Part 1 Auditing

Which of the following is not a component of assurance services?

A user or a group of users who derive value from the service provided.

What type of assurance engagement is involved when the practitioner expresses a

negative form of conclusion?
Limited assurance engagement

Audit committees have been identified as a major factor in promoting

independence in both internal and external auditors. Which of the following is
the most important limitation on the effectiveness of audit committees?

Audit committees are composed of independent directors. However, those

directors may have close personal and professional friendships with management

A primary purpose of an operational audit is to provide

A measure of management performance in meeting organizational goal

Which of the following is not one of the functions of the Board of

Accountancy as specifically provided under RA 9298?
To perform visitorial powers or review professional work of accounting
practitioners in a general or random basis.

Which statement is incorrect regarding the term of office of the chairman and the
members of the Board of Accountancy (BOA)?
A member of BOA may continuously serve office for more than nine years.
Financial interests may be held through an intermediary (for example, a
collective investment vehicle, estate or trust). When control over the investment
vehicle or the ability to influence investment decisions exists, the code defines
that financial interest to be
Direct financial interest.

Examples of circumstances that create intimidation threats for a professional

accountant in public practice include the following except:

The firm promoting shares in an audit client

Before performing any audit procedures. The auditor and the client should
agree on the
Type of opinion Specific Terms of the
to be expressed procedures to be engagement
performed
No No Yes

An accountant who had begun an audit of the financial statements of an entity

was asked to change the engagement to a review. Given reasonable
justification for the change, the accountant’s review report should refer to the
Original Procedures that may have been
Engagement that performed in the original
 was Agreed To engagement
No No

Which of the following is not one of the principal contents of an engagement

letter?
objectives of the financial statements

When considering the effectiveness of a system of internal accounting control,

the auditor should recognize that inherent limitations do exist. Which of the
following is an example of an inherent limitation in a system of internal
accounting control
In the performance of most control procedures, there are possibilities of errors
arising from mistakes in judgment

Control environment component of internal control

Includes the governance and management functions and the attitudes, awareness,
and actions of those charged with governance and management concerning the
entity’s internal control and its importance in the entity

Which of the following would an auditor least likely perform when obtaining
understanding of the entity’s internal control

Reperformance of internal control

Which of the following statements about fraud or error is incorrect?

The likelihood of detecting fraud is ordinarily higher than that of detecting error.

Which of the following is an example of fraud

Misappropriation of assets or group of assets.

To obtain general understanding about the law’s and regulations affecting the
client’s business, the auditor would least likely
Obtain a lawyer’s representation letter.

Which of the following is incorrect about the auditor’s risk assessment

procedures?
The auditor should perform substantive procedures and tests of controls after the
risk assessment procedures are performed.

For initial engagements, PSA 510 does not require the auditor to obtain sufficient
audit evidence:
That the prior period financial statements were audited by an independent CPA.

Buddy, the purchasing agent of Lander Hardware Wholesalers, has a relative

who owns a retail hardware store. Buddy arranged for hardware to be delivered
by manufacturers to the retail store on a COD basis, thereby enabling his relative
to buy at Lander's wholesale prices. Buddy was probably able to accomplish this
because of Lander's poor internal control over
Purchase orders.
Theoretically, which of the following would not have an effect on the amount of
audit evidence gathered by the auditor?
Whether or not the client reports to the Securities and Exchange Commission.

When analytical procedures identify significant fluctuations or relationships or

relationships that are inconsistent with other relevant information or that deviate
from predicted amounts, the auditor should
Conduct further investigatio
Which of the following circumstances least likely result to either a qualified
opinion or an auditor disclaiming his opinion?
The auditor is unable to carry out an audit procedure believed to be desirable; the
auditor carried out alternative audit procedures to support the management’s
assertion

The following statements relate to unaudited prior year financial statements that
are presented in comparative form with audited current year financial statements.
Which is incorrect?
The incoming auditor should state in the auditor’s report that the comparative
financial statements are unaudited.

Part 2
They are not presented as complete financial statements capable of standing
alone, but are an integral part of the current period financial statements intended
to be read only in relationship to the current period figures.

Corresponding figures

Jewel, CPA, audited Infinite Co.’s prior year financial statements.

These statements are presented with those of the current year for comparative
purposes without Jewel’s auditor’s report, which expressed a qualified
opinion. In drafting the current year’s auditor’s report, Grain, CPA, the
successor auditor, should

I. Not name Jewel as the predecessor auditor.

II. Indicate the type of report issued by Jewel.
III. Indicate the substantive reasons for Jewel’s qualification
I, II, and II

Which of the following quality control objectives would be least important to the
auditor?
Determination of audit fee.
The following statements relate to quality control for audit work. Which
statement is false?
According to PSA 220, audit firms should adopt standardized quality control
policies and procedures.
The responsibility for the identification and disclosure of related parties and
transactions with such parties rests with:
Managemen
The audit procedures for the subsequent events review can be divided into two
categories: (1) procedures normally integrated as a part of the verification of
year-end account balances, and (2) those performed specifically for the purpose
of discovering subsequent events. Which of the following procedures are in
category 2?
Correspond with attorneys

When conditions and events have been identified which may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor should
consider performing the following procedures except
Express a report that contains a disclaimer of opinion

A CIS where two or more personal computers are linked together through the use
of special software and communication lines and allows the sharing of
application software, data files, and computer peripherals such as printers and
optical scanners is a/an
Local area network (LAN).

Who is ultimately responsible for the design and implementation of cost-

effective controls in a CIS environment?
The entity’s management

Which of the following features is least likely to be found in an online, real-time

processing system?
Turnaround documents

What is meant by a financial forecast?

A prospective financial statement that presents an entity’s expected financial
position, results of operations, and cash flows

In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.
TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the adjusted net income in 2019?

20, 930

In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.

TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the adjusted net income in 2018?

10, 850

In its financial statements for the year ended. December 31, 2018 TBB
COMPANY reported P73, 500 revenue (sales), P53, 500 costs of goods sold, P6,
000 income tax expense, P20, 000 retained earnings at January 1, 2018 and P34,
000 retained earnings at December 31, 2018.

In 2019, after the 2018 financial statements were approved for issue, TBB
COMPANY discovered that some products sold in 2018 were incorrectly
included in inventories at December 31, 2018 at their cost of P6, 500. In 2019,
TBB COMPANY changed its accounting policy for the measurement of
investments property after initial recognition from the cost model to the fair
value model. It acquired its only investments property for P3, 000 many years
ago, The fair value of the investment was determined on December 31, 2019 a
P25, 000. (P20, 000 in 2018 and P18, 000 in 2017). At December 31, 2019, as a
result of the invention of improved lubricants, TBB COMPANY reassessed the
useful life of Machine A from four years to seven years. Machine A is
depreciated on the straight-line method to a nil residual value. It was acquired
for P6, 000 on January 1, 2017. Inventories of the type manufactured by Machine
A were immaterial at the end of each reporting period.

TBB COMPANY’s accounting records for the year ended December 31, 2019,
before accounting for the change in accounting policy and before accounting for
the change in accounting estimate, record P104, 000 revenue( asset) , P86, 500
costs of goods sold and P5, 050 income tax expense.

Assume that the income tax rate is 30%

What is the amount that should be charged against retained earnings in 2019 as a
result of the above accounting changes and errors?
7, 350

You are auditing the cash of Watson Corp. for the fiscal year ended September
30, 2019.

The bank reconciliation prepared by the account of Watson Corp. for the month
of August is presented below:

Bank balance, per bank statement P156,000

Add: Deposit in transit, August 31 2,700
Total 158,700
Less: Outstanding checks
No. 547 P 600
561 5,400
562 4,200
565 1,800 12,000
Adjusted Balance 146,700

Book balance, per general ledger P120,000

Add: Proceeds of note receivable collected by bank in 24,000
August
Deposit made in bank on August 31 not recorded on
books until
September 3,000
Total 147,000
Less: Bank Service charge 300
Adjusted Balance 146,700

There was no available bank reconciliation for the month of September; instead,
the accountant provided you a copy of the September bank statement to aid you
in your audit.
The September bank statement included the following bank debits and credits:
Date Particulars Debits Credits
Aug 31
Sep 1 Chk #561 5,400 2,700
Sep 6 Chk #562 4,200
Sep 9 Chk #565 1,800 30,000
Sep 12 420 DM 420
Sep 15 Chk #566 3,000
Sep 17 600
Sep 20 Chk #567 2,100 42,000
Sep 27 Chk #569 4,320
Sep 29 300 EC 300 EC
Sep 30 1,320 SV
Sep 30 900 DM
Sep 30 Chk #570 5,460
SV – Service Charges DM – Debit Memo
EC – Error Corrected CM – Credit Memo

Further investigation revealed the following information:

a. All book reconciling items during August has been recorded in
September.
b. The check register revealed that the last check issued in September was
No. 571 for P3,000 and that check No. 568 was P7,200.
c. Cash received for the period September 25 through 31 of P28,200 was
deposited in the bank on October 1.
d. The debit memo on September 12 and September 30 were customer NSF
checks returned by the bank. The check on September 12 was immediately
redepostied without entry. The check returned on September 31 was redeposited
by the client in the bank on October 1 also without entry.
e. Among the bank credits for the month was P600 deposit of Irene Corp.
credited by the bank to the company’s account.

Requirements: Based on your audit procedures and appreciation of the above

data, answer the following:

How much is the adjusted cash balance as of September 30, 2019?

219,600

SOLUTION
BANK Aug 31 Receipts Disbursements Sep 30
Unadjusted balances 156,000 76,020 29,220 202,800
DIT – August 2,700 (2,700)
DIT – September 28,200 28,200
OC – August (12,000) (12,000)
OC – September 10,800 (10,800)
Bank error – Sep (300) (300)
corrected also in Sep
Bank error – (600) (600)
Overstated receipt
Adjusted balances 146,700 100,620 27,720 219,600

BOOK Aug 31 Receipts Disbursements Sep 30

Unadjusted balances 120,000 127,200 25,380 221,820
Unrecorded credit – 27,000 (27,000)
Aug
BSC – Aug (300) (300)
BSC – Sep 1,320 (1,320)
NSF – Sep 12 420 420
NSF – Sep 30 900 (900)
Adjusted balances 146,700 100,620 27,720 219,600

How much is the unadjusted bank balance as of September 30, 2019?

202,800
How much is the unadjusted book balance as of September 30, 2019?
221,820

The accountant of Chu Corp. presented to you the following details of its
subsidiary ledger in relation to your audit of the company’s accounts receivable
balance as of December 31, 2019:
Customer Invoice Date Amount
Sushean Inc. December. 20 550, 000
December. 1 1, 200, 000
October. 11 950, 000
August. 4 420, 000
Karen Co. November. 20 2, 000, 000
September. 4 900, 000
August. 2 500, 000
Jenkeen Inc. December. 10 1, 750, 000
October. 4 600, 000
July. 5 500, 000
Mara Corp. September. 9 2, 600, 000
July. 10 1, 250, 000
March. 5 900, 000
Monet Co. December. 1 (500, 000)

Audit notes:
a. The company’s term is n/60 days.

b. The company’s general ledger shows the following balances as of

December 31, 2019:
P13, 650,
Accounts Receivable 000
Allowance for doubtful accounts (950, 000)

c. The credit balance of the receivable resulted from Monet Co.’s

overpayment of its account. The same shall be settled by a delivery of
merchandise the following period:
 d. You have discovered that JenKeen Inc’s payment of an October 4
invoices amounting to P600, 000 was posted against Karen Co’s account for
an invoice dated December 4, for the same amount.

e. Discussions with the credit department manager revealed the

following appropriate credit policy:

Accounts receivable Doubtful of

age collection
Current 2%
1-60 days past due 5%
61-120 days past due 20%
More than 120 days
past due 50%

Requirements:

What is the correct accounts receivable balance as of December 31, 2019?

14, 120, 000
How much is the unreconciled difference between the control account and the
subsidiary ledger?
30, 000
Assuming that there were no other entries affecting the allowance for bad debts,
what is the correct bad debts expense for 2019?
378, 500

SOLUTION
More
1 – 60 61 – 120 than
GL Current
days days 120
days
Sushean, Inc.
December 20 550,000
December 1 1,200,00
0
October 11 950,000
August 4 420,000
Karen Co.
November 20 2,000,00
0
September 4 900,000
August 2 500,000
Jenkeen Inc.
December 10 1,750,00
0
October 4 600,000
July 5 500,000
 Mara Corp.
September 9 2,600,00
0
July 10 1,250,00
0
March 5 900,000
Monet Co.
December 1 (500,000
)
Unadjusted 13,650,000 5,000,00 5,050,00 2,670,00 900,000
Balances 0 0 0
Advances from 500,000 500,000
Customers – Monet
Co.
Posting Errors 600,000 (600,000
)
Adjusted Balances 14,150,000 6,100,00 4,450,00 2,670,00 900,000
0 0 0
Adjusted to Sales (30,000)
Correct Balances 14,120,000 6,100,00 4,450,00 2,670,00 900,000
0 0 0
2% 5% 20% 50%
Allowance –end (1,328,500 122,000 222,500 534,000 450,000
)

Allowance – beg 950,000

Bad Debt Expense 378,500
Allowance – end 1,328,500

You are engaged in the regular annual examination of the accounts and records
of Joya Manufacturing Co. for the year ended December 31, 2019. To reduce the
workload at year end, the company, upon your recommendation, took its annual
physical inventory on November 30, 2019. You observed the taking of the
inventory and made tests of the inventory count and the inventory records.

The company’s inventory account, which includes raw materials and work-in-
process is on perpetual basis. Inventories are valued at cost, first-in, first-out
method. There is no finished goods inventory.

The company’s physical inventory revealed that the book inventory of

P3,391,920 was understated by P168,000. To avoid delay in completing its
monthly financial statements, the company decided not to adjust the book
inventory until year-end except for obsolete inventory items.

Your examination disclosed the following information regarding the November

30 inventory:
a. Pricing tests showed that the physical inventory was overstated by
P123,200.
b. An understatement of the physical inventory by P8,400 due to errors in
footings and extensions.
c. Direct labor included in the inventory amounted to P560,000. Overhead
was included at the rate of 200% of direct labor. You have ascertained that the
amount of direct labor was correct and that the overhead rate was proper.
d. The physical inventory included obsolete materials with a total cost of
P14,000. During December, the obsolete materials were written off by a charge
to cost of sales.

Your audit also disclosed the following information about the December 31
inventory:

a. Total debits to the following accounts during December were:

Cost of sales P3,841,600
Direct labor 677,600
Purchases 1,383,200

b. The cost of sales of P3,841,600 included direct labor of P772,800.

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

The amount of direct labor included in work in process as of December 31, 2019
P 464,800

Cost of materials on hand, and materials included in work in process as of

December 31, 201

P1,625,120

The amount of factory overhead included in work in process as of December 31,

2019

P 929,600
SOLUTION
Physical Inventory, November – unadjusted 3,391,920
Understatement 168,000
Overstatement – pricing (123,200)
Understatement – footings and extensions 8,400
Obsolete materials (14,000)
Inventory – adjusted, November 30 3,431,120

Inventory – beg, November 30 3,431,120

Net Purchases – December 1,383,200
Direct Labor 677,600
Factory Overhead (677,600 * 200%) 1,355,200
Total Manufacturing Cost 6,847,120
Cost of Sales (3,841,600 - 14,000) (3,827,600)
Inventory – end, December 31 3,019,520

Inventory – adjusted, November 30 3,431,120

Direct Labor (560,000)
Factory Overhead (560,000 * 200%) (1,120,000)
Cost of materials – beg 1,751,120
Net Purchases – December 1,383,200
Total 3,134,320
Cost of Sales – Materials (3,841,600 – 14,000 – 772,800 – (1,509,200)
1,545,600)
Cost of materials on hand - end 1,625,120

Direct Labor – adjusted, November 30 560,000

Direct Labor – December 677,600
Total 1,237,600
Cost of Sales – Direct Labor (772,800)
Direct Labor – end 464,800

Factory Overhead – end (464,800 * 200%) 929,600

Part 3

Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons

distributed by the company to customers who may present the same within a
stated expiration date to various company distributors to avail of theme discounts
as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs.
The company honors requests for coupon reimbursements to distributors three
months after the expiration date. In Holmes’s experience 75% of the coupons
issued ultimately are redeemed by the customers. Total face value of coupons
issued during the year and expiring on December 31, 2019 amounted to
P250,000 while total payments to distributors as of the same date is at P140,250.
The total coupon value was set up as a liability while the total payments where
charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.

Requirements:

What is the adjusted balance of the unearned service contracts?

360,000

Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons

distributed by the company to customers who may present the same within a
stated expiration date to various company distributors to avail of theme discounts
as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs.
The company honors requests for coupon reimbursements to distributors three
months after the expiration date. In Holmes’s experience 75% of the coupons
issued ultimately are redeemed by the customers. Total face value of coupons
issued during the year and expiring on December 31, 2019 amounted to
P250,000 while total payments to distributors as of the same date is at P140,250.
The total coupon value was set up as a liability while the total payments where
charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.

Requirements:

What is the adjusted balance of the liability for unredeemed coupons?

66,000

Holmes Appliance Center reports the following liability items in its balance
sheet as of December 31, 2019:
Liability for unredeemed coupons 109,750
Unearned service contracts 300,000
Accrued officer bonuses 0

The liability for unredeemed coupons are in relation to discount coupons

distributed by the company to customers who may present the same within a
stated expiration date to various company distributors to avail of theme discounts
as indicated in the face of the coupons. Distributors are reimbursed for the face
value of coupons redeemed, plus 10% of the coupon value for handling costs.
The company honors requests for coupon reimbursements to distributors three
months after the expiration date. In Holmes’s experience 75% of the coupons
issued ultimately are redeemed by the customers. Total face value of coupons
issued during the year and expiring on December 31, 2019 amounted to
P250,000 while total payments to distributors as of the same date is at P140,250.
The total coupon value was set up as a liability while the total payments where
charged against the liability set up.

Aside from the company’s normal selling operations, it also sells equipment
service contracts agreeing to service equipment for a two-year period. Revenue
from service contracts is recognized as earned over the lives of the contracts.
Additional information shows that Unearned service contract revenue at January
1, 2019 is at P100,000; Cash receipts from service contracts sold is at P490,000
recorded as revenue; Service contract revenue actually realized is at P430,000.

The company provides a special bonus for its executive officers based on 10% of
its net income before bonus but after income tax. Net income for the year before
tax and before adjustments related to the previous information is at P1,016,250
(Assume income tax rate at 35%). Accrual is yet to be made on the bonuses.

Requirements:

What is the adjusted balance of the accrued officer bonuses accounts?

67,358
Bell Inc. reported the following information in its long-term liability portion of
its Statement of Financial Position for the period ended December 31, 2018:
12% Bonds Payable P5,500,000
10% Note Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000

Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.

Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.

b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.

c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000

At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000

Income tax is at 40%.

Requirements:

How much is the total long-term liability to be presented in the 2019

Statement of Financial Position?
4,764,659

SOLUTION
Proceeds from issuance of convertible bonds 5,500,000
FV of bonds without convertible option at 5% for 10 semi-
annual periods
PV of Principal (5,000,000 * 0.613913) 3,069,566
PV of Interest (300,000 * 7.721734) 2,316,520 (5,386,086)
Equity Portion (Share Premium – Convertible 113,914
Privilege)

Retirement Price 2,500,000

FV of the half bonds without convertible options at 7% for 7
semi-annual remaining periods
PV of Principal (2,500,000 * 0.62275) 1,556,874
PV of Interest (150,000 * 5.389289) 808,393 (2,365,267)
Equity Portion 134,733

FV of the half bonds without convertible options at 7% for 7 2,365,267

semi-annual remaining periods
Carrying Value (5,289,319 * 50%) (2644,659)
Loss on retirement (279,392)

Equity Portion 134,733

Carrying Value – SP Convertible Privilege (113,914 * 50%) (56,957)
Capital Gain – Share Premium 77,776

Financial Income after Permanent Difference 1,000,000

FDA for the period 100,000
FTA for the period (500,000)
Taxable Income 600,000
Tax Rate 40%
Current Tax Expense 240,000

Bonds Payable (5,289,319 * 50%) 2,644,659

Notes Payable – Long Term 1,500,000
Deferred Tax Liability (1,550,000 * 40%) 620,000
Total Non-current Liability 4,764,659

Bell Inc. reported the following information in its long-term liability portion of
its Statement of Financial Position for the period ended December 31, 2018:
12% Bonds Payable P5,500,000
10% Note Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000

Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.
Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.

b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.

c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000

At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000

Income tax is at 40%.

Requirements:

How much should be recognized in the profit or loss as a result of the retirement
of half of the bonds at the end of 2019?
279,392

Bell Inc. reported the following information in its long-term liability portion of
its Statement of Financial Position for the period ended December 31, 2018:
12% Bonds Payable P5,500,000
10% Note Payable – Bank 2,500,000
Deferred Tax Liability, net 340,000

Audit notes:
a. The bonds payable with a face value of P5,000,000 was issued with the
conversion option into 20,000, P100 par value ordinary shares at any time up to
its maturity on June 30, 2023. These were issued on June 30, 2018 when the
prevailing yield rate on similar debt security without the conversion option was
10%. The company recorded the transaction as a debit to Cash and credit to
Bonds Payable for the total consideration received. Interests are being paid semi-
annually every December 31 and June 30 and were recorded appropriately. No
other entries were made by the client affecting the carrying value of the bonds.

Half of the bonds were retired on December 31, 2019 at par value. The
prevailing yield rate on similar debt instrument without the conversion option on
this date was at 14%. The transaction is yet to be recorded at year end.
b. The 10% note payable to the bank is dated September 1, 2018 and is
payable at the rate of P500,000 annually every September 1 of each year starting
2019. Interests are also payable annually every September 1.

c. The deferred tax liability at the beginning of the year resulted to the
following cumulative temporary difference as of December 31, 2018:
Cumulative temporary difference creating future P1,050,000
taxable amount
Cumulative temporary difference creating future
deductive amount 200,000

At the end of the year the balances of the cumulative temporary differences
were:
Cumulative temporary difference creating future P1,550,000
taxable amount
Cumulative temporary difference creating future
deductive amount 300,000

Income tax is at 40%.

Requirements:

Assuming that the total financial income after permanent difference is at

P1,000,000, what is the total current tax expense for 2019
240,000

On January 2019, Sherlock Corp. granted to 600 employees, 100 share options
each exercisable after 3 years, subject to the employees staying with the
company until the end of 2021. Options can be exercised if share price increases
from P40 at the beginning of 2019 to above P60 at the end 2021. The share
options can be exercised at any time during the next five years that is by the end
of 2026. The company estimates the fair value of the share options on the grant
date at P5 per option. This estimate takes into account the possibility that the
share price will exceed P60 per share at the end of 2021, thus options are
exercisable and the possibility that the share price will not exceed P60 at the end
of 2021, thus the share options will be forfeited.

The following information are deemed relevant:

Actual Estimated
number of number of
employees additional
actually employees
leaving the expected to
company leave the
Fair Value of Fair Value during the company by the
Shares of Options year end 2021
12/31/2019 48 4 5 45
12/31/2020 44 3 20 35
12/31/2021 56 10 30
Requirements:

What is the ordinary share options outstanding as of December 31, 2020?

180,000

The share options are under a variable option plan with a market-based
condition, thus the achievability of the condition is not a matter to consider in
determining the compensation expense:
2019
Fair value of options on grant date P5
Number of options (600 – 5 – 45) * 100 55,000
Estimated value of services over 3 years 275,000
Proportion of the Vesting Period 1/3
Compensation Expense, 2019 91,667

2020
Fair value of options on grant date P5
Number of options (600 – 5 – 20 – 35) * 100 54,000
Estimated value of services over 3 years 270,000
Proportion of the Vesting Period 2/3
Compensation Expense – cumulative 180,000
Compensation Expense – 2019 (91,667)
Compensation Expense – 2020 88,333

2021
Fair value of options on grant date P5
Number of options (600 – 5 – 20 – 30) * 100 54,500
Estimated value of services over 3 years 272,500
Proportion of the Vesting Period 3/3
Compensation Expense – cumulative 272,500
Compensation Expense – 2019 and 2020 (180,000)
Compensation Expense – 2021 92,500

On January 2019, Sherlock Corp. granted to 600 employees, 100 share options
each exercisable after 3 years, subject to the employees staying with the
company until the end of 2021. Options can be exercised if share price increases
from P40 at the beginning of 2019 to above P60 at the end 2021. The share
options can be exercised at any time during the next five years that is by the end
of 2026. The company estimates the fair value of the share options on the grant
date at P5 per option. This estimate takes into account the possibility that the
share price will exceed P60 per share at the end of 2021, thus options are
exercisable and the possibility that the share price will not exceed P60 at the end
of 2021, thus the share options will be forfeited.

The following information are deemed relevant:

Fair Value of Fair Value Actual Estimated
Shares of Options number of number of
 employees additional
actually employees
leaving the expected to
company leave the
during the company by the
year end 2021
12/31/2019 48 4 5 45
12/31/2020 44 3 20 35
12/31/2021 56 10 30

Requirements:

What is the compensation expense in 2019?

91,667

What is the compensation expense in 2020?

88,333

Baker Corporation owns 300,000 of Street Inc.’s 1,000,000 shares issued and
outstanding purchased on January 2, 2019 at P20 per share. Street’s net assets
had a book value on the said date at P16M. The excess of acquisition cost over
book value of net assets acquired was attributed to the total understatement of
Street’s Land and Building with a 5 year average useful life at P800,000 and
P1,200,000, respectively. The balance of the excess was attributed to Street’s
unidentifiable asset.

Street Inc. declared P800,000 cash dividends by the end of 2019 and reported a
total comprehensive income amounting to P2,000,000 which is net of an
unrealized holding loss from its investment at fair value through other
comprehensive income amounting to P500,000.

Requirements:

How much investment income should be reported in Baker Corporation’s profit

or loss?
678,000
Assuming that Baker Corporation sold 120,000 of its investment in Street
Corporation at P30 per share, how much is the total gain on cessation should be
recognized in the 2020 profit or loss?
2,562,000

Share from net income (P2.5M * 30%) 750,000

Understatement in Depreciation (360,000/5yrs) (72,000)
Investment Income – P&L 678,000

Investment income – P&L 678,000

Share from Unrealized holding loss – OCI (P500,000 * (150,000)
30%)
Net amount to be reported in the SCI 528,000
Acquisition cost 6,000,000
Share from dividends (800,000 * 30%) (240,000)
Share from net income 678,000
Share from OCI (150,000)
Carrying Amount, 12/31/2019 6,288,000

Sale Transaction
Proceeds (120,000sh * 30) 3,600,000
Carrying amount – sold (6,288,000 * (2,515,200)
120,000sh/300,000sh)
1,084,800
Recycling of OCI (150,000 * 120,000sh/300,000sh) (60,000)
Gain on Sale 1,024,800

Reclassification
FV of the remaining portion to be reclassified (180,000sh 5,400,000
* 30)
Carrying amount – reclassified (6,288,000 * (3,772,800)
180,000sh/300,000sh)
1,627,200
Recycling of OCI (150,000 * 180,000sh/300,000sh) (90,000)
Gain on Reclassification 1,573,200

Total Gain on Cessation 2,562,000

How much total/net amount should be reported in Baker Corporation’s 2019

Statement of Comprehensive Income?
528,000

The property, plant and equipment section of Santos Corporations statement of

financial position at December 31, 2018 included the following items:
Land P600, 000
Land Improvements 280, 000
Buildings 2, 200, 000
Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a) A tract of land was acquired for P300, 000. As of December 31, the
company has not determined its future use.
b) A plant facility consisting of land and building was acquired from
Gladiolus Company in exchange for 40, 000 ordinary shares of Viola. On the
date of acquisition, Viola’s share had a closing market price of P37 per share
on the Philippine Stock Exchange. The plant facility was carried on
Gladiola’s books at P220, 000 for land and P640, 000 for the building on the
date of exchange. Current appraised values for land and building,
respectively are P460, 000 and P1, 380, 000
c) On May 2019, items of machinery and equipment were purchased at a
total cost of P896, 000, inclusive of 12% VAT. Additional costs of P26, 000
for freight and P52, 000 for installation were incurred.
 d) Expenditures totalling P190, 000 were made for new parking lots
streets and sidewalks at the corporation’s various plant locations. These
expenditures had an estimated life of 5 years.
e) A machine costing P160, 000 on January 1, 2011 was scrapped on June
30, 2019. Double declining-balance depreciation has been recorded on the
basis of a year 10-year useful life.
f) A machine was sold for P40, 000 for July 1, 2019. Original cost of the
machine was P88, 000 on January 1, 2016, and it was depreciated on a
straight-line basis over an estimate useful life of or 7 years and a salvage
value of 4, 000

Requirements:

Adjusted balance of Machinery and Equipment as of December 31, 2019

P2, 550, 000

The property, plant and equipment section of Santos Corporations statement of

financial position at December 31, 2018 included the following items:
Land P600, 000
Land Improvements 280, 000
Buildings 2, 200, 000
Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a) A tract of land was acquired for P300, 000. As of December 31, the
company has not determined its future use.
b) A plant facility consisting of land and building was acquired from
Gladiolus Company in exchange for 40, 000 ordinary shares of Viola. On the
date of acquisition, Viola’s share had a closing market price of P37 per share
on the Philippine Stock Exchange. The plant facility was carried on
Gladiola’s books at P220, 000 for land and P640, 000 for the building on the
date of exchange. Current appraised values for land and building,
respectively are P460, 000 and P1, 380, 000
c) On May 2019, items of machinery and equipment were purchased at a
total cost of P896, 000, inclusive of 12% VAT. Additional costs of P26, 000
for freight and P52, 000 for installation were incurred.
d) Expenditures totalling P190, 000 were made for new parking lots
streets and sidewalks at the corporation’s various plant locations. These
expenditures had an estimated life of 5 years.
e) A machine costing P160, 000 on January 1, 2011 was scrapped on June
30, 2019. Double declining-balance depreciation has been recorded on the
basis of a year 10-year useful life.
f) A machine was sold for P40, 000 for July 1, 2019. Original cost of the
machine was P88, 000 on January 1, 2016, and it was depreciated on a
straight-line basis over an estimate useful life of or 7 years and a salvage
value of 4, 000

Requirements:

Loss on scrapping of machine on June 30, 2019

P24, 160

The property, plant and equipment section of Santos Corporations statement of

financial position at December 31, 2018 included the following items:
Land P600, 000
Land Improvements 280, 000
Buildings 2, 200, 000
Machinery and Equipment 1, 920, 000

The following transactions occurred during 2019:

a) A tract of land was acquired for P300, 000. As of December 31, the
company has not determined its future use.
b) A plant facility consisting of land and building was acquired from
Gladiolus Company in exchange for 40, 000 ordinary shares of Viola. On the
date of acquisition, Viola’s share had a closing market price of P37 per share
on the Philippine Stock Exchange. The plant facility was carried on
Gladiola’s books at P220, 000 for land and P640, 000 for the building on the
date of exchange. Current appraised values for land and building,
respectively are P460, 000 and P1, 380, 000
c) On May 2019, items of machinery and equipment were purchased at a
total cost of P896, 000, inclusive of 12% VAT. Additional costs of P26, 000
for freight and P52, 000 for installation were incurred.
d) Expenditures totalling P190, 000 were made for new parking lots
streets and sidewalks at the corporation’s various plant locations. These
expenditures had an estimated life of 5 years.
e) A machine costing P160, 000 on January 1, 2011 was scrapped on June
30, 2019. Double declining-balance depreciation has been recorded on the
basis of a year 10-year useful life.
f) A machine was sold for P40, 000 for July 1, 2019. Original cost of the
machine was P88, 000 on January 1, 2016, and it was depreciated on a
straight-line basis over an estimate useful life of or 7 years and a salvage
value of 4, 000

Requirements:

Adjusted balance of buildings as of December 31, 2019

3, 310, 000