i n g a c t i v i t i e s Total Com. Income (1,200,000) 700,000 value through other comprehensive income or Other Comp. Income 32,000,000 400,000 3,400,000 3,500,000 5,000,000 4,000,000 2,000,000 500,000 1,250,000 , Net Income 53,000,000 62,500 P375,000 P100,000 (750,000) 93,750 P 5 56 ,2 50 3. Ans. A. Net cash us ed i n fi nan cin g act ivi tie s (D ivi den ds p aid ) (P250, 000 ) CHAPTER 10-EXERCISE 8:RAVEN C ORPORATION 1. Ans. D. Sales Cost of goods sold Gross profit Gainonsaleoftradingsecurities Total Sellingandadministrativeexpenses Unrealized holding loss on trading securities Lossonsaleofequipment Net income before tax Income taxes N eitn c o m e a f t etra x 10,776,000 (6,468,000) 4,308,000 144,000 4,452,000 (3,444,000) (48,000) (12,000) 948,000 (420,000) 5 28 ,0 00 2. Ans. A. Accumulated profits, unapp., Jan 1, 2014 Less: Increase in appropriations for expansion Stock dividends declaration (237,600*30%)*P10 Accumulatedprofits,unapp.Dec.31 Less:Netincomefortheyear ReversalofappropforTreasury C a shd i v i d e n dd e c l a r a t i o n 1,344,000 (180,000) (712,800) (943,200) 528,000 60,000 96 ,0 00 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION 9,100,000 1 2, 4 00 ,0 00 AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 143 of 155 3. Ans. C. Sharecapital,Dec.31,2014 Sharepremium,Dec.31,2014 Total Less: Sharecapital,Dec.31,2013 Sharepremium,Dec.31,2013 4,312,800 1,392,000 5,704,800 Increase in Share capital and share premium Sharedividends(237,600*30%)*10 Sharepremium from treasury shares reissue P r o c e e d sf r o m i ss u a n c e o f sh a r e s 4. Ans. B. DecreaseinTradingsecurities Add:GainonsaleofTradingsecurities Unrealizedlossontradingsecurities Pr oc e e d s f r o m sal e o f T r a d i n g sec ur it i es 5. Ans. C. Proceedsfromsaleofequipment Add:Lossonsaleofequipment C a r r y i n gV a l u eo fe q i u p m e n ts o l d 2,400,000 60,000 2,460,000 3,244,800 (712,800) (12,000) 2, 52 0, 0 00 360,000 144,000 (48,000) 4 56 ,0 00 84,000 12,000 96 ,0 00 6. Ans. D. Equipment, end 3,732,000 Equipment, beg 2,040,000 Increase inequipment 1,692,000 Add:Costofdisposedequipment 180,000 Totalequipment acquired during the year 1,872,000 Equipment acquired through noteissuance (600,000) Overhaul on equipment (72,000) To ta l ca sh pa ym en t m ad e fo r eq ui pm en t a cqu isit io n] 1, 20 0, 00 0 7. Ans. A. Decrase in treasury shares (120,000 - 60,000) Sharepremiumontreasurysharesreissue P r o c e e d s f r o m t r e a s u r y sh a r e s r e i s su e 8. Ans. C. Net Income Non cash expenses/income Depreciationexpense-Bldg Depreciaitonexpense-Equipment Bad debt expense Amortizationofbonddiscount Income tax benefit (Decrease in Def. tax liab) Non operating income/expense Loss onsale ofequipment Changes in working capital Trading security Accounts receivable Inventories Prepaid Insurance Accounts payable Accrued expenses Income tax payable Unearned Income N e t c a sh p r o v i d e d b y o p e r a t i n g a c t i v i t i e s 9. Ans. B. Purchaseofequipment Overhaul of equipment Sale equipment of 10. Ans. A. Paymentofserialnotespayable Share issuance Treasurysharesreissuance Payment of dividends 60,000 12,000 72 ,0 00 528,000 45,000 303,000 36,000 6,000 (75,600) 12,000 360,000 (576,000) 108,000 (6,000) (60,000) 111,600 300,000 (96,000) 9 96 ,0 00 (1,200,000) (72,000) 84,000 (1,188,000) (240,000) 2,520,000 72,000 (96,000) 2,256,000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 144 of 155 CHAPTER 11: ERROR CORRECTION AND CASH;ACCRUAL DISCUSSION PROBLEMS CHAPTER 11-PROBLEM 1: SAFARI COMPANY 2012 NI Accruedexpense,under2012 (15,000) Accruedexpense,under2013 Accrued expense, under 2014 B. Accruedincome,under2012 8,000 Accruedincome,under2013 Accrued income, under 2014 C. Prepaidexpense,under2012 16,000 Prepaidexpense,under2013 Prepaid expense, under 2014 D. Unearnedincome,under2012 (11,000) Unearnedincome,under2013 A. 2014 E FFUnearned EC TOFERincome, RORSunder ( 2,000) 1. Ans. CHAPTER 11-PROBLEM 2: MASIGLA COMPANY 2012 NI (50,000) A. E ndingInventory,over2012 EndingInventory,over2013 Ending Inventory, over 2014 B. EndingInvenotry,under2012 EndingInvenotry,under2013 Ending Invenotry, under 2014 C. AR/Sales,under2012 AR/Sales, under 2013 AR/Sales, under 2014 D. AP/Purchases,under2012 AP/Purchases,under2013 AP/Purchases, under 2014 E. Equipment, under/Expense, over per year Depr Expense, under (2012 Equipment) DeprExpense,under(2013Equipment) DeprExpense,under(2014Equipment) E FFEC TOFERRORS 12,000 25,000 (15,000) 200,000 (20,000) 1 52 , 0 00 1. Ans. 2013 NI 15,000 (7,000) 2014 NI 2014 RE, BEG2 014 RE, END 7,000 (22,000) (8,000) 9,000 (9,000) 9,000 (12,000) 6,000 12,000 5,000 (16,000) 12,000 11,000 (13,000) 13,000 3,000 (10,000) (22,000) 2. Ans. 3. Ans. 2013 NI 50,000 (30,000) (12,000) 14,000 (25,000) 22,000 15,000 (12,000) 2014 NI (22,000) (22,000) 5,000 5,000 6,000 6,000 (13,000) 1,000 4. Ans. (10,000) (21,000) 5. Ans. 2014 RE, BEG2 014 RE, END 30,000 (40,000) (10,000) (21,000) 6. Ans. 2014 WC (30,000) (14,000) 8,000 14,000 (22,000) 16,000 22,000 12,000 (10,000) 240,000 220,000 (20,000) (20,000) (24,000) (24,000) (22,000) 218,000 134,000 2. Ans. 3. Ans. 2014 WC (7,000) (40,000) (40,000) 8,000 8,000 16,000 16,000 (12,000) 440,000 (40,000) (24,000) 370,000 4. Ans. (10,000) 660,000 (60,000) (48,000) (22,000) 504,000 5. Ans. (10,000) (26,000) 6. Ans. CHAPTER 11-PROBLEM 3: AMICI COMPANY 2013NI 245,000 (12,000) Unadjustedbalances A. Salariespayable,under2013 Salariespayable,under2014 Accrued interest income, under 2013 Accruedinterestincome,under2014 Unearned rental income, under 2013 Unearnedrentalincome,under2014 Prepaidinsurance,under2013 Prepaidinsurance,under2014 B. Advances f rom customers, under 2013 Advancesfromcustomers,under2014 C. Advances to suppliers, under 2013 Advancestosuppliers,under2014 D. Equipment, over/Expense under (each year Depr Expense, over (on 2013 Equipment) DeprExpense,over(on2014Equipment) ADJUSTED BALA NCES/EFFECT OF ERRORS 2014NI 2014RE,BEG 2014WC 310,000 12,000 (12,000) (5,000) (5,000) 4,000 (4,000) 4,000 3,000 3,000 (14,000) 14,000 (14,000) (15,000) (15,000) 3,000 (3,000) 3,000 5,000 5,000 (31,000) 31,000 (31,000) (25,000) (25,000) 10,000 (10,000) 10,000 7,000 7,000 (60,000) (80,000) (60,000) 12,000 12,000 12,000 16,000 157, 000 268,000 (88,000) (30,000) 1. Ans. 2. Ans. 3. Ans. 5. Ans. CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA Retainedearnings,beg2013 AdjustedNI,2013 Dividends declared and paid in 2013 Retainedearnings,end2013 AdjustedNI,2014 Dividends declared and paid in 2014 Re t a i n e d e a r n i n g s , e n d 2 0 1 4 SOLUTIONS GUIDE 145 of 155 157,000 (75,000) 82,000 268,000 (75,000) 2 756. , 0Ans. 00 CHAPTER 11-PROBLEM 4: SOLID COMPANY 1. Ans. P2,255,000. Cashbasissales 1,980,000 Add:AR,endingbalance 550,000 Sales discounts 80,000 Salesreturns,norefund 60,000 Total 2,670,000 Less:AR, beginning balances (415,000) A c c r u a l b a s i s g r os s s a l e s 2. Ans. P2,260,000. Cashbasissales Add:AR,endingbalance Sales discounts Salesreturns,norefund Write-off of AR Total Less:AR, beginning balances Recovery of previous write-off A c c r u a l b a s i s g r os s s a l e s CHAPTER 11-PROBLEM 5: DEISEL CORP. 1. Ans. P2,800,000. Cashbasispurchases Add:AP,endingbalance Purchasediscounts Purchasereturns,norefund Total Less:AP,beginningbalance A c c r u a l b a s i s g r os s p u rc h a s es 2. Ans. P2,600,000. Grosspurchases Less:Purchasediscount Purchasereturns Net purchases Add:Inventory,beginning Cost of goods available for sale Less:Inventory,end C o so ts f a le s 2,255,000 1,980,000 550,000 80,000 60,000 25,000 2,695,000 (415,000) (20,000) 2,260,000 2,500,000 800,000 45,000 55,000 3,400,000 (600,000) 2,800,000 2,800,000 (45,000) (80,000) 2,675,000 250,000 2,925,000 (325,000) 2,600,000 CHAPTER 11-PROBLEM 6: BECKER COMPANY Ans. P215,000 Cashbasisroyaltyincome 200,000 Add:Royalty receivables, ending 85,000 Unearned royalties, beginning 60,000 Total 345,000 Less: Royalty receivables, beginning (90,000) Unearnedroyalties,ending (40,000) A c c r u a l ba s i s ro y a l t y i n c o m e 2 15 , 0 00 CHAPTER 11-PROBLEM 7: XYZ COMPANY Ans. P305,000 Cashbasisroyaltyexpense Add:Royaltypayables,ending Prepaidroyalties,beginning Total Less: Royalty payables, beginning Prepaidroyalties,ending A c c r u a l ba s i s ro y a l t y i n c o m e 300,000 75,000 55,000 430,000 (80,000) (45,000) 3 05 , 0 00 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 146 of 155 CHAPTER 11-PROBLEM 8: BACOLOD CORP. 1. P10,550,000. Total collections from charge customers 2,550,000 Allowance for BD, beg 125,000 Add:AR,endingbalance 1,200,000 Add: Bad debt expense 100,000 AR written-off 75,000 Recovery of write-off 25,000 Total 3,825,000 otal T 250,000 Less:AR, beginningbalance (750,000) Less: AR write-off (SQZ) (75,000) Recovery of previous write-off (25,000) Accrualbasisgrosssales 3,050,000 Allowance for BD, end 175,000 Add:grosscashsales 7,500,000 To t a l g ro s s s a l e s / N et s a l e s 10,550,000 *Note that since there are no sales discounts or sales returns and allowances, gross sales is also net sales. 2. Ans. P5,670,000. Cashpurchases Creditpurchases Totalgrosspurchases Less:Purchasediscounts Purchasereturns Net purchases Add:Inventory,beginning COGAS Less:Inventory,ending Co s toS f a l es 3. Ans. P345,600. CV, 1/1/14: (P3M*90%*80%*80%) Multiplyby:Ddbalrate De p r e c i a t i o n e x p e n s e , 2 0 1 4 4. Ans. P2,304,400. Net Sales Cost ofsales Gross profit Interestincome(a) Total income Operatingexpenses(b) Depreciationexpense Baddebtexpense Neitn c o m e 5,100,000 1,200,000 6,300,000 (210,000) (120,000) 5,970,000 1,500,000 7,470,000 (1,800,000) 5,670,000 1,728,000 20% 3 45 , 6 00 10,550,000 (5,670,000) 4,880,000 90,000 4,970,000 (2,220,000) (345,600) (100,000) 2,304,400 (a)Interestcollected Less: Accrued interest income, Beg Interestincome,accrualbasis 120,000 (30,000) 90,000 (b) Operating expenses, cash basis Add:Accruedexpense,ending Less:Prepaidexpense, ending Operating expense, accrual basis 2,250,000 60,000 (90,000) 2,220,000 CHAPTER 11-PROBLEM 9: CUTTING EDGE. Cash collections from customer on account 6,000,000 Add:AR,increase 1,480,000 Sales discount 80,000 Sales returns,withoutrefund 120,000 AR written-off 240,000 Less:NR-trade,decrease (800,000) Recovery of previous write-off (72,000) G r os sS a l e sonA c c o u n t 7 , 0 4 8 ,1. 0 0Ans. 0 Grosscash sales 1,200,000 G r osS s a le s 8 , 2 4 8 , 2. 000 Ans. Less:Salesdiscounts (80,000) Salesreturns(Total) (320,000) N eSta l e s 7 , 8 4 8 , 03. 0 0Ans. CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA Cash paid to suppliers on account Add:Notes payable-trade increase Purchasediscount Purchase returns, without refund Less: Accounts payable, decrease G r os s P u r c h a s e s on A c c o u n t Grosscashpurchases G r os sP u r c h a s e s Less;Purchasediscount Purchasereturns(total) N eP t u r c h a se s SOLUTIONS GUIDE 147 of 155 4,800,000 800,000 140,000 200,000 (600,000) 5 , 3 4 04. , 0Ans. 00 1,000,000 6 , 3 4 05. , 0 0Ans. 0 (140,000) (320,000) 5 , 8 8 0 ,6. 0 0Ans. 0 CHAPTER 11-PROBLEM 10: GLASS CO. 1. Ans. P251,636. Cost of sales (P340,000 total sales * 60%) Add: Merchandise Inventory, November 15 P204,000 93,920 Purchases Less: A ccounts payable – trade, November 15 P a y m en t sf o rp u r c h a s e s P297,920 46,284 P251,636 2. Ans. P254,620 Sales P340,000 Less: A ccounts receivable – trade, November 15 C o l l e c t i o n sf ro ms a l e s 85,380 P254,620 3. Ans. P121,612. CASH ACCOUNTABILITY: RECEIPTS Issuance of ordinary shares (P300,000 + P20,000) Mortgage payable Note payable bank – Collectionsfromsale(fromnumber2) T otal DISBURSEMENTS Real property FurnitureandFixtures(P29,000–P6,000) E xpenses Purchases (from number 1) T otal CASH BALANCE CASH AS ACCOUNTED: Bankbalance,November15 T Add: Undepositedcollections otal Less:Outstandingchecks C A S HS H OR TA G Ea so fNo v e m b e r1 5 ,20 1 4 CHAPTER 11-PROBLEM 11: EDU COMPANY 1. Ans. P11,430,000. Totaldepositsperbankstatement Cashreceiptsfromshareissuance Proceeds of bank loan, directly credited to account Deposits f rom cash collections from c ustomers Collections from customers which were used to pay directly disbursements U tilities Salaries Supplies Dividends Undepositedcollectionsonhand To t a l c o l l ec t i o n s f r om c u s to m er s 2. Ans. P14,535,000. Cash collections from customers Add:AR,ending Less: Advances from customers, ending A c c r u a l b a s i s g r os s s a l e s P320,000 80,000 32,000 254,620 686,620 P200,000 23,000 60,756 251,636 P535,392 P151,228 P26,328 5,140 P31,468 1,852 29,616 P121,612 12,600,000 (1,800,000) (1,800,000) 9,000,000 360,000 360,000 720,000 540,000 1,980,000 450,000 11,430,000 11,430,000 3,240,000 (135,000) 14,535,000 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 148 of 155 3. Ans. P9,738,000. Totaldepositsperbankstatement Cashinbank,endperbankstatement Total disbursements per bank statement Add:Outstandingchecks Less: Payments of bank loan and interest Payments of installment due on equipment To t a l c a s h pa y m en t s m a de t o s u p pl i er s 12,600,000 (900,000) 11,700,000 180,000 (540,000) (1,602,000) 9,738,000 4. Ans. P10,998,999. Cashpaymentstosuppliers Add: Accounts payable, ending A c c r u a l b a s i s g r os s p u rc h a s es 9,738,000 1,260,000 10,998,000 5. Ans. P8,280,000 Gross purchases/Net purchases Inventory,end 10,998,000 (2,718,000) C o so ts f a le s 8,280,000 6. Ans. P3,070,000. Grosssales/Netsales Cost of sales Gross profit Operating expenses Utilities(P360,000+40,000) Salaries(P360,000+25,000) Supplies (P720,000-150,000) Depreciation - Bldg (P16.2M/15yrs) Depreciation - Eqpt (P1.44M/5yrs) Bad debtexpense Interest expense - lo an (P90,000+30,000) Interst expense, instal. (P1.602M-P1.44M) Ne In t c ome 14,535,000 (8,280,000) 6,255,000 400,000 385,000 570,000 1,080,000 288,000 180,000 120,000 162,000 (3,185,000) 3,070,000 MULTIPLE CHOICE EXERCISES: CHAPTER 11-EXERCISE 1: BEE CO. 1. Ans. C. Depreciation per books: P250,000/8yrs (a) 31,250 Additional depreciation on capitalizable major repairs (220,000/11yrs) (b) 20,000 De p r e c i a t i o n e x p e n s e p e r a u d i t P51,250 (a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years, thus on 12/31/14 the expired life is (5+3), 8 years. Depreciation per books is computed as: Accum Depr/Expired Life (b) The major repairs cost should have been capitalized on 1/1/12 and depreciated over the remaining useful life of the related asset. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books), P500,000/31,250 = 16 years. Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years. NI 2012 Unadjustedbalances a.Unearnedrentincome,under2014 b. Salaries payable, under 2011 Salaries payable, under 2012 Salariespayable,under2013 Salariespayable,under2014 c. Unused supplies, under 2011 Unused supplies, under 2012 Unusedsupplies,under2013 Unusedsupplies,under2014 d. Repairs expense, over 2012 Depreciation expense, under 2012-2014 A d j u s te db a l a n c e s P100,000 2,500 (5,500) (3,500) 6,500 NI 2013 P145,000 5,500 (7,500) NI 2014 RE, beg2014 P185,000 (6,500) 7,500 (4,700) WC, 2014 (6,500) (7,500) (4,700) (6,500) 3,700 (3,700) 3,700 7,100 7,100 220,000 220,000 (20,000) (20,000) (20,000) (40,000) P300,000 P 1 20 , 2 00 P164,700 P 1 7 6, 2 00 ( P 4, 1 0 0) 2 . A n s D. 3 . A n s B. 4 . A n s D. 5. A n s A. 6 . A n s B. CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 149 of 155 CHAPTER 11-EXERCISE 2: LOG CORP. 2013 2014 Unadjustedpretaxincome P4,545,000 P3,483,000 a. 2013salesoverstatement (1,719,000) 1,719,000 b. 2013inventoryunderstatement 388,800 (388,800) 2014 inventory overstatement (255,000) c. Understatement in interest expense due to amortization of bond discount: (a) 2013: 10,640,250*7% = 744,818 Less: 11,250,000*6%= 675,000 (69,818) 2014: 10,710,068*7% = 749,705 Less:11,250,000*6% =675,000 (74,705) d.Ordinary repairs (382,500) (423,000) Overstatement in depreciation: Amountcapitalizedin2013:382,500*20% 76,500 Balanceofamt.cap.in2013:306,000*20% 61,200 Amountcapitalizedin2015: 423,000*20% 84,600 A DJU S TE DP RET A XI NC OM E P 2 , 8 3 8 , 9 8 2 P 4 , 20 6 , 29 5 1. A n s . C . 2. A n s . A . (a) The loan was srcinated on 1/1/12 at P10,575,000 (11,250,000-675,000). Discount amo. by 12/31/12 therefore shall be: Correct interest (10,575,000*7%) 740,250 Less: Nominal interest (11,250,000*6%) 675,000 2012 Amortization: 65,250 Carrying value of Bonds, 12/31/12 (10,575,000+65,250), P10,640,250 CHAPTER 11-EXERCISE 3: LOT INC. 1. Ans. B. Accumulated depreciation per books (Machine XYZ): 400,000*3/10 Less: Accumulated depreciation per audit : 4 50,000*3/10 Adjustment related to the under depn for 3 years (2011 to 2014) Add: Debit to accum depn attributed to old equipment traded in (2011) NE TA DJUS T M E NTTOA C CU MDE P NA CC OU NT Depreciationexpensefortheperiod: Cost Accum depn, adjusted Carrying value Divideby: Revisedremainingusefullife DE P RE CI A T I ONF ORTH EYE A R( M a c hXYZ ) 2. Ans. A. Carrying value, 1/1/2014: 393,750*10/12 Multiply by: 150% declining balance rate: (1/6)*150% DE P R E C I A T I O N E X P E N S E ( M a c h U V W ) 3. Ans. D. Carrying value, 1/1/2014: 4,500,000*17/20 Less:Salvage value Depreciable cost Multiply by: SYD rate DEPRECIATION EXPENSE Carryingvalue,1/1/2014 Depreciation for 2014 BU I LD I N G C A RR Y I N G V A LU E 1 2 / 2 0 1 4 120,000 (135,000) 15,000 150,000 135,000 credit debit debit 450,000 135,000 315,000 5years 63,000 328,125 25% 82,031 3,825,000 50,000 3,775,000 12/78 580,769 3,825,000 580,769 3 , 2 4 4, 2 3 1 CHAPTER 11-EXERCISE 4: INSULAR CORP. Retained earnin Net income (2014) a. IGNORED (COUNTERBALANCED) b. AR/Sales, under 2013 (over in 2014) c. Insurance expense, under 2013 & 2014 d. Accrued interest expense, under 2013 e. Depreciation, under 2013 & 2014 N ea t d j u st m e n t s Unadjusted Net Income A d j u s t e d2 0 1 4n e ti n c o m e 120,000 (57,600) 7,200 (117,600) ( 48,000) 1 . A n s . D. (120,000) (86,400) (7,200) (117,600) (331,200) 1,750,000 1,418,800 2 . A n s . D. CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 150 of 155 CHAPTER 11-EXERCISE 5: KUTING CORP. Omitted prepayments, 2013 Omittedprepayments,2014 Salaries and wages, 2013 Salariesandwages,2014 Accrued interest income, 2013 Accruedinterestincome,2014 Advances from customers, 2013 Advancesfromcustomers,2014 Capital expenditure, 2013 Depnoncap.ex.in2013 Capitalexpenditure,2014 Depnoncapexin.2014 Total under (overstatement) 2013 2014 (NET INCOME) (NET INCOME) 256,000 (582,400) 172,800 (313,600) (256,000) 205,200 582,400 (520,000) (172,800) 142,000 313,600 (374,000) 2014 WORKING CAPITAL 2014 RETAINED EARNINGS 205,200 (520,000) 376,000 (18,800) 142,000 142,000 (374,000) (37,600) 348,000 (17,400) (110,0 00) 213,40 0 1. An s C . 205,200 (520,000) (374,00) 376,000 (56,400) 348,000 (17,400) (546,800) 103,400 2 . A n s D. 3. A n s A . CHAPTER 11-EXERCISE 6: GHI INC. Unadjustedbalances a. Salaries payable, under 2013 Salairespayable,under2014 b.Inventory,over2013 c.Prepaidinsurance,under2014 d.Interestreceivable,under2014 e. Overstatement in gain on eqpt sale, 2014 f. Overstatement in expense in 2013 Depr, under 2013 (1.3M/10yrs) Depr,under2014(1.3M/10yrs) Inc. from grant, under 2013 (1.2M/10) Inc.fromgrant,under2013(1.2M/10) A d j u s te db a l a n c e s 2013NI 1,750,000 (100,000) 2014NI 2015RE,Beg 2,000,000 100,000 (140,000) (140,000) (190,000) 190,000 120,000 120,000 20,000 20,000 (160,000) (160,000) 100,000 100,000 (130,000) (130,000) (130,000) (130,000) 120,000 120,000 120,000 120,000 1,550,000 2,120,000 (80,000) 1. An s. A. 2. An s. A. 3. A n s. A. 4. Ans. D. Correct cost of Building (P1.2M+100K+200K) Accumdepr:(P1.5M*2/10) C o r r e c t c a r r y i n g v a l u e o f Bu i l d i n g 1 2 / 3 1 / 1 4 1,500,000 (300,000) 1,200,000 CHAPTER 11-EXERCISE 7: BABY INC. 2012 NetIncome Balance 600,000 a. 20 12 Accured expense understated (90,000) 2013Accruedexpenseunderstated 2014Accruedexpenseunderstated 2012 Accrued rental income understate 40,000 2013 Accruedrental incomeunderstated 2014Accruedrentalincomeunderstated 2012 Prepaid expense understated 20,000 2013Prepaidexpenseunderstated 2014Prepaidexpenseunderstated b. 2012 Equipment charged to expense 400,000 2012/2013/2014 De preciation understa (80,000) 2014Equipmentchargedtoexpense 2014Depreciationunderstated c. Ca sh dividends charged to other expens 100,000 *Landacceptedasadonationfromastockholder(APIC) *Lossoninventoryduetoflood 990,000 1 .A n s .C . 2013 2014 2014 2014 2014 NetIncome NetIncome RE,Beg RE,End WC 750,000 300,000 2,000,000 90,000 (110,000) 110,000 (110,000) (98,000) (98,000) (98,000) (40,000) 45,000 (45,000) 45,000 50,000 50,000 50,000 (20,000) 30,000 (30,000) 30,000 35,000 35,000 35,000 400,000 400,000 (80,000) (80,000) (160,000) (240,000) 550,000 550,000 (110,000) (110,000) 150,000 200,000 (400,000) (400,000) (50,000) 815,000 832,000 (195,000) ,187,000 2 ( 13,000) 2 .A n s .B . 3 .A n s .D. 4 .A n s .A . 5 .A n s .A . CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA CHAPTER 11-EXERCISE 8: ROXAS INC. 1. Ans. C. Depreciable cost, Old bulding Divide by: Total Useful Life DepreciationExpense,Oldbuilding Depreciable cost, Extension (Addition) Divideby:Remaininglife(20–5) Total Depreciation expense SOLUTIONS GUIDE 151 of 155 P3,000,000 20 * P150,000 P750,000 15 AccumulatedDepreciation,12/31/200 Divide by, Expired life as of 12/31/2010 (5 +2.5) Annual Depreciation Depreciablecost,Building Divideby:AnnualDepreciation Total useful life Unadjustednetincome a.SalaryAccruals:2011 Salaryaccruals,2012 Salaryaccruals,2013 Salary accruals, 2014 b. Inventory,12/13overstatement c.Inventory,12/14understatement Purchases,12/14understatement d. Prepaidinsurance: 2011 Prepaidinsurance,2012 Prepaidinsurance,2013 P repaid insurance, 2014 e. Interestreceivable: 2012 Interestreceivable,2013 Interest receivable, 2014 f. Gainonsaleofequipmentin2014,overstatement g. Capitalizablecostin2012 Understatement in depreciation 2012-2014 Adjusted Net Income 50,000 P200,000 P1,125,000 7.5 P150,000 P3,000,000 150,000 20 years 2012 P1,500,000 95,000 (110,000) * 2013 1,750,000 110,000 (100,000) (190,000) (75,000) 100,000 (100,000) 115,000 20,000 750,000 (25,000) P2 ,2 55 ,0 00 2 . A n s. C. (20,000) 25,000 2014 2,000,000 100,000 (140,000) 190,000 (150,000) 150,000 (115,000) 120,000 (25,000) 30,000 (160,000) (50,000) P1 ,5 40 ,0 00 3. An s. A. (50,000) P1 ,9 50 ,0 00 4 . A n s . D. CHAPTER 11-EXERCISE 9: GKNB CORP 2012 NET INCOME Unadjustedbalances a. U nderstatementofendinginventory,12/31/2013 Overstatementofendinginventory,12/31/2014 b.Overstatement in 2014 purchases c. Understatementofsales,2012 Understatementofsales,2013 Understatement of sales, 2014 d.U nderstatementof salaries expense,2012 Understatementofsalariesexpense,2013 e. 2013stockdividendchargetoexpense f.O verstatementinrentexpense,2013 Understatementinrentexpense,2014 g. Understatementingainonretirementofbonds(a) A d j u s te db a l a n c e s 381,000 2013 NET INCOME 450,000 42,000 12,000 -12,000 15,000 -30,000 30,000 -42,000 30,000 15,000 2014 NET INCOME 385,500 -42,000 -69,000 45,000 -15,000 10,500 42,000 -6,000 37,800 P 3 63 , 0 00 528,000 388,800 1 . An s . B. 2. An s . C . 3 . An s . B. (a) Gain on the retirement of bonds should be an outright income or loss. Total gain on retirement is (P360,000-P318,000), P42,000. The client recognized only 1/10 of the amount as an amortization over 10 years deducted from interest. Thus effectively, only 9/10 of the amount needs to be added to current net income. 4. Ans. A. Netincome,2012perbooks Netincome,2013perbooks Totalaccumulatedprofits,1/1/2014,perbooks Netincome,2012peraudit Netincome,2013peraudit Totalaccumulatedprofits,1/1/2014peraudit Understatementofaccumulatedprofits,1/1/2014 Correct appropriation of accum profits for share div in item e Net adjustment (increase/credit) 381,000 450,000 831,000 363,000 528,000 891,000 60,000 (39,000) 21,000 5. Ans. C. Entry made for item e: CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 152 of 155 Other expense Ordinary shares 30,000 30,000 Correct entry: Accumulatedprofits Ordinary shares Share premium 39,000 30,000 9,000 Adjusting entry: A c c u m u l a te dp r o f i t s S h a rper e m i u m 9,000 9,000 CHAPTER 11-EXERCISE 10: WWEE COMPANY 2013 net income Unadjustedbal. a. Policychange:Inventory2013 Inventory 2014 b.Overstatementindepnin2014(a) c. Errorcorrection–BorrowingCost A d j u s te db a l a n c e s 2014 net income RE,beg 2014 RE, end 2014 300,000 1,700,000 1,150,000 2,350,000 100,000 -100,000 100,000 90,000 90,000 10,000 10,000 25,000 75,000 25,000 100,000 P425,000 P 1 , 77 5 , 0 0 0 P 1 , 2 7 5 , 0 0 0 P 2 , 55 0 , 00 0 1. Ans. A. 2 . A n s. C. 3 . A n s . D. 4 . A n s. C. ( a)Depreciation per books (2014), Double Decl. Depreciation per audit, Straight line CV, 1/1/14: (P350,000/20%) P1,750,000 Less: Salvage (50,000) Depreciablecost P1,700,000 DivideBy:remaininglife 5yrs OverstatementinDepreciation P350,000 340,000 P10,000 5. Ans. C. CHAPTER 11-EXERCISE 11: KRIS COMPANY 1. Ans. A. Sales,accrualbasis 10,350,000 Add: Decrease in accounts receivable 540,000 Ca s h r e c e i v e d f r om c u s t o m e r s 1 0, 8 9 0, 0 0 0 2. Ans. C. Cost of sales Less:D ecreaseininventory Purchases,accrualbasis Add: D ecrease in accounts payable Ca s hp a i dt os u p p l i e r s 7,050,000 450,000 6,600,00 412,500 7, 0 1 2, 5 0 0 3. Ans. D. Totaloperatingexpense,accrualbasis Add:Increaseinprepaidexpense Decreaseinaccruedexpense Total Less: Depreciation expense (non-cash expense) Ca s h p a y m en t s f o r op er a t i n g ex p en s es 4. Ans. B. Cash received from customers Cashpaidtosuppliers Cash paid for operating expenses Cas h p ro vi d ed b y O p er atin g a ct i vi ties 1,725,000 255,000 150,000 2,130,000 90,000 2,040,000 10,890,000 (7,012,500) (2,040,000) 1,8 37,5 00 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 153 of 155 CHAPTER 11-EXERCISE 12: PROTER COMPANY 1. Ans. B. Excess of cash receipts over cash disbursements Adjustments: a)Depreciation b)Prepaidinsurance (5,400*2/3) c)Unearnedrentincome d) Salariespayable e)Interestreceivable f)Accruedaccountingfees A C C RU A L NE T I N C OM E 2. Ans. D. c)Unearnedrentincome d) Salaries payable f)Accruedaccountingfees TOTA LL I A BI LI TI E S 136,500 -31,500 3,600 -21,000 -8,400 9,510 -1,500 87,210, 21,000 8,400 1,500 30,900 CHAPTER 11-EXERCISE 13: UKG INC. 1. Ans. A. Beginningi nvty Purchases (sqz) Cost of sales COST OF SALES 186,000 348,000 174,000 Ending invty 360,000 ACCOUNTS PAYABLE 116,000 AP, beginning Pa y m ent s 2. Ans. C. AR, beginning Sales on account AR, ending balance 344,000 ACCOUNTS RECEIVABLE 96,000 600,000 586,000 Collections 110,000 3. Ans. A. Present value of principal (200,000*0.456387) Present value of interest, semiannual (10,000*13.59032) Amortization, June 30, 2014 (227,180*4%) – 10,000 Amortization, December 31, 2014 (226,267*4%) – 10,000 Carrying value, December 31, 2014 4. Ans. D. Effective interest as of 6/30/14 (227,180*4%) Effective interest 12/31/14 (226,267*4%) Total interest expense CHAPTER 11-EXERCISE 14: WOWIE CORP. 1. Ans. C. Cash collected from customers Add: AR,ending Deduct: AR, beginning S a l e sA c c r u a lb a s i s P91,277 135,903 P227,180 (913) (949) P225,318 9,087 9,051 P18,138 5. Ans. B. Unadjusted net income Overstatementinotherexpenses** Overstatement in interest expense (20,000 – 18,138) Correct net income Accrual basis Increaseinprepayments Cash basis 348,000 Purchases 120,000 AP, ending 25,000 2,000 1,862 P28,862 **Other Expenses 164,000 4,000 2,000 Increase in accrued utilities 166,000 10,000,000 4,000,000 6,400,000 7, 6 0 0, 0 0 0 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 154 of 155 2. Ans. A. Total payments to suppliers Deduct: payments to suppliers for 2013 invoices Balance: payments to suppliers for 2014 invoices Add:Accountspayable,endingbalance P u rc h a s es ,a c c r u a lb a s i s 3. Ans. B. Wages paid Add: Wages payable, ending balance Deduct: W ages payable, beginning bal. Wa g e s e x pe n se , a c c r u a l ba sis 4. Ans. B. Advertisingexpensespaid Add: Advertising supplies, beg bal. Accrued advertising, ending bal. Deduct: Ad vertising supplies, end. bal. Accrued advertising, beg. Bal. A dv e r ti s i n g e x pe n s e , a c c r u a l b a s i s 5. Ans. B. Insurancepremiumpaid Add:Prepaidinsurance,begbal. Less: Unexpired insurance, ending bal. I n s u r a n c e ex p en s e, a c c r u a l b a s i s 13,618,000 4,632,000 8,986,000 2,621,000 11,607,000 3,050,000 125,000 85,000 3, 0 9 0, 0 0 0 300,000 35,000 40,000 75,000 14,250 285,750 125,000 25,000 41,000 109,000 CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION 1. Ans. A. Cash sales Collections from accounts receivable Collections from trade notes receivable Add: Salesreturnsandallowances(norefund) IncreaseinAccountsreceivable Total Less:DecreaseinNotesreceivable Gross Sales Less:Salesreturns(total) Nesta l e sp, ea r u di t 3,000,000 30,000,000 2,400,000 35,400,000 800,000 1,400,000 37,600,000 (600,000) P37,000,000 (1,200,000) 35,800,000 2. Ans. C.; 3. Ans. B. Cash purchases 1,000,000 Paymentsofaccountspayable Add:Purchase returns and allowances (no refund) IncreaseinAccountspayable Gross Purchases Less:Purchasereturnsandallowances(total) Ne tp u r c h a s e sp , e ra u d i t Add: Decrease ininventory Co so tS f a l esp , er a u d it 4. Ans. C.; 5. Ans. A. Netsales,peraudit Less:CostofSales,peraudit Gross Profit Interest income Total Less: Expense nsurance I (700,000-200,000) Salaries(10,000,000-300,000) Deprec ia ti on (1 00 ,0 00 +800 ,0 00 ) Otherexpenses Nei n t c om e CHAPTER 11-EXERCISE 16: ALASKA INC. 1. Ans. D. Sales,accrualbasis2014 Add:Accounts receivable, beg. Less:Accounts receivable, end AR written-off during the year Ca s h c o l l e c t i o n s f ro m c u s t o m e r s 16,500,000 17,500,000 300,000 400,000 18,200,000 (800,000) 17,400,000 1,000,000 18,400,000 P35,800,000 (18,400,000) P17,400,000 200,000 P17,600,000 500,000 9,700,000 90 0, 00 0 1,500,000 (12,600,000) P 5 , 00 0 , 00 0 4,849,200 270,000 (297,000) (43,200) 4,779,000 CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY AUDITING (2016 EDITION) CTESPENILLA SOLUTIONS GUIDE 155 of 155 2. Ans. B. Cost of sales, accrual basis 2014 Add:Inventory,end Less:Inventory,beg Purchases, accrual basis 2014 Add:Accountspayable,beg. Less:Accountspayable,end Ca s h pa y m en t s to s u ppl i e rs 2,250,000 279,000 (423,000) 2,106,000 139,500 (225,000) 2,020,500 3. Ans. A. Interest expense, accrual basis 2014 Less: Amortization of bond discount Ca s h pa y m en t s f o r i n e te r es t 38,700 (4,500) 34 , 20 0 4. Ans. D. Selling expense, accrual basis 2014 1,273,500 Less: 1/3 of depreciation expense 13,500*1/3) ( Baddebtexpense Ca s h pa y m en t s f o r s e l l i n g e x pe n s e (4,500) (45,000) 1,224,000 CHAPTER 11-EXERCISE 17: ALAMAT COMPANY 1. Ans. B. Cash sales 4,400,000 Add: Accounts receivable, end 100,000 Total 4,500,000 Less: Advances from customers, end (25,000) Gr o s s /N e tS a l es 4,475,000 2. Ans. B.; 3. Ans. B. Cash purchases Add:Accountspayable,end Total Less: Purchase for president (adj to advances) Gr o s s /N e tP u rc h a s es Less:Inventory,end Co s to fS a l es ,p era u d i t 4. Ans. A. Netsales,per audit Less:CostofSales,peraudit Gross Profit Less: Expense Add: Accrued expense, end Deduct,supplies,end Prepaid insurance, end Equipment Depreciation(100,000/10)*6/12 Interest expense (100,000*12%*4/12) Nientc o m e 4,200,000 80,000 4,280,000 (10,000) 4,270,000 (500,000) 3,770,000 4,475,000 (3,770,000) 705,000 560,000 20,000 (5,000) (15,000) (100,000) (460,000) (5,000) (4,000) P 23 6 , 0 00 CHAPTER 11-EXERCISE 18: TITANIUM COMPANY Cash, Jan. 1 balance Collections from customers:' SalesonAccount 17,628,510 Less:AR,April16 (1,327,650) Salesallowances (54,990) Add: AR, Jan. 1 678,690 Payments of merchandise to suppliers: Merchandisepurchases 10,845,780 Less:AP,April16 (621,900) Add: AP, Jan. 1 344,160 (10,568,040) Purchaseoffurniture (9,000) Expensespaid (5,597,490) Cash dividends paid (120,000) To t a ld i s b u rs em en t s To t a la c c o u n t a b i l i t y Less: Cash in bank, net of outstanding check Cash shortage Less: Chargeable against the bank (for encashing the obviou Cas h s ho rta g e ch a rg ea b le ag ai ns t the ca sh ier 16,924,560 2. Ans. A. 1. Ans. C. ( 1 6 , 2 9 4 , 5 3 0 ) 3 .A n s .C . 7 28 , 0 4 0 4 .A n s .A . (296,490) 431,550 (300,000) 131, 55 0 5. An s . B. CHAPTER 11: ERROR CORRECTION; CASH/ACCRUAL AND SINGLE ENTRY