Quizbowl RF12E1. Accepting an engagement to compile a financial projection for a publicly held company

most likely would be inappropriate if the projection were to be distributed to a. A bank with which the entry is negotiating for a loan.b. A labor union with which the entity is negotiating a contract.c. The principal stockholder, to the exclusion of the other stockholders.d. All stockholders of record as of the report date.

E2. Chan Reyes had the following transactions in the capital stock of Lee Corporation:2006June 2 Purchased 200 shares of P100 par value common stock at P120 per share.2007Mar 1 Received stock rights permitting him to purchase at par one new share of

common stock for every four shares held. On this date, the bid price for a share was P140; for a right, P10.

May 1 Exercised 60% of the rights received.June 1 Sold remaining rights at P9.80 each.Dec. 1 Received a cash dividend of P10 a share and a 20% stock dividend.2008Apr. 1 Sold the shares received as stock dividend on December 1, 2007 at P110 a

share.

Use the average cost method.

How much is the cost of the investment after the sale on April 1, 2008?a. P 21,967 c. P 24,000P P 22,400 d. P 26,360

E3. Comparative financial statements include the prior year’s statements that were audited by a predecessor auditor whose report is not presented. If the predecessor’s report was unqualified, the successor should a. Express an opinion on the current years statements alone and make no

reference to the prior year’s statements.b. Indicate in the auditor’s report that the predecessor auditor expressed an

unqualified opinion.c. Obtain a letter of representations from the predecessor concerning any

matters that might affect the successor’s opinion.d. Request the predecessor auditor to reissue the prior year’s report.

E4 When reporting on comparative financial statements, which of the following circumstances ordinarily should cause the following circumstances ordinarily should cause the auditor to change the previously issued opinion on the prior year’s financial statements?a. The prior year’s financial statements are restated following a pooling of interests in

the current years.b. A departure from generally accepted accounting principles caused an adverse

opinion on the prior year’s financial statements and those statements have been property restated.

c. A change in accounting principle caused the auditor to make a consistency modification in the current year’s auditor’s report.

d. A scope limitation caused a qualified opinion on the prior year’s financial statements but the current year’s opinion was properly unqualified.

E5 The following transactions took place in the month of April for Sure Company:

1. The company was incorporated on April 1 by selling shares for P56M.

2. Land and office building were purchased for P23M. A down payment of P8M was paid by check; a note was signed for the remaining P15M, the property being given a collateral to the note which was due in 3 months time only.

3. A check for P4.34M was written to pay for the entire purchase price of the computer equipment.

4. A check in the amount of P0.62M was written to acquire software technology.

5. One piece of computer equipment was sold to Sorry Company at its original price, and the cash collected was deposited in the company’s checking account.

Assume all transactions of the company were properly recorded and the balance of the checking account at the end of April was found to be P43.81M, the selling price of the piece of equipment sold in item (3) above is:a. P 4.19M c. P15.77Mb. P 86.85M d. P 0.77M

E6. Tread Corp. accountants for the effect of a material accounting change prospectively when the inclusion of the cumulative effect of the change is required in the current year. The auditor would choose between expressing a(an)a. Qualified opinion or a disclaimer of opinion. b. Disclaimer of opinion or an unqualified opinion with an explanatory paragraph.c. Unqualified opinion with an explanatory paragraph and an adverse opinion.d. Adverse opinion and a qualified opinion.

E7. In 2008, Mount Corporation acquired land by paying P375,000 down and signing a note with a maturity value of P5,000,000. On the note’s due date, December 31, 2008, Mount owed P200,000 of accrued interest and P5,000,000 principal on the note. Mount was in financial difficulty and was unable to make any payments. Mount and the bank agreed to amend the note as follows:

a. The P200,000 of interest due on December 31, 2008 was forgiven.b. The principal of the note was reduced from P5,000,000 to P4,750,000 and the

maturity date extended 1 year to December 31, 2009.c. Mount would be required to make one interest payment totaling P150,000 on

December 31, 2008.

As a result of the troubled debt restructuring, Mount should report a gain, before taxes, in its 2008 income statement of:a. P200,000 c. P300,000b. P250,000 d. P450,000

E8. The third standard of field work states that sufficient competent evidential matter is to be obtained through inspection, observation, inquiries, and confirmation to afford a reasonable basis for an opinion regarding the financial statements under audit. The substantive evidential matter required by this standard may be obtained, in part, througha. Flowcharting the internal control structure.b. Proper planning of the audit engagement.c. Analytical procedures.d. Auditor working papers

E9. At January 1, 2006, Quest Co. had a receivable from A Company of P400,000 that has been outstanding for quite some time. Initial investigation revealed that A Company is in deep financial dilemma. At present, A Company is unable to settle all outstanding obligations but further investigation revealed that F Company is taking over to run and operate the business affairs of A Company. However, F Company is more than willing to assume only 75% of A Company’s financial obligations and by the end of 2007, all the assumed financial obligations of A Company will be settled. As of December 31, 2006, Quest Company expects to collect P300,000 that is due from A Company. As of December 31, 2006, the prevailing interest rate for a similar financial asset is 14%.

What amount of bad debt/ impairment loss should Quest Company recognize related to its accounts receivable in 2006?a. P136,843 c. P300,000b. P263,157 d. P400,000

E10. The Scope of an audit is not restricted when an attorney’s response to an auditor as a result of a client’s letter of audit inquiry limits the response toa. Matters to which the attorney has given substantive attention in the form of

legal representation.b. An evaluation of the likelihood of an unfavorable outcome of the matters

disclosed by the entity.c. The attorney’s opinion of the entity’s historical experience in recent similar

litigation.d. The probable outcome of asserted claims and pending or threatened litigation.

A1. Syosset Company is a Philippine corporation that purchases inventory from US manufacturers. A recent inventory purchase involved the following events:

Nov. 12 – Purchased raw materials from Hampton Bays Company, a US manufacturer, amounting to US 250,000, payable in 60 days. Current exchange rate is P50.45. (Syosset uses perpetual inventory system and debits inventory account)

Dec. 31 – Made year-end adjusting entry relating to the US 250,000 accounts payable to Hampton Bays. Current exchange rate is P50.89.

Jan. 11 – Issued a check amounting to US 250,000 in full payment of the accounts payable to Hampton Bays and recorded a gain amounting to P122,500.

What is the exchange rate of the Philippine peso to US dollar on January 11?a. P 51.38 c. P

50.67b. P 50.89 d. P 50.40

A2. As auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is toa. Provide the data necessary to prepare a proof of cash.b. Request a cutoff bank statement and related checks be sent to the auditor.c. Detect kiting activities that may otherwise not be discovered.d. Seek information about contingent liabilities and security agreements.

A3. When an auditor tests a computerized accounting system, which of the following is true of the test data approach?a. Test data must consist of all possible valid and invalid conditions.b. The program tested is different from the program used throughout the year by

the client.c. Several transactions of each type must be3 tested.d. Test data are processed by the client’s computer programs under the

auditor’s control.

A4. On December 31, 2009, the balance sheet of Timo Company showed the following property and equipment after charging depreciation:

Building 3,000,000Accumulated depreciation 1,000,000 2,000,000

Equipment 1,200,000Accumulated depreciation 400,000 800,000

The company has adopted the revaluation model for the valuation of property and equipment. This has resulted in the recognition in prior periods of an asset revaluation surplus for the building of P150,000. On December 31, 2009, an independent valuer assessed the fair value of the building to be P1,600,000 and the equipment to be P900,000.

The building and equipment had remaining useful lives of 25 years and 4 years, respectively, as of December 31, 2009.

Amount to be recognized in 2009 profit or loss related to the revaluation of property and equipmenta. P 400,000 b. P 300,000 c. P 250,000 d. P 150,000

A5. A primary advantage of using generalized audit software packages to audit the financial statements of a client that uses an EDP system is that the auditor maya. Consider increasing the use of substantive test of transactions in place of

analytical procedures.b. Substantiate the accuracy of data through spellchecking digits and hash

totals.c. Reduce the level of required tests of controls to a relatively small amount.d. Access information stored on computer files while having a limited

understanding of the client’s hardware and software features.

A6. On January 1, 2003, the Paul Company purchased a machine for P1,300,000 which it installed in a rented factory. It is depreciating the machine over 12 years by the SLM to a residual value of P100,000. Late in 2007, because of increasing competition in the industry, the company believes that its asset may be impaired and will have a remaining useful life of 5 years over which it estimates the asset will produce total cash inflows of P2,000,000 and will incur total cash outflows of P1,650,000. The cash flows are independent of the company’s other activities and will occur evenly each year. The fair value of the machine is P280,000. The cost to sell the machine is P40,000. The company’s discount rate is 10%.

The Recoverable Cost of the machine isa. P 280,000 b. P 240,000 c. 265,356 d. P 292,676

A7. Stratified mean per unit (MPU) sampling is a statistical technique that may be more efficient than uncertified MPU because it usually

a. May be applied to populations where many monetary errors are expected to occur.

b. Produces an estimate having a desired level of precision with a smaller sample size.

c. Increases the variability among items in a stratum by grouping sampling units with similar characteristics.

d. Yields a weighted sum of the strata standard deviations that is greater than the standard deviation of the population.

A8. On January 1, 2007, Charmaine Corporation decided to dispose of an item of plant that is carried in its records at a cost of P900,000, with accumulated depreciation of P160,000. Depreciation on the plant since it was originally acquired has been charged of P10,000 per month. The plant will continue to be operated until it is sold, at which time the operations of the plant will be outsourced. The company undertook all the necessary actions to be able to classify the asset as held for sale. It is estimated that it could sell the plant for its fair value, P720,000, incurring P20,000 selling costs in the process. The plant has been depreciated at an amount of P10,000 per month.

On March 31, 2007, the plant had not been sold but, due to shortage of this type of plant, there had been an increase in the fair value to P770,000. On June 30, 2007, Charmaine sold the plant for P785,000 incurring P25,000 selling costs.

The depreciation expense to be recognized in 2007 isa. P 60,000 b. P 56,760 c. P 58,380 d. P 0

A9. Because of the pervasive effects of laws and regulations on the financials statements of governmental units, an auditor should obtain written management representations acknowledging that management hasa. Implemented internal control policies and procedures designed to detect all

illegal acts,b. Documented the procedures performed to evaluate the governmental unit’s

compliance with laws and regulations.c. Identified and disclosed all laws and regulations that have a direct and

material effect on its financial statements.d. Reported all known illegal acts and material weaknesses in internal control

structure to the funding agency or regulatory body.

A10. Six months after issuing an unqualified opinion on audited financial statements, an auditor discovered that the engagement personnel failed to confirm several of the client’s material accounts receivable balances. The auditor should firsta. Request the permission of the client to undertake the confirmation of

accounts receivable.b. Perform alternative procedures to provide a satisfactory basis for the

unqualified opinion.c. Assess the importance of the omitted procedures to the auditor’s ability to

support the previously expressed opinion. d. Inquire whether there are persons currently relying, or likely to rely, on the

unqualified opinion.

D1.HARPER LEE TRADING CORPORATION is in the process of filing an insurance claim in connection with a fire on September 15, 2007 that destroyed its inventory and

accounting records. As the external auditor of the company, you were requested the company to determine the amount of loss and in filing the said insurance claim. You obtained the following information based on your investigation:

a. Inventory as reported in the latest annual financial statements, dated December 31, 2006 amounted to P632,369.40 this amount is based on the physical inventory count conducted by the Harper Lee under you observation on December 31,2006.

b. Accounts payable and accounts receivable as reported in the latest annual financial statements amounted to P330,319.23 and P405,027.54.

c. Unpaid open invoices due to the suppliers as of the date of the fire were ascertained to be P380,836.11.

d. All sales are on account and unpaid open invoices due from customer as of the date of the fire were ascertained to be P321,435.75.

e. Payments to vendors from December 31,2006 to the date of the fire totaled to P1,925,614.68 while total collections on receivables during the same inclusive dates totaled to P2,628,586.50.

f. Almost all the merchandise items are sold at approximately 30% in excess of cost. As at September 15, 2007, the total cost of inventory items not destroyed by the fire amounted to P434,646.99.

g. The annual premium of P23,640 on the insurance carried was due and paid on January 1, 2006. The policy, which has a face amount of P465,000 carries an 80% coinsurance clause (applied to the estimated book value of inventories on the date of the fire.)

What is the estimated amount to be recovered from the insurance company? (Hint: recoverable amount + [(Face of policy/ Co-insurance requirement)*Fire Loss]a. 275,776.67 b. 193,060.65 c. 121,722.48 d. 465,000

D2.An auditor’s report contains the following:

We did not audit the financial statement of B Company, a consolidated subsidiary, which statements reflect total assets and revenues constituting 20 percent and 22 percent, respectively, of the related consolidated totals. These statements were audited by other auditors, whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for B Company, is based solely upon the report of other auditors.

These sentencesa. Disclaim an opinion. c. Divide responsibility.b. Qualify the opinion. d. Should no be part of the audit report.

D3.PORTER COMPANY is in its first year of operation and is using the cash basis of accounting. The company presented the foll0owing cash receipts and disbursement records for 2007:

Cash receipts P384,000Cash disbursements (247,500)

P136,500

The management requested you to compute its income under accrual basis.

The following information are deemed relevant in your analysis:a. Depreciation of plant assets for 2007 computed by straight-line method is P31,500.

b. Prepaid insurance f P5,400, two-thirds of which relates to 2008, is included in the 2007 cash disbursement figure. This amount was recognized as insurance expense when it was paid.

c. Porter Company received P36,000 in advance rent for space in its building. The entire amount is included in the cash receipts figure and was recognized as rent revenue when received. However, P21,000 of it was space that will be provided in 2008.

d. Employees are due P8,400 at the end of 2007.e. Interest amounting to P9,510 from investment is receivable at the end of 2007.f. You estimate that your 2007 fee for accounting services that have not been billed will

be P1,500.

What is the total liabilities to be reported as of the balance sheet date under the accrual basis? a. 34,500 b. 44,010 c. 40,410 d. 30,900

D4. On January 1, 2002, BRUCE Ltd. Granted stock options to its chief executive officer (CEO). This is the only stock option plan that BRUCE offers. The details of the stock options are set out below:

Option to purchase 5,000 no-par-value common shares

Option price per share P62.00

Market price per share at grant date P57.00

Stock options expire The earlier of 8 years after issuance or the employee’s cessation of employment with the company for any reason other than retirement.

The options are first exercisable The earlier of 4 years after issuance or the date on which an employee reaches the retirement age of 65.

Fair value at grant date, as determined by using a binomial valuation model P10.00

On January 1, 2007, 4,000 of the options were exercised when the market price of the common shares was P78.00. The rest of the options were allowed to expire.

The journal entry to record the exercise of 4,000 options on January 1, 2007 will requirea. a debit to cash P312,000b. a debit to contributed surplus of P40,000c. a credit to common shares of P40,000d. a credit to contributed surplus of P248,000

D5.Which of the following is least considered if the auditor has to determine whether specialized CIS skills are needed in an audit?a. The auditor needs to obtain a sufficient understanding of the

accounting and internal control system affected by the CIS environment.b. The auditor needs to determine the effect of the CIS environment on

the assessment of overall risk and of risk at the account balance and class of transactions level.

c. Design and perform appropriate tests of controls and substantive procedures.

d. The need of the auditor to make analytical procedures during the completion stage of audit.

D6.On December 31, 2005, Rebecca Rose Corporation acquired the following three intangible assets:

A trademark for P300,000. The trademark has 7 years remaining legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.

Goodwill for P1,500,000. The goodwill is associated with Rebecca Rose’s Hayo Manufacturing reporting unit.

A customer list for P220,000. By contract, Rebecca Rose has exclusive use of the list for5 years. Because of market conditions, it is expected that the list will have economic value for just 3 years.

On December 31, 2006, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets:

a) Because of a decline in the economy, trademark is now expected to generate cash flows of just P10,000 per year. The useful life of trademark still extends beyond the foreseeable horizon.

b) The cash flows expected to be generated by the Hayo Manufacturing reporting unit is P250,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the Hayo Manufacturing reporting unit are as follows:

Book values Fair valuesIdentifiable assets P2,700,000 P3,000,000Goodwill 1,500,000 ?Liabilities 1,800,000 1,800,000

c) The cash flows expected to be generated by the customers list are P120,000 in 2007 and P80,000 in 2008.

Assume that the appropriate discount rate for all items is 6%

Impairment loss for the year 2006a. P90,476 b. P133,333 c. P179,584 d. P0

D7.The following procedures may be performed by CPAs in an engagement:

I. Consideration of internal controlII. ObservationIII. Inquiry and analysisIV. InspectionV. ConfirmationVI. Obtaining management representation letter

Which of the foregoing are normally performed in an agreed-upon procedures engagement?

a. II and VI only c. II, III, IV, and V onlyb. I, II, and VI only d. II, III, IV, and VI only

D8.The STEPHANY CO. sold P6,000,000 of 9% bonds on October 1, 2001, at P5,747,280 plus accrued interest. The bonds were dated July 1, 2001; interest payable semiannually on January 1, and July 1; redeemable after June 30, 2005 to June 30, 2009, at 101, and thereafter until maturity at 100 and convertible into P10 par value common stock as follows:

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

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

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

The following transactions occur in connection with the bonds:

2007July 1 P2,000,000 of bonds were converted into stock.

2008Dec. 31 P1,000,000 face value of bonds were reacquired at 99-1/4 plus accrued

interest. These were immediately retired.

2009July 1 the remaining bonds were called for redemption and accrued interest

was paid. For purposes of obtaining funds for re4demption and business expansion, an P8,000,000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2002, and are due in 20 years.

In recording the bond conversion on July 1, 2007, how much should be credited to the additional paid-in capital account?a. P1,796,320 b. P1,965,440 c. P1,845,440d. P1,865,440

D9.Which of the following is not an objective of requiring registration of individual CPAs and Firms of partnership of CPAs engaged in public accounting practice?a. The required registration will give equal opportunities to CPAs in the practice

of their profession.b. It will enable the Board of Accountancy to formulate and implement rules and

regulations more effectively for the enhancement and maintenance of high professional, ethical, and technical standards of the accounting profession.

c. To protect the public against fraud, deception, unethical practices and from the consequences of ignorance, incompetence and incapacity in the practice of public accounting.

d. It will help PRC and BOA to identify and impose corresponding sanctions and penalties on individual CPAs.

D10. Jennifer Sales Company uses the first-in, first-out method in calculating cost of goods sold for the three products that the company handles. Inventories and purchase information concerning the three products are given for the month of October.

Product C Product P Product A

Oct. 1 Inventory 50,000 units 30,000 units 65,000 units at P6.00 at P10.00 at P0.90

Oct. 1-15 Purchases 70,000 units 45,000 units 30,000 units at P6.50 at P10.50 at P1.25

Oct. 16-31 Purchases 30,000 units at P8.00

Oct. 1-31 Sales 105,000 units 50,000 units 45,000 unitsOct. 31 Sales price P8.00/unit P11.00/unit P2.00/unit

On October 31, the company’s suppliers reduced their prices from the most recent purchase prices by the following percentages: product C, 20%; product P, 10%; product A, 8%. Accordingly, Jennifer decided to reduce its sales price on all items by 10%, effective November 1. Jennifer’s selling cost is 10% of sales price. Products C and P have a normal profit (after selling costs) of 30% on sales prices, while the normal profit on product A (after selling cost) is 15% of sales price.

The Allowance for inventory write down at October 31 isa. P5,650 b. P85,650 c. P13,500 d. P60,150

Clincher # 1

You were able to gather the following in connection with your audit to the CHONA-ANN Company for the year ended December 31, 2008:

1/1/2008 12/31/2008Accounts receivable P6,400,000 P4,000,000Unpaid merchandise invoices ? 2,621,000Accrued wages 85,000 125,000Advertising supplies inventory 35,000 75,000Accrued advertising 14,250 40,000Prepaid Insurance 25,000 -Unexpired insurance - 41,000

During the year:

Amount collected from customers P10,000,000Total payments to suppliers of merchandise 13,618,000Total payments to suppliers of merchandise of prior years 4,632,000Wages paid 3,050,000Advertising paid which includes P40,000 applicable in 2006 300,000Insurance premium paid 125,000

1. What is the net purchases for 2008? __________________

a. P11,607,000

Clincher # 2

Information about accounts receivable during the year follows:

(a) An aging schedule of the accounts as of December 31, 2007 showed the following:

% to be appliedAge Net debit balance after correct made

Under 60 days P172,500 3%61-90 days 136,900 8%91 – 120 days 39,600 * 12%over 120 days 28,700 P4,400 definitely

uncollectibleestimated remainderis 25% uncollectible

*The P2,000 write-off of receivables belongs to this category.

(b) The accounts receivable control account has a debit balance of P398,000 on December 31, 2007. The difference between this amount and the adjusted balance was established as advances to officers and employees.

(c) Two entries were made in the Bad Debts account during the year;(1) a debit for the amount credited to Allowance for Doubtful Accounts, and (2) credit for P2,000 on November 4, 2007 and a debit to Allowance for Doubtful Accounts because of Bankruptcy.

(d) The allowance for Doubtful accounts showed a debit of P2,000 and a credit equal to 5% of the December 31, 2007 Accounts Receivable balance aside from the beginning balance which amount to P20,000.

(e) A credit balance exists in the Accounts Receivable (61 – 90 days) of P4,200 which represents an advance on a sales contract.

To correct the entry to write-off the accounts receivable, the account debited and credited, respectively are (Give the entry)

Bad DebtsAccounts Receivable

Clincher # 3

On January 2, 2008, a tract of land that originally cost P800,000 was sold by LANGIT Corporation. The company received a P1,200,000 note as payment. It bears interest rate of 4% and is payable in 3 annual installments of P400,000 plus interest on the outstanding balance. The prevailing rate of interest for a note of this type is 10%. The present value table shows the following present value factors of 1 at 10%.

Present value factor of 1 for 3 periods 0.75132Present value factor of 1 for 2 periods 0.82645Present value factor of 1 for 1 period 0.90909Present value of an ordinary annuity of 1 for 3 periods 2.48685

The effective interest income on the note receivable for the year ended December 31, 2008 is __________________

a. 107,685

Clincher # 4

The following information pertains to YouCanPass Company’s intangible assets:

a. On January 1, 2007, YouCanPass signed an agreement to operate as a franchise of Jolibee for an initial franchise fee of P1,500,000. Of this amount, P300,000 was paid when the agreement was signed and the balance is payable in 4 annual payments of P300,000 each, beginning January 1, 2008. The agreement provides that the down payment is not refundable and no future services are required of the franchisor. The present value at January 1, 2007, of the 4 annual payments discounted at 14% (the implicit rate for a loan of this type) is P874,000. The agreement also provides that 5% of the revenue from the franchise must be paid to the franchisor annually. YouCanPass Company estimates the useful life of the franchise to be 10 years.

b. YouCanPass incurred P1,300,000 of experimental and development costs in its laboratory to develop a patent which was granted on January 2, 2007. Legal fees and other costs associated with registration of the patent totaled P272,000. YouCanPass estimates that the useful life of the patent will be 8 years.

c. A trademark was purchased from McDonalds for P640,000 on July 1, 2004. Expenditures for successful litigation is defense of the trademark totaling P163,200 were paid on July 1, 2006. YouCanPass Company estimates that the useful life of the trademark will be 20 years from the date of acquisition.

The total expenses resulting from the transactions that would appear on YouCanPass Company’s income statement for the year ended December 31, 2007 should bea. P 183,400 b. P 1,133,400 c. P 1,260,560 d. P 1,255,760