auditing problems notre dame

8/10/2019 Auditing Problems Notre Dame

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Accountancy DepartmentCollege of Business and Accountancy

Notre Dame UniversityCotabato City, Philippines

CPA MOCK BOARD EXAMINATION

AUDITING PROBLEMS MR. RONALD GERMO MAMARILINSTRUCTION: Select the correct answer for each of thefollowing questions. Mark only one answer for each item byshading the box corresponding to the letter of your choice onthe sheet provided. STRICLY NO ERASURES ALLOWED. Use pencil no.1 only.

CASE 1: STOCK INVESTMENT IN SAN MIGUEL

1. The Stock Investment showed the following details during year 2008

STOCK INVESTMENT IN SAN MIGUEL

Debit CreditJan. 1 Audited balance 4,000shares P80,000Feb. 28 Cash dividend 2,000Mar. 31 Bought shares 9,000Apr. 1 Sale of rights 6,000June 30 Sale of shares 10,000

1. A cash dividend of P0.50 per share were received on Feb. 28. Theadjusting entry (assuming the use of the cost method) is:

a. Stock Investment 2,000Dividend income 2,000

b. Retained earnings 2,000Dividend income 2,000

c. Dividend Income 2,000Stock investment 2,000

d. Cash 2,000Dividend income 2,000

2. On March 15, stock rights were received entitling shareholders topurchase one share for every five held at P15 per share. Market valueson this date were: shares, P20; rights, P5. The adjusting entry torecognize the cost allocated to the rights is:

a. Stock rights 16,000Stock investment 16,000

b. Stock rights 20,000Stock investment 20,000

c. Stock rights 10,000Stock investment 10,000

d. Stock rights 30,000Stock investment 30,000

3. On March 31, 600 shares were purchased with the partial exercise ofthese rights. The adjusting entry, after the adjustment in No. 7 abovehas been given effect, is

a. Stock investment 18,000Stock rights 18,000

b. Stock investment 12,000Stock rights 12,000

c. Stock rights 12,000Stock investment 12,000

d. Stock rights 15,000Stock investment 15,000


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4. On April 1, the remaining rights were sold for P6, 000. The adjustingentry is:

a. Stock investment 6,000Gain on sale of rights 6,000

b. Stock investment 6,000Stock rights 4,000Gain on sale of rights 2,000

c. Stock investment 4,000 Loss on sale of rights 2,000

Stock rights 6,000d. Stock investment 4,000

Gain on sale of rights 4,000

5. On June 30, 460 shares were sold for P10, 000. Using the average costmethod, the adjusting entry is:

a. Cash 10,000Stock investment 7,500Gain on sale of stock 2,500

b. Stock investment 10,000Gain on sale of stock 10,000

c. Stock investment 2,500Gain on sale of stock 2,500d. None of the above

CASE 2: HOME OFFICE AND ESPERANZA BRANCH

The following were found in your examination of the interplant accountsbetween the Home Office and Esperanza Branch.

a. Transfer of fixed assets from Home Office amounting to P53, 960 was notbooked by the branch.

b. P10,000 covering marketing expenses of another branch was charged byHome Office to Esperanza.

c. Esperanza recorded a debit note on inventory transfers from Home Officeof P75,000 twice.

d. Home Office recorded cash transfer of P65,700 from Esperanza Branch ascoming from Upi Branch.

e. Esperanza reversed a previous debit memo from Cotabato Branch mountingto P10,500. Home Office debited that this charge is appropriately UpiBranchs cost.

f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650.

6. The net adjustment in the Home Office books related to the EsperanzaBranch current amount is:

a. P75,700b. 65,700c. 86,200d. 94,820

7. The net adjustment in Esperanzas books related to the Home Officeaccount is:

a. P33,335b. 31,450c. 20,950d. 10,450

8. Before the above discrepancies were given effect, the balance in theHome Office books of its Esperanza Branch Current account was debitbalance of P165, 920. The unadjusted balance in the Esperanza Branchbooks of its Home Office Current account must be:

a. P92,336b. 98,230c. 104,500d. 111,170

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9. The adjusted balance of the reciprocal account is:

a. P84, 807b. 90, 220c. 99, 200d. 109, 120

CASE 3: LEILA MAES FLOWER SHOP (ACCRUAL)

The following information pertains to Leila Mas Flower Shop, acalendar-year sole proprietorship, which maintained its books on the cashbasis during the year.

Leila Mas Flower ShopTRIAL BALANCE

December 31, 2008

Debit CreditCash P 102, 400Accounts receivable 64, 800

Inventory, 12/31/2007 248, 000Furniture & fixtures 472, 800Land improvements 180, 000Accumulated depreciation, 12/31/2007 P129, 600Accounts payable, 12/31/2007 68, 000Leila Maes, DrawingsLeila Maes, Capital, 12/31/2007 498, 400Sales 2, 612, 000Purchases 1, 220, 400Salaries 696, 000Payroll taxes 49, 600Insurance 34, 800Rent 136, 800Utilities 50, 400Living expenses 52, 000

P3, 308, 000 P3, 309, 000

Leila Maes has developed plans to extend into wholesale flower marketand is in the process of negotiating a bank loan to finance the expansion.The bank is requesting 2008 financial statements prepared on the accrualbasis of accounting from Leila Maes. During the course of a reviewengagement, Marion, Leila Maes accountant, obtained the following additionalinformation.

1. Amounts due from customers totaled P128, 000 at December 31, 2008.

2. An analysis of the above receivables revealed that an allowance foruncollectible accounts of P15, 200 should be provided.

3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, atDecember 31, 2008, and December 31, 2007, respectively.

4. The inventory totaled P291, 200 based on a physical count of thegoods at December 31, 2008. The inventory was priced at cost, whichapproximates market value.

5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensiveinsurance coverage for 1 year. The premium on the previous policy,which expired on April 30, 2008, was P31, 200.

6. On January 2, 2008, Leila Mae entered into 25-year operating leasefor the vacant lot adjacent to Barons retail store for use as aparking lot. As agreed in the lease, Leila Mae paved and fenced inthe lot at a cost P180, 000. The improvements were completed on April1, 2008, and have an estimated useful life of 15 years. No provisionfor depreciation or amortization has been recorded. Depreciation onfurniture and fixtures was P48, 000 for 2008.

7. Accrued expenses at December 31, 2007 and 2008, were as follows:

2 0 0 0 2 0 0 1Utilities P3, 600 P 6, 000Payroll taxes 4, 400 6, 400

P8, 000 P12, 400 page 3


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8.Leila Mae is being sued for P16, 000. The coverage under thecomprehensive insurance policy is limited to P1, 000, 000. Leila Maesattorney believes that an unfavorable outcome is probable and that areasonable estimate of the settlement is P1, 200, 000.

9.The salaries account includes P16, 000 per month paid to theproprietor. Leila Mae also receives P1, 000 per week for livingexpenses.

Required: You are to convert the balances of the nine (9) accounts below tothe accrual basis.

MULTIPLE CHOICE QUESTIONS:

a b c d

10. Accounts receivableP64, 800 P63, 200 P128, 000 P192, 80011. Inventory 291, 200 248, 000 43, 200 334, 40012. Accounts payable 54, 000 68, 000 122, 000 176, 00013. Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 20014. Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 00015. Salaries 888, 000 696, 000 600, 000 504, 00016. Payroll taxes 51, 600 47, 600 49, 600 50, 000

17. Insurance 34, 800 33, 600 36, 000 35, 00018. Utilities 50, 400 48, 000 50, 000 52, 800

CASE 4: J& M CO. (BONDS)

The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5,747, 280 plus accrued interest. The bonds were dated July 1, 2001; interestpayable semiannually on January 1 and July 1; redeemable after June 30, 2006to June 30, 2007, at 101, and thereafter until maturity at 100; andconvertible into P10 par value common stock as follows.

Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond. From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each

P1, 000 bond. After June 30, 2009, at the rate of 4 shares for each P1, 000 bond.

The bonds mature 10 years from their issue date. The company adjustsits books monthly and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds:2007July 1 P2, 000, 000 of bonds were converted into stock.

2008Dec. 31 P1, 000, 000 face value of bonds were reacquired

at 99-1/4 plus accrued interest. These were

immediately retired.

2009July 1 The remaining bonds were called for redemption

and accrued interest was paid. For purposes of obtaining funds for redemptionand business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97.These bonds are dated July 1, 2009, and are due in 20 years.

19. What are the carrying value of bonds payable at December 31, 2001?

a. P5, 747, 280 c. P5, 753, 760b. P6, 000, 000 d. P5, 749, 440

20. What is the total interest expense for 2001?

a. P128, 520 c. P141, 480b. P 47, 160 d. P135, 000

21. In recording the bond conversion on July 1, 200, how much should becredited to the additional paid-in capital account?

a. P1, 796, 320 c. P1, 845, 440b. P1, 965, 440 d. P1, 865, 440

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22. What is the gain or loss on bond conversion on July 1, 2007?

a. P0 c. P1, 865, 440b. P1, 796, 320 d. P 34, 560

23. What is the carrying value of the bonds reacquired on December 31, 2008?

a. P989, 200 c. P1, 010, 800b. P957, 880 d. P 981, 700

24. What is the gain (loss) on bond reacquisition on December 31, 2008?

a. P3, 300 c. P34, 620b. (P3, 300) d. P (P34, 620)

25. What is the carrying value of the bonds retired on July 1, 2009?

a. P3, 000, 000 c. P2, 873, 640b. P2, 974, 080 d. P3, 025, 920

26. What is the gain (loss) on bond retirement on July1, 2009?

a. (P25, 920) c. (P12, 960)

b. P25, 920 d. P0

CASE 5: BLUE ICE CO. (R/E)

BLUE ICE COMPANYS stockholders equity account balance at December 31,2008 were as follows:

Common Stock 800, 000Additional Paid-in capital 1, 600, 000Retained Earnings 1, 845, 000

The following 2009 transactions and other information relate to thestockholders equity accounts:

a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, ofwhich 160, 000 shares were issued and outstanding.

b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stockfor P10 per share to hold as treasury stock. The shares were originallyissued at P15 per share. BLUE ICE uses the cost method to account fortreasury stock. Treasury stock is permitted in BLUE ICEs state ofincorporation.

c. On July 15, 2009, BLUE ICE declared and distributed a property dividendof inventory. The inventory had a P75, 000 carrying value and a P60,000 fair market value.

d. On January 2, 2009, BLUE ICE granted stock options to employees to

purchase 20, 000 share of BLUE ICEs common stock at P18 per share,which was the market on that date. The option may be exercised all 20,000 options when the market value of the stock was P25 per share. BLUEICE issued new shares to settle the transaction.

e. BLUE ICEs net income for 2009 was P240, 000.

Instruction: Based on the information above and other analysis asnecessary, answer the following question.

27. BLUE ICEs Common Stock balance at December 31, 2009 is;

a. P1, 160, 000 c. P800, 000b. P900, 000 d. P1, 300, 000

28. BLUE ICEs Additional Paid-in capital balance at December 31, 2009 is;

a. P1, 860, 000 c. P2, 000, 000b. P1, 960, 000 d. P2, 100, 000

29. BLUE ICEs Retained Earnings balance at December 31, 2009 is;

a. P2, 085, 000 c. P2, 025, 000b. P2, 010, 000 d. P1, 770, 000

30. BLUE ICEs Treasury Stock balance at December 31, 2009 is;

a. P50, 000 c. P0b. P75, 000 d. P125, 000

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31. BLUE ICEs Stockholders Equity balance at December 31, 2009 is;

a. P4, 910, 000 c. P4, 720, 000b. P4, 820, 000 d. P4, 735, 000

CASE 6: LETICIAS CO. (PPE)

Information pertaining to LETICIA COMPANYS property, plant andequipment for 2009 is presented below.

Account balances at January 1, 2009:

Debit CreditLand 6, 000, 000Buildings 48, 000, 000Accum. Depreciation Bldg. 10, 524, 000Machinery and equipment 36, 000, 000Accum. Depreciation Mach/Equip. 10, 000, 000Automotive equipment 4, 600, 000Accum. Depreciation Auto. Equip. 3, 384, 000

Depreciation data:Depreciation Useful

Method LifeBuilding 150% declining balance 25 yearsMachinery/Equip. SLM 10 yearsAutomotive Equip. SYD 4 yearsLeasehold improvements SLM -

Depreciation is computed to the nearest month.

Transactions during 2009 and other information are as follows:

On January 2, 2009, LETICIA purchased a new car for P800, 000 cash andtrade-in of a 2-year-old car with a cost of P720, 000 and a book value ofP216, 000. The new car has a cash price of P960, 000; market value of thetrade-in is not known. On May 1, 2009, costs of P6, 720, 000 were incurred to improve leasedoffice premises. The leasehold improvements have a useful life of 8 years.The related lease terminates on December 31, 2008. On July 1, 2009, machinery and equipment were purchased at a total invoicecost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000,000 for installation were incurred. LETICIA determined that the automotive equipment comprising the P4, 600,000 balance at January 1, 2009, would have been depreciated at a total amountof P720, 000 for the year ended December 31, 2009.

Instruction: Based on the information above and other analysis asnecessary, answer the following question:

32. What is the depreciation on building for 2009?

a. P1, 499, 040 c. P2, 998, 080b. P2, 880, 000 d. P2, 248, 557

33. What is the book value of the building at December 31, 2009?

a. P34, 596, 000 c. P34, 477, 920b. P35, 976, 960 d. P35, 227, 393

34. What is the depreciation on machinery and equipment for 2009?

a. P4, 128, 000 c. P4, 220, 000b. P4, 151, 000 d. P4, 197, 000

35. What is the gain on machine destroyed by fire?

a. P620, 000 c. P160, 000b. P300, 000 d. P460, 000

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36. What is the balance of the accumulated depreciation machinery andequipment at December 31, 2009?

a. P13, 231, 000 c. P13, 760, 000b. P13, 777, 000 d. P13, 691, 000

37. What is the depreciation on automotive equipment for 2009?

a. P1, 104, 000 c. P720, 000b. P816, 000 d. P960, 000

38. What is the gain (loss) on car traded in?

a. P (240, 000) c. P (56, 000)b. P240, 000 d. P56, 000

39. What is the depreciation on leasehold improvement for 2009?

a. P756, 000 c. P560, 000b. P672, 000 d. P630, 000

40. What is the book value of leasehold improvements at December 31, 2009?

a. P6, 160, 000 c. P6, 090, 000b. P6, 048, 000 d. P5, 964, 000

CASE 7: ST. JOHN AND ST. THERESE

Financial Statements for St. John and St. Therese on December 31, 2009follows:Income Statements for the year ended 12/31/02

St. John St. Therese

Sales 750, 000 420, 000Cost of sales 581, 000 266, 000Gross Margin 169, 000 154, 000Depreciation and interest expense 28, 400 16, 200Other operating expenses 117, 000 128, 400Net income from operations 23, 600 9, 400Gain on sale of equipment 3, 000Gain on bondsEquity in subsidiarys income 8, 460 .Net income 35, 060 9, 400

======== ========Statement of Retained Earnings for the year ended 12/31/02

01/01/02 Retained Earnings 48, 000 41, 000

Net Income (from above) 35, 060 9, 400Total 83, 060 50, 400Dividends (15, 000) (4, 000)12/31/02 Balance 68, 060 46, 400

========= ========

Balance Sheet as of December 31, 2009

Cash 45, 300 6, 400Accounts receivable (net) 43, 700 12, 100Inventories 38, 300 20, 750Equipment 195, 000 57, 000Accumulated depreciation (35, 200) (18, 900)Investment in stock of St. John 125, 460Investment in bonds of St. Therese 44, 000Patents . 9, 000

412, 560 130, 350========= ========

Accounts payable 8, 900 18, 950Bonds payable 100, 000Capital Stock 154, 000 50, 000Additional paid-capital 81, 600 15, 000Retained earnings (from above) 68, 060 46, 400

412, 560 130, 350======== =========

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St. John acquired 90% of the common stock of St. Therese for P120, 600 onJanuary 1, 2009.

The following additional information is available in the first year after theacquisition.

1. During 2009, St. John sold merchandise to St. Therese that originally costSt. John P15, 000, and the sale was made for P20, 000. On December 31, 2008,St. Thereses inventory included merchandise purchased from St. John at acost to St. Therese of P12, 000.

2. Also, during 2009, St. John acquired P18, 000 of merchandise from St.Therese. St. Therese uses normal markup of 25% above cost. St. Johns endinginventory includes P10, 000 of the merchandise acquired from St. Therese.

3. St. Therese reduced its intercompany account payable to St. John to abalance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 onDecember 30. This P1, 000 payment was still in transit on December 31, 2009.

4. On January 2, 2009, St. Therese acquired equipment from St. John for P7,000. The equipment was originally purchased by St. John for P5, 000 and had abook value of P4, 000 at the date of sale to ST. Therese. The equipment hadan estimated remaining life of 4 years as of January 2, 2009.

5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of theoutstanding bonds issued by St. John. The bonds mature on December 31,2005, and were originally issued at par. The bonds pay interest annually onDecember 31 of each year, and the interest was paid to the prior investorimmediately before St. Thereses purchase of bonds.

QUESTION:

Assume that the combination is accounted for as PURCHASE.

41. What is the eliminating entry for the Equity in subsidiarys income anddividends declared by the subsidiary?

a. Equity in subsidiarys income 8, 460Investment in stock of St. Therese 8, 460

b. Equity in subsidiarys income 8, 460Dividends declared St. Therese 3, 600Investment in stock of St. Therese 4, 860

c. Equity in subsidiarys income 12, 060Investment in stock of St. Therese 12, 060

d. No Eliminating Entry

42. What is the eliminating entry for St. Thereses stockholders equity?a. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Goodwill 25, 200

Investment in stock of St. Therese 120, 600b. Capital; stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900

Investment in stock of St. Therese 95, 400c. Capital stock St. Therese 50, 000 Additional paid-in capital 15, 000 Retained earnings St. Therese 46, 400 Goodwill 14, 060

Investment in stock of St. Therese 125, 460d. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400

Investment in stock of St. Therese 111, 400

43. To eliminate the sales made by St. John to St. Therese, the entry is:

a. Sales 20, 000 Inventory St. Therese (B/S) 3, 000

Purchases 20, 000Inventory St. Therese (I/S) 3, 000

b. Sales 20, 000Cost of sales 17, 000Inventory St. Therese 3, 000

c. Sales 20, 000 Inventory St. Therese 3, 000

Cost of sales 23, 000

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d. Retained Earnings 3, 000 Sales 20, 000

Inventory St. Therese 3, 000Cost of sales 20, 000

44. To eliminate the entry made by St. Therese to St. John, the entry is:(assume that Equity in subsidiary income has not been recorded by parent)

a. Sales 18, 000Inventory 2, 000Cost of sales 16, 000

b. Sales 18, 000 Investment in stock of St. Therese 1, 600 Retained earnings St. Therese 400

Cost of sales 18, 000Inventory 2, 000

c. Sales 18, 000 Retained earnings 2, 000

Cost of sales 18, 000Inventory 2, 000

d. Sales 18, 000 Inventory 2, 000

Cost of sales 20, 000

45. To record the items in transit and to eliminate the inter-companyspayable/receivable, the entry is:a. Accounts payable 4, 000

Accounts receivable 4, 000b. Accounts receivable 4, 000 Cash 1, 000

Accounts payable 5, 000c. Cash 1, 000 Accounts payable 3, 000

Accounts receivable 4, 000d. Cash 1, 000 Accounts payable 4, 000

Accounts receivable 5, 000

46. To eliminate the acquisition made by St. Therese from St. John, the entryis:

a. Equipment 2, 000 Accumulate depreciation 1, 000

Gain on sale of equipment 3, 000b. Gain on sales of equipment 3, 000

Equipment 2, 000Accumulated depreciation 250Depreciation expense 750

c. Gain on sale of equipment 3, 000Equipment 2, 000Accumulated depreciation 1, 000

d. Gain on sale of equipment 3, 000

Equipment 2, 000Depreciation expense 1, 000

47. The depreciation recorded by St. John at December 31, 2009 is:a. Overstated by P750 c. Overstated by P1, 750b. Overstated by P250 d. Understated by P1, 000

48. The entry to eliminate the bonds purchased by St. Therese from St. Johnis:

a. Bonds payable 50, 000Investment in bonds of St. John 44, 000Gain on extinguishments of debt 6, 000

b. Investment of St. John 44, 000 Loss on extinguishments of debt 6, 000

Bonds payable 50, 000c. Bonds payable 44, 000

Investment in bonds of St. John 44, 000Retained earnings 6, 000

d. Bonds payable 50, 000Investment in bonds of St. John 44, 000Retained earnings 6, 000

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For items 49-50, assume that the combination is accounted for as POOLING OFINTEREST.

49. What is the eliminating entry for the Equity in subsidiarys income anddividends declared by the subsidiary?

a. Equity in subsidiarys income 8, 460Investment in stock of St. Therese 8, 460

b. Equity in subsidiarys income 8, 460Dividends declared St. Therese 3, 600Investment in stock of St. Therese 4, 860

c. Equity in subsidiarys income 12, 060Investment in stock of St. Therese 12, 060

e. No eliminating Entry

50. What is the eliminating entry for St. Thereses stockholders equity?a. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Goodwill 25, 200

Investment in stock of St. Therese 120, 600b. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500

Retained earnings St. Therese 36, 900 Investment in stock of St. Therese 95, 400c. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400 Goodwill 14, 060

Investment in stock of St. Therese 125, 460d. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400

Investment in stock of St. Therese 111, 400

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