chapter 10 - pre-board examinations

CHAPTER 10 – Pre-Board ExaminationsPB Examination No. 1

INSTRUCTIONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED QUESTIONS. USE THE SPECIAL ANSWER SHEET AND DRAW A VERTICAL LINE ACROSS THE LETTERED BOX THAT CORRESPONDS TO YOUR CHOICE. STRICTLY NO ERASURES ARE ALLOWED.======================================================================

Problem 1You have been engaged for the audit of the Letecia Company for the year ended December 31, 2007. The Letecia Company is engaged in the wholesale chemical business and makes all sales at 25% over cost.

Following are portions of the client’s sales and purchases accounts for the calendar year 2007.

SALESDate Reference Amount Bal. Forward

Date Reference Amount12-31 Closing entry P 699,860 P 658,320

12-27 SI # 965 5,19512-28 966 19,27012-28 967 1,30212-31 969 5,84112-31 970 7,922

_______ 12-31 971 2,010P 699,860 P 699,860

PURCHASESBal. Forward

Date Reference Amount Date Reference AmountP 360,300 12-31 Closing entry P 385,346

12-28 RR # 1059 3,10012-30 1061 8,96512-31 1062 4,86112-31 1063 8,120 _______

P 385,346 P 385,346

SI – Sales Invoice RR – Receiving Report

You observed the physical inventory of goods in the warehouse on December 31, 2007 and were satisfied that it was properly taken.

When performing a sales and purchases cutoff tests, you found that at December 31, 2007, the last receiving report that had been used No. 1063 and that no shipments have been made on any sales invoices with numbers larger than No. 968. You also obtained the following additional information:

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1. Included in the warehouse physical inventory at December 31, 2007, were chemicals that had been purchased and received on receiving report No. 1060 but for which an invoice was not received until 2008. Cost was P2,183.

2. In the warehouse at December 31, 2007, were goods that had been sold and paid for by the customer but which were not shipped out until 2008. They were all sold on sales invoice No. 965 and were not inventoried.

3. On the evening of December 31, 2007, there were two cars on the Letecia Company siding:

(a) Car BR38162 was unloaded on January 2, 2008, and received on receiving report No. 1063. The freight was paid by the vendor.

(b) Car BAE74123 was loaded and sealed on December 31, 2007, and was switched off the company’s siding on January 2, 2008. The sales price was P12,700 and the freight was paid by the customer. This order was sold on sales invoice No. 968.

4. Temporarily stranded at December 31, 2007, on a railroad siding were two cars of chemicals en route to the Z Pulp and Paper Co. They were sold on sales invoice No. 966 and the terms were FOB destination.

5. En route in the Letecia Company on December 31, 2007, was a truckload of material that was received on receiving report no. 1064. The material was shipped FOB destination and freight of P75 was paid by the Letecia Company. However, the freight was deducted from the purchase price of P975.

6. Included in the physical inventory were chemicals exposed to rain while in transit and deemed unsalable. Their invoice cost was P1,250, and freight charges of P350 had been paid on the chemicals.

Questions:

1. The inventory at year-end is understated by:a. P 23,976 b. P 32,096 c. P 33,696 d. P 44,714

2. The adjusted sales at year-end is:a. P 664,817 b. P 677,517 c. P 680,590 d. P 712,560

3. The adjusted purchases at year-end is:a. P 377,226 b. P 379,409 c. P 383,163 d. P 387,529

4. The cost of sales at year-end is overstated by:a. P 31,513 b. P 50,991 c. P 52,591 d. P 63,609

5. The sales at year-end is overstated by:a. P 19,270 b. P 22,343 c. P 35,043 d. P 40,120

Problem 2During the audit of a new client, Cialette Company, for the year ended December 31, 2007, you learned of the following transactions between Cialette Company and another client, financiers, Inc.:

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1. Cialette completed construction of a warehouse building on its own land in June, 2006 at a cost of P2 million. Construction was financed by a construction loan from the Capital Development Bank.

2. On July 1, 2006, Financiers, Inc. bought the building from Cialette for P2 million, which Cialette used to discharge its construction loan.

3. On July 1, 2006, Financiers, Inc. borrowed P2 million from Capital Development Bank, to be repaid quarterly over four years plus interest at 9%. A mortgage was placed on the building to secure the loan, and Cialette signed as a guarantor of the loan.

4. On July 1, 2006, Cialette signed a noncancelable 20-year lease of the building from Financiers, Inc. The lease specified that Cialette would pay P242,700 per year for 20 years, payable in advance on each July 1, and granted an option exercisable at the end of the 20-year period, permitting Cialette to either (a) purchase the building for P240,000 or (b) renew the lease for an additional 15 years at P30,000 per year and purchase the building for P20,000 at the end of the renewal period. The lease specified that P12,000 of the annual payment would be for insurance, taxes, and maintenance for the following 12 months; if the lease should be renewed, P10,000 of each annual payment would be for insurance, taxes and maintenance.

5. The building has a useful life of 40 years and is to be depreciated under the straight-line method (assume no salvage value).

6. Cialette and financiers negotiated the lease for a return of 10%. You determine that the present value of all future lease payment is approximately equal to the sales price and that the sale-and-leaseback transaction is in reality only in financing arrangement.

Instructions: For the December 31, 2007, balance sheet of Cialette company, prepare schedules computing the balances for the following items:

Questions:

6. The prepaid insurance, taxes, and maintenance at December 31, 2007 is:a. P 0 b. P 6,000 c. P 10,000 d. P 12,000

7. The cost of the warehouse building at December 31, 2007 is:a. P 2,720,000 b. P 2,180,000 c. P 2,192,000 d. P 2,000,000

8. The current liabilities arising from the lease at December 31, 2007 is:a. P 59,147 b. P 144,923 c. P 230,700 d. P 242,700

9. The long-term liabilities arising from the lease at December 31, 2007 is:a. P 1,769,300 b. P 1,715,530 c. P 1,656,383 d. P 1,570,607

10. The accumulated depreciation of the warehouse building at December 31, 2007 is:a. P 50,000 b. P 54,800 c. P 75,000 d. P 82,200

Problem 3Charmaine Corporation was incorporated on January 1, 2000, and began operations one week later. Charmaine is a nonpublic enterprise. Charmaine Corporation’s controller prepared the following financial statements for the 11 months ended November 30, 2005:

Balance SheetNovember 30, 2005

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ASSETSCurrent Assets:

Cash 150,000.00Marketable securities, at cost 60,000.00Accounts receivable 450,000.00Allowance for doubtful accounts (59,000.00)Inventories 430,000.00Prepaid expenses 15,000.00

Total current assets 1,046,000.00Property, plant and equipment 426,000.00Accumulated depreciation (40,000.00)Other Assets 120,000.00 Total assets 1,552,000.00

LIABILITIES & STOCKHOLDERS’ EQUITYCurrent Liabilities

Accounts payable & accrued expenses 592,000.00Income tax payable 0 Total current liabilities 592,000.00

Stockholders’ EquityCommon stock, P10 par value 300,000.00Retained earnings 660,000.00 Total stockholders’ Equity 836,000.00

Total liabilities & Stockholders’ Equity 1,552,000.00

Statement of IncomeFor the year ended November 30, 2005

Net sales 2,950,000.00Cost & expenses:

Cost of sales 1,670,000.00Selling and Administrative 650,000.00Depreciation 40,000.00 Research and Development 30,000.00

2,390,000.00 Income before income taxes 560,000.00

Transactions for the month of December 2005:

1. Purchased merchandise from Abegail Industries, P350,000. Terms: Less 5%, 10%, FOB shipping point, 2/10, n/30. Abegail Industries paid P2,000 for the transportation cost. It is the policy of the company to record the purchases at net of discount.

2. Collected P150,000 accounts receivable less 2% discount.

3. Sold merchandise on account to Bing Supplies, P300,000. Terms: FOB destination, 3/10, n/30. Charmaine Corporation paid the freight for P3,000. The company records these sales at net of discount.

4. Charmaine Corporation issued check for P100,000 as partial payment of the account to Abegail Industries.

5. Paid various operating expenses, P215,000.

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6. Collected in full the account of Bing Supplies within the discount period.

7. Charmaine Corporation issued check for full payment of accounts to Abegail Industries 20 days after the invoice date.

8. Ending inventory, P500,000.

Additional Information:

a. Income tax rate is 35%.

b. The investment portfolio consist of short-term investments in marketable equity securities with a total market valuation of P75,000 as of December 31, 2005.

b. A P15,000 insurance premium paid on November 30, 2004, on a policy expiring one year later was charged insurance expense.

c. On June 1, 2002, a machine purchased for P45,000 was charged to repairs and maintenance. Charmaine depreciates machines of this type on the straight-line method over a five year life, with no salvage value, for financial and tax purposes.

d. During November 2005, a competitor company filed suit against Charmaine for patent infringement claiming P200,000 in damages. Charmaine Corporation’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the court’s award to the plaintiff is P50,000.

Questions:

11. Cash a. P 51,230 b. P 62,765 c. P 68,750 d. P 70,250

12. Marketable Equity Securities a. P 50,000 b. P 60,000 c. P 75,000 d. P 80,000

13. Property, Plant, & Equipmenta. P 398,750 b. P 399,500 c. P 426,000 d. P 471,000

14. Total Current Assetsa. P 899,750 b. P 804,980 c. P 884,750 d. P 908,750

15. Accounts payable and othersa. P 592,000 b. P 642,000 c. P 773,775 d. P 765,600

16. Retained earnings - bega. P 100,000 b. P 123,075 c. P 135,070 d. P 146,700

17. Salesa. P 3,190,000 b. P 3,238,000 c. P 3,247,000 d. P 3,301,000

18. Selling and admin expensesa. P 946,735 b. P 945,485 c. P 937,735 d. P 936,485

19. Research and Development costa. P 0 b. P 30,000 c. P 45,000 d. P 50,000

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20. Depreciationa. P 40,000 b. P 49,000 c. P 71,500 d. P 72,250

Problem 4The Vanessa Company engaged Mr. Coliseo, a CPA, in 2007 to examine its books and records and to make whatever adjustments are necessary.

The CPA’s examination disclosed the following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS Balance

Date Particular Debit Credit Debit Credit

2005 Jan. 1 Balance 580,000Dec. 31 Net income for the year 310,000 890,000

2006Jan 31 Dividends paid 140,000 750,000Apr. 3 Paid in capital in excess of par 90,000 840,000Aug. 30 Gain on retirement of preferred

Stock at less than issue price 64,500 904,500Dec. 31 Net loss for the year 205,000 699,500

2007Jan 31 Dividends paid 100,000 599,500Dec. 31 Net loss for the year 165,500 434,000

b. Dividends had been declared on December 31, 2005 and 2006 but had not been entered in the books until paid.

c. The company purchased a machine worth P360,000 on April 30, 2004. The company charged the purchase to expense. The machine has an estimated useful life of 3 years. The company uses the straight line method and residual values are deemed immaterial.

d. The company received at transportation equipment as donation from one of its stockholders on September 30, 2006. The equipment was used to deliver goods to customers. The equipment costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a fair value of P240,000 and P30,000 was incurred for registering the transfer of ownership. The company did not record the donation on its books. The expenses paid related to the donated equipment were charged to expense.

e. The physical inventory of merchandise had been understates by P64,000 and by P44,500 at the end of 2005 and 2007, respectively.

f. The merchandise inventoried at the end of 2006 and 2007 did not include merchandise that was then in transit shipped FOB shipping point. These equipments of P43,400 and P32,600 were recorded a purchases in January 2007 and 2008, respectively.

QuestionsBased on the above audit findings, the adjusted balances of the following are: (Disregard tax implication)

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21. Retained earnings, 12/31/04a. P 860,000 b. P 850,900 c. P 790,900 d. P 760,900

22. Net income for 2005a. P 373,100 b. P 369,800 c. P 254,000 d. P 215,800


24. Net loss for 2006a. P 379,000 b. P 359,700 c. P 349,700 d. P 269,700


26. Retained earnings, 12/31/07 a. P 362,700 b. P 332,700 c. P 302,700 d. P 254,000

Problem 5You have been engaged to audit the financial statements of Cuajotor Corporation for the calendar year 2007. The company was organized on January 2, 2006 and has not been audited before.

The following items relating to equity and income statement accounts appear in your Working Balance Sheet (WBS) and Working Income Statement (WIS)

WBS- December 31, 2007: Balance Per Books Long- term liabilities P240,800Capital Stock issued 560,000Additional Paid in capital 100,000Revaluation increment- Land 90,000Retained Earnings 54,000

WIS- Year ended December 31, 2007 Income before tax 150,000Provision for income tax 45,000 Income before extraordinary items 105,000Extraordinary items(net of tax) 77,000 Net income 28,000

Following are your audit findings:

1. Long- term liabilities- This consist

Mortgage payable P180,000Accrued interest on mortgage payable 10,800Reserve for general contingencies 50,000 Total P240,800

The company mortgage its land to the Philippine National Bank for P180,000 on September 1, 2007. The mortgage liability is payable in 18 semi-annual installments of P10,000 plus accrued interest of 18% to date. The first installments due March 1, 2004.

The reserve for general contingencies was set up by resolution of the Board of Directors on December 27, 2007. its purpose is to provide for possible future losses due to the risk

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of an impending business recession. A corresponding charge was made to general contingency losses which is classified as an extraordinary item.

2. Capital Stock issued- The company is authorized to issue 10,000 shares of P100 par value common stock. Your analysis of the capital stock issued account shows:

2007 DESCRIPTION AMOUNT

Jan. 1 Balance, 4,500 shares issued P450,000 Mar. 1 Sold 500 shares at P120 per share 60,000 Nov. 1 Assessment on stockholders P10 per share 50,000 Dec. 31 Balance P 560,000

3. Additional paid in capital - The account balance represents the fair value of property donated to the company in 2006. There was no manager’s check account in 2006.

4. Revaluation increment (Land) – Land was written up to appraised value on December of 2007. The appraised value of P90,000 was determined by the company engineer. The property was acquired in 2006 at a cost of P40,000.

5. Retained earnings, December 31, 2007 – Analysis of the retained earnings account for 2007 shows:

Balance, January 1, 2007 P18,000Net income – 2007 28,000Gain on sale of treasury stock 8,000Balance, December 31, 2007 P54,000

6. Over/Understatement – The following over/understatements were discovered in the course of your audit:

2006 2007 Inventory, end 4,000 under 10,000 underDepreciation expense 2,500 under 2,000 underAccrued expenses payable end 1,000 under 1,600 over

7. Extraordinary items – Extraordinary items consists of:

General contingency losses P50,000Write-off of obsolete inventory 20,000Loss due to earthquake 40,000Total 110,000Less: Tax savings, 30% 33,000 Extraordinary items, net of tax 77,000

8. Provision for income tax - The income tax rate is 30%. There are no permanent differences between financial and taxable income.

Required: For each item below, determine the amount per audit that should appear in your working balance sheet and working income statement. Assume that client approves all adjustments.

Questions

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27. Capital stock issueda. P 580,000 b. P 550,000 c. P 510,000 d. P 500,000

28. Additional paid-in capitala. P 168,000 b. P 150,000 c. P 110,000 d. P 100,000

29. Long-term liabilitiesa. P 230,000 b. P 190,800 c. P 180,000 d. P 160,000

30. Current portion of long-term debta. P 80,000 b. P 20,000 c. P 10,000 d. P 0

31. Revaluation increment – Landa. P 90,000 b. P 50,000 c. P 40,000 d. P 0


33. Extraordinary items (net of tax)a. P 0 b. 42,000 c. 40,000 d. 28,000

34. Income before taxa. P 96,600 b. 136,600 c. 134,600 d. 120,400

35. Provision for income taxa. P 40,980 b. P 40,380 c. P 36,120 d. P 28,980

36. Net income a. P 67,620 b. P 54,220 c. P 42,280 d. P 24,280

37. Retained earnings, 12/31/2007a. P 85,970 b. 72,220 c. 63,080 d. 47,720

Problem 6On January 1, 2006, Kazoo Company acquired a factory equipment at a cost of P150,000. The equipment is being depreciated using the straight line method over its projected useful life of 10 years. On December 31, 2007, a determination was made that the asset’s recoverable amount was only P96,000. Assume that this was properly computed and that recognition of the impairment was warranted. On December 31, 2008, the asset’s recoverable amount was determined to be P111,000 and management believes that the impairment loss previously recognized should be reversed. You have been asked to assist the company’s accountant in the application of PAS 36, the standard on impairment of assets.

Questions:

38. How much impairment loss should be recognized on December 31, 2007?a. P0 b. P9,000 c. P24,000 d. P54,000

39. What is the asset’s carrying amount on December 31, 2008?a. P84,000 b. P86,400 c. P90,000 d. P96,000

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40. What would have been the asset’s carrying amount at December 31, 2008, had the impairment not been recognized in 2007?a. P84,000 b. P86,400 c. P96,000 d. P105,000

41. How much impairment recovery should be reported in the 2008 income

statement of Kazoo Company?a. P0 b. P6,000 c. P21,000 d. P27,000

Problem 7 Mark Company has a department that performs machining operations on parts that are sold to contractors. A group of machines had an aggregate carrying amount of P3,690,000 on December 31, 2006. This group of machinery has been determined to constitute a cash generating unit for purposes of applying PAS 36, Impairment of Assets. A cash generating unit as defined in this standard is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or group of assets.

Presented below are data about future expected cash inflows and outflows based on the diminishing productivity expected of the machinery as it ages and the increasing costs that will be incurred to generate output from the machines.

Cost, ExcludingYear Revenues Depreciation 2007 P2,250,000 P 840,0002008 2,400,000 1,260,0002009 1,950,000 1,650,0002010 600,000 450,000

Totals P7,200,000 P4,200,000

The fair value of the machinery in this cash generating unit, net of estimated disposition costs, is determined to amount to P2,535,000. The company discounts the future cash flows of this cash generating unit by using a 5% discount rate.

The following are lifted from the present value tables:

Present value of 1 at 5% for:1 period 0.952382 periods 0.907033 periods 0.863844 periods 0.822705 periods 0.78353

Questions:42. How much impairment loss should be recognized at December 31, 2006?

a. P 0 b. P 224,427 c. P 930,573 d. P 1,155,000

Problem 8On January 1, 2007, Greg Corporation contracted with Mega Construction Company to construct a building for P40,000,000 on land that Greg purchased several years ago. The contract provides that Greg is to make five payments in 2007, with the last payment scheduled for date of completion. The building was completed on December 31, 2007.

Greg made the following payments during 2007:

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January 1 P 4,000,000March 31 8,000,000June 30 12,200,000September 30 8,800,000December 31 7,000,000Total P 40,000,000

Greg had the following debt outstanding at December 31, 2007:

a. A 12%, 4-year note January 1, 2007, with interest compounded quarterly. Both principal and interest are payable on December 31, 2010. This loan relates specifically to the building project. P 17,000,000

b. A 10%, 10-year note dated December 31, 2003, with simple interest; interest payable annually on December 31 12,000,000

c. A 12%, 5-year note dated December 31, 2005, with simple interest; interest payable annually on December 31 14,000,000

Greg adopts the allowed alternative treatment of capitalizing borrowing costs under PAS 23: Borrowing Costs.

The following present and future value factors are taken from the present and future value tables:

3% 12%Future value of 1 for:

4 periods 1.12551 1.5735216 periods 1.60471 6.13039

Present value of 1 for:4 periods 0.88849 0.6355216 periods 0.62317 0.16312

Questions:

43. The amount of interest to be capitalized during 2007 isa. P 0 b. P 2,133,680 c. P 2,277,710d. P 5,013,680

44. The amount of interest that would be expensed for 2007 isa. P 0 b. P 2,277,720 c. P 2,735,960d. P 5,013,680

Problem 9 Sydel Company was organized on January 1, 2007, 25,000 shares of P100 par value ordinary share being issued in exchange for property, plant, and equipment valued at P3,000,000 and cash of P1,000,000. The following data summarize activities for the year.

1. Net income for the period ending December 31, 2007 was P1,000,000.2. Raw materials on hand on December 31 were equal to 25% of raw materials purchased.3. Manufacturing costs were distributed as follows:

Materials used 50%Direct labor 30%Factory overhead 20% (includes depreciation of building, P100,000)

4. Goods in process remaining in the factory on December 31 were equal to 33 1/3% of the goods finished and transferred to stock.

5. Finished goods remaining in stock were equal to 25% of the cost of goods sold.6. Expenses were 30% of sales.

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7. Cost of goods sold was 150% of expenses total.8. Ninety percent of sales were collected. The balance was considered collectible.9. Seventy five percent of the raw materials purchased were paid for. There were no

expense accruals or prepayments at the end of the year.

Questions:

45. Sales at year-end is:a. P 4,000,000 b. P 5,000,000 c. P 2,222,222 d. P 2,200,000

46. Cost of goods sold at year-end is:a. P 2,250,000 b. P 1,800,000 c. P 1,200,000 d. P 666,667

47. Purchases at year-end is:a. P 2,300,000 b. P 2,000,000 c. P 1,800,000 d. P 1,500,000

48. Cash receipts at year-end is:a. P 2,980,000 b. P 3,000,000 c. P 4,600,000 d. P 5,500,000

49. Cost of goods sold rate is:a. 56.25% b. 45% c. 30% d. 24%

50. Periodic or cycle of selected inventory items are made at various times during the year rather than a single inventory count at year end, which of the following is necessary if the auditor plans to observe inventories at interim dates?a. Complete recounts by independent teams are performed.b. Perpetual inventory records are integrated with production accounting records.c. Unit cost records are integrated with production accounting records.d. Inventory balances are rarely at low levels.

---End of Examination---Answer and Solution to the ProblemAnswer - 1. b 2. a 3. d 4. d 5. c

Solution – Problem 1

(a) Adjustment to the Physical Inventory of 12.31.07Item 3a – Goods received per RR # 1063 P 8,120Item 3b – Goods sold per SI # 968 (P12,700 / 125%) 10,160Item 4 -- Goods sold per SI # 966 15,416Item 6 – Cost of damaged chemicals ( 1,600) Amount to be added to the Physical Inventory P32,096

(b) Letecia CompanyAudit Working Paper Adjusting EntriesDecember 31, 2007

(1) Sales 15,773 Accounts Receivable 15,773To adjust for unshipped goods: Invoice No. 969……………….. P 5,841 970……………….. 7,922 971………………. 2,010 P15,773

(2) Cost of Sales 2,183 Vouchers Payable 2,183To take up cost of chemicals purchased and received per RR # 1060 but not recorded.

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(3) Inventory 8,120 Cost of Sales 8,120To include in the EI merchandise received per RR# 1063.

(4) Inventory 10,160 Cost of Sales 10,160To include in the EI the cost of merchandise sold per SI # 968 (12,700/125%); goods considered sold in 2003.

(5) Sales 19,270Inventory 15,416 Accounts Receivable 19,270 Cost of Sales 15,416To reverse entry made on SI # 966; ( goods in transit sold FOB destination). Cost = P19,270/120%)

(6) Claim Receivable – Trucking Company 1,600 Inventory 1,600To set up claim for unsaleable chemicals from the trucking company . (P1,250 + P350)

Answer - 6. b 7. d 8. b 9. c 10. c

Solution – Problem 2

a. Computation of prepaid insurance, taxes and maintenance:Paid for the period July 1, 2007 to June 30, 2008 P12,000Less expired portion at 12.31.07 (1/2) (6,000)Prepaid portion at 12.31.07 P 6,000

b. Computation of cost of building less acc. depr.Cost, July 1, 2006 P2,000,000Less accumulated depreciation to 12.31.06 P2,000,000 / 40 = P50,000 x 1 ½ years 75,000 Building cost less acc. depr. P1,925,000

c. Computation of Current Liabilities Arising from the Lease:Original lease balance (present value) P2,000,000Lease payment , July 1, 2006 P242,700Less maintenance fee to 6.30.07 12,000 230,700 Lease balance, July 1, 2006 P1,769,300Lease payment, July 1, 2007 P242,700Less maintenance fee to 6.30.08 12,000 Balance applicable to lease P230,700Interest, 10% from 7.1.06 to 7.1.07 (P1,769,300 x 10%) 176,930 Balance applicable to lease 53,770 Lease balance, July 1, 2007 P1,715,530

Payment due on lease – July 1, 2008 P230,700Less interest at 10% from 7.1.07 - 7.1.08 (10% x P1,715,530 (171,553) Current portion of lease liability P 59,147Accrued interest payable, 7.1.07 - 12.31.07 (P171,553 / 2) 85,776Total Current liabilities arising from lease P144,923

d. Computation of long-term liabilities arising from lease:Lease balance, July 1, 2007 (refer to letter c) P1,715,530Less current portion of lease liability (refer to letter c) (59,147)Long-term liabilities arising from the lease P1,656,383

Answer – 11. c 12. c 13. a 14. a 15. b 16. b17. b 18. c 19. b 20. b

Solution – Problem 3Additional Information:

Cost of sales 295,265.00 Accounts payable 293,265.00 Valuation Allowance 15,000.00 Cash 2,000.00 Unrealized holding gain 15,000.00

Cash 147,000.00 Insurance expense 13,750.00

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Sales 3,000.00 Retained earnings - beg 8,937.00 Accounts Receivable 150,000.00 Income tax payable 4,813.00

Accounts receivable 291,000.00 Property plant & equip 45,000.00 Selling and Admin exp 3,000.00 Retained earnings - beg 29,250.00

Sales 291,000.00 Income tax payable 15,750.00 Cash 3,000.00

Retained earnings - beg 15,112.00 Accounts payable 100,000.00 Income tax payable 8,138.00

Cash 100,000.00 Depreciation 9,000.00 Accum. Depreciation 32,250.00

Selling and admin exp 215,000.00 Cash 215,000.00 Selling and admin exp 50,000.00

AP and others 50,000.00 Cash 291,000.00

Accounts receivable 291,000.00

Accounts payable 193,265.00 Selling and admin exp 5,958.00

Cash 199,250.00

Cost of sales 430,000.00 Inventory 430,000.00

Inventory 500,000.00 Cost of sales 500,000.00

Net Sales 3,238,000.00 3,238,000.00 Cost of sales 1,895,265.00 1,895,265.00 Gross profit 1,342,735.00 1,342,735.00 Other Operating income - 15,000.00 15,000.00 Total 1,342,735.00 1,357,735.00 Selling and admin 873,985.00 63,750.00 937,735.00 Depreciation 40,000.00 9,000.00 49,000.00 R & D 30,000.00 30,000.00 Income from operations 398,750.00 341,000.00 Provision for income tax - 119,350.00 Net income 398,750.00 221,650.00 Retained Earnings - beg 100,000.00 15,112.00 38,187.00 123,075.00 Retained Earnings - end 498,750.00 344,725.00

Cash 68,750.00 68,750.00 Marketable securities 60,000.00 15,000.00 75,000.00 Accounts receivable 300,000.00 300,000.00 Allowance for BD (59,000.00) (59,000.00)Inventories 500,000.00 500,000.00 Prepaid expenses 15,000.00 15,000.00 Property plant & equip 426,000.00 45,000.00 471,000.00 Accum. Depreciation (40,000.00) 32,250.00 (72,250.00)Other Assets 120,000.00 120,000.00

1,390,750.00 1,418,500.00

AP & others 592,000.00 50,000.00 642,000.00 Income tax payable - 8,138.00 139,913.00 131,775.00 Common stock 300,000.00 300,000.00

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Retained earnings 498,750.00 344,725.00 1,390,750.00 1,418,500.00

Answer – 21. a 22. c 23. b 24. a 25. d 26. d

Solution – Problem 42005 2006 2007

Unadjusted net income/(loss) 310,000 (205,000) (165,500)Adjustments:“c” – Depreciation (120,000) (120,000) (40,000)“d” – Error in charging to expense 30,000 Depreciation (20,000) (80,000)“e” – Understatement of inv. – 2005 64,000 (64,000) Understatement of inv. - 2007 44,500“f” – Understatement of inv. - 2006 43,400 (43,400) Understatement of inv. – 2007 32,600 Under. of purchases – 2006 (43,400) 43,400 Under. of purchases – 2007 ___________ ___________ (32,600)Adjusted Net income 254,000 (379,000) (241,000)Plus: Retained Earnings – beg unadj. 580,000 Prior period adjustment Error in charging to expense 360,000 Unrecorded depreciation (80,000) Retained Earnings – beg adjusted 860,000 974,000 495,000Less: Dividends (140,000) (100,000) _________Retained earnings – end 974,000 495,000 254,000

Answer – 27. d 28. a 29. d 30. b 31. d 32. c33. a 34. a 35. d 36. a 37. a

Solution – Problem 5Long-term liability 20,000

Mortgage Payable – current 20,000Long-term liability 10,800

Interest payable 10,800Long-term liability 50,000

Extraordinary item 35,000Income tax payable 15,000

Capital stock 10,000APIC 10,000

Capital stock 50,000APIC 50,000

APIC 100,000APIC - Donated capital 100,000

Revaluation increment 40,000Land 40,000

Gain on sale 8,000APIC – TS 8,000

Beg. Inventory 4,000Retained earnings - beg 2,800Income tax payable 1,200

Inventory 10,000Cost of sales 10,000

Retained earnings – beg 1,750Income tax payable 750Depreciation 2,000

Accum. Depreciation 4,500Retained earnings – beg 700Income tax payable 300

Expenses 1,000Accrued expenses 1,600

Expenses 1,600Loss on inventory 20,000Loss on damages 40,000

Extraordinary items 42,000

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Income tax payable 18,000

Unadjusted NI 150,000Under beg. Inv. ( 4,000) Under ending invent. 10,000Under depreciation ( 2,000)Under AE – beg 1,000Over AE – end 1,600Loss on inventory (20,000)Loss on damages (40,000)Income before tax 96,600Provision 28,980Net income 67,620

Answer – 38. c 39. a 40. d 41. c

Solution – Problem 638. Recoverable amount 96,000

Carrying value 120,000Impairment Loss 24,000

39. Carrying value – 12/31/07 96,000Depreciation – 2008 12,000Carrying value – 12.31/08 84,000

40. Historical cost 150,000Depreciation – 2006 to 2008 45,000Carrying value had no impairment been made 105,000

41. Carrying value had no impairment been made 105,000Carrying value with impairment 84,000Replacement cost 111,000

Impairment loss (105,000 – 84,000) 21,000

PAS 36 provides that “an impairment loss recognized for an asset in prior years should be reversed if there has been a change in the estimate used to determine the asset’s recoverable amount since the last impairment loss was recognized.”

This means that the recoverable amount of an asset that has previously been impaired turns out to be higher than the asset’s current carrying value, the carrying amount of the asset should be increased to its new recoverable amount.

However, the standard further provides that “the increased carrying amount of an asset due to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined, had no impairment loss been recognized for the asset in prior years.”

Answer - 42. c

Solution - Problem 7Fair market value - 2,535,000

Cash Inflow Cash Outflow Net Cash flow PV factors Value in Use 2,250,000.00 840,000.00 1,410,000.00 0.95238 1,342,855.80 2,400,000.00 1,260,000.00 1,140,000.00 0.90703 1,034,014.20 1,950,000.00 1,650,000.00 300,000.00 0.86384 259,152.00 600,000.00 450,000.00 150,000.00 0.82270 123,405.00

2,759,427.00

Recoverable amount 2,759,427 Carrying value 3,690,000Impairment loss 930,573

Answer – 43 c 44. c

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Solution – Problem 8 Computation of Average Accumulated Expenditures:

4,000,000 x 12/12 = 4,000,0008,000,000 x 9/12 = 6,000,000

12,200,000 x 6/12 = 6,100,0008,800,000 x 3/12 = 2,200,0007,000,000 x 0/12 = 0

18,300,000

Computation of Interest Potentially Capitalizable (Avoidable Interest)Specific borrowing –

Future value - 17,000,000 x 1.12551 = 19,133,670Present value 17,000,000 2,133,670

General borrowing2,880,000/26,000,000 = 11.08 x 1,300,000 144,040

2,277,710Actual Interest Cost –

Specific borrowing 2,133,670General borrowing

12,000,000 x 10% 1,200,00014,000,000 x 12% 1,680,000

5,013,670Interest to be capitalized is P 2,277,710 which is the lower between the Interest Potentially Capitalizable and the Actual Interest Cost. Total interest cost 5,013,670Capitalized interest 2,277,710Interest expense – 2007 2,735,960Answer - 45. a 46. b 47. b 48. c 49. b 50. b

Solution – Problem 9 Sales (1,000,000/25%) 4,000,000Cost of goods sold (45% x 4,000,000) (1,800,000)Gross income 2,200,000Expenses (30% x 4,000,000) (1,200,000)Net income 1,000,000

Cost of goods sold (150% x 30%) 45%Net income (100% - 45% - 30%) 25%

Computation:Purchases (1,500,000/75%) 2,000,000Raw materials – December 31 500,000Raw materials used (50% x 3,000,000) 1,500,000Direct labor (30% x 3,000,000) 900,000Factory overhead (20% x 3,000,000) 600,000Total manufacturing cost 3,000,000Goods in process – December 31 (1/3 x 2,250,000) 750,000Cost of goods manufactured 2,250,000Finished goods – December 31 (25% x 1,800,000) 450,000Cost of goods sold 1,800,000

Cash receipts: Cash investment 1,000,000 Collections (90% x 4,000,000) 3,600,000 4,600,000Cash disbursements: Purchases (75% x 2,000,000) 1,500,000 Direct labor 900,000 Factory overhead (600,000 – 100,000) 500,000 Operating expenses 1,200,000 4,100,000Cash balance – December 31 500,000

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PB Examination No. 2

INSTRUCTIONS: SELECT THE CORRECT RESPONSE TO EACH NUMBERED QUESTIONS. USE THE SPECIAL ANSWER SHEET AND DRAW A VERTICAL LINE ACROSS THE LETTERED BOX THAT CORRESPONDS TO YOUR CHOICE. STRICTLY NO ERASURES ARE ALLOWED.======================================================================

Problem 1In reconciling the cash in bank account of Charmaine Company with the bank statement balance for the month of July 2007, the following data are summarized:

Cash in bank:

Balance, June 30 1,000,000Book debits for July including June CM for note collected, P300,000 4,000,000Book credits for July including June NSF of P100,000 and service charge of P4,000 3,600,000

Bank statement for July:

Balance, June 30 1,650,000Bank debits for July including service charge of P1,000 and June outstanding checks of P854,000 2,500,000Bank credits for July including CM for bank loan of P500,000 and June deposit in transit of P400,000 3,500,000

Questions:

1. Deposit in transit at July 31 is:a. P 1,150,000 b. P 1,100,000 c. P 900,000 d. P 850,000

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2. Outstanding checks at July 31 is:a. P 1,851,000 b. P 1,954,000 c. P 1,951,000 d. P 1,861,000

3. Cash balance at June 30 is:a. P 1,846,000 b. P 1,650,000 c. P 1,196,000 d. P 1,200,000

4. Cash balance at July 31 is:a. P 1,599,000 b. P 1,846,000 c. P 1,899,000 d. P 2,300,000

5. An entity’s internal control structure requires for every check request that there be an approved voucher, supported by a prenumbered purchase order and prenumbered receiving report. To determine whether checks are being issued for unauthorized expenditures, an auditor most likely would select items for testing from the population of alla. Purchase orders.b. Canceled checks.c. Receiving reports.d. Approved vouchers.

Problem 2 Gaze Company sells directly to customers. On January 1, 2006, the balance of accounts receivable was P250,000 while allowance for doubtful accounts was a credit of P20,000. The following data are available since 2003:

Credit sales Write-off Recoveries2003 1,100,000 26,000 2,0002004 1,200,000 29,000 3,0002005 1,500,000 30,000 4,0002006 3,000,000 40,000 5,000

Doubtful accounts are provided for as a percentage of credit sales. The accountant calculates the percentage annually by using the experience of the three years prior to the current year. The formula is accounts written off less recoveries expressed as a percentage of the credit sales for the period. Cash receipts in 2006 from credit sales amounted to P2,615,000.

Questions:

6. What is the percentage to be used in computing the allowance for doubtful accounts on December 31, 2006?a. 1.63% b. 1.75% c. 2.00% d. 2.17%

7. How much is the provision for doubtful accounts for 2006?a. P 65,100 b. P 60,000 c. P 52,500 d. P 48,900

8. What is the ledger balance of accounts receivable on December 31, 2006?a. P 615,000 b. P 600,000 c. P 534,900 d. P 385,000

9. What is the ledger balance of the allowance for doubtful accounts after necessary adjustments on December 31, 2006?a. P 28,900 c. P 32,500 c. P 45,000 d. P 45,100

10. Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

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a. The billings department supervisor sends copies of approved sales orders to the credit department foe comparison to authorized credit limits and current customer account.

b. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.

c. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

d. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Problem 3 Metro Company has experience a critical cash flow problem largely occasioned by collection problems with customers. Consequently, it has become involved in a number of transactions relating to note receivable. The following transaction occurred during a period ending December 31:

May 1 Received a P200,000, 90-day, 12% interest bearing note from EF, a customer, in settlement of an account.

1 Received a P300,000, six month, 12% interest bearing note from MN, a customer, in settlement of an account.

July 30 EF defaulted on the P200,000 note.Aug. 1 Discounted the MN note at the bank at 15%.Sept. 1 Received a one-year noninterest bearing note from DJ, a customer, in

settlement of a P120,000 account receivable. The face of the note was P132,000.

28 Collected the defaulted EF note plus accrued interest 12% per annum on the total amount due.

Oct. 1 Received a P500,000, 90-day note from RS, a customer. The note was in payment for goods purchased and was interest bearing at 12%.

Nov. 1 MN defaulted on the P300,000 note. Metro Company paid the bank the total amount due plus a P12,000 protest fee and other bank charges.

Dec. 30 Collected RS note in full.31 Collected from MN in full including interest on total amount due at 12% since

default date.

Questions:

11. Proceeds in the discounting of note on August 1 is:a. P 324,075.00 b. P 306,075.00 c. P 323,400.00 d. P 297,412.50

12. Proceeds in the collected note on September 28 of EF that was defaulted is:a. P 210,120.00 b. P 206,000.00 c. P 204,000.00 d. P 202,000.00

13. Proceeds of RS note that was collected on December 30 is:a. P 515,000.00 b. P 500,000.00 c. P 485,000.00 d. P 450,000.00

14. Proceeds of MN note that was collected on December 31 is:a. P 318,000.00 b. P 324,000.00 c. P 336,600.00 d. P 336,000.00

15. Which of the following is not a step in an auditor’s decision to assess control risk at below the maximum?a. Evaluate the effectiveness of the internal control procedures with tests of controls.b. Obtain an understanding of the entity’s accounting system and control environment.c. Perform tests of details of transactions to detect material misstatements in the

financial statements.

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d. Consider whether control procedures can have a pervasive effect on financial statement assertions.

Problem 4 Deli Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from accounting records on December 31, 2006 are as follows:

Inventory at December 31 (based on physical count on December) 1,250,000Accounts payable 1,000,000Sales 9,000,000

Additional information is as follows:1. Parts held on consignment from XYZ to Deli, the consignee, amounting to P165,000,

were included in the physical count on December 31, 2006, and in accounts payable at December 31, 2006.

2. P20,000 of parts which were purchased and paid for in December 2006, were sold in the last week of 2006 and appropriately recorded as sales of P28,000. The parts were included in the physical count on December 31, 2006, because the parts were on the loading dock waiting to be picked up by the customers.

3. Parts in transit on December 31, 2006, to customers, shipped FOB shipping point, on December 28, 2006, amounted to P34,000. The customers received the parts on January 6, 2007. Sales of P40,000 to the customers for the parts were recorded by Deli on January 2, 2007.

4. Retailers were holding P210,000 at cost and P250,000 at retail, of goods on consignment from Deli, at their stores on December 31, 2006.

5. Goods were in transit from a vendor to Deli on December 31, 2006. The cost of goods was P25,000, and they were shipped FOB shipping point on December 29, 2006.

Questions:16. The inventory at year-end is:

a. P 1,320,000 b. P 1,300,000 c. P 1,290,000 d. P 1,270,000

17. The accounts payable at year-end is:a. P 1,190,000 b. P 1,165,000 c. P 860,000 d. P 835,000

18. Net sales at year-end is:a. P 8,960,000 b. P 9,034,000 c. P 9,000,000 d. P 9,040,000

19. Which of the following questions would most likely be included in an internal control questionnaire concerning the completeness assertion for purchases?a. Is an authorized purchase order required before the receiving department can accept

a shipment or the vouchers payable department can record a voucher?b. Are purchase requisitions prenumbered and independently matched with vendor

invoices?c. Is the unpaid voucher file periodically reconciled with inventory records by an

employee who does not have access to purchase requisitions?d. Are purchase orders, receiving reports, and voucher prenumbered and periodically

accounted for?

Problem 5

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On April 30, 2006, a fire damaged the office of Amaze Company. The following balances were gathered from the general ledger on March 31, 2006:

Accounts receivable 920,000Inventory – January 1 1,880,000Accounts payable 950,000Sales 3,600,000Purchases 1,680,000

Additional information:

1. An examination of the April bank statement and canceled checks written during the period April 1-30 as follows:

Accounts payable as of March 31 240,000April merchandise shipments 80,000Expenses 160,000

Deposits during the same period amounted to P440,000 which consisted of collections from customers with the exception of P20,000 refund from a vendor for merchandise returned in April.

2. Customers acknowledgement indebtedness of P1,040,000 at April 30, 2006. Customers owed another P30,000 that will never be recovered. Of the acknowledge indebtedness, P40,000 may prove uncollectible.

3. Correspondence with suppliers revealed unrecorded obligations at April 30 of P340,000 for April merchandise shipment, including P100,000 for shipments in transit on that date.

4. The average gross profit rate is 40%.5. inventory with a cost of P260,000 was salvaged and sold for P140,000. The balance

of the inventory was a total loss.

Questions:20. Sales from January 1 to April 30, 2006 is:

a. P 4,220,000 b. P 4,200,000 c. P 3,600,000 d. P 3,480,000

21. Purchases from January 1 to April 30, 2006 is:a. P 2,100,000 b. P 2,020,000 c. P 1,980,000 d. P 1,680,000

22. Fire loss on April 30, 2006 is:a. P 1,200,000 b. P 1,440,000 c. P 1,340,000 d. P 1,140,000

23. Periodic or cycle of selected inventory items are made at various times during the year rather than a single inventory count at year end, which of the following is necessary if the auditor plans to observe inventories at interim dates?a. Complete recounts by independent teams are performed.b. Perpetual inventory records are integrated with production accounting records.c. Unit cost records are integrated with production accounting records.d. Inventory balances are rarely at low levels.

24. Tracing bills of lading to sales invoices provides evidence thata. Shipments to customers were recorded as sales.b. Recorded sales were shipped.c. Invoiced sales were shipped.

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d. Shipments to customers were invoiced.

Problem 6The management of JENNY Company has engaged you to assist in the preparation of year-end (December 31) financial statements. Based on your examination, the following pertinent information were gathered:

a. The company’s year-end inventory of 43,500 units is based on a physical count taken on December 31 which has been undertaken under your observation.

b. During the month of December, sales totaled 138,630 units including 40,000 units shipped on consignment to BASAN Corporation.

c. A letter received from the BASAN Corporation indicates that as of December 31, it has sold 15,200 units and was still trying to sell the remainder.

d. Your review of the December purchase orders to various suppliers disclosed the following:

a. 4,200 units were shipped on January 2, 2004 and received on January 5, 2004, under FOB destination.

b. 3,600 units were shipped on December 17, 2003 and received on December 22, 2003, under FOB destination.

c. 7,900 units were shipped on January 5, 2004 and received on January 7, 2004, under FOB shipping point.

d. 8,000 units were shipped on December 29, 2003 and received on January 2, 2004, under FOB shipping point.

e. 4,600 units were shipped on January 4, 2004 and received on January 6, 2004, under FOB destination.

f. 3,500 units were shipped on January 5, 2004 and received on January 7, 2004, under FOB destination.

e. JENNY Company uses the “passing of legal title” for inventory recognition.

Questions:

25. Inventory balance in units to be reported on December 31, 2003a. 76,300 units b. 55,100 units c. 51,500 units d. 43,600 units

26. Total units available for sale to be reported on December 31, 2003a. 157,330 units b. 165,330 units c. 168,960 units d. 190,130 units

27. Cost of sales in units to be reported on December 31, 2003 a. 153,830 units b. 138,630 units c. 125,430 units d. 113,830 units

28. Inventory level in units on November 30, 2003a. 178,530 units b. 168,960 units c. 165,330 units d. 157,330 units

29. Purchases for the month isa. 3,600 units b. 11,600 units c. 16,200 units d. 19,700 units

Problem 7The income statement and a schedule reconciling cash flows from operating activities to net income are provided below (P in 000s) for Abajero Computers.

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Abajero ComputersIncome Statements

For the year ended Dec. 31, 2004

Sales 305Cost of goods sold 185Gross profit 120Salaries expense 41Insurance expense 19Depreciation expenses 11Loss on sale of land 5 76Income before tax 44Income tax expense 22Net Income 22

Abajero ComputersIncome Statements

For the year ended Dec. 31, 2004

Net income 22Adjustments for Noncash effects:Depreciation expense 11Loss on sale of land 5Decrease in accounts receivable 6Increase in inventory ( 13)Decrease in accounts payable ( 8)Increase in salaries payable 5Decrease in prepaid insurance 9Increase in income tax payable 20Net cash flows from operation 57

Questions:30. The cash received from customer during the reporting period is:

a. P 319 b. P 311 c. P 305 d. P 299

31. The cash paid to suppliers of goods during the reporting period is:a. P 214 b. P 206 c. P 198 d. P 190

32. The cash paid to employees during the reporting period is:a. P 46 b. P 41 c. P 36 d. P 11

33. The cash paid for insurance during the reporting period is:a. P 10 b. P 11 c. P 19 d. P 28

34. The cash paid for income taxes during the reporting period is:a. P 42 b. P 22 c. P 18 d. P 2

Problem 8In your audit of the December 31, 2008, financial statements of ABELLO, INC., you found the following inventory-related transactions.

a. Goods costing P25,000 are on consignment with a customer. These goods were not included in the physical count on December 31, 2008.

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b. Goods costing P16,500 were delivered to Abello, Inc. on January 4, 2009. The invoice for these goods was received and recorded on January 10, 2009. The invoice showed the shipment was made on December 29, 2008, FOB shipping point.

c. Goods costing P21,640 were shipped FOB shipping point on December 31, 2008, and were received by the customer on January 2, 2009. Although the sale was recorded in 2008, these goods were included in the 2008 ending inventory.

d. Goods costing P8,645 were shipped to a customer on December 31, 2008, FOB destination. These goods were delivered to the customer on January 5, 2009, and were not included in the inventory. The sale was properly taken up in 2009.

e. Goods costing P8,600 shipped by a vendor under FOB destination term, were received on January 3, 2009, and thus were not included in the physical inventory. Because the related invoice was received on December 31, 2008, this shipment was recorded as a purchase in 2008.

f. Goods valued at P51,000 were received from a vendor under consignment term. These goods were not included in the physical count.

g. Abello, Inc. recorded as a 2008 sale a p64,300 shipment of goods to a customer on December 31, 2008, FOB destination. This shipment of goods costing P37,500 was received by the customer on January 5, 2009, and was not included in the ending inventory figure.

Prior to any adjustments, Abello, Inc.’s ending inventory is valued at P445,346 and the reported net income for the year is P1,648,723.

Questions:35. The correct inventory amount to be reported in the financial statements of

Abello, Inc. for the year ended December 31, 2008 isa. P 554,631 b. P 517,131 c. P 511,351 d. P 486,206

36. The adjusted net income for the year 2008 isa. P 1,712,608 b. P 1,685,808 c. P 1,642,528 d. P 1,631,828

Problem 9The ABERGAS, INC., reported net income before taxes of P843,600 for 2007 and P965,400 for 2008. The company takes its annual physical count of inventory every December 31. Your audit revealed the following information:

a. The price used for 1, 500 units included in the 2007 ending inventory was P109. The correct cost was P190 per unit.

a. Goods costing P23,600 was received from a vendor on January 5, 2008. the shipment was made on December 26, 2007, under FOB shipping point term. The purchase was recorded in 2007 but the shipment was not included in the 2007, ending inventory.

b. Merchandise costing p64,750 was sold to a customer on December 29, 2007. ABERGAS was asked by the customer to keep the merchandise until January 3, 2008, when the customer would come and pick it up. Although the sale was properly recorded in 2007, the merchandise was included in the ending inventory.

c. A supplier sold merchandise valued at P14,000 to Abergas, Inc. The merchandise was shipped FOB shipping point on December 29, 2007, and was received by Abergas on

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December 31, 2007. The purchase was recorded in 2008 and the merchandise was not included in the 2007 ending inventory.

Questions:37. Adjusted net income of 2007 is

a. P 1,087,450 b. P 965,950 c. P 988,700 d. P 923,950

38. Adjusted net income of 2008 isa. P 1,045,750 b. P 885,050 c. P 843,050 d. P 755,550

Problem 10Alang Corporation uses the physical inventory system. You observed the taking of a physical inventory on December 31, 2007. The total inventory cost per client’s list is P376,000.

Test of inventory pricing and quantities revealed the following:

a. A review of quantities in the inventory list with those in the original inventory tags disclosed that one inventory item should be 10 dozens instead of 10 units. The price per client list is P100 per unit.

b. Inventory includes P50,000 worth of goods received on consignment from Recta Company. Freight and other shipping charges totaling P5,000 which were incurred by Alang Corporation were recorded as delivery expenses. These are to be deducted from Alang’s payment to Recta when consigned goods are sold.

c. To ascertain that there was a proper cut-off, you reviewed purchases and sales transactions a few days before and after December 31, 2007. You review disclosed the following:a. Purchase invoice for P15,000 physically counted on December 31, 2007, was

recorded in January 2008 voucher register.b. Goods with an invoice price of P18,000 (cost P12,000) shipped to a customer FOB

destination on December 28, 2007, were in transit on December 31, 2007. No entry was made to record the sale.

c. Merchandise costing P74,500 was consigned to Alberca Corporation on December 24, 2007 Alang records consignment shipment on a memorandum basis and bears the cost of shipping to consignees. As of December 31, 2007, Alberca reported sales totaling P30,000 since December 24, and claimed P6,000 as commission of 20% of sales. Alberca also claimed reimbursement of P4,000 for freight paid on December 2007 and P500 for advertising expense to be borne by Alang. No entry has been made on Alang’s books for the consignment sales and the cost incurred by Alberca. You have verified that as of December 31, 2007, the cost of consigned goods amounts to P59,600.

Having been appointed auditor only in May 2008, you were unable to physically observe the taking of client’s inventory on December 31, 2007. However, you adopted alternative means to verify this item. Through inquiry and review of the inventory summary sheets and records, you became aware that the beginning inventory was understated by P15,000. Other than this, you were satisfied as to the general accuracy of the opening inventory.

Questions:39. Inventories received from consignor will

a. Not be recorded but included in the inventories total.

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b. Not be recorded but included in the notes to the balance sheetc. Be recorded with a debit to inventories.d. Either recorded or not recorded.

40. The shipping charges on the goods received on consignment was treated asa. Other receivable c. Delivery chargesb. Deduction to accounts payable d. None of the above

41. Which of the following cost incurred by Alberca Corporation should be capitalized by Alang as part of the consigned goods?a. Freight charges c. Advertising chargesb. Consignment commissions d. None of the above

42. How much of the cost incurred by Alberca Corporation should be charged to operating expenses?a. P 10,500 b. P 7,300 c. P 6,500 d. P 6,000

43. What is the cost of consignment sales that should be reported by Alang in connection with the sale of consigned goods by Alberca?a. P 18,900 b. P 16,900 c. P 15,700 d. P 14,900

44. The inventories on consignment will be show a 2007 balance ofa. P 67,600 b. P 63,800 c. P 62,800 d. P 59,600

45. The 2007 inventories will bea. P 411,800 b. P 408,600 c. P 348,300 d. P 312,500

46. The understatement in beginning inventory will result toa. Net income decrease c. Retained earnings decreaseb. Retained earnings increase d. Net income increase

Problem 11The following information is based on a first audit of Russell Company. The client has not prepared financial statements for 2005, 2006 or 2007. During these years, no accounts have been written off as uncollectible, and the rate of gross profit on sales has remained constant for each of the three years.

Prior to January 1, 2005, the client used the accrual method of accounting. From January 1, 2005, to December 31, 2007, only cash receipts and disbursement records were maintained. When sales on account were made, they were entered in the subsidiary accounts receivable ledger. No general ledger postings have been made since December 31, 2004.

As a result of your examination, the correct data shown in the table below are available:

12/31/04 12/31/07Accounts receivable balances: Less than one year old P 15,400 P 28,200 One to two years old 1,200 1,800 Two to three years old 800 Over three years old 2,200Total accounts receivable P 16,600 P 33,000

Inventories P 11,600 P18,800

Accounts payable for inventory purchased P 5,000 P11,000

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Cash received on accounts receivable in:

2005 2006 2007Applied to:Current year collections P148,800 P162,800 P208,800Accounts of the prior year 13,400 15,000 16,800Accounts of two years prior 600 400 2,000

Total P162,800 P177,200 P227,600Cash sales P 17,000 P 26,000 P 31,200Cash disbursements for Inventory purchased P125,000 P141,200 P173,800

Questions:

47. The company’s sales revenue for the three-year period amounted toa. P 74,200 b. P 415,300 c. P 625,400 d. P 658,200

48. The aggregate amount of purchases for the three-year period isa. P 131,000 b. P 434,000 c. P 440,000 d. P 446,000

49. What is the company’s gross profit ratio in each of the three-year period?a. 33.33% b. 28.35% c. 35.16% d. 31.15%

50. What is the company’s gross profit for each of the three-year period? 2005 2006 2007

a. P 60,933 P 68,200 P 80,000b. 55,533 60,133 79,000c. 122,400 137,600 178,800d. 61,200 68,800 89,400

---End of Examination---

Answer and Solution to the Problem

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Answer – 1. b 2. a 3. c 4. c 5. b

Solution – Problem 1a. Bank reconciliation – June 30 Book balance 1,000,000 Add: Credit memo for note collected 300,000 Total 1,300,000 Less: NSF check 100,000 Service charge 4,000 104,000 Adjusted book balance 1,196,000

Bank balance 1,650,000 Add: Deposit in transit 400,000 Total 2,050,000 Less: Outstanding checks 854,000 Adjusted bank balance 1,196,000 Bank reconciliation – July 31

Book balance 1,400,000 Add: Credit memo for bank loan 500,000 Total 1,900,000 Less: Service charge 1,000 Adjusted book balance 1,899,000

Bank balance 2,650,000 Add: Deposit in transit 1,100,000 Total 3,750,000 Less: Outstanding checks 1,851,000 Adjusted bank balance 1,899,000

b. Adjusting entries, July 31 1. Cash in bank 500,000 Bank loan payable 500,000 2. Bank service charge 1,000 Cash in bank 1,000

Computation of deposit in transit – July 31Deposit in transit – June 30 400,000Add: Deposits during July: Book debits 4,000,000 Less: June credit memo for note collected 300,000 3 ,700,000Total 4,100,000Less: Deposits credited by bank during July: Bank credits 3,500,000 Less: July credit memo for bank loan 500,000 3,000,000Deposit in transit – July 31 1,100,000

Computation of outstanding checks – July 31Outstanding checks, June 30 854,000Add: Checks drawn by company during July: Book credits 3,600,000 Less: June debit memos for NSF check 100,000 Service charge 4,000 104,000 3,496,000Total 4,350,000Less: Checks paid by bank during July: Bank debits 2,500,000 Less: July service charge 1,000 2,499,000Outstanding checks, July 31 1,851,000

Answer – 6. c 7. b 8. b 9. c 10. d

Solution – Problem 2 2002 2003 2004 Total

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6. Writeoff 26,000 29,000 30,000 85,000 Less: Recoveries 2,000 3,000 4,000 9,000 Net writeoff 24,000 26,000 26,000 76,000

76,000 Percentage to be used in computing the allowance = ------------- = 2%

3,800,0007. Credit sales for 2005 3,000,000 Multiply by bad debt percentage 2% Provision for doubtful accounts 60,000

8. Accounts receivable – January 1, 2005 250,000 Add: Credit sales for 2005 3,000,000 Recoveries 5,000 3,005,000 Total 3,255,000 Less: Collections in 2005 2,615,000

Writeoff 40,000 2,655,000 Accounts receivable – December 31, 2005 600,000

9. Allowance for doubtful accounts – January 1 20,000 Add: Doubtful accounts for 2005 60,000 Recoveries 5,000 65,000 Total 85,000 Less: Writeoff 40,000 Allowance for doubtful accounts – December 31 45,000

Answer – 11. b 12. a 13. a 14. c 15. c

Solution – Problem 3May 1 Notes receivable 200,000 Accounts receivable 200,000 1 Notes receivable 300,000 Accounts receivable 300,000July 30 Accounts receivable 206,000 Notes receivable 200,000 Interest income (200,000 x 12% x 90/360) 6,000Aug. 1 Cash 306,075 Note receivable discounted 300,000 Interest income 6,075

Principal 300,000 Interest (300,000 x 12% x 6/12) 18,000 Maturity value 318,000 Less: Discount (318,000 x 15% x 3/12) 11,925 Net proceeds 306,075

Sept. 1 Notes receivable 132,000 Accounts receivable 120,000 Interest income 12,000 28 Cash 210,120 Accounts receivable 206,000 Interest income (206,000 x 12% x 60/360) 4,120Oct. 1 Notes receivable 500,000 Sales 500,000Nov. 1 Accounts receivable 330,000

(318,000 + 12,000) Cash 330,000 Notes receivable discounted 300,000 Notes receivable 300,000

Dec. 30 Cash 515,000 Notes receivable 500,000 Interest income (500,000 x 12% x 90/360) 15,000 31 Cash 336,600 Accounts receivable 330,000 Interest income (330,000 x 12% x 2/12) 6,600

Answer –

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16. b 17. c 18. d 19. d

Solution – Problem 4Inventory Accounts payable Net sales

Unadjusted 1,250,000 1,000,000 9,000,000 1 ( 165,000) ( 165,000) - 2 ( 20,000) - - 3 - - ( 40,000) 4 210,000 - - 5 25,000 25,000 - ___

1,300,000 860,000 9,040,000

Answer – 20. b 21. a 22. a 23. b 24. d

Solution – Problem 520. Accounts receivable – April 30, 2005 1,040,000 Writeoff 60,000 Collections (440,000 – 20,000) 420,000 Total 1,520,000 Less: Accounts receivable – March 31, 2005 920,000 Sales for April 600,000 Sales up to March 31, 2005 3,600,000 Total sales 4,200,000

21. Accounts payable – April 30 for April shipments 340,000 Payment for April merchandise shipments 80,000 Purchases of April 420,000 Purchases up to March 31, 2005 1,680,000 Total purchases 2,100,000

22. Inventory – January 1 1,880,000 Purchases 2,100,000 Less: Purchases return 20,000 2,080,000 Goods available for sale 3,960,000 Less: Cost of sales (4,200,000 x 60%) 2,520,000 Inventory – April 30 1,440,000 Less: Goods in transit 100,000 Salvage value 140,000 240,000 Fire loss 1,200,000

Answer – 25. a 26. d 27. d 28. a 29. b

Solution – Problem 6Inventory – Nov. (squeezed figure) 178,530 * Physical count 43,500Purchases (3,600 + 8,000) 11,600 Out on consignment 24,800Total Goods Available for Sale 190,130 In-transit (d) 8,000Ending inventory 76,300* Adjusted ending inv. 76,300Cost of sales 113,830

Answer – Problem 730. b 31. b 32. c 33. a 34. d

Solution – * - assumed amount

Accounts Receivable___ Accounts payable___beg. bal. 10* collection 311 (squeezed figure) payment 206 beg. bal. 10 * Sales 305 ___ (squeezed purchases 198 315 311 figure) ___ ___end. bal 4 * 206 208

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end bal. 2Inventory – beg 10 *Purchases 198 (squeezed figure)TGAS 208Inventory – end 23 *COS 185

Salaries insurance Income taxesCash paid – squeezed figure 36 10 2Prepaid expense – beg * 10Accrued expenses – end * 15 * 30Prepaid expense – end * ( 1)Accrued expenses – beg * (10) __ * (10)Expenses – IS 41 19 22

Answer – 35. c 36. c

Solution –Problem 8Inventory NI - 2008

Unadjusted balance 445,346 1,648,723A – Understatement of inventory 25,000 25,000B – understatement of inventory 16,500 16,500 - Overstatement of purchases (16,500)C – Overstatement of inventory (21,640) (21,640)D – Understatement of inventory 8,645 8,645E – Overstatement of purchases 8,600F - - -G – Understatement of inventory 37,500 37,500 - Overstatement of sales ________ (64,300)Adjusted balance 511,351 1,642,528

Answer – 37. d 38. b

Solution – Problem 92007 2008

Net Income - unadjusted 843,600 965,400A – Understatement of 2007 ending inventory 121,500 (121,500)B – Understatement of 2007 ending inventory 23,600 (23,600)C – Overstatement of 2007 ending inventory (64,750) 64,750D – Understatement of 2007 ending inventory 14,000 (14,000) - Understatement of 2007 purchases (14,000) 14,000Adjusted balance 923,950 885,050

Answer – Problem 1039. b 40. a 41. a 42. c 43. c 44. c45. a 46. d

Solution – a Inventory 11,000

Cost of sales 11,000b Cost of sales 50,000 Inventory 50,000

Other Receivable 5,000 Delivery expenses 5,000

c-a Cost of sales 15,000 Accounts payable 15,000

c-b Inventory 12,000

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Cost of sales 12,000c-c Inventory 74,500

Cost of sales 74,500Accounts Receivable 30,000 Sales 30,000Cost of sales 14,900 Inventory (74,500 – 59,600) 14,900Commission expense 5,000Advertising 500 Accounts receivable 6,500Inventory 3,200Cost of sales 800 Accounts Receivable 4,00059,600/74,500 x 4,000 = 3,200

Answer – 47. d 48. d 49. a 50. d

Solution – Problem 11* - squeezed figure

Accounts Receivable – 3 yrs______ Accounts Payable _____2004 16,600 Collection 567,600 payment 440,000 2004 5,000Sales 584,000* _______ _______ purchases 446,000 * 600,600 567,600 440,000 451,0002007 33,000 2007 11,000

Cash sales - 74,200Credit sales - 584,000Total sales 658,200

Sales 658,200COS

Beg. Inv. 11,600Purchases 446,000 Ending inventory (18,800) 438,800

Gross profit 219,400 33.33%

2005 2006 2007Current year collection 148,800 162,800 208,800

28,200Cash sales 31,200Total Sales 268,200X GP rate 33.33%Gross profit 89,400

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chapter 10 - pre-board examinations

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