1. The document provides information about an audit of the financial records of the Beat Company for the year ended December 31, 2006. It includes details about the cashier's year-end reconciliation, a cash count, unrecorded transactions, and other audit findings.
2. Questions at the end ask the auditor to calculate the correct bank balance, cash shortage amounts, and which department should reconcile the bank statements based on the information provided.
3. The document appears to be an audit problem or case study presented to students or trainees to test their understanding of auditing cash and resolving discrepancies.
1. The document provides information about an audit of the financial records of the Beat Company for the year ended December 31, 2006. It includes details about the cashier's year-end reconciliation, a cash count, unrecorded transactions, and other audit findings.
2. Questions at the end ask the auditor to calculate the correct bank balance, cash shortage amounts, and which department should reconcile the bank statements based on the information provided.
3. The document appears to be an audit problem or case study presented to students or trainees to test their understanding of auditing cash and resolving discrepancies.
1. The document provides information about an audit of the financial records of the Beat Company for the year ended December 31, 2006. It includes details about the cashier's year-end reconciliation, a cash count, unrecorded transactions, and other audit findings.
2. Questions at the end ask the auditor to calculate the correct bank balance, cash shortage amounts, and which department should reconcile the bank statements based on the information provided.
3. The document appears to be an audit problem or case study presented to students or trainees to test their understanding of auditing cash and resolving discrepancies.
Mandaue City, Cebu AUDITING PROBLEMS PREWEEK LECTURE PROBLEM NO. 1 The following accounts were included in the unadjusted trial balance of Pit!n C!"#any as of December 31, 2006: Cash P !1,600 "ccounts recei#able 1,12$,000 %erchandise in#entor& 3,02',000 "ccounts (a&able 2,100,'00 )ther current liabilities 21','00 During &our audit, &ou noted that Pistons held its cash boo*s o(en after &ear+end so that a more fa#orable balance sheet could be (re(ared for credit (ur(oses, Cash recei(ts and disbursements for the first 10 da&s of -anuar& were recorded as December transactions, The following information is gi#en: 1, -anuar& cash recei(ts recorded in December cash boo* totaled P32$,300, of which P1!0,0'0 re(resents cash sales and P1$,2'0 re(resents collections on account for which cash discounts of P$,$'0 were gi#en, 2, -anuar& cash disbursements recorded in the December chec* register li.uidated accounts (a&able of P1!6,200 on which discounts of P6,200 were ta*en, 3, The amount shown as in#entor& was determined b& (h&sical count on December 31, 2006, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, The adjusted cash balance as of December 31, 2006 is a, P!1,600 b, P33,300 c, P30,'00 d, P36,$00 2, The adjusted wor*ing ca(ital as of December 31, 2006 is a, P2,31$,600 b, P2,130,100 c, P2,13,$'0 d, P2,36!,000 3, The adjusted current ratio as of December 31, 2006 is a, 2,00 b, 1,!' c, 1,!6 d, 2,11 , During &our e1amination of a cut+off ban* statement, &ou noticed that the majorit& of chec*s listed as outstanding at December 31 had not cleared the ban*, This would indicate a, " high (ossibilit& of *iting, b, " high (ossibilit& of la((ing, c, That the cash disbursement journal had been held o(en (ast December 31, d, That the cash disbursement journal had been closed (rior to December 31, ', %a*ing the financial statements indicate a more fa#orable (osition b& gi#ing effect to transactions in a (eriod other than that in which these actuall& occurred is called a, Pro+forma balance sheet, c, 2a((ing, b, 3inancial (rojections, d, 4indow dressing, PROBLEM NO. $ )n -anuar& 10, 200$, &ou started the audit of the financial records of the %eat C!"#any for the &ear ended December 31, 2006, 3rom &our in#estigation, &ou disco#ered the following: AP&PW '()* Page 2 of 18 1, The boo**ee(er also acts as the cashier, )n December 31, 2006, the boo**ee(er5s &ear+end cash reconciliation contains the following items, Cash (er ledger, 12+31+06 P01,200 Cash (er ban*, 12+31+06 '1!,!00 )utstanding chec*s 1,$60 %iami Co, chec* charge b& ban* in error 12+20+066 corrected b& ban* on 1+'+0$ 1,200 Cash in transit, credited b& ban* on 1+2+0$ ',$60 2, The cash account balances (er ledger as of 12+31+06 were: Cash + P01,2006 (ett& cash + P1,200 3, The count of the cash on hand at the close of business on -anuar& 10, 200$, including the (ett& cash, was as follows: Currenc& and coin P3,0!0 71(ense #ouchers 160 7m(lo&ees5 8)95s dated 1+'+0$ 0 Customers5 chec*s in (a&ment of account 2,320 P6,000 , 3rom -anuar& 2, 200$ to -anuar& 10, 200$, the date of &our cash count, total cash recei(ts a((earing in the cash records were P6!,!00, "ccording to the ban* statement for the (eriod from -anuar& 2, 200$ to -anuar& 10, 200$, total credits were P60,!00, ', )n -ul& ', 2006, cash of P3,200 was recei#ed from an account customer6 the "llowance for Doubtful "ccounts was charged and "ccounts :ecei#able credited, 6, )n December ', 2006, cash of P2,00 was recei#ed from an account customer6 8n#entor& was charged and "ccounts :ecei#able credited, $, Cash of P',!0 recei#ed during 2006 was not recorded, !, Chec*s recei#ed from customers from -anuar& 2, 200$ to -anuar& 10, 200$, totaling P3,360, were not recorded but were de(osited in ban*, 0, )n -ul& 1, 2006, the ban* refunded interest of P160 because a note of the ;eats Com(an& was (aid before maturit&, <o entr& had been made for the refund, 10, 8n the cashier5s (ett& cash, there were recei(ts for collections from customers on -anuar& 0, 200$, totaling P6,!006 these were unrecorded and unde(osited, 11, 8n the outstanding chec*s, there is one for P00 made (a&able to a trade creditor6 in#estigation shows that this chec* had been returned b& the creditor on -une 1, 2006 and a new chec* for P!00 was issued in its (lace6 the original chec* for P00 was made in error as to amount, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, Correct ban* balance as of December 31, 2006 is a, P!,00 b, P'03,200 c, P!,000 d, P!3,200 2, Cash shortage as of December 31, 2006 is a, P10,200 b, P1!,!00 c, P1!,00 d, P0 3, Cash shortage for the (eriod -anuar& 1 to 10, 200$ is a, P13,360 b, P20,320 c, P10,160 d, P0 , 3rom the stand(oint of good internal control, the monthl& ban* statements should be reconciled b& someone under the direction of the a, Controller, b, Treasurer, c, Cashier, d, Credit manager, AP&PW '()* Page 3 of 18 ', "n auditor would consider a cashier5s job descri(tion to contain com(atible duties if the cashier recei#es remittance from the mailroom and also (re(ares the a, Dail& de(osit sli(, c, :emittance ad#ices, b, Prelist of indi#idual chec*s, d, %onthl& ban* reconciliation, PROBLEM NO. + Net C!"#any (roduces (aints and related (roducts for sale to the construction industr& throughout %etro %anila, 4hile sales ha#e remained relati#el& stable des(ite a decline in the amount of new construction, there has been a noticeable change in the timeliness with which the com(an&5s customers are (a&ing their bills, The com(an& sells its (roducts on (a&ment terms of 2=10, n=30, 8n the (ast, o#er $' (ercent of the credit customers ha#e ta*en ad#antage of the discount b& (a&ing within 10 da&s of the in#oice date, During the &ear ended December 31, 200', the number of customers ta*ing the full 30 da&s to (a& has increased, Current indications are that less than 60> of the customers are now ta*ing the discount, 9ncollectible accounts as a (ercentage of total credit sales ha#e risen from the 1,'> (ro#ided in the (ast &ears to > in the current &ear, 8n res(onse to &our re.uest for more information on the deterioration of accounts recei#able collections, the com(an&5s controller has (re(ared the following re(ort: Net C!"#any A,,!unt Re,ei-ab.e C!..e,ti!n December 31, 2006 The fact that some credit accounts will (ro#e uncollectible is normal, and annual bad debt write+offs had been 1,'> of total credit sales for man& &ears, ;owe#er, during the &ear 2006, this (ercentage increased to >, The accounts recei#able balance is P1,'00,000, and the condition of this balance in terms of age and (robabilit& of collection is shown below: Pro(ortion to total "ge of accounts Probabilit& of collection 6> 1 ? 10 da&s 00,0> 1!> 11 ? 30 da&s 0$,'> !> Past due 31 ? 60 da&s 0',0> '> Past due 61 ? 120 da&s !0,0> 3> Past due 121 ? 1!0 da&s 6',0> 2> Past due o#er 1!0 da&s 20,0> "t the beginning of the &ear, the "llowance for Doubtful "ccounts had a credit balance of P2$,300, The com(an& has (ro#ided for a monthl& bad debt e1(ense accrual during the &ear based on the assum(tion that > of total credit sales will be uncollectible, Total credit sales for the &ear 2006 amounted to P!,000,000, and write+offs of uncollectible accounts during the &ear totaled P202,'00, QUESTIONS: /ased on the foregoing, answer the following: 1, ;ow much is the adjusted balance of the allowance for doubtful accounts as of December 31, 2006@ a, P10,00 b, P0,!00 c, P$$,100 d, P2$,300 2, The necessar& adjusting journal entr& to adjust the allowance for doubtful accounts as of December 31, 2006 would include a credit to allowance for doubtful accounts of: a, P2$,300 b, P0,!00 c, P$$,100 d, P22,300 AP&PW '()* Page 4 of 18 3, "n aging anal&sis of accounts recei#able would (ro#ide an indication as to the a, Aalidit& of the accounts, c, 8ntegrit& of the credit grantors, b, Collectibilit& of the accounts, d, Bol#enc& of customers, , 3rom the stand(oint of good internal control, the billing de(artment, for good internal control should be under directions of the a, Credit manager, c, Controller, b, Bales manager, d, Treasurer, ', 8n order that sound internal accounting control could be achie#ed, which de(artment should (erform the acti#ities of matching shi((ing documents with sales orders and (re(aring dail& sales summaries@ a, /illing b, Credit c, Bhi((ing d, Bales order, PROBLEM NO. / 8n connection with &our e1amination of the financial statements of Ca-a.ie0, In,, for the &ear ended December 31, 2006, &ou were able to obtain certain information during &our audit of the accounts recei#able and related accounts, The December 31, 2006 balance in the "ccounts :ecei#able control accounts is P''!,600, "n aging schedule of the accounts recei#able as of December 31, 2006 is (resented below: "ge <et debit balance Percentage to be a((lied after corrections ha#e been made 60 da&s C under P2'!,'13 1 (ercent 61 to 00 da&s 20,$3' 3 (ercent 01 to 120 da&s '0,!!6 6 (ercent )#er 120 da&s 3',66 P''!,600 Definitel& uncollectible, P6,3006 the remainder is estimated to be 2'> uncollectible, Two entries were made in the Doubtful "ccounts 71(ense account were: 1, " debit on December 31 for the amount of the credit to the "llowance for Doubtful "ccounts, 2, " credit for P,110 on <o#ember 30, 2006, and a debit to "llowance for Doubtful "ccounts because of a ban*ru(tc&, The related sales too* (lace on )ctober 1, 2006, The "llowance for Doubtful "ccounts schedule is (resented below: Debit Credit /alance -anuar& 1, 2006 P13,12' <o#ember 30, 2006 P,110 0,01' December 31, 2006 DP''!,600 1 '>E P2$,030 P36,0' There is a credit balance in one account recei#able D61 to 00 da&sE of P$,2606 it re(resents an ad#ance on a sales contract, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, ;ow much is the adjusted balance of "ccounts :ecei#able as of December 31, 2006@ a, P''','0 b, P''0,'60 c, P'0,030 d, P'!,100 AP&PW '()* Page 5 of 18 2, ;ow much is the adjusted balance of the "llowance for Doubtful "ccounts as of December 31, 2006@ a, P10,$06 b, P10,'!3 c, P10,!30 d, P10,1$ 3, ;ow much is the Doubtful "ccounts e1(ense for the &ear 2006@ a, P16,001 b, P16,!6! c, P1$,11' d, P2$,030 , ;ow much is the net adjustment to the Doubtful "ccounts e1(ense account@ a, P6,0'2 credit b, P6,$0' credit c, P6,!20 credit d, P,110 debit ', "uthoriFation for the write+off of accounts recei#able should be the res(onsibilit& of the a, Credit %anager, c, "ccounts recei#able cler*, b, Controller, d, Treasurer, PROBLEM NO. ' Wi1a0d Ente0#0ie loaned P1,000,000 to 4ashington 8nc, on -anuar& 1, 200, The terms of the loan re.uire (rinci(al (a&ments of P200,000 each &ear for ' &ears (lus interest at !>, The first (rinci(al and interest (a&ment is due on -anuar& 1, 200', 4ashington made the re.uired (a&ments during 200' and 2006, ;owe#er, during 2006 4ashington began to e1(erience financial difficulties, re.uiring 4iFards to reassess the collectibilit& of the loan, )n December 31, 2006, 4iFards determines that the remaining (rinci(al (a&ments will be collected, but the collection of interest is unli*el&, The (re#ailing interest rate for similar t&(e of note as of December 31, 2006 is 10>, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, The (resent #alue of the e1(ected future cash flows as of December 31, 2006 is a, P'$,100 b, P'1',00 c, P''6,60 d, P600,000 2, The loan im(airment for the &ear 2006 is a, P!,600 b, P3,360 c, P'2,000 d, P0 3, ;ow much is the interest income for the &ear 200$, assuming that 4iFardsG assessment of the collectibilit& of the loan has not changed, a, P2$,$6! b, P2!,'31 c, P2',232 d, P32,000 , 4hich of the following audit (rocedures (ro#ides the best e#idence about the collectibilit& of notes recei#able@ a, Confirmation of note recei#able balances with the debtors, b, 71amination of notes for a((ro(riate debtorsG signatures, c, 71amination of cash recei(ts records to determine (rom(tness of interest and (rinci(al (a&ments, d, :econciliation of the detail of notes recei#able and the (ro#ision for uncollectible amounts to the general ledger control, ', 4hen auditing the allowance for uncollectible accounts, the least reliance should be (laced on which of the following@ a, The credit managerGs o(inion, b, "n aging of (ast due accounts, c, Collection e1(erience of the clientGs collection agenc&, d, :atios that show the (ast relationshi( of the allowance to net credit sales, AP&PW '()* Page 6 of 18 PROBLEM NO. * Pa,e0 C!"#any, a manufacturer of small tools, (ro#ided the following information from its accounting records for the &ear ended December 31, 2006: 8n#entor& at December 31, 2006 Dbased on (h&sical count on December 31, 2006E P1,'20,000 "ccounts (a&able at December 31, 2006 1,200,000 <et sales Dsales less sales returnsE !,1'0,000 "dditional information follows: a, 8ncluded in the (h&sical count were tools billed to a customer 3)/ shi((ing (oint on December 31, 2006, These tools had a cost of P31,000 and were billed at P0,000, The shi(ment was on Pacers5 loading doc* waiting to be (ic*ed u( b& the common carrier, b, Hoods were in transit from a #endor to Pacers on December 31, 2006, The in#oice cost was P$1,000, and the goods were shi((ed 3)/ shi((ing (oint on December 20, 2006, c, 4or* in (rocess in#entor& costing P30,000 was sent to an outside (rocessor for (lating on December 30, 2006, d, Tools returned b& customers and held (ending ins(ection in the returned goods area on December 31, 2006, were not included in the (h&sical count, )n -anuar& !, 200$, the tools costing P32,000 were ins(ected and returned to in#entor&, Credit memos totaling P$,000 were issued to the customers on the same date, e, Tools shi((ed to a customer 3)/ destination on December 26, 2006, were in transit at December 31, 2006, and had a cost of P21,000, 9(on notification of recei(t b& the customer on -anuar& 2, 200$, Pacers issued a sales in#oice for P2,000, f, Hoods, with an in#oice cost of P2$,000, recei#ed from a #endor at ':00 (,m, on December 31, 2006, were recorded on a recei#ing re(ort dated -anuar& 2, 200$, The goods were not included in the (h&sical count, but the in#oice was included in accounts (a&able at December 31, 2006, g, Hoods recei#ed from a #endor on December 26, 2006, were included in the (h&sical count, ;owe#er, the related P'6,000 #endor in#oice was not included in accounts (a&able at December 31, 2006, because the accounts (a&able co(& of the recei#ing re(ort was lost, h, )n -anuar& 3, 200$, a monthl& freight bill in the amount of P6,000 was recei#ed, The bill s(ecificall& related to merchandise (urchased in December 2006, one+half of which was still in the in#entor& at December 31, 2006, The freight charges were not included in either the in#entor& or accounts (a&able at December 31, 2006, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, The adjusted balance of 8n#entor& as of December 31, 2006 is a, P1,6$3,000 b, P1,$0,000 c, P1,6$2,000 d, P1,6$0,000 2, The adjusted balance of "ccounts Pa&able as of December 31, 2006 is a, P1,333,000 b, P1,262,000 c, P1,32$,000 d, P1,330,000 3, The adjusted <et Bales fro the &ear ended December 31, 2006 is a, P!,103,000 b, P!,110,000 c, P!,1'0,000 d, P!,063,000 AP&PW '()* Page 7 of 18 , 4hen auditing merchandise in#entor& at &ear end, the auditor (erforms a (urchase cutoff test to obtain e#idence that a, "ll goods (urchased before &ear end are recei#ed before the (h&sical in#entor& count, b, <o goods held on consignment for customers are included in the in#entor& balance, c, "ll goods owned at &ear end are included in the in#entor& balance, d, <o goods obser#ed during the (h&sical count are (ledged or sold, ', 4hich of the following audit (rocedures would (ro#ide the least reliable e#idence that the client has legal title to in#entories@ a, "nal&tical re#iew of in#entor& balances com(ared to (urchasing and sales acti#ities, b, Confirmation of in#entories at locations outside the clientGs facilities, c, )bser#ation of (h&sical in#entor& counts, d, 71amination of (aid #endorsG in#oices, PROBLEM NO. 2 " flood recentl& destro&ed man& of the financial records of Bu.. Manu3a,tu0in4 C!"#any, %anagement has hired &ou to re+create as much financial information as (ossible for a month of -ul&, Iou are able to find out that the com(an& uses an a#erage cost in#entor& #aluation s&stem, Iou also learn that /ulls ma*es a (h&sical count at the end of each month in order to determine monthl& ending in#entor& #alues, /& e1amining #arious documents &ou are able to gather the following information: 7nding in#entor& at -ul& 31 '0,000 units Total cost of unit a#ailable for sale in -ul& P11!,!00 Cost of goods sold during -ul& P00,000 Cost of beginning in#entor&, -ul& 1 P0,3' (er unit Hross (rofit on sales for -ul& P101,000 -ul& (urchases Date 9nits 9nit Cost -ul& ' 60,000 P0,0 11 '0,000 0,1 1' 0,000 0,2 16 '0,000 0,' QUESTIONS: /ased on the abo#e and the result of &our engagement, &ou are as*ed to (ro#ide the following information: 1, <umber of units on hand, -ul& 1 a, 3',000 b, 1,'!0 c, P12,2'0 d, 100,000 2, 9nits sold during -ul& a, 1!',000 b, 162,2'0 c, P2'0,000 d, 101,'!0 3, 9nit cost of in#entor& at -ul& 31 a, P0,'06 b, P0,306 c, P0,'60 d, P0,02 , Aalue of in#entor& at -ul& 31 a, P2',300 b, P10,!00 c, P2!,000 d, P2,600 ', 8n obtaining e#idence to establish the e1istence of in#entories, which one of the following is unli*el& to be used b& and auditor@ a, :econciliation, b, 8ns(ection, c, )bser#ation, d, Confirmation, AP&PW '()* Page 8 of 18 PROBLEM NO. 5 /oth /B" 8nc, and CP" Cor(, ha#e 1,000,000 shares of no+(ar common stoc* outstanding, Bu,6 In,. ac.uired 100,000 shares of /B" stoc* for P' (er share and 2'0,000 shares of CP" stoc* for P10 (er share on -anuar& 2, 200', /oth securities are being held as long term in#estments, Changes in retained earnings for /B" and CP" for 200' and 2006 are as follows: /B", 8nc, CP" Cor(, :etained earnings DdeficitE, 1=1=0' P2,000,000 DP3'0,000E Cash di#idends, 200' D2'0,000E + <et income, 200' 00,000 6'0,000 :etained earnings, December 31, 200' 2,1'0,000 300,000 Cash di#idends, 2006 D300,000E D100,000E <et income, 2006 600,000 2'0,000 :etained earnings, December 31, 2006 P2,'0,000 P '0,000 %ar*et #alue of stoc*: 12=31=0' P$,00 P12,00 12=31=06 6,'0 1',00 QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, The income from in#estment in /B", 8nc, in 2006 is a, P30,000 b, P2',000 c, P2,000 d, P0 2, The income from in#estment in CP", 8nc, in 200' is a, P62,'00 b, P',000 c, P162,'00 d, P0 3, The carr&ing #alue of 8n#estment in /B", 8nc, as of December 31, 2006 is a, P'00,000 b, P6'0,000 c, P$00,000 d, P'0',000 , The carr&ing #alue of 8n#estment in CP", 8nc, as of December 31, 2006 is a, P2,'00,000 b, P3,$'0,000 c, P2,'3$,'00 d, P2,$00,000 ', ;ow much is the unrealiFed gain or loss that will be included as com(onent of e.uit& as of December 31, 2006@ a, P1'0,000 gain b, P'0,000 gain c, P'0,000 loss d, P0 PROBLEM NO. 7 8n connection with &our e1amination of the financial statements of the S#u0 C!0#!0ati!n for the &ear 2006, the com(an& (resented to &ou the Pro(ert&, Plant and 7.ui(ment section of its balance sheet as of December 31, 200' which consists of the following: 2and P 00,000 /uildings 3,200,000 2easehold im(ro#ements 2,000,000 %achiner& and e.ui(ment 2,!00,000 The following transactions occurred during 2006: 2and site number 102 was ac.uired for P,000,000, "dditionall&, to ac.uire the land B(urs (aid a P20,000 commission to a real estate agent, Costs of P60,000 were incurred to clear the land, During the course of clearing the land, timber and gra#el were reco#ered and sold for P20,000, AP&PW '()* Page 9 of 18 " second tract of land Dsite number 103E with a building was ac.uired for P1,200,000, The closing statement indicated that the land #alue was P!00,000 and the building #alue was P00,000, Bhortl& after ac.uisition, the building was demolished at a cost of P120,000, " new building was constructed for P600,000 (lus the following costs: 71ca#ation fees P ,000 "rchitectural design fees 32,000 /uilding (ermit fee ,000 8m(uted interest on funds used during construction 2,000 The building was com(leted and occu(ied on Be(tember 1, 2006, " third tract of land Dsite number 10E was ac.uired for P2,00,000 and was (ut on the mar*et for resale, 71tensi#e wor* was done to a building occu(ied b& B(urs under a lease agreement, The total cost of the wor* was P'00,000, which consisted of the following: Particulars "mount 9seful life Painting of ceilings P 0,000 )ne &ear 7lectrical wor* 10,000 Ten &ears Construction of e1tension to current wor*ing area 320,000 Thirt& &ears The lessor (aid one+half of the costs incurred in connection with the e1tension to the current wor*ing area, During December 2006, costs of P260,000 were incurred to im(ro#e leased office s(ace, The related lease will terminate on December 31, 200!, and is not e1(ected to be renewed, " grou( of new machines was (urchased under a ro&alt& agreement which (ro#ides for (a&ment of ro&alties based on units of (roduction for the machines, The in#oice (rice of the machines was P300,000, freight costs were P!,000, unloading charges were P6,000, and ro&alt& (a&ments for 2006 were P'2,000, QUESTIONS: /ased on the abo#e and the result of &our audit, com(ute for the following as of December 31, 2006: 1, 2and a, P!,00,000 b, P',000,000 c, P',!0,000 d, P6,000,000 2, /uildings a, P,2!0,000 b, P3,!!0,000 c, P3,!00,000 d, P,200,000 3, 2easehold im(ro#ements a, P2,$20,000 b, P2,600,000 c, P2,'60,000 d, P2,300,000 , %achiner& and e.ui(ment a, P3,100,000 b, P3,10!,000 c, P3,11,000 d, P3,166,000 ', 8n testing (lant and e.ui(ment balances, an auditor e1amines new additions listed on an anal&sis of (lant and e.ui(ment, This (rocedure most li*el& obtains e#idence concerning management5s assertion of a, Com(leteness, c, Presentation and disclosure, b, 71istence or occurrence, d, Aaluation or allocation, AP&PW '()* Page 10 of 18 PROBLEM NO. 1) The following inde(endent situations describe facts concerning the ownershi( of #arious assets, 8n each case, com(ute the amount of de(reciation or de(letion for 2006, 1, Buns Com(an& (urchased a tooling machine in 1006 for P600,000, The machine was being de(reciated on the straight+line method o#er an estimated useful life of 20 &ears with no sal#age #alue, "t the beginning of 2006, when the machine had been in use for 10 &ears, Buns (aid P120,000 to o#erhaul the machine, "s a result of this im(ro#ement, Buns estimated that the useful life of the machine would be e1tended an additional ' &ears, a, P2!,000 b, P1',000 c, P20,000 d, P23,000 2, Phoeni1 %anufacturing Co,, a calendar+&ear com(an&, (urchased a machine for P6'0,000 on -anuar& 1, 200, "t the date of (urchase, Phoeni1 incurred the fol + lowing additional costs: 2oss on sale of old machiner& P1',000 3reight cost ',000 8nstallation cost 20,000 Testing costs (rior to regular o(eration ,000 The estimated sal#age #alue of the machine was P'0,000, and Phoeni1 estimated that the machine would ha#e a useful life of 20 &ears, with de(reciation being com(uted using the straight+line method, 8n -anuar& 2006, accessories costing P!,600 were added to the machine to reduce its o(erating costs, These accessories neither (rolonged the machineGs life nor did the& (ro#ide an& additional sal#age #alue, a, P31,'0 b, P3,1'0 c, P33,!!0 d, P36,030 3, )n -ul& 1, 2006, <ash Cor(oration (urchased e.ui(ment at a cost of P30,000, The e.ui(ment has an estimated sal#age #alue of P30,000 and is being de(reciated o#er an estimated life of ! &ears under the double+declining+balance method of de(reciation, a, P$$,'00 b, P3!,$'0 c, P2,'00 d, P!',000 , 8n -anuar& 2006, %arion Cor(oration entered into a contract to ac.uire a new machine for its factor&, The machine, which had a cash (rice of P2,000,000, was (aid for as follows: Down (a&ment P 300,000 ',000 shares of %arion common stoc* with an agreed+u(on #alue of P3$0 (er share 1,!'0,000 P2,1'0,000 Prior to the machineGs use, installation costs of P$0,000 were incurred, The machine has an estimated useful life of 10 &ears and an estimated sal#age #alue of P100,000, The straight+line method of de(reciation is used, a, P212,000 b, P1!20,000 c, P100,000 d, P10$,000 ', )n -anuar& 2, 200', Diaw Cor(oration (urchased land with #aluable natural ore de(osits for P10 million, The estimated residual #alue of the land was P2 million, "t the time of (urchase, a geological sur#e& estimated 2 million tons of remo#able ore were under the ground, 7arl& in 200', roads were constructed on the land to aid in the e1traction and trans(ortation of the mined ore at a cost of P$'0,000, 8n 200', '0,000 tons were mined, 8n 2006, Diaw fired its mining engineer and hired a new e1(ert, " new sur#e& made at the end of 2006 estimated 3 million tons of ore were AP&PW '()* Page 11 of 18 a#ailable for mining, 8n 2006, 1'0,000 tons were mined, "ll the ore mined was sold, a, P3$2,000 b, P26,000 c, P33,'00 d, P06,'00 PROBLEM NO. 11 )n -anuar& 1, 200', Nu44et C!"#any entered into a lease contract with Den#er Com(an& for a new e.ui(ment that had a selling (rice of P2,120,000, The lease contract (ro#ides that annual (a&ments of P20,000 will be made for 6 &ears, <uggets made the first (a&ment on -anuar& 1, 200', subse.uent (a&ments are made on -anuar& 1 of each &ear, <uggets guarantees a residual #alue of P36$,122 at the end of the lease term, "fter considering the guaranteed residual #alue, the rate im(licit in the lease is determined to be 12>, <uggets has an incremental borrowing rate of 1'>, The economic life of the e.ui(ment is 0 &ears, <uggets de(reciates its e.ui(ment using straight line method, QUESTIONS: /ased on the abo#e and the result of &our audit, com(ute for the following: 1, Cost of the leased e.ui(ment to be recogniFed b& <uggets Com(an& a, P1,012,$$2 b, P2,013,00! c, P2,120,000 d, P0 2, "nnual de(reciation e1(ense a, P2'$,60! b, P202,16 c, P2$,6 d, P0 3, 8nterest e1(ense in 200' a, P1$0,133 b, P101,260 c, P20,000 d, P0 , 2iabilit& under finance lease as of December 31, 2006 a, P1,2'1,00' b, P1,!,000 c, P1,36',1$$ d, P0 ', Current (ortion of the liabilit& under finance lease as of December 31, 2006 a, P21,020 b, P260,$$1 c, P2'6,1$0 d, P0 PROBLEM NO. 1$ Iou were able to obtain the following from the accountant for Ma-e0i,6 C!0#, related to the com(an&5s liabilities as of December 31, 2006, "ccounts (a&able P 6'0,000 <otes (a&able ? trade 100,000 <otes (a&able ? ban* !00,000 4ages and salaries (a&able 1',000 8nterest (a&able @ %ortgage notes (a&able ? 10> 600,000 %ortgage notes (a&able ? 12> 1,'00,000 /onds (a&able 2,000,000 The following additional information (ertains to these liabilities, a, "ll trade notes (a&able are due within si1 months of the balance sheet date, b, /an* notes+(a&able include two se(arate notes (a&able to "llied /an*, D1E " P300,000, !> note issued %arch 1, 200, (a&able on demand, 8nterest is (a&able e#er& si1 months, D2E " 1+&ear, P'00,000, 11 J> note issued -anuar& 2, 2006, )n December 30, 2006, %a#eric*s negotiated a written agreement with "llied /an* to re(lace the note with a 2+&ear, P'00,000, 10> note to be issued -anuar& 2, 200$, The interest was (aid on December 31, 2006, c, The 10> mortgage note was issued )ctober 1, 2003, with a term of 10 &ears, Terms of the note gi#e the holder the right to demand immediate (a&ment if the com(an& fails to ma*e a monthl& interest (a&ment within 10 da&s of the date the (a&ment is due, "s of December 31, 2006, %a#eric*s is three months behind in (a&ing its re.uired interest AP&PW '()* Page 12 of 18 (a&ment, d, The 12> mortgage note was issued %a& 1, 2000, with a term of 20 &ears, The current (rinci(al amount due is P1,'00,000, Princi(al and interest (a&able annuall& on "(ril 30, " (a&ment of P220,000 is due "(ril 30, 200$, The (a&ment includes interest of P1!0,000, e, The bonds (a&able is 10+&ear, !> bonds, issued -une 30, 100$, 8nterest is (a&able semi+annuall& e#er& -une 30 and December 31, QUESTIONS: /ased on the abo#e and the result of &our audit, answer the following: 1, 8nterest (a&able as of December 31, 2006 is a, P1'',000 b, P13,000 c, P203,000 d, P21',000 2, The (ortion of the <ote Pa&able+ban* to be re(orted under current liabilities as of December 31, 2006 is a, P300,000 b, P'00,000 c, P!00,000 d, P0 3, Total current liabilities as of December 31, 2006 is a, P3,0'0,000 b, P,13!,000 c, P3,03!,000 d, P3,00!,000 , Total noncurrent liabilities as of December 31, 2006 is a, P1,$60,000 b, P2,'60,000 c, P3,060,000 d, P1,060,000 ', 4hich of the following is correct regarding the classification of financial liabilities@ a, "n entit& classifies financial liabilities as noncurrent when the& are due to be settled within 12 months after the balance sheet date, b, 8f the entit& e1(ects, and has the discretion, to refinance or roll o#er an obligation for at least 12 months after the balance sheet date under an e1isting loan facilit&, it classifies obligation as current, c, 4hen refinancing or rolling o#er is not at the discretion of the entit&, the (otential to refinance is not considered and the obligation is classified as current, d, 4hen an entit& breaches an underta*ing under a long+term loan agreement on or before the /B date with the effect that the liabilit& becomes (a&able on demand, the liabilit& is classified as non+current, if, after the /B date, and before the 3B are authoriFed for issue, the lender has agreed not to demand (a&ment as a conse.uence of the breach, PROBLEM NO. 1+ G0i11.ie In,. was organiFed on -anuar& 2, 200', with authoriFed ca(ital stoc* of '0,000 shares of 10>, P200 (ar #alue (referred, and 200,000 shares of no+(ar, no stated #alue common, During the first 2 &ears of the com(an&Gs e1istence, the following selected transactions too* (lace: 200' -an, 2 Bold 10,000 shares of common stoc* at P16, 2 Bold 3,000 shares of (referred stoc* at P216, %ar, 2 Bold common stoc* as follows: 10,!00 shares at P226 2,$00 shares at P2', -ul, 10 "c.uired a nearb& (iece of land, a((raised at P00,000, for 600 shares of (referred stoc* and 2$,000 shares of common, DPreferred stoc* was recorded at P216, the balance being assigned to common,E Dec, 16 Declared the regular (referred di#idend and a P1,'0 common di#idend, 2! Paid di#idends declared on December 16, 31 The 8ncome Bummar& account showed a credit balance of P'0,000, 2006 3eb, 2$ :eac.uired 12,000 shares of common stoc* at P10, AP&PW '()* Page 13 of 18 -un, 1$ :esold 10,000 shares of the treasur& stoc* at P23, -ul, 31 :esold all of the remaining treasur& stoc* at P1!, Be(, 30 Bold 11,000 additional shares of common stoc* at P21, Dec, 16 Declared the regular (referred di#idend and a P0,!0 common di#idend, 2! Di#idends declared on December 16 were (aid, 31 The income summar& account showed a credit balance of P2',000, QUESTIONS: /ased on the abo#e and the result of &our audit, determine the balances of the following as of December 31, 2006: 1, Preferred stoc* a, P$$$,600 b, P600,000 c, P$20,000 d, P$20,600 2, Common stoc* a, P61',000 b, P066,'00 c, P$3','00 d, P606,100 3, "dditional (aid in ca(ital a, P3!,000 b, P03,600 c, P'$,600 d, P0',600 , Total stoc*holders5 e.uit& a, P2,0!,1'0 b, P2,3!!,1'0 c, P1,!02,100 d, P2,3$6,630 ', "n auditor usuall& obtains e#idence of shareholders5 e.uit& transactions b& re#iewing the entit&5s a, %inutes of board of directors meetings, c, Canceled stoc* certificates, b, Transfer agent5s records, d, Treasur& stoc* certificate boo*, PROBLEM NO. 1/ C.i##e0 C!0#!0ati!n as*ed &ou to re#iew its records and (re(are corrected financial statements, The boo*s of accounts are in agreement with the following balance sheet: C.i##e0 C!0#!0ati!n Ba.an,e S8eet De,e"be0 +1, $))* "ssets Cash P 0,000 "ccounts recei#able !0,000 <otes recei#able 2,000 8n#entories 200,000 Total assets P3,000 2iabilities and )wners5 7.uit& "ccounts (a&able P 16,000 <otes (a&able 32,000 Ca(ital stoc* !0,000 :etained earnings 216,000 Total liabilities and owners5 e.uit& P3,000 " re#iew of the com(an&5s boos indicates that the following errors and omissions had not been corrected during the a((licable &ears: 2003 200 200' 2006 7nding in#entor& + o#erstated P + P'6,000 P6,000 P + 7nding in#entor& + understated !,000 + + $2,000 Pre(aid e1(ense $,200 ',600 ,000 ,!00 9nearned income + 3,200 + 2,00 "ccrued e1(ense 1,600 600 !00 00 AP&PW '()* Page 14 of 18 "ccrued income + 1,000 + 1,200 <o di#idends were declared during the &ears 2003 to 2006 and no adjustments were made to retained earnings, The com(an&5s boo*s re(orted the following net income: 2003 P60,000 200' P'2,000 200 ,000 2006 60,000 QUESTIONS: /ased on the abo#e and the result of &our audit, determine the adjusted amounts of the following: (Disregar !a" i#$%i&a!io's( 1, <et income in 2003 a, P00,200 b, P113,600 c, P116,!00 d, P1$,600 2, <et income DlossE in 200 a, DP62,!00E b, DP1,!00E c, DP'0,600E d, P1',200 3, <et income DlossE in 200' a, P60,00 b, P,!00 c, P,00 d, DP11,600E , <et income DlossE in 2006 a, DP$6,000E b, P10,00 c, P10',200 d, P106,000 ', :etained earnings as of December 31, 2006 a, P2!1,600 b, P201,200 c, P202,000 d, P1$,200 & end !3 #0e9ee6 .e,tu0e& GOOD LUCK! SOLUTION GUIDE TO SELECTED PROBLEMS: PROBLEM NO. 1 Per boo*s "djustments Per audit Current assets Cash !1,600 "ccounts recei#able 1,12$,000 %erchandise in#entor& 3,02',000 ,633,600 Current liabilities "ccounts (a&able 2,100,'00 )ther current liabilities 21','00 2,316,000 4or*ing ca(ital DC"+C2E 2,31$,600 Current ratio DC"=C2E 2,00 AP&PW '()* Page 15 of 18 PROBLEM NO. $ /an* /oo*s 9nadjusted balances, 12=31=06 "dd DdeductE adjustments: )utstanding chec*s 7rroneous ban* debit Cash in transit Collection charged to "llow, 3or Doubtful a=cs Collection charged to 8n#entor& 9nrecorded cash recei(t 9nrecorded interest refund Chec* returned and re(laced not &et cancelled /alances Bhortage "djusted balances PROBLEM NO. + Categor& "ging ratio ": /alance :ate "llowance 1 ? 10 da&s 6> 1,00> 11 ? 30 da&s 1!> 2,'0> 31 ? 60 da&s !> ',00> 61 ? 120 da&s '> 20,00> 121 ? 1!0 da&s 3> 3',00> o#er 1!0 da&s 2> !0,00> 100> 1,'00,000 PROBLEM NO. / H2=B2 60 61 to 00 01 to 120 o#er 120 9nadjusted balances ''!,600 "dd DdeductE adjustments: "-7 <o, 1 "-7 <o, 2 "-7 <o, 3 "djusted balances PROBLEM NO. ' Date Collection Period PA factor PA at !> -anuar& 1, 200$ 200,000 0 -anuar& 1, 200! 200,000 1 -anuar& 1, 2000 200,000 2 600,000 PROBLEM NO. * 8n#entor& "ccts, Pa&able <et Bales AP&PW '()* Page 16 of 18 9nadjusted balances 1,'20,000 1,200,000 !,1'0,000 "dd DdeductE adjustments: a b c d e f g h "djusted balances PROBLEM NO. 2 Cost of units a#ailable for sale 2ess (urchases: -ul& ' D60,000 units 1 P0,0E -ul& 11 D'0,000 units 1 P0,1E -ul& 1' D0,000 units 1 P0,2E -ul& 16 D'0,000 units 1 P0,'E Cost of beginning in#entor& Di#ide b& cost (er unit <umber of units on hand, -ul& 1 PROBLEM NO. 5 "c.uisition cost D2'0,000 shares 1 P10E Bhare in net income for 200' DP6'0,000 1 2'>E Carr&ing #alue, 12=31=0' Di#idends recei#ed in 2006 DP100,000 1 2'>E Bhare in net income for 2006 DP2'0,000 1 2'>E Carr&ing #alue, 12=31=06 PROBLEM NO. 7 /alance, -anuar& 1, 2006 2and site number 102: "c.uisition cost Commission (aid to real estate agent Clearing costs "mounts reco#ered 2and site number 103: "c.uisition cost Demolition cost /alance, December 31, 2006 PROBLEM NO. 1) Cost of natural resources, net of residual #alue DP10% + P2%E %ine im(ro#ements AP&PW '()* Page 17 of 18 Cost subject to de(letion Di#ide b& total estimated reser#es in 200' De(letion rate in 200' <umber of tons mined in 200' De(letion for 200' )riginal cost subject to de(letion 2ess de(letion in 200' :emaining cost to de(lete, 1=1=06 :emaining tons of ore, 1=1=06 D3,000,000K1'0,000E De(letion rate in 2006 <umber of tons mined in 2006 De(letion for 2006 PROBLEM NO. 11 Present #alue of rental (a&ments DP20,000 1 ,60!E Present #alue of H:A DP36$,122 1 0,'066E Cost of leased e.ui(ment Date Pa&ment 8nterest Princi(al 2ease liab, 01,01,0' 01,01,0' 20,000 01,01,06 20,000 01,01,0$ 20,000 01,01,0! 20,000 01,01,00 20,000 01,01,10 20,000 01,01,11 36$,122 PROBLEM NO. 1$ P300,000 note (a&able to ban* DP300,000 1 !> 1 =12E %ortgage note (a&able ? 10> DP600,000 1 10> 1 3=12E %ortgage note (a&able ? 12> DP1,'00,000 1 12> 1 !=12E Total interest (a&able, 12=31=06 PROBLEM NO. 1+ Preferred stoc* Common stoc* "P8C :etained earnings Treasur& stoc* 8ssuance of CB, 1=2=0' 8ssuance of PB, 1=2=0' AP&PW '()* Page 18 of 18 8ssuance of CB, 3=2=0' 8ssuance of PB and CB for land, $=10=0' Declared cash di#idend+PB and CB, 12=16=06 <et income for 200' /alances, 12=31=0' $20,000 $3','00 '$,600 302,2'0 + "c.uisition of TB, 2=2$=06 :esale of TB abo#e cost, 6=1$=06 :esale of TB below cost, $=31=06 8ssuance of CB, $=31=0' Declared cash di#idend+PB and CB, 12=16=06 <et income for 2006 /alances, 12=31=06 PROBLEM NO. 1/ <8 <8 <8 <8 :7 $))+ $))/ $))' $))* 1$.+1.)* 9nadjusted balances 60,000 ,000 '2,000 60,000 216,000 1; 7nding in#entor& + o#erstated 200 200' $; 7nding in#entor& + understated 2003 2006 +; Pre(aid e1(ense 2003 200 200' 2006 /; 9nearned income 200 2006 '; "ccrued e1(ense 2003 200 200' 2006 *; "ccrued income 200 2006 "djusted balances AP&PW '()*