PROBLEM NO

Page 8 of 9

Cebu CPAR

Mandaue CityFINAL PREBOARD EXAMINATION

SUNDAY, SEPTEMBER 30, 2006

AUDITING PROBLEMS

1:00 PM TO 4:00 PM

INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE LETTER OF YOUR CHOICE WITH A VERTICLE LINE ON THE ANSWER SHEET PROVIDED. STRICTLY NO ERASURES ARE ALLOWED.

PROBLEM NO. 1The following balance sheet is submitted to you for inspection and review.

Close to You Corporation

Balance Sheet

December 31, 2006

Assets

CashP 180,200

Accounts receivable450,000

Inventories816,000

Prepaid insurance35,200

Property, plant, and equipment 1,507,200

Total assetsP2,988,600

Liabilities and Owners Equity

Miscellaneous liabilitiesP 14,400

Loan payable304,800

Accounts payable 301,000

Capital stock536,000

Paid-in capital 1,832,400

Total liabilities and owners equityP2,988,600

In the course of your audit, you find the following data:

(a) The possibility of uncollectible accounts on accounts receivable has not been considered. It is estimated that uncollectible accounts will total P19,200.

(b) The amount of P180,000 representing the cost of large-scale news paper advertising campaign completed in 2006 has been added to the inventory because it is believe that this campaign will benefit sales of 2007. It is also found that inventories include merchandise of P65,000 received on December 31 and has not been recorded as a purchase.

(c) The books show that property, plant and equipment have a cost of P2,227,200 with accumulated depreciation of P720,000. However, these balances include fully depreciated equipment of P340,000 that has been scrapped and is no longer on hand.

(d) Miscellaneous liabilities of P14,400 represent salaries payable of P38,000, less non current advances of P23,600 made to company officials.

(e) Loan payable represents a loan from the bank that is payable in regular quarterly installments of P25,000.

(f) Income tax payable not shown is estimated at P73,000.

(g) Deferred tax liability arising from temporary differences totals P178,200. This liability was not included in the balance sheet.

(h) Capital stock consists of 25,000 shares of preferred 6% stock, par P20, and 36,000 shares of common stock, par value P1.

(i) Capital stock have been issued for a total consideration of P1,134,400; the amount received in excess of the par values of the stock has been reported as paid-in capital. Net income and dividends were recorded in Paid-In Capital.

QUESTIONS:

Based on the above and the result of the audit, determine the adjusted amounts of the following:

1. Current assets

a. P1,347,200b. P1,217,200c. P1,282,200d. P1,462,2002. Noncurrent assets

a. P1,530,800b. P1,507,200c. P1,190,800d. P1,167,2003. Total assetsa. P2,878,000b. P2,473,000c. P2,789,400d. P2,813,0004. Current liabilities

a. P512,000

b. P577,000

c. P504,000

d. P600,6005. Noncurrent liabilities

a. P383,000

b. P204,800

c. P406,600

d. P433,0006. Total liabilitiesa. P983,600

b. P895,000

c. P716,800

d. P960,0007. Contributed capitala. P634,400

b. P1,134,400c. P598,400

d. P536,0008. Owners equity

a. P1,853,000b. P2,096,200c. P1,918,000d. P2,368,4009. Under PAS 1 Presentation of Financial Statements, which of the following should be disclosed in the balance sheet?a. A statement of compliance with PFRS

b. The measurement basis used for the revaluation of assets.c. Information about the key assumptions used in the depreciation of assets.d. The carrying amount of property, plant and equipment.10. If you have no reservations concerning the fairness of the clients financial statements, then you should issue a (an)a. Unqualified opinion.

c. Disclaimer of opinion.

b. Qualified opinion.

d. Adverse opinion.

PROBLEM NO. 2Your audit of the Weygandt Corporation disclosed that the company owned the following securities on December 31, 2005:

Trading securities:

Security SharesCost Market

Crosswind Corp.9,600P144,000P184,000

Fortune, Inc.16,000432,000288,000

10% , P200,000 face value , Coastwise bonds (interest payable every Jan. 1 and Jul. 1) 158,400 163,440

TotalP734,400P635,440

Available-for-sale securities:

Security SharesCost Market

Ultimate Products32,000P1,376,000P1,440,000

Finite Corp.240,0006,240,0005,840,000

GUTS, Inc.80,000 960,000 1,280,000

TotalP8,576,000P8,560,000

Held to maturity:

CostBook value

12%, 2,000,000 face value, Innovator bonds (interest payable annually every Dec. 31)P1,900,000P1,926,000

During 2006, the following transactions occurred:

Jan. 1Receive interest on the Coastwise bonds.

Mar. 1Sold 8,000 shares of Fortune, Inc. stock for P152,000.

May 15Sold 3,200 shares of GUTS, Inc. for P15 per share.

July 1Received interest on the Coastwise bonds.

Dec. 31Received interest on the Innovator bonds.

31Transferred the Innovator bonds to the available-for-sale portfolio. The bonds were selling at 101 on this date. The bonds were purchased on January 2, 2005. The discount was amortized using the effective interest method.

The market values of the stocks and bonds on December 31, 2006, are as follows:

Crosswind Corp.P22 per share

Fortune, Inc.P15 per share

10% Coastwise bondsP151,200

Ultimate ProductsP42 per share

Finite Corp.P28 per share

GUTS, Inc.P18 per share

QUESTIONS:

Based on the above and the result of your audit, determine the following:

11. Gain or loss on sale of 8,000 Fortune, Inc. shares on March 1, 2006

a. P8,000 lossb. P64,000 lossc. P8,000 gaind. P64,000 gain

12. Realized gain or loss on sale of 3,200 GUTS, Inc. shares on May 15, 2006

a. P9,600 lossb. P3,200 lossc. P9,600 gaind. P3,200 gain

13. Total interest income for the year 2006?

a. P260,000

b. P289,640

c. P251,120

d. P286,000

14. The amount that should be reported as unrealized gain in the statement of changes in equity regarding transfer of Innovator bonds to available-for-sale?

a. P94,000

b. P123,640

c. P64,360

d. P 0

15. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2006 should be

Trading securitiesAvailable-for-sale securities

a. P482,400

P11,466,400

b. P602,400

P 9,446,400

c. P482,400

P11,524,000

d. P602,400

P11,441,600

PROBLEM NO. 3The property, plant and equipment section of Warfield Corporations balance sheet at December 31, 2005 included the following items:

Land P 600,000

Land improvements 280,000

Buildings2,200,000

Machinery and equipment1,920,000

The following transactions occurred during 2006:a) A tract of land was acquired for P300,000. As of December 31, the company has not determined its future use.

b) A plant facility consisting of land and building was acquired from Heneral Company in exchange for 40,000 shares of Warfields common stock. On the date of acquisition, Warfields stock had a closing market price of P37 per share on the Philippine Stock Exchange. The plant facility was carried on Henerals books at P220,000 for land and P640,000 for the building on the date of exchange. Current appraised values for land and building, respectively, are P460,000 and P1,380,000.c) On May 1, 2006, items of machinery and equipment were purchased at a total cost of P896,000, inclusive of 12% VAT. Additional costs of P26,000 for freight and P52,000 for installation were incurred.d) Expenditures totaling P190,000 were made for new parking lots, streets and sidewalks at the corporations various plant locations. These expenditures had an estimated life of 15 years.e) A machine costing P160,000 on January 1, 1998, was scrapped on June 30, 2006. Double-declining-balance depreciation has been recorded on the basis of a 10-year useful life.

f) A machine was sold for P40,000 on July 1, 2006. Original cost of the machine was P88,000 on January 1, 2003, and it was depreciated on a straight-line basis over an estimated useful life of 7 years and a salvage value of P4,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

16. Adjusted balance of Land as of December 31, 2006a. P970,000

b. P1,060,000c. P1,270,000d. P1,460,00017. Adjusted balance of Buildings as of December 31, 2006a. P3,580,000b. P3,500,000c. P2,200,000d. P3,310,00018. Adjusted balance of Machinery and Equipment as of December 31, 2006a. P2,646,000b. P2,550,000c. P2,472,000d. P2,710,00019. Loss on scrapping of machine on June 30, 2006a. P21,475

b. P24,160

c. P26,845

d. P020. Loss on sale of machine on July 1, 2006a. P6,000

b. P4,000

c. P18,000

d. P0PROBLEM NO. 4In 2001, Kieso Corporation acquired a silver mine in Benguet. Because the mine is located deep in the Benguet mountains, Kieso was able to acquire the mine for the low price of P50,000. In 2002, Kieso constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2002 cost P750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete.During 2003, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2001, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2004, the first year of operations, only 5,000 tons of silver ore were removed from the mine. However, in 2005, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 million tons of silver ore in addition to the original 4 million tons. Improvements of P275,000 were made to the mine early in 2005 to facilitate the removal of the additional silver. Early in 2005, an additional building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value.In 2006, 2.5 million tons of silver were mined and costs of P1,100,000 were incurred at the beginning of the year for improvements to the mine.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off depletion and depreciation rates to two decimal places)21. Depletion for 2004a. P6,300

b. P6,500

c. P7,250

d. P5,55022. Depletion for 2005a. P1,300,000b. P1,820,000c. P780,000

d. P870,00023. Depreciation for 2005a. P250,000

b. P490,000

c. P180,000

d. P210,00024. Depletion for 2006a. P1,950,000b. P2,150,000c. P2,425,000d. P2,275,00025. Depreciation for 2006a. P525,000

b. P625,000

c. P1,225,000d. P450,000PROBLEM NO. 5You gathered the following information related to the Patents account of the Lady Han Cookie Corporation in connection with your audit of the companys financial statements for the year 2006.

In 2005, Lady Han developed a new machine that reduces the time required to insert the fortunes into its fortune cookies. Because the process is considered very valuable to the fortune cookie industry, Lady Han patented the machine. The following expenses were incurred in developing and patenting the machine:

Research and development laboratory expensesP1,000,000

Metal used in the construction of the machine320,000

Blueprints used to design the machine128,000

Legal expenses to obtain patent480,000

Wages paid for the employees work on the research, development, and building of the machine (60% of the time was spent in actually building the machine)1,200,000

Expense of drawing required by the patent office to be submitted with the patent application68,000

Fees paid to the government patent office to process application100,000

During 2006, Lady Han paid P150,000 in legal fees to successfully defend the patent against an infringement suit by Cookie Monster Corporation.

It is the companys policy to take full year amortization in the year of acquisition.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

26. Cost of patent

a. P580,000

b. P1,128,000c. P648,000

d. P 798,000

27. Cost of machine

a. P1,236,000b. P1,040,000c. P1,648,000d. P1,168,00028. Amount that should charged to expense when incurred in connection with the development of the patented machine

a. P1,480,000b. P1,608,000c. P1,000,000d. P 0

29. Carrying amount of patent as of December 31, 2006

a. P522,000

b. P1,015,200c. P583,200

d. P 837,900

30. The most effective means for the auditor to determine whether a recorded intangible asset possesses the characteristics of an asset is to

a. Analyze research and development expenditures to determine that only those expenditures possessing future economic benefit have been capitalized.

b. Vouch the purchase by reference to underlying documentation.

c. Inquire as to the status of patent applications.

d. Evaluate the future revenue-producing capacity of the intangible asset.

PROBLEM NO. 6

Lady Choi Corporation manufactures television components and sells them with 6-month warranty under which defective components will be replaced without charge. On December 31, 2005, Estimated Liability for Product Warranty had a balance of P765,000. By June 30, 2006, this balance had been reduced to P120,375 by debits for estimated net cost of components returned that had been sold in 2005.

The company started out in 2006 expecting 8% of the peso volume of sales to be returned. However, due to the introduction of new models during the year, this estimated percentage of returns was increased to 10% on May 1. It is assumed that no components sold during a given month are returned in that month. Each component is stamped with a date at time of sale so that the warranty may be properly administered. The following table of percentages indicates the like pattern of sales return during the 6-month period of the warranty, starting with the month following the sale of components.

Month Following SalePercentage of Total Returns Expected

First 20%

Second30

Third20

Fourth through sixth 10% each month 30

100%

Gross sales of components were as follows for the first 6 months of 2006:

Month Amount

JanuaryP5,400,000

February4,950,000

March6,150,000

April4,275,000

May3,000,000

June2,700,000

The companys warranty also covers the payment of freight cost on defective components returned and on the new components sent out as replacements. This freight cost runs approximately 10% of the sales price of the components returned. The manufacturing cost of the components is roughly 80% of the sales price, and the salvage value of returned components averages 15% of their sales price. Returned components on hand at December 31, 2005, were thus valued in inventory at 15% of their original sales price.

QUESTIONS:

Based on the above and the result of your audit, answer the following:

31. The total estimated returns for the six-month period ended June 30, 2006 is

a. P2,232,000b. P2,118,000c. P2,647,500d. P2,382,75032. The warranty expense for the six-month period ended June 30, 2006 is

a. P1,985,625b. P2,057,400c. P1,674,000d. P1,588,50033. The Estimated Liability for Product Warranty as of June 30, 2006 should have a balance of

a. P956,400

b. P713,250

c. P795,938

d. P636,75034. The adjusting entry on June 30, 2006 will include a debit to Warranty Expense of

a. P592,875

b. P675,563

c. P740,385

d. P516,37535. In evaluating an entitys accounting estimates, one of an auditors objectives is to determine whether the estimates are

a. Not subject to bias.

b. Based on objective assumptions.c. Consistent with industry guidelines.

d. Reasonable in the circumstances.PROBLEM NO. 7

On January 1, 2005, Lian Sheng Corporation issued 2,000 of its 5-year, P1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Lian Sheng uses the effective interest method of amortization. On December 31, 2006, the 2,000 bonds were extinguished early through acquisition in the open market by Lian Sheng for P1,980,000 plus accrued interest.

On July 1, 2005, Lian Sheng issued 5,000 of its 6-year, P1,000 face value, 10% convertible bonds at par. Interest is payable every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12%. On July 1, 2006, an investor in Lian Shengs convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Lian Shengs common stock, which had a fair value of P105 and a par value of P1 at the date of conversion.

QUESTIONS:

Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.)

36. The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2005 is

a. P1,898,400b. P2,129,500c. P2,000,000d. P2,121,100

37. The gain on early retirement of bonds on December 31, 2006 is

a. P20,000

b. P112,000

c. P121,200

d. P0

38. The carrying value of the 5,000 6-year, P1,000 face value bonds on December 31, 2005 is

a. P4,605,800b. P5,000,000c. P4,732,875d. P4,615,40039. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2006 will increase equity by

a. P1,485,000b. P1,374,600c. P1,415,054d. P1,377,697

40. During the audit of a publicly held company, the auditor could obtain written confirmation regarding long-term bond transactions from the

a. Bond holders.

c. Client's attorney.

b. Trustee.

d. Internal auditors.

PROBLEM NO. 8

Geum Young Corporation was authorized at the beginning of 2004 with 300,000 authorized shares of P100, par value common stock. At December 31, 2004, the stockholders equity section of Geum Young was as follows:

Common stock, par value P100 per share; authorized 300,000 shares; issued 30,000 sharesP3,000,000

Additional paid-in capital 300,000

Retained earnings 450,000

Total stockholders equityP3,750,000

On June 15, 2005, Geum Young issued 50,000 shares of its common stock for P6,000,000. A 5% stock dividend was declared on September 30, 2005 and issued on November 10, 2005 to stockholders of record on October 31, 2005. Market value of common stock was P110 per share on declaration date. The net income of Geum Young for the year ended December 31, 2005 was P475,000.

During 2006, Geum Young had the following transactions;

March 1Geum Young reacquired 3,000 shares of its common stock for P95 per share.

May 31Geum Young sold 1,500 shares of its treasury stock for P120 per share.

August 10Issued to stockholders one stock right for each share held to purchase two additional shares of common stock for P125 per share. The rights expire on December 31, 2006.

September 1525,000 stock rights were exercised when the market value of common stock was P130 per share.

October 3140,000 stock rights were exercised when the market value of the common stock was P140 per share.

December 10Geum Young declared a cash dividend of P2 per share payable on January 5, 2007 to stockholders of record on December 31, 2006.

December 20Geum Young retired 1,000 shares of its treasury stock and reverted them to an unused basis. On this date, the market value of the common stock was P150 per share.

December 31Net income for 2006 was P500,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2006:

41. Common stock

a. P21,400,000b. P21,300,000c. P14,800,000d. P21,250,00042. Additional paid-in capital

a. P4,627,500b. P3,007,500c. P4,632,500d. P4,592,50043. Retained earnings

a. P600,000

b. P565,000

c. P557,000

d. P560,00044. Treasury stock

a. P10,000

b. P47,500

c. P50,000

d. P045. An auditor usually obtains evidence of shareholders equity transactions by reviewing the entitys

a. Canceled stock certificates.

b. Transfer agents records.

c. Treasury stock certificate book.

d. Minutes of board of directors meetings.

PROBLEM NO. 9

You were able to gather the following information in connection with your audit of the stockholders equity section of the balance sheet of Jang Duk, Inc. The company is a manufacturer of school and office equipment. As of December 31, 2005, the stockholders equity of the company is presented below:

Cumulative preferred stock (P15 par value; 50,000

shares authorized, 6,000 shares issued and outstanding)P 90,000

Common stock (P10 par value; 500,000 shares authorized,

165,000 shares issued and outstanding1,650,000

Retained earnings 933,000

P2,673,000

Jang Duks capital stock transactions during 2006 were as follows:

a. On January 31, 12,000 preferred shares were issued in exchange for land with an appraised value of P150,000. Six months ago, 1,000 shares of Jang Duks preferred stock were exchanged over the counter for P14 per share.

b. On February 14, 6,750 shares of common stock were sold to Ms. Acti Vista at P25 per share.

c. On December 14, Jang Duk purchased dissident stockholder Vistas 6,750 shares at P27 per share. The shares are to be held as treasury shares. (Vista violently opposed Jang Duk business strategy and Jang Duks management decided to eliminate her interest.)

d. On December 20, Jang Duk contracted with Ma Ria for the sale of 15,000 previously unissued shares at P25 per share to be issued when the purchase price is fully paid. At December 31, only 292,500 had been paid. Ria agreed to pay the balance on or before January 31, 2007.

e. On December 31, Jang Duk retired 6,000 preferred shares at P18 per share.

f. A cash dividend of P2 per share was declared on the preferred shares on October 15, and paid on November 15.

g. A cash dividend of P1.50 per share was declared on December 15, and payable on January 15, 2007.

h. Jang Duks net income for the year 2006 was P375,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2006:

46. Preferred stock

a. P180,000

b. P132,000

c. P150,000

d. P162,000

47. Common stock

a. P1,717,500b. P1,867,500c. P2,010,000d. P1,818,750

48. Additional paid-in capital

a. P296,250

b. P326,250

c. P101,250

d. P71,250

49. Total retained earnings

a. P988,500

b. P1,006,500c. P824,250

d. P1,018,500

50. Total stockholders equity

a. P3,085,500b. P3,198,000c. P3,018,000d. P3,168,000- end of examination -

GOOD LUCK!

AP-59-1stPB