Advanced Auditing 2016 Solution Guide

!! AUDITING 2016 EDITION SOLUTION GUIDE ! ! ! ! ! ! ! ! ! ! ! ! CHRISTOPHER T. ESPENILLA, CPA MBA FACULTY – SAINT LOUIS UNIVERSITY, BAGUIO CITY REVIEWER – REVIEW SCHOOL OF ACCOUNTANCY, MANILA ! AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 1 of 155 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 1 C 11 E 21 B 2 D 12 B 22 A 3 C 13 D 23 C 4 C 14 C 24 B 5 A 15 C 25 C 6 D 16 C 26 A 7 C 17 C 8 D 18 D 9 D 19 D 10 A 20 A 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 AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 2 of 155 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 10 C 30 B 11 A 31 D 12 B 32 A 13 B 33 A 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 000 Compensating balance . Ans. Ans.000 Petty cash fund 18.946.500 Bills and coins 7.250. P7.000.000 Adjusted current account at Metrobank 3.500 6.Adjusted to AR-nontrade (80.000 Post-dated disbursement check . Ans.000 Debt and equity securities . P3.000 Adjusted savings account at Rural Bank 2.250.750.000 Interest and dividend fund 120.500 Travel fund 50.adjusted to AP 75.000 Payroll fund 400.000 Debt security investment due 3/31/15 purchased 12/31/14 600.000 Preference shares redeemable on 2/28/15 purchased 12/1/14 300. 4.000 3.adjusted to AR (125.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 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 C 17 B 18 D 19 D 20 B 21 C 22 D 23 C 24 D 25 B AP02-PROBLEM 2: MAPERA CORPORATION 1.000 2.Adjusted to AR (155.500 Adjusted cash fund .000 Adjusted undeposited collections 738. P2. Ans. Ans. Ans.000 8.000 Current account at Metrobank 3.Cash and cash equivalent 613.legally restricted (500. P613.Cash and cash equivalent 900.000 Change fund 25.500 7.000) Customer DAUD check .000) Officer's NSF check . Undeposited collections. Zero The bank overdraft balance with BDO shall be presented as a current liability since there is no right of offset. adjusted balance 7.adjusted to AP 120.000 Cash and cash equivalents.445.000 5.500 Debt and equity securities .278. Ans.000 Undelivered disbursement check .000 Replenishment check 11.250. P900.000 Adjusted cash fund .000) Adjusted undeposited collections 738.500 Adjusted petty cash fund as of 12/31/14 18. that is the company has no bank account with BDO.000 Customer stale check .445.500 Adjusted current account at Metrobank 3.000 Savings account at Rural Bank 2.Cash and cash equivalent 900. P18. unadjusted balance 1.000) Customer post-dated check .500 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS . P738.946.000) Adjusted savings account at Rural Bank 2.445.adjusted to AR (180.250. Ans.Cash and cash equivalent 613. 000 Bond sinking fund .000 Adjusted petty cash fund 25.000 30.000 Ordinary shares .900 1. Petty cash fund.000 Return of an expense advance (a) 900 Total Accountability 40. Valid supporting items: Bills and coins 13.000 Petty cash fund shortage .adjusted to AP 120.700. (a) Should be subsequently deposited to the bank.700) AJE 2.100 Petty cash fund shortage 10.800 Petty cash fund 10.000 CHAPTER 2-PROBLEM 3: MANNY CO.000 *classified as short-term investment Ordinary shares .compensating balance . Ans.Adjusted to Other assets 150.800) Adjusted petty cash fund 25.AR-nontrade 30.500 3.marked NSF 1.000 Petty cash fund 1.000 Pension fund .adjusted to AR 125.000 Undelivered disbursement check . 3 Receivable from employee 10. imprest balance 40.Bank overdraft 240.000 Rural bank .000 Credit memo for a purchase return .Available-for-sale security/FA at FMV through OCI/L 300. amusement and representation expense 900 Due to employees 1. (a) Should be subsequently deposited to the bank. Ans.000 Accomodated check 12/30 2.Adjusted to AR-custodian 1. 2014 Bills and coins 13. (1. Ans. 4.800 2.500 *alternatively.000 11.000 Petty cash fund 2. Ans.Adjusted to AR 155.874. P495.Trading securities/FA at FMV through P&L 400.000 Post-dated disbursement check .AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 4 of 155 9.000 Non-current assets 1.000 Current assets (other than cash and cash equivalents) 1. P1.adjusted to AP 75.Office supplies 3.700 Accomodated checks Dated 12/30 2.Adjusted to Long-term Investment 500. (10.000 Replenishment check 10.000 Replenishment check 10.874.800 To record petty cash fund shortage. P1.500 10.000 To record NSF accomodated check. Ans.000 Dated 11/30 .Adjusted to Other assets 500.000 Cash in closed bank at recoverable value .700 To record unreplenished paid vouchers.000 IOU from a key officer .000 Officer's NSF check . Imprest balance 40. 2 Receivable from employee 1. Accountability: Petty Cash Fund.Adjusted to AR-nontrade 80. this can be charged to other expense Postage stamps .500 Customer stale check .000 Investment in debt security due 1/31/15 purchased 1/1/14 900.400 Unreplenished paid vouchers 3. Ans.adjusted to AP 60.700.000) AJE 3.adjusted to AR 180.000 Customer DAUD check .000 AJE 1. Adjusting entries: 1 Transportation expense 500 Repairs and maintenance expense 300 Entertainment.400 Return of excess travel expense advance (a) (900) Unreplenished paid voucher dated 1/2 1.Adjusted to Long-term Investment 250.000 Customer post-dated check .000 Current account at BDO . Cash items as of December 31. (2.500 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS .000 Current liabilities 495. ) 103.900 Unused postage (adjusted to supplies) 110 Vouchers paid out of receipt (adjusted to expense) 1.500) September bank charge error (corrected in October) (1.975 125.200 Accomodated checks (whether depositable or not) 12/30 D.350 10/3/14 .500 4. 2.250) (1.170 1. Ans.L. Ans. excluding missapprop. imprest balance 10.750) Cash shortage (1. 10. CHAPTER 2-PROBLEM 6: DATUNG MANUFACTURING CO. Reyes 1.190 Valid supporting items: Currency and coins 12.250) Unrecorded Bank Debits: Bank Service Charge Correct cash in bank balance (2. 31 only.960 10/4/14 . (c) Receivable from employee 2. Employee 312 Unreplenished Vouchers 850 Employee IOU's 700 11. Imprest balance 10.608 Petty Cash fund 2. 31 5.770 8.220 1/2 Junior..650 Undeposited collections as of October 11 18. Bank Reconciliation Statement 10/31/2014 BANK BOOK Unadjusted Balance. Vice President 1. Customer 1.840 Total bank credits. ) 103. (b) Receivable from employee 700 Petty Cash fund 700 To record employee .608 To record the petty cash fund shortage.La.500 19.630 CHAPTER 2-PROBLEM 5: BETTY CO.945 Correct cash balance CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS . Ans.300) Unrecorded Bank Debits: NSF Check Bank error (unrecorded bank charge) (1.000 AJE (a) (730) AJE (b) (700) AJE (c) (2. 10/1-10/11 (per bank statement) 16.400) 10. Customer 1.310 Customer collection checks 9/30/14 .820 Overage 1. AJEs to the Petty Cash Fund: (a) Expenses 730 Petty Cash Fund 730 To record unreplenished expense vouchers as of Dec. Adjusted Petty Cash Fund as of Dec. Rarr.550 September deposit in transit (4. Ans.695 Adjusted balance per books (25.670 Customer collection checks (depositable only) 2. per Bank Statement 144. Dong.630 Accountability: Total collections. P1. Ans. 1.Baguio Corp. Ans.562 Petty Cash Shortage 2.608 2.590 5.000 Undeposited collections Cash collections (per cash sales invoices) 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 5 of 155 CHAPTER 2-PROBLEM 4: MAKWARTA COMPANY Ans. 10/1-10/11 (per OR) 28. Valid supporting items Currencies and coins 5.962 4.000 Unrecorded Bank Credits Oustanding checks (50.980 Customer collection checks (depositable only) 12/30 Errol Corp.945 129.608) (4. Accountability Petty cash fund.550) (2.038) 3.300 1/2 R.170 Total Accountability 14.245 Unadjusted Balance per Books Undeposited collections. Union Corp. 000) 675.000 Shortage/Overage - CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS . No shortage.500 Book errors (audit note a.253.000 January deposits from January collections Januray bank credits 143.020.895 Correction of Dec.600 2.600 Correct cash balance 729.000 (220.250 CHAPTER 2-PROBLEM 7: JADE CORPORATION Bank Reconciliation 12/31/2014 BANK BOOK Unadjusted balance 792.000 1.000 250.500 Unrecorded credit as of 12/31 (20. Ans.000) Unrecorded bank debits: BSC. bank charge error (2.000 1. 2.300 (c) Bank service charge/Other expenses 1.600 Unrecorded bank credit: May 600.125 Expense vouchers 1.840) 213.317.615.145 Cash on hand 10. May 480.Aug (120.760 2.000 2.000) 3. Proof of Cash Augsut 31: Receipt Disbursement September 30: Unadjusted balances.645 4. 2015 81. Ans.000 1.000) (100.600 Unadjusted balance Deposit in transit 10. June 9.020. Bank error . May 31.000 Undeposited collections .Sept /Correction .000 (450. June (SQUEEZE) 5. per book 640.760) Bank error.818. 15.745. Ans.000 240.536.Sept 220.000 1.Sept 250.745.000) 675.000) Book errors in Janaury (audit note b and c) 19.000 (80.000 (240. Unadjusted balances per bank statement 1. May Overstated disbursement 240.060 773.040) Shortage (3. Ans.975) (5. Ans.108.000) Outstanding checks. 15 37.000) (80.Jan.460) 2. 6.000) Bank error.093.000 785. May (7.093.Aug 200.000 1.000 (b) Accounts receivables 2.000 (144.600 Outstanding checks.840 Adjusted balances 1.200) (7.000 805.000 805. 2 . Ans. Ans.Aug (80. Ans.000) (720.000 1. ) 729.000 1. Unadjusted balances per book (1.040 Total cash shortage as of Jan.100 (44.913.Sept (100.000 635. CHAPTER 2-PROBLEM 8: PIRA CO.000 Accounts receivables 8.600 (9. per bank 485.000 Unrecorded credit Outstanding check (75. Outstanding checks . 31 44.500 20.443. deposit in transit (10. Ans.600 2.000 1.250 Cash in bank 1.605 Add: Cash shortage as of Dec.955.000 1.000 2.Aug 450.Sept 240. ) 729.800.615. May (1.000) (45.317.000) Book error.000) Unrecorded credit . 6/30/2014 May 31.253. Ans.Aug (180. Ans.795.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 6 of 155 3 Adjusting Entries: (a) Cash in bank 8.760 (2. June Overstated disbursement (213.000) Unrecorded debit .000) Outstanding checks . Accountability as of January 15 180.600 2.200 4.285 726.000) Undeposited collections .375.000 3.Sept 80.655.171. Receipt Disbursement June 30. June Overstated collection (720.000 Unrecorded credit . May Overstated disbursement 405.000 (200.600) Unrecorded bank debits: NSF Check June 144.060 Adjusted balance Unadjusted balance per books 726.171. Ans.000 Unrecorded debit .000 (600.836.000 3.840 3.375. 1.000 1. Proof of Cash.000 3. June (SQUEEZE) 4.500 Adjusted accountability 180.000 (480.000) Book Error . Receipt Disbursement June 30.000 Deposit in transit.200 2.200) Unrecorded bank debits: BSC.000 (405.840 2. ) 538.250 31.224.760 2. Ans.300 Cash in bank 2.000) Adjusted balances 1.000) (180.000) Unrecorded debit Bank error 2.000) (120.000) Book error.Aug (45.125 Cash shortage from Jan.496.600 1.536.060 Net adjustement to cash (12/31) (2.000) Deposit in transit. CHAPTER 2-PROBLEM 9: KRAME INC. Ans.) Correct cash balance (1.000) (1. 4.000) Book Error .250) Dec.500) 131. June 30: Receipt Disbursement July 31: Unadjusted balances. 000 Petty cash fund. 3. April (excluding certified check) 1. Ans.000 *prepaid expense Employee’s post dated check 12. returned in April recorded in April 1.510 216.000 4.775 32.945 221. April Understated disbursement 360 (360) Adjusted balances 27.040 NSF check.800) 4.120 Outstanding checks. CHAPTER 2-EXERCISE 3: UHAWSAIYO COMPANY Accountability: Petty cash fund. Liever 5. NSF customer collection check (1.500.120 10.000 *LT fund investment 8.675) Outstanding checks.000 1.945 221.000 3.640 Unrecorded bank debits: NSF check.060) Undeposited receipts.055 22.000) *classifed as LT Fund Investment Adjusted cash balance .000.707 145.500) 5. January 5 collection recorded in December (15.040 Undeposited receipts.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 7 of 155 CHAPTER 2-PROBLEM 10: MANGO COMPANY Proof of Cash.000 *other receivables IOU from a key officer 30. March (2.000) 2.000 Current account at Equitable PCI Bank (300. 2.000 150.000 10. 4/30/2014 March 31.000.744 Other collections: Return of expense advance 260 Other collections: Contribution for Christmas Party 9. March 9. Receipt Disbursement April 30. due 1/31/15 (purchased 1/1/14) 900. April Overstated disbursement (950) 950 Adjusted balances 27.430 (1.000 Treasury bills.503 1.150) Unrecorded bank credit: April 11.450 218. Eyes 12.545 222. 2. Unadjusted balances per book 16.000 *accounts receivable Money orders 90. Camp (return of expense advance) 260 Expense vouchers and IOUs 6.680 March 31.000 12.000 6.210) (1.current asset 50. Cash fund for non-current purpose (40. B.640 11.150 (12.174 Customer collection checks 12/30 T.000 *other receivables Credit memo from a vendor for a purchase return 60.707 12/21 F.190 216. 4.C. imprest balance 15.000 Foreign bank account – restricted (in USD) ** 60.000) *no right of off-set. Ans . CHAPTER 2-EXERCISE 2: BIG BROTHER CORP. Ans. Ans.362.350 Accomodated check 310 12/29 O.500 Official receipts 39.000 1.537 Customer collection check.920 12/26 R.000. Ans.500.000 *current investment Change fund 10.430) Bank error.000 1.040 1. currencies only 12.675) (2.000.505 1/2 O. April 10.060 (9.000 Undeposited collections Cash sales invoices (17903-18112) 100. MULTIPLE CHOICE EXERCISES CHAPTER 2-EXERCISE 1: ILANG-ILANG COMPANY Unadjusted cash balance 105. Ans.000 Bond sinking fund 1.970 23. B. Ans.600 Ans.000 *debited to accounts payable Traveler’s check 150.000 Treasury bills.000.000 Customer’s not-sufficient-funds check 45. classified as current liability Payroll account 1.000. Unadjusted balances per bank statement 21. returned in April not yet recorded 860 (860) Unrecorded bank debits: BSC. March (750) (750) Unrecorded bank debits: BSC. Undelivered check disbursements 9. Otis 11. Rancisco 13.000 600. due 3/31/15 (purchased 12/31/14) 600.001 Petty cash shortage 14. B.775 32.000 *Other Asset at current exchang price Postage stamps 3.680 1. Receipt Disbursement April 30.560 220.680 Book receipts used to pay creditors in cash (1.504 Valid supporting items: Bills and coins 105. Post-dated customer collection check (7.600 1. not yet included 5.510 216.210) Unrecorded bank credit: March 12.000 90.500 Total Accountability 170. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS . Cash & Cash Noncurrent Equivalent Asset Current account at Bank of the Philippine Islands 6. April 420 (420) Bank error.775 156.300 3. 2014 since the disbursement was made only on 1/2.150 Unadjusted balance per books (700) Shortage 1. thus the same was not included among the adjustments to petty cash as of December 31. Should it be recorded as part of the cash of the company. and since it is still in check the same was also part of the valid supporting items.503) (14.200 (70.700 3. Ans. ans.000 (18.450 CHAPTER 2-EXERCISE 5: HOME CORP.202) 102. deposit in transit (21.000 Adjusted accountability 360.174 Customer collection checks 43.950) (10. C ) 1. (b) Receivable from employee 14. 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 back to the general cash of the company.422. adjusted balance 47 3.000 200. belonging to the Petty Cash 12 Vouchers paid after December 31: 1/2/15. PNR 35 Petty cash fund as of December 31.210) Cash on hand as of January 5. Undeposited collections (as being reported) 3. imprest balance 15. Ans. Ans.000 150 Unrecorded bank credit Outstanding checks (as per complete list) (850) Correct cash balance per audit (4. As an additional audit procedure.953) 2.482 Accomodated check 310 Return of expense advance check 260 149.239.g. AJEs: (a) Office supplies expense (150-80) 70 Unused office supplies 80 Receivable from employee 300 Petty cash fund 450 To record unreplensihed expense vouchers as of December 31.500) Dec. Ans.120 Adjusted balance Accountability as of January 10 521.120 1.422. The return of expense advance amounting to P260 shall be included as part of accountability. 14.790 Correction of Dec.450 Adjusted balance per books 2.290) (3.503 To record petty cash shortage Reconciliation: Petty cash fund. D) 1.000) Cash in Bank (excluding Cash on Hand) 11.450 Cash on hand/Undeposited collection (3. bank charge error (4. Ans.548.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 8 of 155 Cash on hand as of January 5. B.300 15. D.000 Unrecorded credit Outstanding check (151. B. B.200 Unadjusted balance Deposit in transit 21.475 Expense vouchers 22.500+560+1.500-6.492. 2015 Bills and coins 105.000) Unrecorded debit Bank error 4. Ans.985 (19. 2.000) Book errors in Janaury (audit note a and b) 39.482 Cash collections (100. Notes: 1.000) 297.080) Shortage (17.) January deposits from January collections Januray bank credits 322. Ans. the same shall be regarded as a payable to whoever owes the excess collectoins (e. Ans.Jan. the employees who made the contribution). Bank Reconciliation 12/31/2014 BANK BOOK Unadjusted balance 1. CHAPTER 2-EXERCISE 4: SILVER COMPANY Bank Reonciliation Statement 12/31/2014 BANK BOOK Unadjusted balance per Bank Statement 12. 10 16. Ans. Ans.450 15. B. B. 2 . Petty cash fund.500 63.000 AJE (a) (450) AJE (b) (14.290 Cash and Checks on hand (Depositable) 23.000 Shortage 700 Accountability for cash on hand 3. D.000 Unadjusted balance per books Undeposited collections (as being reported) 3.) 14.503 Petty cash fund 14.226 Cash that does not belong to the petty cash fund Undeposited collections: Collection checks 43.250 Cash shortage from Jan.262 (145. 3. The unreplenished voucher dated 1/2/15 shall still be considered as valid cash as of December 31. 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.570 1.000 Unrecorded credit as of 12/31 (200. 2015 47 3. Correct cash balance per audit 14.744) Return of expense advance (260) Excess collection from Christmas Party (9. B) CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS .000 Book errors (audit note) Correct cash balance (16. B. D. B. December 31. corrected also in Sept. September 10.700) Deposit in transit.000 60.103.000) Adjusted balances 642. 5. C. Ans. the NSF check had been recorded both as disbursement (upon learning that it is NSF) and as receipt (upon redeposit). Sept. Ans. Ans.000) Adjusted balances 642. Unadjusted balances per book 82.600) (3.560 (150.000 76. 2014 June 30.185 201. June 13 (b) 1.330 763.250 Adjusted balances 437.005) Undeposited collections.400 Outstanding checks. June 30.940 3. To reconcile.200 Outstanding checks.540 1. Unadjusted balances per bank statement 156. Ans.800 1. July Payment of AP 31. B. B.800 (31.880) 11.250 41. 2014 August 31. June 18.590) Outstanding checks.. Unadjusted balances per book 140. June 17.610) Unrecorded bank debits.820 (41. B. A.720 219. D.260) Outstanding checks.220 202. September 30.091. Deposit in transit.390 20. A. Ans. Ans.800) Bank error. 6. July (SQUEEZE) 30. Ans.425 1. Ans.182.800 219.. May (800) (800) Unrecorded bank debits: BSC. July Overstated disbursement (11.700 100. August (12.070 20.620 27.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 9 of 155 CHAPTER 2-EXERCISE 6: CARRERA INC. CHAPTER 2-EXERCISE 8: HALALAN CORP.800 3.000 (183. Unadjusted balances per bank statement 652.020 29.085 Undeposited collections.268. Receipt Disbursement September 30.200 676.680 654. Bank error.600) Unrecorded bank debits: BSC. Nov.680 Unrecorded bank debits.000 Outstanding checks. Dec.800 729. B. Deposit in transit.610 (2.700 (2.800 729.000 30. Proof of Cash. to reconcile. Thus.000) Unrecorded bank debits.410 1.245.330 763.000 60.200 28.000 (3. July BSC 2. Ans.330) Adjusted balances 140. 150. Proof of Cash.000 63.820) 1. 3.800) Unrecorded bank debits.. Nov. 64.268.590 751. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS .925 4. Dec.330 249.935 1. Ans. Nov.260 1. C. May 10.590) (138. A. Notes: (a) the error committed by the bank in June was also corrected in June.000) Outstanding checks.835 602.000 (18. Receipt Disbursement December 31.940 Cash in bank. No entry had been made by the company to reflect the receipt and redeposit while on the bank side. July 31. Receipt Disbursement June 30.000 Unrecorded bank debits: NSF. June 200 (200) Unrecorded bank debits: NSF. thus both receipts and disbursements per bank shall be in excess by P1. 5.600 5.260) (52. B.865 689.825 1.680 903. CHAPTER 2-EXERCISE 9: SALUYOT CORP. July NSF 9. August 2. Ans. same month* 41.000 if compared to receipts and disbursements per books. (138. 2.000) Unrecorded bank debits: BSC. return and redeposit.000 148. D.000 1. 2. Dec.000 4.000) NSF Check. June 70. Receipt Disbursement April 30. B. Unrecorded bank credit: May 72.350 1.925 3. May (20.000 2. 359.880 Deposit in transit. Ans.000 (3. Nov.063.000) (12. September 28. Ans. Receipt Disbursement June 30.400 64. B.330 763. July Payment of NP 183. 41.000 148. Unadjusted balances per bank statement 172. (300) (300) Bank error. Receipt Disbursement December 31. the same had been deducted from both receipt and disbursements. March 31.500 Unrecorded bank debits: BSC.000) (1.400 6.600) Bank error. 2014 May 31.680 881. June (52.800 (10.400 732. Ans. Overstated receipt (600) (600) Adjusted balances 146. Outstanding checks. Sept. 404.600 (17.200 4. June corrected also in June (a) (1.000) Deposit in transit. (3. July (SQUEEZE) 41.005 (41.330 (9. Receipt Disbursement July 31. (b) the NSF check on June 13 had been redeposited immediately. Ans.075) Unrecorded bank credit: Note Col.880 Adjusted balances 138. Unrecorded bank credit: Note Col.000 57.000) Outstanding checks. Ans. Ans.000) (20.000 (10. May 31.500 404. Unadjusted balances per bank statement 535.070 22.000 88. Ans.835 602. B.560) Adjusted balances 437. C. CHAPTER 2-EXERCISE 7: EDILBERTO INC. Dec.825 1. June 30 3.000 70.935 1. 2014 November 30.000) Deposit in transit.000 (72.103. shortage June 30 2. Proof of Cash.075 (359.200 1. the same has been added to both receipts and disbursements per books. Proof of Cash. Unadjusted balances per book 570. November 30.680 881. 000 4. A.750 6. D.500) December collections credited in December (132. November 30 (16.750 Adjusted balances 14.500 129.250) Book error. Ans.500) Unrecorded Bank Service Charge.250 3.632 November BSC recorded in Decemeber 36 Total book disbursements. Ans. 1.000 Less: DIT. Ans.250 150. B. December (377. November (16. Ans.250) Checks issued in December 126.500) Deposit in transit.700 100.000 2.500) Book receipts. 9. A Total checks issued and recorded in December 377. C.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 10 of 155 August 31.500) (1. November 30.000 20. Ans. November 30 16.500 Deposit credited by bank in Decemeber 145.750 7. C. 2.500) DIT.766 Total book disbursements.500 37. Sept. A. December 2.500 145.000 137.620 27. 9. December 150. December 371. September 1.668) Balance per books.500 Adjusted balances 14. Unadjusted balances per book 16.000 128. Overstated Disbursement (3. B.250 (2. Ans. December 31 37.698 Total book receipts.500) Bank error.250 Bank Service Charge recorded per books in Dec.500 37.500 129. Checks issued in December (4) 126.796 CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS .000 26. Receipt Disbursement December 31. Ans. Receipt Disbursement December 31. Unadjusted balances per book 120. Ans D. CHAPTER 2-EXERCISE 10: WISE COMPANY 1. 12 420 420 Unrecorded bank debits: NSF.668 2.500 Book error. B. December 377.500 Decemeber Bank Service Charge 3. December actual collections from customers 152.750 37.500 (12.000 (27.500 (12. November 12. Dec. 30 900 (900) Adjusted balances 146. (2. December 31. December 31 12.250 Add: Bank service charges recorded in 2. Balance per books. November (12.000 Total 142. D. November Bank Service Charge 1.750 152. December 20. September 12. 3. Understated Receipt 2. December 31. underfooting cash receipts (2.000) 3) Book balance.500) Unrecorded bank debits: BSC. Dec. November 30 15. Ans. November (1. Book balance.250 5. B. Ans.250 Proof of Cash.500 Add: Checks paid by bank in December 130. Unrecorded bank credit: August 27.750) 3. 8. Ans.500 2. Ans.000 127. Unadjusted balances per bank statement 18.750 Total 166.250) (16. C.720 219.320) Unrecorded bank debits: NSF.500 (SQUEEZE) Deposit in transit. Outstanding checks. August (300) (300) Unrecorded bank debits: BSC.750 152. Ans.320 (1.820 4.000 Outstanding checks. B. Ans.500 Add: Book disbursements in December (5) 128.600 2.250) Outstanding checks. 10.500 Unrecorded bank debits: BSC. Ans.250 Less: Book receipts in December (from number (150. A.500 December Book disbursements in December 128. December 20. Dec. Sept. 2014 November 30.380 221.200 25.500 Less: Outstanding checks. Receipt Disbursement September 30. Actual company collections in December 152.000) Unrecorded bank debits: BSC.750 CHAPTER 2-EXERCISE 11: I-BOT INC. A. Dec. B.284 17.080) Bank error. D. Unadjusted balances per book 15. Ans. Ans. not yet clearing the bank 36. Check 3417 (not yet corr. Ans.420 1. Nov.) 270 270 Book error. December. Overstated Disbursement (180) 180 Adjusted balances 637. B (SQUEEZE) Deposit in transit.140 16. Overstated Disbursement (480) 480 Bank error. CHAPTER 2-EXERCISE 12: HALAL CORP.180 308. Over.824 5.516 Deposit in transit.660 576. Unadjusted balances per book 637. D.140 Outstanding checks.912 5.140) (64. Receipt Disbursement December 31.000 4.000 Unrecorded bank debits: BSC.260) Deposit in transit.000 Checks issued in Dec.060 2. A. check 3413 (not yet corr.260 (15.042 (9. November (64. November (36) (36) Unrecorded bank debits: BSC. Checks issued prior to Dec. 4. 7.042) Bank error.120 356. CHAPTER 2: AUDIT OF CASH AND CASH EQUIVALENTS .AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 11 of 155 3. Overstated Disbursement 1.220 367.500) Bank error. December 31.140) Outstanding checks. November 30. Understated Disbursement 42 (42) Adjusted balances 16.080 **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. Ans. Receipt Disbursement December 31. December 42 (42) Book error. Ans. B. Unadjusted balances per bank statement 685. Ans. November 15. 3. December 31 74.042 Proof of Cash.220 2. Nov. 6. December 31. Check number 3408 440 Check number 3418 2. Proof of Cash. 6.824 4. 2014 November 30. D.766 377. Over. C.698 371.766 377.502 380.648) Deposit in transit. Overstated Disbursement (980) 980 Reversal of check (stop-payment)** (780) (780) Adjusted balances 637. Receipt Disbursement December 31.140) 38.668 9. C.800 307.140. A. the same has been deducted both in the receipt and disbursement columns per books. Ans.800 307.796 Unrecorded bank credits: Note Coll.500 365. 2014 November 30. Nov.214) Outstanding checks.298 373.840 579. C.840 579.080 (74.814 Check number 3419 5. 7. November 3. December 31.732 375. Thus. Ans. Ans. Dec.860 306.674 14.460 5. Dec.214) (11. November 30. December 5.648 (3. November (60) (60) Book error.) 800 800 Adjusted balances 16.060 Unrecorded bank debits: BSC. 9. Ans. (SQUEEZE) Unrecorded bank credits: Note Coll.(P64.912 Outstanding checks. Dec. 2. November (11.766 377. Unadjusted balances per bank statement 24.P26. Ans.080 Total outstanding checks. September 74.674 14.500 365.732 375. Receipt Disbursement December 31.500 (1. September 9. Ans. Dec.460 4. December 16.788 Outstanding checks. to reconcile.080 637. balance (credit balance to be adjusted to Advances) 115. P124.000 (h) Advances to suppliers 10.000) (8. 21 A.000 (e) Claims receivable (AR-nontrade) 5.000 Accounts receivable-trade 25.000 Advances from customers 10.250.500 Allowance for Sales Discount (P124.500*20%)*50% (12. 20 A.450) (16. 16 D.000 Accounts receivable-trade 5.500+P3.500) Gross Accounts Receivable balance 124. 13 B.000) Sales returnds and allowances (P5. 8 D.500 January 1. 19 B.537 3.000 Accounts receivable-trade 50. 6 B.000 Charge sales 1. 5 D.735) >120 Days past due (P124.000) Write-off of receivables (7. 9 D.000 (f) Advances to employees (AR-nontrade) 1.000 Collections from customers (overpayment credited to Advances) (1.000 (i) Accounts receivable-trade 10. 15 A. 3 A. 18 B.000 (g) Advances to affiliates (Investment) 50.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 12 of 155 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES DISCUSSION PROBLEMS CHAPTER 3-PROBLEM 1 1 A 2 B.185) Amortized cost. 12/31/14 107.000 Accounts receivable-trade 10. 17 C.230.537 Gross Accounts Receivable 124.000 (c) Subscriptions receivable (AR-nontrade) 60. Ans.000 Accounts receivable-trade 1.500 2. 11 A.000 (d) Advances from customers 5. Adjusting Journal Entries: (a) Accounts receivable-trade 9.000 (j) Accounts receivable-trade 2.000 Claims receivable (AR-nontrade) 2. 14 A.000 Accounts receivable-trade 5.500*30%)*10% (3.000 Accounts receivable-trade 60.500*50%*25%)*5% (778) Alowance for Bad Debts: 60 Days past due (P124. 4 A. P107. CHAPTER 3-PROBLEM 2: PRESARIO CORPORATION 1. 7 D. 10 D.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . Ans. 12 C. 22 D.000 (b) Sales 25.000 Advances from customers 9.000 Recovery of previous write-offs 5. AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 13 of 155 (k) Accounts receivable-trade 45,000 Subscriptions receivable (AR-nontrade) 45,000 CHAPTER 3-PROBLEM 3: DELL COMPANY 1. Ans. P366,000 Per GL Per SL Under 30 d 30-60 d 61-120 d 121-180 d Over 180 d Balances 360,000 360,000 240,000 48,000 36,000 24,000 12,000 Accounts definitely uncollectible (6,000) (6,000) (6,000) Advances from customers 12,000 12,000 12,000 Adjusted balances 366,000 366,000 252,000 48,000 36,000 24,000 6,000 % Uncollectible - 3% 15% 30% 60% Allowance for Doubtful Accounts 17,640 - 1,440 5,400 7,200 3,600 2. Ans. P22,320; 3. Ans. P17,640 Allowance for Doubtful Accounts, End 17,640 Less: Allowance for Doubtful Accounts, Beginning (1,320) Add: Write-of off Accounts 6,000 Bad debt expense for the year 22,320 4. Ans. P330,720 Gross Accounts Receivable 366,000 Allowance for Doubtful Accounts (17,640) Allowance for Sales Discounts (P252,000*20%)*10% (5,040) Allowance for Sales Returns (P252,000*5%) (12,600) Amortized Cost, 12/31/14 330,720 5. Ans. P25,320 Allowance for Doubtful Accounts, End 17,640 Add: Allowance for Doubtful Accounts, Unadjusted Debit Balance 1,680 Write-of off Accounts 6,000 Bad debt expense for the year 25,320 CHAPTER 3-PROBLEM 4: TWINHEAD CORPORATION Per GL Per SL Nov-Dec Jul-Oct Jan-Jun Prior to Jan 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) Adjusted balances 2,240,000 2,240,000 1,140,000 600,000 400,000 100,000 % Uncollectible 1.5% 8% 35% 70% Allowance for Doubtful Accounts 275,100 17,100 48,000 140,000 70,000 2. Ans. Per books: Allowance for DA, Jan. 1 65,000 Add: Interim provisions (P4.5M*2%) 90,000 Recoveries of previous write-off 7,500 Less: Write-off of receivables (45,000) Additional write-off (30,000) Allowance for DA, Dec. 31 per books 87,500 Allowance for DA, per audit 275,100 Additional DA Expense for the year 187,600 1. Ans. Entry: Doubtful Accounts Expense 187,600 Allowance for DA 187,600 3. Ans. P1,960,700 Gross Accounts Receivable 2,240,000 Allowance for DA (275,100) Allowance for Sales Discount (P700,000*30%)*2% (4,200) Amortized Cost, 12/31/14 1,960,700 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 14 of 155 CHAPTER 3-PROBLEM 5: MAHOGANNY CORP. Customer Invoice Date Amount Current 1-60 d past 61-120 d past >120 d past Credit bal Nov-Dec Sept-Oct Jul-Aug June and prior Zulu Inc. 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 Whiskey Co. 41,963 2,000,000 2,000,000 41,886 900,000 900,000 41,853 500,000 500,000 Uniform Inc. 41,983 1,750,000 1,750,000 41,916 600,000 600,000 41,825 500,000 500,000 Tango Corp. 41,891 2,600,000 2,600,000 41,830 1,250,000 1,250,000 41,703 900,000 900,000 Romeo Co. 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 Per GL Per SL Current 1-60 d past 61-120 d past >120 d past Credit bal Balances 13,650,000 13,620,000 5,500,000 5,050,000 2,670,000 900,000 (500,000) Advances from Reomeo Co. 500,000 500,000 500,000 Posting error - - 600,000 (600,000) Adjsuted balances 14,150,000 14,120,000 6,100,000 4,450,000 2,670,000 900,000 - Unreconciled difference (1. Ans.) (30,000) Adjusted balance (2. Ans.) 14,120,000 Required allowance for Bad Debt as % 2% 5% 20% 50% Required allowance for Bad Debt 1,328,500 122,000 222,500 534,000 450,000 3. Ans. P378,500 Allowance for BD, ending 1,328,500 Less: Allowance for BD, beg (950,000) Bad Debt Expense 378,500 4. Ans. P12,791,500 Gross Accounts Receivable 14,120,000 Allowance for BD (1,328,500) Amortized Cost, 12/31/14 12,791,500 CHAPTER 3-PROBLEM 6: BONIFACIO INC. ADJUSTING ENTRIES: (a) Credit balance: Accounts receivable 7,500 Allowance for bad debts 7,500 (b) Customer Aye: No AJE necessary since the remmittance is still in transit as of December 31, 2014. (c) Customer Bee: Sales Returns 13,800 Accounts payable 13,800 Accounts receivable (1-60 days) 13,800 Purchases 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 11,600 Accounts receivable (1-60 days) 11,600 Inventory 8,000 Income summary/Cost of sales 8,000 (f) Customer Eff: Sales 18,000 Accounts receivable (1-60 days) 14,000 Advances from customers 4,000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 15 of 155 (g) Customer Jeeh: Sales 6,000 Accounts receivable (1-60 days) 6,000 (h) Customer Eych: Sales returns and allowance 1,200 Accounts receivable (61-120 days) 1,200 Per GL Per SL 1-60 days 61-120 days > 120 days Credit bal. Unadusted balances 221,250 221,250 110,625 66,375 51,750 (7,500) (a) Credit balance 7,500 7,500 7,500 (c) Customer Bee (13,800) (13,800) (13,800) (d) Customer See and Dee - 16,600 (16,600) (e) Customer Eee (11,600) (11,600) (11,600) (f) Customer Eff (14,000) (14,000) (14,000) (g) Customer Jeeh (6,000) (6,000) (6,000) (h) Customer Eych (1,200) (1,200) (1,200) Adjusted balances (2. Ans.) 182,150 182,150 81,825 48,575 51,750 - Required allowance for BD in % 2% 10% 20% Required allowance for BD (3. Ans.) 16,844 1,636.50 4,857.50 10,350.00 4. Ans. P1,844 Allowance for BD, ending 16,844 Less: Allowance for BD, beg. (7,500) AJE a) Recovery of write-off (7,500) Bad Debt Expense 1,844 CHAPTER 3-PROBLEM 7: ABC COMPANY 1. Ans. P1,034,711 Principal Amount 1,000,000 Origination cost 57,851 Origination fee (23,140) FMV of Loan/Initial measurement 1,034,711 2. Ans. P1,018,182 Amortization table: Loans Receivable/Notes Receivable Correct Int. Nominal Int. Amortization Balance January 1, 2014: 1,034,711 December 31, 2014: 103,471 120,000 (16,529) 1,018,182 December 31, 2015: 101,818 120,000 (18,182) 1,000,000 3. Ans. P373,944 Carrying value/Amortized cost 12/31/15 1,000,000 1 Accured interest, 12/31/15 120,000 2.48685 Total 1,120,000 Present value of new future cash flows at 10% for 3 periods with annuity P300,000*2.48685 746,056 Impairment loss 12/31/15 373,944 4. Entries 12/31/16 to 12/31/18 Amortization table after impairment loss: Correct Int. Nominal Int. Amortization Principal Coll. Balance December 31, 2015: 746,056 December 31, 2016: 74,606 - 74,606 (300,000) 520,661 December 31, 2017: 52,066 - 52,066 (300,000) 272,727 December 31, 2018: 27,273 - 27,273 (300,000) 0 12/31/16: Cash 300,000 Interest income 74,606 Notes receivable/Loans receivable 225,394 12/31/17: Cash 300,000 Interest income 52,066 Notes receivable/Loans receivable 247,934 12/31/18: Cash 300,000 Interest income 27,273 Notes receivable/Loans receivable 272,727 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES 382 December 31.000*4.Trade receivable.908.331 4. 10% . Ans.000 39. the face value is also the proceeds (fmv) December 31.000 41.349 December 31.000 44. 2013: 287. 2015: 330.000. 2015: 294.000 Loans receivable 35.364 December 31. 2013: June 30. 2014: Cash 2.000 Loans receivable 37. 2014: 300.363 Interest income 41.170 250.483.754.000 Interest income (2M*12%) 240.330 June 30. Retroactive adjustement: Retained earnings. 300.579 3.000 June 30.636.000. 2014: Cash 240.611 Overstatement in interest income in 2013 173.) 572. per audit (see amo.754.917324 Total 4. 363.526 .000 *note that since nominal interest and effective interests are the same and since there are no principal collections yet.134 June 30.000 Cash 250. 273.Trade receivable.605 4.917324) 1.369 2.000 Interest income in 2013.134 Fair market value = Loan proceeds (Present value of future cash flows at 6% semi-annual effective rate for 6 semi-annual periods) Principal: (5.785 December 31.500 250.754.524.305. 2016: 363.981 250.685 December 31.981 4. Term. P2.000.000 Cash 250. 12% .134) Add: Nominal interest 500.754.000 Intrest Income 250. 2012: Cash 2. Ans.6209213) 2.636 4. 2013: Cash 4.369 .789.000 Interest income 250.000 Less: Proceeds (4.134 Loans receivable 4. 4.605 250. Term and Interest-bearing CORRECT ENTRIES January 1.330 (a) DEF Corp.000.745 June 30.134 and P4.000 Interest income 250. 2014: 289. Ans. 248.754.205 3.685 0. Ans. Amortization Balance January 1. Term and Non-interest-bearing CORRECT ENTRIES Janaury 1.803 0.636 .248 Loans receivable 39. the carrying value/amortized cost at 12/31/14 remains the face value.363 4.134 Amortization table: Loans receivable.605 Interest income 35.Non-trade receivable (Advances to associate). P4.005.000 37.483.170 5.255 Loans receiavable 173.981 Interest income 37. 2014: Cash 250.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 16 of 155 CHAPTER 3-PROBLEM 8: ABC CORP. 2013: 285.785 (c) KLM .000 Loans receivable-Nontrade 2. 1.363 Loans receivable 41.000.866. per books 745.000*0.830 December 31.229. 2012: 248.363 250.248 250.000.6209213 Amortization table: Loans receivable. 2012: 2.579 . Nominal Int. 2013: 273.732. KLM Correct Int. 1.483. DEF Corp.826.255 3.483. 330.684 and P3.908.000.685 Loans receivable 2.248 Interest income 39.952. 2014: Cash 250.605 December 31. Correct Int.483.054 December 31.205 .526 3.500 4.704961 Interest: (250.000 and P2.305.000. 2014: 291.000 *note that the nominal interest and effective interest are the same thus.000. Interest-bearing CORRECT ENTRIES: Jan.000*0.000 47. 2015: 297.259 December 31.704961) 3.000 (b) GHI.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . 2013: December 31. beg 173.754.248 4. P2.000 Intrest Income 250. 2013: 4.000 35.981 2. Nominal Int.866 Interest income in 2013.255 Face value 5. Amortization Balance January 1.685 Fair market value = Loan proceeds (Present value of future cash flows at 10%effective rate for 5 periods) Principal: P4. 747258 485.889996 645. Balance January 1.326 (500. 10% .000 0.000 100.000) 2.247 July 1.049 200.) (248.800 250.425 July 1. Ans.000 25.000 725.000 24.000 200.000 625.000 Interest income 250.316. Coll.350.000 31.000) 1.000 Loans receivable 500.955. 2014: 500.943396 707.808 January 1. Retroactive adjustement: Retained earnings.850.167 (500.627412 360.558395 293.381.704961 440. 2015: 500. 2016: 174.Trade. 2019: 29. 2015: 259. NOP Correct Int. 2018: 500. 2013: Loans receivable 273.205 Interest income 273.007 July 1. 2017: 500.516. 2017: 146.000 December 31.326 100.000 175.762 July 1.000 0.000) 495.365 (500.034 January 1.283 January 1.865 January 1.483.) (273.818 (d) NOP.000 675. 2014: 286.526 Interest income 300.364 January 1.008 Interest income 34.007 and P4.000 36.205) Overstatement in interest income in '12 and '13 994.000 650. 2017: 500. 2014: Loans receivable 36.751 January 1.780.062 125.007 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 PV factor Present Value July 1.000) 4.472. 2015: 500.008 Interest receivable 225. 2016: 202.167 50. Amortization Princ.000 0.007 Loans receivable 4.000 250.008 225.000 600.780.000) (0) July 1.000 50.000 575.000 Less: Proceeds (2.000 0.000 0.000 0.049 (500. Nominal Int.000 Interest income 225.547 January 1.777 July 1.000 550. 2016: 500.909.800 (500. 2017: 117.000) 1.205 December 31.000 0.000) 2.733 January 1.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .000 27.544 January 1.741 Principal amount 4.663 July 1.000) 3.434.717 (500.718 January 1.000 125.800 Interest income 36. 2018: 500. 2018: 88.587 (500.315 Correct interest income in 2012 (see amo.912 (500.000 9.000 75.792094 534. beg 994.000 21.000 13. 2018: 59. 2012: Loans receivable 248. 2014: Cash 4.665057 399.000) 3.369 Interest income 248.000 4.000 34. Ans.587 150. 2014: Loans receivable 34. 2016: 500.365 75.717 25.000 750. Serial and Interest-bearing CORRECT ENTRIES January 1.816 July 1.369 December 31.600 July 1.157 TOTAL 4.800 Cash 750. P4.780.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 17 of 155 December 31.780.000 700.000 0.526 5.000 525. 2015: 231.008 (500.116 July 1.000 17.000.741 Loans receivable 994.062 (500.685) Interest income rececognized in 2012 1.000 150.000) 986. 2014: 500.369) Correct interest income in 2013 (see amo.839619 587.741 6.007 Amortization table: Loans receivable. 2014: 4.780.591898 325.000 0.000 0.000 225.912 175. 2014: Loans receivable 300. 000 Jul 31.032. 4. - (d) Note receivable from sale of land . Write-off Accounts receivable 1. JORNAL ENTRIES (a) Pledging of AR June 30.920 225.000 950.526 . Ans.2M*12%*1/12) 32.nontrade Dec. 2104 balance 3.500. 2015) 231. 12% .200.000 Aug. a receivable that is expected to be realized as part of the normal operating cycle is always current. Loans Rec.200.000 .100.564.800 July 1.450. Ans. 10% .320.200. 2. 4. CHAPTER 3-PROBLEM 10: WHISKEY INC. CHAPTER 3-PROBLEM 9: DWARF CORP.200.000 Int.654.000 LOANS PAYABLE 3.000 principal collection shall be made on Jan.000*12%*9/12 270.500 Interst income (P2. amortized cost 4.000*10%) 120.680 1.000 Jun. Note that per PAS 1.038 43.1M*11%*6/12) 115. 1. bal Aug.000 6. 2014 amortized cost 521. 2014 @ FMV=Face (Nominal%=Effective%) Dec. Ans. 1.000 Jul Returns Cash 1. P1. bal 1.000. 31. Payment 879.320. bal CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . - Int. bal 4.168. 2014 balance = Face 2.500.350. Ans.000) Dec 31. P1. Noncurrent Current Int.000 Interest expense (P3. (a) DEF Corp. 9.152.945.nontrade Jul.875 Long-term portion: 1. Ans.908.932 2.000 ACCOUNTS RECEIVABLE Loans payable (P4M*80%) 3. 31.000.000 Accounts receivable 80. a nontrade receivable is current if it is realizable within 12 months after the reporting period or balance sheet date.000.000.500 Total 4. 31. 3.000 12.500 683. 3.000 Aug.000 Int.000 200.450. Coll July 31. 1.000 Jul.350.1M*11%*6/12) 115.nontrade Apr. Income (a) Note receivable from sale of plant . thus trade receivables are always current.000 Jun. (478.654.667.238 .000 (c) Note receivable from sale of equipment . Payment 1. Loan Sales returns 80. 2014 @FMV=PV of future cash flows at 12% for 2 periods (P600.168. 2015) 676.875 445. principal collection (1.nontrade 1.007 July 1.785 (d) NOP . 31.200. 1. Receivable: P3.000 Current portion: Periodic payment (on Jul.330 (b) GHI. Ans.538 1.780.586 . Ans.152. ReceivableInt.trade 545.500.000 2. 2014 amortization 34. 31.816 Total 1. 2014: 80.797) 478.320 Aug.000) Dec. 1. Note that as per PAS 1.875 Interest expense (upto Jul.000 (c) KLM . 2013 balance 4.000 445. Ans.000.000 1. Ans.038 Dec. 31. 2014: SUMMARY: Cash (P4M*80%)-(P4M*5%) 3.305.500. 7. 31.000 Apr.320 Cash 1. 2014.200*12%*9/12) 43.000*0.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 18 of 155 Proceeds from issue 1/1/14 4.875 385.000 4.nontrade 240.000 2. Coll Sales discount 120.200. 1.816 *note that the next P500. 8. Income: (P4.125 Interest receivable (P2.200 Dec.000 3.trade 581.000 1.875.000 (b) Note receivable from officer .000 1.125 1.5M*12%*3/12) + (P3M*12%*9/12) 405. 2014 amortization 36.000 Interest expense (P4M*5%) 200. Ans.008 December 31.trade 300.809 225. 2014 principal collection (500.000 Aug.000 Jul. Income (P1. 2014: Amo.000. 2.000 . 30. 1. 2015 SUMMARY Interest Interest Current Non-current Income Recevable Loans Rec.000 Loans payable (balance) 1.363 1.238 521. 000 Accounts receivable-Assigned 80.066.320 2. Ans. bal 470. 2014: Aug.082.000 Sales discount 40.082.200.032K*12%*1/12) 20.000 Maturity Value: Principal Amount 2.000 60.000 Allowance for BD 80.500. where there is transfer of significant risk and rewards (e.000 3.Discount) Maturity Value 2.000 Accounts receivable-Assigned 650.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .000 Sales discount 50.5M*95%) 1.000*8%*8/12) (117. the notes receivable has been derecognized/transferred.000 Interest expense (P915K*12%*1/12) 9.5M*12%*1/12) 15.000. Ans.000 Jul 31.000 1.000 Jun. 31. Interest expense (P1.150 915.000 Loans payable (balance) 879. P224.) (P2.000 (b) Discounting of NR Cash (Proceeds) 2. Ans.150 LOANS PAYABLE Interest expense (P1.000 Allowance for BD 200.000 Jul.500. P470. 2014: Cash 700.000 650.000*10%*4/12) 66.000 Accounts receivable 950.000 2.000 Aug.000 Interest from Jan.000 ACCOUNTS RECEIVABLE-ASSIGNED Loans payable 1. 30.000 Aug.000 Cash 600. bal Accounts receivable-Assigned 60.082.000 CHAPTER 3-PROBLEM 11:VICTORY INC.200. Coll Accounts receivable-Assigned 2.000 Accounts receivable 200.000 Jun.000 Interest (P2M*10%) 200.000 Interest expense (P2.000 Accounts receivable-Assigned 740. bal 2.200.425.667 Less: Carrying value of Notes Receivable 2.000 740.000 Less: Discount: (Maturity value*Discount rate*Remaining term) (P2.680 Cash 900. 31.000.000.000.000.667 2. Write-off November 30.850 Sales returns 60.000 Interest income (P2M*10%*4/12) 66. 2014: Cash 900. 1.850 Cash 700. Proceeds from discounting/Sales proceeds 2.667 Gain on discounting 16. Loan Loans payable (balance) 585.000 2.000 August 31.000 Sales discount 50. bal Aug.000.g.000 Cash 600.000. 5.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 19 of 155 August 31.150 Aug. without recourse basis). P16.000 Jul Returns Accounts receivable 2.000 224.667 Gain on discounting 16. 0 Since discounting was recognized as a sale. Payment 690. Ans.032.667 Notes receivable 2.000 915.000.000 Loans payable (balance) 690.000.000 Jul. Payment 585.667 4. 2014: SUMMARY: Cash (P1. JORNAL ENTRIES (a) Assignement of AR November 1.000 Proceeds: (Maturity value .5M*5%) 75. 1 to May 1 (4 mo. Coll 80.333) Proceeds from discounting 2. thus is presented as LT Investment.000) Total loss from receivable financing (86. the accounts receivable factored has been derecognized/transferred. CHAPTER 3-EXERCISE 2: MORGAN INC.000 Accrued interest receivable 20.550.000 Total/Net Sales proceeds from AR 390.000 3. 2014 (per aging) 700.000 Loss from discounting (36.000) 340. 2014 (600. 4. Ans. Ans. 3.000 is a non-trade.000*40%*6/12) (66.000 Loss of Factoring (90. Ans.000 1.000 Allowance for BD (20. Jan.056.000 Subscription receivable due in 60 days.000) Recovery of previously written-off accounts (100. 2014 (per aging) (700.000) 480.000) Net proceeds from factoring (350.000 Loss on Factoring 90. normally due 1 year to two years 600.000 Add: Factor's holdback 50.000 3.000 2.000) Loss from factoring (50. 31. noncurrent receivable. Dec. Ans.000 Carrying value of AR factored (300.current Total trade & other Trade accounts receivable 1. Ans.225.000 950.g. B.050.000.000 Correct Bad Debt Expense 375. C.000 Less: Discount (MV*disc%*remaining term) (P330.000) Proceeds from NR discounted: Maturity value: (Principal + Interest) Principal 300.375.100. without recourse basis). (b) The cash advances to subsidiary amounting to P800.000 Trade accounts receivable.000) 3. Dec.000 shall be presented as an addition to the investment in subsidiary account in the parent-company financial statements.000 shall be presented as Other Assets in the noncurrent asset portion of SFP.000) Note: (a) The credit balances from customer accounts at P60.000 and P40.000*20%*6/12) 30.000 Less: Allowance for DA. (P90.000 Carrying value of NR (no interest) 300. Gross Accounts Receivable 2.000 merchandise Claim from insurance company 30. 2014 1.000 Allowance for BD 20.000 (proceeds from assignment 12% Trade notes receivable 200.000 Accounts receivable 500. (d) The advances to stockholders amounting to P2. 31.000) 340.000 Receivable from factor 50. (c) The deposit on contract bids amounting to P500.000) Amortized cost/Carrying value. where there is transfer of significant risk and rewards (e.000 Advance payments for purchase of 300.000-10.000 330.675. D.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 20 of 155 (b) Factoring of AR Cash.000) MULTIPLE CHOICE EXERCISES CHAPTER 3-EXERCISE 1: DKNY COMPANY Trade Other .000) Proceeds from NR discounted: 264.000 Installments receivable. Allowance for DA. 600. 1. assigned 750. Ans. A.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . 2. thus is presented as Other Asset. 1.000) (169.300 Less: Allowance for DA.000-10.) unless there is right of offset. 31. Dec.000 Interest (P300.000 Since factoring was recognized as a sale. B.000 4.000 shall be presented as advances from customers (current liab. net (350.300 Add: Write-off of accounts during the year 375.000 Carrying value of AR Gross Accounts receivable factored 500. Proceeds from AR factored 250. *Note that the unlocated difference between GL and SL shall be adjusted to GL since SL should prevail.300 188.686.700 16. A.225.660 Over 90 days past due 78.000 2.800 10% 38.800 235.000 160. Ans.183.000) Add: Additional write-off per audit 40.600 153.000 5% 46. Gross Accounts Receivable 3.000 Nanong 9/27/14 96.300 Allowance for uncollectible accounts (188.120 185.400 2% 33.000 Accounts receivable 7. Ans.000 Naning 12/8/14 160. 31 88.000) (40. Ans.000) Adjusted Gross AR 1.230.368) Amortized cost/Net realizable value 3. Dec.200 Tisoy 12/12/14 153.200 99. and prior Customer Invoice date Amount 0-30 days 31-60 days 61-90 days 91-120 days >120 days Gudang 9/12/14 139. Dec.000) (40.000 15.300 20% 30.120 10/8/14 176.300 CHAPTER 3-EXERCISE 5: ROVERS INC.8M*2%) 256.000 Unlocated difference* (7.700) Amortized cost/Net realizable value 1.360 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . In Amount Current 1. Ans.560 220.000 1.700 Bad debt expense per books (P12.100 31 to 60 days past due 384.000 88.190. Oct.800 50% 39. Sept.720 524.700 3.000 10/25/14 44.223. C.440 Total 1.200 111.000 112.440 169.600 12/2/14 99. Aug.036. Required allowance for BD.368 3.000 176. B. C.800 354.000 50.225.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 21 of 155 CHAPTER 3-EXERCISE 3: INUYASHA INC.700 Less: Allowance for BD. The adjusting entry shall be: Sales 7.000 220.000) Balance 1.728 1 to 30 days past due 922. Age of accounts Amount Allow in % Required Allow.000 128.000 35.932 CHAPTER 3-EXERCISE 4: MEXICAN CORP.200 1.480 61 to 90 days past due 153.000 Less: Allowance for BD (88.000 40.000 825. Gross Accounts Receivable 1.000 825.000 Additional bad debt expense per audit 22.000 Balong 8/20/14 71. Reconciliation of GL and SL with Aging of AR Per GL Per SL 0-60 days 61-90 days 91-120 days > 120 days 1.183.500 22.000 1.094.360 71.360 Peejong 12/6/14 112. C. Nov. Ans.800 8/20/14 40. 1.000 Required Allowance for BD in % 2% 10% 30% 40% Required Allowance for BD in Amounts 88.400 Total 3.000 220.000 Total bad debt expense per audit 278. C.200 Gusoy 11/17/14 185. Ans.446.000 96.000 11/29/14 169.800 44.200 139.000 50. 31 – 60 days 1 – 90 days More than 90 Year Current 1 – 30 days PD PD PD days PD 2013 1% 6% 9% 23% 55% 2012 2% 8% 10% 18% 60% 2011 1% 4% 11% 16% 45% 2010 3% 5% 12% 22% 45% 2009 3% 2% 8% 21% 45% Average uncollectible accounts in % 2% 5% 10% 20% 50% 2. unadjusted balance (106.000 Write off of AR (40.183. 360 Allowance for Bad Debts (120.000 793.662 4.720 524.375.000. (e) Allowance for bad debts 10.000 To record additional accounts written-off per the aging schedule.960 309.057 Less: Allowance for BD. Allowance for BD.) P8.360 425.320) Amortized cost/Carrying value 1. (4.360 Bad Debt Expense 144.360) (71. credited by the client to Bad Debt Expense account.297) CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . (99.) 19. Ans.000 CHAPTER 3-EXERCISE 6: NATASHA INC.296 To adjust the entry made upon recovery of previously written-off account.560 220.200 798.360) (b) Posting error .360) 4.280 88.186 2.320 Less: Allowance for BD.720 20.360) Unlocated difference (debited to Sales) (20.000) Adjusted balance 1.832 Additional write-off per audit 4.760 8.000 Accounts receivable 20.) 798.800 235.296) Add: Write off of accounts receivable 6.760 220. (b) Allowance for bad debt 800 Accounts receivable 800 To record additional accounts written-off per SL.000 Advances from customers 8.057 3.000) (4.343 1.000) (d) AR with credit balances 10.360 1. . Ans. Write-off of AR-Balong (71.688 22.400. C.000 8.466.00 Adjusting entries: (a) Bad debt expense 1. 3. ending 120.00 2.360 (a) Write-off of AR-Balong (71.040 5.512 22.960 307. Reconciliation between GL and SL with Aging of AR analysis Per GL Per SL 0-1 Month 1-3 Months 3-6 Months > 6 Months Unadjusted balances 788. Ans.000 and (1-3 mo. Ans.000 Unreconciled difference (20. Ans. (c) Allowance for bad debt 4.600 453.000 Bad Debt Expense per audit 13. B.960 2. Ans. A.960 372. Ans.200 40.) P2. AJE to record unreconciled difference: Sales 20.375.800 235.040 20.000 Unreconciled difference 5.255. Gross Accounts Receivable 1.000 792.000 Adjusted balances (3.640 Overstatement in Bad Debt Expense (10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 22 of 155 Reconciliation between GL and SL with Aging of AR analysis Per GL Per SL 0-30 days 31-60 days 61-90 days 91-120 days >120 days Unadjusted balances 1. C.000.000) (4. beginning (15.000 (b) Additional write-off (GL only) (800) (c) Additional write-off per aging sched. C.720 1. Ans.000 1.446. unadjusted (46.360) (71. ending 19.720 24. (d) Accounts receivable 8.250) Recovery of previous write-off (1.297 Bad debt expense 10. C.960 Allowance for BD in % 1% 2% 3% 50% 20% Allowance for BD in Amount (4.000 12. D. A.360 Required allowance for BD in % 2% 5% 10% 20% 50% Required allowanc for BD in amount 120.000 10.296 Allowance for bad debt 1.200 Adjusted balances 1.320 8.200) 99.080 47.000 To reclassify the credit balances in customer accounts at (0-1 mo.800 354.375.720) Add: Write off of AR-Balong 71.000) Total adjustments to AR-GL (91.810 6.000 2.000 Accounts receivable 4.280 88.395.200 111.960 380. Bad Debt Expense per books 23.297 Allowance for BD. Kalachuchi (Advances) 27.260.000 66.000 20. Ans. D. .AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 23 of 155 (f) Accounts receivable 5. Credit bal. 5. Receivable from Mr.000 Credit balance . and prior Customer Invoice date Invoice Amount 1-30 days 31-60 days 61-90 days 91-120 days more than 120 days Zulu Inc.000 To record the unlocated difference (SL should prevail over GL) 4.237.Kamote (Advances) 12.000 27.960 97.000 = P16.000 1.000) (72.800 Whiskey Co.000 540. Gross Accounts Receivable 798.620 18. Ans. Ans. Over 6 mo.903 CHAPTER 3-EXERCISE 7: SAYOTE INC. A.800 31. D.000 27. Sia is correctly stated because the goods are considered sold in 2014 16.000 Allowance for BD % 1% 2% 50% 10% Allowance for BD in Amount (3.520 159.020 AJE: Bad debt expense 40. Ans. Allowance for BD.020 5. D. Reconciliation between GL and SL with Aging of AR analysis Per GL Per SL Under 1 mo. (21. 12/30/14 20. A.000) Add: Write off of AR 24. Sept.000 Adjusted balance (2. 9/12/14 52.600 132.020) Amortized cost/Carrying vallue 1. Sales 10. Ans.000 8/20/14 26. Ans. Ans A) 46.000 11/29/14 63. 1-6 mo.000.000) 36. B) 1.000 Additional write-off per audit 72.760 Xylon Inc.000 Allowance for bad debts (46. C.000*20% = P6.000) 1. 9/27/14 36. Ans.227.000 Additional bad debt expense per audit 40. 12/12/14 57.200 542. (320*P100) – P48.000 Write-off of accounts (72.000 42. B.200 Uniform Inc. Gross 1. Actual number of units sold to Mr Lazo was 320 (P48. B.000 36.540 63.200 37. 12/6/14 42. ending 46.000 1.000 - Unlocated difference (10. 2014. 2.400 10.020 5. Sales 5.270.000/P150) 4. 5. The credit memo should be recorded as of December 31.800 88.020 Allowance for bad debt 40.540 Yankee Co.000 Credit balance . 3.000 40.020 Less: Allowance for BD.960 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES . Aug.000 156.000 12/8/14 40.760 To adjust the unlocated difference (SL should prevail over GL). Dec.000 10/25/14 31.000 12.000 552. C.020 Bad debt expense per books 72.000 12.960 Allowance for BD (19.000 1.Kutchay (Posting error) .760 26.000) (72.Income is overstated by the gross profit on the sales. Nov.000 Accounts receivable 10.600 57. Oct. Ans.980 CHAPTER 3-EXERCISE 8: LUCRATIVE COMPANY 1. Accounts receivable.000 .227.180.227. (30. Ans. Ans. CHAPTER 3-EXERCISE 9: MILK CORP.420 10/9/14 66.057) Amortized cost/Carrying value 779.000 540.000 Victory Corp.000 120.000 12. beg. Ans. P30.000) Credit balance .760 2. D. 11/17/14 69.420 69.200 63. A.000) 21.000 (60. Ans.200 52.000 Bad debt expense per audit 112.000 531. Unadjusted balances 1.000 228.600 8/20/14 37. Ledger Current Past due 63.000 189.200 Debit unadjusted balance 16.METREBANK 258.400 27. Accounts receivable (current) 57.790 Customer post-dated check (AJE b) 189. D.000 i. Ans.800 88. Advances to supplier 60.000.000 Purchases 60.045. Sales 4.360 132.800 36.900 58. Bad debt expense 880.626.659 4. A.) 31.495. Cash .740.200 63.aging) j. Cash .900 Cash – BADO 57.550.900 57. Cash – BADO 3.890 3.290) Consigned goods to NITZ (adj to SL only) (3.500 3. B.900 30.000 Loans payable 300.900 Collections Received on Dec.000) (1.200) (52.320 Allowance for BD in % 1% 2% 5% 10% 50% Allowance for BD in Amounts (1.960 97.760 (26. A.500.320 Allowance for BD (31.550 Accounts payable 107.925.600 18.290) (1. Allowance for BD.413 1.664 2.000 Accounts receivable 225.000) (20.METREBANK 107.500) Undelivered sales (adj to GL only/ AJE i) (4.550 d. 31. Ans.219.763 Gen Ledger Subs.960 97.600 132. (SL should prevail over GL) CHAPTER 3-EXERCISE 10: BROCOLI CORP.925.520 159.000 Cash . Sales return 225.900 h. Gross Accounts Receivable 470. CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .500.METREBANK 67.871.200 Unreconciled difference (7.960 Yankee & Victory: Posting error 26.650 Accounts payable 115.900 Overdraft (Liability) 3.869. Ans. end 31.113 4.413) Amortized cost/Carrying value 438.500.500) (3.000) Unrecorded sales returns (adj to GL only/AJE j) (225.000 c.800 470. Accounts receivable (current) 189.000 Expense 42.000) Adjusted Balances 58. Accounts payable 67.790 35.500 Cash . D.000 Customer post-dated check (AJE f) 57.000 (no adjustment to subsidiary – aging) k.413 Add: Write off 52.METREBANK 189.480 To adjust the unreconciled difference.000) Uniform: Write-off (52.760) Xylon: FOB Destination (20.626.207.900 g.000 f.500 Bad debt expense 100.740.907 3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 24 of 155 Reconciliation of GL and SL with Aging of AR analysis Per GL Per SL 1-30 days 31-60 days 61-90 days 91-120 days more than 120 days Unadjusted balances 550. Ans.000) (20.207.000 189.000 Accounts receivable 4.500 b.600 2.200) Adjusted balances 477. Sales 7. Ans.650 e.000 (no adjustment to subsidiary.900 57.000 37.480 Accounts receiavable 7.000 65. Cash .200) (52.000 542.763 Allowance for bad debts 880. 2014 (adj to SL only) (2.METREBANK 115.320 166.000 29. Adjusting entries a.480) Adjusted balance 470. Ans. (P120. NR .577097 948.478.90 days (Subscription Receivable) 500.000.500 7% 1.925. (P500.150. 3.207.000*16%*108/360) 5.000 15. Cash in bank.500+4.877 60.760 5. adjusted balance 62.335 December 31.000 35.680.663 5. 2. D.207.000 Add: Origination cost (Squeeze) 28.000+225. Ans.869.400 Cost of sales 6.920. . Ans.000.900 Additional bad debt expense per audit' 880.763 l.147 981. Inc.147 60.950.481 December 31.000 Int. Ans.900) (g) 3.093 1.458 Less: Origination fee (80.195) Interim provision/Bad debt per books (435. BADO (3.316.700 2.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 25 of 155 Current 30. 2015: 77.540 CHAPTER 3-EXERCISE 11: MYBAGS INC. A.832 0.284.140 (l) 6. Ans.500.458 December 31. Ans.093 19. end 2.000) (a) (67. Inventory 6.333 (d) NR-dishonored (collection w/in 12 months is doubtful) . D. (a) NR discounted as a sale .519 1.550 (d) 115.558.877 964.400 Inventory. Ans. C. Ans. Unadjusted balance (90.293 Add: Write-offs 521.920.020. 4.000 17.293) Amortized cost/Carrying value 56.120 days 120.total Recievable-Curr Interest Income Interest Rec.000 (c) NR . C.763 Bad debt expense per audit 1.760 Total 1.568.900) Cash in bank.33 13. Cash. Bad debt expense per books 435.565 Less: Allowance. - (b) NR .333. C.400 (3.773.626 2.172.650 (e) 258. D. Ans.30 days 900. Inc.871.90 days (Advances to Officer) 160.920.000 (f) NR .000 900. CHAPTER 3-EXERCISE 12: YZA INC. BADO (total overdraft)(3.900) Additional bad debt expense 880. C.000) (c) 107. 2014: 948.500) (b) (189. beg (1.519 60. .607 6.428 Past Due 27.000*0.458 Amortization table: Loans receivable Correct Int.740. 2014: 75.577097) 154.000) (f) (57.000 120.000 - (e) NR .568. Amortization Balance Janaury 1. A.865 Required Allowance. adjusted balance 3.458 Principal amount 1. 1.000.793832 Interest (60.793832) 793. 2015: 78.000)*80% 1. 16. Nominal Int. Ans.000) Net proceeds/Fair value 948. Inventory. Proceeds from the loan (FMV = Present Value of future cash flows at 8% effective rate for 3 periods) Principal (1.000 (f) (57.000*2. .000 1. unadjusted balance 55.000 Int.000*16%*2/12) 13.900 Cash.900) 4.400 2% 617.000 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .900 Allowance for bad debt (2. C. Gross Accounts Receivable 58.000 18. 170 .554 3.000 10.049 0. Amortization table: Loans receivable Correct Int.000 Less: Origination fees (374. 2015: 361. Ans.237 Accrued interest (12/31/15): 320.867 400.000 38. Accounts receivable-assigned 800. Payment Interest Principal Balance (Bal*24%*1/12) (Payment-Int) Loans payable balance. D.000 Factors holdback 50. 2020: 33.000 Total/Net sales price of AR factored 390.000) Sales returns (30. B.000+P5. Net cash proceeds from factoring (P350.793832 Impairment loss 525.860. Assignment is only a loan transaction.000 366. Amortization Principal Coll.642529 3. 2014: 358.000.000 December 31. Amortization Balance December 31.801 .000-P20.000) (205. Ans.000) 2.041. A.345 3. Ans.724.000+P4.170 .000*0.892 3.049 December 31.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 26 of 155 2. Carrying value/Amortized cost (12/31/15) 981.543 .400. D.925926 Due 12/2018: P300. Ans. Ans.000 310.200 143. thus there is no transfer of receivable.954. Balance December 31.965 0.642529) 257. Nominal Int. 2013: 3.481 Accrued interest (as of 12/31/15) 60.000 Total receivables as of 12/31/15 4.345 December 31.954. 2019: 81.000) Accounts written-off as worthless (20.332 December 31.274. 2018: 159.25% Due 12/31/2017: (1.June 30 391. Ans.874.570 1. Ans. B. 2015: 2. 2. C. 2016: 242.000 June 31 remittance 150.000 (0) CHAPTER 3-EXERCISE 14: VISAGE CORP.150 515. 2016: 365.618.927 0. 33. Ans. 2017: 264.793832 238.874.701963) 421.000 1.481 Present value of new cash flows at original eff.000.618. C. 242.789 December 31.570 .000 41.172.000 Less: Carrying value of AR (P500.000 1.237 December 31. CHAPTER 3-EXERCISE 13: ISIAH COMPANY Principal amount 4.000-P10.895 0.000*0.000 May 31 remittance 200.656. 1.763 4.000) Loss from factoring (90. A. B. Ans.000. Ans.925926 277. C.000 4.000) Accounts receivable-assigned .000 45.000 Add: Origination cost 248.237 Less: Present value of new future cash flows at 9.766895 Due 12/31/2020: (P400K*0. % (8%) Due 12/2016: P300. 3. 159.915332 Due 12/31/2018: (P1M*0.188 0.000) 340.000 190. Amortization table: Loans receivable after impairment loss Correct Int. 264.4M*0.012 2.701963 Impairment loss 1.837832) 1.000 2. 81.892 320..000 May collection with sales discount (P200. May 1 500. Amortized cost/Carrying value (12/31/15) 3.801 600.000 6.178 0.000 Total receivables as of 12/31/15 1.763 320.000) June collection with sales discount (P150.778 0.766895) 766.912.345 320.800 166. Nominal Int.543 1.000) (154.000 884.867 .837832 Due 12/31/2019 (P600K*0.000) Initial amount/Fair value/Proceeds 3.200 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .219 December 31.133 December 31.000) (480. 4. 31 (P600K*12%*4/12) (24.400 ** Proceeds from discounting Maturity value Principal amount 600.000 636.000*10%*2/12) (10. B.400 CHAPTER 3: AUDIT OF RECEIVABLES AND SALES .000*12%*6/12) 36.000) Interest receivable up to Oct.400 Less: Carrying value of Notes (600.000 Interest (P600.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 27 of 155 5. Proceeds from discounting ** 625.000 Discount (P636.600) Proceeds from discounting 625. Ans.000) Gain on Discounting 1. SP (105.000 (750.Beta Corp.000 (a) Goods held on consignment.Loan to Hote Inc. Ans.000) (120.000) (224.000) 1.100 2.000 (d) Unrecorded purch.000) (f) Goods out on consignment 70.543.000 200.FOB.000) (j) Purch in transit .000) (105.040 Adjusted balances 2.840 RR #11214 25.FOB.200. Ans.000 790. Ans.000) (c) Sales in transit .000) (70. Ans.000) - (e) "Bill and Hold" Sales (224.000 770. (not purch) (100. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .900) - (h) Inventory financing . 6 7 1 A 2 D 3 C 4 B 5 A 6 B 7 D 8 D 9 B 10 B 11 D 12 A 13 C CHAPTER 4-PROBLEM 2: NOKIA CORP.Fox Inc. (P795. Payable Net Sales Net Purch.000) (g) Purchase discount .000 27. 3 D.640 RR #11215 28.000 (84. 4.000. 5.100 26.169.000 6. 4.400 Total/Net Adjustment 72.616. Payable Sales Net Income Unadusted balances 3.000 98.000 4. Ans.000) (465.000) 120.000 - (f) Unrecorded freight cost 3. (120.000) (100.680 412. recorded as purchases (465. 2.000) (g) Sales in transit . Net Income Unadjusted balances 1. 2 D. Ans. Ans.900 354. Dest.800) RR #11210 4.000 (141. SP 170. Ans.943.000 1. SP) .000 3.075.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 28 of 155 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES DISCUSSION PROBLEMS CHAPTER 4-PROBLEM 1 1 B.000 170.900) (15.950.600. 2.000 (3.000) (h) Goods segregated but not yet sold 98.750.640 25. 5 B.000) (30.000) (e) Purchase in transit.300.not yet valid sale 66. Ans.000) (120.000 5.700 RR #11212 12. Ans.166.000 610.FOB Seller (FOB.000 (c) Purch in transit .000 (100.000 3. Inventory Acc. returns/allowance (70.780 58. CHAPTER 4-PROBLEM 3: INGGO CORP.000 RR #11211 9.280. SP 200. recorded as sales 630. (Advances to supplier) 25.FOB.050.400 28. 4 C.000) - 3. SP) 75.000 3.000) (18.500 RR #11204 (7.000 75.000) - (b) Credit balance .no adjustment (d) Goods out on consignment.000 Sale on approval . CHAPTER 4-PROBLEM 4: TOUR COMPANY Purchases Inventories Unadjusted balances 2. FOB Seller (FOB. Inventory Acc.000 1.000 (i) Purch in transit . 3.540 2.000) (70.000 499.000*2%) (15.FOB.000 6. 3.000 (170. 000 Inventory loss due to fire 156. 31) 830. Gross Sales 2. Ans.000.000 Multiply by cost % (100%-30%) 70% Estimated cost of sale 756.439.540) Cost of Sales 2.000) Gross Sales on account 1.000 Inventory not damaged by fire 48. 1 120.000 Transportation-in 20.000 Divide by Selling Price % (100%+25%) 125% Estimated cost of sale 864. P156. 2014.680 Cost of goods avaialble for sale 2.850. Adjusting journal entries: Purchases 72.000 Sales returns (40.000 Sales discounts 30. 2013 235.000 1.140 CHAPTER 4-PROBLEM 5: ABC CORP.080.000) Estimated inventory. Merchandise Inventory.040 Income summary 58.000) Employee discount 24. Oct.000 1.000) 840. 1 120. P2. as adjusted (412.439.000) Estimated inventory.000 Transportation-in 20. Collection on AR 1. Nov.000 Less: Sales returns (25.000 *Estimated cost of sale Gross Sales 1.200.000 Add: AR. 1.000 Less: Estimated cost of sale* (756.000) Sales for inventory estimation 2.000 Sales returns (40.000 Sales returns 25.000 Gross Cash Sales 350.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 29 of 155 1. 1.780 Inventory 58. P1. P48.000 Purchase returns and allowances (10. October 31 96.000 Inventory loss due to fire 48. 31) 830. Merchandise Inventory.000. 1 to Oct.225. Ans. Ans.000 Net Purchases.875.140 Inventory.780 Accounts payable 72.680 Inventory. 31. Ans.000 Gross Sales 2. P2.000 *Estimated cost of sale Gross Sales 1. Jan.000 Purchaes (Jan.080.000.000 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . Ans.000 2.000 Inventory not damaged by fire 48.825. as adjusted 2.000 Less: Estimated cost of sale* (864.000 Purchaes (Jan. October 31 204.096.000 Accounts written-off 20.000 CHAPTER 4-PROBLEM 6: KAGOME COMPANY 1.096. January 1 (295.040 3.000 Less: AR.851.000) Employee discount 24.616. Jan.000 Actual cost of goods available for sale 960. 270. 1 to Oct.225.000 2.000 Purchase returns and allowances (10.000 Actual cost of goods available for sale 960.000) 840.000.225. December 31. 000. P400.500) Adjusted balances 674.500 Cost of sales. 1 .000 Add: Cost of sales (Sales at 0%GP) 10.000) 1.000 1.500) c) Advances to suppliers (2.March 31 42. 11 months 168.000 Less: Estimated cost of sales (P2.000 Purchases 1.000 80% Gross profit.300) 7.500 Inventory.000 Cost of goods available for sale. 11 months 672. Jan. FOB Dest. 2014 95.500 Purchases.000 Cost of goods available for sale 1.500 Cost of goods available for sale.000 Unrcorded purchases 10. 1 to Aprl 15 50. July 1.000 Purchases on account (P8. Inventory.000) Sales for the month of June 120. 11 months 840.320. Inventory. Jan. (1. P50. Ans. FOB Dest.000) d) May purch in transit. (5. Estimated Inventory per audit 400.000 CHAPTER 4-PROBLEM 7: JIM CORPORATION 11 Mo. 2013 87.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 30 of 155 3. returns/allow.500-P1. Purch Unadjusted balances 675.000 CHAPTER 4-PROBLEM 8: DOWN WHOLESALE CORPORATION 1.000 a) May purchases recorded only in June 7. Purchases.000 Payments to suppliers.000 Inventory shortage 80.000 Sales. Purch 12 Mo.15 Cash purchases 2. 11 months as adjusted 674. July 1.200 Purchase returns (450) 8.000 e) Sales in June at 0% GP (10. 2013 320. 2014 114. 11 months 672. 12 months (P672. 11 months 761.000 796.500 b) Unrecorded purch.000 Total Cost of Sales for June 98.000 Inventory per books 320. 11 months (840. P80.000) (770.000 Multiply by Cost% 80% Cost of sales (Sales at 20%GP) 88.000) (1. 1 . 2013 87.750 Purchases.000 800.000) (2. Ans.000.750.750 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . June 30. 20%.000) Sales for June at 20% GP 110. May 31.000) Estimated Inventory. (5.000 100% Cost of sales.720.000.000 4.410. (20. P98. 2014 400. Sales.000 Advances to suppliers recorded as purch. December 31. Apr. Ans.500 Purchases. Ans. 12 months 796.000 Less: Cost of sales.400. P114.000 d) May purch in transit.000) Estimated Inventory.000+P98.000.000 20% 2.500 Inventory. Sales. 12 months 960. Ans. December 31. 12 months 884.000 3.500) 89. Ans.2M*60%) (1. 000) COGAS . P105.960) Departmental transfer out (135.540 5. March 31 (27.000) (45.500) (175.000) Inventory. Ans. 1 . 2013 372.265. Apr. P236. End at retail price 381.000) (620.000-40.600 Sales. Estimated Inventory. Apr.Apr.000 1. 2013 (372.267.200 Add: AR. April 15 26.024.650.500 (4.000 Conservative Cost % 62% Inventory.Inventory.000 Transportation in 55.643.000 55% Gross profit 2012 and 2013 315.15 10.893. 2013 50. Ans.750 Estimated cost of sales (105K*55%) 57.000) Normal breakages 50.000 Purchases.000) 250.265.404.400 Collections from customers.400 Write-off of receivables 5. 15 50.910.000 65% Average Less: Inventory.540 4.000-P40.000) Cost of goods available for sale 3. P39.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 31 of 155 2.000 620.024. October 1.645 2.000 100% Cost of sales 2012 and 2013 385. 15 43.500 165. 15 43. P43.000 Less: AR. Ans. End at cost 247. Apr. 15 105. P247. P251.000 3.000 FIFO Retail Cost % 66% Inventory.000 Less: COGAS at retail/Sales Gross sales 4. Jan 1 . 31. October 1. End at cost 251.000 66% FIFO Retail Cost of goods available for sale at retail 5.March 31 90.000 3.500 Discounts to employees 75.750 Estimated Inventory. Ans.Apr.000 Average Cost % 65% Inventory.000 5.000 45% 4.220.500) Purchase discounts (15. Jan.872.350) Inventory Loss 39.000 Net Mark up (P290.220 2.000 Purchase return (27.000) (243. Inventory. End at retail price 381.540 5.452. End at retail price 381. Jan. 45% Total Sales 2012 and 2013 700.000. Beg 2.000 4. 1 .000) Purchase allowance (18.000) Departmental transfer in 125. Ans.000 Purchases 2.000 62% Conservative Net Mark down (P283. 1 .650 CHAPTER 4-PROBLEM 9: DIOSAH INC.460. Inventory. End at retail price 381. Ans.750 Cost of goods available for sale 100.460 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .000) 14.000. Cost Retail Inventory.000 Sales returns (355. Inventory. Dec. Sales.000 NRV of remaining inventory (3. Ans.645. End at cost 236. Inventory. ending 23. P825.150.000 .000 430. A B C Cost 250.WIP 40.000 825.000 275.000 320.000 540.000 25.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 32 of 155 CHAPTER 4-PROBLEM 10: GLORIA CORPORATION 1.000 (45.RM 50.000.000.400.105.000 NRV: Est.000 Current purchase price 250. Allowance for WD-FG. ending 40. Selling Price .000 1. P240.000.000 Total inventories 6.000. D E Cost 375.000 60.000 4.000 4.000.000 527.000 500.497.000 Cost of goods in transit sold FOB destination 120. ending 90.000 MULTIPLE CHOICE EXERCISES: CHAPTER 4-EXERCISE 1: 1. beg. Cash Acc. (40. (40. Ans.000 900. 40. RM of item M shall be tested for possible write-down.000 550.201.000 400.000) 855.000 188.050. Since finished goods Q has not been written-down. 240.000 NRV: Est.000) Loss on write-down . Invty Acc.FG 13.254.000 Less: Allowance for WD-FG.000 Less: Allowance for WD-WIP.000. Since finished goods P has been written down to NRV.050. Ans.400 (a) (654. (10.000) Lower of Cost or NRV 1.000 148.000. A. Payable Accrued Exp. beg.000 13.000 480. Ans.000 Allowance for WD-RM. Selling Price . P527.000 Factory labor costs incurred on goods still unsold 150.000. P1. P430.900. P855.Cost to Sell . - Loss on write-down . 25.000) Lower of Cost or NRV 708.000) Loss on write-down .000 Required allowance for write-down .000 Total loss on inventory write-down 103.000 CHAPTER 4-EXERCISE 2: SILANG CORP. Merch.000 (45. Ans.000 Factory supplies 60.000 300.000.520.Cost to Compl. Rec.000 1. Since finished goods M has been written down to NRV.600) 310.000 748. Ans. the RM for item Q shall not be tested for possible write down. X Y Z Cost 400.000 .000 Materials on hand not yet placed into production 1.000 Current purchase price 450.000 450.105. P103.000.000 180.000) 1. Ans. Finished goods Item M Item P Item Q Cost 550. Work-in-process Item M Item P Item Q Cost 240. P540.000 Required allowance for write-down 10.000 5.000 Allowance for WD-WIP.200 2.000 6. (23.000 Goods in transit purchased FOB shipping point 360.750 Required allowance for write-down . P320.000 Cost of goods sold with repurchase agreement/Inventory financing 900.000 20.000 Less: Allowance for WD-RM.000 697.Cost to Sell 540. P148.000 Costs identified with units completed but not yet sold 780.000 3.000 Freight charges on goods purchased 240.000 2.000 200.000 Required allowance for write-down . RM of item P shall be tested for possible write-down. 20. Cost of Sales Unadjusted balances 963.000 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .000 Raw materials on which the company has started production 840.000 375. beg.000 6. Ans. Cost of goods out on consignment at another company’s store 2. 000 - c.000) Net adjustments: 59. CHAPTER 4-EXERCISE 5: SOFIA INC.000 1.000 9.000 b.130.000) 11.204. Goods out on consignment 100. A.500 1. end Purchases Cost of Sales Net Income Unadjusted balance 200.000) (140. Ans. A.000 (252.000) (c-5) (175.000 33.000 3.035.000 400.000) RR 1115 9.000 60. purchases 24.500 217.000) d.000 (275. Purch in transit (FOB SP) 33.000) g.000) (40. Ans.000 (30.400 57. Acc. D. 3.000 (75. C.615. 2. Inventory AR Sales AP Purchases Net Income a.000 (204.000) 22.000 Adjsuted balance 2.000) (c-2) 217.000 401. Ans.000 24.000 16.900 60. Ans.000 d.000 e. Goods held on consignemnt (50.564. A. A.500) 637. B. C.000) 1. Ans. 4. 6.000 SI 1023 (50. Unrecorded Dec.000) b.615.000) 36.400) End of the year: a. Dec. (50.000 (50.000 f.000 250. 4. Sales Purchases Inventory Accts Rec. Dec.000 (36. Ans.300 Working Capital Ratio 1.909.000) SI 1025 (34. 3. Ans. Invty.676.000 33.000) (50.000 b.035.98 CHAPTER 4-EXERCISE 3: IVY INC. Sales in transit (FOB Dest) 16. purchases not included in Invty 26.000 1.000) RR 1119 400. CHAPTER 4-EXERCISE 4: LONE STAR CORP.000) (23.000 SI 1024 (23. Ans. D. 5.900 Accrued expense 60.000) c. 2.400 (c-1) 275.000) (50. 4.160. Ans. B.000 6. Dec.000 30.000) (112.000) (22. purchases recorded in Jan.000) 40. D.000) (8.600 Current Liabilities Accounts payable 4. Ans.000 3. Ans. 3.000 .000) (112.267. Ans.000) 60. Ans.000 3.000 RR 1118 32.400 115.000) SI 1021 (75.400 4.564. B.000 Merchandise inventory 6.000 372. D.500. 2. 2. Ans. Current Assets Cash 668. Ans.000 4. Payable 2. Purch in transit (FOB Dest) (22.000 11.000 1. - Adjusted balances 260.000 3.000) 50.000 200.600 Accounts receivables 2.200.000 Beginning of the year: a. 4.000) Adusted balances 668.000) (40. Ans.000 300. 3. Ans.000 (130.000) (34. C. Ans. Sales in transit (FOB Dest) (112. sale 86.400 (26.000) SI 1026 (8. Dec. C.000) (175.000) (252. purchases not included in Invty 36. 5.500 (c-4) 130.500 - (c-3) (637. C.815. Sales in transit (FOB SP) (40. A.600 2.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 33 of 155 (b) 360.000 610.000 9. 30.000 (140.625. Dec. B. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . purchases recorded in Jan.000 832. D. Ans.600 1. 240) (1.500) B 93.000) January recorded sales: In-transit FOB. Dest.000) 12) 8.680) 7. CHAPTER 4-EXERCISE 8: KAMPT COMPANY Sales Inventories December 2014 recorded sales 1) (2.000 175. (10.100) 1.000 F 31.000 RR No.620 420.000 9. SP (6.440) Sipment to consignee (14. Ans. C. Ans.000 RR No.200 1.900) 5) (600) 7) (4.000 1. Purchases Inventories Unadjusted balances 1.095.693.000 (5.440 1.000 December recorded sales: In-tansit FOB.000) 4) (6. A. Ans.000 93. Ans.560 1. A.200) 21. 5.415.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 34 of 155 CHAPTER 4-EXERCISE 6: BIRD COMPANY Inventory Accts Payable Net Sales Unadjusted balances 1.200 2.000 (18.000 C 27.000 1.000) (10. 2.000 D 49.000) (10. CHAPTER 4-EXERCISE 9: MALAGUKU CO. 3. A.500) Net Adjustment (8.751.500 (14. 634 8.000 (4.200) (12. Ans.750.200) 12.100) 6.870. 638 7. 636 (6. B.000 478.000 18. 635 RR No. A. 632 (4. Dest. A.700) In-tansit FOB. Ans. (8.000 9. 641 4.000 16. 2.500) (1.240 (8.000) RR No.000) January 2015 recorded sales 9) 6. D. Ans. C CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .000 Adjusted balances 2.900) (12.560. Ans. B. 4.100) Sipment to consignee (14.400 Adjustments: A (78.200 RR No.000 H 8.120 846. CHAPTER 4-EXERCISE 7: Accts Receivable Inventories Sales Cost of Sales Gross profit 276.000) (14.300 194.800) E 17.000) 3) (2. 631 2. Ans. Ans. 2.000 1.560 447.000 842. 2.100 Adjusted balances 1.100 (6. 633 9. D.294.000) In-transit FOB.200 G 36.500 425. Ans B.000) (14.547. SP 21.100 1.000 RR No.000 RR No.000) RR No.320.000) 8) (10. 3.680) (7.000 (67.800 Adjusted balance 250. Ans. Ans.250 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . 3671 290 Invoice No.200) 10 700 11 30. 6610 420 Invoice No.100 9 (1. 0481 (750) Invoice No.220 651.000 2. A. end (Squeeze) 56. beg 15.300 2.400 6 (7. Per Count Per GL Per "Tab Run" Unadjusted balances 342.500) 7 (900) 8 2. Ans C. B. Cost of goods manufactured (Squeeze) 91.000 650. Ans.300 374.500) (7. Ans.000 Add: WIP. beg 50.000 Less: RM Inventory. entries Invoice No.300 1 (500) 2 (23. D. Direct labor 40. D. 2. 70.000 55. Ans.000 December 2014 entries Invoice No.000 Total goods placed into process 148. Inventories Purchases 27.900) Adjsuted balances 28.000 Multiply by Cost rate (100%-32.000) Cost of sales (estimated)** 101.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 35 of 155 CHAPTER 4-EXERCISE 10: KULA INC. Ans. D. end (60. CHAPTER 4-EXERCISE 12: ALDER PAINTS RM Inventory.000 Cost of goods available for sale 161. end (30.250 1.5%) 68% Estimated cost of sales 101.000 Purchases 50. 7711 460 460 Invoice No.000 Factory overhead (45% of Direct labor) 18. 6609 690 Invoice No.300 374.200) (1. Add: Finished goods. 7263 610 610 Goods held on consignment (750) Deliveries made to customers after count date (1.900 403.000 RM available for use 70.000 Total manufacturing cost 98. beg. Ans.000 3. D.000) RM used 40.250 less: Finished goods.000 Freight-in 5. 9176 310 Invoice No.250 ** Sales 150. less: WIP. 4678 315 315 Invoice No. 9981 595 595 Invoice No.750 4. D. 0010 180 Invoice No. Ans.000 Adjsuted balances 374.900) 3 (600) 4 (800) (800) 5 4.650 1. 9001 770 Invoice No. CHAPTER 4-EXERCISE 11: FLORES COMPANY 1.400 384. 6098 (350) January 2015. 000 Goods in transit as of Sept. Ans.295.116.800 3.000 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .000 Purchases 400. A.030. Sept.849.590.000 50% (a) Sales 10 months.116.000 Estimated ending inventory 110.000 5.177.016.008.000) Add: Employee discounts 150. C. Ans.900.000) Purchase returns and allowance (30.680 4.000 100% Cost of Sales 10 months (Jan to Oct) (b) (2.800 Purchases 4.031. Ans.000 Sales 10 months.000) Inventory loss 70.000 Gross Profit 1.400 1. A.177. Ans.000 Divide by: Selling price % 120% 300.720 CHAPTER 4-EXERCISE 15: AB CORP. adjusted (for GP comp only) 4. C. Ans.000 Inventory loss 587. 1. Jan. Sept. Inventory. 1 1. Jan. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 36 of 155 CHAPTER 4-EXERCISE 13: NATURAL CORPORATION Inventory.000 529. 1 1. 1 to Sept.720 5.680 Cost of goods available for sale 5.800 Less: AP.000 1.000 Less: Purchase discounts (40.000 Add: AP.000 Less: Sales returns (20.590.000 Estimated cost of sale Sales 380. Payments to suppliers Jan. Sales for 10 months (Jan to Oct) (a) 4. Ans. 1 6.720 Goods out on consignment 390.502. 1 139. 2011 2012 2013 Total Sales 5. Ans. 1 (705.400 Add: AR. 1.000) 330. C.000) Adjusted Sales 10 months 4.328. Collections from customers Jan.690.765.000 Normal breakages 50.000 2. Estimated Inventory.720) Gross sales (accrual basis) 6. 1 80.000 5. Less: Inventory not damaged by fire (in-transit) (40.800 Multiply by: Cost % (100%-30%) 70% (4. Sept. unadjusted 4. 1 (1.760) Estimated Inventory.000 Less: Delivery in transit (FOB Dest.640. 1 1.600 Gross profit % based on sales 30% 26% 34% 90% Divide by: 3 years 3 Average gross profit rate 30% 2. Jan. 1 1.000 Less: Sales returns and allowance (300.) (75.211. Sept. 1 to Sept. 1 982.440.400 1.295.120 Less: AR.000 Cost of goods available for sale 410. 1 3. B.120) Gross purchases (accrual basis) 4. CHAPTER 4-EXERCISE 14: BAGUIO CORP. Jan.044.466.000) Sales for GP method purposes 360.000) 50% Gross profit 2.480 Less: Estimated cost of sales Sales 6.016.150. 000) Sales in Dec.400) (1.000 Multiply by normal Cost %.400 5.575.575.320.485.470.000 Add: Normal breakages (12 months) 50.000) Net purchases (as adjusted) 2. end (550.000) Purchase returns and allowance (100.000) (640.000 Add: Purchase in transit FOB shipping point 90. Ans.500 CHAPTER 4-EXERCISE 16: SURETY CORP.000 (c) Purchases. 3.905. Ans.405.000 Purchase discount (70.332.500 4.332. as adjusted (for GP Method) (4.000 Purchases 3.000 Mark-up cancellations (100. Cost of Sales (10 months.000 Freight in 90.000 3.935.000) (180.750.00+90.048.000) Add: Employee discounts (12 months) 150. Inventory.000 Cost of Goods Available for sale (10 months) 2.500 (d) Sales 12 months.000 Add: Net Purchases (12 months) Gross Purchases 3.685.000 Less: Cost of sales at Retail/Sales Sales 4.485.720.000 Net purchases (as adjusted:)(c) 2. unadjusted 2.Average 3.037.000 2.000) 3. Ans.500.000) Cost of Sales (10 months) 2.000 Cost of goods available for sale .000) Cost of goods available for sale .AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 37 of 155 (b) Beg Inventory 450.037. as adjusted (for GP Method)(d) 6.000 56% Less: Beginning inventory (598. Ans.500 solution) Total Cost of Sales 3.000 Sales (10 months).000 49% Mark-downs (1.800 7.000) Gross Sales for 2 months (for GP Method) 1.800 6.875. B.780.000) Mark-ups 600.295.000 1.000 61% Cost of goods available for sale at Retail 6.450. see number 1 2. at 10% mark-up on cost (110.FIFO Retail 2. see number 2 1. B.000 Less: Purchase discount (45.000 Sales 12 months.000 Total cost of sales for 2 months 1.000 (4.000 Freight in 60.000 Less: Sales in Dec. at normal 50% mark-up 1.000 Less: Inventory.000 Freight in 80.400 4.586.000) Employee discount 400.000 Cost of Sales 12 months (see number 3 solution) (3.000 solution) Cost of Sales (2 months. D.500.500.400 1. under normal GP% 50% Cost of sales at normal GP rate 937.988.590. Sales (12 months).330. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES .000 Purchase returns (140.000 Less: Sales returns and allowance (12 months) (375.000) Purchase returns and allowance (70.000 Sales returns (150. adjusted 6.000) Purchases . A.500) Estimated ending inventory 447. unadjusted 6.985.500 Add: Cost of sales 10% markup on cost 100.410.300.295.Conserv.405.000) Estimated Inventory at Retail 1.586.000 Cost of Goods Available for Sale (12 months) 3. beginning 450. Cost Retail Cost % Beginning inventory 598.000) Mark-down cancellations 385. 252.800. Estimated Inventory at Retail 1.250 CHAPTER 4-EXERCISE 17: TITANIUM CORP. Estimated Inventory at Retail 1.000 62% Less: Beginning inventory (1.600) Inventory shortage 294.125.000) (1.000 Multiply by Cost % .050 2.750 CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . Estimated Inventory at Retail 1. Estimated Inventory at Retail 1.650 Less: Inventory per count (649.000 425.Conserv.125. Ans.027.155.455.000 3.072.000) Departmental transfer debit 300.000) Cost of goods available for sale .125. Ans.000) Invntory shortage 308.500 2.500 22.000) Abnormal spoilages and breakages (120. Ans.000 (20.Conservative 58% Estimated Inventory at Cost 652.000 Departmental transfer credit (600. Ans.000 Normal Spoilage 600.020.600) Inventory shortage 176.425.000 Less: Cost of sales at Retail/Sales Sales 19.000) Inventory shortage 252.000 Purchases 13. Ans. C.920.000) Net markup 450.Conservative 63% Estimated Inventory at Cost 708.685.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 38 of 155 Estimated Inventory at Retail 1.125.000) Purchases .000) Estimated Inventory at Retail 1. Cost Retail Cost % Beginning inventory 1. Estimated Inventory at Retail 1.500 21.Conservative 61% Estimated Inventory at Cost 1.252.375.600) Inventory shortage 378.250.685.000 1.750 Less: Inventory per count (400.000) Purchase allowance (270.000) (200.000 Multiply by Cost % . C.000 58% Net markdown (1.000 Freight in 300.232.500 Less: Inventory per count (400.Conservative 62% Estimated Inventory at Cost 697.920.500 Less: Inventory per count (400.000 Multiply by Cost % .000) (1.500 3.800.200.000) Inventory shortage 297.000 Sales returns (450.000 Purchase returns (450.000 63% Cost of goods available for sale at Retail 21. A.000 Multiply by Cost % .FIFO Retail 12.685.000) Employee discount 300. B.000 Cost of goods available for sale .600 Less: Inventory per count (649.Conservative 56% Estimated Inventory at Cost 943.000 Multiply by Cost % .375.500 19.Conservative 49% Estimated Inventory at Cost 825.Average 13. C.000 Multiply by Cost % .850 Less: Inventory per count (649.000) (750.500 22.020. 13.000 1. 880 Allowance for write-down.000 69.000 250.000 5.000 Z-03 20.880 Lower of cost or NRV 69.200) Estimated cost to sell (1.000 3.200 17.880 30.956. 5.000 Class Y: Y-01 20.000 15 25 15 450.A. Ans.000 17.050.000 Y-03 28.000 750.000 30 25 750.000 Z-03 20.000 3.000 Lower of Cost or NRV 5.000 Y-04 25.000 Gain on recovery (1. Ans.800 38. Ans.831.000 28 25 25 550.880 Lower of cost or NRV 69. Total Cost 72.000 550.000 2.000 22 23 440.000 900.000 Z-05 30. Total Cost 72.000 Y-01 20.981.000 20 25 20 200.000 Z-05 30.880 Lower of cost or NRV 69.000 Z-04 25.000 25 30 25 700.000 Z-02 15.025. B.000 25 22 22 330. Item Quantity Unit Cost NRV Lower of Cost or NRV Z-01 10. B.880 3.000 32 35 32 800.000 Loss on write-down 1. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . 2.000 32 35 800.800) (2.000 460.000 30 26 26 520.120) 4.000 Z-02 15. B.000 25 22 375.000 18.000 30 25 25 625.000 840.880 Allowance for write-down.000 2.000 Selling price 36. beg.000 Y-05 30. Class Z: Quantity Unit Cost NRV Total Cost Total NRV LCorNRV Z-01 10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 39 of 155 CHAPTER 4-EXERCISE 18: NANCY INC. Total Cost 5.000 35 30 30 900. beg.000 Allowance for write-down.000 Y-05 30. end 3.000 30 26 600.000) (2.000 28. Ans.180) (3.000 20 25 200.956.831.000 Allowance for write-down. Ans.620) (6.515.875. Total Cost 72. end 3.000 Loss on write-down 3. Ans.000 625.000 Z-04 25.000 Y-04 25. Total Cost 5. B.000 330.000 Lower of Cost or NRV 5. C.000 2.000 28 25 616.000 5.000 Y-03 28.000 CHAPTER 4-EXERCISE 19: SAVIOR CORPORATION Markers Pens Pencils Historical cost 24.000 Loss on inventory write-down 150.000 3.000 Y-02 22.000 21.000 875. 1.875.880 2.000 520.225.981.000 Loss on inventory write-down 466.000 15 25 450.000 35 30 1.000 Y-02 22.000 Estimated cost to complete (3. Ans.515.000 2.800) Net realizable value 31.000 Lower of cost or NRV 24.000 25 30 700.000 2. Ans.000 28.000 1.000 22 23 22 440.000 2. 000 Total Cost 105.000 80. CHAPTER 4: AUDIT OF INVENTORIES AND COST OF SALES . FG WIP RM Cost 2.000 1.00 . ending 150.000 98.Item B RM B-01 RM B-02 RM B-03 Cost 80.000 708. D.000 Lower of Cost or NRV 2. thus RM .000 215.000 100.000 240. Finished goods Item A Item B Item C Cost 500.000 95.540.10 each 3.Item A shall not be tested anymore.000 4.000 396.45 E 400 units 9.350.000 NRV (Replacement cost) 100.000) NRV 110.000 RM .000 RM . Ans.000 115.080.000 105.000 Loss on write-down 150. B.Item C (FG not written-down.00 each 1.000 396.000 49.000) (60.050.000 725. beginning 60.25 Ans.80 C 28 units 16.000) (40.20 each 221.680.000 445. Cost 2.364.000 86.70 each 4.000 17.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 40 of 155 CHAPTER 4-EXERCISE 20:OCTOBER INC.00 D 43 units 5.Cost to sell) 800.500. RM C-01 RM C-02 Cost 175.000 216. Ans. thus RM .000 49.000) 17.000 215.000 65.000 800.000 Direct Labor 50.240. A.00 each 2.000) (75.200.000 17.000 190.000 176.000 80.000 5.60/dozen 3. B.350.000 176. RM .00 F 70 dozens 2.70*12 per dozen*P2 132.10 each 8.64/dozen 108.000 1.000 725.50 each 16.000 708.000 1.000 Total Lower of Cost or NRV 708.000) (24.000 Allowance for WD. RM A-01 RM A-02 Cost 120.000 NRV (Selling price .000 45.000 Allowance for WD.000 445.360/12per dozen*P3. B.500.80 each 112.350.000 150.00/gros G 95 grosses 144.000 75.60 B 24 units 4.050.000 3.Item C shall not be tested anymore.000 Cost to complete (50.Item A (FG not written-down.000 800. Ans.000 40.50 each 462.000 Lower of Cost or NRV 2.000) Cost to sell (% of Sellin price) (40.000 Lower of Cost or NRV 500.000 2.000 1.00 .000 35.000 - Loss on WD(Recovery gain) 90. 1.000 98.000 70.000 110.000 40. Work-in-process Item A Item B Item C Direct Materials 30. Ans.00/gross 12.000 (21.15 each 5.000 250. Ans.00 s 18.000 100.000 Overhead 25.000 Lower of cost or NRV 105.000 2.000 278.000 396. B.000 CHAPTER 4-EXERCISE 21:SOLSONS COMPANY Quantity Cost NRV Amount at Lower of Cost or NRV A 360 units 3.000 115.000 Selling price upon completion 200. P24. P261.025. January 1.000 FA at FMV 250.312. 2014: 93.000 (7.896 Amortization table: FA at Amortized Cost Correct Int.000 Interest Income (P1M*10%) 100.916.000 Fair Value (12/14): P1M*120% 1.499 2.501 100. Amortization Balance (Bal*eff%) (Princ*nom%) January 1.032.P/L 250.916 100. Ans.896. Ans.000 2.688 CASE 2: FA at FMV through Profit or Loss 1. 2014: 1.025.896 Initial cost 1.038.312 December 31. P1. CASE 1: FA at Amortized Cost 1. P92.397 December 31. 2014: FA at FMV (P1M*95%) 950.000 Unrealized holding gain .000 (6.000 Interest income 100.896) Interest income 100.038.499 FA at amortized cost 6.501. Ans.896 Cash 1.000 Unrealized holding gain 250.200.104 CHAPTER 5: AUDIT OF INVESTMENTS .084 3.084) 1. Ans.000. December 31.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 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. 5.000 Interest income 7. 2014: Financial asset at amortized cost 1.499) 1.000 Interest income 6.688 gain Sales proceeds (1/1/16) 1.000 Interest income 100. P93.000 Unrealized holding gain 250. Transaction cost (Expense) (88. January 1. 2015: 92.038.312 Realized gain on sale 24.084 FA at amortized cost 7. Ans. Ans.896 Quoted price (P1M*95%) 950. 4.000 Expense 88. Ans. Nominal Int.025. 2014: Cash 100.104.050.038.000 Transaction cost 88. P950.000 Net investment income 261.896 December 31.038.896 December 31.038.896 Cash 1. 2015: Cash 100. 2014: Cash 100.000 Carrying value 950.000 Less: Carrying Value/Amortized cost 1.P1. Ans.916 Fair Value (12/15): P1M*105% 1. (P50.SHE.032. Ans.OCI of SCI 167.000 (6.P1.038.312 Unrealized holding gain .000) 4.OCL of SCI 142. CHAPTER 5: AUDIT OF INVESTMENTS . Ans. Amortization Balance (Bal*eff%) (Princ*nom%) January 1.200.025. Ans.050.OCL of SCI (142. Nominal Int.000 Interest income 6.603 Fair Value (12/14): P1M*120% 1.000) Interest income 100. P1.688. Ans.397 December 31.050. Ans.000. P93.896 Initial cost 1.916 100. Unrealized holding gain .SHE.916) 4.916) Unrealized holding loss .SHE. 5. beg 167.312 December 31.000 FA at FMV 150.896.038.038.688 5. 2014: Cash 100.000 Amortized cost (12/15) 1.038.501 100.200.000 Interest income 7.896 Quoted price (P1M*95%) 950.499 Available for sale security 167. Ans.050. end 24.000 Carrying value 1.000 Unrealized holding loss 150.000 Interest income 100. 2014: Available for sale security 1.896 December 31.000 Interest Income (P1M*10%) 100.P/L (2014) 93. 2015: Cash 100.896 Cash 1.688 Unrealized hoding gain . 12/31/15 1.000 Less: Carrying Value/FMV. 2014: 1.000 Fair Value (12/15): P1M*105% 1.603 2.084) 1. 2015: Cash 100.050.038.499) 1. P24.000) Net investment loss (50.P/L (150.896 Amortization table: Available for sale security Correct Int.499 Available for sale security 6. 2014: 93.025. 2015: 92.397 Unrealized holding gain .603 Unrealized holding loss .603 Unrealized holding gain-OCI 167.501 December 31. January 1.000 Unrealized holding loss .000 Amortized cost (12/14) 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 42 of 155 December 31.084 Available for sale security 7. (P142.0 Sales proceeds (1/1/16) 1.084 Unrealized holding loss .000) 3.501 Interest income .032.050. P1. end 24.916 Available for sale security 142.000 Unrealized holding loss (150.000.OCL of SCI (2015) (142.916) 3.000 Interest income 100.000 Realized gain on sale - CASE 3: AVAILABLE FOR SALE SECURITY 1.000 (7.050.000 Transaction cost 88. Ans. 620921 Interest (P1.971.157 FMV = Present value of future cash flows at 10% effective rate for 5 periods.209. 2014: Cash 1.200.000 Interest income 1.200.239 December 31.239720 FMV (12/14) 10.758.816 1.758.P/L 213. Ans. 2015: Cash 1.758.157. 2014: 1.620921) 6.603) 10.157 December 31.790787 Initial cost 10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 43 of 155 6. Ans.200.816.944 3.157 Amortization table: FA at Amortized Cost Correct Int.790787) 4.708425) 7. 2016: 524.758. Ans.184) 10. 4.400.000 (136. P10. P1.000*0.000*0.759.548.973 December 31.759 **FMV = Present value of remaining cash flows at 9% for 4 periods.790787 Initial cost 10. P622.157.252 0.916 2.759 CHAPTER 5: AUDIT OF INVESTMENTS .200.200.184 FA at amortized cost 124.050.887.213 0. 2014: 10.000*0.000 (124.000*3.000 Less: Carrying Value/Amortized cost - Realized gain on sale 1.758.497.869 600.075. Ans. Ans.200.184 2.000 FA at FMV 213. Principal (P10.157 FMV = Present value of future cash flows at 10% effective rate for 5 periods.688 gain Sales proceeds (1/1/16) 1.000. 2015: 1.413. P24.397 1.000 Interest income 124.000 Interest Income (P10M*12%) 1.084.000 (75. 5. Principal: (P10.759 Net investment income 1. 2014: Financial asset at amortized cost 10.000) Realized loss on sale (622.157 Unrealized holding gain .200.200. Interest income 1.000 CHAPTER 5-PROBLEM 3: SOTA CORPORATION CASE 1: FA at Amortized Cost 1.000 Unrealized holding gain 213.758.548. January 1. P10.075.370 June 30.239720) 3.200.000 Less: Carrying Value/Amortized cost (10.000. Ans.664 3.413.759 Unrealized holding gain 213. Ans.000*3.944 3.620921 Interest (P1.000 Interest income 1.758.790787) 4.213 0.708425 Interest: (P1.157 Cash 10.131) 10.000*3.239 loss Sales proceeds (6/30/16) 10.620921) 6.000.050.603 3. P1.759 Fair Value (12/14)** 10.397.200.971.497.422.000 Interest income 136.063.758. Ans.157 December 31.422.209.633.200.063. 2014: FA at FMV 10.758.239) CASE 2: FA at FMV through Profit or Loss 1.916 Carrying value 10.370. P10. January 1. Nominal Int.603 FA at amortized cost 136. December 31. P1. Amortization Balance (Bal*eff%) (Princ*nom%) January 1. 2014: Cash 1.758. Principal (P10.200.239) Accrued interest (600.157 Cash 10. Ans.839 Amortized cost (12/15) 10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 44 of 155 December 31.213 0.000*3.577097 FMV (12/15) 11.030. Principal: (P10.030.400.SHE. 2014: Available for sale security 10. end 533.633.000) Realized loss on sale (1.000*2.157 Amortization table: Available for sale security Correct Int.603) 10. beg 337.P/L 58. Principal: (P10.200.839 CHAPTER 5: AUDIT OF INVESTMENTS .944 3.577097) 3.063.839. 2015: 1. Ans.793832) 7.000*3.000*0. P11.923 4.973 Unrealized holding gain .OCI of SCI 195.209.200.092.000.516 2.816 December 31.184) 10. 2015: Cash 1. Principal (P10.943 Unrealized holding gain-OCI 337.516 2. Ans. Interest income 1.943 Fair Value (12/14)** 10.230. 2015: Cash 1.758. 2014: Cash 1.708425) 7.030.923 Net investment income 1.620921) 6.971.239720) 3.P/L (2014) 1. Interest income .943 **FMV = Present value of remaining cash flows at 9% for 4 periods.157.000*0. Ans.000*0. P1.839) Accrued interest (600.SHE.000 Unrealized holding gain 58.526 Fair Value (12/15): P1M*105% 11.603 Available for sale security 136.157 Cash 10.923.258.397 1. January 1.758.000 Interest Income (P10M*12%) 1.OCI of SCI 337.P/L 58.916 Unrealized holding gain .000 (136.258.839 loss Sales proceeds (6/30/16) 10.200.000 FA at FMV 58.075.030.200.000.923 Unrealized holding gain . Principal: (P10.758.816.000*2.916 2.633. 2014: 10.030.526 **FMV = Present value of remaining cash flows at 8% for 3 periods.322 0.200.971.971.075.790787 Initial cost 10.370 Unrealized holding gain .157 FMV = Present value of future cash flows at 10% effective rate for 5 periods.030.200. Ans.758.322 0.000 (124.793832 Interest: (P1.793832 Interest: (P1.938.370 December 31.664 3.468 Unrealized hoding gain .200.000.200.708425 Interest: (P1.839 3.084.200.000 Less: Carrying Value/Amortized cost (11.577097) 3.887.758. 2014: 1.577097 FMV (12/15) 11.000 Interest income 136.497. P10.075.916 Amortized cost (12/14) 10.157 December 31.200.200.816 1.184 Available for sale security 337.603 Available for sale security 195.943 Unrealized holding gain .839) CASE 3: AVAILABLE FOR SALE SECURITY 1. P1. Amortization Balance (Bal*eff%) (Princ*nom%) January 1.200.923 **FMV = Present value of remaining cash flows at 8% for 3 periods.184 Available for sale security 124.497.923 Fair Value (12/15)** 11. P1. 5.000*0.230.526 Unrealized holding gain-OCI of SCI 195.239720 FMV (12/14) 10.000.973 December 31.252 0.000 Interest income 1.092.200. Nominal Int.839 Carrying value 10.000 Interest income 124.790787) 4.620921 Interest (P1.548.000 Interest income 1.793832) 7.938. P622.877 December 31. P1. 2014: 557.069. 3.366.229. Ans. 2015: 553.865) Proceeds from sale (P5. Thus.870 FA at FMV 15.345.603) Realized loss on sale 10.263. Ans. Unrealized holding gain .000 124.111 6. 0. 2015: Entry upon remeasurement as FA at FMV Unrelized holding loss .000 (111.249*4/6) 3.397 CHAPTER 5-PROBLEM 4: ABC COMPANY 1.499 Carrying value (P6. (P6.151. Amortization table: FA at amortized cost at 10%. Ans. Ans.111. there shall be no gain or loss resulting from transfer on December 31. Ans. 2014: 6.603 9.862 Carrying value 6.85 December 31.*nom%) January 1.931.094 CV (FMV at 12/31/15) 1.526.897.OCI of SCI (2015) 195. Ans. P533.P/L 15.151.027 December 31.119 600.877. 2014: 924. Ans.249*2/6) 1.SHE. 6.088) 5. Correct Int.000 136.494 600.750 Carrying value of remaining inv.383 December 31.881) 6.P/L 35.345 Net unrealized holding gain or loss in the 2016 profit or loss (62. Ans. Ans.546*2/6) 2.241.973.000 (46.992 FA at FMV (CV) 6.030. Amortization Balance (Bal*eff%) (Princ. 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 2015.870 January 1.973. P195.897.070.965. P6. (P138.194. 2015: 6. 2016: 497.032. P11. 2015.035. 2014: 9.000 CHAPTER 5-PROBLEM 5: ABC COMPANY 1.546 2.000 Less: Carrying Value/Amortized cost - Accrued interest (136.105. (As FA at FMV) 5.229.526 4.213.213. Unrealized gain/loss on transfer on Janaury 1.992. CHAPTER 5-PROBLEM 6: BET CO.239 loss Sales proceeds (6/30/16) 10. Amortization Balance (Bal. end 533.144. The transfer from FA at Amortized cost to FA at FMV shall be made effective at the beginning of the following reporting period. Nominal Int.213. P6. P6. Ans. 2016: FMV of remaining investment (P5. Amortization Balance (Bal*eff%) (Princ.862. Ans.184 800.213. Amortization table: FA at amortized cost at 9% Correct Int.992 4. Amortization table: FA at Amortized cost at 8% effective rate: Correct Int. Ans.000 (102.839. P35. December 31.331) 6.000 (42.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 45 of 155 3.111.364 Realized loss on partial sale (138. P7.468 5. Thus.502. The transfer from FA at FMV to FA at Amortized cost shall be made effective at the beginning of the following reporting period.*Eff%) (Princ*Nom%) January 1.479 2. Nominal Int.400.094. 2016: Entry upon transfer to FA at Amortized Cost FA at amortized cost (FMV 12/15) 6.182 (69. 2016: FMV (12/31/16) 1.889 600.000.111. Ans.958.965. Nominal Int.*nom%) 1 5. 2015: 936.992 December 31. Ans.92 December 31. 4.468 Unrealized holding gain .479.213. P6.603 800.111) 6.546*4/6) 4.432) Unrealized gain/loss on remeasurement on December 31.184 9.843 December 31.506) 6.105. 2017: 488.630 CHAPTER 5: AUDIT OF INVESTMENTS .750 7.865) 3. 0. 2015. there shall be no gain or loss resulting from transfer on December 31.669 600.383 Unrealized holding gain .194.992 2 1.105. FMV (12/31/14) 6. AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 46 of 155 1. Ans. P4,667,769. Amortized cost, December 31, 2015: 9,502,630 Accrued interest, December 31, 2015: 800,000 10,302,630 Present value of new future cash flows at 10% Principal: (P10M*75%)*0.751315 5,634,861 0.7513148 Impairment loss 4,667,769 2. Ans. P6,198,347. Amortization table: FA at amortized cost after impairment: Correct Int. Nominal Int. Amortization Balance (Bal.*Eff%) (Princ*Nom%) December 31, 2015: After Impairment 5,634,861 December 31, 2016: 563,486 - 563,486 6,198,347 3. Ans. P1,239,669. Amortized cost, December 31, 2016 6,198,347 Present value of revised cash flows at 10% Principal (P10M*90%)*0.826446 7,438,017 0.826446 Impairment recovery gain 1,239,669 4. Ans. P8,181,818. Amortization table: FA at amortized cost after impairment recovery: Correct Int. Nominal Int. Amortization Balance (Bal.*Eff%) (Princ*Nom%) December 31, 2016: After Impairment recovery 7,438,017 December 31, 2017: 743,802 - 743,802 8,181,818 CHAPTER 5-PROBLEM 7: ABC CORPORATION 1. Ans. FA at FMV 25,000 Unrealized holding gain 25,000 FMV (12/14) CV (excluding transaction cost) Alpha 300,000 250,000 Beta 475,000 500,000 Total 775,000 750,000 Unrealized holding gain - P&L 25,000 2. Ans. Unrealized holding loss - OCL of SCI 30,000 FA at FMV through OCI/L 30,000 Charlie, FMV (12/14) 850,000 Carrying value, including transaction cost 880,000 Unrealized holding loss - OCL of SCI (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. FA at FMV 100,000 Unrealized holding gain - P&L 100,000 FMV (12/15) CV (FMV 12/14) Alpha 350,000 300,000 *reclassification is not allowed, thus Alpha is still Beta 525,000 475,000 regarded as FA at FMV through OCI/L. Total 875,000 775,000 Unrealized holding gain - P&L 100,000 5. Ans. Unrealized holding loss - OCL of SCI 100,000 FA at FMV through OCI/L 100,000 Charlie, FMV (12/15) 750,000 Carrying valuu (FMV 12/14) 850,000 Unrealized holding loss - OCL of SCI (100,000) 6. Ans. P875,000. 7. Ans. P750,000. 8. Ans. P3,260,000. Delta Securities - Investment in Associate Acquisition cost, including transaction cost 1,650,000 Share from net income (P2.5M*25%) 625,000 Share from forex loss (P500K*25%) (125,000) Share from dividends (P200K*25%) (50,000) Carrying value, 12/31/14 2,100,000 Additional Investment 500,000 Share from net income (P1.9M*30%) 570,000 Share from forex gain (P600K*30%) 180,000 Share from dividends (P300K*30%) (90,000) Carrying value, 12/31/15 3,260,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 47 of 155 CHAPTER 5-PROBLEM 8: ETC INC. Case 1: PAS 39 1. Ans. P51,000. FMV (12/13) Cost Aye Co. 50,000 45,000 Bee Inc. 250,000 300,000 Si Corp. 30,000 36,000 330,000 381,000 Unrealized holding loss - SHE (51,000) 2. Ans. (P30,000) Proceeds from sale (15,000*P8) 120,000 Original cost (P300,000/30,000)*15,000 150,000 Realized loss on sale (30,000) 3. Ans. (P72,000) FMV (12/14) Cost Bee Inc. 90,000 150,000 Si Corp. 24,000 36,000 114,000 186,000 Impairment loss - P&L (72,000) 4. Ans. P15,000. FMV (12/14) Cost/Impaired value Aye Co. 60,000 45,000 Bee Inc. 90,000 90,000 Si Corp. 24,000 24,000 174,000 159,000 Unrealized holding gain - SHE 15,000 5. Ans. P174,000. Case 2: PFRS 9 1. Ans. P51,000. FMV (12/13) CV Aye Co. 50,000 45,000 Bee Inc. 250,000 300,000 Si Corp. 30,000 36,000 330,000 381,000 Unrealized holding loss - SHE (51,000) 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. FMV (12/14) Cost Aye Co. 60,000 45,000 Bee Inc. 90,000 150,000 Si Corp. 24,000 36,000 174,000 231,000 Unrealized holding loss - SHE (57,000) 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. FMV (12/15) Cost/Impaired value Aye Co. 75,000 45,000 Bee Inc. 175,000 90,000 Si Corp. 50,000 24,000 300,000 159,000 Unrealized holding gain - SHE 141,000 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) SOLUTIONS GUIDE CTESPENILLA 48 of 155 2. Ans. P300,000 and P69,000. FMV (12/15) Cost Aye Co. 75,000 45,000 Bee Inc. 175,000 150,000 Si Corp. 50,000 36,000 300,000 231,000 Unrealized holding gain - SHE 69,000 CHAPTER 5-PROBLEM 10: SHIPO CO. 1. Ans. P2,000,000. Acquisition price 14,000,000 Book value of net assets acquired (P48M*25%) (12,000,000) Total excess 2,000,000 Identifiable asset: Depreciable asset: (P1.2M*25%) 300,000 Land (P6M*25%) 1,200,000 1,500,000 Unidentifiable asset/Goodwill 500,000 Divide by: 25% Total Goodwill based on 25% interest of Shipo 2,000,000 2. Ans. P2,670,000 Share from net income (P10.8M*25%) 2,700,000 Less: Understated Depr (P300,000/10y) (30,000) Share from net income 2,670,000 3. Ans. P16,345,000. Initial cost 14,000,000 Share from net income 2,670,000 Share from UHGain-OCI (P800K*25%) 200,000 Share from dividends (P2.1M*25%) (525,000) Carrying value, 12/31/14 16,345,000 4. Ans. P805,000. Realized Unrealized Total Proceeds from portion sold (25,000*40%)*(P680-P5) 6,750,000 6,750,000 Fair value of remaining portion to be reclassified: (25,000*60%)*P680 10,200,000 10,200,000 Carrying value of Investment in Associate: Sold (P16,345,000*40%) (6,538,000) (6,538,000) Reclassified (P16,345,000*60%) (9,807,000) (9,807,000) Gain on cessation before recycling of OCI/L 212,000 393,000 605,000 Recycling of OCI to P&L Sold (P200,000*40%) 80,000 80,000 Reclassified (P200,000*60%) 120,000 120,000 Total cessation gain - P&L 292,000 513,000 805,000 5. Ans. 6. Ans. 7. Ans. P171,000. #shares #shares outs. % interest Proportionate interest before dilution 25,000 100,000 25% Proportionate interest after dilution 25,000 125,000 20% Decrease in interest 5% Share from increase in capital due to share issuance: (25,000sh*P680)*20% 3,400,000 Prorated CV of portion deemed sold: P16,345,000*(5%/25%) (3,269,000) Gain on dilution before recycling of OCI/OCL 131,000 Recycling of OCI to P&L: P200,000*(5%/25%) 40,000 Gain on dilution 171,000 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%) 30,000 Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Share from Net Income in 2015 110,000 CHAPTER 5: AUDIT OF INVESTMENTS AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 49 of 155 2. Ans. P3,176,000. January 1, 2014 Cost (10%) 700,000 Share from Net Income, 2014 (P400,000*10%) 40,000 Share from Dividends, Oct. 1, 2014 (10,000*P0.90) (9,000) Carrying value, 12/31/14 had equity method been used 731,000 Share from Net income, Jan to Jun, 2015 (P300,000*10%) 30,000 Share from Dividends, Apr. 1, 2015 (10,000*P1.10) (11,000) Additional investment, July 1, 2015 (30%) 2,400,000 Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Carrying value, 12/31/2015 3,176,000 Case 2: “Cost-Based Approach, without Catch-up Adjustment”: 1. Ans. P91,000. Dividends Income, April 1, 2015 (10,000*P1.10) 11,000 Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Share from Net Income in 2015 91,000 2. Ans. P3,126,000. January 1, 2014 Original Cost (10%) 700,000 Additional investment, July 1, 2015 (30%) 2,400,000 Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Carrying value, 12/31/2015 3,126,000 Case 3: ““Fair Market Value Approach, without Catch-up Adjustment” 1. Ans. P91,000. Dividends Income, April 1, 2015 (10,000*P1.10) 11,000 Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Share from Net Income in 2015 91,000 2. Ans. P3,226,000. Original Investment at prevailing FMV on July 1, 2015 (10%) 10,000sh*(P2.4M/30K) 800,000 - the prevailing FMV is based on the current Additional investment, July 1, 2015 (30%) 2,400,000 selling price of the additional shares. Share from Dividends, Oct. 1, 2015 (40,000*P1.35) (54,000) Share from Net Income, Aug to Dec, 2015 (P200,000*40%) 80,000 Carrying value, 12/31/2015 3,226,000 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 12,500,000 Carrying value (Acquisition cost 1/1/2014) 10,500,000 Unrealized holding loss - P&L 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 11,000,000 Carrying value (FMV, 12/31/2014) 12,500,000 Unrealized holding loss - P&L (1,500,000) 5. Ans. P10,000,000. June 30, 2016 FMV P10,000,000 6. Ans. (P1,000,000) June 30, 2016 FMV upon reclassification 10,000,000 Carrying value (FMV 12/31/15) 11,000,000 Unrealized holding loss - P&L (1,000,000) 7. Ans. (P1,000,000) Proceeds from sale 10,000,000 Carrying value (FMV 12/31/15) (11,000,000) Realized loss from sale (1,000,000) Case 2: Cost Method 1. Ans. P9,450,000. Cost 10,500,000 Accum Depr: (P10.5M/10)*1yr (1,050,000) Carrying value 9,450,000 *lower than FMV, P12.5M, thus not impaired. CHAPTER 5: AUDIT OF INVESTMENTS 2016 (7. Dec. 2011 2012 2013 Annual insurance premium 180.000 Retained earnings (180.000 December 31.000 Accum Depr: (P10. P10M.000 January 1. P180.000 Life insurance expense 7.000 115.000.400. 2013: Cash surrender value 60. thus not impaired.000 CSV. Cost 10. 31.000) Dividends from CSV (5.000.000 December 31. 2014: Cash surrender value 37.500 Life insurance expense (180.000 Carrying value.000 January 1. 2014: Life insurance expense 180.000 Cash 180. 2013: Cash 5. thus not impaired. P8.000) Realized gain from sale 2.5M/10)*2.000) Carrying value 8. 2013: Life insurance expense 180. 4.000 CHAPTER 5: AUDIT OF INVESTMENTS .000 July. 2012: Cash surrender value 180. 31.000.000) Carrying value.500 1.875.000 Cash 180. July 1.000.000 and None. 2016 7. 2013 240. 2014: Cash 7.000 Increase in CSV for 2013 60. Cost 10.5yrs (2.000 180. Ans.875.875.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 50 of 155 2.000) Life insurance expense 180. 2011: Life insurance expense 180. Proceeds from sale 10.000.000 CHAPTER 5-PROBLEM 13: PULITZER INC.500 December 1. Dec.000 Life insurance expense 60.000 *unexpired portion as of date of death Gain on life insurance policy settlement 4.000*2/3) 120.000 August.000 Accum Depr: (P10.000 Multiply by: 9months/12months 75% Increase up to 9/30/14 37. January 1.125. Ans.125. 2012: Life insurance expense 180.500 Life insurance expense 37.000 Cash surrender value (9/30/14) 277.000 120.000 180. July 1.5M/10)*2yrs (2.000 Increase in cash surrender value . 2012 180.000 September 30.000 *lower than FMV.000 *lower than FMV. 12/31/2013 240.500.000 CSV. P115.000*3/12) 45. 12/31/2014 290.000 Cash 180.5M.000 January 1.000 Life insurance expense 60. P7.500. 3.625.000 CSV.000 Cash 180.000.000) (60. Ans.000 Life insurance expense 5.500 CSV.000 Increase for the year 50.400. 2010: Life insurance expense 180.000.000 January 1. 2014: Cash 5. Ans. (60. P2.000 Cash 180. P10.100.677. P120. 000) 3.8416800 Interest (P200.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 51 of 155 2. B.035.000 Total financial asset at FMV through P&L 200. Ans.100. B.000 Realized loss (15.624 1.000. Proceeds (50.84168) 1. Ans A.759111) 351.822 200.000 14.683.035. C.000*0. D.000 CHAPTER 5-EXERCISE 2: PINAY CORP. Equity securities of another company where no control nor significant influence exist.000 2. C.000 6.126 12/31/13: 214.100. Alpha shares (FMV through P/L) .750 6/30/14: 108.000 Realized gain 150.116 100. 51% Equity securities of another company quoted in an active market 1. P240.000 Debt security of another company quoted in an active market.000.000 3.500. Proceeds 1.000 Carrying Value (50. 1.7591112 CV/FMV 12/31/2013 2.624 200.900. 100.13 Realized gain 32. Ans. Business model of the company has an objective to hold debt securities for short- term profits.000. The company elected to report gains or losses in the other comprehensive income/losses 150.700.500) Life insurance expense. Debt security of another company quoted in an active market. D.31. 4.000 Unexpired insurance premium as of date of death (45.000) Carrying Value (P2. Proceeds (15.965. P0.591) *half of the carrying value which is the fair value on 12. Ans.000*55) 2.866 5.000) Dividend from CSV (7. Ans.500 4a) Ans. Ans. Ans. None.000) Increasein CSV up to date of death (37. Ans.000 1.933) **half of the carrying value which is the amortized cost on 6/30/14 Realized gain 63.000 Original Cost (15. Proceeds 1. Ans. P90. Ans.000 3.000 5.750.017.000*60) 900.000 principal. 20% Equity securities of another company quoted in an active market 500.951.000 8. A. P4.973. Ans.400. Real property held for speculation purposes 700.000) Carrying Value (P1.000 Land held for undetermined future use 800. A. Annual insurance premium 180.000*59) 885.100. Business model of the company has an objective of collecting contractual cash- flows from the bonds which are primarily in the form of interests and 500.409 FMV=Present value of future cash flows at 9% yield rate Principal (P2.000 2. A.000 Real property of a manufacturing business being leased out to another party under operating lease 900. Ans.182 4. P180.000*58) 2. Ans.000 0. B. 2014 90.116 1.067 Amortization table: Correct interst Nominal Interst Amortization Balance 1/1/13: 1. MULTIPLE CHOICE EXERCISES: CHAPTER 5-EXERCISE 1: 1.000sh*62) 3.677.000*1.973.360 2.(50.000 CHAPTER 5: AUDIT OF INVESTMENTS .500 4b) Ans.000 Accrued interest (50.000 Real property being developed as an investment property 300.182/2) (1. The company elected to report gains or losses in the profits/losses 100.866/2) (986.000 Accrued interest (50.000 Total Investment Property 2. Equity securities of another company where no control nor significant influence exist. 690 Amortization table: Financial asset at amortized cost.Bee Inc.857 1.923.948 1.50)*40.000) Bee Inc.614. FMV 12/14 CV/Cost Aye Corp.000sh Bee Inc. Shares (10. 57. Nominal Int.973. Transactions costs . 2.082.000 1.143 FMV=Present value of remaining future cash flows at yield rate 12% Principal (P1.000*3. C.5% semi-annual prevailing effective rate) Principal (2M*0.664.400.948 3.000 7.000) 3.000 (2. 10%. Shares (20. 2M Bonds (FMV/PV of Cash flows using 5.8928571 982.Expense Aye Corp. 2014: 1.000) Share from net income 280.690 Alternative Solution: Financial asset at amortized cost: See Co 10%. Ans.000*0. Shares 700.000 Total noncurrent investmetns 4.000 UHG from Aye and Bee only Share from net income .000.360.FA 121. See Co at effective rate 10% Correct Int.948 Financial assets at FMV through P&L 3. 50.664.430.948 Share from net income .100.948 3. 2M Bonds Amortized cost shall be PV of cash flows using original effetive rate (6% semi-annually) Principal (2. Transactions costs .000) Bee Inc.000 *excluding accrued interest December 31.964.433 1 Interest (100. 280.50-2-0. 120.000 (29.000sh See Co.690 CHAPTER 5: AUDIT OF INVESTMENTS . D. 10%. Ans. B.000 Unrealized holding gain .187 0.000. Alpha sahres (FMV through P/L) 3.Expense Aye Corp.Dee Corp. Shares (10. Shares 1.000*12%*3/12) Unrealized holding gain . D.000 4. Investment in Dee Shares (Associate) Intial cost (6/30/14) 2. Ans.430. C. Amortization Balance October 1.930.000 540.7921) 1.FA 80. C.000 0.923.511 3.8072) 1. Ans.690 *(1.Dee Corp.5052) 350.000 (1.000 Total/Net Investment income 507.See Co. See Co Bonds at amortized cost 1.948 5.000 Unrealized holding gain .IS 121.50)*20.000) Dividend income . Ans.240.080.892857 Interest (P100.000 Share from dividends (250.000.000 Total/Net Investment income 541. Shares .000*0. 12/31/14 1.698 6.143 *** Total Current Investment 4.000 Interest income . Shares (20.Bee Inc. 1.515 * 1. 2014: 57.143 CHAPTER 5-EXERCISE 3: BENSHOPPE INC.543.286 100.000 (27. Ans.892857) 892. 2.000*0.000*6/12)*25% Investment in Assoc Balance 2.584.Assoc.000.690 Dee Corp.930.000 Delta bonds (FMV through P/L) 982. 120.000) Dividend income .690 1. 2M Bonds* 1.930.50-.964.690 50.948 See Co. 280.4651 Amortized cost.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 52 of 155 6.000-50.7921 Interest (100. B.4651) 346.000 Interest income .892857) 89.See Co.000 0.923.000*3. Ans. FMV (12/14) Cost DEF Corp.331 Carrying values before year-end remeasurement # of shares CV Dec. FMV Cost PATATAS (1M*P64) 64.500.500.927 CHAPTER 5: AUDIT OF INVESTMENTS .000 62.400 1.800. 31.000 72.667 Cash dividends from PATATAS 1. 31): P50M*10%*2.000 140 2. B. 15): P100M*10%*6/12 5.500.000.155. Ans.5/12 1. 2013 7. Shares 1.140.000.250. C.000sh*P78) 19.000 82.400 Share from dividends (0.678 200.500. ASSET AT FMV THROUGH PROFIT/LOSSES FMV (12/14) CV (FMV 12/13) DEF Corp. Proceeds from sale of half of SIBUY bonds 51.050.85734 Principal (P2.000 Realized loss on sale. BAWA (250. 15 to Oct.000.000 82. C.SHE 46. Ans.Shares 348.000 Original cost 20.000*0.000 8% yield 2. under PAS 39 1.150) Sahre from net income (450.400 Unrealized holding gain .Dec.000 Original cost (P62.450. under PAS 39 (500.000 Realized gain on sale (PAS 39) 144.500.000 GHI Corp. (face value) 50.000.000 Total interest and dividends income.600 Unrealized holding gain .000 3.000 Amortized cost October 16.000 Tres shares 18. A.000.000 12% yield 1.000.73 800.783265 Interest (P200.000 5.734.000sh*P65) 32.250 CHAPTER 5-EXERCISE 6: ANGEL CORP.903. IF SHARES ARE FIN. Interest from SIBUY bonds (Apr. Ans.000 Interest from remaining SIBUY bonds (Oct. 31.000. A. 2014 Dec.600. A.400 1.SHE 500. Proceeds from sale of all BAWA shares (250. 1.000 2.14 382.000.000.000.000 1.000*65) 585.400 325.000) CHAPTER 5-EXERCISE 5: MARIAH CORP. IF JKL SHARES IS INVESTMENT IN ASSOCIATE: Initial cost (including transaction cost) 325.000 GHI Corp.765.000.331 * 7.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 53 of 155 CHAPTER 5-EXERCISE 4: SITAW CORP.653 Total Fair Value 2.041.000 2.783265) 356.000*1.000*P74) 18. D.811. Shares 1.600 JKL Shares 323.000 105 1.500.000 Quatro bonds 2.000 Quatro bonds 2.346.Shares 348.000 1.000 Unrealized holding gain .541.000 3.000.000 Dos shares 11.400 1.667 4.000 *reclassification to FA through P&L not allowed.331 **FMV=Present value of cash flows at 8% 2. 31.800 4.250. Ans. Ans.000 Dos shares 11. A. Ans.000 369. B. Uno shares 10. Ans.927 ** Total Carrying Value 5. 12.85734) 1. Proceeds from sale of half of PATATAS (500.000 360.080. Ans. Ans. 2014 Total FMV Uno shares 10. 15 .000 1. 1. 1.75*4200) (3.000 Realized gain on sale.000 160 1. Ans.000 145 1.000 20.000 1.714.000/2) 31.140.071.071.SHE 76. D.000 Original cost 441. Proceeds from sale (9.000 Carrying Value.953.811.000 Realized gain on sale 1.520.000 100 1.000 JKL Shares 323.400 315. Fair Value Dec.000 Tres shares 18.000.31.000*20%*8/12) 60.000 0. 000 0.270.000+5.P&L 2.005. in lieu of stock div.520.000 5.000 28.000 2.000 CV of ABC after cash div.000*0. Proceeds from sale plus accrued interest (P500.000*100) 1.000 108 1.129 1.000*(P21. Aggregate Fair Value (12/31/14) Equity Securities only 5.000 Divide by: # of shares (25.000 0.000*0.401831 Total Fair Value 1.950.000.796 Unrealized holding gain . Ans. D.000 Unrealized holding gain .000*98%)+(P500. 2014 Trans.000 CV of shares sold on 8/5 (50. Proceeds from sale: Dos shares (10.000 XYZ (5.000) Realized gain on sale 2. 12/31/14 416.000*80) 800.000*P100) 1.000 4.50))/23. Ans.800.85734 Principal (P2.000*P15) 225.000 Original Cost of Equity Securities: # of shares Cost including Dec.927 Unrealized holding gain . 31.000 Tres shares (18.871 2.000*12%*11/12) 545. 2014 7.667 (b) CV of ABC before cash div.000 3.9009009 Interest (P60.000) Transaction cost (rec.000 Realized gain on sale .000 Dos shares 11.471 1.000.258 Prorata: portion sold 50% (487.711780) 1.505 1. B.667 (a) XYZ (18.129) Accrued interest: (P500.000*P11. B.346. C.953.054 504.000 shares sold (300.903.500. 500.000*P20) 800.000) 974.083.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 54 of 155 **Acquisition cost=Present value of cash flows at 12% 2.P&L 140.258 Accrued interest (P1M*12%*6/12) (60.000 2.927 12/31/12: 228. Dec.709 (a) Initial cost ABC (40.9009009) 450.000*2. in lieu of stock div.000 290. in lieu of stock div. Proceeds from sale: ABC (15.331 Carrying value 5.000.000 74.471 200.000 (c) DEF at 11% yield rate Principal (P500.P&L 1. Ans. 31.520.000sh*P15) 270.398 CHAPTER 5-EXERCISE 7: DUMBO INC.000 CV of 15.333) (b) CV ABC. Ans. Ans. A.000 Tres shares (18.000*(P13-P1.927 Unrealized holding gain .000 Carrying value (Initial cost.932.667 (c) Initial cost DEF (20.000) 30.P&L 920.000 Tres shares 18.000 Carrying value of shares sold: Dos shares (10.000 1.000 CHAPTER 5: AUDIT OF INVESTMENTS .000) CV DEF 12/31/14 180.000 180.505 487.000*12%*11/12) (55.392. 12/31/14 416.9009009) 54.000*0.401831) 480. Ans.55 820. Fair market value.044. 16. Amortized cost of Quatro bonds (12/31/12) Correct Interest Nominal InterestAmortization Balance 1/1/12: Orig Cost (12% yield rate) 1.224. as expense) (10.50) 300.404 3.783265 Interest (P200.000) Effect of cash div. (83.000 50.000*140) 2.000 Carrying value.423. B.000 150 1. B.000 XYZ: 5.000 Carrying value: ABC: 15.50) 230.000) 3.50-P1.000sh*P18) 450. excluding accrued interest and transaction cost) Total cash consideration paid 1.560 2.711780 200.903.450 0. Cost Total cost Uno shares 10. FMV 12/31/14 CV ABC (25.000*(20.275. Ans. 1.000 350.600.000 Total Cost 4.000 416.67 Multiply by: Remaining shares 25.000.000 Realized loss on sale (60.366 200.000*P13) 65.OCI 1. 345 December 31. Proceeds from sale of JKL (4. 6. D.000 (600sh*P260) ABI (1. as if shares were received and were as if sold for the cash dividend received.20) 1. The investment shall be remeasured at FMV on the disposal date.700 3.000*0.000 (P1. 2014: 558.000 Cost: 4. 2014: (9months) 37. Interest income (6/30 to 12/1): P1.000 XYZ (18.000) 472.000sh*P18) 450.000*P153. Ans.000sh)) GHI (P500. that is. Proceeds from disposal shall be equal to the carrying value. C.750 2.984.000 (1. Nominal Int.600 1.000sh*P138) 552.200sh*P340) 408.056.000) 2.257.9009009) 54.000*98%) 392. Proceeds from sale of DEF (4.000 528.000) DEF (4. Amortization Balance (Bal*9%) (Princ*12%) March 31.22%) 411. A.000*93%) 3.000 Realized loss on sale. Ans.056.000 5.200sh*P330) TDI (P200.000 Original cost: SMC: (400sh*P260) 104.750 Unrealized holding gain . Ans.000+P459. D. Ans. Ans. Proceeds from sale on 12/31 (P300. FMV 12/31/14 Cost/Amortized cost SMC (600sh*P275) 165.000 CV (FMV 12/31/13): 4. Cash in lieu of share dividends is accounted through the "as if" approach.000 220.000 372.342. thus no gain or loss shall be recognized in the profit or loss from its disposal.413 (P551. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9.000*82. Any OCI/L related to the sold investment shall be transferred directly to RE.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 55 of 155 4.224. Ans.P&L 84.500 PQR (P400.000 Interest income from bond investment 55.000/10.450 Interest (P60.250 132 Realized gain on sale 23.620) *Amortized cost: 12/31/14 Correct Int. Ans.9009009) 450. Ans.000sh*P124) 496.033*3/5) 330.000 3.033*2/5) 763. Stock dividend does not result to dividend income and accounted only through memo entry. D. recognizing any increase/decrease in the OCI/L. D.688 45. B.180. Ans.500/8.500/8.000 772.000*95%) 285.000 Amortized cost (P551. Ans. D.000 156. 4. FMV 12/31/14 ABC (25.000 Realized gain on sale 24. C.000 ABI: (800sh*P325) 260. Proceeds from sale on 11/5 SMC: (400sh*P230) 92. B.000 352.000sh*(P1.413 Unrealized holding loss-OCI (9. 1.413) 4.100 373.000*P137) 548.000*95%) 190.312) 551.000 396.000sh) 528.000*0.000sh*P15) 270.505 CHAPTER 5-EXERCISE 8: NYU CORP.000 Interest income (12/1 .033 3. 1.000.000*12%*1/12 5.054 504.000 368.000 ABI: (800sh*P330) 264.505 Total 1.525.000 (7.000sh*(P1.000 (P400. under PAS 39 (16. Ans. CHAPTER 5-EXERCISE 9: VEGAS CORP.620 * Realized loss on sale of bonds (45. FA at FMV through P&L FMV (12/31/14) CV ABC (13.250 (4.950 CHAPTER 5: AUDIT OF INVESTMENTS . A.12/31): P500.000 DEF at 11% yield rate Principal (P500.000sh*(P1.991.000*12%*5/12) 50. 500. 6.000 700.750 2.000sh*(P1.050. under PAS 39 (125. 4. C. The decline in the value of the investment.000.750) 9.000) 7. Ans.000 3. recognizing any increase/decrease in the OCI/L.P&L (83. Ans. Ans. under PFRS 9 FMV 12/31/14 COST Poor preference shares 800. Ans.000 1.000 *Impaired value under PAS 39 Five ordinary shares 1. 1.000) 11.500.000sh*P110. Ans. FA at FMV through OCI/L FMV (12/31/14) Cost JKL (6.000/10.688. Proceeds from sale of Tri shares (25. under PAS 39 (50.000sh)*10. The investment shall be remeasured at FMV on the disposal date.000 Unrealized holding loss .000 Cost 1. 12.000*P45) 450.000 Unrealized holding loss . Ans.250 160. FMV of Poor shares 800.000sh)*5. thus no gain or loss shall be recognized in the profit or loss from its disposal. Proceeds from sale of Seeks shares (10. C.200. C. Ans.000/20. C.250.000 1.000) 3.000sh*P60) 300.000 3.750 (P1.000 Seeks ordinary shares 900.50) 663.000sh*P30) 750.SHE (450. C.000 Impairment loss .543. 8.000 CV: (P1.145.000 3.000sh*P35) 875.P&L (600.180.000sh*P44) 880. Any OCI/L related to the sold investment shall be transferred directly to RE.SHE 150. Fair Market Value.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 56 of 155 5.000.000 6. 12/31/2013 P160. FA at FMV through P&L FMV 12/31/14 CV (FMV 12/31/13) Wan ordinary shares 825. recognizing any increase/decrease in the OCI/L. D.250.200.250 + 32. Proceeds from disposal shall be equal to the carrying value.SHE (145.000 1. C. Ans.000sh 500. 1.250 Realized gain on sale . below) P57.450 Unrealized Holding Loss P150 *Cost (P25. under PAS 39 FMV 12/31/14 COST Poor preference shares 800.000 708. Ans.145.400. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9.000sh) MNO (20. A. A.200 CHAPTER 5: AUDIT OF INVESTMENTS . C.750 Unrealized holding loss . No impairment loss shall be recognized in the profit or loss under PFRS 9.000 Realized loss on sale. CHAPTER 5-EXERCISE 11: EBC CO. Ans. Proceeds from disposal shall be equal to the carrying value.000 800.650. Ans. The investment shall be remeasured at FMV on the disposal date.000) CHAPTER 5-EXERCISE 10: JACK CORP.000 3.000 10. Proceeds from sale of Wan shares (5.000 980. Any OCI/L related to the sold investment shall be transferred directly to RE.000 858.200 10% BS Treasury bond at cost (purchased in the current year) 103. Ans. C.000.000/20.000 Cost: (25. D.300 Fair Market Value last remeasurement date.475. 12/31/2012 (see 1.000 1.000 1.000) 5.000 1.000 Unrealized holding gain .450) P57.000 Cost (P1. C. FA at FMV through OCI/L.000 1.000 *No impairment loss under PFRS 9 Five ordinary shares 1.700 FMV adjustment credit balance (500) 57.000 1.000 1.000sh)*5.P&L 13. Ans.558.000sh Too preference shares 650.000 Realized loss on sale.400. D. thus no gain or loss shall be recognized in the profit or loss from its disposal. whether permanent or temporary shall be recognized in the OCI/L. There shall be no realized gain/loss from disposal to be recognized in the profit or loss under PFRS 9.000 Seeks ordinary shares 900.000sh 286. Ans.000/20. FA at FMV through OCI/L. 100 CHAPTER 5-EXERCISE 12: HART CORP. June 1 sale Proceeds from sale (195*20.000 Multiply by: Interest rate 10% 10% Annual interest 10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 57 of 155 2.700. C.000 190.000) P3. last remeasurement date 12/31/2013 160. Ans.000)*20.000)*1.310. Ans.000*190 5. 4.000 – 300.000 Nov. Ans. 12/31/2014 P161. Financial asset at FMV through P&L FMV.300 Unrealized Holding Loss (800) 3.: FMV (12/31/2014) 30.000 110.000 4.000+(5. Ans. C.000)*1.000 P100.000) CHAPTER 5: AUDIT OF INVESTMENTS .000 SHARES 2. Ans. per share 5 Dividend income from cash dividends 25.000 GHI (5.000 Mulitiply by: Months outstanding 2/12 12/12 Interest income P1. Ans.000 Carrying value (7. Ans.000) P150. Ans. C.000 5. B. A. 1.000 410.000 SHARES 3.000 (95.000sh*P105) 210.000 180.500.000 Oct.000.000/50.700.000/3. Fair Market Value. Ans. 12/31/2014 P161. FMV (12/31/2014) 2.000 4.500sh*P150) 225.667 P10.000)*30.000 Less: Dividends recievable (shares acquired "Div.000/3. 1. July 5 sale Proceeds from sale (450*1. B.000 Fair value of shares 55 Dividend income (shares in lieu of cash) 55.000 (P285. D. 20 Proceeds from sale (3.000 Initial cost .000.000 2. Fair Market Value of the Inv.DEF Shares 255.000 Unrealized holding loss . B.000 WHITE INC.000 10.000 CV of shares sold (285.000 Add: Transaction cost 30.000 3. C. Shares in lieu of cash dividends (4.000.000 (285.900. FMV (12/31/2014) 30.000 1.910.000sh*P75) 375.000sh/4) 1.000 6. 11 sale Proceeds from sale (150*1.-on") (20.000) P3.000 Carrying value (285.000 990. D. BLACK INC. portfolio.700.000) P450.000 WHITE INC.000 Cost of shares sold (7.500. Ans. excluding transaction cost 200. Acquisition cost. Ans.000 CV of shares sold (570.000) Initial cost .000 3. B. D.400.000 Multiply by: cash div. 10% BS Treasury Bonds P100.000) 165.P&L (5.000-P90.000) 2.500.000*150 300. Acquisition cost (1.000 4.000 UNREALIZED HOLDING GAIN – P&L 1. 2009 2010 Face Value.000sh*P25)) 585. B.000/2.000) 55. 12/31 CV ABC (2. Ans.100 Fair Market Value.000 TOTAL GAIN FROM SALE OF BLACK 220. BLACK INC.000 400.000 Cost of shares sold (P3.ABC Shares 180.000 590.000/50.: FMV (12/31/2014) 2.200. No dividend income shall be recognized from the share dividends received from DEF.000*190 5.000)*2. Ans.000 TOTAL GAIN FROM SALE OF WHITE 1.000 6.000 CHAPTER 5-EXERCISE 13: CSI INC.000*150 300.390. # of GHI shares after share split 5. 500 *note: King shares is only 25% (250. Fair value of Queen Shares (AFS).000).592.000 Share from net income (P600.000sh*P12) (120.500 CV of Investment (12/31/13) 2.000 Unrealized Holding Gain (Cumulative).000*20%) 120.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 58 of 155 7. 12/31/14 2. B.000*10%) P30.000 5.000+(1. 2. C.000 Unrealized Holding Loss – SCI P50.50) P650.000 4.000 Fair value of Queen Sahres (AFS).000*6.000*5) 500.000) Share from dividends (10. 12/31/14 (40.000 Unrealized holding gain . 12/31/14 (100.000) Share from net income 360.000shares*P64) 2. 1.000 Original cost of Queen Shares.000 255.000*6. Acquisition cost 2. in 2014 (300. 12/31/13 (100.000 – no imp.000sh+1. Ans. Ans. thus shall be accounted for as Associate Investment under equity method. Value (FV:250.4M*30%) 1.000 Excess attributable to Depreciable asset (P640K*30%) 192.000 Carrying value. 1.000 CHAPTER 5-EXERCISE 14: PRINCE INC. Value (FV:250.000 JKL (4. C.000 Share from forex loss (P100. A. Share from net income 360.000 Total excess of acqusition cost over book value 672. C.000 Impairment loss 152.SHE 78.000) Carrying value. 5. Ans.000 4. Dividend income (P6*40.712.000 3.750.000 8.000 vs Rec. 3.000*12) P3.000) Investment Income 360.000) CHAPTER 5: AUDIT OF INVESTMENTS .650.000 Recoverable amount/Fair value less cost to sell: (40.000 FMV. Dividend income from Queen Corp. C.500 vs Rec. Ans.000*15) P3.592. Share from net income of King Inc. thus shall be accounted for as AFS. Share from net income: 2014 37. B.000 Understatement in depr: (P192. Investment income for investment in AFS shall be through dividends declared by Queen. 2014 850.000sh) (240.000.000/5)*25% (25.000). 1/1/13 (100. Ans.000*20%) (20.000 510.50) P650.500 Understatement in Depr expense (500.MNO shares Initial cost.000 6. Investment in Associate . 12/31/14 650.000*10) 2.560. C.500sh+300sh)*P160 288. 2013 (650. Share from the net income of associate (P1.592.000 Share from net income: 2013 137.000) Net amount to be reported in the income statement 208.000/8yrs) (24. Acquisition cost (January 1.000 Unrealized holding loss . 12/31 Cost DEF (1.637.000 Carrying value (Cost) 2.280K*30%) 384.000 2.500 Share from dividends: 2014 (100. 2013) (250. Ans. Ans.000. Ans. Financial asset at FMV through OCI/L FMV. C. Fair Value of Queen Corp shares 12/31/2014 (100.000sh) 240.000.000/1.000) Net amount to be reported in the income statement 208. Acquistion cost 2. 12/31/14 830. Ans.560.000) CV of Investment (12/31/14) 2.SHE/BS 150.000*7.920.000*P64) 2. B. Ans.000 Impairment loss (152.000 – no imp.000*25%) 162. Ans. Ans.000 Unrealized holding loss-P&L (32.500.000) Share from net income of King Inc.000 BV of Net Assets acquired (P6.000 255.000 Share from dividends (P6*40. Ans.000 *note: Queen shares is only 10% (100.000/1.000sh)*P60 300.P&L (32.000 (P200. 2013 137.000 CHAPTER 5-EXERCISE 15: ISUZU CORP. Fair value of Queen Shares (AFS). C.000*25%) (25.000 Excess attributable to Goodwill 480. January 1.000sh*P55) 588.00) 700. A. A. 000 Understatement in Depr: (P4M*25%)/5yrs (200.000*30%) (240. cost over book value 1.344.000*210)*24% 1.000 4. Ans.000 Share from net income (4.000*6/30) (1.000 Excess attrib. 1. Decmeber 31.000sh/200. Acquisition cost. 2014 16.250.500. (1.500. Ans. 2014 16.000) Carrying Value.800) Gain on dilution before recycling of OCLoss 129.000*30%) 360. 6. C.780.130.000) Share from dividends (1.000 Less: Carrying Value of Investment in Assoc. Net income 2.000 Recycling of OCloss (240.300. Ans. D. Ans.IS 81. C.000 Carrying value. January.000 Share from other comp.200 CHAPTER 5-EXERCISE 18: BLACK CORP.000 CHAPTER 5-EXERCISE 17: IFFY CORP. Acquisition cost.520.000 Excess of acq. 2014 (50. Decmeber 31. Ans.000) Adjusted share from Net Income 425. Share from net income (P4.200 Recycling of Ocloss (240.000 2. 2014 (50.654.000*210) 2.000) Adjusted share from Net Income 300. to identifiable assets Land (P800.000 Share from net income in 2014 425. Acquistion cost (300. loss (800. D.000 Excess attrib to Goodwill 600.000 2. CESSATION: Proceeds from sale (18. Ans.000 125.000 Less: PS share in net income (10%*P50*100. Ans. (P1.000*6/30) (48.000sh) 25% Share from net income before adjustments 625.000sh) 25% Share from net income before adjustments 500.000 Share from net income in 2014 300.675. A.000) 3.000) Investment Income . Net income 2. loss (800. 12/31/14 5.000*30%) (240.000 Understatement depr.000 % of interest 30% 24% Share from increase in Assoc. Share from other comp.000 FMV of remaining share relassified to FA at FMV (12.000) Total cessation loss .000 Multiply by: Proportionate interest (50.000 Multiply by: Proportionate interest (50.654. Ans.000sh*P325) 16.000 4.000) 500.344.000sh*P325) 16.000 Carrying value of Investment as if given up (5.000sh/200.6M/5)*30% (96.000 30.000 Total 6.000 CHAPTER 5: AUDIT OF INVESTMENTS .500.000 OS share in net income 2. Ans.440. D. D. 1.'s net assets (25. DILUTION: Before Dilution After Dilution # shares held 30.000) Total cessation loss .000*210) 3. C.000 5.000 BV of Net Asset (P16M*30%) 4.8M*30%) 1.000 # shares outstanding 100. Ans.200. Ans.000. C.800.P&L 1.IS 406.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 59 of 155 6.000 Understatement depr.000 Understatement in Depr: (P4M*25%)/5yrs (200. Ans. D.6M/5)*30% (96.200.000 3. CHAPTER 5-EXERCISE 16: PACQUIAO CORP.000.000*30%) (450. before cessation 5.000 Building (P1.000) 1.550.654.000. 1.000 Gain before recycling of OCLoss 646.8M*30%) 1.440. B.260.250.000*30%) 240. January. Acquisition price 5.000sh*P20) 6.000 Carrying value. 024.000sh*P30)*25% 1.Dec.000) Adjsuted cessation gain 1. 5. CHAPTER 5-EXERCISE 19: GREENDAY INC.500sh) (33.048.200) CV of portion reclassified (P6. A. Ans.000 8.537. 30. 1. 2015 (P4.000 CV of investment.000) Carrying value.000)*(5%/30%) (948. 1. Ans.228.000 Share from Unrealized holding loss . A. Share from net income (P2. After Dil. Share from the increase in White's capital as a result of share issue: (200.763.000 Share from dividends (P800.800 1.000 Recycling of OCL (P150.000 30% 25% 5% Share from the increase in White's capital as a result of share issue: (200.000 1.000sh*P30)*25% 1.000 180. 2015): P800.000 Total outstanding shares 1.OCL (P500K*30%) (150.561.000*30%) (240. 31.50*12.000) Net amount to be reported in the SCI 528.800) (3.P&L 678.000) Investment income . 31.627.228.000) (90.200 2.600. D.000) (60.000. 2015) 105. 2014 1. January 1. Investment income .288. Dec.000.250 2.000*15%) 187.000) Portion reclassified (P150.000 Acquisition cost.500.000.250.000) Dilution gain before recycling of OCL 452.000*(5%/30%)) (25. Oct. After Cess.000 Share from dividends.000 Total investment income in 2015 305.50*7.562.000.000) Adjusted dilution gain (True Sale) 427. B.Jun.000 Recycling of OCL: Portion sold (P150. excluding goodwill deemed sold: (P6.000/5yrs) (72.000*25% 200.000 Share from dividends.000) Adjusted dilution gain 527.000) Share from net income 678. 2015) 200.000 30% 18% Realized Unrealized Total Proceeds from poriton sold (120. Apr.000 300. 1 .P&L 678.000 Share from net incoem (Jul.200) (2.772.Dec. 2015): P700.600.000 5.500 Carrying value.750 CHAPTER 5: AUDIT OF INVESTMENTS .000*180/300) (3.250) Share from net income in 2014 (P1. Acquistion cost.250.50*7. beg 2015 161. B. Ans. Decrease Number of shares owned 300.750) Share from net income (Jan. Acquisition cost 6.000 CV of investment deemed sold: (P6. Case 1: “Cost-Based Approach.515.400. Ans. 2015 1. Ans. B. Share from net income under Equity Method in 2014 (P1.515. Aug.000*15% 105.000*120/300) (2. 31.000 6. 31.000*(5%/30%)) (1.000 Carrying value. A.200 2. with Catch-up Adjustment”: 1.000 7.000 3.400.000 4.000 5.000 3.800 1.000 3. July 1. Ans.000 Recycling of OCL (P150.000*30%) (150.000 Understatement in Depr: (360. Ans.000*120/300) (60.000 Share from OCL (P500. 1 . Ans.50*7.000.000) Dilution gain before recycling of OCL 552.800) Cessation gain/loss before recycling of OCI/L 1. 2014 (P3.000 FMV of remaining portion to be reclassified to FA at FMV 5. 1 .5M*30%) 750.712.500sh) 26.000-P600.250 Share from dividends.June 30. 2014 (Equity Method) 1. Before Dil. 2015 (P5. 12/31/14 6. 1 .000 1.000 Total outstanding shares 1. Dec.000shares*P30) 3.000 Less: CV of portion sold (P6.500sh) (26. C.500 Dividend income recognized under FMV Method in 2014 (P3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 60 of 155 2. Ans.228.250 Rertroactive adjustment to RE. A. Number of shares owned 300.000*15%) 187.228. Share from net income (Jan. C.772.000*(5%/30%)) (25. Ans.084.500.750) Share from net incoem (Jul. 2015 2.000*180/300) (90. Before Cess.400.200.500sh) (68. 641) 4.000 (66.895 480.841680 3. July 1. Apr. 5. Instead. C.727) 4. July 1.443715 1. 1 .727 December 31. Dec. 31. Dec.924.000.000. Principal: P4. 2015) 200.731191 2.411 Correct interst income (see amortization table) 425.884 480. Ans. 1 . Instead.253.198.Dec. Ans. Principal: P4.000 (60. 5. 2015) 200.50*12. 2015 (P4. beg under the Cost-based approach without catch-up adjustement.000 Share from dividends.105) 4. 2013 at 11% effective rate: (b) 4.50*7.500sh) (68.093 (b) FMV of bonds.000 (72.000 Consideration given up (FMV) 4. No retroactive adjustment to RE. Ans.359 480. Ans.000. Investments in Bonds: Proceeds (PV of future cash flows. 1.50*7.732.000 * Acquisition cost.000 Assumed FMV. Ans. D. A.749 Unrealized holding gain . 2015 1. 2014: 419.273 480. Ans. 1 .589) Nominal interest collected/Credited to interest income 480. FMV of bonds.Dec.097. A.000. 5. 31. C. No retroactive adjustment to RE. 2015 (P4.000 Divide by: # of shares 5.750 Share from net incoem (Jul.50*12. 2015 (P5.) 233.366.000 Total investment income in 2015 (Cost-based w/o catch-up adj. Dec.750 6.211.097. Dividend income.172. July 1.1699 Intial fair value (1/1/13) 4. 1 .000 Share from dividends. C.138.253.759111 844. 2013: 4. 31.373 1.000 Acquisition cost.1699) 1. Acquistion cost. July 1. 2015 (P5.759111 4.000.054 0.750 Share from net incoem (Jul.400.731191 Interest: P480. whatever is the original cost of the original investment before gaining significant influence shall be its deemed cost. Apr.345 (a) FMV of bonds.000 Interest income in 2013 per books: 226.500sh*P200) 1.750 9.000 Carrying value.250 *FMV/Acq.500) 33. Dec. Ans.000*0.000*1.6830) 2. Oct.000 Carrying value.750) Share from net incoem (Jul. 2015 2. D. 2015) 200.500sh) (68. A. Dec. D.Dec.500) 33.766 0. 2014 at 9% effective rate: (a) 4.250 Case 3: “Fair Market Value Approach.000.093 FMV of bonds. 2015 1.211.841680 Interest: P480. 31. January 1.720 0.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 61 of 155 Case 2: “Cost-Based Approach. without Catch-up Adjustment”: 7. beg under the FMV-based approach without catch-up adjustement.000.749 CHAPTER 5: AUDIT OF INVESTMENTS . 31. effective rate: 10%) Principal: (4.948 3.000 2.) 233. Ans.253.000*3.P&L 113. the original investment shall be remeasured at prevailing fair value at the date significant influence is gained. 1.589 Correct Interest Nominal InterestAmortization January 1.116) 4.359 Understatement in interest income in 2013 198. 1. Dividend income. Dec.000*0. without Catch-up Adjustment”: 4. 2014 (deemed cost) 1.6830 Interest: (480.000 Total investment income in 2015 FMV-based w/o catch-up adj. FMV of original investment.000.531. 2015) 200.843 7.589 Debit to/Reduction in interest income per books (253.072.500. 31. Oct. 2013 = PV of remaining cash flows at 11% effective rate for 23periods.000*0.000*2. Price of new investment (10%) 1.Dec.000 (54.589 December 31. 31.521. 8. 2014 = PV of remaining cashflows at 9% effective rate for 2 periods.750) Share from net incoem (Jul.443715 4. 2016: 407. Ans.535 3.631. 2013: 425. December 31. 31. Face Value of bonds 4. 31. 31. A.983 2.948 December 31. 2015 200 CHAPTER 5-EXERCISE 20: ORION CORP. 2015: 413. 2015 (7. 2015 2. ' FMV. 360.000) 170. 2014 (5.000 8. FMV.000 December 31. to Depr.000 Recoverable amount/Fair market value 4. C. Ans.500.000 *Understatement in Depr (800K/10)*3/12 (20. Present value of the installment payments at 12% effective rate: Downpayament 1 1.000*10/40) (1.500) Portion reclassified: (6. (FMV upon reclass on 6/30/2014) 3.000) CHAPTER 5-EXERCISE 21: JUDE CORPORATION 1.000 Share from OCL (400.690.000 Fair value of remaining Investment (169*30. Investment in Associate (20%) Acquisition cost 5. Dec. 2013 Acquisition Cost 5. PPE.000 400. Investment property.000 60. 2014 (160. Any increase in the value. 5. Dividend income (2*40. 12/31/14 3.600.000) 1. After Cess.600.000 200.000/4yrs)*3.000 * September 30. Ans. D.000) (60.1M/23years (178. B.037.000 5.000) 960. following PAS 16. 2012) 4.000 Share from Dividends.000 Recycling of OCI 15. 2013 Carrying Value 5.739 Carrying value had there been no impairment: (P4.500) Cessation gain.002.000 Revaluation surplus .000 CV. 12/31/14 upon reclass to IP 4.000 2.037349) 3.P&L (400. B.000 Investment income per books in 2013 480.000 Revaluation Surplus (OCI) on Reclass 350.OCI 340.000 5. A.000 December 31. Ans.000 Excess of Acquisition cost (Attrib. Ans.890. A.349 Option money related to property acquired 314.0373493 3.000*20%) (80. C.000 Recycling of OCL (20.960.000.670.000 Share from Dividends.960.667.070. Asset) 800.500 52. Ans.000*30/40) (5.500 70.8M*20%)*3/12 190.300. 2013 (4.000 Carrying Value/Depreciation Cost (6/30/14) 3.500. Fair Value on Reclass date (6/30/14) 3.070.P&L 38.690.670.670.000 CV of investment Portion sold: (6.000.000 20% 15% Realized Unrealized Total Proceeds from sale (169*10.500) (1. 2013 (3.800. Ans.921.000 Carrying value (Depr. PPE to IP If a property is transferred from PPE to IP.000 30.000 4. CESSATION: Before Cess.000 Depr 2014: P4. 2013 (80.000 7. any decrease on the reclassification date shall be recognized as impairment loss in the profit or loss.000 Balance (P4. 1. Recoverable amount 12/31/13 4.2M*20%) 1. Ans. 2013 Carrying Value 6. Number of shares owned 40. Ans. Ans.000 Number of outstanding shares 200.000 BV of net assets acquired (P25M*20%) 5.000 Unrealized holding loss .000 Impairment loss 40.140.250.000 Accum depr.261 6.500) (5.000 45. 31.000) Share from OCI (300.000.000 Unrealized holding gain (155-145)*40. 3.100. 2012 147.. and the FMV method is used to value IP. on the reclassification date shall be recognized in the OCI as Revaluation Surplus.200.000) Share from NI. Cost (Jan. beg 310.000 6.040.000*20%) 60.000 *Understatemetn in Depr (800K/10) (80.800.000 Depreciated cost 4.5M/25yrs)*2yrs.000) Total cessation gain/loss 17.779 Property taxes in arrears as of January 1.261) Carrying value.000) 5. Ans. C.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 62 of 155 4.000) (80.000 1.500 67.5M*22/25) 3. Cost: P4.000 Investment income per audit in 2013 (see analysis) 170.000) 80. Ans.002.. A.000 CHAPTER 5: AUDIT OF INVESTMENTS .872 Initial cost of the property 4. D.500 90. before recycling of OCI/L 22.5M*22/25) 3.667.000 Retroactive adjustement to RE.000 Impairment recovery . before impairment recovery 3. B. however.100.000) Share from NI. 000 Less: Increase in CSV up to date of death (P50.000-P25.100. Dec.600) Life insurance expense. 2016: (P8. FMV. 2017: 9. D.400-P39. 12/31/14 upon reclass to PPE 4.800 5. D.000) (9.000 Gain on the transfer .800 4. Ans. 2014 87.000 Carrying value (FMV 12/31/13) 4.000*12mo) 96. 2014: (P8.600) Dividend from CSV (9.000 CV of CSV as of October 31. 2017. no additional insurance premium had been paid.300. Annual premium.000 48. 31.200 3. 2016 76. Ans. IP to PPE If a property is transferred from IP to PPE. Life insurance policy 4.600 Increase up to Oct.600-P30.200) Life insurance expense.000) Dividend from CSV in 2017 (11. any decrease or increase in the value of the property on the transfer date shall be recognized in the profit or loss.000*10mo) 80.600 Gain on life insurance policy settlement 3. A.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 63 of 155 7. Ans. Annual premium. 2016 39. B. CHAPTER 5: AUDIT OF INVESTMENTS .000.200) (4.600)*10/12 (9. it is assumed that after death on October 31.200*1/3) (8.000 Less: Increase in CSV for 2015 (P30.800) Dividend from CSV (8.400 Observe that since the insurance premium are payable monthly. D.000 CHAPTER 5-EXERCISE 22: DADO COMPANY 1. Ans. 2015: (P8.000 Less: Increase in CSV for 2016 (P39. 31. Insurance premium up to date of death (P8.951. Ans.000 Less: Increase in CSV for 2014: (P25. and the FMV mehtod is used to value IP.P&L 200.000) Life insurance expense.600 2.000*12mo) 96.000*12mo) 96. C. Ans.400) Life insurance expense. Annual premium. 2015 83. 2017 59. 2017: CSV. Ans. The income shall be recognzied as outright income in the P&L and shall not affect the cost of the constructed building.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 64 of 155 CHAPTER 6: AUDIT OF PROPERTY.Organization expense (300.000 Option payments (P250K-50K)* 160. Ans. CHAPTER 6-PROBLEM 2: BACOLOD INC. Ans.000 40.567.000 80. 7 D.000 Excavation of the land 400.250.600. 8 B.600.259 2.065.000 4.000 Trade discount taken on the machinery (127.080 (950. 2. Note: (a) The demolition of the old building is preferably capitalized as cost of the new building as per PIC Q&A 2012-012. 2. Jan.000 Fees for search of title for land 24..000 Building construction permit fee 140. 11 B. CHAPTER 6-PROBLEM 3: MIRAM COMPANY Land Building Adj.000 0 Total 2. 4 A. 12 A.000 (50. Land Land Impr.000) Cost of freight and handling 50. 6 C.000 Cost of testing the equipment 125. Buidling Mach. 13 C.000 List price of Machinery and equipment purchased 4.000) Property taxes .000 24. 18 C. Ans.000 Income from the testing of machinery (65. 14 D.000. 4.000 Cost of paving parking lot.outright expense (120.600. Ans.000 Payments to tenants of the old building 184.000) 1.856. 15 C.000 1. Ans. 3.000 Land survey 208.000) Stock bonus .000) 15. PLANT AND EQUIPMENT . 9 A.000) 1. for road projects 80.000 Balance: (P8M/5yrs)*3. Ans. 2 C. Purchase of land 15.512. 17 C.912.320 22.000 Cost of to raze the old building 940. Ans.000 1.094.000 Property taxes .a. to NI Organization fees .790787 6. 3 D.000.000 Temporary quarters for construction workers 430. 16 D. *FMV of Land 1.000) Broker's fees* 88.065.550. 5 D.000 378.320 524. & Eq.000 1 FMV of Building 450. driveway and sidewalks 1.in arrears (P240K*6/12)* 96. (b) The income from the car park during construction is from an unrelated activity unnecessary for the construction of the building. 10 C.2014 expense (P240K*6/12) (120. 2014 Present value of installment payments at 10% effective rate: Downpayment 2. PLANT AND EQUIPMENT DISCUSSION PROBLEMS CHAPTER 6-PROBLEM 1 1 C.259 8.000 Special assessment of the gov. 3.000 Salaries of executives (360.790787 3.000 Cost of construction 78. Land Initial cost.080 Remodelling cost of the building 60.800. CHAPTER 6: AUDIT OF PROPERTY.000 1 CHAPTER 6-PROBLEM 4: ABC CORPORATION a.000) Land and Building (Prorata)* 1. 600*12%*3/12) 1. c.f.020. 31. Depr.000 Accum.316. 31) July: (P1.800. 2014 (P3. Ans.000 2.000 2. Actual borrowing cost (Jul.000 Installation cost 50.856. 31.6209213) 100.b.c.875 October (P1. %** 11. Equipment A Initial cost.d.000-P900. 1..Nov.000.000 2nd Quarter: (P35. Carrying value.Dec.000 Import duties and nonrefundable taxes 250.000 October 1 27. September 1 Fair value of asset accepted as donation 1.400. 2014: (P1.8M-P180K)*5/15 (540.2M-P320K)/10yrs (288.000 Accum. Dec. 1.000-P550.000 CHAPTER 6: AUDIT OF PROPERTY.600 3rd Quarter: (P36. 30): P1M*12%*6/12 60. Carrying value. 31.000.000)*5%*1/12 1.000) 1. Ans. PLANT AND EQUIPMENT .000 3 82.118 4th Quarter: (P37.080. Actual borrowing cost from Specific Borrowing: 1st Quarter: P34M*12%*3/12 1.000. Dec. 2014: (P4. Ans.000. 2014: (P7M*10%) (700.070. 2014 (P1.2. 31): P1M*12%*1/12 10.800. 31.667 Less: Proceeds from specific borrowing (34.000.1. 31. Dec.000-P250.000 .050.08% 588.000 Case 2: PAN CORP.000.000) 1. Dec. P39.260.Jun.000 12 96.000.000 Accum. Ans..a.000)*5%*1/12 1.000 9 171.000)*5%*1/12 3. 31): P1M*12%*5/12 50. Carrying value. Ans.000 PV of future retirement cost at 10% effective % for 5 yrs (P161. 31. Jan.000.000.267.000 Interest expense for 2014 70.000 2. Dec. *note: Where the donation is from a related party and is considered as a capital transactions where APIC-Donated Capital is credited.000 2.000-P100.082. Dec.000. Building Initial cost. Ans. 1 . Carrying value.000 2.223 Cost incurred #mo. 31..000) WAAE financed by general borrowing 5.000) 1.856.400.316.4M-440K)*5/15*6/12 (660.923 Capitalizable borrowing cost 4. P4.114. 31.000) 1.223. July 1. Ans. Carrying value.e. Dec.042 November (P1. Jan.600. Equipment C Initial cost.000. Depr. Ans. 2014 3.000 5 122.300 Borrowing cost from General Borrowing Weighted average actual expenditure* 39. Furniture and fixture Initial cost. 1 . Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 65 of 155 b.e.. P70.912. Equipment B Initial cost. Ans. Dec. 2014 1.d.208) Net capitalizable borrowing cost 39.000 Accum Depr.000-P750.000)*5%*1/12 3. 31. 2014 4. 2014 1.000.. Ans. July 1.792 2.000.000.667 Multiply by: Weighted Ave.125 September (P1. Interest expense (Jan. to 12/31 Peso*Mos. Depr.582 4.Nov.000) 1. Depr..3. 2014 6.000)*5%*1/12 417 (10.200. d. 2014 Purchase price 4. 31. CHAPTER 6-PROBLEM 5: Case 1: ABC CORP. Dec. 2 . Ans.740. 2014 FMV of shares issued (100.750 August: (P1. 1 . c.000 April 1 19. 2014 Cash price equivalent (P2M*90%) 1. Ans.000 July 31 24. any donation related expenses shall be regarded as a reduction from the donated capital rather than capitalized cost.b. - Total 471. *January 1 8. Gen Borr.051*0.300. Jan. 2014 2.000sh*P70) 7.718*12%*3/12) 1. 2014 Cash price upon acquistion 3.6209213 Intial cost..000 Interest expene (Dec.000 December 31 14.000.152. c. Dec.c.2M-120K)*5/15*4/12 (120.000 0.792.000 Income from temporary investments (Jul.800.000 Accum.200.020M*12%*3/12) 1. AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 66 of 155 Divide by: 12 months 12 Weighted average actual expenditure 39,316,667 **Actual General Borrowing Cost P24,000,000*10% 2,400,000 P28,000,000*12% 3,360,000 5,760,000 Divide by: Proceeds from Gen. Borr. (P24M+P28M) 52,000,000 Weighted average genearl borrowing % 0 2. Ans. P5,171,077. Actual General Borrowing Cost 5,760,000 Less: Capitalizable Gen. Borr. Cost (588,923) Gen. Borr. Cost. - Interest Expense 5,171,077 *note that the entire actual borrowing cost from specific borrowing had been entirely capitalized. 3. Ans. P97,856,223. *January 1 8,000,000 April 1 19,000,000 July 31 24,400,000 October 1 27,600,000 December 31 14,000,000 Capitalizable borrowing cost 4,856,223 Carrying value, 12/31/14 97,856,223 CHAPTER 6-PROBLEM 6: KELSON CORP. 1. Ans. P254,628 Depreciation of Old Buildings (3,600,000-796,200)*6% 168,228 Depreciation of New Building (1,800,000-360,000)*6% 86,400 Depreciation expense – BUILDINGS 254,628 2. Ans. P36,000. Depreciation on LAND IMPROVEMENT (P576,000/12yrs)*9/12 36,000 3. Ans. P276,000. Depreciation of Old Machinery (2,325,000/10) 232,500 Depreciation of New Machinery (870,000/10)*6/12 43,500 Depreciation expense – MACHINERY AND EQUIPMENT 276,000 4. Ans. P66,300. Leasehold improvement carrying value (12/31/2013) 331,500 Divide by: Remaining useful life: 8yrs-3yrs=5yrs (shorter than the remaining extended lease term: 3yrs+5yrs=8yrs) 5 Depreciation expense – LEASEHOLD IMPROVEMENT 66,300 5. Ans. P43,369. Delivery Equipment: Book value, Jan. 1, 2014 137,400 Book value of delivery equipment sold on Sept 30 as of Jan. 1, 2014 (31,356) *P24,300+P7,056 Balance subject to depreciation 106,044 Multiply by 150% declining rate (1/5)*150% 30% Depreciation on the Remaining Delivery Equipment 31,813 Depn on equipment purchased on Aug. 30 (45,000*30%)*4/12 4,500 Depn on truck sold on Sept. 30, 7,056 Total Depreciation expense – DELIVERY EQUIPMENT 43,369 CHAPTER 6-PROBLEM 7: GANADO CORPORATION 1.a. P56,214. Buidling, CV Jan. 1, 2014 936,900 Multiply by: 150%Dbrate over 25 years 6% Depreciation expense - Building 56,214 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 67 of 155 1.b. Ans. P103,775. Depr. on Disposed Mach.: P23,000/10yrs*3/12 575 Depr. on New Mach.: P310,000/10yrs*6/12 15,500 Depr. on Remaining Mach.: P877,000/10yrs 87,700 Depreciation expense - Mach&Eqpt 103,775 1.c. Ans. P21,000. Depr. on New Auto: P12,000*4/10 4,800 Depr. on Remaining Auto:** Depr on Auto had there been no change 18,000 Supposed depr. on Auto disp. on 1/1/14: (9,000*2/10) (1,800) 16,200 Depr Expense - Automotive Equipment 21,000 2.a. Ans. P319,314. Accum. Depr - Building, Jan. 1, 2014 263,100 Depr for the year 56,214 Accum. Depr - Building, Dec. 31, 2014 319,314 2.b. Ans. P342,275. Accum. Depr - Mach&Eqpt, Jan. 1, 2014 250,000 Accum. Depr of M&E disposed on Apr 1, (11,500) Depr for the year 103,775 Accum. Depr - M&E Dec. 31, 2014 342,275 2.c. Ans. P99,300. Accum. Depr - Auto. Eqpt. Jan. 1, 2014 84,600 Accum. Depr of Auto. Eqpt. Disp. on Jan. 1, (6,300) Depr for the year 21,000 Accum. Depr - M&E Dec. 31, 2014 99,300 3. Ans. P11,500. CV on the date of fire (P23,000*5/10) 11,500 Recoverable value - Impairment loss due to fire 11,500 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) Fair value of asset received 12,000 Cash paid to equalize exchange (10,000) Assumed fair value of asset given-up 2,000 CV of asset given up 2,700 Loss on trade-in (700) CHAPTER 6-PROBLEM 8: MALIK CORP. 1.a. Ans. P732,000. Replacement of wooden roof to brick roof 300,000 Major improvement on electrical wiring system 70,000 Storm windows and screens installation 162,000 Automatic door-opening system installation 200,000 Total amount capitalizable to Building or Building Improvements 732,000 1.b. Ans. P690,000. Replacement of retired factory equipment 500,000 Rearrangement cost to ensue a more efficient production 120,000 Overhead crane in the assembly department 70,000 Total amount capitalizable to Equipment 690,000 1.c. Ans. Acquistion of furniture 50,000 2. Ans. P1195,000. Repainting of building 60,000 Routinary repairs to building 50,000 Replacements of minor gears 20,000 Service contract of office equipment 40,000 Sealing of roof leaks in the factory 25,000 Total repairs and maintenance expense 195,000 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 68 of 155 CHAPTER 6-PROBLEM 9: BONBON COMPANY 1. Ans. P3,640,000. Cost, Jan. 2005 5,200,000 Accum. Depr, Dec. 31, 2014: (P5.2M-P520K)*10/30 (1,560,000) Carrying value, Dec. 31, 2014 3,640,000 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. Value in Use 1,645,700 FMV less Cost to sell 1,560,000 Recoverable value shall be the Value in Use, since it is higher. 4. Ans. P1,994,300. Carrying value, Dec. 31, 2014 3,640,000 Recoverable amount 1,645,700 Impairment loss 1,994,300 5. Ans. P75,047. Carrying value, Dec. 31, 2014 after impairment 1,645,700 Less: Salvage value 520,000 Depreciable cost 1,125,700 Divide by: remaining useful life 15 Depreciation expense 75,047 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. Value in Use 5,518,855 FMV less Cost to sell 5,070,000 Recoverable value shall be the Value in Use, since it is higher. 3. Ans. P1,861,145. Carrying value, Dec. 31, 2014 7,380,000 Recoverable amount 5,518,855 Impairment loss 1,861,145 CHAPTER 6-PROBLEM 11: NAIA COMPANY 1. Ans. P150,000. Replacement cost 1,500,000 Mulitply by condition % (7yrs/10yrs) 70% Fair value/Sound value/Depr. Repl. Cost 1,050,000 Fair value, 12/31/14 1,050,000 Divide by: remaining life 7 Depreciation expense, 2015 150,000 2. Ans. P180,000. Fair value, 12/31/14 1,050,000 Carrying value, 12/31/14 (P1.2M*7/10) 840,000 Revaluation surplus, 12/31/14 210,000 Transferred to RE in 2015 (210K/7yrs) (30,000) Revaluation surplus, 12/31/15 180,000 3. Ans. P900,000. Fair value, 12/31/14 1,050,000 Depr in 2014 (150,000) Carrying value, 12/31/15 900,000 CHAPTER 6: AUDIT OF PROPERTY, PLANT AND EQUIPMENT 000.000 Divide by: remaining life 7 Annual transfer to RE 94. 12/31/16 (210.714. 12/31/16 (P1. P2.000 Impairment loss 2.000 Gain on impairment recovery .000.000 Increase over CV had there been no impariment is recognized as REVALUATION SURPLUS-OCI under FMV method. 1/1/2014 4. P1. 4.000 Carrying value.000) Gain on sale . P1.500.000. P50.000 Value is use 14. Recoverable amount/FMV 15.500.500.500.000 .000.500. CHAPTER 6-PROBLEM 13: RAM CORP.000.800. Proceeds from sale 800.000 2. no depreciation is provided. Carrying value after impairment loss.000 Revaluation Surplus. the gain on impairment recovery is recognized in the P&L.714 CHAPTER 6-PROBLEM 12: PEPSI CORP. Carrying value had there been no impairment (cost method) 12. Carrying value.000.5M*5yrs/8yrs) 2.000. after revaluation 562. 1/1/2014 500.000 Carrying value.P&L 50.000.750.500. The property had been transferred from PPE to Investment property.750.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 69 of 155 4.000 Impairment loss . 1/1/14 4. after impairment loss 360. P2.500. Ans. 1/1/17 (P4M*5yrs/8yrs) 2. 1.000 Revaluation surplus.500.000 4.800.812.000.000*5/7) (750. P500.000 Carrying Value. Carrying value. Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12.000.000 Carrying value based on the impaired value: (P14M*6yrs/8yrs) 10. (P500. Fair market value.500.000*5yrs/8yrs) Carrying value had there been no revaluation.286 Revaluation surplus.2012 (P24M-P8M) 16.000 2.000. 1/1/2014 (P5M*8yrs/10yrs) 4. 12/31/15 565. P565. Ans.000 CHAPTER 6: AUDIT OF PROPERTY.000 Divide by remaining useful life: 5 Revised annual depr.000.P&L 700.000 3.000 -provide additional depr. Ans. where the property is measured under FMV model.000.000 Carrying value had there been no impairment: (P16M*6yrs/8yrs) 12. Ans. for 2012 (P18M/9yrs) Recoverable amount (higher)* 14.whether under cost or FMV method. 1/1/17 1.000. instead the propety is remeasured at each balance sheet date at their prevailing FMV. Ans. Ans.000 Increase over CV had there been no impariment is ignored under cost method.500. None.000. 12/31/14 660. P700.000 Divide by: remaining useful life 8 Annual depreciation after impairment 1. 12/31/14 1. Carrying value after revaluation.000.000.000 and P150. 1/1/13 after impairment 14.050. Ans.000. Any increase or decrease is recognized as unrealized holding gain/loss in the profit or loss.000 Divide by: remaining useful life 8 Annual depr. 12/31. Fair Value/Soud Value.000 higher FMV less cost to sell 13.000 Divide by: remaining useful life 6 Annual depreciation after recovery. P562.P&L 1.500 3.000.000*5/7) 150.000. Ans.500 Incidentally.500 Carrying value had there been no revaluation. Ans. Ans.000. PLANT AND EQUIPMENT .000. 1/1/17 1.000 Revaluation surplus balance. 3. P360. 1/1/17 (P4M*5yrs/8yrs) 2.000 5.000 Reversal of revaluation surplus in the OCI 312. Carrying value based on revalued amount. 12/31/14 840. 1/1/17 (P4.000 Recoverable value/FMV. cost method 2. Ans. 1.000 5. Under the FMV model of valuing investment properties. this is also the carrying value of RS as of 1/1/17 under the piecemeal method of transferring revaluation surplus to retained earnings. 650.167 **Actual General Borrowing Cost P5.000.000 New building construction cost 15.000 Borrowing cost from General Borrowing Weighted average actual expenditure* 25.000.Ans. C.000*4/12) 8. Ans.000.000 Proceeds from sale of salvaged materials (30.500 12 218. Ans. PLANT AND EQUIPMENT .395.000 Weighted average genearl borrowing % 0 2 .000 15. 2014: (P20.308.000*8% 800.2M+P500K+P800K) 2. Since actual borrowing cost was fully capitalizable.000 Legal fees 4.000) Title insurance and legal fees to purchase land 150. Land Building Acquisition price 2.000. *January 1 18.167 Multiply by: Weighted Ave.500.000*10% 500. Actual borrowing cost from Specific Borrowing: P10M*12% 1.000 Cost of razing old building 300. Gen Borr. A.395.500 Divide by: useful life 25 Annual depreciation 61.000.742.000 1.000 4 16.000 December 31 5. Correct cost of Building. Ans.500.000 Property taxes in arrears.000 1.543.000 Divide by: Proceeds from Gen.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 70 of 155 MULTIPLE CHOICE EXERCISES: CHAPTER 6-EXERCISE 1: QUEZON MANUFACTURING COMPANY 1.000 Partial payment on constructed building 700.000) WAAE financed by general borrowing 15.500 2.000 Architect’s fees 600.200. 1.000 1. July 1.000.000 September 1 4.000 March 1 7.000. Jan.000 Final payment on constructed building 200.334.000. no borrowing cost shall be recognized as outright expense for 2014.870 CHAPTER 6-EXERCISE 2: MILDEN COMPANY 1.742.000 10 70. (P10M+P5M) 15.000 CHAPTER 6-EXERCISE 3: BOND COMPANY 1. Land Building Land and building acquisition price 1.228. - Total 304. %** 8.000 Option payment on property acquired only 15.248 Actual borrowing cost (P1.000 Divide by: 12 months 12 Weighted average actual expenditure 25. CHAPTER 6: AUDIT OF PROPERTY.248 Capitalizable borrowing cost 2.534. Ans. 2014 1.000 2.740 Multiply by: 6months/12 months in 2014 6/12 Depreciation for 2014 30.000 lower Cost incurred #mo. Borr.000*1yr/2yrs) 10.395.000 .. D.500 Insurance during construction only: (P24. to 12/31 Peso*Mos.. C. 2. Ans.000 P10.related to construction 12.000 Second payment on constructed building 600.67% 1.543.000 General expense .300. Ans.000.337.167 Less: Proceeds from specific borrowing (10. C.000 Cost of removal of old buidling 22.000 1. 2.000. C. B.870. 333 Ans.000.000. C.50 Mulitply by: Actual sales 900. Ans. 1/1/4/14 (P50.200 Divide by: 8 years 8 Depreciation expense 1. Bal rate 25% Multiply by (6months/12months) 1/2 Depreciation in 2014 (6 mo. 1/1/14 (P30. Ans.000 Depletion rate: 2. B. B.600.500 March 1 7.091.500 Capitalizable cost on 1/1/14 486.000 CHAPTER 6: AUDIT OF PROPERTY.000 Total Depletion 3.000 Depletion expense 2. Machine C: Depreciation expense. 1.000. B. C.000 Less: Salvage value (600.577097) 7.000 Divide by: Useful life (output) 7.000 Divide by: Extended remaining life 15 Depreciation expense in 2014 160.000.000 Salvage value (5.000.) 1. Ans.000 Balance: (3M*2. PLANT AND EQUIPMENT .250.290.000 Less: Salvage value (500.000.000 5. Machinery DE020 Cost 1/1/12 6. B.728. Ans.731.000) 25.800 Ans.000 Carrying value.50 Mulitply by: Actual production 1.000 Divide by: Remaining life 18 Additional Depreciation 27.228.000 Total Depreciation in 2014 341.000 Divide by: Useful life 20 Annual Depreciation 314. Machine B: Carrying value. Depletion rate: 2. Machinery AB001 Carrying Value 1/1/14 (6M*10/20) 3.000) Depletable cost 19.000.200.000.500.000*60%*40%) 4.000 Divide by: remaining useful life (4yrs+2yrs) 6 Depreciation expense 3. CHAPTER 6-EXERCISE 5: DELITE CORP.200 Salvage value (5. 12/31/14 36.000 Salvage value (1.000) Depreciable carrying value 20. January 1 18.400.500 3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 71 of 155 3. A.000 Capitalizable borrowing cost 2. Ans.000.291 Multply by: Double Decl.000) Depreciable carrying value 14.731.000-P25.000 2.000 December 31 5. B.000 September 1 4. A.775 Ans.000 Restoration cost 2.500 CHAPTER 6-EXERCISE 4: MAJESTIC CORPORATION Machine A: Carrying Value.411 4.000. Machinery GH033 Cost 7/1/14 Down payment: 1. Wasting Asset Cost 18. 2014 (P20.000) Depreciable cost 6. Ans.790.000) Depreciable carrying value 2.291 Initial Cost (Cash Price/Present Value) 8.000*80%*80%) 19. C. Cost Life in years Depr.000 Less: Proceeds from sale (300*10) (3.000) 178. 2014 300 Cost of later purchase (2006 purchase) 60 Total 18.680. Tools disposed. Proceeds from sale of Mach. A.800) Depreciation expense 13.000 10 100.000 **Accum.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 72 of 155 CHAPTER 6-EXERCISE 6: JERSEY CORP.000) (35. B.000 Cost of next earlier purchase (200*60) 12.000 Gain on sale 82.030. 2015: 700 700 Cost of latest purchases (2015 purchase) 80 Total 56. 2015: 700 Cost of earlier purchases (500*40) 20.800) Depreciation 46.000 Equipment 1.000 Less: Proceeds from sale (300*10) (3. Total cost 9. Depreciable cost 9.000 Ending inventory (40.550. Building 6. D.000 1.000 Total 7.200 2.000 Tools disposed. 2014 2015 Beginning inventory 32.000 67. Ans. 1. Building 6.000*(45/55) (522.30% Depreciation expense 900. PLANT AND EQUIPMENT .680.000 77.000 Carrying Value as of date of disposal Original Cost 700.000 30.200 3. B. rate 9.000. Aye 260.56 3. A.000 Less: Proceeds from sale (700*14) (9.000 Cost of tools available for use 56.000 Equipment 1. 2014 300 Cost of earlier purchase (From beg.: 638.800) Depreciation 22. Ans.030.100.000.000 Less: Proceeds from sale (700*14) (9.000 Purchases 24.000 2. Depr.680.000 Multiply by: Composite depr.200 CHAPTER 6-EXERCISE 8: COCO COMPANY 1. Ans.000 900.000 4.130.000 72.500. rate 9.000 9. Ans.000 5 500.913 CHAPTER 6-EXERCISE 7: GRANNY INC.000 Total 9. Ans.000) Depreciation 15. Ans.100.000) Depreciation 9.000 112.000 Machinery 2.000 Divide by: Depreciation expense 900.000 Tools disposed. Cost Salvage Depr.000) (9.000 40. Invty) 40 Total 12.000 6.30% Depreciation expense 662.000 Less: Proceeds from sale (3.000 Depreciation expense 900.000 100.500. C.30% 2. D. Exp. Ans.000 Composite life 10.000 50.000 20 300. Ans. 1.000 Multiply by: Composite depr.000 Divide by: Total cost 9.500.000 CHAPTER 6: AUDIT OF PROPERTY.000) Balance 16.000 Composite depreciation rate 9. Tools disposed. 000 Accum Depr (1/1/14) (960.4M*5. A.000) (1. Mach.500 Remaining Mach: P12. 3/1/14 (654.490 2.250.600.000 Accum.452.000 Accum Depr.200.660.000) See: (300. PLANT AND EQUIPMENT . Ans.000) Loss on trade-in (70.00 Multiply by: Actual hours used in 2014 2.000 CHAPTER 6-EXERCISE 9: PQR CORP. by: Revised remaining useful life (18.000 Carrying value of asset given-up.577097 Freight and handling cost 138.000 Remaining F&F: P4.788.000) Eff: (440K*20%) (88. Depr: Bee: (704. B. Carrying Value of remaining machineries: Cost: Machinery Bee 1.3M-100.020.5yrs/10yrs) (1.Furniture and Fixture Disposed F&F: P1.200.000) Carrying Value (1/1/14) 1.909 Present value of installment price at 8% effective rate: P2.000hrs)*11.2M*6/55 458.545 CHAPTER 6: AUDIT OF PROPERTY. bal.6M*20%)+(1.300.727 New F&F: P2.260.872.000 Depreciation rate per hour 40.000+84.182 Depreciation expense . 1/1/14 316.500 3.322 Total initial cost of new F&F 2.545) Loss on sale of F&F (254. A. Ans.900 Multiply by: Double decl.000 3.000) 5.000 Div.600. Fair market value of asset given-up 1.280K*20%) (576.000 Machinery See 1. Ans.000 1.000-36.2M*10/55*6/12 200.577097 2. Ans. Machinery Bee (Cost) 1. D.000 Accum Depr (1/1/14) **(1.000) 7. B.678 2. Ans. Ans.061.000+120.904. Ans.100 Depreciation Expense in 2014 84. 1. D.600.000) Carrying Value.800. A. CV 1/1/14 5.Machinery 1. Depreciation .45M/10yrs*6/12 72.112. 3/1/14 654.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 73 of 155 2.000 Mach. up to 3/1/14 (P1. rate (20yrs) 10% Depreciation expense .000) 280. 2014 2.Machinery Disposed Mach: P2.000-11.F&F 690.5M/15)*3yrs (300.000 Machinery Eff 440.000) (420.000) Carrying value as of December 31.8M*6/55*2/12 32.000 Divide by: Revised remaining useful life 10 Depreciation Expense in 2014 120.8M*6/55*2/12) (32.000 Machinery Dee 1.727) Depr.020.000) Dee: (1.000) (788.000 4. no depreciation on year of acquisition.000hrs (704. full on year of disposal Mach See (Depr Carrying Value): 1.Building 590. Depreciation . See (Cost) 1. Building. Bee (Depr Carrying Value): (316. 12/31/13 (P1.000 4. C.000/15. Ans.000 4.320.4M/10yrs*6/12 120.000 Carrying value of F&F sold.000 **as per policy.727) Carrying value.545) Cost 1.4M/3yrs*2.6M/10yrs 1. Proceeds from sale 400.000 Depreciation expense .000 New Mach: P1. 6/30/14 (P2.8M*34/55) (1. over the remaining life of building which is 12 years.250) 543. Proceeds from sale of B 24. (D) (18.440) 389.000 Equipment C 132. B.000 773.000 Accum Depr (3 yrs + 7 mo. 10/1/14: P120. 2013: (P75.000) 2.000*3.000 PV of Balance.200 1/1/10: 6/30/12: .000 Carrying Value (1.200 December 31.5yrs/5yrs 139. C Fair value of asset given up (1.) 235.760 March 31. C.000 Carrying Value 355.000.760 June 30.000 755.956 December 31.200 6/30/11: .760 May 31.385543 Initial cost of new Factory equipment P2. (net of disc.) 645. 2014: (24.165 December 31.250 CV of C. (D) 18. (E) 240. .000 1/1/10: 10/1/14: .000 CV of B.000 737.200 Equipment E: Cash price equiv.000) 700. C.25yrs/5yrs (6. Depreciation (20% of bal) (108. D.000.534 P227. 2.000 451.041*0. Ans. (D) 18. Ans. Building (10.5yrs/5yrs 70.000) 150. . Building Improvement (780. 1. Ans.000 443. 18.233) 328.165 October 1.+Trans. Ans.200*2.000) 24. B.000 5. Debit Credit Balance January 1.000*90%)*12/120 900. Ans. - Equipment B 120.200..200 November 30.75yrs/5yrs 27. 0.building being deprecated on its 4th year. Downpayment P1. 12/31/14: 12/31/14: 2014 Equipment A 157.206 January 1.000*2yrs/5yrs 52.760 December 31.800 Correct CV. C) 409.000 3. A.000+6.000 PV of future retirement cost.560 47.400 CHAPTER 6-EXERCISE 11: ROLLING CORP. % as of CV as of Depr.200 December 31. 1/1/2013: P132.000 Cost 1.008 December 31. – Building & Improv.000 407.5yrs/5yrs (78.000 Gain on trade-in 345.200 409. 2010 (A.760 January 31.600) Gain on trade-in 50.200 October 31. PLANT AND EQUIPMENT .000 *Book value of asset given up 355.000.760 August 30.000 769. (D) 18. A. Proceeds 250. (Asset given-up): 129. net 71. 1.000*0.000. Total Depr.000 4.000 CV of A.000 **depreciation for 5 months in 2014 Loss on disposal of old Factory equipment (454.000 497.000 .760 July 31 (D) 18. C.760 April 30. at 10% for four periods: P250.760 February 28. 6/30/12: P157. Cost 186. Ans. Correct cost Date of Acq Date of Disp Cond. Ans. (D) 18.802) 615. at 10% for 10 period: 87.000 479.000-P3. 1. 6.466 Incidental costs (freight and installation) 120. - Equipment D: Cash price equiv.000 433.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 74 of 155 CHAPTER 6-EXERCISE 10: CAULIFLOWER CORP.008 June 30.000 CHAPTER 6: AUDIT OF PROPERTY.000 461. Ans.200 September 30.000-500. (D) 18. Exp.169865 792.000** 704. 12/31/14 237. . (D) 18. FMV of A.791) 435.750) (71.000) 411.800 Gain on sale of C 18.000 469.5M*80%*80%*80%)-64.000-P129. 1. Depreciation (20% of bal) (154. Depreciation (20% of bal) (82.500 55.752) 619.040 3.000 . Depreciation (20% of bal) (97.000*12/78) 120.000 9/30/14: .450 4. 2011 (D) 18. Depreciation (20% of bal) (153. (D) 18. Ans.000) Gain on sale of B 18.900 37.960 158. B. Ans.000 6/30/12: .000 1/1/10: 1/1/13: . Proceeds from sale of C.760 June 30. (D) 18.000 487.000 425. 2012 (F) (P279. (D) 18. D.932 2.020.040 Equipment F: at FMV 279. 000 New: (2.933 4. PLANT AND EQUIPMENT .300. 2015 4.259 7. 2. CV Land 5. 2015 4.230.000 Balance (4.000 Buidling per books.407) 2. Correct cost (see #3) 49.000 CHAPTER 6: AUDIT OF PROPERTY. September..000 Total P12.000) P1.911 9. Ans. Allocation of lump sum price in proportion to fair values: Land A (135/1.350 x P12.429.000 Adjustment to Equipment account (7. Inventory Fixtures Total Per audit: Prorata based on relative FMV 75.000.000) 6.A.000.200.000) 4. 2015 45.170.269.350 x P12. 1.070.600 Total Depreciation – Factory Equipment 962.000 2.593 Divide by: Useful life 10 Depreciation expense.000**80%*80%*80%*20%) 665. 2015 - Adjustment to Land 48.500.000 Adjustment to Building account 150.000*20%*7/12) 233. Per audit.780.000 Total 18.107) (5.000 7. Ans.970.200.000 Building A (1. 2015 85.000 3.000 8.070. Ans.000*90%)/5 720.067 CHAPTER 6-EXERCISE 12: SABRINA MANUFACTURING COMPANY 1.333 Balance: (6.500. C. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 75 of 155 5.000*90%)/5*7/12 105.000 140.107 Divide by: Useful life 10 Depreciation expense.000 Per books.500 5. 2015 9.230.000 2. Ans A. 2014 100. Building.000 6. Disposed: (1. Ans. Disposed: (1.893) (15.92593) 92. Machinery at FMV 40.000.000. D.593 0.000 CHAPTER 6-EXERCISE 13: BAGPIPE MANUFACTURING COMPANY 1. June 1. Ans.000 Adjustement to Inventory and Fixtures (9. Ans.500 Per books. Correct cost (see #1) 92. Correct cost (see #5) 40. Ans.92593 Equipment per books.000 Per books. D. Machinery. Fixtures. A.893 49. B.000 Adjustment to Machinery (5. October 12. Apr. 2014 500. A. Ans.000 Building and Improvements 10. Correct cost (see #2) 650. Cost Accum Depr.000 4.000 4.000 New: (1.000 Divide by: Useful life 10 Depreciation expense. Per audit. Ans.000 Divide by: Useful life 25 Depreciation expense.215/1.500. C. Land at FMV 48. Building per audit: at FMV 650.000*90%)/5*5/12 90. A.300.000 5. 2015 26.000 Total Depreciation – Automotive 915.107 125. Ans.067 Automotive Equipment 5.000 Factory Equipment 8.933 6. Ans.000) 11. Equipment. A. 1.000*0. Feb.000.000 55. Equipment per audit: (P100. Ans.000*80%*80%*80%*20%)*5/12) 64. C.610.300. C. D. Down payment P86. B. End of 2016 (P120 million x 5/8) P75 million 2.500 Less: Normal repairs and maintenance 223. Book value of plant and equipment. A.000-P67.470.160. for the year ended September 30.000 150% declining balance rate (1/10 x 150%) X 15% Depreciation expense P67. Depreciation expense—Machinery A. 2016 261. C.000 12.473. Ans. D.000 First installment payment on October 1.500 150% declining balance rate (1/10 x 150%) X 15% Depreciation expense P57.000 Divide by: Annual depreciation 261. Depreciation expense—Machinery A for the year ended September 30. Depreciation expense—Donated equipment. C. Total cost as recorded P2. 2016: Book value.375 10.250. Plant and equipment: Book value P75 million Recoverable value (FMV) 50 million *cash flow is undiscounted.000 x 7/36 x 4/12) P140.000 Less: Salvage value (600. D. 2016. Ans.750 Estimated life 40 years 4. 2015 (P450.160. Ans. 2016: (P2. Purchased technology: Book value P30 million Recoverable value (FMV) 10 million *cash flow is undiscounted thus not useful Impairment loss P20 million CHAPTER 6: AUDIT OF PROPERTY.710) 603.125. B.000 14. D. Depreciation expense on Building A for the year Ended September 30. Ans.900 Total cost of Machinery B P780. Depreciation expense—Donated equipment.250.750 Same as prior year because straight-line method is used in depreciating Building A.000 x 8/36) P480. 6. for the year ended September 30. 5.000=P2. 2016: (P780. Book value of purchased technology (Patent) (P60 million x 3/6) P30 million 3.000 CHAPTER 6-EXERCISE 14: KARUMA TECHNOLOGY INC. for the year ended Septmeber 30. 2015 90.000/20years) 39. 2015: Cost P450.000 x 6.500) P382. for the year ended September 30. Ans. Since Builidng B is not yet available for use as of September 30.000 8. B.500 Correct cost of Machinery A P2. Oct.000-P90.000 11. C. Cost of Building A P11.070.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 76 of 155 3.000 *Demolition cost shall be charged to the cost of the new constructed Building. Ans. Ans. Ans. at fair value P450. 1. D. Ans. thus not useful Impairment loss P25 million 4.000) Depreciable cost 10.500 9. Ans. PLANT AND EQUIPMENT . A. Ans. no depreciation shall be provided yet. Depreciation expense-Machinery B. Fair value of Land on acquisition date = FMV of shares P1.000 13. Donated equipment. Ans. A. D. Ans. A.000 Present value of succeeding 10 nstallment payments (P90. C. Ans. 1. Ans. 2015: (P2. Ans. 7. B.050. Present value of future net cash flows from the CGU's: Continued use: P1.000 6.800.440.000 Total 8.980 3.440. prorata (relative book value before impairment) Factory (1.070) Building (7.000 7.050 5.440.224. Ans.224. Ans.930 4. Factory Machinery Carrying value before impairment loss: 1.020 4.909091 128.950) Carrying value after impairment loss 889.816) Impairment loss 107.245 0.9676 5.000.000/8.000*0.000.800.000 5.751315 22.000)*3yrs/8yrs (210. Ans. Ans.440.500. Factory: (P1.391 0.000.000)*P3. B.751315 2018: P15.000*24/30) 1.000. Ans.909091 2016: P114.000 Accum.930 4.000*0.000 7.000. (609.440.950) 173. Ans.000/8. Ans.000 Recoverable amount (291.683013 2019: P10. Cost of machineries 609.326.224.000 Building: (P10.950) Carrying value after impairment loss 889.224. Carrying value 399.000)*P3.000-49. prorata (relative book value before impairment) Factory (1. CHAPTER 6-EXERCISE 16: MARGOT CORPORATION 1.000.050 *lower than FMV P4. D.020 (550.184 CHAPTER 6: AUDIT OF PROPERTY.000 Recoverable value/Value in use 5. A.000 2. Carrying value 399.000)*P3.673.000 Recoverable amount (300.209 261.683013 10.620921 6. Value in use 291.000)*P3.000 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. A.020 (2.620921 Disposal: 2019: P49.000 2.000*14/20) 7.182 0.826446 2017: P30. Ans. A.000/8.5M Additional impairment to Factory (173.440. B.000/8.620921 30. Carrying value of CGU: Factory: (P1.000*0.440.000*0. Present value of future net cash flows from: Use: 2015: P141.000 higher 4.070) Building (7. D.000. B. Ans.000*14/20) 7.980 *FMV not determinable Impairment loss 3.000) Carrying values. Factory Machinery Carrying value before impairment loss: 1.440.326.440.215.215.000*4.980 4.539 0.000 Impairment allocated.000 Building: (P10.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 77 of 155 CHAPTER 6-EXERCISE 15: BRENDAN CORPORATION 1.000*0. Ans.020 (2. C.425 Value in use 291.816 higher FMV less cost to sell 275.440. Ans.816 3.950 Carrying value after reallocation of impairment loss 715.215 0.000*24/30) 1.000) Impairment loss 99.673. 12/31/14 399.826446 94. PLANT AND EQUIPMENT . Depr.020 (550.816 FMV less cost to sell 300.000 Impairment allocated. B.224.440. Value in use 291.000*0.000. 000. Ans.000) Recovery gain Reversal of RS Impairment loss from Land B (1. Carrying value (P500.000.000) 320.000) 320.000.000.000.000) 410.000 CV (8. C. Land A Land B Fair Market Value 11.000) 4. 12/31/16: (P33. Land A Land B Fair Market Value 12.000.000-50.000 Reversal of revaluaiton surplus for Land A (1.000 15. Ans.000-P72. PLANT AND EQUIPMENT .000.000 15.000 Recoverable value (338. Land A Land B Fair Market Value 8.000.000.000) 2. Ans.000.000.000 2.000-P180.000 5.000 (1.000.000.000) (Impairment loss)/Revaluation Surplus 2. 12/31/14 302.000) (12. 1.000. C. Ans.000.000*7years/8years) 28.000) OCI P&L Fair Market Value 12.875 *note that the remaining life of the asset after revaluation is (12years-4years) 8 years.000 CV based on impaired value (P338. B. 3.000 3.000.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 78 of 155 CHAPTER 6-EXERCISE 17: REVO CORP. C.000) CV.000 Multiply by: Condition percent (6yrs/10yrs) 6/10 Depreciable FMV.000 (1.000.000. Ans. B.000 2014 Depr: (338.000 11.000.000 (5. CV after impairment loss 338.P&L 54.000 Fair value/Sound value 353.000 4.000) Recovery gain from Land A 2.000 Net gain from Lands 1. Ans. A.000) Total increase/decrease in value 4.000 Cost (10.000.000.000) (Impairment loss)/Revaluation Surplus (2.000) 1.000) 505.000-P90.000 OCI OCI Fair Market Value 11.000 Reversal of RS Recovery gain Revaluation surplus from Land B 3. Fair value/Sound Value 353.000) (12.000) 4. Depreciable Sound Value 303.000-P180.000.000. CHAPTER 6: AUDIT OF PROPERTY. C.000 CHAPTER 6-EXERCISE 18: LABANOS CORP.000.000.000.000) (Impairment loss)/Revaluation Surplus .000) (11.000.000.000 Revaluation surplus 33.000 Cost (10.000.000 11.000)/8yrs (36.000 3.000 CV had there been no impairment (P500.000 Recovery gain .000.000 Salvage value 50.000.000. Ans.000 CV had there been no impairment (P500.000.000) Net OCI for the year 2.000.000. RS.000 Cost (10. C.000) (16.000. Ans.000.000) 266.000) (12. Replacement depreciable cost (P555.000) Impairment loss 72.000-50.000 16.000.000. 1.000 P&L OCI 2.000 CV (12.000) Total increase/decrease in value (1.000 (4. 000 Patent GHI 350. P3.000 Patent DEF amo.75y/20y 78.000 Patent DEF amo. Ans.000*2.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 79 of 155 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS DISCUSSION PROBLEMS CHAPTER 7-PROBLEM 1 1 A.667 Related Patent (P120.000 Legal fees .600 577. Condition % CV Cost Acq. 1.5yrs) 30.000 4/1/2010: 15.000 Cost of purchasing a trademark 290.000 2013: Amortization: Original Patent (P640.000-P128. (P350.000/20yrs) 5. (P100.333) 526.938 2014: Patent ABC amo.000 12/31/2011: 9.000 Patent DEF amo. 3 C.000.000/20yrs) 5. (P100.577097 386. Ans.667 Related Patent (P120.000 416.000/12.667 2014: Amortization: Original Patent (P640.102) CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000 Amortization.000-P128. P386.000)/12 years 42.700. Value in use/Present value of future net cash flows at 8% for 3 years. (P100. 1. 2008: Research and development expense 418. 12/31/14 Original and Related patent cost 760. (P100.000 Stand-alone application computer 100.667 2.000 2012: Amortization (P640.000 Cost of purchasing a copyright 900.000 Patent GHI amo.750 2011: Patent ABC amo.000)/12 years 42.000 Patent GHI amo.000/12 years) 10.938 CHAPTER 7-PROBLEM 4: GARY INC.000 Total Amortization 52.5yrs) 30.000/10yrs) 64.000/20yrs) 5.000 2009: Research and development expense 520. P680. 2 B.5y/16y 317.000 Goodwill acquired in the purchase of a business 640. 12/31/14 (233. Ans.700.000/12.875 Research and development expense 360.000 7/1/2013: 14. Purchase of a franchise 1.000/12 years) 10.000/16yrs) 21.000 2012: Patent ABC amo. CHAPTER 7-PROBLEM 2: Ans.600 2013: Patent ABC amo.000 455.938.750 Patent DEF 375. 3.000/10yrs) 64.938 45.188 Total 680.565. Ans..000 Research and development expense 500. Date 12/31/14: 12/31/14: Patent ABC 100. 2011: Amortization (P640.000 software Total Intangible Assets 3.000/20yrs)*9/12 3. (P375.875 2. (P375.200.000 Legal costs incurred in securing a patent 70.565 2. P150.000 Total Amortization 52.667 Impairment loss (140.successful defense 42.000 2010: Patent ABC amo.000 Cost of purchasing a patent from an inventor 500.5y/12.000/20yrs) 5. (P100.5yrs) 30.000 Research and development expense 450. (P375.000 CHAPTER 7-PROBLEM 3: CLOUDE NINE CORP. (P140.000 128.000/12.102).000/16yrs)*6/12 10.5y 285.750 Research and development expense 125.577097 Carrying value. (P350. Ans. 000*5.4M/4yrs*2.223 Patent: Amortization 68.649 Interest expense (P1.855.348.348. 2014 (544.752 Continuing franchise fee (P18M*5%) 900.000 Amortization.053.995247 1. P128.348.successful defense 326. Franchise.000 Value in use/PV of net cash flows at 10% for 7yrs: P80.086. 12/31/2014 2.913712 1.823 Impairment loss 673.926 Total expenses 2.000 Impairment loss - 2.227/10yrs) (234.405 Value in use/PV of net cash flows at 10% for 9yrs: P250.4M/4yrs*2.000 Value in use/PV of net cash flows at 9. Fanchise: Amortization 234.227*14%) 244.000/8yrs) (68.348.000) Carrying value.913712 1.000) Carrying value.649 2. Franchise. 12/31/2014 2.000 PV of Balance a 14% for 4 periods. 2015 128. 2014 800. 2014 (P1M/10yrs) (100.227 2. Ans.227. 2013 (P1M/10yrs) (100. Patent.474.433436 1.433436 5.474 Impairment loss 310..000*4. Trademark.000 Amortization.000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS . Ans.199.000 Amortization.000) Carrying value. 2014 Downpayment 600. Patent. 12/3/12 900. 2013 900. P2. Ans.913712 Less: Amo.868419 4. P1. 12/3/13 800. Ans.000 3. 2012 1..150 Case 2: 1.526 4.500. 2012 (P1M/10yrs) (100. Jan.000.000) Carrying value. 2014 (2.227 2. 12/3/14 700.000 Trademark: Amortization 100.748.000/10% 5. 1.868419 389.000 2.823) Carrying value. Ans.759024 1. 1/1/15 after impairment 386. Ans. P2. Jan. Jan.565 Divide by: Remaining life 3 Amortization.858.227 Carrying value.995247 5.000. Jan.000 Value in use/PV of net cash flows at 9% for 9yrs: P200.000*5.5% for 8yrs: P200..000 Amortization. 2014 544.348. Jan.855 CHAPTER 7-PROBLEM 5: COLGATE COMPANY Case 1: 1.049 Impairment loss - Trademark.748. P476.756.000*5.227 2.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 80 of 155 4.000 PV of Balance a 14% for 4 periods.000. 1. P476.756 Impairment loss 673.000/8yrs) (68. CV.439. Jan.439. P2. P389. 2014 (544.150. 2014 544. P2.759024 5.227 Value in use/PV of net cash flows at 10% for an indefinite period: P250.858.687 Impairment loss - Trademark. 12/31/14 476.759024 2.113.000 Impairment loss 310.. Jan.400 736.526 Legal fees . 2014 Downpayment 600.000) Carrying value..000 Amortization. Ans. 12/31/14 476.748. 12/3/13 1.000.198. P800.000) Accum.300. Ans.000 FMV of Net Assets 6.198.000 Trademark: Impairment loss 200. P1. Goodwill (P195.950.450.000 2.868419 800.500.500.000/5yrs) (70. 2013 1.000 Goodwill (P195.000*6. Ans. Ans.. (P6.500. Average/Normal Earnings of DA Inc.000 Less: Average/Normal earnings of industry (P2.433436 2.000 Excess earnings in % (12%-9%) 3% Excess earings 195. 12/3/14 1. P1. P8.000.144567 FMV of Net Assets 6. P1.000 Value in use/PV of net cash flows at 10% for an indefinite period: P80.000 FMV of Net Assets 6.000) Projected excess earnings 40.000.000.000 FMV of Net Assets 6.. Fanchise: Interest expense (P1.000/10% 4.600. Ans.263 Impairment loss - Trademark.191.144. P7.000.800.625.000 Carrying value. (P350.500.000 Acquisition cost 7.000 Carrying value.000.6M*10%) (260.000 Impairment loss 200.000 Carrying value.752 Continuing franchise fee (P18M*5%) 900.105. Ans.000 Less: Inrease in depr.5M*12%) 780. 12/3/12 1.000 4.000 FMV of Net Assets 6. Jan. P1. Acquisition Cost 8.950.000.000.5% 5. Ans.000*10yrs) 1.144567 1.222.400 526.222 Impairment loss - Trademark.000 3.500. Jan. Ans. Operating Profits 2010-2014 1.152.000 4.500.000) Projected average operating profits 300.698.successful defense 326.000 Goodwill 1. Ans.000/9% 5. P1.000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000 Add: Annual presidents bonus 50.400 Total expenses 1.5% for an indefinte period: P200. Present value of excess earnings at 10% for 10 years: Goodwill: P195.000 5.995247 2..748.227*14%) 244.152 CHAPTER 7-PROBLEM 6: PJ CORP.500.000 Less: Gain on sale of equipment in 2012 (200.800.000. Ans.000 Divide by: Capitalization rate 10% Acquisition cost 7.000.000 Legal fees .000.000 Goodwill 1.000 Value in use/PV of net cash flows at 9% for an indefinite period: P200.739.000/12%) 1. 2014 1.800.191 CHAPTER 7-PROBLEM 7: KAREN CORPORATION Accumulated profits 2010-2014 1. P7.000/9.000.191.000 Acquisition cost 8.000.125.500.698.000.625. P1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 81 of 155 3.739. exp. Ans.000.000 1.450. 1. P8.200. FMV of Net Assets 6.125.191 6. Jan. Ans.000 Value in use/PV of net cash flows at 9.000 Acquisition cost 8.000 Divide by: 5 Annual average operating profits 320. Trademark.752 Patent: Amortization 68. 2012 1. 000.606080 2.350.440*6.000 Acquisition cost/price 2.726*6.000 Acquisition cost/price 2.000 Office Equipment 250.000) (900.000 250.000 200.600.000 950.850. Profits 300.050.000*0.000 d) Present value method Goodwill: (P40.000) - Net Assets 2.79079) 151. the best option is that which will yield the least acquistion price and least goodwill.000 175.631.000 200.000 150.000 1.500.000 Before impairment.000 Building 500.000 700. P1. 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) Factory equipment 100.813692 950.000 c) Capitalzation of average earnings Projected annual average oper.000 Goodwill: (P40. Ans.000.751.000 Noncurrent Asset (excluding GW) Land 950.000. a) Purchase of excess earnings Goodwill (P40.000 375.000/25%) 160.000.000 795.000 175.144567 DEF: P289.600.000) Goodwill 400.000.000 1. P160.000 Goodwill (prorated)** 200. Ans.600.000 Goodwill (P40.000 c) Capitalzation of average earnings Projected annual average oper.000.3.000 1.3.000 490.000.000 6.79079 2.000 2.631 3.000 400.000 .600.500.606080 GHI: P76.144567 920.600. P400. Ans.000 b) Capitalization of excess earnings FMV of Net Assets 2. Ans.000 7.100.000 Chargeable to Goodwill-ABC (130.000 250.000 1. Profits 300.005.000 700. P200.000 CGU-ABC Impairment loss 130.760.000 6.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 82 of 155 FMV BV Difference Current Asset 700.631 3. CHAPTER 7-PROBLEM 8: ABC CORPORATION 1.000 240.000/25%) 160.000 550.000 Divide by: Capitalization rate 10% Acquisition cost/price 3.000) CGU-DEF Impairment loss - CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000 Less: FMV of Net Asset (2.79079) 151.000 375.000 FMV of net assets (4 CGUs) 800.631 Acquisition cost/price 2.000 Liabilities (900.200. 325.144567 470.000 120.000 b) Capitalization of excess earnings Goodwill (P40.000 350.000.000 1.000 d) Present value method FMV of Net Assets 2.000 100.000 Goodwill 200.000 Goodwill** 200.000 Impairment loss 130.000 - Depr. Option d) For the acquiring company. P151.000.000*5yrs) 200.000*0.000 Value in use: ABC: P149. ABC DEF GHI JKL Acquisition price 5.813692 JKL: P161.000.242*7.000 400. Asset 1.000 1.000 Divide by: Capitalization rate 10% Acquisition cost/price 3. a) Purchase of excess earnings FMV of Net Assets 2.000.000 2.490*6.800.000 900.000 4.000 Carrying value of CGU 1. Ans.000 Computer program services 17.000 3.5yrs 9.579 Divide by: Remaining useful life 10.105.000 490.000) - Balance to allocated to other assets 150.545 2.968 Building (400.000. 1.064. 2019 60. feasibility 313.000 4. is now shorter than the extended Depreciation expense. 2014 Rental expense 480.000. Ans. P604.695 Building 500.771 Goodwill** 70.480. P1.774) 303.307.000 Divide by: Remaining lease term: 9. After impairment. after impairment 445.000 2014 Amortization of leaserights (P300.200. P63. Ans. after impairment Impairment loss 400.000 Impairment loss charged to goodwill 555. .003.000 950.000 2. CHAPTER 7-PROBLEM 9: EDD CORP.158. Ans.000) 120. Salaries and wages of programmers doing research 940. P60. Salaries of staff working on research project 78.000) - Balance to allocated to other assets 150.000 (95.000 . Ans.727 1.000 Chargeable to Goodwill-GHI (250. P510.500*25%) 43. 15yrs.600 Total research and development expense 1. CHAPTER 7-PROBLEM 10: MUSAR CORP.273) 172.100.100.000) 400.727 Building (700. 5.000/1.000 900. Carrying value.000) 700.600.495.000 90.000) 200.320. 12/31/14 ABC DEF GHI JKL TOTAL Cash 50.000/620.158 3.032) 90. .000 240.000) 200.480 3.320 CHAPTER 7-PROBLEM 11: BITS AND BYTES INC. 2014 63.534 Office Equipment 250.968 172.000*5yrs/9.194) 75. Ans.226 CGU-JKL CV.000 Factory Equipment (200.000 .200. before impairment 1.546.000 (96.226 604. Ans.000/620. Ans.727 Office equipment (200. 9.100. 10.273) 172.5yrs) 631. P258. 1. P2.50 *remaining lease term.875 Total research and development expense 139. 1/1/2019 (P1.000 Chargeable to Goodwill-GHI (175.000/1. P605.375 2.253. Annual depreciation 126.000/10yrs) 30. Patent. 1. 445. after impairment Impairment loss 325.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 83 of 155 CGU-GHI CV. Ans.000/1.000 100. Ans.000 Expenses prior to establishment of tech.000) 100.800 Divide by: useful life 10 Amortization expense 2.000 (29. Goodwill. Ans.000.50 *remaining life (15-4.000 (27.000 2. P139.000 4. 15 yrs. 150. P395.727 588.455) 604.150.500 Allocated general expenses (P175.000.253.000 Factory equipment (100.000 (24. P22.375.806 172. initial cost 24.000 375.5yrs is shorter than improvement's life.150 remaining lease term (10-5yrs+10yrs).000 510.316 Multiply by: 6/12 Depreciation expense.600 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000 Carrying value of CGU 970.5yrs.000 470.806 Office equipment (120.000 Goodwill.800-2480) 22.000 303. Patent (24.000 Factory equipment 100.000/620.000 75.545 2.5yrs). Cost of leasehold improvement 1.000 (27. 000 .600 2.000 Cost to produce and prepare software for sale 225.750 3. Amortization of franchise. 12/31/14: P168.75yrs/2yrs 63.500 Rent expense. P100.000 .000.000.000 Initial franchise fees paid 175. P330.000/8yrs)*6/12 15.000. Ans.000) 165. 2013 132. Franchise. 12/31/14: P252. D.750 221.000/8yrs) 31. 2014 (P444. Amortization of computer software: P330. 2014 (P252. B.800 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .Receivable 1-year rent 220. 1.000*6.5yrs/8yrs 204.900 Research and development expense.000 Portion of goods remaining on hand 30% Cost of ending inventory 100. Ans.000 3.750 5.Receivable/Other asset Idle office equipment 25. Prepayment Exp. Ans.000/10yrs) 44.000 Legal fees . 2014 960.000 50.500 37.400 Cost to develop a secret formula 450.000.500 Property insurance 56.000 Licensing.000 Operating and broadcast rights 112.beg. 2013 (P252.000 20.000/2yrs)*3/12 21.000 5. CV.000 A license to manufacture a steroid by means of a government grant 150.Other asset Bond redemption fund 545. Expenses after technical feasibility is established 330.000/P4.000 Cost of goods produced 335.000 .000 Goodwill purchased in a business combination 500.000 Advances to officers 135.645. CV.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 84 of 155 2.750 Rent expense.000 Cost of purchasing a trademark 250.250 18. MULTIPLE CHOICE EXERCISES: CHAPTER 7-EXERCISE 1: Purchased recipes and secret formulas 150.000 Office supplier 25. Amortization of computer software (330.successful defense 75. Prepaid rent.000 CHAPTER 7-EXERCISE 2: DOHA CORPORATION 1. 2014 (P168.000 Net loss including organization expense in 2013 96.000*9yrs/10yrs 399. A.000 Total expense in 2014 1. Ans. 2013 (P168.500.000 CHAPTER 7-PROBLEM 12: HARRY CORP.000 Cost to produce and prepare software for sale 225. Ans.-2014 Miscellaneous Rent Security Deposit 50.000 Amortization of patent.LT Investment 393. P117.750 Advertising 25. B.000 4.500 4.000 Cost of purchasing a patent from an inventor 137.000/2yrs) 84.000 90.000*0. Ans.000/3yrs) 110.000 Legal cost in securing a patent 70. Ans.000 Lease bonus 55.000 Retroactive adjustment to RE. Amortization of franchise.000 Inurance Fire insurance 12.000 Portion of goods remaining on hand 30% Cost of ending inventory 117.000 Amount paid to a lessor for the exclusive right to rent a facility under an operating lease agreement for a period of 10 years 100. Ans.000 Total intangibles including goodwill 1.250 2. Ans. Ans. 12/31/14: P444.000*(P2. Patent. and stand still agreement 300.944. C.000 .000 Cost of goods produced 390. royalty. 000 -Training cost is recognized as outright expense.000 Retroactive adjustment to RE.160.000 2. Ans. 1/2013 3. Ans.500. Legal and other professional fees to process the patent application (useful life is 15 years).000 Amortization: (2. B. D. 2013 expenses: Rent expense (840.000/9% 1.000 5.000 Legal fees on patent defense 379. Amortization (2012-2014): P2.000*2yrs/10yrs 432.000*3yrs/10yrs (648.Successful defense cost is recognized as outright expense. 2014 expenses: Impairment loss on Franchise 10. Correct Cost. Ans. 1.800.000 CHAPTER 7-EXERCISE 5: NICOLE CORP. License.000 0 5.000/10yrs 40. beg.000*2yrs/10yrs 480.000 Amortization expense (2012-2013) per audit: P2.Depr.220K/10yrs) (222.000 3. Patent: Cost (1/1/14) 2.160.512. Ans. C.000 Retroactive adjustment.000 Impairment loss 280.000 Impairment loss in 2014 . no impairment in 2013 Carrying Value/Cost (no definite life) 1. per audit 672.740. is over useful life since it is shorter than remaining lease term.000 Net loss for the year 480. B.500 Total expense 3.000 Recoverable value/Value in use (337.000 Recoverable value/Value in use: (150.000 4.000 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS . Franchise: Carrying Value/Cost (no definite life) 1. 2007 660. 2014 192. to RE. B. Ans.400. Trademark.250. Ans.000) Carrying value.000 . P400. expense in 2012 per audit 240.250.366..160. Ans.000/12%) 1. Amortization of Leaserights. 12/31/14 3.000/12%) 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 85 of 155 CHAPTER 7-EXERCISE 3: ALYSSA CORP. 1/2012 2. Training cost.000/2)*3/12 105.000 Total expense 190. PV of Future net cash flows at 9% for an indefinite period: P90.000 Cost of developing recepe 2. A.998.280.500 CHAPTER 7-EXERCISE 4: STU CORPORATION 1. C.000 Impairment loss in 2014 10.32825) 1. 12/31/14 1. Depreciation on the Leasehold Improvement P900. thus no amortization.000 .000 Recoverable value/Value in use: (180. Ans.260.Trademark is with indefinite life. A.740. 1.000 3.000 Amortization (2013-2014): P3. Correct Cost.000. Correct CV.000 Impairment loss on Patent 198.. Jan.000) Carrying Value (12/14) 1. D.220.822*5.328250 Impairment loss 198.000*2yrs/20yrs (374.000/5yrs * 10/12 150.000 Prior period expense. 12/31/14 1.000 Amortization on Patent 222.000 Rent expense for 2014 420. Ans. Ans.000) Carrying value.000 Amortization expnse (2012-2013) per books: P2. Beg 585.479.260. debit.000 2.000 4. Recoverable value/Value in use: . Patent. B. 857.000 3. CV.186.028 3. B. Original Patent.000*11/13) 825.000*14/15 616. CV.306*14%) 260. 1/1/2012 975.000) Patent. 1.000/6yrs) 68. Dec.333.457.000 Divide by: Extended remaining life (10yrs+3yrs) 13 Revised amortization expense. B.857. Patent.023 Total expense 860.731 Recoverable amount/Value in use CV 12/31/14 2. 12/31/13 (P975.000 Recoverable value - Impairment loss 750. B.321632) 1.306 1 Balance (800. D.857. Original Patent.000/8) 68. B. 31. Patent.306 2.000/11yrs 20.275 5.000 517.000 Total amortization. 2014 113.000*10/11 200.125 Carrying Value 12/31/2014 476. Ans.457. Ans. 1/1/2012 200. 12/31/14 (before amortization). Ans.000*4.211.000 CV of remaining Patent with the same useful life 410. A. Ans.000 4.023 Impairment loss 80. Dec.306*14%) 260. CV.023 Continuing franchise fee (12M*5%) 600. 2007: P660. CV.306/10) 245.333 Recoverable Value/Value in Use Impairment loss - (400.000 640. Dec.000 Competing Patent.857.306 Less: Amortization: 245. 2011: P660.000 Competing Patent. PATENT: 8 YEARS: Cost 1/1/2014 545.275 Continuing franchise fee (12M*5%) 600. 1/1/2012 440.000*6yrs/14yrs 90. 12/31/14 (before amortization). Ans. C. Ans. C.667 3. per audit 500.321632) 1.000 CHAPTER 7-EXERCISE 6: DEF CORP. 2012 64.000 Competing Patent: P220. 12/31/14 (before amortization). Amortization expense 2012: Original Patent: P660.457.000 Amortization of patent with revised life: (P90.000/12%) 3. 2.000/2yrs) 45. 1/1/2012 335.000 Amortization of patent w/o change in life: (P410. per books 550. C.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 86 of 155 2. Ans.000*2.000 Balance (800.563757) 547.575 (400. Ans.000*2.875 Recoverable value (120. CV.731 Interest expense (1. 12/31/14 (P975. CV.000 5.000 Total expense 1.000 7. FRANCHISE: TERM 10 YEARS FRANCHISE: INDEFINITE Initial franchise fee (PV) Initial franchise fee (PV) Down payment 600.000 Total Patent.300 0 Impairment loss 80.000 Down payment 600.333 Total amortization expense. CV.000/15yrs 44.000 Related Patent. The carrying value of the capitalized repairs cost as of 1/1/14 should have been expensed as early as 2011.333) Patent. 1.000*6yrs/9yrs (50.000*5. A.000 CV of Patent with revised useful life: P210.3282498 Amortization - Impairment loss - Amortization (2. CHAPTER 7-EXERCISE 7: AMFURST CORP.000 6. 12/31/14 after amortization 386. 31.321632 2. Ans. 2011: P220.306 2.000*10/13) 750. 31.32825) 2.131. per audit 500. Ans. D.651 0 Impairment loss - CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000*10/15 440. B.750 Amortization (545.333 2.000 Correct amortization for 2014 (113. 2012 75.000 CV of Repairs cost capitalized in 1/1/2011 P75.000 Interest expense (1. Ans. Ans. 480. Ans D.000 Depreciation on Building (11.2) 8.640.000 Total R&D Expense 11. B. Salaries and other employee benefits 7.2M*1.2M/10yrs)*9/12 (240.000) FMV of net assets 36. thus no amortization *Continuing franchise fee is recgonized as outright expense.200. Impairment loss 100. A Building cost 11. CHAPTER 7-EXERCISE 10: CAN CORP.000 Total expense 280.000 Depr of improvement (450.000 *No indication of impairment of CGU with which the Goodwill is allocated to.368M*1.800. Patent cost 3. Ans. B.640.2M/20yrs) 560.800. 5.400 9.000 6. Ans. thus the CV remains to be the initial cost.000 Other expenses 3. Projected profits for the next four years: 2014: (6M*1. 12/31/14 550. LEASE AGREEMENT: Rent expense for 2014 200.2) 7. net 24.662. Ans. CV.441. C.5yrs)*6/12 50.640. Organization cost is recognized as outright expense. *No capitalizable internally developed intangible yet since one of criteria for capitalization (i.000/4. Intention to complete the project and to either sell/use the result of the project.000) CV 12/31/14 2. Patent cost 3.500/15%) 450.600 Total 38.662.200.800. Recoverable value/ Value in use (P67.000 PPE.400 CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .000 CHAPTER 7-EXERCISE 8: SAHARA CORP.000 3. Ans.2M/20) (560.200.368.000 *No definite life.649. how future economic benefits shall be derived) has not been met.000 Useful life 10 Amortization for 2014 320.000 2.000 Amortization in 2013: (3.000/5yrs) 30. Ans. Ans. 3. D.64M*1.440.000 Projected average excess earnings 3. Ans.000 4.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 87 of 155 4.2) 10. 1. 0.e. Ability to complete the project and to either sell/use the result of the project. How probable future economic benefits can be derived from the intangible.080.000 5.000 Investments at FMV 9. B.480.2) 12. Ans.000) CV 12/31/14 10. Excess of cost over net assets of entrprise acquired in 2012 200. C.000 Amortizatin of lease rights (150.000 2015: (7. 4. Availability of resources to complete the project. 6. 2.000.000. Ability to reliably estimate future cost to be incurred to complete the intangible. Establishment of technical feasibility 2. Intangibles.000) Amortization in 2014 (320.000) Noncurrent liabilities (6.182.000 Current liabilities (4.000 *PV of future net cash flows from continued use at 15% for an indefinite period.000 CHAPTER 7-EXERCISE 9: BALAGTAS ENTERPRISES 1. the following criteria should be strictly complied with if to capitalize development cost of an internally generated intangible: 1.200.8M) 13. Under PAS 38.000 2016: (8. 3.000 Multiply by: industry rate of return 18% Average/Normal earnings at industry rate: 6.000.600 Divide by: 4 Projected average earnings 9. Franchise.400 Average/Normal earnings at industry rate: Fair market Value of Net Assets Current Asset (9M+4.000.000 Accum Depr (11.000 2017: (10. 700.679 CV after impairment Payables (700.085. Ans.000.500.155 Should not be lower than its Rec.000 (687.700.000 2.680. Value in use/Recoverable value 4.000 Effect of new legislation (cutting by 40% imports to Country C) 60% Estim.012.574 Factory equipment 2. Projected average excess earnings 3.118. Ans. Ans..AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 88 of 155 1.000.000. prorata: 1.400 Multiply by: # of years 4 Goodwill 12. estimate of cashflows Payables (700. Ans.000) (700. Ans. thus no cash flows from eventual disposal.000 1.786 Store Equipment 1.000 (687.680.574 4. 2013 10.085.125. A.000 (381. 4 periods 3 Goodwill 9.500.000 1.000 375.312. 5.830.830.000 Building 2.182. Total Country A Country B Country C Acquisition Price. January 1. prorata: 1. Value in use=Present value of future net cash flows from CGU Country C: Estim.125. Projected average excess earnings 3.321) 2.705.500.000 Acquisition price 48. CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS . Future net cash flows before impairment event 1.118.771584 Value in use 4.863. Future net cash flows after impairment event 900.000 FMV of Identifiable Net Asset 8.705.125. A.600 3.000 4.500. Ans.000 **observe that payables is deducted since.000 Multiply by: PV factor of 1 at 15% for 9-year remaining life of CGU C 4.000. 3.400 Divide by: Capitalization rate 18% Goodwill: 17.800.125. Ans.500. Projected average earnings 9.000.4M Building 2.683 Add: Fair value of net assets 36.341. Ans.000 (458. B.600 Add: Fair value of net assets 36.000 500.294. C.830.155 CV after impairment Building 2.679 Payables (700. D.000 Add: Fair value of net assets 36. Value. Projected average excess earnings 3.000 2. Ans.125.400 Divide by: Capitalization rate 20% Acquisition price 48. Assets Factory equipment 2. Ans.000) *liabilities are not impaired.321) 2.845) 1. P1.000 Acquisition price 45.000 also included cash flows related to payable. Impairment loss 2. 6.662.500. A.000 Goodwill (Allocated. A.012.000.000) 7. Prorata: FMV of NA) 2. D.500.574 Allocation of loss: Goodwill of Country C (1.574 Factory equipment 1.000 4.000 (381.000.000 (636.574 Allocation of loss: Goodwill of Country C (1. Impairment loss 2.729.700.294.214) 1.683 CHAPTER 7-EXERCISE 11: T CORPORATION 1.500.000 Acquisition price 53.845) 1.729. Carrying Value of Country C's.408) 1.000 2.000) Balance to other asset.426 *observe that there is no salvage value of net asset of Country C.000) Balance to other asset.592 CV after impairment Store equipment 1.182.000) (700.000 Goodwill 1.426 Impairment loss 2.400 Multiply by: PV factor at 15%.182.000) *liabilities are not impaired. C. C.000 Store Equipment 1. 000 (205. Ans. Office equipment 1. Value. CHAPTER 7-EXERCISE 12: ABC CORPORATION 1. Cost incurred prior to establishment of capitalization criteria on Nov.000 (642.679 Payables (700.118 Office equipment 1.000 (458.000 (475.000) *liabilities are not impaired.770 CV after impairment Store Equipment 1.000 (75.600. P1M Building 2.000 Impairment loss 1. Ans.000) Balance to other assets.882) 1.200.282*3. 31.500.000 (173. Dec.800.000 Recoverable value/FMV less cost to sell 5.725.200. B.475. 700.000 included in the determination of the fair value less cost to sell.000 (963.705.574 Cash 700.000 .118.544.845) 1.000 (173.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 89 of 155 Reallocation of impairment loss: Impairment loss 2. Fair value less cost to sell 5.000 (150.830.157.012.475. Cash - Allocation of loss: Goodwill of Country C (100.000 Allocated to: Goodwill (500.000) 1.118 *Should not be lower than 1.992710 3. Ans.725.000) Balance to other assets.000 2. prorata 700. Carrying value of CGU Factory equipment 1. 2014 540. prorata: 1.750. Impairment loss 1.404.000) 2. P1. Ans.214) 1.341.000 CHAPTER 7-EXERCISE 13: MEGAMALL COMPANY 1.000 Factory equipment 1.000 Impairment loss - CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .588) 2.882) 1.655 CV after impairment Payables (700.475.529) 1.000 (320.000 (205.000) (700.000) Balance to other assets.400.000 Building 2.412 4.000 Building 2. Capitalizable cost.471 *Office Equipment CV should not be lower than P1.000 (381.000 Should not be lower than its Rec.200.250.000 Allocated to: Goodwill (500.725.529) 1.000 higher Value in use/PV of future net cash flows at 8% for 5 periods: Use: P1. prorata. Value.475.301.750. prorata 700.574 Allocation of loss: Goodwill of Country C (1. 1.725. B.155 Not be lower than its Rec. 2014 500.000 Factory equipment 1. 2014 60.471 Building 2.345) 1.000) Balance to other asset.700. prorata 700.400.6M Office equipment 1. 6.750.000 Factory equipment 1.750.252.000 (100.786 Store Equipment 1.000 2. 1. prorata: (100.800. C.500.4M Building 2.700.301.321) 2.450. 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.000) 1. C.544.250. C. Thus the impairment that should have been allocated to the inventory was reallocated to receivable and the property and equipment. Ans.000 Allocated to: Goodwill (500.000) Balance to other asset.000 *no impairment allocated to cash Factory equipment 1.4M Building 2. Ans.000.000 (320.000 3.000 6. Impairment loss 1.000) (700.125.000 Recoverable amount. after Nov.000 Goodwill 500.000) *liabilities are not impaired.230) 1.000 Office equipment 1.000) 1.992710 5. Ans.736. A.000) Factory equipment 1. C.200.250.412 Reallocation of Impairment loss Impairment loss 1.404.588) 2.000 (687. 400 51. Dec. Total research and development costs (all costs in item f) P433.260. b) Ans. Net Assets acquired 1.000 Note that since there are no indication of GW impairment from acquisition date to 6/30/14. 31. C. on Equipment for various projects (10.000/10) P60.737. 2015 1. D.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 90 of 155 3.200. Salaries of staff doing research 18.600 Copyright XYC 33. Ans. D. Date Condition % CV 6/30/2014: 6/30/2014: Copyright ABC 30. Ans. Amortization of Patent (600. Amortization Expense: ABC (30. 12/31/15 P5.000*. A. c) Ans.200 Total amortization expense on copyrights 3. thus only the amortization is recognized as R&D Expense. Ans.000 FMV. d) Ans. Ans.05) 125. 1.200 Amortization Expense: XYC (33.000 Franchise (480.000 Computer software (300.000/25yrs) 1. 2..200*9/10) 14. Project 123 is entirely research and development. a) Ans. CV.000 Amortization of Franchise (480. thus no capitalizable intangible.000 Amortization of Copyright (1.000 Total expenses related to computer software and franchise P298.5yrs/25yrs 24.000 CHAPTER 7-EXERCISE 15: BOHOL CORPORATION 1.000 Additional capitalizable cost. 2015 1.620 Cost of pilot models 8. The first Patent is useful solely for 1 project only.000/15yrs) 2.000-125. B. Amortization of Software (300.000 CHAPTER 7-EXERCISE 14: LAS VEGAS INC.000) 840.000*9/10) 432.000*9/10) P540. on Patent for various projects (16.000 Goodwill 2. June 30. 2014 60. B. D. 2015 1.000 Copyright (1. C. A.560.500. Ans.580 Copyright: Cost Acq.000 Total carrying value of intangible. Capitalizable cost. A.200/10yrs) 1. The balance shall be reflected as Intangible asset.. C.200.400 4..700.000-360.000 Recoverable amount.500 Patent solely for Project AM123 12. since the project has not qualified yet for capitalization under PAS 38.000/10) 48. Ans.000/240)*100 P125.000 Impairment loss 120. the entire cost of the first Patent is recognized as R&D Expense.000*1.950 Total R&D Expense 43. CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS .050. 1. after Nov.000 2.000 3.000 Goodwill Acquisition cost 1.000 7/15/2011: 12yrs/15yrs 26.000 Total cost as of Dec. Ans. Patent (600. unless qualified under PAS 38 capitalization criteria.140.000 Continuing franchise fee (2. 4.000 4.000) 175.582.070 3.000 Amo.000 Goodwill.000/5yrs) 2.5M/5M) 360. Ans. A. GW is assumed not to be impaired. initial recognition 22. 2014: (P16. Ans.200. Patent. The second Patent is useful for many projects.000 Total amortization (Patent and Copyright) P420. thus is fully recognized to that project only. 31.000 1/2/2010: 20.000 Depr.000 Tradename 1. A.. 292.000 Indirect costs reasonably allocable to research and devt projects 150.000 Materials consumed in research and development projects 177.000 Testing for evaluation of new products 72.000 Consulting fees paid to outsiders for research and projects 300.000 expense CHAPTER 7: AUDIT OF INTANGIBLES AND OTHER ASSETS . and testing of preproduction prototypes and models 870. construction.000 Design.000 Radical modification of the formulation of a glassware production 78. Searching for applications of new research findings 57.000 Personnel costs of persons involved in research and devt projects 384.000 Laboratory research aimed at discovery of new knowledge 204.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 91 of 155 CHAPTER 7-EXERCISE 16: TAILOR CORP.000 Total research and developmnet 2. 7 B. 8 D.000 Serial bonds payable. 12 C.000 Advance from customers (AR with credit balances) 50.000.000 Estimated warranties payable 420.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 SSS payable 30. semi-annyally 2. For item d.000 notes payable. 5 D.000) Credit balance (Advances to suppliers) 40. Notes: For item a. checks released Dec.120. 18 B. 19 C.300.) (300. however.000 Goods in-transit.000 b) P500. For item c.120.000. 30 (valid payment) (520. 9 A. 2015 500.000. the agreement to refinance the liability on a LT-basis was only completed after the balance sheet date. Ans.020. 30 (valid purch. 2.000 Estimated liability for environmenta damages 50. CHAPTER 8-PROBLEM 3: JOJO INC. 4 C.000. due June 15. 31). payable P1M. while the grace period was agreed upon as of the balance sheet date (Dec. Ans.000 Unearned rental income. Ans.000 2.060.000 1. 10 A. due Feb.450. Thus.000 480.000 Note payable . the right existed already as of the balance sheet date.000 Medicare payable 15.000 8. 2015 50.000 100.000 8. 13 D. 31.000. Current Noncurrent a) P1M short-term notes payable. 2 C. the grace period is short-term only. due Dec. 7.000 Accrued interest on bonds payable 300. 31 (not valid) 200.000 Total 5.000 Goods received on Dec. CHAPTER 8-PROBLEM 4: TARBUCK INC.000 Cash advances from shareholders 200. 2015 1.000 only P480. Ans.620.000 4. that is P480. 1.000 c) P500. since the amount of the loan to be used to refinance the currently maturing obligation is expected only at 80% of P600.120.000 480.trade only 500. for 3 years starting Jan. Per GL Per SL Unadjusted balances 4. transaction) (50.000. 6 C/B.000 of the currently maturing obligation is expected to be refinanced on a long-term basis. 17 B. adjusted for the debit balance (Advances to suppliers) 660. FOB Dest (not valid purch. Ans.000 Wittholding taxes payable 60.000 4. P4.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 92 of 155 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES DISCUSSION PROBLEMS CHAPTER 8-PROBLEM 1 1 B.000 Pag-ibig payable 5.000 VAT payable 120. 2018 1. 2. checks not yet released as of Dec.000 Purchase returns (valid Dec. 2014.000 Interest on the bonds payable P1M*10% 100. 11 B.000 short term debt. 14 D. the liability is still current as of Dec.000) Payments to suppliers. due June 1. 16 B. 2015 20.000 Adjusted balances 4.000) Payments to suppliers. while there was a LT-refinancing agreement completed after the balance sheet date. For item b.000 Salaries payable 800. 15 B.000 d) P1M bonds payable.) 400. there was no indication that the right to refinance already existed as of the balance sheet date.000 1. 31. 3 B. CHAPTER 8-PROBLEM 2: MERMAID COMPANY Current Noncurrent Accounts payable. Ans.000 2015: 6. Ans.728. Ans.443. P900. Ans. 3.500-P300) (1. Ans.000 Actual cost incurred/Actual redemption: Vacuum Cleaners: (1. Analysis: Required estimated expense: VC SF Total Vacuum Cleaners: (P45M*30%)/P15. Ans.000 30% earned in the second contract year: 120.000 2. 3.000 6 months in 2017 90.000.000 6 months in 2014 50.000 6 months in 2016 90.750) Stand Fan: (1. CHAPTER 8-PROBLEM 8: NOKIA CORP.000.000units*30%*P500 900.650. Ans.000.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 93 of 155 CHAPTER 8-PROBLEM 5: RONNIE COMPANY Required Estimated Expense (500u*80%*P8. 2.000 45% earned in the third contract year: 180.000) 3. 425.200.950.000 2. Ans.000 90. 4.000*(P2. CHAPTER 8-PROBLEM 6: JDI VIDEO AND SOUND Analysis 2014 2015 Estimated warranties payable. Ans.500u-125u)*(P1.200. P209.750) Estimated premiums payable. Ans. Ans.250-P500) (1.303. end 131.950.303. 2014 2015 2016 2017 Collection for unearned service contract 400.000) (3. Ans.000 110.000 25% earned in the first contract year: 100.000 Balance unearned at the end of each year: 350.000 6 months in 2015 50.000) Estimated warranties payable 1.093. in 2014) 425. beg.000 Less: Actual cost incurred (1. CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . P675. end 425.000.000 Required estimated expense: 2014: 5. Ans.: Warranties expense 1. P3.000.000 240.000) (650.950.250 78.950.500-P300) 1. CHAPTER 8-PROBLEM 7: SIERRA APPLIANCE CORP.000 6 months in 2016 60.000.000 150.000 1. P425.000 3.000 Service contract earned for each year 50. P1.250.000u-175u)*(P2.000 90.250 1.250.000) Estimated warranties payable.000 Stand Fan: (P45M*40%)/P12.575. 3.000units*30%*P500 750. 2.250-P500) 1. P3.000 Actual cost incurred for the year (325.000 6 months in 2015 60. P750.000 Warranties expense 250.000 1.000 675.000 Estimated warranties payable 675.500*(P1.000 - 1. Audit adjusting entry in 2015: Retained earnings (add'l exp.000 Estimated warranties payable 1.000 209. 5.000. Ans.081.081.974 50.081.109 Amortization tabe: Bonds payable: Correct Int. 2013 leaves: 55employees*4weeks*5days 1.000 (6. Ans. 2.000. C.074. CHAPTER 8-PROBLEM 10: BARO CORP.500 unaccrued.100 days 25employees*2weeks*5days 250 days Total 2013 unused leaves: 1.000 400.756) 1. 2016: 42. Ans.000.401 50. The outflow of benefits is probable and the most reliable estimate is P400.353 March 1.000 (7. Since the lawyers estimate that the reasonably possible outflow may be upto P700.000. 2014 275 Liability for compensated absences/Salaries payable 453.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 94 of 155 CHAPTER 8-PROBLEM 9: SAN MIG CORP. Ans. 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. The purchase commitment is non-cancellable.000 (7. thus forfeited by year-end 2014 425 days 2014 leaves: 30employees*6weeks*5days 900 days 25employees*5weeks*5days 625 days 30employees*3weeks*5days 450 days 10employees*2weeks*5days 100 days Total cummulative unused leaves by 12/31/2014 2.109 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . Entry: Loss on purchase commitment (P100-P60)*10.675564 Interest: P50.244 50.000*0.000. thus expense in 2013 was understated.650 Mulitply by: Current salary rate.000 Premium on bonds payable 81.052. 1. 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. Ans. Nominal Int. 2015: 42.021 March 1. the contract is rendered onerous as of the balance sheet date.000.026) 1.350 days Multiply by: Salary rate in 2013 250 Liability for compensated absences/Salaries payable 337.000*P60=P600. 2.000). 2015: 42.100 days 25employees*2weeks*5days 250 days Total 2013 unused leaves: 1.110896 1.000 3.000*P100=P1.693 50.000 (7. Since as of the balance sheet date the unavoidable cost to fulfill the contract (10. Amortization Balance (CV*4%) (P1M*5%) March 1.075 days Less: Expired unused leaves from 2013: (425) Unused leaves still exerciseable 1. Ans.350 days Less: Exercised in 2014 925 days Unexercised in 2014.109 September 1.500. The contingent asset that is probable is disclosed. PAS 37. B. requires the recongition of the loss and provision when the contract is rendered onerous. additional contingent liabiltiy should be disclosed at P300.675564 675.110896 405.109 Bonds payable 1. already exceed the expected benefit (10. 2014: 43.060. 2014: Cash 1.000).599) 1. 2014: 1. Damages occurred in 2014.750.564 0. P453.421 Correct entries: March 1. P337.000 Estimated liability on purchase commitment 400. 2013 leaves: 55employees*4weeks*5days 1.067.327 September 1. C.307) 1.545 8. 1. thus is a present obligation. D.750 2.000*8.000. 1. P1.669 Interest expense 11.684) 1. Dec.069.333) (1. 2014 (see table) 1. P10.000*10%*4/12) Premium on bonds payable 4.060. Sept.843 0. Sept. Sept.081. P720. Ans. Dec. Ans. Required warranty expense.151.000.021 CHAPTER 8-PROBLEM 12: MNO INC.000. unadjusted balance 1.000 Premium on bonds payable 6.649 Interest expense.240.050.000. 31) P1.620921 Interest: P240.000 RR 2903 .333 (P1.109 Premium on bonds payable 69.058.050. 2014: Interest expense 33. Ans.099.244 Interst expense (Sept. 31.021.756 Interest expense 6.000 Required warranty expense.080. 31.069.649 Nominal interest accrued (P1.074.353*8%*4/12 28. 2013 340. Ans: Adjusting Entries: Bonds payable 81.620921 1. 1.000.000 Amortized cost.000*10%*1/12) (8.790787 909. 2014: Interest expense 50.109*8%*6/12 43. 2014 720.000*10%*4/12) 33.000 Actual cost (560.000u*40%*P900) 1.000) Warranties liability. Ans.021) Amortized cost.684 Interest expense 4. Retirement price 1.440 Interest expense 33.Dec.000) RR 2904 .754 Entry: Bonds payable 1.067 Nominal interest (P1. 2014 1. 1.500u*40%*P900) 900.000.684) Amortized cost.000 2.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 95 of 155 September 1.474. 2015 1.058.074.on consignment (30. 31.074.000) Warranties liability.333 Interest payable 33. Proceeds from bond issue/FMV 1/1/13 = PV of future cash flows at 10% for 5 years. 30.789 2. 31.669 4. 1 . P71.000.245.267) Amortized cost.669. P1.000 Cash 50.790787 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . Accounts payable.333 Interest payable 33.333 Amortization (4. 2014: (3. Amortized cost. FOB SP 35.000 Gain on retirement of bonds 10. Principal: P2. 2015: (1. 30: Correct interest (P1.241.894 3.754) Accrued interst (P1M*10%*1/12) (1.894.353 Amortization up to Dec. 1.000 Premium on bonds payable 58. 2015 (see table) 1.060.in transit.Sept. 1) P1. Ans.754 Interest expense 1. 2014 (see entries) (4.353*8%*4/12) 28.000*3.631 3.000 3. P2.021*8%*1/12) 7. Sept.756 December 31.245. Ans. adjusted 1. Dec.000*0. 1 .000 Accounts payable.267 Cash 1.000 Actual cost (700.021 Amortization up to Sept.267) Gain on retirement of bonds (10.684 Correct interest (P1. Interest expense (Mar.333 2. 2014 71. 2013: (2.000. 505.450 Warranties payable. 1.1 330 (268. Ans.250*70%)*P350 306.2M .4868520 Residual amount/APIC from bond coversion privilege 402.378 8.000 Shipments from consignor (recorded) (42. P785.795 December 31.751315 Interest: P960.486852 2.099.750 *any unused prior to 2013 leaves are forfieted by the end of 2014 4. 2013: 2.B .000. FOB SP (not yet recorded) 55.126. Adjusted net income 2014.000 2.679 Understated accounts payable/purchases (5.000. P1.505. P402. Nominal Int.750 Adjusted net income 2.000*2.000 Bonus = P130.2M .B) B = P78.679 240.Tx .000 Less: Bonus (78.557.474 4.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 96 of 155 Amortization table: Bonds payable Correct Int. Proceeds from convertible bond issue (P8M*110%) 8.046 CHAPTER 8-PROBLEM 13: MAMALOLA CORP. Tx = 30%(NI .000 Accounts payable. 1.700 AJE 1: Overstated purchases 17.000) Understated warranties payable/warranties expense (380. Ans.000 (24.000. P78.000) AJE 1: Accounts Payable 17.000 AJE 2: Understated warranty expense (95. 2013 unused leaves forwarded to 2015 (625-(700-200))* 125 2014 unused leaves forwarded to 2015 550 AJE 3: Salaries payable 45.B). Ans.321 Adjusted net income 2014.07B = 140.700 3.397. Net income before any adjustments: 1.30%(2.121.750.387..07B 1. FOB Destination (recorded) (30.505) Net income before 30% tax 1.450 Warranty expense in 2014 (1.000 .000 Shipment-in-transit.000) AJE 2: Warranties Expense 95. Amortization Balance (Bal*10%) (Face*12%) January 1.450 Less: Actual warranty cost incurred in 2014 (250.450) AJE 3: Overstated salaries expense 45.TX) TX = 30% (NI .500/895days)*1. adjusted 443. 2013: 215.800.032. P222.000) Purchases 17.000 Shipments-in-transit. Ans. Unajdusted net income 2. before bonus 1.010.000.750 Total unused leaves that may be forwarded to 2053 675 Salaries expense 45.000 Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 10% for 3 years: Principal: P8.6M (P2M*80%).410*70%)*P350 345.321) 2. P130.448) Net Income after tax 785.000*0.046. Accounts payable.896 2.(30%(1.000. Ans.151.000 B = 10% (NI .200. P248.750 Multiply by current salary rate in 2014: (268.200.518 0. Ans.163 240. 2012 248.495 Income tax expense (336.250 Less: Actual warranty cost incurred in 2011 (153.B .B) B = 10% (1. P443.631 December 31. 5. only P1.6M may probably be refinanced on a long-term basis. unadjusted balance 460.104 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 B = 10% (NI . before bonus 1.B) .000) Overstatement in interest expense in 2014 27. 2013 153.B)) B = 140. 2014: 212.750) Salaries payable (Liab for compensated absences) 222. based on the probable proceeds from the issuance of long-term debt security P1. Ans.700.000. Ans.841. *There is a right/option to refinance the obligation on a long-term basis as of December 31.000) Warranties payable.000 .B) B = 10% (2.600. Warranty expense in 2013 (1.000 .500-222.751315 6.000 (27.837) 2. 2014. 5. However.104.841 CHAPTER 8-PROBLEM 14: SANTOS CORP.250 Warranties payable 95. Total Bonds Payable APIC-BCP (at FMV.214 80. Ans.537 80.000 Less: FMV of bonds without conversion option = PV of future cash flows from the bonds at 5% for 8 semi-annual periods: Principal: P2.706 Share premium/APIC . Nominal Int.000 CASE 2: Annual rental 300.000 Amortization of lease bonus (120.486 3.455 162.273 January 1. P379. (40.455.686 Alt2 Bonds payable 8.Expired warrants 151.455 CV.000.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .559 Ordinary shares (6.*10%) (Face*12%) January 1. Entry upon expiration of remaining warrants: Ordinary share warrants outstanding(40%) 151. 1.104 Cash 8. 2014: 8.706 CHAPTER 8-PROBLEM 16: CASE 1: Periodic rentals (March to December).353.000*0. P8.000*10mo) 400. 2014: 1. Ans. Entry upon exericise of warrants: Cash (2.000/8yrs) 12. 2014: 839.231) 8.264 2.4632128 Residual amount/Ordinary Share Warrants Outstanding 379.250.898. 102) (Residual) Retirement price 8.000 Share premium 4.559.000*50*P10) 4.686 APIC-Bond conversion privilege 402.277.000.104 Ordinary shares (8. Entry upon conversion: Alt1 Bonds payable 8. Amortization table: Bonds payable Correct Int.000 (145.320.000 Rent Expense 337. 1/1/16 8.000*50*P10) 4. P65.790 960.000 CV.676839 1.104 to profit/loss to APIC Entry: Bonds payable 8.790 Note: Both alternatives are acceptable under PAS 39.057 1.686 December 31.455 APIC .000 Share premium 4.000.000 Premium on bonds payable 277. P257.104 CHAPTER 8-PROBLEM 15: DIRT CORP.Bond conversion privilege 402.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 97 of 155 2.870. 2015: 94.145.5M-P2M)*5% 25.9mo) 1.000 8.000 (132.896 December 31.679.277.870. P1. Proceeds from bond with warrants issue 2.145.676839 Interest: P80.000*(60mo . Ans.000 Amortization of lease bonus (100.898. Nominal Int.000shares*P50) 300.686. Amortization Balance (Bal.277.210) 8.455 December 31.104 Gain on retirement of convertible bonds 65.500 CASE 3: Total lease payments: P30. Ans.000.264.530.000.000 3.*10%) (Face*12%) January 1.080.000 13.455 APIC/Share premium 162.686 Ordinary shares (8.000 Rent Expense 420.486.500 Contingent rental (P2. APIC . Ans. 2016: 814. Ans.679 0. 2014: 93.000 Ordinary share warrants outstanding(60%) 227.000*5w)*60%*P55 330. 4. Ans.884.397.000 240.214 1.320.455) 8.736 6.000 (120. Bonds payable.769 960.000 Premium on bonds payable 145.000.545 960.4632128 517.Bond coversion privilege 402.559 4. 2015: 827. Amortization Balance (Bal.000 Premium on bonds payable 277.736 July 1.000 14.000.000*6. Amortization table: Bonds payable Correct Int.000 Gain on retirement of bonds (profit/loss) 65.000 Share premium 257.000/5yrs)*10/12 20.537 1. 000 Less: Depreciation (2.150 201.434.000 Dec.7590238) 0 5. 31.000 298.000 CASE 2: Minimum lease payment in advance 96.879.000) Property taxes (90.000 Bargain purchase option 200.944 CASE 3: Minimum lease payment Periodic payments in advance 400.000 1.000 Multiply by: PV factor of 1 at 14% for 10 period without annuity 0.000 Divide by: 10 years 10 Annual rental expense 468.231.8680 Initial cost of the asset 563.500 Dec.000) Depreciation expense (120.9500 2. 12/31 220.P500.7590238 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .500 CASE 4: Total lease payments: P40.000 Total expense for 2014 171.000 CHAPTER 8-PROBLEM 17: CASE 1: Minimum lease payments in arrears 200.512 Cash 500.165.000.) (60.500 Less: Amount paid for the year (Nov.2700 54.000 Divide by: 5 years 5 Annual depreciation expense 60. 2015: 500.000*100*2yrs) 600.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 98 of 155 Divide by: 5 years 5 Annual rental expense 306.167 *note that the depreciation is based on the useful life since ownership will be transferred to the lessee CASE 4: Amortization table: Periodic PaymentsInterest Principal Balance Dec.000 Mulitply by: 3mo/12mo 3/12 15.000 Multiply by: PV factor of 1 at 14% for 10 period in advance 5.000/12 years) (202. 2014: (P3.512 *PV of MLP 10% for 10 years in advance: (lower than FMV of asset) (P500. Entries made.379. 2016: 500. and Dec.000 Initial cost of the asset 2. 31.680. under finance lease: December 31.779.000 Lease liability 2.165.833) * Carrying value as of 12/31/14 2.000 Amortization of direct lease expense (150.434.500 2.500 Amount collected in 2014 200.000) Net rental income 260. 2013: Building* 3.000*6.000 Unearned rental income (12.650 CHAPTER 8-PROBLEM 18: ANGLO INC.500) CASE 6: Gross rental income 500.000 Multiply by: PV factor of 1 at 10% for 8 period in advance 5.000 Multiply by: 4mo/12mo 4/12 Rent expense for 2014 156.000 Multiply by: PV factor of 1 at 10% for 10 periods in arrears 6.000/5years) (30.981.229.000 CASE 5: Total lease collection: First two years: (P2.000) Accrued rent expense.000*100*2yrs) 400.500 183.380. 31.000 .1450 Initial cost of the asset 1.000 Divide by: 4 years 4 Annual rental income 250.328 Divide by: 12 yrs (life since title passes to the lessee) 12 Depreciation expense 46.000) 3.000 Mulitply by: 11mo/12mo 11/12 Rent expense for 2014 280.000 Multiply by: 9mo/12mo 9/12 Rent income for the period ended 9/30/14 187.759024 6.850 2.000 Leasehold improvement cost 300.000 Last two years: (P3.000*(120mo-3mo) 4.000 316. 512 December 31.418 October 1.000.388 Cash 150. 2013: Prepaid rent 500.000 Cash 500.000 77.096 July 1. 2014: Interest expense 287.000 Prepaid rent 500. thus should have been accounted for only under finance lease. 2014: 150. 2014: Building* 4.035.000 Cash 150.966.185.708 69. finance lease January 1. operating lease: January 1. 2. There is no transfer of ownership.000 October 1.463 December 31.185.000 80.049 Cash 500. 2014: Prepaid rent 500. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset. There is no bargain purchase option. Correct entries per audit.9025888 0.678 3.9025888 27. The PV of MLP (P3.512/10years) AUDIT ANALYSIS: 1. 2014: 150.879.951 Lease liability 212. Correct entries. under operating lease.902. Principal Balance December 31. Ans.185.951 625. Expenses per books Interest on finance lease liability 287. The term (10 years) is not a major part (at least 75%) of the life (15 years) of the asset.000 Overstatement in expense/Understatement in NI 125. There is no transfer of ownership. 2014: Rent expense 150.388) The lease agreement does qualify as finance.895.951 212. 2014: 500.379.092 3.000 Depreciation expense 337. thus should have been accounted for only under operating lease.000 July 1.902 2. Entries made per books.388 April 1.049 2. 2014: Rent expense 150.388 *PV of MLP at 2% for 40 quarters in advance.000 79.388) is substantially all (at least 90%) of the FMV of the leased asset (P4.4619482 Amortization table: Finance lease liabilty: Periodic PaymentCorrect Int. There is no bargain purchase option. None.000 April 1. 3.908 72.9025888) 26.000 Cash 150.000 January 1.951 (P3. CHAPTER 8-PROBLEM 19: LACTUM INC.951 Accumulated Depreciation 337. 2014: 150.951 Depreciation expense 337.902 Expense per audit 500.035. December 31. 2013: 2.000 Cash 150. Principal Balance January 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 99 of 155 Amortization table (per books): Finance Lease Periodic PaymentCorrect Int.379.000) The lease agreement does not qualify as finance. (P150.000 1. 4.000 December 31.292 3.000 AUDIT ANALYSIS: 1.512) is not substantially all (at least 90%) of the FMV of the leased asset (P4. 2014: 4. P125. 3.000 Cash 150. 2014: Rent expense 500.823.667.000 287. Ans.000 Lease liability 4. 2014: Rent expense 150. The PV of MLP (P4. 4.322 70. 2014: Rent expense 150. 2.326 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000*27.000 Cash 500. 092 Cash 150. Ans.000 Carrying value (360.496 76.000 July 1.326 Interest payable. 2015: 76.034 3. Ans.000 Carrying value (360.000 Fair market value (320. 2015 (see amortization table) Janaury 1. Sales price 420. Ans.504 3.000 3.000) Realized loss on sale (40.004 3.000 December 31.520.674.31.000) Deferred gain on sale 100.326.14 3.000 Fair market vaue 380.000. P132. Expense per books Rent expense (P150.000) 4. 2015 to December 31.539 Accumulated depreciation 418. Ans.823.533 April 1.996 75. Sales price 420.185.076 CHAPTER 8-PROBLEM 20: CASE 1: 1. Ans. Sales price 420.292 Cash 150.708 Lease liability 69.000 71.823. 2014: Interest expense 76.000 Fair market value (450.943) 2.000 74.000) Deferred gain on sale - Fair market vaue 420.749.000 Expense per audit: Interest expense 314.14 76. 2015: 75.598.000 October 1. 2015: 73. 100.388/10years) * no transfer of ownership.467 73.322 Lease liability 70.789 July 1. P3.467 Depreciation expense 418. 12. Ans.908 Lease liability 72.31.000 Fair market value (420.000) Deferred gain on sale 40.000 Fair market vaue 320.678 Cash 150. 2015: 78.285 October 1. Principal due from January 1.000. 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 100 of 155 Janaury 1. P60.000) Sales price 420. Ans. 60.250 April 1.076. 40.034 Current portion of lease liability 303.000.000. 2015: 150.000 73.000 Carrying value (360. 2014: Interest expense 77.539 732.504 October 1.966 78.000) Realized gain on sale 60. 12.943.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . Sales price 420.004 July 1.000 Fair market value (380.793 April 1. 2014: Interest expense 79. Lease liability.467 Interest payable 76.000 76. 2014: Interest expense 80.943 Understatement in Expense/Overstatement Net Income (132.000*4qtrs) 600. P303. 2015: 150. thus depr shall be over term.000) Realized gain on sale 20. 2015: 150.000 2. 2015: 150.405 Depreciation expense 418.539 (P4.467 3.533 3.000) Ignored (30. Ans. Interest expense on finance lease liab (600. 2016: 200.P500.955 2. 115.000 Fair market value (480.000) Realized loss on sale (60.000 *loss on sale is fully realized since it is an indication of Net amount recognized in the profit or loss 115. 3yrs is 100% of the remaining life. 8 yrs.104 480.000) Deferred loss on sale (80. 2.000 *Selling price is at FMV (no expected future benefit) Net amount recognized in the profit/loss 158. Fair market vaue 480.000 Cash 20. *Direct lease costs incurred under direct finance lease is added to the initial investment on lease.269 Realized gain on sale (P600.000) Realized loss on sale (80. 72. Entry upon inception/Sale of asset: Finance lease receivable 720. 626.000) Realized loss on sale 60. Interest expense on finance lease liab (150.000 40. there is an expected future benefit from the asset being sold at a loss. Principal Balance January 1.955 Amortization table: Periodic Coll. No profit shall be recognized from the sale of the asset since under Direct Finance Lease. 2018: 200.000 Depreciation on the leased-back asset (600. Fair market vaue 480. P40. Under a Direct Finance Lease. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 101 of 155 Carrying value (360. Ans.000*10%) 60.896 127.429 178. 0. Interest Inc.604776 1 Present value of minimum lease collection 720. Sales price 400.010 December 31. Rent expense 58. 2019: 200. 3yrs is 100% of the remaining life.000 Carrying value (540. there is no expected future benefit from the asset sold at a loss.000. 8 yrs.P150. P158.000/3yrs) 50.000 72. 2.955 Initial investment on the lease agreeement 720.000) * since the future rentals is below rent. Ans.896.000*10%) 15.955 Cost of the asset/FMV of asset (Under Direct Finance) 700.955 December 31.000 21.644 142.000 Amortization of deferred gain on sale (100.205 *note that the lease back agreement is acconted for as operating lease since the term.571 (0) 1.269 *note that the lease back agreement is acconted for as operating lease since the term.205 Realized loss on sale (P200. P80.000 Carrying value (540.000) Total realized loss (140.000 Add: Direct finance lease cost 20. 141. 3yrs is less than 75% of the remaining life.667 amortized over lease term. 2015: 200.356 338.000 Multiply by: PV factor of 1 at 12% for 5 years with annuity 3.000 86.667.333) .000) * since the future rentals is at market rate of rent.955 Asset 700.000) *Selling price is at FMV Net amount recognized in the profit/loss 141. 2015: (CV * 12%) 720.000) 2.561 159. the only source of income shall be interest.000/3yrs) 600.000) Realized loss on sale (60. Sales price 400.485 607. the cost of the asset on the company's books shall be equal to its selling price to the customer.515 113.gain on a sale and leaseback (finance) is fully deferred and Net amount recognized in the profit or loss 626.205. 3yrs is less than 75% of the remaining life.366 December 31. CASE 4: 1.439 178.000 CASE 2: 1.470 December 31.000. CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 Fair market value (480.269 Rent expense 241. Ans.000) CASE 3: 1. *note that the lease back agreement is acconted for as finance lease since the term.000 57.000) 100. thus increasing the amount receivable. *note that the lease back agreement is acconted for as finance lease since the term.000 .000 Depreciation on the leased-back asset (150. 2017: 200.000 asset impairement.000) (100. Ans.000 .571 December 31.000/3yrs) (33.000 Realized loss on sale 50. Ans. Ans. CHAPTER 8-PROBLEM 21: CASE 1: Minimum lease collections 200.000. 973 Amortization table: Periodic Coll. 31.397 Finance lease receivable 136. Ans.737 Jan. 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.069.000 Cash 20. CASE 2: Minimum lease collections 200. 31. Interest Inc.000 Multiply by: PV factor of 1 at 10% years w/o annuity 0. 1.000 Interest receivable 63. 2015: Interest receivable 63. 2019: 200.790787 Present value of minimum lease collection 1.578.000 Multiply by: PVF of 1 at 10% for 5yrs w/ annuity in advance 4. 2016: Interest receivable 49.973.397 Interest income 63.104 3.603 497. 2016: Cash 200.578. Ans.366.737 Interest income 49. Ans. Principal Balance January 1. See amortization table above.973 Cost of the asset 600.182 181.737 Finance lease receivable 150.407 December 31. Ans.263 3.000 157. Under a Sales Type Lease. 2015: (CV * 10%) 1.973 Sales 833.000 Interest income 72. 49.407 Amortization table: Periodic Coll.000 Interest receivable 49.485 Dec. 2016: 200. *Direct lease costs incurred under sales type lease is recognized as outright expense Entry upon inception/Sale of asset: Finance lease receivable 833. 233. 2018: 200.169865 1 Present value of minimum lease collection = Sales Price 833.000 Inventory 600.289 181.159 1.000 34. 497.841 242. Interest Inc. 2015: (CV * 10%) 633. 2015: 400.107 January 1.000 Interest income 86.092 Total Sales Price of the asset = Total Lease Receivable 1.625 266.872 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .973 January 1.000 18.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 102 of 155 Entry upon periodic collections: Dec.516.370.397 Jan.515 Finance lease receivable 113.737. 1.603 Dec. 2017: 200. 2016: Cash 200. 2017: Cash 200.370 January 1.620921 Present value of the guaranteed residual value 62. 2016: 400.000 Entry to recognize the direct lease expense: Expense 20.000 2.375 1.000 133.818 January 1.818 0 1. 31. See amortization table CASE 3: Minimum lease collections 400.896 Finance lease receivable 127.737 150.397 136. Entry upon accrual of interest and periodic collections: Dec. 480. 31.336.000 63. if perpetual inventory is used: Cost of sales 600. 2015: Cash 200.263 347.000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3. Principal Balance January 1.248 December 31.000 49.711 165.315 Guaranteed residual value 100.000 Gross profit on sale 233.973 Entry to recognize cost of sales. P133.860 December 31.375 CASE 4: Minimum lease collections 400.578.000 3.069.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 103 of 155 December 31.159 1.625.790787 Present value of minimum lease collection = Sales Price of the asset 1. 2019: Guaranteed RV 100.686 322. 31.545 December 31.000 Interest income 157. Ans.000.860 December 31.000 157.000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3. that portion of the asset is deemed sold.314 454.987 293.407 Sales 1. 2019: Guaranteed RV 100.407 Less: Cost of the asset/FMV of asset (1. where residual value is guaranteed.000 December 31.908.013 776.000 Entry to recognize the direct lease expense: Expense 50. Ans.407 4.407.000.516.545 100. if perpetual inventory is used: Cost of sales 1.000 December 31.407 2.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .407.013 776.545 December 31. 2015: (CV * 10%) 1.000 Interest income 133.407 December 31.314 454. 2019: 400. *Direct lease expense under sales type lease is recognized as outright operating expense.872 December 31.248 December 31. Ans.578. 2015: Cash 400.578. Ans.841 242. 31. Entry to recognize cost of sales. 2019: 400.000 Multiply by: PV factor of 1 at 10% years w/o annuity 0.908 *Since the residual value is unguaranteed. P1. P1.000.000 100.315 2.987 293. Amortization table: Periodic Coll.000 77.375 1.686 322.000 133. Under Sales Type Lease. P1.315.578. thus the PV of the guaranteed residual value is added to the total sales price of the asset.000. 2016: Cash 400. Interest Inc.000. 2017: 400.516.336. 2016: 400.545 100.000 Inventory 1. Entry upon inception/Sale of asset: Finance lease receivable 1. 1.455 354. 2015: 400. 578.790787 Present value of minimum lease collection 1.000 100.516.159 Dec.625 Finance lease receivable 266. Entry upon inception/Sale of asset: Finance lease receivable 1. Entry to recognize cost of sales.000 45.000.578. 2018: 400. 2018: 400. Minimum lease collections 400.516.000 0 1.092 Cost of sales 937.092) Net cost of the asset sold 937. Ans. the unguaranteed residual value which will be received at the expiration of the lease term is still added to the receivable.625 266.315 *Since the residual value is unguaranteed. Thus was not included in the sales price.516.407 *Since the residual value will still accrue to the benefit of the lessor (no trasfer of ownership).315 Guaranteed residual value 100.000) Gross Profit on Sale 578.000 45. 2017: 400. The PV of the unguaranteed residual value is therefore deducted from the cost of the inventory sold.841 Finance lease receivable 242.000 Less: Present value of the unguaranteed residual value (62. Total Sales Price of the Asset 1.000 106.315 Sales 1.000 77.908 Inventory 1. Entry upon periodic collections: Dec.000 Multiply by: PV factor of 1 at 10% for 5 years with annuity 3.000. that portion of the asset is not deemed sold.578. Total cost of the asset 1. that portion of the aset is not deemed sold.000 Cash 50.620921 Present value of the guaranteed residual value 62. if perpetual inventory is used: Finance lease recievable 62.092 Total Lease receivable.000 0 1. Ans. P937.000 106.455 354. Principal Balance January 1. 000 Advances from customers 500. Total Sales Price of the Asset 1.625.650. 31.000 3.000.000 Permanent Differences: Nondeductible expenses 100.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .850.000 Interest income 133.841 Finance lease receivable 242.000 1.000 Temporary Differences: Future Deductible amounts Accrued warranties 250. 2015: Cash 400.000 (400.000 Cash 50.625 Finance lease receivable 266.000. 2016: Cash 400. Ans. 578.850. 31. Entry upon periodic collections: Dec.407 4.000) Net income after permanent differences 9.000 Nontaxable income (500.000 Interest income 157. Ans.340.159 Dec.600.340.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 104 of 155 Entry to recognize the direct lease expense: Expense 50. P133.000 Provision for probable losses 900.516.315 Less: Cost of the asset/FMV of asset (937. P4.407.000 Future Taxable Amounts Prepaid rent 400.000) Taxable income 10. Ans.908) Gross Profit on Sale 578.000 Mulitply by: Current tax rate 40% Current tax expense 4.375 CHAPTER 8-PROBLEM 22: ABC CO. Reconciliation: Net income before any differences 10. Taxable income 10.000 1. 000 Decrease in Future Taxable Amount for the year: Cummulative FTA.000 Taxable income 5.000) Total tax expense 3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 105 of 155 2. P140. Ans.000 Mulitply by: Current tax rate 40% Current tax expense 2.000 Multiply by: Constant tax rate 40% Total tax expense 3. P160. Ans.000 Nontaxable income (50. P200.650.000 Less: Deferred tax benefit (FDA:P1.000 400.000*35%) (577. Ans.000 3.000) Net income after permanent differences 5.840.000 4.040. end 1.000 Less: Deferred tax benefit (FDA) (660. P2. P660.600. ending 500.000 Less: Deferred tax benefit ( dec in FTA) (120.000 1.000 Mulitply by: Constant tax rate 40% Deferred tax liability 200.85M*40%) 4. Future deductible amounts 1.800.100.000 7.000 To reconcile: Current tax expense 2.800. Cummulative Future Deductible Amt.500 CHAPTER 8-PROBLEM 23:XYZ CO.000.040.000*35%) 140.902.000.000 Mulitply by: Futre tax rate 35% Deferred tax liability 140. Reconciliation: Net income before any differences 5.000 Taxable income 5.340.902.100. Future taxable amounts 400.000.320. Ans. Net income after permanent differences 9.000 Mulitply by: Constant tax rate 40% Deferred tax asset 640. Future deductible amounts 1.000.000 Temporary Differences: Increase in Future Deductible for the year: Cummulative FDA. If tax rate in the future is expected to change (at 35%): Current tax expense (P10.000 Mulitply by: Constant tax rate 35% Deferred tax asset 577. end 500. Ans. Ans.000) Total tax expense 2. Ans. P3.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .200.600. beginning 800. Cummulative Future Taxable Amt.340.000 4.000.000 300. Ans.000 Add: Deferred tax expense (FTA:P400. Net income after permanent differences 5. ending 1. Future taxable amounts 400.500 6.000 To reconcile: Current tax expense 4.000 Cummulative FDA.000.320.320.000 Multiply by: Constant tax rate 40% Total tax expense 2. Ans. Ans.650.000) (decrease in deferred tax liability) Less: Deferred tax benefit (inc in FDA) (160. beginning 1.650. P660.840.600.000.000 Mulitply by: Constant tax rate 40% Deferred tax asset 660.000 Mulitply by: Constant tax rate 40% Deferred tax liability 160.040.500) Total tax expense 3.000 5.000. P3.500.000 Permanent Differences: Nondeductible expenses 150.500.000 3. P577.840. P2.000 Cummulative FTA.000 2.000 Add: Deferred tax expense (FTA) 160. 980.000 CHAPTER 8-PROBLEM 25: IRELAND CORP.400 2. end (9.000 Interest on ABO (P10.000) Balance 10.000 Interest on PA (P9. 1.000) Accrued pension end 700.200.600 3.000 Add: Contribution for the year 1. Ans. present value.000 Past service cost for the year 120.450.500.900.000 Add: Current service cost 855.000 Past service cost recognized for the year 120.000 Pension expense (total) 1.000. (1.080.000) Accrued pension.200.000 Plan asset.000) Settlements to early retirees (800. beginning balance 9.125.600 Less: Benefits settled. Total pension expense 620.000.000 Actuarial loss on ABO 30. Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial loss on PA 80.270.000) Balance 9. P1.600 157.214.000*8%) 238. end 700.000) (17.800. To reconcile: Accrued pension. Ans.270.584.000 Net interest (income)expense Interest on ABO (P2. Ans. 1.000 (b) Actuarial gain/loss on Accumulated Benefit Obligation ABO.400 Interset on PA (P3.500.000 Actuarial gain on plan asset 216. early retirees (650.450.000*12%) 1.134.400 69.000 Loss on settlment: Payments to early retirees 800.080. Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial gain on PA (a) (216.800.600 Interset on PA (P9.000 150. Service costs Current service cost 480.209. Service costs Current service cost 855. beg 630.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 106 of 155 CHAPTER 8-PROBLEM 24: JAPS CORP.000*12%) 1. Ans.000.000 CV of accrued benefits of early ret. Ans.270. ending balance 10. at scheduled ret.400. P620.000 Net interest (income)expense Interest on ABO (P10.400 3.000*12%) (1.000) 75.000 Less: Settlements at scheduled retirement (1.000*12%) 1.080.000 Total 1.600 ABO.400.000 Effect of ceiling** 47.000*8%) (256.600 Pension expense (Profit or loss) 1.200.000) Actuarial loss on ABO (b) 285.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 (a) Actuarial gain/loss on Plan asset Plan asset.134.400 4.450. Ans. end 10.600) Pension expense (Profit or loss) 462.600 2. at FMV at the year-end 9. 650.000 Actuarial loss on AB0 285.000 ABO. beginning balance 10.200.000) Benefits settled.209. P700.000 Plan asset. Total pension expense 1.000 Contribution to the plan for the year (1. Ans.000 1. FMV.000 3. A.000 u.000 d.566. 3.000 r.000 – 164.000shares) 1.000 Remeasurement loss/Effect of ceiling 47. Bonds payable: Noncurrent Current 7/1/2008: (P4. Installment notes payable. 2.000 70. Provision for losses (25.000)*5% 355. P75. beg (ceiling was higher) (220.177. To reconcile: Prepaid pension. Containers deposit 50.000 160. at scheduled ret.300 1. P70. Note: Stock dividends payable is classifed as capital and not as liability.40*2. Output VAT. (560.000*15%*4/12 2.500) Estimated Warranties Payable.000*15%*2/12 500 c.000/10yrs*5.980.000 P200.000 Add: Contribution for the year 750.000 TOTAL P817.933.000 ABO at present value. beginning balance 3. Deferred tax liability 150.600 Asset Ceiling (lower) 350. P200.000.000 Payroll related items 193.300 0. Notes payable – officers 40.646.000 b. A. Ans.366.000-150.000) 70. Notes payable – BPI .000 Warranties liability (P55. Notes payable – trade. P350.000 Less: Actuarial loss on PA (80.000 Cummulative discount amortization: P80. Estimated warranty costs on goods sold 46. end 3.400.250.200. credit balance 12.500.75yrs 46. Ans.000*98%) 3. CHAPTER 8-EXERCISE 2: CUT INC.000 Less: Settlements at scheduled retirement (560.000 Accrued interest on bonds (P4M*7%*3/12) 70.000 Noncurrent portion of notes payabe 2. beginning balance 2.000 i.000 ABO.000+P145.200.000 t.000/5 40. end 3.360. present value. Ans.000 6.000 Interest on ABO (P2.000 50. CHAPTER 8-EXERCISE 3: RADO INC.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 107 of 155 Plan asset.566. Cash in banks (overdraft) 115.000.000 m.000) Pension expense (total) 620.000-P130.000 s. Advance receipts from customers.000 Other accruals 50.500 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 Current portion of notes payable 600. A.000*8%) 238.966. Current Noncurrent ITEM Liabilities Liabilities a.000.000 Required Estimated Expense (7.000 Taxes payable 535.000 *1/3 25.000 Less: Actual cost incurred for the year (415.600 ** 4. end 3.000 Accrued interest on notes payable 90. Salaries and wages (68.000) Balance 3.000 P2.000. beginning balance P225.000 1. end 397. 2.000 j.000*15/30) 34.920. ending balance P164.000 Interest on PA (P3.000 e.000 n. Ans. Accounts payable – trade.000) 82.980. Ans. Ans.000 Trade payables 325.000) 65.000) Prepaid pension.000 Interest on Notes: 50. Convertible bonds 1.000) Plan asset.000) Balance 3.000 Add: Current service cost 480.168. C.000+55. net of Input (246. Accounts receivable. end (ceiling is lower) (350.000 ABO. B. Estimated Warranties Payable.400 Prepaid pension. Ans.000 – (125. end 3.000 2.400 Less: Benefits settled.000 + 75.400 Add: Actuarial loss on ABO 30.000 Contribution to the plan for the year (750.000 Total 400.000) / 2 50.000*8%) 256.138.300 P1.000 k. P170.168.400 Plan asset at fair value. B.500 20.000 + 30.000) MULTIPLE CHOICE EXERCISES: CHAPTER 8-EXERCISE 1: PROBE INC. 100.000 Cash dividends payable (P0. B. D. end 1.750 2. Total sales – home furniture 28. beginning 2. Estimated warranty liability.000 2.000 Net adjustment (76.09750 1. end 3. per books 300.624. 65% 0.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .829. A.600.750 Net adjustment 38. Ans. beg 716. Required premiums expense: (40. C. Cummulative unused leaves 12/31/14 750 Less: 2012 leaves (forfeited (50) Leaves that can be carried forward to 2015 700 Exercise rate (per past experience) 80% Cummulative leaves that will probably be exercised 560 Multiply by: 2014 current salary rate 400 Accrued salaries . per audit 224.277.675 122. B. C.600 Actual redemption (9.147.400. per books 118.750 Estimated premiums liability 38.000 Actual cost/Actual redemption (5. Since there is no right of offset. Ans.221.505. Ans. Ans.000 Multiply by: 5% Estimated warranties expense 4.. abs. Ans.250)*(P95-P25) (262.000 Actual warranty costs during the year` (2.320.500 Understatement in accrued comp. 2. C.Tx).176. net cost of premiums (340-50) 290 Estimated premium expense 2.750 AJE 2: Premiums expense 38.600 Premiums liability.000 1.000 Total 3. the advances to sppliers should be reclassifed as an asset: AJE 1: Advances to suppliers 55. Tx = 35% (NI ./salaries expense (18.500) Estimated premiums liability.392.892 CHAPTER 8-EXERCISE 6: ASCOT INC.000 Salaries expense 76. Ans. c.400 Multiply by: estimated redemption 60% Estimated redemption 8.B .compensated absences.500 1.000-1.000) Estimated premiums liability.000)*290 (1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 108 of 155 CHAPTER 8-EXERCISE 4: MOUNTAIN PROVINCE HOME DEPOT 1.892.000 Divide by: 2.B) 818.872. per audit 157.compensated absences.259.B) B = 15% (NI .000 CHAPTER 8-EXERCISE 5: ABRA COMPANY 1.945 111.0975 111.000 Accrued salaries . Ans.500 Estimated premiums liabilty.000/2.35%(NI . 2013 unused leaves by the end of 2014 (850days-550days) 300 2014 unused leaves by the end of 2014 500 Total unused leaves by the end of 2014 800 Multiply by probable exercise rate 80% Leaves that will probably materialize 640 Multiply by: 2014 current salary rate 400 Accrued compensated absences per audit 256.000) Estimated warranty liability.000 Total premium distributable 14.000*75%)/5*(P95-P25) 420.801 B = P111. Audit notes: a.000 Accounts payable 55.892 B = 15% (NI .000) AJE 3: Accrued salaries 76.800.608 745.000 Total sales – kitchen applicances 86. b.000) Adjusted net income 1. Unadjusted net income 1.600 3.B .640 Multiply by. 590326) 3. 31. 2014: 250. only P450.000 . 2014: Balance. Ans.485 December 31.000 Warranty expense.714 d.585 48.381 .B) B = 15%(NI .000) Warranties liability.000*75%) shall be refinanced on a long term basis.B) B = 110.397.000 (800.B) .381 . Amortization Table: Lease Liability Interest 13.500/1.000-96. 2014: 42. thus will still be presented as current as of December 31.415) 846. P50. The balance of the note.000*6%) 633.052.706 September 30. Net Income before tax (1.000 Less: Actual warranties paid (310.283.000 Adjusted net income before bonus and tax 1.000 (P500. for 20 semi-annual periods (P250.052.000 3. B. D.B) B = 15%(1.000*12%*3/12) Total accruals 47.417 December 31. Legal services 4.449 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 Total 643. 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. Accounts Payable.381 . A.000 121. 2014.097 3.000*13.074 Current portion Long-term Portion 5. The deferred tax liabiltiy resulting from the future taxable amount shall be presented as noncurrent liablity.460) 4.714) Net Income after tax 666. The refinancing agreement was completed as of December 31.052. 2014: 250.661 3. 2014 (10.913.582 June 30.000 131.600 4. adjusted 272.000 135.000 (5. Unadjusted net income before bonus and tax 1.105 B = 100. CHAPTER 8-EXERCISE 7: PUERTO FURNITURE INC.593 123. ENTRY: Income tax expense (deferred) 250.000 Deferred tax liability 250. at 4%.30%(NI .600 Medical services 5.824 June 30.Tx . Amortization Table: Bonds Payable Nominal Effective Amortization Balance Balance 851.606 Carrying value as of Dec. thus there is a right to refinance the liablity on a long-term basis as of December 31. A. A.903 114.400 *8/12 9.500 Payroll (12/21/ .000) 952.000 126.315 48. Ans.30%(1. unadjusted 250.000 (5. A.B) Tx = 30% (NI .B) .291 Amortization up to 12/31/14: P5.500 2. Ans.540 (100.041.052.291 March 31.500 Receiving report number 2636 (Purchase in transit) 10.000 5. e.381*30%) (285. A. Ans.339 118.015. 2015: 250. However.657 128.750) AJE3: Overstated salaries expense 76.685*3/12: (2.667 AJE 5: Income tax expense (current) 285.843) Amortized cost as of December 31.131 AJE 2: Understated premiums expense (38. A.164. 1.714 Income tax payable 285.59032634 Payment Principal Balance (Bal.P450. 2014. Warranties liability.343 2.100. 2015: 250. 2014: 843. Ans. adjusted (12/2014) 333. 2015: 42.381 Less: Income tax (952.000 Accounts Payable.000 AJE 4: Accrued salaries 5. 2014 846.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 109 of 155 3. September 30.407 3.685) 840. unadjusted 10. Ans.000 Receiving report number 2634 (Unrecorded purchase) 12. 2014.550.600 Royalties 3. Ans. Ans.*2%) Present value of MLP.000 (P600.000) is not expected to be refinanced on a long-term basis.12/31) : 14.900 Accrued interest on Bond Liability 24.381 B = 15% (NI .540 Salaries expense 5. Ans.250 960. 2011: P7. 1.000 584.000/5)*40%*(P160-P50) 440.000 5. 73.224.546. 2015: 1.018 1.9927) P2. Ans.000 Actual cost of redeemed premiums 2013: (3.286*50% = P982. 2013: 1. priv.200.138 960.200+6.000 Accounts payable.801. 2011: 1.400 December 31.000 616. 1. Accounts Payable.200)*(P160-P50) (198.451.000 payments Amounts starting initially12/31/2011 capitalized on P7. balance December 31.395.000 RR# 1016 (purchase in transit – FOB Shipping point) 40.036 CR: Discount on bonds payable 17.240.366 Total present value = Fair value P1.350 1.000 Required estimated expense 2014: (60.258 6.000 Actual cost of redeemed premiums 2014: (1.179 5.423.857 CR: Ordinary shares (10. 12/31/2014 209.144 Current Noncurrent CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 158.000 *100%.000 * 2.000.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 110 of 155 CHAPTER 8-EXERCISE 8: DETOX INC.040. thus Finance lease Amortization table: Lease liability Date Periodic Paymts Interest Principal Balance Jan.395.000 5.932.400. D.000 380.097.903.104 819. 1.050.276 Dec.398 Dec. A. C.000) Estimated premiums payable.982 441.000 28.000-1.640 745. adjusted 604.000 Fair value of bonds at 12% effective rate* 1. 1.471 200. 2012: 1.000 119.964. Ans.138 7. 2014: 2.400 677.000) RR# 1013 (goods received on December 30.711780 P1.626 Fair market value of the leased asset at inception of lease 2. 2103: 228.000) Estimated premiums payable.888 200.669 *9 months only up to December 31.927 Amortization table: Bonds payable Correct Int.903. Amortization Balance Jan. P2.040. 2014: 838. 2012: P7.000 DR: APIC – Bond conv. Ans. 8% for 5 periods: (600.200.000 191. Entry upon conversion of half of the bonds (P1.000* 118.903.000 December 31.281* P7.964.200.888 1. Ans.650 408. 12/31/2013 242.200.360 3. C. unadjusted 534.981.286 4.000 31.250 7.000 March 31.471 1.000*3.000 RR# 1015 (purchase in transit – FOB Destination) (35.546. Lease liability balance per books. Ans. 2013: 1.125 CHAPTER 8-EXERCISE 8: PIPINO CORP. 31.000. Present value of the minimum lease payment at implicit lease rate. 2014 2.000 12/31/2011 = Fair market value of the Amortization table: Finance Lease Liability Effective Date Payment Principal Balance Interest December 31.195.840.626 Dec.600 4.000 2.000 137. 31. Proceeds from issuance of bonds on 1/1/2013 P2. Ans. D.896 2.569.000 December 31.000 545.626 Divide by: Term (no transfer of ownership) 5 years Depreciation expense in 2014 P479.800.000 December 31.250 March 31. D. 2013: 1.388 December 31.560 Interest: 200.143) on 12/31/14: DR: Bonds payable 1. Amortization table: Notes Payable Nominal Date Correct Interest Amortization Balance Interest April 1. Nominal Int.000/5)*40%*(P160-P50) 528.200. 31.000*50) 500.927 APIC – Bond Conversion Privilege P146.40183 480.000 522.100)*(P160-P50) (561. 2014: 231.073 *PV of future cash flows at 12% for 3 periods: Principal: 2.281* 720. 2014: 1. Required estimated expense 2013: (50. 31. C.000 12/31/2014 Debits to the account for the periodic 4.395.000 3. 2015: 600. Ans.314.079.927 Dec.987.000 CR: Share premium 555.000 * 0. 2014) 65. B.000-2. Present value of MLP on 1/1/14 P2. 2014: 600. 2014: 1.040 Liab. Ans.144 Deferred tax liability 250.402.711780 3.896 CHAPTER 8-EXERCISE 9: ADELAIDA INC.650.532.000*10*50) (2. Ans. Amortization Balance January 1.000*12%*9/12) 720.257.669 Liability under capital lease – Long term** 2. D.000 Multiply by estimated warranty cost as % of 8% sales Warranties expense in 2014 P2. Notes payable P7. 2014 (5.000) RR# 65219. B.439 6.000 The temporary difference from excess tax depreciation over financial depreciation is future taxable amount creating Deferred Tax Liability: Deferred tax liability (Noncurrent Liability): P150.000) 582.710 Upon assumed conversion: 1/2016: 5.000 * P20) P100.000 Estimated premiums expense in 2014. D.813 4.000*2.759.399.500) RR# 65220.000 5. 1.200. FOB Destination (19.942 500.680583 P3.000 Current liabilities P690.840.000 4.000 2. Carrying value of bonds up to 12/31/2015 5. goods received only after the December 31 (41.000 Current portion of Long term liability under capital lease 819. 2014 Sales P31. adjusted balance P1. A.331.729 Total Par Value of Shares (5.558.257. Ans.817 Gain on retirement of bonds (profit or loss) 497. B.916 4. 2014: 5.000*0. D.871.858.058) 5.901 Present value of interest: 500. Option P5.000 (73.750.000. Ans.Bond Conversion Priv. Ans.000 Estimated premiums liability at the end of 2013.99271 1. 2015: 426.000 6.271 December 31. Ans.000 (68. Ans.271 Amortization Table: Bonds Payable Correct Int.503) 5.710 APIC. D.000 Warranties payable (2.893 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .750.271 Equity component/ APIC from Bond Conversion Privilege P100.000) Estimated premiums liability at the end of 2014. Accounts payable 1. Ans.000 Multiply by: Net expense per tote bag (P25 – P5) P20 Estimated premiums expense in 2014 P340.000. unadjusted balance P1. in tote bags 5. Accounts payable.000 3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 111 of 155 3.000 * P20) 100. Ans.000.000 Estimated premiums payable.000*30% P45. The temporary difference from premiums payable is future deductible amount creating Deferred Tax Asset: Estimated premiums payable.569.500 RR# 65218. Nominal Int. 2014 (5.500.950. Accounts payable.000*0.000*3.916 Present value of Interest: 500. 100. Tote bags actually distributed in 2014 19. C.996.710 Fair value of bonds without the conversion option at 12% effective rate: Present value of principal: P5.896 Total current liabilities P3. in tote bags (7.981.000 Total long term liabilities P10.729 Present value of Principal: P8. 2014: 431.000 – 1. as adjusted (P540.497 500.000 Fair value of bonds without the conversion option (at 8% effective rate)* 5.000) P590. Proceeds from bond issuance (the amount credited per entry made) P5.000) Accounts payable.399.000) Share Premium from conversion 2.800.399. Upon assumed retirement: 1/2016: Carrying value of bonds up to 12/31/2015 5.213 December 31. FOB Buyer (Destination) (30.257.532.401831 1.355 Fair value of the bonds without the conv.000 + P50.000 Interest payable on notes (8.000 Multiply by tax rate: 30% Deferred tax asset (Noncurrent Asset) P30. purchase in transit. C.500. purchase in transit. Ans. in tote bags 17. B. Ans.405 Bonus = 5% (75.500.000.000 Adjustment for additional premium expense (3. b.000 -2. A.000. The amount of liability is reliably measurable at the principal amount owed by the principal debtor.. Unadjusted net income 80. The outflow of economic benefits became probable when the principal debtor experienced financial difficulty after the balance sheet date.000 – B)) Tax = 35% (75.000) Estimated warranties payable 7. c. The amount of liability is reliably measurable given a range of amounts without best estimate.000 since the deductible clause is P1.500 + .000 2. The outflow of economic benefit is probable. since there is a virtually certain reimbursement from the insurance company.000.016.480. D. thus is present obligation. thus is present obligation. The obligating event is the guarantee agreement completed in 2014. Thus. A. the obligation is merely disclosed as a type 2 (Non-adjusting) subsequent event. but before the issuance of the FS.480. thus is present obligation.000 Less: Bonus (2. a.100) 3.916) B = 5% (48.680.. However.679) Net income 47. Thus.000. the virtually certain reimbursement shall be a reduction from the recognized probable loss (as per PAS 37).679 B = 2.444. b.000 + .164.0175B 0. Ans. Case 2: a.916) Income tax (35%) (25.000.9825B = 2. The outflow of future economic benefits is probable.000.000.000+P1.437.000.750.200) Liability for premiums in units 840 Liability for premium in peso (840*4. 5. The outflow of economic benefits is probable.000) Adjusted net income 75. The obligating event is the environmental damages occuring in 2014.000.000)/2 = P1. The obligating event is the damages incurred when the plant exploded in 2014. Ans.444. thus is present obligation.000*40%) P112.000.137. 1.916 CHAPTER 8-EXERCISE 13: LUZON COMPANY 1.500) 27.5M. Class B Laundry appliance sales (280.000.000. This is considered a Type 1 (Adjusting) subsequent event.000) Adjustment for additional warranties expense (1. Ans. given that the company is no longer principally liable over the portion to be reimbursed by the insurance company. even if there are no claims yet.720. The obligating event which is the damages incurred happened only after the balance sheet date.500 B = 2. Adjusting Subsequent Event) CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . b. c.000 Divide by P50 Number of coupons distributed 3.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 112 of 155 CHAPTER 8-EXERCISE 11: Ans. Case 1: a.000. Estimated warranty expense (30.000. with a reasonably possible additional liabilty of P2.040 Number of premiums actually redeemed (1. C. c. Case 3: a.381.500.000 Multiply by: Estimated warranty cost as % of sales 3% Estimated warranty expense for 2014 P3.000 Multiply by: probable redemption 60% Coupons that will probably be redeemed 2. C. Ans. B.437.480.000u*60%*P1. D. 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 1.500. thus there is no present obligation yet. CHAPTER 8-EXERCISE 12: LABANDERA INC.360.000 3.5M. Ans. b. meaning the insurance company will be reimbursing the company for anything in excess of the deductible clause.35B) T = 25.000. Case 4: a. Class A Laundry appliance sales (280.000/400) (4. The obligating event is the damages occurring in 2014.360. B. 4.000. acccrue obligation at P1.000 Actual cost incurred (19. Ans.381. c. Thus. accrue obligation at best estimate P2.000*60%) P168. The best estimate of the probable amount of liability is P2.000 – 35%(75. accrue obligation at the mid-range (P500.000 2. Thus.000 Divide by: number of coupons to acquire 1 premium 400 Estimated number of premiums to be redeemed 5. Nominal Int.000*0.020 Less: Par value of issuable shares: (50. B. 1.465 Liab balance Janaury 1. PV of Principal 2. Ans .198 200.414 1. Dec.000.7049605 2. 2014: 3/6 Carrying value of leased asset.000 92% More than 90%.000 (33. B.821 January 1. 2012: 800.000 FDAAB for the period 100. Amortization Balance January 1. 31.158 533. (113.365.465 3.803.000 Mulitply by tax rate 40% Current Tax Expense 240.161 December 31.693*3/4) 335.890 200. Ans.683.821 January 1.683.267 134.841.659 56.505 December 31. Ans.429. Inc.556.000.667 233.890 3.883. 2013: 800.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 113 of 155 3.230) 5. Ans.803.941 2. Principal Balance Present value of MLP 3.261 4. A.365.319*50%).000 29.) 113.500.696) 5.874 PV of Interest: 150. priv 2.000.047 Carrying value of APIC-Bond conversion privilege (P446. 2012 (Asset capitalized) 3.6/30 (see amortiz.000 2.386.355. 2014: 266.) 267.250.000*4. option at 5% for 10 semi-annual periods: PV of Principal: P5.000 FMV of bonds w/out conv.914*50%) 2.566 PV of Interest: 300. C.000) Taxable income 600.087 December 31.604776 Fair market value of leased asset at inception: 4. Ans. Dec.5M*10%*8/12) 166.000 FTALE for the period (500.333 Total interest expense 767.391 June 30. PV of MLP at 12% for 6 periods in advance: (P800. Total Bonds @ FV* APIC@Residual Retirement Price 2.086 Equity portion (APIC -Bond Conv.861.289.000 346.000*7.307 4. at 7% for 7 semi-annual remaining periods.875. 31.000.000*0.604776) 3.059 453.000 800.000 FMV of bonds=PV of future cash flows at 6% for 6 semi-annual periods: Principal: P4.921.069.323.733 Carrying Value** (5.914 2.520 5.770 from 7/1 .158 300. Ans. 2014 1. thus Finance Amortization table: Periodic paymt Interest Exp.067 CHAPTER 8-EXERCISE 14: MNO INC.289.) 266.307 June 30. 31.667 from 9/1 . Dec. Proceeds from issuance of convertible bonds 5. 1.776 profit/loss APIC/Share premium *FMV of half of the bonds w/out the conv. 2014: 229.896.861.000*5.352.393 Fair value of bonds w/out conv. Gain (279.8/31 (2. 2014: 267. Allocation of issue price on January 1.928 Interest from Notes Payable from 1/1 .12/31 (see amortiz.9173243 Residual amount allocated to APIC-Bond conversion privilege 446.879 January 1.644.613913 3.62275 1.721734 2.389289 808. 2013: 5.770 300.842 0. 2014: 3.9173243 983.386.000*4.198 3. Jan.000 2. Ans.392) 77.842) 5.C.12/31 (2M*10%*4/12) 66. 2015: 800.819.041 Accrued interest 4.424 1.000 291.831. Interest from Bonds Payable from 1/1 .821 Multiply by condition percent (over term). 2014: 800.000sh*3/4)*P50 (1. priv. 2013: 269.821 4.396 Carrying value of converted bonds.000 28. PV of MLP.000 (32. Priv.683.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .316.000*0. 2014 (P3. 2014: 228. B.319 ** 3.304 300. B.500.396*3/4) 2.000 (30.000 230.000) Share premium/APIC 1. 2014: Total issue price 4.693 Amortization table: Bonds payable Correct Int.356.957 P&L Loss/ Cap. Fin. after permanent diff 1.586 508.576 569.500.267 Amortization Table: Bonds Payable Correct Nominal Amortization Balance June 30.910 5.7049605 Interest: P200. Ans.000 Mulitply by: Current tax rate 33% CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .193. C. Ans.000 Unearned retnal income 300.200. D.550.556.000.511 3.741162 2.245 December 31.092 240.000 Multiply tax rate 40% Deferred Tax Liability 620. priv. Proceeds from issuance (at face value) 4.see amor.000/4.800.896 4. Ans. Temp Diff (FTALE) 1.000 53.088.000 147.000 Total noncurrent liability 4.908 Amortization table: Bonds Payable Correct Int.000*40) *P10 (1.417 3.002 240.800.104 December 31.889.000.000 Nontaxable income: Dividend income (500.) 2. CV at 1/1/2016 (see amortization table) 3.104 292. A.648 PV of Interest: P240. Net income after permanent differences 9.000 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4.663 Multiply by exercise rate: (3.000*0.669. priv P3.000 6. B.531295 607. C. Taxable income 9. at 9% for 1 remaining period.000 Deferred tax liabilty 620. PV of Principal 4.183 Fair value of bonds w/out conv.889.689.917431 220.409 240.000. Ans. Ans. Ans.848.000 92.092 4.837.755 2. 2016: 350.696. D.000 101.000 Future Taxable Amounts Installment receivable 1.409 3. Amo.000) Share premium from assumed conversion 1.908 110.278 December 31. Ans.500.465123 591. D. Bonds Payable (half . 3.145.000 Permanent Differences: Nondeductible expenses: Life insurance expense 300. 1. 2015: 341.725 PV of Interest: 240. Bonds Payable. 2014: (Princ.002 3.764.696.000) Net income after permanent differences 9.161) retirement loss capital gain *FMV of half of the bonds w/out the conv.896 240. A.245 Equity component/APIC-Bond Conversion 303. Balance January 1. 2014: 373.772183 3.662 3.200.917431 P3.630 3. Amortization table: Bonds Payable Correct Int.755 Total 4. Nominal Int.500.278 Equity component/APIC-Bond Conversion P292.000 900.000.000*0.000 110.247 Less:Par value of issuable shares (3.200.000 2. Ans.964.531 Fair value of bonds at effective rate 9% for 3 periods PV of Principal: P4. net of transaction cost) P3. 2016: 402. Gain 52.000) Taxable income 9.556.000 (1.000) 3/4 Prorated CV of BP and APIC-Bond Conv.644. 2014: 332. Nominal Int.000.788. 2014: 3. Ans.092 Carrying Value 3.247 4.000 133.000*0.000*0.253 5. D.662 240. Balance January 1. Amo.687 December 31. Proceeds from issuance (at face value.000*2.234.000 3. 2015: 387.417 240.659 Notes payable .000 162.804 (182. Ans.000.000 1.500. Cum.908 APIC-Bonds Conversion Privilege 303.889.889.long term 1.734 PV of Interest: 240.000 Temporary Differences: Future Deductible amounts Estimated litigation loss 600.000 Multiply by: Constant tax rate 33% Total tax expense 3.908 December 31.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 114 of 155 5. B. Val.837.000 CHAPTER 8-EXERCISE 16: TRY CORP. 3.907 December 31.000*2. Reconciliation: Net income before any differences 10.000.945.253 P&L Loss/ Cap.659 CHAPTER 8-EXERCISE 15: KURT CORP. Priv.000.) Retirement Price P4.*6%) (CV*9%) 3. Total Bonds @ FV* APIC (Res. 000 Less: Deferred tax benefit (FDA) (297. Ans.200.488.135.000 Less: Deferred tax benefit (FDA): P900.000 336.200.000*33% 3.000*35% 420.000 2.000 Excess tax depr. Ans.000 CHAPTER 8-EXERCISE 17: COSINE CORP.000 3.000*35% (315. Service costs Current service cost 160.000 600. Ans. P9. Taxable income 10. B. D. Future taxable amounts 900.000) Actuarial loss on ABO (b) 442.587. A.000 Mulitply by: Constant tax rate 33% Deferred tax liability 396.000 1.000 Pension expense (Profit or loss) 172. Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial gain on PA (a) (106.000 Temporary Differences: Future Deductible amounts Warranty provision 600.234.000 3. Ans. Ans. Total pension expense 508.000*6%) (168.000 Mulitply by: Current tax rate 32% Current tax expense 3. B.000 1. Ans.900.000.800.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 115 of 155 Current tax expense 3.240.000 4. D.000. Ans.500.000 3. B.200. Ans.000 Add: Deferred tax expense (FTA): P1.000 To reconcile: Current tax expense 3.000) Total tax expense 3. CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES .000 Permanent Differences: Nondeductible expenses: Life insurance expense 400.488. Future taxable amounts 1.000) Net income after permanent differences 11.000 Add: Deferred tax expense (FTA) 396. Future deductible amounts 900.000 Net interest (income)expense Interest on ABO (P3. Reconciliation: Net income before any differences 12.900.135.000*6%) 180.000 Mulitply by: Constant tax rate 33% Deferred tax liability 297.200. Future deductible amounts 600.135.000 4. To reconcile: Current tax expense 3.000 Interset on PA (P2.000) Taxable income 10. Current tax expense.000 2.000 Nontaxable income: Dividend income (1.000 CHAPTER 8-EXERCISE 18: BONCHON CORP. 400. A. D. B.000 5. C. Ans.000 Add: Deferred tax expense (FTA) 297.000 Less: Deferred tax benefit (FDA) (198.000 (900.000) 12.000 Mulitply by: Constant tax rate 33% Deferred tax asset 198.000 Future Taxable Amounts Prepaid advertising 500. over finanicial depr.000 Mulitply by: Constant tax rate 33% Deferred tax asset 297. Ans.000) Total tax expense 3.000) Total tax expense 3. 300.800.000 Plan asset. B. end 7.010.000 Add: Actuarial gain on ABO (200. Net remeasurement gain/loss (Other comprehensive Income/loss) Actuarial gain on PA Actual return on plan asset 840.040.000 Interest on PA (P2.000 ABO.000) 50. beginning balance 7.000 Plan asset.650.510.000 Less: Benefits settled.000*10%) (700. Ans. end 7.000 Add: Current service cost 160.000 Total 1.000.000 Plan asset. settled 400.000 2.000 Less: Actuarial gain on PA 140. Plan asset at fair value.140.400. at scheduled ret.000 4.000 Less: Settlements at scheduled retirement (1.000 Actuarial loss on AB0 442.000 ABO. To reconcile: Accrued pension.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 116 of 155 (a) Actuarial gain/loss on Plan asset Plan asset.500.800. end 7.000 ABO at present value.500.000 Pension expense (total) 508.000 1. beginning balance 7.000) (140.000) 1.000 Add: Current service cost 1. A.000.000) Actuarial gain on ABO (200.200.000) Settlement price of addl ben.000) 3. Ans.000 Net interest (income)expense Interest on ABO (P7. beg 200. Settled (400.000 (b) Actuarial gain/loss on Accumulated Benefit Obligation ABO. present value.500. beginning balance 3.984.000) ABO.000 Interest on ABO (P3.140.000 CHAPTER 8-EXERCISE 19: DEE CORP.000 Settlement gain: Settlement price other ben. 4.000*10%) 750.000) (100. D. B.500.000. present value.000 Total 708.000 Accrued pension expense.000 Actuarial gain on plan asset 106. at scheduled ret.000) Balance 7.000 PV of other benefits settled (500. Ans.200.000 Add: Contribution for the year 210.000 Add: Contribution for the year 1.000 Less: Benefits settled.000) (340.482. D.000 CHAPTER 8: AUDIT OF LIABILITIES AND PURCHASES . end (2.000 Less: Settlements at scheduled retirement (300.000*6%) 168. Total pension expense 1. ending balance 3. Ans.000 Interest on ABO (P7.000 Interset on PA (P7.878.000 Pension expense (total) 1.000) Balance 7.000 Estimated return (Interest on PA) (700. end (310. B. FMV.010.000. end 3. end 310.000 Interset on PA (P7. end 7.000 Contribution to the plan for the year (1.000) Accrued pension.450. Ans.000*10%) 750. (1.000) PV of additional benefits settled (500. Service costs Current service cost 1.000) Accrued pension.984.350. end 498. (300.000.000) Balance 2.000 4. A.000 Contribution to the plan for the year (210.500.000 5.000) Balance 3.000. beginning balance 2. at FMV at the year-end 2.482.450. beg 500. Plan asset. ABO.000) To reconcile: Prepaid pension.000*6%) 180.000*10%) 700. Ans.400.000 Pension expense (Profit or loss) 1. Ans.000) Accrued pension end 498. 000 Bonds payable 2. 4.000-P1.000) 1.000 6.000 (g) Net income in 2014 4.000 Share premium-PS 690.000 Correct entries to record transactions in 2014: (a) Treasury shares (20.000 *share premium from original issuance (P150-P100) Share premium-TST 70.000 Ordinary shares (10.270.000.000 (e) Treasury shares reissuance in 2014 200.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 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.000 (c) Preference shares issuance in 2014 250. Retained earnings .000 400.000) 1.000 8.280.000 (c) Cash.000) Total Stockholders' Equity 23.500.000 Treasury shares (7.000 Share premium-TST 130.000 9. @ Fair value 2.000*P160) 1. 2.000*P100) 5.000 5. Ans.000 1.050.000 (d) Cash 5.540.000.000 (d) Ordinary shares issued with Bonds 1.000 5.000 (b) Building 1.000.000) 800. Sh.000 (e) Cash (8.000-P1.000*P100) 1.000.000 4.000.000-P500. Preference Sh.300. Share capital: Ordinary Shares 6.000 Treasury shares (8.000 Retained earnings .280.000 (g) Income summary 4.500.000 (b) Cash 2.000 Share premium-OS (7.000*P85)-P25.000 Share premium-PS 200.000 130.000 *Allocation: FMV (total) Rato Amount Allocated Share premium-OS (P1.000*P150) 7.000*P160) 3.000 Total 2.000) (350.000*P50) 1.800. Total Contributed Capital 13.000 2. Ans.750.780.000 Share premium-PS 150.000*P100) 1.000 Share premium-OS 2.960.000 2.000*P50) 350.000 200.000 Share premium-TST 200.000 Ordinary shares (15.000*P50) 250. Ans.000 Retained earnings 4.480.000 690.000 Additional paid-in capital: Share premium-OS 4.200.000 Preference 750.800.000) 200.200.000 Treasury shares at cost (800.000) 340.200.000*P185) 1.230. Ans. 3.410.800.000 (f) Treasury shares retirement in 2014 (700.120.unappropriated 9.270.500.000 1.000 Ordinary shares (50.000 8. Correct entries to record transactions in 2013: (a) Cash (50.000.500.000 30% 840. Ans.000 5.120.000 (a) Treasury shares reacquired in 2014 (3.000 Preference shares (10.800.000 *Allocation: Amount Allocated Premium on bonds payable (P2.000 Ordinary 1.530.000 (h) Appropriation for treasury (800.750.000 960.000 Preference shares (20.000 (b) Preference share issuance in 2013 1.000 (f) Ordinary shares (7.530.200. CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000*P50) 500.000 (800.000 Retained earnings appropriated for Treasury 800. Ans.000 1.000.960.500. 7.000 Ordinary @ Residual 2.540.000 (c) Net income in 2013 5.200.200.750.000.000.000 150.000 Adjusted 12/31/14 balances 6.000 340.000) 960.410.000 Retained earnings 5.000.800.500.000 (c) Income summary 5. Prem-OS Sh.000*160) 1. Prem-TST RE-unapp RE-app TS (a) Ordinary share issuance in 2013 5.000*P100) 700.000) (b) Ordinary and Preference shares issue 1.530.000 Share premium-PS (P840.000 70% 1.500.550.000 Cash 3.000) (70. Prem-PS Sh.000 500.800.000 Share premium-OS (P2.appropriated 800.000 Bonds pay.000 800.000 Preference Shares 1.000.300.000-P2. Ans.540.000 Summary Ordinary Sh. Ans.000 (h) Retained earnings 800.000 Preference shares (5.000) 1. net (5. 000 (b) Preference share issuance in 2013 1. (a) Cash 5.000 *Share premium from the original issuance of preference shares in 2013 Ordinary shares (80. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 118 of 155 CHAPTER 9-PROBLEM 3: GLORIETTA INC.000 *Share premium from original issuance computed as: Retained earnings 40.000 Retained earnings .000*P10) 50.000 375.000 955.000 Cash 220.000 Treasury shares (5.000.000) (e) Treasury shares reissuance in 2014 (4.000*P20) 100.000 (b) Cash (4.000 1.000sh*P70) 280.000 248.000 Share premium-PS (20.000 3.000 Retained earnings 4.000) (20. Prem-PS RE-unapp RE-app TS (a) Ordinary share issuance in 2013 1.000-P250.000) (b) Ordinary and Preference shares issue 250. Ans.000 (400.000*P20) 400.000 Preference @Residual amount 575.100.000 5.000 Additional paid-in capital: Share premium-OS 955. the fair value of preference shares is not clearly Preference shares (5.000 Retained earnings 830.000) 175.000sh*P75) 300.000 Treasury shares (4. 2. Retained earnings .278.000) 375.000*P10) 1. Ans.000 Preference shares (50.000 Summary Ordinary Sh. Ans.000) 44.200.000*P50) 2.000 (c) Preference shares issuance in 2014 100.000 (g) Net income in 2014 830.000*P20) 1.000*P10) 250. Ans.538. Ans.000.000 (h) Retained earinings 66.000 2.000*52)-P12. Preference Sh. Ans. Correct entries: 1.000 Share premium-PS 1.000 (g) Income summary 830.500.000 (h) Appropriation for treasury (66. Ans.000 Correct entries to record transaction in 2014: (a) Preference shares (20. CHAPTER 9-PROBLEM 4: BULACAN CO. P450.000.000 Treasury shares (2. since while the fair value of ordinary shares (c) Cash.000.000 (P400.000 (66. Correct entries to record transactions in 2013: (a) Land 1.000.000 (b) Cash (50.000 Share premium-PS 1.000)*5.000 Note that the Building's fair value was more clearly determinable that the fair value of the securities issued.000 (d) Reacquisition of Treasury (220. net (5.000 Bonds payable 5.400.000 1.000 Share premium-PS (P575. Sh.000) 66.000) 1.000 (d) Treasury shares (10. Ans.000.000 1.000.000.000 66.000 (a) Conversion of PS to OS in 2014 800.000) (40. Total Contributed Capital 5.000 Fair value of Building 1.000*P22) 110.unappropriated 1.000*P20) 400.000 (e) Cash (2.000 Share premium-OS 200.500.000 Premium on bonds payabe 250.000 400.000) Total Stockholders' Equity 6.000 were determinable at P25.000 Ordinary shares (100.000*P10) 800.000-P400.000) 110.000 Treasury shares at cost (66.000*P22) 44.000 175.000 400.000 Accumulated profits 20.000 148.000 6.000 Ordinary @Fair value (25.000 Preference Shares 1.000 Share premium-OS 20.000 (f) Ordinary shares (5.700.000 (b) Building (@fair value) 1.100.000 (600.000/100.000 (c) Income summary 540.000*P30) 600.000 *Allocation: Ordinary shares (25.000 8. 4.000*P20) 40. 3.000) 200.000 (f) Treasury shares retirement in 2014 (50. 7.178.000 Retained earnings 540.000 Share premium-OS (P625.appropriated 66.000*P25) 625.100.000 Retained earinings appropriated for Treasury 66.000 Preference shares (20.000 Share premium-OS 400.223.200.000 Ordinary share warrants outstanding 450.260.260. Share premium-PS 148.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . Share capital: Ordinary Shares 2.000 determinable since it is highly speculative or volatile. Prem-OS Sh.000 Adjusted 12/31/14 balances 2.000*P22) 220.000 (c) Net income in 2013 540.223.000 1.500. Ans. 1.000 . 2.000 Summary: Prefence Sh Ordinary Sh APIC/Sh Prem.000 Share premium-OS 20. 1. Ans.000 6.000 Correct entry: Cash 650.000 (e) Entry made: CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .250. (d) Cash (5.000sh*50) 300.680. 5.000 (f) Income summary 1.000 Ordinary shares (600sh*P50) 30.000) 75. Treasury Total Balances.000 Share premium-OS 276.000 Balances.000 3.400 Ordinary shares subscribed (600sh*P20) 12.000 Correct entry: Cash 130. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 119 of 155 Ordinary shares (1.000share rights were issued to 49.000 (c) Memo: 49.000 220.000*P50) 50.000/10)*P55 220. (a) Entry made: Cash 130.000 4.000 Tresaury retirement (50.400 Correct entry: Cash 158.800 Ordinary shares subscribed (700sh*P20) 14.000 Ordinary shares 12.000 (c) Entry made: Cash (700sh*P440)*40% 123.000*P50) 200. CHAPTER 9-PROBLEM 5: HARVEY MERCHANDISES.500.000 600.000 Warrants (12Kw*P10) 120.000 3.000 Accumulated profits 20.000 Correct entry: Cash (700sh*P440)*40% 123.000 1.000 Ordinary share warrants outstanding 130. (e) Cash (40.000 Allocation: Prorata Preference shares 300.000 20.000) (20.000 (e) Rights exercise 200.000 Treasury shares 65.000 shares outstanding.311.000 Pref.000 Ordinary shares (4.000 1.000 Accumulated profits 1.000 Share premium-OS 294.000 Ordinary shares 12.000 Share premium-OS (P250K/50Ksh)*1K 5.000) 6. Accum.000 2.000 Treasury shares (P363. P45. Ans.000) 300.000 (b) Entry made: Cash 650.000) (5.000 2450000 (375.000 280. Adjusting entry: Share premium-TST 65.000 Share premium-OS 294.200 Subscription receivable 184.400 Subscriptions receivable 158.000.250.000 2.200 Subscription receivable 184.000 (b) Treasury reissue (20.000. January 1.000 80% Share premium-PS (P650K*80%)-PAR 220.000*60%)/5w*P60 36.000 971. Adjusting entry: Share premium-PS 130.000 2. (6Ksh*P80) 480. Adjusting entry: Ordinary shares subscribed 12.000 36.000.000/605)*325 195. 8.000 4.000. P276.660.000 Treasury shares (1. Adjsuting entry: Ordinary shares subscribed 294.000 Preference shares (6.000 Share premium-PS 350.000 Treasury shares 130. Ans.000 Ordinary share warrants (P450K*60%) 270. Sh. 6.000 (d) Entry made: Cash 158.000sh*P75) 75. Ans.000 Share premium-TST 65. Ans.000 (f) net Income 1.000 - (c) Share rights issue (memo entry) - (d) Warrants exercise 30.000 (a) Warrants issuance 450.250.000 3. Ans.000 20% Ordinary share warrants outstanding (P650K*20%) 130. December 31.000 500.800 Orinary shares subscribed 308.000 450.250. Prof. Ans.075.400 Subscriptions receivable 158. 000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . Ans.333 Ordinary shares (4. Ans.333 Ordinary share options outstanding 33. 1. 2016 108.333 Salaries expense.833. P50.800-P158. Revised FMV of options (85emp*100opt)*P25 212. 2014 75.000.333 Ordinary share options outstanding 58.333 4. Entry upon exercise of all options: Cash (7.333 Salaries expense.000 Entry: Divide by: Vesting period 3 Salaries expense 83.000.500 Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. Entry: Ordinary share options outstanding 175.000*2sh*P400) 3.000 5. Entry: Salaries expense 50. 31. 1.000sh*P25) 175.000*2sh*P20) 160. Ans.000 Ordinary share options outstanding 50. 2014 66. the options are not exerciseable and are therefore reverted back to equity.000 Multiply by: 120% estimated increase 120% Projected sales. Dec.333) Salaries expense 58.000 Ordinary share options oustanding 175. Note that since the market-based condition (FMV of shares) was achieved by the end of 2015. Ans.667) Salaries expense.400 Miscellaneous expense 5. P210. the vesting of the options are accelerated. Revised FMV of options (100-25emp)*100opt*P25 187. Ans. Dec.200. Estimated FMV of options (100-20emp)*100opt*P25 200. Final FMV of options (70emp*100opt)*P25 175.000 CHAPTER 9-PROBLEM 7: PUNK INC. 2015 90.000.667 Entry: Less: Prior year's salaries expense (83. salaries expense shall be recognized.333 Ordinary share options outstanding 83. P62.000 Salaries expense. 2016 50.667) Salaries expense 33.333 Ordinary share options outstanding 58. Ans.200.000 4.083. P58.333 Share premium-OS 3.040. in principle the services were received. Ans.000 Correct entry: Cash 3. P50.000 Ordinary share options outstanding 50. Ans.333. Ans.333 5. The options are exerciseable by the end of 2015. wether the market based- condition is achieved or not. 2015 141.833 CHAPTER 9-PROBLEM 8 : PUNK INC.333.000 Subscription receivable 26. That is. 1.000 Multiply by: 120% estimated increase 120% Projected sales. thus the vesting period has been revised from 3 years to 2 years.333. Ans.000) Salaries expense 50. (f) Correct entry/Adjusting entry Cash (P184. P120.000 Share premium-OS 3. 2015 (75emp*100opt)*P25 187.000 Ordinary share warrants outstanding 43.000 Entry: Divide by: Vesting period 3 Salaries expense 66.333 3.000 Entry: Less: Prior year's salaries expense (66. 2014 83.000 Ordinary shares 3. 2015 125. Ans.000 Ordinary shares (7. P83.667 2.400 Ordinary shares subscribed 2. Final FMV of options.667.333 2. Ans.667 Salaries expense. 2015 58.000 Share premium 210.667) Salaries expense 58. P66.000 Since the condition was not achieved however.333.500. as long as the employees stayed with the company until the vesting period ends. thus.400)+P5.333 3.000 Retained earnings/APIC-Unexercised options 175.333 Salaries expense. 31.000sh*P20) 140. 2015 120.000. Final FMV of options (70emp*100opt)*P25 175.500 Less: Prior years' cummulative salaries expense (66.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 120 of 155 Cash (4.000 Entry: Less: Prior years' cummulative salaries expense (141.000 Ordinary shares (100*P20) 2.000 31.667 Ordinary share options outstanding 66. P33.500 Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. 2016 33.000 Entry: Less: Prior years' cummulative salaries expense (125.200.000.333 6. P58. FMV of options (100emp*100opt)*P25 250.083.000 CHAPTER 9-PROBLEM 6: PUNK INC. 2015 58.000.333 Salaries expense. 2014: Is the non-market based condition achievable? Actual sales.000 Ordinary share warrants (P130K*4/12) 43. 31. Adjusting entry: Ordinary shares 3. Note that the market-based condition has no bearing in the recognition of the salaries expense. 2016) 14% Thus. VP is 3 years. therefore options are exercisable.000 Ordinary share options outstanding 100. P504.000 Thus. Est. 2014 (P81M-75M)/75M 8% Minimum required increase in sales. VP is 2 years.*P25 187. 2014 10% Thus. Est.500 Entry: Divide by: Vesting period 3 Salaries expense 62.2015) 12% Thus.667.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 121 of 155 Minimum required sales 100. the condition has bee achieved. 2015 137.000. 2015 110. P33. FMV of options vested (100-25emp)*100opt.000 4.000 Thus.34M)/92. 31.000 Entry: Less: Prior years' cummulative salaries expense (200.000 Salaries expense.800sh*P20) 336.000.333 Salaries expense.000.000opt*P25 175. 2016 150.333 3. 2016: Has the non-market based condition been achieved? Actual sales.500 2. not achieved.8M-92. Dec. 2014 (P81M-75M)/75M 8% Actual inrease in sales. achievable. achievable. FMV of options vested (10-2emp)*1.000 2. 1.500 3.500. Revised FMV of options (100-20emp)*150opt*P25 300.333) Salaries expense 41. Note that the actual sales in 2016 is P150M.000 Minimum required sales 100. Ans. 2016 41.000 Salaries expense. 2016: Has the non-market based condition been achieved? Actual increase in sales.333. achievable. thus the estimated number of options per employee shall be 100. 31.000.000.000. 2015: Has the non-market based condition been achieved at the end of 2015? Actual increase in sales.500 Salaries expense.000 Multiply by: 120% estimated increase 120% Projected sales. Note that the estimated sales in 2016 is P132M.500 Salaries expense. 2014 62. 2016 132. 2015 200.000 Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec.000 Share premium 504. 31.333 Ordinary share options outstanding 33. Entry upon exercise of all options: Cash (16. P100. thus the final number of options per employee shall be 200. achieved. 31.000 Ordinary share options outstanding 220.000.500) Salaries expense 137.000 Entry: Less: Prior year's salaries expense (62. Dec. Dec. 2014: Has the non-market based condition been achieved at the end of 2014? Actual increase in sales. Is the non-market based condition achievable by the end of 2015? Estimated average increase in sales in 2014 and 2015: (8%+16%)/2 12% Minimum required average increase in sales (2014 -2015) 12% Thus. 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 14% Minimum required average increase in sales (2014 .000 Entry: Divide by: Vesting period 2 Salaries expense 100.34M 20% Actual average increase in sales (2014-2016) (8%+14%+20%)/3 14% Minimum required average increase in sales (2014 . Ans. 31. thus the estimated number of options per employee shall be 150. Note that the estimated sales in 2016 is P108M. Dec.*P25 200. 31.2016) 14% Thus.667 Salaries expense. Final FMV of options (10-3emp)*1. Final FMV of options (100-16emp)*200opt*P25 420.000) Salaries expense 220. achievable.800sh*P25) 420. Revised FMV of options (10-2emp)*1.667 Ordinary share options outstanding 41.000 Ordinary shares (16. 2015 33. P41.000.000opt*P25 200. 2015: Is the non-market based condition achievable? Actual sales.000 CHAPTER 9-PROBLEM 9 : PUNK INC. 2014 100. Options are exercisable. 31. 2015 (P92.333 Entry: Less: Prior year's salaries expense (100.500 Ordinary share options outstanding 62. 2015 133. 2016 220.000 Minimum required sales 100.000 Ordinary share options outstanding 420. P137. not achieved. 2016 (P110.000 Thus. Ans.500 Ordinary share options outstanding 137.23M-81M)/81M 14% Actual average increase in sales (2014 and 2015) 11% Minimum required average increase in sales (2014 . Ans.000) Salaries expense 33. Dec. Ans. Ans.000.000opt.000 Entry: Less: Prior years' cummulative salaries expense (133.667 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000 Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. P220. 000 (P95 .000 Minimum required 2016 sales 250.000 10% share dividends (90.050.667) Salaries expense 603.000 Ordinary shares (7.600sh*P10) 36.000 Share premium 2.000.000 Minimum required 2016 sales 250. number of SARs is 20.900.000.000sars*P95) 1. P1.000 Share premium 210. Ordinary shares.050.000 Minimum required 2016 sales 250.333 2.500 CHAPTER 9-PROBLEM 12 : CHRIS COMPANY 1.000 2.000 2. 1. Ans.275.500 3.050. Ans. 2015 850.500 Share dividends payable (24.000 Share premium 36.000sars*P90) 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 122 of 155 4. Ans.000 CHAPTER 9-PROBLEM 10 : MYX CO.333 SAR payable 603.000 Entry: Less: Prior year's salaries expense (246. 2014 246.000sars*P85) 1.000sh)*P10 247.000.000 25% share dividends (99.000sh*P10) 90.000sh*P10) 460.667 Salaries expense.000sars*P74) 740.500 Ordinary shares 247.333 Salaries expense.000 SAR payable 1.000 Multiply by: 2years/3 years 2/3 Cummulative salaries expense as of Dec. 2015 603.000.000) Salaries expense 1.000sh*25%)*P10 247.050.000. Ans.000 Salaries expense/Income from SAR reversal 100.500.500 Share dividends payable 247. number of SARs is 15. Ans. Stock dividends payable 500.000 3.000 Share dividends payable 90.900. Retained earnings (25%*99. P1. SAR payable at prevaiing FMV (20.000 Achieved. 2016 1.000 3. P1.000 Entry to remeasure the SAR at the end of 2017: SAR payable 100. number of SARs is 10.000 Ordinary shares (46. 31.000 Ordinary share options outstanding 175.667 SAR payable 246.000 Share dividends payable (9.500 Ordinary shares.333. Ans.800.000.000)*P25 2.P90)*20.000.000.000*P10) 40.000 Ordinary shares (3.000sh)*P14 126. Estimated FMV of SARS. Estimated FMV of SARS. Ans. End of 2016: Has the non-market based condition been achieved? Actual 2016 sales 760. beginning balance 1.500. ending balance 1.000 Cash (20.000sh*P10) 500.000sh*10%)*P10 90.125. Ans. Retained earnings (10%*500.000.000 Achievable.000 Ordinary shares 90. P210.000 4.000 Entry: Divide by: Vesting period 3 Salaries expense 246. Entry upon exercise of all options: Cash (7. Retained earnings (10%*90. Fractional warrants outstanding 36. Final FMV of SARS (20.000sars*P98) 1.667 End of 2015: Is the non-market based condition achievable? Projected 2016 sales: (P410M*120%) 640.000. 2015 (15.960.000sh*P25) 175. P603.750sh*P10) 247.000.625. End of 2014: Is the non-market based condition achievable? Projected 2016 sales: (P210M*120%*120%) 328. Entry upon exercise in 2017 at prevailing FMV P98.000 Entry: Less: Prior years' cummulative salaries expense (850.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000 Salaries expense. Ans. SAR payable 1.000 Achievable.337.000 Stock dividends payable (50.000 Salaries expense 60.000SARS CHAPTER 9-PROBLEM 11 : DARK COMPANY 1.000. Ans.800. Ans. 2014 (10.000 Fractional warrants outstanding (4.337.000sh*P20) 140. 000*P0. 2014 Property dividends payable 200.200 Entry: Retained earnings 1. Ans.000 shares issued. From P5 par to P2.50) 8. NO EFFECT. deducted from total SHE.000 Ordinary shares (20.700 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . upon reclass 720. From P20 cost per treasury to P10 per treasury (d) Equipment 50. Ans. beg 50.000 Preference shares (10.480*P2.000*P15) 150.000 CV.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 123 of 155 4.000 FMV at 12/31/14 700.000 Adjustment to RE 100. None.000 2.000 Preference shares (40.099.000 (e) Cash (10.000 Property dividends payable 800.000 Share premium-PS 50.P&L 100.600 Total outstanding shares 549. 1/31/2015 800.000 Building (PPE) 800.000*P10) 100.000.000) Loss 20.000. Balance sheet date: December 31. From 20. Ans. P900.000 Share premium-TST 22.000 Property dividends payable 100.800*P10) 28. Share dividends payable (3.000 Ordinary share dividends distributed 46. 4.000 Total cash dividends 50.180 Share dividends payable 8.700 Ordinary shares 8.800*10%)*P6 20.000 Property dividends payable 900.600 Dividends payable 1.000/4.600*P1) 549.000 Noncurrent asset held for disposal 720.000 treasury shares to 8.000 Accum.000*P1) 40. Declaration: Retained earnings 900. beginning 500.000*1/10) 80.099.000 shares issued to 40.P&L (20.000 Retained earnings 200. Ans.000 Dividends payable.200 Capital liquidated (549. NCAHFD 700.600 Multiply by: Cash dividends 2 Dividends from earnings 1.800 Note that the Capital liquidated accounts is a contra-capital account.000 Final FMV. Note that the increase or decrease in the property dividends payable is charged to RE.200.880 2.000 (b) Treasury shares (80.000 Loss on remeasurement .000 Cash 80. Ans.648.000 CHAPTER 9-PROBLEM 14: JKL CORP. Ans. Ans.000 Shares issued from fractional warrants 3. depr (P800.000 (c) Memo: Share split up 1 is to 2: 1. P100.000) 3.000.000 Cash 50. CV 900.099. Distribution: Retained earnings 100. 1. Ans.000 Noncurrent asset held for disposal 20.50 par From 4.Expired fractional warrants 4.000 Dividends payable.000 treasury shares. Correct entries: (a) Accumulated profits.000 5. P1. CHAPTER 9-PROBLEM 13 : ABC INC.50) 10. that is. P700.000 Share premium .000 (f) Accumulated profits (34.000= P20) 80.000 Noncurrent asset held for disposal 700.000 Adjustment to RE (200.000 Treasury shares (2.000 FMV less cost to sell.000 Gain on settlement of property dividends .700 Share premium-OS 12. Oustanding shares. Fractional warrants outstanding 4. CV (FMV 12/2014) 700. 000. before quasi-reorganization 1.957. Ret. Ans.000 c) Retained earnings 150.000 (250.000 600.000) (75.000 e) Write-off of deficit . per audit (15%*100.000 Debit to RE.000 (250.000 300.000 Share premium 500.000 100. 4. 2. Accumulated profits 17.880) (g) 2014 cash dividends (59. Prem-OS Sh.000 300.000 100. Ans.000) December 31.000) 550. after quasi-reorganization 1.000) (150.000 600.150. Share Prem.000 - 1.000 Accounts payable/Liabilities 150. Dr. P.000 e) Share premium 550.000 (52.150.000 1.180 22.000 (150.000 (f) 10% stock dividends 8.000 d) Revaluation surplus 500.000) c) Accrual of additional Liability 175.200.000 Cost Accum Depr .000 Repl.000) d) Recapitalization .570 Preference shares (50.000.Appropriation for treasury 52.000 1.000 Retained earnings 500.000 1.500. Ans.000) 500.000 Sound Value 1.000 Accumulated profits appropriated for treasury 52. (550. (500.000 c) Retained earnings 175.000 50. Rev.000) (100.000 -. Prof Treasury January 1. CHAPTER 9-PROBLEM 16: SPURS INC. Ans. Ans.500.700 50.000.000) b) Write-down of Inventory (50.000 500.000 550.000 850.000 1.000*P1) 50.000 (175.675.000) (50. before quasi-reorganization 1.000 Carrying Value b) Retained earnings 75.000) (75. Debit to RE.25) 9.000) 500. Accumulated profits 52.000 Adjustment to RE (additional debit) (150.500. Ans. Ans. Ans.000) AD Revaluation surplus 600.500.50) CHAPTER 9-PROBLEM 15: TRUST CORPORATION CASE 1: Entries: a) Retained earnings 100.000 850.000 Accum Depr 100. CASE 2: Entries: a) PPE .Appraisal Increase 400. (500.570 Total cash dividends 59. 3. Ans. after quasi-reorganization 1. 5. Surplus Ret.570 3.570) (h) 2014 net income 940.000) (c) Share split .400 Share dividends payable 17.000 b) Write-down of Inventory (75.000sh)*P110 1.000) c) Accrual of additional Liability 150.000) (50.000 - 1.000) (600.000 1.000 100. Ans. 2014 balances 400. Earnings Balances.000 (a) Retroactive adjustment. Cash dividends payable 59.000) 4. 2. Share Prem.570 (h) Income summary 940.000) a) Write-down of PPE (100. Prem-TS Accum.000.000 Assets Liabilities SHE Ordinary Sh. Prem-PS Sh.000 100.Appraisal Increase 1.000 Inventories 50.000.800*20%*P2.000) (100.000 Accounts payable/Liabilities 175. Ans. P150.000 Balances. 1.550 (52. 2014 balances 500.000 Retained earnings 550.000.000 -.000 52.000 450. 3.650. 4.000 Accumulated profits 940.000 1.000 Inventories 75.000) a) Write-down of PPE 600. Ans.000 1. per books 1.000 28.000 475. Earnings Balances.000) d) Write-off of deficit . 5. Ans.700 12.000 192.000sh) 500.000 Assets Liabilities SHE Ordinary Sh.400 Computed as: (34.000 Summary: Preference Sh Ordinary Sh Sh.000 108.000 204.280*P0.180 (20.200.000 Repl AD (1. 2013 dividends (50.000 Balances.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 124 of 155 (g) Accumulated profits 59. Cost 2.000) (b) Treasury shares reacquisition (80.000 b) Retained earnings 50.000 50.000 (e) Preference shares issue 100.000 d) Ordinary shares (P5*100.000) CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .No Effect (d) Treasury shares reissue 22.-App Accum.000 100.000 900.000.000 Ordinary shares (38.000) (175. 000 Subscribed (P140-P100)*900 36.164. Revaluation surplus 240.000) Loss on sale of Equipment (200.000 Stockholders' equity 4.000 Share premium from ordinar shares Issued 920. Ans. Ans. receivable.000 4.000 Unissued ordinary shares (500. receivable.000 Proceeds from sale of donated shares 800.000 Preference shares subscribed. A. A. Ans. beg. Contributed capital 2. B.000) Excess over par on share issuance 1. Retained earnings.000 Total Additional Paid-in Capital 621.000.000 3. beginning 7.650.000) Gain on retirement of bonds 300.650.000sh*P20) 800.000 15.000) Reserve for plant expansion (3. Inventory under FIFO (100.000 Translation reserves (credit) 100. Ans.000 5.998.000 CHAPTER 9-EXERCISE 2: ALPHA CORPORATION 1.000 Ordinary shares subscribed.000) Adjusted Net Income 9. Ans.000) 150. P1.000) Increase in end. Ans.050. other comprehensive income 346.650.000 1. P9.000 Additional paid-in capital on preference shares 112.000 Donated capital 25.650.500. C.000 Inventory fire loss (150.000 Preference shares issued 300.000 2. Inventory under FIFO 300. net of subs.000 Ordinary share warrants outstanding 40.000 Accumulated profits 820.000) Ordinary shares issued P400.000 Additional paid in capital on sale of treasury shares 4.000 15% stock dividend declaration (1.000sh*P20) 100. Additional paid-in capital on ordinary shares 460. Authorized ordinary shares at P10 par value 900. Ans.000.998.000.000 Accum.000 MULTIPLE CHOICE EXERCISES: CHAPTER 9-EXERCISE 1: MICKEY MOUSE INC. Unadjusted Net Income.000 20. beg.000.400. P10.000.000 Ordinary shares subscribed (5. Excess over par on share dividends (P1. 1.000 Increase in beg.100. Retained earnings. D.000 Ordinary share warrants outstanding 20.000 Preference shares issued (6.000 Unissued preference shares 100.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 125 of 155 2.000 Unrealized holding gain .000 Preference shares subscribed (900sh*P100) 90.000 Unrealized holding gain on FA 700. Ans. per audit 9.000 4.000) Impairment loss on PPE (750.000 Share premium from treasury shares 8.000 Retained earnings.000) Change in policy (Ave to FIFO) 100. Authorized preference shares at P50 par value 400.000-P1.100.800.000 260. Ans. per books 9. Ordinary shares issued P400.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . P6.000sh 180.000 Unrealized capital/Other comprehensive income 346. 30. as restated 6.000 2.100. Ans.000.000) (200.400. D.000 3.000) Loss on retirement of Treasury (P1.000 Retained earnings.000 3. Ordinary shares issued (40.000 Correction of prior period error (1.000 Total Additional Paid-in Capital P621. Ans. as restated 6. ending balance 10.100.100.000 Share premium from preference shares Issued 224. net of subs. D.000 Subscribed (P56-P20)*5.000 Adjusted Net Income.000 Total contributed capital 2.400.000 Preference shares issued P300.000sh*P100) 600.100. 30.000 Loss on retirement of treasury (850.000-P850.000 Net/Total adjustment to Additional Paid-in Capital 1.000.381.AFS 6.000 Total Contributed Capital P1.500. 31.800.000 P.000 Retained earnings.S.000 Preference shares issued 300.000. D.200. Ordinary shares. 2014 P14.000 Accumulated other comprehensive income: Unrealized holding gain-AFS 3. Ans. 600. 31.800. as of 12. C. 2014 P12.000 No entry Interest income 25.800.430.000 Share Prem – OS 33. Ans. 350. – TS 37.500 Other expense 37. January 1.800.000 – 2.000 = 14%).000)/5*130 P1. D. 2.000 Share Prem – OS 90.000.) P795.000 6.000 O.000.000 Cash 425. 450.000. 2014 P8. D.000 Ordinary shares subscribed 50.000*20) 2.000 Par value of Ordinary shares issued (11.000 Subs Rec. B.000.000 Ordinary shares 16. C.000 Cash 900. Retained earnings.000 2.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . Dec. C.31.000 Share premium P330. 2014 P55.000) Property dividends (800.S.000 Cash 225. Ans.000 Subs Rec.500 Share Prem – TS 37.000 Retained Earnings 250. Total Contributed Capital 1.500 Retained Earnings 37.000 Share Prem.000 Multiply by Market value of Options 30 Total Options Outstanding 600. Share Prem – OS 33. Ans.000) 4.000 Opex 50. Cash 425. Dec.000 CHAPTER 9-EXERCISE 3: TABUK CORPORATION Entry Made Correct Entry Adjusting Journal Entry Cash 900.000 Share Prem – PS 117.000 O.000 O. Exp.000/2)*P25 (b) (10.000 CHAPTER 9-EXERCISE 5: MISAMIS INC.000 Retained earnings.000 Total Stockholder’s equity P2.000) Net income for the year 60. thus valued at fair market value. 1.2013 400. Number of options estimated to vest (200opt*100emp) 20.000 Share Prem – TS 340. 2014 P16.000 *share split is accounted through memo entry only.000 Share premium 12.000 3. (b) The property dividends’ valuation (debit to RE) shall be final at the settlement date. – OS 90. 600. Ans.000 Preference shares subscribed 45.114. Jan. Ordinary shares issued P400.381. 2.000 Stock dividends issuance (100.000 Share Prem – PS 117. Ans.000–5.000 Reserve for bond sinking fund 220. Ans.000.000 Treasury Stock 350. A. 1.000.800. December 31.000 Retained earnings 16.000*P68) (a) (6. January 1. 300.400. B.000 Ordinary shares.000 Total Legal Capital (Par value of issued and subs. Share premium.000 Retained Earnings 250.800. Comp. 2014 P16.S.000.000 Cash 225.000 Retained earnings 150.500 Treasury Stock 262. 350.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 126 of 155 5.000 Treasury Stock 350. O.000 Share premium from share dividends (6. 2014 P30.500 *books are already closed.000 Multiply by (2012 & 2013) 2/3 Total Accum.000*100) 1.000) Stock dividends (100. CHAPTER 9-EXERCISE 4: NEVADA SQUARE 1.S.000 Retained Earnings 150. Ans. Ans.000 P.000/700.000 Revaluation increment in properties 100. B.000 Retained earnings 75.000 Share Premium – TS 340.000 Cash dividends (2. 450. 4.000 *books are already closed.000. December 31. Ans.000 4.500 Treasury Stock 262.100.400.000.000 Share Premium.S. Ans. C. Preference shares P10. C.000 Accumulated profits: Accumulated profits – unappropriated 410. aggregate par value remains the same. Proceeds from exercise of rights (60. 300.S.000 1. Ans. 3.000 (a) The stock dividends is small dividends (100.000 Share Prem. C. C. 2014 91. Estimated 2014 Rev. 2016 P207. Ans. VP 3 years achievable if 2016 Rev>=20M. Final number of options: 63*500 31.000*50%) 375.000 * 5) (355. 3.500*P35) 787.000 P1.5M – not achieved. (P17.500 Multiply by fair value on grant date P18 Carrying value of options outstanding 12/31/17 P135. end P4. 2016: VP 3 years achieved if 2016 Rev>=20M.000 Fair value of options on grant date P5 Estimated value of services over 3 years P275. Ans.000 5. The share options are under a variable option plan with a market based condition.500 Options exercised in 2017: 45*500 (22. VP 2 years achievable if 2015 Rev>=18M.000 2. 2015: VP 2 years achieved if 2015 Rev>=18M.000 Multiply by: 3/3 3/3 Accumulated salaries expense as of 2016 P567.905.500 CHAPTER 9-EXERCISE 7: PANDORA CORP. D. Ans.000 CHAPTER 9-EXERCISE 6: SANTIAGO INC. A.000 3. 2014 P270. 2015 P88.000 Share premium 742.500 Fair value of options on grant date P18 Final value of services over 3 years P567.000 Divide by: Vesting period 2 years Salaries expense. ans.500 options: Cash (22.000) 2.000 – 200. P17.000 Retroactive adjustment to retained earnings (400.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 127 of 155 3. thus the achievability of the condition is not a matter to consider in determining annual salaries expense: 2014: Number of options: (600-5-45)*100 55.000 Multiply by: 2/3 2/3 Accumulated salaries expense as of P360. thus: 2014: VP 1 year achieved if 2014 Rev>=15M.000 Ordinary share warrants outstanding (750.000 4.000 Share premium from exercise of rights 330.000 4. 1. Number of options: (68-8)*500 30. 2015: Number of options: (600-5-20-35)*100 54.000 Fair value of options on grant date P5 Estimated value of services over 3 years P270.5M*125%) = 18. B. Ans.880.5M*125%) = 21.000. Actual 2016 Rev. B..000 Fair value of options on grant date P18 Estimated value of services over 3 years P540. 2014 (2. 1. Ans.5M – not achieved.000) Net income.545. (P14.000 Ordinary share options outstanding (20. P20. B.667) Salaries expense. D.000) Appropriation for dividends (71.000 2015 Less: Prior years’ salaries expense (270.000 Accumulated profits.000 Multiply by: 2/3 2/3 Accumulated salaries expense as of 2015 P180.667 2.000.500*P20) 450.500 Ordinary share options outstanding (22. Actual 2014 Rev. Entry upon exercise of 45*500 = 22.000 Divide by: Vesting period 3 years Salaries expense.000 Share premium from exercise of warrants 575.5M –achieved. Accumulated profits. Ans. Ans.500) Options forfeited in 2017 3*500 (1. beginning P3.300.000 Total APIC P2. The share options are under a variable option plan with a non-market based condition. Final number of options: 63*500 31. 2015 P90. Estimated 2016 Rev. Ans.000) Salaries expense. Number of options: (65-5)*500 30.000 Fair value of options on grant date P18 Estimated value of services over 2 years P540.500. C.500*18) 405.500) Remaining options as of 12/31/17 7. Ans.875M – achievable.333 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . Actual 2015 Rev. Share premium from ordinary shares P1.000) Salaries expense. P14. A.000 Less: Prior years’ salaries expense (360.000 Ordinary shares (22.000*30) 600.000 Less: Prior years’ salaries expense (91.125M – achievable. 000 4.800 CHAPTER 9-EXERCISE 9: KALINGA CO. D.000 Divide by: Vesting period 3 years Salaries expense.480*P100) 1. thus: 2014: Condition achievable if Sales Vol. Ans.500 Fair value of options on grant date P5 Final value of services over 3 years P272. 12.480*40) 619. B. 2015: Condition is achievable if Ave Rev Growth >=10%.100.500 Less: Prior years’ salaries expense (180.857. Entry upon expiration of 40% of the options (25.320 options): Ordinary share options outstanding (10.380.000. Final number of SAR 15*20. (12+20+16)/3=16% – achived.667 3.800 Share premium – Expired options 412. Ans. 12% – achievable.020. Inc. 2016 P352. B. B.000 160.800 5. 2015 P466.800 Fair value of options on grant date P40 Final value of services over 3 years P1.500 Multiply by: 3/3 3/3 Accumulated salaries expense as of 2016 P272. Inc. Ans. The share options are under a variable option plan with a non-market based condition.200 Ordinary shares (15.000) Salaries expense.000 160.>=5%. Estimated Sales Vol.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .>=5%. 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 128 of 155 4. 2015 400. A.000 Fair value of options on grant date P40 Estimated value of services over 3 years 640. (12+20+20)/3=17.000 Less: Prior years’ salaries expense (720.000 300. thus: 2014: Condition is achievable if Ave Rev Growth >=10%. Ans. The share appreciation rights are under a variable plan with a non-market based condition. 4 Ans. A. 2014 P213. Estimated Ave Rev Growth.480*P120) 1. 2016 P92.333 2. Ans. Estimated Sales Vol.320*40) 412.5% – achievable. value of services over 3 years P2. Ans. Ans. Actual Ave Rev Growth (10+15+25)/3=16.032. Number of options: (100*85%)*300 25. Inc. Ans. Final number of options: (100-14)*300 25.000 Fair value of options on grant date P7 Est.000 Divide by: Vesting period 3 years Salaries expense. Estimated Ave Rev Growth. Inc.800*40% = 10. 2014 P320.333) Salaries expense. A.000 3. 2015: Condition achievable if Sales Vol.600 Ordinary share options outstanding (15.000) Salaries expense.000 Less: Prior years’ salaries expense (213. D. Estimated Sales Vol.3% – achievable. 2016: Condition achieved if if Sales Vol.000 Multiply by: 3/3 3/3 Accumulated salaries expense as of 2016 P2.000 Estimated FMV of SAR at year-end P6.0) Salaries expense. 2016: Final number of options: (600-5-20-30)*100 54. Estimated number of SAR: (20-4)*10.000 Multiply by: 3/3 3/3 Accumulated salaries expense as of 2016 P1.000 Less: Prior years’ salaries expense (320.100. 2016 P1. 1.500 Fair value of options on grant date P40 Estimated value of services over 3 years 1. Ans.75 Estimated value of services over 3 years P1. 2016: Condition is achieved if Ave Rev Growth >=10%.000 Estimated FMV of SAR at year-end P6 Estimated value of services over 3 years P960. D. Inc.>=5%.000 Multiply by: 2/3 2/3 Accumulated salaries expense as of 2015 P680.000) Salaries expense.500 CHAPTER 9-EXERCISE 8: JUBEE CORP.480 options): Cash (15.000 Multiply by: 2/3 2/3 Accumulated salaries expense as of 2015 P720.080. C. 12. Inc.000 Share premium 928.032. Entry upon exercise of 60% of the options (25.800*60% = 15.7% – achieved.000 Less: Prior years’ salaries expense (680.5% – achievable Estimated number of SAR: (20-4)*10.548.000 2. Number of options: (100*80%)*200 16. 365. Ans.000 B.000 (120.000 shares subs into 32.000 40. C.000 2014 transaction: A. CHAPTER 9-EXERCISE 11: ROXXY CORP.300.000 RE 22.500 2.00sh*5%*P52) (1. Ans.000*P1) (200. for treasury shares (equal to cost) (234. (270. Sh Prem .000 6.000 Net Income for 2014 fiscal year 160.000 Shares Outstanding 238.000 Share premium 220.000) D. Ans. 2012) 440.000 Ordinary Shares 500. Compensation expense 84.25) 62.000 Multiply by cash div rate 1 Total Cash dividends 270.500. Retained earnings.000) Legal approp. P10 par value to P2.000 Stock Dividends to OS (Dec. Ans.000 2013 transactions: A.000 Cash 252. 1.260.50 par 8. (22.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 129 of 155 CHAPTER 9-EXERCISE 10: SANS CORP.000 shares into 248.000 June 1.000 MEMO: SPLIT: 62.000 Cash Dividends Payable 270.000 680. 2014 4. 2013) (200. Share issue for land 200. 4.000 Subscription receivable 252.000 (8. for sinking fund (200.000 shares subs. Ans C.500 Treasury shares (10.000*P15)/5years 3. Ordinary Sh. RE 270.520.000 Ordinary share subscribed 120.000 1. Stock Dividend Declaration 220. Balances 620.000 B. Ans.000 Shares Subscribed 32.280.000 462.145.500) 62.000 Subsription receivable 420.000 sh) 125.000 Balances: June 30.300.000 (78.000 Building (1.000) Cash Dividends to PS (Dec.000 Cash 125.000 234. 200.000 1.000 3.000 1.000) December 31. 500.000 TS into 20.000) Voluntary approp.980.000 D.25 subs price 5.000*6.Treasury-OS 6.000 Treasury shares (5. 5. B. June 30.000 924. Cash dividend declaration (June 15.TS Treasury Shares # of Shares Outstanding Prior to 2013: A.000) Retained earnings.000 288.000 Appropriation for TS (62. P25 cost per unit to P6.000 TS. Share issue for cash 80.000 7.000 2.000 Share premium 1. Ans. RE TS TOTAL January 15.152.000 RE 1.000) July 15. Ans. 2013 2.000 Total Share premium 11. (125.OS Sh Prem. C.25 cost per unit Cash 40.8M*70%) 1. 2013) (440. 2013) 440. C 6.000 464.500. 120. D.760. C. unappropriated June 30.000 20.000 380.000 11.800.500. Share issue for cash 3.700.000 1.000 22.000 C. Reacquisition of Treasury Shares 312. CORRECT ENTRIES: Land (1. P21 subs price to P5.000 (7*4.8M*30%) 540.158. 2014 1. 1.000 Share premium .000) 2.000 Summary OS OS-Subs Share Prem.144.000 March 1.000 220.000 Income Summary 1.000 Ordinary shares 120.000 Total 270. Cash dividend declaration (Dec. C.500) Adj.000 1.000 Ordinary shares subscribed 200.000 8.500 December 30. 15.000 shares.142.500) 3.000 (62.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000 C.000 SAR Payable 84.152. Share subsription/issue 400.000) September 2. Ans. D. Share premium .000 80.OS 11. Reissue of TS 6. Treasury (OS) 6. 5.OCI (SCI/SHE) 110.000 Share premium . Ans.000 Share Premium .000 OSWO 200.000 Unrealized holding loss – SHE (135.700.142. beg 275.000 OS (80. Ans.420.000 UHLoss .050.000) Options exercise 400.195.000 APIC 5. unappropriated 1.000 3.195.000 Rent income 500.000 PS OS APIC UHLoss RE TS SUMMARY January 1 balances 1.000 1.000 e) Cash dividends (180.OS 11.000) c) Stock rights exerise 1.800. Property dividends payable 750. B.000 1.000 Property dividends payable 700.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000*5) 50.050.260.OS 150.000*8) 640.000 Share premium .000 CHAPTER 9-EXERCISE 12: GLORIA CORPORATION ENTRIES: a) OS (30. C.000 2. Ans. June 30.OS 400.000 Share premium .PS 3.000 6.000 - 3.000.600.OS 1.000 UHLoss .AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 130 of 155 4.000 RE (10.000 UHGain .000 Contributed Capital 13.000 Total Stockholders’ Equity P18.000 December 31.800.260.170. C.000 g) RE. B.000 RE 2.000 Cash (80. 6.Total 5.000) f) UHGain .000 (245.000 f) Available for sale securities 110. Ans.450.000 5.000 Preference Shares 5.000 Property dividends payable 50.000) Accumulated profits .000) Total SHE.000*2) 200.AFS for the year 110.000 (135.310. A.000. Ans.000 RE.000 Treasury Shares at cost (234.000*70) 700. balances 1.000 d) Options (prior period error) 200.590.000 RE. Ordinary Shares 4.000 Gain/Income 70.800.000) a) Treasury shares retirement (150. A.AFS 12/31/14 (135. Preference share 1.AFS 12/31/13 245.450.600.TST 30.000 Trading securities @CV 680.480.600.000. 1 OS: 4 SR plus P11 Cash (840K/4)*11 2.000 d) RE (100. Ans.000 Treasury shares 270.000 Income tax expense 225.000) h) Net Income for the year 2.000 240.000 (200.000 Ordinary shares 6.152.000) Decrease in UHL or UHGain for the year 110. 4.000 b) Property dividends (750.150.000 c) Memo: 1M share rights were received. Ans.000*80%) 160.000 h) Income summary 2.000 Share Premium .8M*10%) 180.000*5) 400.000 (270.000 g)Prior period error (275. Ans.000) (120.000 Dividends payable 180.170. appropriated 434.000 Share Premium .000 5.000) 270.000) 5. D.000 Share premium . A. 7.000 e) RE (1. 2014 26.000 OSWO (200.000 OS (210K*5) 1.800. b) RE (10.000) 4.000*5) 150. 500 2.787.500 4.260 1. 2013 share issue 500.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 131 of 155 CHAPTER 9-EXERCISE 13: RAJA CORPORATION OS Sh.335.000 November.000) 353.260 500.250.000 – 110. 3. total P633. 31 2. Contributed capital in excess of par value P18.500 (3. Ans.670.000 3.000 Accum.000) 500. A. D.000 - Ending balance 6. Ans.850.000) Feb. Ans.000 (500.000 TOTAL 2.000) - Aug. Reserve for self insurance 75. 3.000*2) 500.30) (637.000 500.000) Retained earnings. A.000*4) 240.000) 13. unappropriated P393.000 11. A.000) - Apr.000 160.140.000 Net income.000 (440.850. B.400.000) 815.000) Correction of error (note 2) 6. Ans.000.300.000) (1.000 October 2 stock dividends (800.180.000 Contributed capital 2.000 Net income.000 Share premium (750. Ordinary shares issued P21.000 2.000 P197.000*9) (45. at FMV as of 12/31/06 (955.000 – 5. issuance of stocks thru rights exercise (250. (50. B Non-current liabilities (250.000.000) 375.125.040.000 Recapitalization (reduction in par value) 1. 2013 350.218.. A. Treasury shares (50.000 45.150.000 400. (325. 30 200.000 700.000 Reserve for treasury shares (50*5.000) 355. 2.000 Additional paid-in capital 5.000 Balances 2. issuance of stacks thru rights exercise (400.000 Machinery and equipment (330. Ans.700. 2014 treasury stock (30. cash dividends: (2.300.000 – 75.000) (250.560.000 October.000 Jul. appropriated (60.000 Ordinary shares.000 2010 – 2013 Cash dividends (1. 4.000 280.000 Refund of prior year’s income tax 27. Ans.000 December 15.000–100. A.000) 82. Prem.000 Retained earnings.000 Retained earnings.000–250. A. 1 Split (no entry) - May.225.000 + 100.000) Net income.000) 220.000*5%) 40.000) * 25 1.000) 400.000 Prepayments 50.000) 300.500 2. A. 2012 balances 300.000 July 23.000 Retained earnings 197. Ans.740) Dec.500. Ans. 20 (1. Ans.000) 10.000 Building (600. Ans. 3. C.700. December 31.000 1. reissuance of treasury 15.profits (625.000) (164. D.000–50.000*.000+100.000.000. Ans.993.400. C.000 P5.114. Ans. 1.500 2.000 60. 4.000 1. 2014 (750. 25 200.000–3.000 + 50.000 Jan.000 + 4.000–100. 16 (164.000 2. C.000 Net income.500.000 Jan. 2014 800.000) Total stockholders’ equity P26. Retained Outstanding Issued APIC Earnings May.000 P3.000 480.000 1.500) 1. 1 1.000 TOTAL 2.000) 250. retirement of TS (100.000 50% share dividend.000 1. 2014 510.000*2) 800.000+75.125. 5 100.000 February. CHAPTER 9-EXERCISE 14: APAYAO CORPORATION ASSETS Cash and cash equivalents (325.000) June.000 – 50. Ans.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .197.000.000 4.000–140.000 40.000 Marketable securities.000 5.000) 550.000 + 140.000 5. A. #of Shares Ordinary Sh.000 Additional paid in capital P1. 2010 – 2013 Net income P2.500 Treasury shares (5. Land 900. Ans.000 2.000 5.000 CHAPTER 9-EXERCISE 15: WHISPER INC.500 CHAPTER 9-EXERCISE 16: GREY CO.575.000 – 600.000.000 8.997.000*5.000 (1.000 653.000 P300.000 1. Ans.545.150.533. C.000) 2.000 1.000 P21.000–50.000.545. 2012 P125. RE-app RE-unapp TS TOTAL Beginning balance 4.000 Accounts receivable (275. LIABILITIES AND CAPITAL Current liab.000 + 75. 1 778.740) (238.000 Mar.140.000 Appropriation for TS (500.000+3.000 Donated capital (from stockholder) 15.000.000 6.000 2. 1 (238.000) Feb. Ans. Ans. Appropriated for plant expansion (700. Unrealized loss (IS) 57. Ans.000 b. D.000) Correct Unappropriated Accumulated Profits balance P274.548.000 b.000 Share premium 180.400 Understatement of insruance expense. 2.000-P628.200) (31.300 SUMMARY: 1.100 Overstatemetn in 2014 Net Income (P660. Correct valuation of share dividends (336. B. Depreciation expense 3.000 l. Shares issued 100.000) i. Retained earnings 150. 1. Ans.000) c.000 Less: treasury (1.500 e.000 k.300 Inventory.000) h. PPE 36. Loss on treasury share reissue (debited to (375. Ans.000 Prior period errors: (P585.000. d.700 f. end 2014 1.000 (i) Understatement in depreciation in 2013 (3. in 2013 (3.000 3.000 i.000) (140.500 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY . Unadjusted Retained Earnings.401. 2013 2014 Unadjusted net income.000 (e) Decrease in value of marketable sec.000 136.300 d.000 Gain on sale of PPE 7.000 660.300 Bad debt expense 30.000) l. Ans.800) Unrecorded dividend declaration (b) (150. 5.000) (g) Decreasein inventory. Allowance for bad debt 30. Ans. Retained earnings 3. A.300) (h) Understatement in PPE in 2013 36.000 g.000 PPE 45.500 (l) Correcrion of error: prepayment 2. Impairment on property declared as dividend (600.300) (j) Understatement in depreciation in 2014 (3.000 Multiply by fair value 42 Appropriation for share dividends 336. in 2014 (57. D.700 Total assets.000) f.545.000 Retained earnings 5.500 e.254.000 (e) Decrease in value of marketable sec. Ans.200 (c) Decrease in allowance for bad debt 30.200.000) Outstanding shares 80.000 – 450. net of gain from TST (375. end 2014 (18.000 j.300 c.300) (h) Overstatement of repairs expense in 2013 36. Accumulated depr 52.000 shares k.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 132 of 155 CHAPTER 9-EXERCISE 17: SCURBS CORPORATION ADJUSTING JOURNAL ENTRIES a.000 i.000 4.300 Share dividends payable 150. Total net income since incorporation P3. in 2013 9.000) 12. Share issuance expense (45. B.000) e. 2014 7. Marketable securities 9. 585.300) (k) Correction error: PPE disposal in 2014 7.000 Accumulated Depr 3.000 (g) Understatement in inventory. Retained earnings 12.000 (d) Increase in value of marketable sec. 3. Prepayment 2.200 4. Income summary 18.500 (l) Overstatement of insurance expense. in 2013 9. in 2014 (57. 2014 unadjusted 2.100) 35.000 Accumulated Depr.000) APIC 456. Share premium in excess of par from issued215. 3. in 2014 (3. Proceeds from sale of donated stocks 150.500 2.300) (k) Understatement in gain on sale of equipment.700) Adjusted Net Income 620.000) f) j. Note that the property dividends shall be measured on the declaration at FMV which is equal to the FMV of asset declared as dividends.000) Appropriation for property dividend at impaired value (450.000 (c) Decrease in bad debts in 2014 30.500 Retained earnings 9.000-P620. Ordinary shares 180.000 – 200. Loss on treasury share reissue. Gain on treasury share transaction 375. Ans. A. Ans. end 2014 (18.300) (j) Depreciation of PPE in tem h.400 Income summary 12.000. Total cash dividends paid (150.000/50) (20.000) (f) Overstatement in inventory.000 – 515. 2014 adjusted 2. D.000 h. end 2013 (12.000 Retained earnings 36.700 Insurance expense 2.. a. Share premium from share dividends (336. small 8. D. end 18.000) Adjusted Retained Earnings. end 2014 1.000 (i) Depreciation of PPE in item h. Total assets.300 CHAPTER 9-EXERCISE 18: GBC INC. 2013 5. Appropriated for remaining treasury shares at cost P50/share (1. B.000 Marketable securities 57.000) (150.000 Multiply by 10% Dividends distributable.100 628.000 (d) Increase in value of marketable sec. 2014 (2. 000 b. a.000 2. Property Dividends (see entries above) (1.400.000) g.000 Gain on sale of treasury.000 NET INCOME 443.000 Donation from stockholder 52.000 Dividends payable 100. UNAPP.200. Ans.000) Gain on settlement of the property dividends 100. A. Noncurrent Asset Held for Disposal 900.000 Gain on sale of own shares 12.000) *Appropriation for treasury stock (30. Ans.000 Correction of prior period error (15. Ans.000 Gain on sale of property 23.000 Dividends payable 900. Ans. Stock dividends (see entries above) (840. unadjusted 300.000) Proceeds from life insurance 150. D. Ans.000 APIC 167. APIC.000) (100.000-400.000*10%)*42 840.000 d. 1.200.000) e.000 2.000 ACCUM PROFITS.000 Share premium 340. Appropriation for plant expansion (700. A.000 Payment: Retained earnings 100. Ans.000) Correct net income 443. Net income.000 Loss 300.000. Capital loss from treasury shares reissue (300. beginning 200.000) Appropriation for bond redemption (20. Ans.000 3. ENTRIES STOCK DIVIDENDS Declaration: Retained earnings (200. ENTRIES: PROPERTY DIVIDENDS Declaration: Retained earnings 900. A.000 Payment: Dividends payable 500.000) c. Cash dividends since 2013 (300.unappropriated balance 2. Accumulated profits. A. net 3.060.000 CHAPTER 9: AUDIT OF STOCKHOLDERS' EQUITY .000 Ordinary shares 500.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 133 of 155 CHAPTER 9-EXERCISE 19: MAMA CORP.000 Gain 100.000 CHAPTER 9-EXERCISE 20: TAR CO.000 4.000) Accumulated profits .000 Noncurrent Asset Held for Disposal 900. A.000 1.000*25) 500.000) Dividends to ordinary (50. D.000 3.000 Profit sharing of employees (30. Dividends payable (20.000) Dividends to preference (40.000.000 Equipment 1.000 Dividends payable 1. unadjusted 100.000) Adjustments to Net income in relation to the property dividends Loss on reclassification of Equipment to held for disposal (300. Total net income since 2013 6.000*P40) (1. 518. 000 4.000 Share capital 3. unadjusted 4.100.000) Dividend receivable (40. Profits.000 3. (d) 4.000 Inventory 1. P3.000*10%) 25.000) Accounts payable 900.000 150.000 Treasury shares (250.000) Discount on bonds payable 200.500 1.500 1.000 (b) Property taxes for the current year (25.000 Patent 200.500 Treasury shares (a) (250. unappropriated.500 Bonds payable 2. adjusted 400.000) Dividend receivable (a) 40.000 4.000 200.000.000 (200.950.000) Adjusted balances 3.000 Prepaid expenses 160.000 400. unadjusted 5.000 Land (b) 525.012. Ans.000 Accumulated depreciation 300.500 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .000) Financial asset at fair value.000. Ans.000 Accrued interest on bonds payable (d) 60.000 Financial assets at fair value (a) 690.000) *charged to RE Building in progress.000 Accrued expenses 150.000 6.500 *charged to RE Total interest payable on notes 52.000 750.000 (c) Notes payable.000 800.000 Building in process (b) 5.000 Interest in 2013 (P250.762.000*12%*3/12) 60.000 2.000 (50.762.000 4.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 134 of 155 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION DISCUSSION PROBLEMS CHAPTER 10-PROBLEM 1: ABC CORPORATION Current Noncurrent Current Noncurrent SHE Asset Asset Liabilities Liabilities Cash 800.000 Accounts receivable 750. 2.000 Land including property taxes in arrears (525. 3.950.875.000. adjusted 3. 5.000 Allowance for doubtful accounts 50.000 Interest in 2014 (P275.000 1. Accumulated profits.000 (300.500 *charged to RE (d) Accrued interest on bonds payable (P2.500.000 Accumulated profits (b).500.000 160.800. Ans.500.000 1.000 6. principal 250.000.000) Appropriation for Treasury shares (250.000.000) Accum.412.500. 10% (c) 250. adjusted 4.000) Interest on notes in 2014 (27.500.000 Accrued interest on notes payable (c) 52. Ans.000) (c) Interest on notes in 2013 (25.000 250. Ans. unadjusted 690.000 900.762.150. Audit notes: (a) Financial asset at fair value.000 Machinery and equipment 1.500) (d) Unaccrued interest on bonds in 2014 (60.000 (b) Building in progress.000 1.000 Note payable.000.150.000.000*10%) 27.000) Property tax expense (25. (c). Ans.000 (100.000 (100. 4.000 Accrued expenses 60.000 1.000 Less: Cost of Sales Note 2 (6.000 (140.000 500. Ans.000 60.000 (1.000 1.current portion 100. P50.000 Other income Note 4 210.560. 2015 (Note b) 500.000 50. Ans. 3.000 300.000 Retained earnings app. CHAPTER 10-PROBLEM 3: SCR COMPANY Current Noncurrent Current Noncurrent SHE Asset Asset Liabilities Liabilities Unadjusted balances 6.000 (2.670. Ans.000 1.000 3.200.600.000 900. Ans.000. Ans.000 Mortgage payable.000) 600.580.000) 1. 3. 5.000 quarterly 2.000 1.000 Adjusted balances 2.000 1.000 Unearned leasehold income -current portion 140.800.000) 500.000) Financial asset at fair value through profit/loss 800.000) Adjusted balances 4.150.400.000) Land. net def. 2.000 Retained earnings.000 5.806. Ans.000 Share premium 300.000.000) Store supplies 100.000 Loss on inventory write-down (200.800.000 Trademark 150.000 100. tax asset. P100. net of tax 70.000 Accumulated depreciation – building 2.000 Def.000 1.000.500.000 14.000) Equipment 3.000 Accumulated depreciation – equipment 1.000 1.470.300.000 Accounts receivable 800.000 150.000 1.000 3.000 Prepaid expenses 100.000) Net income before tax 2.000 1.650. for contingencies 100.200.000 Total comprehensive income 2.000 800. net of tax 140.400.000 Land.000 500.000.000 400. tax liability.230.000 Interest expense 400.700.000 12.230.000 1. unappropriated 1.000.740. Current Noncurrent Current Noncurrent SHE Asset Asset Liabilities Liabilities Cash 400.000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .000.000 Income tax payable 50.000 Allowance for doubtful accounts 50.000) Net income after tax 1.000 Building 3. for plant expansion 1.000. Ans.000 Accounts payable 350.000 Total income 6.750.000) Gross profit 5.000 100.366. Ans.000 Share capital 3.000 2.000 (100.000.000 General and administrative expenses Note 6 850.000 Estimated liability for damages 140.000 400.350.000 Bank loan payable – June 30.000 Other income Note 4 210.000 11.000) (600.000.000 560.000 2.000 4.300.000 Less: Operating expenses Selling expenses Note 5 1.000 750. net of tax 350.000 Notes payable 750.000 (800. Ans.460.000.000 Secret processes and formulas 200.350. Ans. 2.000 Revaluation surplus.000 (50.820.000.000) Treasury shares (600.000 5.000) Share premium (500. Other comprehensive income/loss: Unrealized holding gain on financial asset.000 50.000 Share from net income of associate Note 3 170.000) (200. 4.000 Retained earnings app.000 100.000 2.000 150.000 Investment property at cost (1.000) 1.000 200.000) Investment in associate 1.000 Serial bonds payable . Statement of Comprehensive Income (Expenses according to nature) Note # Net Sales Note 1 12.150.000 14. CHAPTER 10-PROBLEM 4: ABC COMPANY Statement of Comprehensive Income (Expenses according to function) Note # Net Sales Note 1 12.800.000 3.300.000 140.000 350.000 Unrealized holding loss from financial asset 400.000 Foreign translation gain.200.000) Stock dividends payable (300.300.050.000.000) 300.000 Share from net income of associate Note 3 170.000 Restricted foreign deposit (600. for speculation at FMV (Note a) 1. plant site 500.000 (3. Ans.000) Inventories at cost (NRV is P900.000 Income tax expense (30%) (774.000.400.000 7. 5.000.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 135 of 155 CHAPTER 10-PROBLEM 2: RCW CORP. net of tax 140.000 Total manufacturing cost 6.000 Total comprehensive income 2.000 Add: Finished goods inventory.. December 31 (1.000 Salaries 900.400.000 Rent 200.000) 5. net of tax 350.000 Add: Work-in process inventory.000 Supplies 600.000 Income tax expense (30%) (774.000 Net purchases Note 2 5.000 Cost of goods placed into process 7.000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .000 Less: Work-in process inventory.000 Utilities (P400. January 1.000 Factory overhead: Depreciation (P1.140. December 31.000*40%) 480. Ans Less: Operating expenses (Increase)Decrease in inventories Note 7 390.000 Royalty income 90.540.000 Note 4: Other income Rent income 120.520. Note 3: Share from Net Income of Associate XYZ Inc.000) Cost of goods manufactured 6.000*30%) 270.610.000 Total other income 210.000 Depreciation 1.000 3.000) Purchase discounts (150. Ans.000 Less: Purchase returns and allowances (310.000 Less: Finished goods inventory. Ans.290.000 1.000 760.200.000 Utilities 400. net of tax 70. 920.000 Add: Freight-in 200.000 4.100.000*40%) 160.000) Cost of goods sold 6.000 (10.000) Sales discounts (250.000 Raw materials available for use 6.580.000 Add: Net purchases Gross purchases 5.000 Revaluation surplus.366.000 Supplies (P600.000 Unrealized holding loss on financial asset 400.000.000) Net Sales 12. (980.000 Interest expense 400.440. December 31.000 Freight-out 250. Net Income for 2014 850. SUPPLEMENTARY NOTES: Note 1: Net Sales Gross sales 13. (800.000 Direct labor (P900.340.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 136 of 155 Total income before expenses 12. Ans. 1.140. January 1.000 Proportionate share 20% Share from net income of associate 170. 1.000 Less: Raw materials.560.000 Less: Sales returns and allowances (520.000 Note 2: Cost of Sales Raw materials inventory.490.000) Raw materials used 5.030.000 Advertising 150.200.000 5.806.000 Cost of goods available for sale 7.200.230. Other comprehensive income/loss: Unrealized holding gain on financial asset.000 560.000) Net income before tax 2.000*20%) 120.150.000 Foreign translation gain.000) Net income after tax 1. January 1. 000 1.000 3. Ans. 2016 2.400.000 Total selling expenses 1. 2014 3.000 CHAPTER 10-PROBLEM 5: UTV CORP.000 Utilities (P400.380.000 560.000 180. 1/1/14 280.000 Building 6. recognized in Jan.000 600.000 Selling expenses 1.000*25%) 100.100.000 (1.820.000 Cost of sales 6.000 Finished goods 1.000 Allowance for doubtful accounts 40.000 2.000*35%) 420.400.000 Finished goods 980. 2.000 120.000 Dividend declared and paid Balances 3.000.000 Sales 10.600.300.400.000.400.000*40%) 360.000 Accounts receivable 900.000 400. 2013 1.000 2.000 Advertising expense 150.000 Note 7: Increase/Decrease in Inventories Inventories.000*25%) 300.000 1.000 Total general and administrative expenses 850.000 2. Ans. January 1: Raw materials 1. bank – due June 30.000 Salaries (P900.000 Supplies (P600.000 Warranty liabilities 80.000.000.000 Income tax expense 160.000 80.400.000 Finance cost 100.000) Plant and equipment 2.000.000 Work-in process 1.000 6.000 Employee benefit provisions 180.000 1.000 1. 2015 1.000 2. January 1.000*35%) 140.000 2.400.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 137 of 155 Note 5: Selling Expenses Depreciation (P1.000*50%) 300.000 800. Ans.000 Finished goods 1.000 Work-in process 920.000 2.000 Net Income 1. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION . December 31: Raw materials 800.000 Financial assets at fair value through OCI 2.000 Accumulated profits.000 900.000 280.000 1.100.000 Goods in process 600.880.960.000 Decrase in inventories 390.500.500.000 Land. at fair market value 12/31/14 1.000 Share premium. Noncurrent Current Noncurrent Current Asset Assets Liabilities Liabilities Cash and cash equivalents 400.000 Accounts payable 1.820. Ans. Ans.100.000) Raw materials 560.000.000 Revaluation surplus on Land during the year 140.000 Note payable.150.000 Goodwill.000*30%) 270.000. 1.000 12.000 Unrealized gain on financial assets.000.000 Unrealized gain on financial asset for the year 100.200. 2014 360.200. 3.000 Note payable.270.000 Bank overdraft 100.000 100.000 Income tax payable 120.600. bank – due June 30.000 Supplies (P600.000 Utilities (P400.000) Patent 800. January 1.000 Accumulated depreciation – Plant and Eqpt.000 Freight out 250.000*30%) 180.200. 400.000 Accumulated depreciation – building 1.300. 4. Note 6: General and Administrative Expenses Depreciation (P1.000 Deferred tax liability 280.000 Inventories.000 Rent expense 200.600.000 2.000 (400.000 Salaries (P900.000 Share capital 5.000 Administrative expenses 500.000 Revaluation surplus on Land.100.000 (40.780.000.000. 800.000 2.160. Ans.000) Cash paid for operating expenses (1. 1. Collections from customers P7.000 4. P7.000.000 Share premium.700.000. Ans.350. January 1.000.550.185.800. Ans.025. bank – due June 30.280.000 140.250.000) Collections from customers P7.000 Total Comprehensive Income 1.000 Unrealized gain on financial assets. 7.800.000 Accumulated Profits 3.000 1.000) 1.000 Increase in accounts receivable (P1.000. 2013 Note payable.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 138 of 155 Continued… Total Compre.000) Income tax expense (160.000.125.520.000 Share capital 5.960.000 1.000 Cash used in investing activities (P2.880.750.000 Operating expenses P1.000) Increase in equipment (P8.760.880. 2016 Accounts payable Employee benefit provisions Warranty liabilities Income tax payable Deferred tax liability Accumulated profits.000 Sale of equipment 45.000.000) Finance cost (100.000-P1. Patent Goodwill. Ans.000)1 Sale of land 495.000.000 Cost of sales (6.025.350.000 100. bank – due June 30. 6.275.000) Cash provided by operating activities P4. Purchase of equipment (P2.000) Administrative expenses (500.000 3.000 Cash disbursed for purchases (2.000) Cash disbursed for purchases P2.00-P1.000) Cash paid for operating expenses P1.000-675.280.485. CHAPTER 10-PROBLEM 6: THEODORE COMPANY 1.485.000 P6.935.000-P1.000 Increase in accrued expenses payable (225.000) Balances Net Income 1.000) Selling expenses (1. 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.000 3. 1/1/14 280.700.000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .485.025. P2.000) (450.000 Revaluation surplus on Land.000 Unrealized gain on financial asset for the year 100.000 Purchases 2. January 1. 2015 Note payable.280.000 Stockholders' Equity 10. at fair market value 12/31/14 Building Accumulated depreciation – building Plant and equipment Accumulated depreciation – Plant and Eqpt. Net Income Income Accum.185.000 Increase in accounts payable (P2.000.925. Ans.000- P1. Ans.000) Dividend declared and paid (1.500.000) (900. P2.000. P4.575. 2014 360.000 Purchase of equipment P2.000 Sales 10.700. Cost of goods sold P1.000) Add: Cost of equipment sold 900. 2014 3. recognized in Jan.000 Increase in inventory (P2. Sales revenue P7.275.000) (900.600.000 5.160. Ans.000 Revaluation surplus on Land during the year 140. 000 Proceeds from sale of land P495. 4.000 (180.000 (P900.000) 3.000) dividends paid CHAPTER 10-PROBLEM 7: SARI-SARI COMPANY 1.000) Cash provided by operating activities 920.000) Appropriations: Plant expansion 400.000) (35.000) December 31.000) Cash used in investing activities (1. Ans.900.000) Cash provided by financing activities 205.676.000.000 Payment of dividends (P500.000 CHAPTER 10-PROBLEM 8: ABC CORP. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION . Ans.000 Increase in cash for the year 120.000-110.000.000 Carrying value of equipment sold P90. Net income 790.000x10%) Less: Loss on sale of equipment 45.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 139 of 155 Increase in lease-liability—Land P450.000)+(P3*78.000 Proceeds from short-term bank debt 325.000.000) (20.000 (400. balances 4.946.800.000) (200.000 Proceeds from sale of equipment 45.000 2.000-P100. P920. Ans.000) 10. P1.200.000 (650. Ans.550. 3.000) Accounts payable and accrued liabilities. Ans.000- 225.000 2. Ans.000 Share issuance 1. Ans. decrease (5.005.000) Carrying value of land sold 225.000) Adj: Non-cash (income)/expenses Depreciation expense 250. Proceeds from sale of Building 350.000 5.000 Adj: Decrease/(Increase) in Working Capital Inventory.000) - Comprehensive income Net income 1.000 4. Cash used in financing activities-cash (P1.000 (180.000) - Cash dividends (P12*5. Proceeds from share issuance 220.000-160.000 Summary: Cash provided by operating activities 920.005.000) (300.000) (340.000 - Dividends declaration: Share dividends (20%*65.000.000 Less: Increase in land (P2.000) (1.000 Treasury shares reaquisition (300.000. STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE Profits-Unapp Shares January 1.000+600.000 Add: Gain on sale of land 270.005.000.000 Other comprehensive income (200.000 1.190.000 1.000) Cash provided by financing activities 205. P1.000) Purchase of Available for sale securities (300.025. P205.350.000 Adj: Non-operating (gain)/loss Gain on sale of LT investment (P135.350.000 Cash used in investing activities (1.000 Proceeds from sale of LT Investment 135.000sh)*P50 650.200.000 1.000 9.000 Purchase of Plant assets (P700.540.000 2. 2. Ans.000) (294. balances 3.000.000) - Treasury shares 180.540.000) (294.000 1.000) 120.000) Treasury shares retirement (100.000. increase (80.000 3. Cash (184.000 1.000 Adjustment (inventory LCNRV) (3.000) Increase in FMV of financial asset at fair value 150.000) Reversal of appropriation Treasury shares (270.600.025. 18.000) (260.000) (600.000 (500.000 110.250.480 – 4. D. Ans.000) (275. Ans.000 Furniture and fixtures.000 8.090.000 Prepaid Insurance 12. Ans.600) 80.000 7.000) 270.000) 270.000.000) Share issuance from exercise of rights 1. Ans.000) 14.600. Ans.000 Inventory write-down (to NRV which is lower) (100.000) (100.000*80%) 72.000 7. C.000) Mortgage payable 4. 1.000) (500.000 3.000) Appropriated for bond treatment 50. Share capital (4. MULTIPLE CHOICE EXERCISES: CHAPTER 10-EXERCISE 1: KALAMANSI INC. Ans.000) (180.000 (270.125–72. Ans. 3.000) Current tax payable 200.000) (750. Ans.000 2.000 Total retained earnings P341.000.050.310.600 – 34. balances 8.125) 80. 3.000 4.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 140 of 155 CHAPTER 10-PROBLEM 9: GLORIA CORPORATION STATEMENT OF CHANGES IN EQUITY Share Capital Reserves Accumulated Treasury Total SHE Profits-Unapp Shares January 1.000) (100.355 Inventory at NRV (90.000 - Comprehensive income Net income 2.000 690. Ans. Land P167.600.000) - Overstatement in rent income in 2013 (275.000 - Dividends declaration: Property dividends (10.000 Accumulated depreciation on the building (600.950. D.035.000 Accounts receivable (84. 4.000) 200.000 3.000 4. net (114. A.000 2.000*10) P40.000 5. Ans.000) 330.875 Total SHE P811.000 4.405 Advances 12.000 Bank overdraft 200.600. Accounts payable P23.000 2.000 Paid-in capital in excess of par 430.000 Share issuance from exercise of options 400.000 – 45. 5.000) Cash dividends (P10%*P100*18.875 5.000 200.000 200.000 Prior period adjustment: Unrecorded 2011-2013 options 200. Ans. Ans.000 .000 3.000 150.000sh*P75) (750.000 Building. 4.000 (200. 2.000 3.000 9.000 Total PPE P577.000 Interest payable 400.920) P83.000 Total current assets P247.480. Ans. 2.000 (200.000 December 31. A.615.000 1.000sh) (180.000 1.000 Allowance for bad debts/bad debt expense (260.000) Goodwill (200. B. balances 6.000 Short term portion of serial bonds 50.000) (600.000 150.000.000 Treasury shares retirement (150.920 – 101.000) (260.000 Other comprehensive income 110. C. B.000 640. 6. Profits Unadjusted balances 8. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .000.400.000 Salaries payable/Salaries expense 500.595 Interest payable 8.260. Ans.000) (120. B.000 400.790.000 Total Current liabilities P94.000 3.000) Adjusted balances 7. Noncurrent Current Noncurrent Current Asset Assets Liabilities Liabilities SHE Accum. c. C.00 Total retained earnings 341.000 5. Unappropriated retained earnings P295.000.195. net (375.730.875 CHAPTER 10-EXERCISE 2:ETT INC.000.125) (75.000 240. C.300.355 2. 850. Non-current liabilities (250.670.000 3. 45. 5. Ans. Inventory 750.P3.000sh*25) 100. A. B.000) 300.77218) 231.000 2. B. A.432.000 775.000 Other Assets Bond retirement (600.000) Net Income for the year 1.701.765.000 Inventory 2.180.000 Advances to officers (past due) (600.000+3. Cash 775.000sh) 815. 500.000 Net sales and other revenues 13.000) 400.000-250. LIABILITIES AND CAPITAL Current liabilities (325.000) Prepaid expense 30.000 5.000 3.000 TOTAL CURRENT ASSETS P1.250.000 Financial Asset at Fair value through P&L 170. sent on consignment: (P100.000) 129.000-50.007 Credit balance 45.000 × 25%) 25.000 Prepayments 50.000 ×125% × 92% .000 Compensating balance (300.000 Marketable securities (955.850.125.000 shares issued (1. 1.000 Income taxes payable (654.000-600.085.000 Ordinary shares.000) TOTAL NONCURRENT ASSETS 1. Accounts payable and accrued liabilities 1.917431)) 91. 2.000 Share dividends payable (4.743 Non-current portion: 2016:(P200.000 Retained earnings.000) 600.000 Reserve for treasury shares 250.000 Total current liabilities 1.000) 300.000) 375.000 Costs and expenses 11.180.000 × 125%) (125.000 2.000 Accounts receivable (275.000 TOTAL ASSETS 2. A.000 Treasury shares (500. B.000-3. Ans.000sh*(60-25))-((750. 12/31/14 4.000 Reserve for depreciation – Building (50.000 Share premium (750.000 × .450.000) 353.000 1.000 LT Investment Account receivable 930.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 141 of 155 CHAPTER 10-EXERCISE 3: JACOB CORPORATION ASSETS Cash and cash equivalents (325.695.000)*5.000-140.000 Total current assets 5.360. A.000 Building 600.197.555. B.000) Increase in value of AFS 50.000+75.000-125.830.000+50. TOTAL LIABILITIES P653.000-250.000) (250. Land 900. Ans.000 Reserve for self insurance 75.000 (30.000 Reserve for depreciation – Machinery and equipment (110.000) TOTAL SHE 2. TOTAL 2.000 Accounts receivable (net) 2. Ans.000+100. D.976.180.000) Machinery and equipment 330. CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .654 Other Assets Mdse.000/50.040.250 425.000 2.000) 355. (150.000+100.000) 82.000) Current portion of past due: 2015: (P100. Ans.000 1.000+75.84168) 168.000 Note that the installment receivable from customer is classified as current since it is a trade payable.000-100.000) 83. Ans. C.000) 1.336 Other Assets 2017: (P300.526.000 LT Investment Contingency fund (500. Ans.000-100.000 TOTAL CONTRIBUTED CAPITAL 2. Ans.000 Net income before tax 2. Ans. P25 par.000 4.000 Income tax expense (30%) (654. 1/1/14 3.000 Investment 763.000+(4. Ans B.000-525.000-50.990 4.000 CHAPTER 10-EXERCISE 5: TORRES COMPANY Current Non-current Cash 1.000 Accumulated profits (625.000 LT Investment Total 1.000 × .000 x .000 CHAPTER 10-EXERCISE 4: REESE CORP. Ans. Retained earnings. Ans. Ans.000 3.000) 365.000) Due from consignee: (P75. D.000 On consignment (P100. C.000 633.765. 000) Net cash provided by operating activities P1. Ans.400.500.000) Unrealized holding loss on trading securities (48.000) Interest expense 2.000 (800.000 3.000.000 2..000) Loss on sale of equipment (12.300. Jan 1. B.200.200.000.100.000. Accumulated profits. A.000.000 1. Ans. January 1 (adjusted) 3.000 400.400.000.308.400.000.500.000 Gain on expropriation of asset 2.344.800.000 700.000 Gain on sale of trading securities 144.000.000. net of income 1.000.000 Merchandise Inventory. net of income tax Investment income – equity method 3.000-87.000 2.500.000. 2014 4.250 3. 1.000) Sales returns and allowance 1.000 Less: Increase in appropriations for expansion (180.000 Increase in inventories (337. A.000 (550.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 142 of 155 CHAPTER 10-EXERCISE 6: KATZ CORP.000) value of P5.400.400. Ans.000 Other Comprehensive Income 2.250. 12.900. C.000 CHAPTER 10-EXERCISE 7: NAM COMPANY 1. December 31 3.000 Gain on sale of equipment (P100.500 Depreciation for 2014 P375.000 (1.000 debt Foreign translation adjustment.000 Selling and administrative expenses (3.100.000 2.000 4.000 Reversal of approp for Treasury 60.000) CHAPTER 10-EXERCISE 8:RAVEN CORPORATION 1.200.000 Cost of Sales 29.000 Cost of goods sold (6.000 Accumulated Profits.000 (2.000.075.000 Purchases 32.000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .500) (12.000 (2. net of Revaluation 700. Accumulated Cost of Sales Net Income Income Income Profits Sales 53.900. (750.000-P87.000.000) Decrease in accounts receivable 100.300.200.000 (1. D. Net income P925. Ans. Net cash used in financing activities (Dividends paid) (P250. beginning error.000.000) losses.000.600*30%)*P10 (712.750 Net cash used in investing activities P556.100.300.000 9. Other Comp.000) Accumulated profits.000 1.000.000 (3. 31 (943. 2014 4.000) Distribution costs 5. Sales 10.000 (5.000) Proceeds from sale of land with a carrying 4.000) Gross profit 4.000. Total Com.000 Merchandise Inventory.912.000) Net income after tax 528. Ans. January 1. Dec.000) General and administrative expenses 4. Ans.600.000) Gain on early extinguishment of long-term 500. Ans. 31.000 income tax loss on financial assets at fair Unrealized value through other comprehensive income or 550.000 Depreciation (see note below) 375.000 (29. unapp.000 Total Comprehensive Income 3.000) Stock dividends declaration (237.000) Purchase returns and allowance 800.000.000 3.000) Net Income 1. Dec.000 32. B.444. B. B. D.000) Principal collection of loan receivable 93.000 53.000 (4.500) Share from net income of associate (P300.000. Ans.000. 2014 1. Proceeds from sale of equipment P100.000 Cash dividend declaration 96.000 (1.000 Loan to Ari Co.000 Dividends declared 1.200) Less: Net income for the year 528.000 500. 9.000) Net income before tax 948.000 (5. Ans.000 9.000 Sales discount 2.500) Increase in accounts payable 150.452.000) 312.000.000) Correction of merchandise inventory.500 Accumulated depreciation of equipment sold (150.000 Total 4.000 tax – credit surplus for the period.000*25%) (75.250.468.500) 62. 10.000 Income taxes (420.000 Increase in accumulated depreciation (2.800) Accumulated profits.000 (500.000 Income tax expense 5.000 Decrease in income taxes payable (50.500-2.000) Purchase discount 1.776. unapp. net of income tax – credit 400. 000 Share premium. C. B. Proceeds from sale of equipment 84. Equipment.312. Dec.800) Share premium from treasury shares reissue (12.256.000 Non cash expenses/income Depreciation expense . 2013 60.000 Income tax benefit (Decrease in Def. 31.000) Inventories 108. Decrease in Trading securities 360.520.000) Share issuance 2. A. C.000) 2.000 4.000 2.000) Accounts payable (60. 31. 2014 1.000 Increase in Share capital and share premium 3. 2013 2.000 6.000 Unrealized loss on trading securities (48.000 Bad debt expense 36.000) 60.000) 10.872.000 Equipment. D.000 Proceeds from treasury shares reissue 72.600*30%)*10 (712.000 Payment of dividends (96.000 8. Payment of serial notes payable (240.400.000 Total equipment acquired during the year 1. Ans. Dec.392.000 .000 9.200.800 Share premium.040.000) Total cash payment made for equipment acquisition] 1.000 Total 5.000 Add:Gain on sale of Trading securities 144. Net Income 528. Ans.60.200.520. A.000) Sale of equipment 84.000) Overhaul on equipment (72.Bldg 45.000 Changes in working capital Trading security 360.000) Accrued expenses 111. Ans.000 CHAPTER 10: FINANCIAL STATEMENTS PRESENTATION .000 Prepaid Insurance (6. Ans. 31. B. 31. Dec. end 3. Ans.000 Equipment acquired through note issuance (600.000) Proceeds from issuance of shares 2. Ans. beg 2.732.460.600 Income tax payable 300.000 Add: Loss on sale of equipment 12. Decrase in treasury shares (120. Dec. 2014 4.000 Carrying Value of eqiupment sold 96.000 Share premium on treasury shares reissue 12.000) Overhaul of equipment (72.000 Amortization of bond discount 6.000 Accounts receivable (576.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 143 of 155 3. Ans.000) Net cash provided by operating activities 996.000 Depreciaiton expense .000 5.000 Add: Cost of disposed equipment 180.Equipment 303.000 Treasury shares reissuance 72.188.244. Share capital.704.000 (1. Ans.000 Increase in equipment 1. tax liab) (75.800 Less: Share capital.692.000) Proceeds from sale of Trading securities 456. Purchase of equipment (1.000 Unearned Income (96.600) Non operating income/expense Loss on sale of equipment 12.000 7.800 Share dividends (237. C. 000 D. under 2012 12. 4.000 (22.000 (7.000 12.000) Advances from customers.000 (22.000) 14. Accrued income. under 2013 (14. CHAPTER 11: ERROR CORRECTION.000) (24.000) (80.000 220.000 Prepaid insurance. CHAPTER 11-PROBLEM 2: MASIGLA COMPANY 2012 NI 2013 NI 2014 NI 2014 RE. over 2013 (30.000) C.000) (25.000) Unearned income. 6.000) (15. under 2013 3. 5.000) 1. under 2013 10. Equipment.000 134.000) 31.000) 11. Ans. under 2014 (15.000) (10.000) (21.000) (20.000) 30. under 2013 14.000) 13.000 (3. under 2012 16. END 2014 WC A.000 D.000 (21. over 2012 (50.000) (40.000) (22.000) B.000) Prepaid expense.000 (4. under 2012 (15.000 (10. under 2014 5.000) E.000) 50.000 (12.000 5. Salaries payable.000 Depr Expense.000) (30. Prepaid expense. 2. Ending Invenotry. under 2014 16. under 2012 (15. over/Expense under (each year) (60.000 5.000) B. under 2014 6.000 Ending Inventory.000 6. under (2014 Equipment) (22.000 AP/Purchases. under 2014 (5.000) (40.000) 22.000) 12. under 2013 (12. under 2014 3. Unearned income.000) (10. under (2013 Equipment) (24.000 (30.000 Unearned income. under 2013 (7.000) AP/Purchases.000) 10.000) 3. under 2013 12. Ans. CHAPTER 11-PROBLEM 3: AMICI COMPANY 2013 NI 2014 NI 2014 RE.000) Ending Invenotry. under 2012 8.000 Accrued income.000) 1.000 370. over (on 2014 Equipment) 16. 3. under 2014 (10.000 (12.000) 9. under 2014 (10.000 (9.000) (10.000) 12.000) 4. over 2014 (40. under 2014 (25.000) (22. 6.000 268. AP/Purchases.000 ADJUSTED BALANCES/EFFECT OF ERRORS 157. Ans. END 2014 WC A.000 (14.000) EFFECT OF ERRORS 152.000 440.000) 12.000 12. 5.ACCRUAL DISCUSSION PROBLEMS CHAPTER 11-PROBLEM 1: SAFARI COMPANY 2012 NI 2013 NI 2014 NI 2014 RE. under 2013 (12. under 2013 9. Ans.000) 14. 4. Ans.000) Accrued expense.000 (12.000 3.000 660.000) 3. Ans.000 7.000 16. CASH/ACCRUAL AND SINGLE ENTRY . Advances from customers. under 2014 5.000 16. under/Expense.000) 1.000 (16.000 6. under 2014 8.000 A. Ans.000 8. Ans.000 Prepaid expense.000 AR/Sales.000 Advances to suppliers. Ending Inventory. 3.000 8.000 (14.000) Prepaid insurance.000 (25. under (2012 Equipment) (20.000) (10.000) Depr Expense. over per year 200. Ans.000 240.000 Unearned rental income. under 2012 25. over (on 2013 Equipment) 12. Ans.000 (88.000 Depr Expense.000 5. under 2013 22.000 C. Ans.000) (24.000 (26. 2.000 (13. Advances to suppliers.000 D. under 2013 (13. AR/Sales. 5. Ans.000 Accrued interest income. under 2013 4.000 Accrued expense. under 2013 (31.000) 7. BEG 2014 RE.000 (12. Ans.000 C.000) (20.000) EFFECT OF ERRORS (2.000) Unearned rental income.000 (8. Accrued expense.000 B.000) (40. Ans. under 2012 (11.000) Salaries payable. BEG 2014 WC Unadjusted balances 245.000) (22. 3. 2.000) 1.000) (60.000 218.000) AR/Sales.000) 15. BEG 2014 RE.000 (31.000) 15.000 504. Ans.000) Depr Expense.000) Ending Inventory.000) Accrued interest income. under 2014 (22.000) Accrued income.000) (5.000) (60.000) Depr Expense. Equipment. under 2014 7.000 Ending Invenotry.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 144 of 155 CHAPTER 11: ERROR CORRECTION AND CASH.000) (48.000 310. Ans. Ans.000 Add: AR.000 Add: AR. beg 2013 - Adjusted NI.000) Cost of sales 2. Ans. ending (40.000 Sales returns.000 Less: Inventory. beginning balances (415.670.000 Total 345.000 Sales returns. Ans.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 145 of 155 Retained earnings.400. ending (45.000 2.000 Purchase discounts 45. ending balance 550.000 Cash basis royalty income 200. Cash basis purchases 2.000 Total 2. ending 85.000 CHAPTER 11-PROBLEM 6: BECKER COMPANY Ans.980. beginning balance (600.980. Cash basis sales 1.000 6.000) Retained earnings.000. beginning 55.000. beginning 60. end 2013 82.500.000 Prepaid royalties. Ans.000) Accrual basis gross sales 2.000) Purchase returns (80. 2013 157.260.000 CHAPTER 11: ERROR CORRECTION. ending 75. ending balance 800. no refund 60.000) Accrual basis royalty income 215. P2.800. beginning (90.000) Accrual basis gross purchases 2. Cash basis sales 1. Ans. no refund 55. P2. P305.000 Less: Royalty receivables.000 Total 3.000) Accrual basis gross sales 2.000 Less: Royalty payables.000 Unearned royalties. end (325. P215.000) Prepaid royalties. P2.000 Adjusted NI.000. 1. beginning balances (415.000 CHAPTER 11-PROBLEM 7: XYZ COMPANY Ans. beginning 250.000 2. Gross purchases 2.260.600.000) Accrual basis royalty income 305.000 Sales discounts 80. end 2014 275.000 Dividends declared and paid in 2014 (75.000 Cash basis royalty expense 300.800.000 Add: Royalty receivables.000 Dividends declared and paid in 2013 (75.000 Total 430.255.000 Add: Royalty payables.000 Less: AR.925.000 Less: Purchase discount (45. CASH/ACCRUAL AND SINGLE ENTRY .000.000 Purchase returns.675.695.000) Net purchases 2. P2. CHAPTER 11-PROBLEM 4: SOLID COMPANY 1.800.000 Add: AP.000 Total 2.000 Write-off of AR 25.000 CHAPTER 11-PROBLEM 5: DEISEL CORP.600. ending balance 550.000 Add: Inventory.000 Less: AP.000 Less: AR. 2014 268. no refund 60.000 Cost of goods available for sale 2. beginning (80.000) Retained earnings.000) Unearned royalties.255.000 Sales discounts 80.000) Recovery of previous write-off (20. 000 Total income 4.048. accrual basis 2.000) Less: AR write-off (SQZ) (75. Beg (30.880.670.100.000 AR written-off 75.000 2.970.000) Net income 2.000 3.000 COGAS 7.000 (b) Operating expenses.000 Add: Inventory.000) Depreciation expense (345.000 Gross Sales 8.000 Less: Inventory.848. beginning 1.000) Net purchases 5.000) Gross Sales on Account 7.000 Credit purchases 1.000 Add: AR.000) Interest income. Net Sales 10.000 Total 3.300. Ans. Ans.000 Allowance for BD. Cash collections from customer on account 6. P2.000 Less: NR-trade.200. CASH/ACCRUAL AND SINGLE ENTRY .000 CHAPTER 11-PROBLEM 9: CUTTING EDGE. accrual basis 90. Gross cash sales 1.000) Net Sales 7.304.000 Add: gross cash sales 7.000 Recovery of write-off 25. P5.304.000 Cost of sales (5. Ans. increase 1.600) Bad debt expense (100. ending 60. beg 125.600 4. 1/1/14: (P3M*90%*80%*80%) 1.000 Sales discount 80.000) Operating expense.670. cash basis 2. 1.400.000 Multiply by: Ddbal rate 20% Depreciation expense.728.200. decrease (800.000 Less: Accrued interest income.470.000 Allowance for BD.550.220.000) Cost of Sales 5.248. Ans. gross sales is also net sales. beginning balance (750. 2.670. Total collections from charge customers 2. P345.800. P10.550. ending balance 1.000 Add: AR. end 175.250. CHAPTER 11: ERROR CORRECTION.000) Recovery of previous write-off (72.000.000 1.220. ending (90.000 *Note that since there are no sales discounts or sales returns and allowances.600.000 Total gross sales/Net sales 10.000) Sales returns (Total) (320.500.550.000 Total 250.000 Add: Bad debt expense 100.000.550.000 Less: Prepaid expense.970.000.000) Purchase returns (120.000 Sales returns. without refund 120. CV.000) Recovery of previous write-off (25.500.000 Less: AR.000) Gross profit 4.825. Ans. Cash purchases 5.000 Interest income (a) 90. Less: Sales discounts (80.000 Add: Accrued expense.400 (a) Interest collected 120.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 146 of 155 CHAPTER 11-PROBLEM 8: BACOLOD CORP.000 Total gross purchases 6.000) Accrual basis gross sales 3.480.050.000 Less: Purchase discounts (210. 2014 345.000 3.000 Operating expenses (b) (2. Ans.000 AR written-off 240. ending (1.200. P14.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 147 of 155 Cash paid to suppliers on account 4.000) Accrual basis gross sales 14. Cash collections from customers 11.000) Deposits from cash collections from customers 9.000 Mortgage payable 80.800.600.980.880. ending 3. CHAPTER 11-PROBLEM 10: GLASS CO.000.240.000 Less: Advances from customers. P251.000 Add: Merchandise Inventory.000) Gross Purchases on Account 5.620 DISBURSEMENTS Real property P200.380 Collections from sales P254.000) 23. P254.800.340.140 Total P31.228 CASH AS ACCOUNTED: Bank balance.636 2.284 Payments for purchases P251. Ans. November 15 85.000 Add: AR.000 1.612 CHAPTER 11-PROBLEM 11: EDU COMPANY 1.000 Furniture and Fixtures (P29.000) Proceeds of bank loan.000 6.000.636 Total P535. Ans.000 Purchase discount 140.000 Salaries 360.000 Collections from customers which were used to pay directly disbursements Utilities 360. Ans.000 + P20.920 Less: Accounts payable – trade. Ans.000 Undeposited collections on hand 450. Gross cash purchases 1. ending (135.430.430.000 Purchase returns.000 Dividends 540.852 29.000 Note payable – bank 32. without refund 200.000 Cash receipts from share issuance (1. Ans.535.000 Total collections from customers 11. Total deposits per bank statement 12.328 Add: Undeposited collections 5. Ans.000 5.000 Gross Purchases 6.620 3. 2014 P121.000 Less: Accounts payable.616 CASH SHORTAGE as of November 15. Less. Ans.000 CHAPTER 11: ERROR CORRECTION.000 Expenses 60.000 2.468 Less: Outstanding checks 1. decrease (600.756 Purchases (from number 1) 251. Cost of sales (P340.000 Add: Notes payable-trade increase 800. 1.620 Sales P340. November 15 46. directly credited to account (1.000 – P6. CASH/ACCRUAL AND SINGLE ENTRY .000 total sales * 60%) P204.000) Purchase returns (total) (320.000) P320.000 Less: Accounts receivable – trade. Ans.620 Total 686. P11.612.430. CASH ACCOUNTABILITY: RECEIPTS Issuance of ordinary shares (P300.392 CASH BALANCE P151.000 Supplies 720.800. November 15 P26.535.340.000.000 Collections from sale (from number 2) 254.000) Net Purchases 5. November 15 93.636.000 4. Purchase discount (140.920 Purchases P297.000. P121. 000 220.Eqpt (P1.250 Additional depreciation on capitalizable major repairs (220.000) Cost of sales 8. 5. thus on 12/31/14 the expired life is (5+3).000 4. under 2014 7.500) 7.000 Depreciation expense per audit P51. Repairs expense.185.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 148 of 155 3. Gross sales/Net sales 14. end (2.700 (3. Ans.602. CASH/ACCRUAL AND SINGLE ENTRY .000 a.000 Salaries (P360. Ans.000) 385. under 2011 (3.000+30. Depreciation per books: P250.070.250 (a) The expired life of the asset as of 1/1/12 (3 years ago from 12/31/14) was 5 years.000 Inventory. 6. instal.000) (20. Cash payments to suppliers 9.738.000 (3. 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.280.999.100 7.000/31.000 6.500 - Salaries payable.000 Accrual basis gross purchases 10.44M) 162.000) Total cash payments made to suppliers 9.998. P3.000 Interest expense .000.500) Salaries payable.998.738.000 P185.998.500) b.700 P176.000 5. CHAPTER 11: ERROR CORRECTION.718.100) 2. 2014 Unadjusted balances P100.700 Unused supplies.000 Gross purchases/Net purchases 10.602M-P1.070.000 P145.000) Adjusted balances P300. under 2012 (5.000 Interst expense.Bldg (P16.738.000) 400. under 2014 (4. under 2013 3.700) 3. Ans A.000 Supplies (P720.260.250 = 16 years.000) (20. Ans. (P1. Ans.255. under 2013 (7. P500.000 Add: Accounts payable.280. beg 2014 WC.000 P120.000 Depreciation expense. Unused supplies. Ans. Unearned rent income.500) (6.000 Bad debt expense 180. ending 1.000 Operating expenses Utilities (P360. under 2012-2014 (20.100 d.280.000) Total disbursements per bank statement 11. Remaining useful life as of 1/1/12 is 16 years – 5 years = 11 years. Ans B.000) 570.000) Net Income 3.200 (P4.500 - Salaries payable. under 2011 2. NI 2012 NI 2013 NI 2014 RE.700. 8 years.000+40. Ans B.000) 120.500) Unused supplies. Total deposits per bank statement 12.000 Depreciation . Salaries payable.000/11yrs) (b) 20. end per bank statement (900. P10. 3.000+25. under 2012 6. P9.loan (P90. Ans D.535.000) Payments of installment due on equipment (1.500) 5.200 P164.000 Add: Outstanding checks 180. P8.000) (40.000.000/8yrs (a) 31.000 Cost of sales (8.44M/5yrs) 288.2M/15yrs) 1.000 Less: Payments of bank loan and interest (540. 4.500 (6.500 (7. under 2014 (6. Total life of asset is 16 years computed as (Total Cost/Annual Depreciation per books).500) Unused supplies.600.700) (4. C.000 Cash in bank.000) Gross profit 6.000-150.080.000 Depreciation . Ans D. 1. over 2012 220.000 MULTIPLE CHOICE EXERCISES: CHAPTER 11-EXERCISE 1: BEE CO.700) c. 250. Understatement in interest expense due to amortization of bond discount: (a) 2013: 10.500 Balance of amt.200) e.000 P3. Accrued interest expense.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 149 of 155 CHAPTER 11-EXERCISE 2: LOG CORP.500*20% 76.000*20% 84.000 (69.000*17/20 3.575. under 2013 7. cap.000 Depreciable cost 3. 2013 inventory understatement 388. adjusted 135. in 2013: 306.500.000 Adjusted 2014 net income 1.031 3.719.600) Net adjustments (48.000 Less: Accumulated depreciation per audit : 450. Ordinary repairs (382.800 (388.250*7% = 744. Discount amo. Retained earnings Net income (2014) a.575. Accumulated depreciation per books (Machine XYZ): 400.600) (86. Ans.769 BUILDING CARRYING VALUE 12/2014 3.000*7%) 740.000 credit Add: Debit to accum depn attributed to old equipment traded in (2011) 150.000*3/10 (135. Ans.000 (11.800 1. 2.500) (423. Depreciation. 1/1/2014: 393. (a) The loan was originated on 1/1/12 at P10. Insurance expense. Ans.250).000 debit Depreciation expense for the period: Cost 450. 12/31/12 (10.483.000 2012 Amortization: 65.982 P4. A.838. Ans.250 CHAPTER 11-EXERCISE 3: LOT INC.719. under 2013 & 2014 (57.250. D. AR/Sales.418.000) (331. C.000 b. CASH/ACCRUAL AND SINGLE ENTRY .000 Less: Salvage value 50.000*6% = 675.000 (120.600 ADJUSTED PRETAX INCOME P2.600) (117.200 (7.206.400) d. Ans.705) d.750.000 (74.818 Less: 11.250.250 Less: Nominal interest (11.250. Ans.825. 2013 sales overstatement (1. Carrying value.750*10/12 328.000*3/10 120. 1/1/2014 3.000 a. under 2013 (over in 2014) 120.000*20% 61. Ans.295 1.775.000 2.000) c.000) Adjustment related to the under depn for 3 years (2011 to 2014) 15.000-675.000) Overstatement in depreciation: Amount capitalized in 2013: 382.200 Amount capitalized in 2015: 423. P10.825.125 Multiply by: 150% declining balance rate: (1/6)*150% 25% DEPRECIATION EXPENSE (Mach UVW) 82.000 Carrying value 315.710. 2.000 Divide by: Revised remaining useful life 5 years DEPRECIATION FOR THE YEAR (Mach XYZ) 63.000*6%) 675.000) 1.000*6% = 675.250 Carrying value of Bonds. by 12/31/12 therefore shall be: Correct interest (10.231 CHAPTER 11-EXERCISE 4: INSULAR CORP. IGNORED (COUNTERBALANCED) b.000 Multiply by: SYD rate 12/78 DEPRECIATION EXPENSE 580.575. 1.769 Carrying value.818) 2014: 10. A.000 Depreciation for 2014 580.000 Accum depn. 2013 2014 Unadjusted pretax income P4. under 2013 & 2014 (117.705 Less: 11.800) 2014 inventory overstatement (255.068*7% = 749.545.000 debit NET ADJUSTMENT TO ACCUM DEPN ACCOUNT 135. D.000) c.244.640. Carrying value.640.200) Unadjusted Net Income 1. CHAPTER 11: ERROR CORRECTION. D. 1/1/2014: 4. B.000+65.000). 5M*2/10) (300.000 2.000 815.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 150 of 155 CHAPTER 11-EXERCISE 5: KUTING CORP.000) 2013 Accrued rental income understated 45.000 300.000 376. Ans.000) (80.000 Adjusted balances 1.000 200.000 (195. D.000) 190.000) 990. 2014 (374.3M/10yrs) (130. Ans. 2. Ans.000) (374.000) (140.000) 45.2M/10) 120. Ans.000 348. Interest receivable.000) * Loss on inventory due to flood (50.000 (20. 5.000 b.000) b.000 142.400) (17. CHAPTER 11: ERROR CORRECTION.400) Capital expenditure. Ans.000 Inc.000) 2014 Accrued expense understated (98.000.000) (130.000 2012 Prepaid expense understated 20. 2014 142.000 a.000) (160. Correct cost of Building (P1.000 142.000) (520. 2013 376.000 (45. from grant. 3.000) Inc.200.400 Salaries and wages. A.00) Capital expenditure. Ans.200 205. 3. Prepaid insurance.000) f.000 120.000) (98.000 150.000 550.000 2014 Depreciation understated (110.000) (160.000) c.000 100.800) 103.000 a. Ans C.000) 213. A.750. Ans D.2M/10) 120.000 Depr.187. Ans.000) 2013 Prepaid expense understated 30.000 Accum depr: (P1. Overstatement in expense in 2013 100.000 (256.2M+100K+200K) 1.000) 110. under 2013 (100.000 2.000 (13.200 Salaries and wages. Beg RE. 2012 2013 2014 2014 2014 2014 Net Income Net Income Net Income RE.000 *Land accepted as a donation from a stockholder (APIC) (400. ex. under 2014 (1.000 400.000 2014 Accrued rental income understated 50.000) 1. 4. C.550.600 Advances from customers. CHAPTER 11-EXERCISE 6: GHI INC.000 c.000 (110.000 832. over 2013 (190. 2014 348.000 750.000 2. D.000) (374.000) (520. from grant.000 35. Inventory.600) 313.000 (80.000) 100.000) 2014 Equipment charged to expense 550.000) Depr. under 2014 (140.000 2012/2013/2014 Depreciation understated (80.000 Depn on cap ex in.400) Total under (overstatement) (110.500.000) Accrued interest income.000 d. Overstatement in gain on eqpt sale.400 1.000 Advances from customers.400 (546.800) (37. under 2014 120. Salaries payable.000 e.400) 582. 2014 (160. Beg Unadjusted balances 1.000) (240.000 50. Ans A. under 2014 20. under 2013 (1. 2. in 2013 (18.000 (30.000) (400. CASH/ACCRUAL AND SINGLE ENTRY .000 400. 2013 256.000) 30. A. 2013 2014 2014 2014 WORKING RETAINED (NET INCOME) (NET INCOME) CAPITAL EARNINGS Omitted prepayments.000 120.000) 2012 Accrued rental income understated 40. A. 2014 (17. 2014 (520. 2013 NI 2014 NI 2015 RE.200 205. 2013 (313.000 50.000) 2.000 35.800 (172.000) Omitted prepayments.000) (130. 4.000 Depn on cap.600) (56.120. A.000) Correct carrying value of Building 12/31/14 1. 2014 205. 2013 (582.000 Salaires payable. 2012 Accured expense understated (90.000 120.000) (110.000 2013 Accrued expense understated (110. 2.000 (40.000 CHAPTER 11-EXERCISE 7: BABY INC. 2013 172. 2012 Equipment charged to expense 400. under 2013 (1.000. Ans.000) 1.000 2014 Prepaid expense understated 35. Cash dividends charged to other expense 100.000 20. B.000) 90.800) Accrued interest income.3M/10yrs) (130.000) (80.000) (98. 3. End WC Balance 600. Ans. under 2013 (1. Expired life as of 12/31/2010 (5 +2.000 d.000 a.000) b.500 a. B. per books 831.000) Net adjustment (increase/credit) 21.000) Prepaid insurance. Overstatement in 2014 purchases 45.000 Depreciable cost. (a) Gain on the retirement of bonds should be an outright income or loss.125.000) 100. Old bulding P3.000 P1.000) 110. 2013 per audit 528.000) Prepaid insurance.000 Correct appropriation of accum profits for share div in item e (39.000 1.000 (100. Ans. Understatement in gain on retirement of bonds (a) 37.000 388. 2014 10. 2013 15.000). 1.5 Annual Depreciation P150. Prepaid insurance: 2011 (75.000 2.000 Understatement of salaries expense.000 Understatement of sales. Extension (Addition) P750. 1/1/2014 per audit 891.000 Total accumulated profits. Depreciable cost.000 Divide by. Gain on sale of equipment in 2014.000) Interest receivable.000) 190.000 Divide by: Annual Depreciation 150.000 (25. 2014 (140. 12/13 overstatement (190.000 42. Ans.000 c. 2012 per books 381. 2014 30.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 151 of 155 CHAPTER 11-EXERCISE 8: ROXAS INC.750. 3.000 (20. Total gain on retirement is (P360.000 2.000 385.255. Understatement of salaries expense.000 30.000.000 528. 12/31/2014 -69.000) (50. C.000 Net income. Overstatement in rent expense. 4. Inventory. 4.000 Understatement of accumulated profits.000 Total Depreciation expense P200. 2012 100. 2014 -6.000 (115.500.000 -42.000) Purchases. D. 12/31/200 P1.000 Salary accruals. Ans.000 Salary accruals.800 1. Interest receivable: 2012 20.540. 3. Salary Accruals: 2011 95. 2013 stock dividend charge to expense 30.000 f. Understatement of sales.000 e.000. 1/1/2014. 2012 -30. 2012 (110.000 Depreciable cost. 2013 -42. Old building P150. 1/1/2014 60.000 Net income.000) g. CHAPTER 11-EXERCISE 9: GKNB CORP 2012 NET 2013 NET 2014 NET INCOME INCOME INCOME Unadjusted balances 381. C.000 b. 12/14 understatement (150. Entry made for item e: CHAPTER 11: ERROR CORRECTION. Ans. Ans. Ans. 2014 120.000 Net income.000 -12.000 Divide by: Remaining life (20 – 5) 15 50.000) Interest receivable.000 -15. A.000 Divide by: Total Useful Life 20 * Depreciation Expense. Building P3. Inventory. overstatement (160. C.800 Adjusted balances P363. 2013 25. C. Ans.000 Accumulated Depreciation.000-P318. A. 2013 15.000 c.950. Net income.000 P1.000 Understatement of sales.000 Understatement in rent expense.000 450.000) Adjusted Net Income P2. 2012 per audit 363. CASH/ACCRUAL AND SINGLE ENTRY .000 Salary accruals.000) Prepaid insurance. 2013 (100.000.000 Total accumulated profits.000 Overstatement of ending inventory.500 d. Ans. Understatement of ending inventory. B.000 f. Thus effectively.5) 7. Capitalizable cost in 2012 750.000 Understatement in depreciation 2012-2014 (25. Ans. 2013 115. 12/31/2013 42. 12/14 understatement 150. 2012 12. only 9/10 of the amount needs to be added to current net income.000) (50.000. 2. The client recognized only 1/10 of the amount as an amortization over 10 years deducted from interest. 2013 per books 450.000 Total useful life 20 years * 2012 2013 2014 Unadjusted net income P1.000 g. P42.000 e.000 5. 000 c.000 1. 1/1/14: (P350. C.000 Less: Depreciation expense (non-cash expense) 90. Ans.000) Depreciable cost P1. Ans. D.600.000 1. Total operating expense. Ans.890.000 Ordinary shares 30. Ans.000 Cash received from customers 10.350.350.000 Purchases. 4 .000 2.000 90. accrual basis 10. Straight line CV.500 CHAPTER 11: ERROR CORRECTION.000 a.000 Cash paid to suppliers (7.000 Cash payments for operating expenses 2.012.000 -100.000 Depreciation per audit.000 Correct entry: Accumulated profits 39. CHAPTER 11-EXERCISE 11: KRIS COMPANY 1. Ans.775.000 Decrease in accrued expense 150.750.000 Adjusting entry: Accumulated profits 9.500) Cash paid for operating expenses (2.837.000 Overstatement in Depreciation P10.012. (a)Depreciation per books (2014). Sales.000 Less: Salvage (50. Ans.000 25.000 Share premium 9.050.275.700.130. C. C. 3. 2.725. end 2014 income Unadjusted bal.000 Less: Decrease in inventory 450.890.000 Total 2. A.000 2.000 1.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 152 of 155 Other expense 30.500 Cash paid to suppliers 7. D.beg 2014 RE. Ans. A.000 4. Policy change: Inventory 2013 100. Cost of sales 7.000 Add: Decrease in accounts receivable 540.00 Add: Decrease in accounts payable 412. accrual basis 1.000 Share premium 9.040. Overstatement in depn in 2014 (a) 10.000 Adjusted balances P425. C.000 P1.700. CASH/ACCRUAL AND SINGLE ENTRY .000 Add: Increase in prepaid expense 255. Ans. Error correction – Borrowing Cost 25.150. accrual basis 6.000 100.000) Cash provided by Operating activities 1.000 CHAPTER 11-EXERCISE 10: WWEE COMPANY 2014 net 2013 net income RE. P350.000 Divide By: remaining life 5 yrs 340.000 10.040.550.000 b. Double Decl.000 100.000/20%) P1.000 75.500 3.000 Ordinary shares 30. Ans. Cash received from customers 10.000 P2.000 P1.000 5. 300. B.000 Inventory 2014 90. 267*4%) – 10.000 Collections AR. Ans. 2014 (227. A.000 2.277 Present value of interest.000 174. 1. D.000 d) Salaries payable 8. B. Ans.900 CHAPTER 11-EXERCISE 13: UKG INC.000 Sales on account 600. Effective interest as of 6/30/14 9.400 e) Interest receivable 9.600 c) Unearned rent income -21. 2. Present value of principal (200. Unadjusted net income 25.500 TOTAL LIABILITIES 30.000 Purchases 120. C.400 f) Accrued accounting fees 1.862 Correct net income P28.500 ACCRUAL NET INCOME 87. Ans.000 Ending invty Cost of sales 360.000.180 Amortization. ACCOUNTS RECEIVABLE AR.000 AP.267*4%) 9. beginning 96. Ans. A.500 b) Prepaid insurance (5.400*2/3) 3.210.500 Adjustments: a) Depreciation -31.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 153 of 155 CHAPTER 11-EXERCISE 12: PROTER COMPANY 1.000 – 18.510 f) Accrued accounting fees -1.000 Deduct: AR.000 (949) Carrying value. 2014 P225. Ans. Cash collected from customers 10.000 CHAPTER 11: ERROR CORRECTION. D.400.59032) 135.000 348.903 P227. c) Unearned rent income 21.000 3.000 Overstatement in other expenses ** 2. 2014 (226.000 AP.456387) P91. CASH/ACCRUAL AND SINGLE ENTRY .000 Purchases (sqz) 348.000 Add: AR.000 d) Salaries payable -8.318 4. C.180*4%) Effective interest 12/31/14 (226.051 Total interest expense P18.000 Overstatement in interest expense (20. December 31.087 (227. beginning Payments 344. semiannual (10. June 30.138 5.000 CHAPTER 11-EXERCISE 14: WOWIE CORP.000 ACCOUNTS PAYABLE 116.000 Increase in prepayments 4.000*0. ending 2.000 586. Excess of cash receipts over cash disbursements 136.000.138) 1.862 **Other Expenses Accrual basis 164.000 Increase in accrued utilities Cash basis 166. 1. COST OF SALES Beginning invty 186. December 31.000*13.600.000 Sales Accrual basis 7. B. ending balance 110. beginning 6. Ans. ending 4. Ans.180*4%) – 10.000 (913) Amortization. Ans. 000) Net income P5.000) 9.849.000 35. per audit (18.000) 900. Net sales.000 Total 37. 35.000 Add: Sales returns and allowances (no refund) 800. Sales.750 5.000-200. 40. 1.000 Balance: payments to suppliers for 2014 invoices 8.200) Cash collections from customers 4.000+800. Total payments to suppliers 13. B.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 154 of 155 2. Ans.000 Depreciation (100.000 Total P17. 5. Insurance premium paid 125. A.000.000 Deduct: Wages payable.500.400.000) Gross Profit P17. beg bal. beg bal. B. 85.000 Collections from trade notes receivable 2.000) Net sales. ending bal.600.000) Gross Sales P37.000 2.500.000 CHAPTER 11: ERROR CORRECTION. Ans.000 Accrued advertising.000 Interest income 200.621.000 Deduct: Advertising supplies. accrual basis 11.050.000 Accrued advertising.400.618.000 4.000-300.600. per audit 17.000 (12.000 Add: Prepaid insurance.000 Less: Decrease in Notes receivable (600.400.000 Less: Sales returns (total) (1. CASH/ACCRUAL AND SINGLE ENTRY . 3.986.000 17. C.000 Collections from accounts receivable 30.000 Less: Cost of Sales.200.000 CHAPTER 11-EXERCISE 16: ALASKA INC.000 Payments of accounts payable 16. per audit P35.400. beg. Cash purchases 1. Ans.000 Less: Accounts receivable. 75..000) AR written-off during the year (43. Bal.000 Less: Purchase returns and allowances (total) (800.200. Ans.000 Other expenses 1. ending bal.000 Less: Expense Insurance (700. Ans.000 Purchases.090. B. 14. Wages paid 3.000.200 Add: Accounts receivable. C. end (297.000) 500. Advertising expenses paid 300..000 Add: Decrease in inventory 1. A.600.000.250 Advertising expense.700.000) Net purchases.000 Increase in Accounts receivable 1. bal. 25.000 Wages expense. Ans.000 Less: Unexpired insurance.800.000 Add: Purchase returns and allowances (no refund) 300. Cash sales 3. accrual basis 2014 4. end. beg. accrual basis 285.500. ending balance 2.000 3. Ans.800.000.000 Insurance expense.000 Add: Wages payable.000. A.000 Salaries(10.400. Ans.000 Deduct: payments to suppliers for 2013 invoices 4.000 Gross Purchases 18.000. 41.400.000.000 Add: Accounts payable.400. B. Ans. ending balance 125. beginning bal.000 CHAPTER 11-EXERCISE 15: JOURNEY CORPORATION 1. accrual basis 109. Ans. per audit 18. per audit 35. 270. D. accrual basis 3.000 Cost of Sales.779.607.000 4.000 Increase in Accounts payable 400.632.000 Add: Advertising supplies. 000) Depreciation (100.000 CHAPTER 11-EXERCISE 17: ALAMAT COMPANY 1. Cash purchases 4.500*1/3) (4. Payments of merchandise to suppliers: Merchandise purchases 10.106.000 Add: Accounts receivable. accrual basis 2014 2.020.000) Prepaid insurance.040 4. Interest expense.200 4. B. 1 678.000) Net income P236.000) Purchases. Ans.000 Less: Expense 560.000 Total 4. 139. end 20. Ans.000) Expenses paid (5.040) 1. A. Net sales. Ans.000 Add: Accounts payable.400.500.AUDITING (2016 EDITION) SOLUTIONS GUIDE CTESPENILLA 155 of 155 2.270. C.000 Less: Purchase for president (adj to advances) (10.000) (460. Purchase of furniture (9.160 (10. end (225. Ans.500 3. Ans.000) Cost of Sales.000 Less: Inventory. Selling expense. April 16 (621.845.273. Cost of sales. Ans. per audit (3. April 16 (1.000 Add: Accounts payable. Ans. beg. CHAPTER 11: ERROR CORRECTION.000 Deduct.990) Add: AR. D.490) Cash shortage 431. Ans.000 4. per audit 3.000) Interest expense (100.200. 3.475. Ans.510 Less: AR.250.224.500) Cash payments for ineterest 34.000) Cash payments for selling expense 1.700 Less: Amortization of bond discount (4. Jan.000) Gross/Net Sales 4.000 Total 4. Jan. end (15.628.000) Equipment (100. Total accountability 728. Ans. supplies.500 Less: Accounts payable.000 Less: Cost of Sales.924. B.530) 3. B. end (5.000 Add: Inventory.770.550 5. accrual basis 2014 2. A.000 Add: Accrued expense. A.500 Less: 1/3 of depreciation expense (13.000) Cash payments to suppliers 2.000 Less: Advances from customers.000) Total disbursements (16.650) Sales allowances (54.568.294. end (25. end 279.000) check: Cash shortage chargeable against the cashier 131. Cash sales 4. 1 balance Collections from customers:' Sales on Account 17.770.327. Ans. beg (423. Less: Cash in bank.490) Cash dividends paid (120. accrual basis 2014 38.000) Gross Profit 705. accrual basis 2014 1.597.900) Add: AP.000 2. end 80. Jan. net of outstanding check (296.690 16. per audit 4.000 Less: Inventory. B.500) Bad debt expense (45.. CASH/ACCRUAL AND SINGLE ENTRY .280.000) Gross/Net Purchases 4. Ans.780 Less: AP. C. B. end (500. 1 344.000/10)*6/12 (5. A.000 CHAPTER 11-EXERCISE 18: TITANIUM COMPANY Cash.475.560 2.000*12%*4/12) (4. end 100.550 Less: Chargeable against the bank (for encashing the obviously forged (300.