AUDITING PROBLEMS

CPA Review

PROBLEM NO. 1 HOWARD COMPANY

1. B Current service cost
Interest expense (P6,000,000 x 7%)
Interest income (P4,500,000 x 7%)
Employee benefit expense

P750,000
420,000
(315,000)
P855,000

2. C Actual return
Interest income
Remeasurement gain on plan assets
Increase in projected benefit obligation actuarial loss
Net remeasurement gain other comprehensive income

P450,000
(315,000)
135,000
(100,000)
P 35,000

3. A Employee benefit expense

Prepaid/accrued benefit cost
Remeasurement gain OCI
Cash

35,000
1,150,000

855,000
330,000

4. D Prepaid/accrued benefit cost, Jan. 1

Transitional effect credit
Transitional effect debit
Debit adjustment
Prepaid/accrued benefit cost, Dec. 31

(P1,400,000)
(750,000)
650,000
330,000
(P1,170,000)

5. A Past service cost

Unrecognized actuarial gain
Net adjustment to Retained earnings, Jan. 1 credit

P750,000
(650,000)
P100,000

PROBLEM NO. 2 ALTERADO COMPANY

1. D Policy 1
Policy 2 (P72,000 x 3/36)
Policy 3
Insurance expense

P25,500
6,000
13,000
P44,500

2. C Equipment retired during 2013 (P2,400,000 P1,600,000 =

P800,000 x 5%)
P1,600,000 x 10%
Total depreciation expense

P 40,000
160,000
P200,000

3. D Bad debt expense (P2,148,000 P100,000 = P2,048,000 x 1%)

P20,480

4. D Interest income (P600,000 x 7% x 5/12)

Rental income (P216,000 x 3/18)

P17,500
P36,000

5. D Expired rent (P30,000 x 8 months)

P240,000

PROBLEM NO. 3 ISIDRO MANUFACTURING COMPANY

1. B Depreciation expense for 2010:
Truck # 1 (P180,000/5)
Truck # 2 (P220,000/5)
Truck # 3 (P300,000/5 x )
Truck # 4 (P240,000/5)
Truck # 5 (P400,000/5 x )
Total
2. A Trade-in value of Truck #3 (P400,000 P220,000)
Book value of Truck #3:
Page 1 of 7 Pages

P 36,000
44,000
30,000
48,000
40,000
P198,000
P180,000

Cost
Accumulated depreciation, 1/1/09 7/1/10
(P300,000/5 x 1.5)
Loss on trade-in
3. A Cost:
Truck #2
Truck #5
Truck #6
Accumulated depreciation:
Truck #2 (fully depreciated 7/1/12)
Truck #5, 7/1/10 12/31/13 (P400,000/5 x 3.5)
Truck #6, 7/1/12 12/31/13 (P420,000/5 x 1.5)
Book value, Dec. 31, 2013
4. C
Truck #1
Truck #2
Truck #3
Truck #4
Truck #5
Truck #6
Correct depreciation
Per client
Overstatement

P300,000
(90,000) 210,000
P30,000
P220,000
400,000
420,000P1,040,000
P220,000
280,000
126,000

626,000
P414,000

2010
2011
2012
2013
Total
P36,000
---- P36,000
44,000 44,000 22,000
-- 110,000
30,000
---- 30,000
48,000 48,000 24,000
-- 120,000
40,000 80,000 80,000 80,000 280,000
--- 42,000 84,000 126,000
P198,000 P172,000 P168,000 P164,000 P702,000
210,000 225,000 250,500 304,000 989,500
P12,000 P53,000 P82,500 P140,000 P287,500

5. B Accumulated depreciation
Trucks
Retained earnings
Depreciation expense

665,500
480,000
45,500
140,000

PROBLEM NO. 4 TOY COMPANY

1. A Acquisition cost (P8,297,000 P297,000 = P8,000,000 x75%) P6,000,000
Reconditioning cost
342,000
Salvaged materials garage
(66,000)
Construction of warehouse
1,013,000
Total cost - Buildings
P7,289,000
2. B Land - acquisition cost (P8,000,000 x 25%)
3. B Machinery (P310,000 + P610,000)

P2,000,000
P920,000

4. C Share premium (P640,000 P40,000) + (P1,110,000 P1,000,000)P710,000

5. A Patent (P640,000 P310,000)
Franchise
Total intangibles

PROBLEM NO. 5 LAFAYETTE CORPORATION

Page 2 of 7 Pages

P330,000
500,000
P830,000

Computation of Estimated Loss on Returns on Sales Warranties

Subsequent to June 30, 2013

Month
January
February
March
April
May
June

Percentage
of
Estimated
Returns

Sales
P4,200,000
4,700,000
3,900,000
3,250,000
2,400,000
1,900,000

7%
7
7
7
10
10

Total
Estimated
Returns

Percentage of
Estimated
Returns Subsequent to
6/30/13

P294,000
329,000
273,000
227,500
240,000
190,000
P1,553,500

Total estimated returns................ P648,850

Loss percentage on returns.........
65%*
Total estimated loss on returns.... P421,753

Total
Estimated
Returns Subsequent to
6/30/13

10%
20
30
50
70
100

P29,400
65,800
81,900
113,750
168,000
190,000
P648,850

Required liability balance.......

Less balance, 6/30/12............
Required adjustment to
liability account

*Estimated loss on component replacement (in percentage of sales price):

Cost of unit replacement
Add freight charges on return and replacement

P421,753
120,400
P301,353

70%
5
75%
10
65%

Deduct salvage value of components returned

Net loss on components returned
Adjusting Entry
Warranty Expense
Estimated Liability for Product Warranty
1. D

2. B

3. A

301,353
301,353
4. B

5. B

PROBLEM NO. 6 MALOX SPECIALTY COMPANY

Down tube shifters at NRV
Bar end shifters at cost
Head tube shifters at cost
Work-in-process at NRV
Derailleurs at NRV
Remaining items at NRV
Supplies at cost
Totals
1
2

FG
P266,000
182,000
195,000

WIP

P108,700

P643,000

P108,700

RM

FS

P110,0001
127,400
P237,400

P64,8002
P64,800

P264,000 x = P132,000; P132,000/1.2 = P110,000

P69,000 P4,200 = P64,800

1. B

2. C

3. D

4. A

5. C

PROBLEM NO. 7 GATAS COMPANY

1. C Cows (15,000 x P4,000)
Heifers (1,000 x P3,000)
Fair value, Nov. 1, 2012

P60,000,000
3,000,000
P63,000,000

2. A Cows (15,000 x P5,000)

Heifers (1,000 x P4,500)
Heifers (7,500 x P3,600)

P 75,000,000
4,500,000
27,000,000
Page 3 of 7 Pages

Fair value, Oct. 31, 2013

P106,500,000

3. C Increase in fair value due to price change:

Cows 15,000 x P(4,500-4,000)
Heifers 1,000 x P(3,200-3,000)
Heifers 7,500 x P(3,200-3,000)
Total

P7,500,000
200,000
1,500,000
P9,200,000

4. B Increase in fair value due to physical change:

Cows 15,000 x P(5,000-4,500)
Heifers 1,000 x P(4,500-3,200)
Heifers 7,500 x P(3,600-3,200)
Total

P7,500,000
1,300,000
3,000,000
P11,800,000

5. A Fair value of cattle in Central Visayas:

Cows (6,000 x P5,000)
Heifers (2,000 x P4,500)
Total

P30,000,000
9,000,000
P39,000,000

PROBLEM NO. 8 MINA MINING CO.

Depletable/Depreciable CostEstimated ReservesDepletion/Depreciation
Mineral propertyP 26,100,0001
120,000
P217.50
Building
1,080,000
120,000
9.00
Machinery (1/2)
900,000
120,000
7.50
Machinery (1/2)
900,000
120,000
15.00 2
1
2

P27,000,000 P900,000
P900,000/120,000) x 2

1. D
Mineral property (P217.50 x 6,000)
Building (P9 x 6,000)
Machinery (1/2) (P7.50 x 6,000)
Machinery (1/2) (P15 x 6,000)

Year 1
Depletion
Depreciation
P1,305,000
P 54,000
45,000
90,000
P1,305,000

P189,000
2. C
Mineral property (P217.50 x 12,000)
Building (P9 x 12,000)
Machinery (1/2) (P7.50 x 12,000)
Machinery (1/2) (P15 x 12,000)

Year 5
Depletion
Depreciation
P2,610,000
P108,000
90,000
180,000
P2,610,000

P378,000
3. D
Mineral property (P217.50 x 12,000)
Building (P9 x 12,000)
Machinery (1/2) (P7.50 x 12,000)
Machinery (1/2) (P15 x 6,000)

Year 6
Depletion
Depreciation
P2,610,000
P108,000
90,000
90,000
P2,610,000

P288,000
4. A
Mineral property (P217.50 x 6,000)
Building (P9 x 6,000)
Machinery (1/2) (P7.50 x 6,000)
Machinery (1/2) (P15 x 6,000)
P99,000
5. A

Year 11
Depletion
Depreciation
P1,305,000
P54,000
45,000
-P1,305,000
Year 1

Page 4 of 7 Pages

Mineral property (P217.50 x 5,000)

Building (P9 x 5,000)
Machinery (1/2) (P7.50 x 5,000)
Machinery (1/2) (P15 x 5,000)

Depletion
P1,087,500

Depreciation
P 45,000
37,500
75,000
P1,087,500

P157,500
PROBLEM NO. 9 DEBBY CORP.
1. B Land (appraised value)

P8,700,000

2. A Total purchase price

Less: Land appraisal
Balance of purchase price to be allocated
Building
Machinery

Appraisal Value
P3,150,000
1,350,000
P4,500,000

P12,000,000
8,700,000
P 3,300,000

Ratios
Allocated Values
315/450 = 0.70 x P3,300,000 P2,310,000
135/450 = 0.30 x P3,300,000
990,000
P3,300,000

Building (allocated value)

Renovations
3,000,000
Capitalized interest (P3,000,000 x 12%)
Total cost of building

P2,310,000
360,000
P5,670,000

3. D Machinery (allocated value)

P990,000

4. C 2014 Depreciation Building (P5,670,000 x 10%* x )

P283,500

* 150% x 1/15

5. B 2014 Depreciation Machinery (P990,000 x 40%* x )

P198,000

* 200% x 1/5

PROBLEM NO. 10 GARLA HOME IPROVEMENTS/MANGO BANGGO

1. B Allowance to reduce inventory to NRV, May 31, 2013
P45,600

(P1,224,000 P1,178,400)

2. A Allowance balance prior to adjustment

Required allowance balance
Gain to be recorded

P82,500
45,600
P36,900

3. B Gain from change in fair value of biological asset

P45,000

4. A Agricultural produce, at fair value

P90,000

5. A Gain from change in fair value biological asset

Gain from change in fair value agricultural produce
Gross profit on sold mangoes
Total effect on income

P 45,000
90,000
15,000
P150,000

PROBLEM NO. 11
1.
Cost of trademark
Less: Accumulated amortization, 20X4 20X6 (P300,000/10 x 3 yrs.)
Carrying value, December 31, 20X6
Remaining useful life, 20X7 20X9
Amortization for 20X7
Answer: B
2.
Page 5 of 7 Pages

P300,000
90,000
P210,000
3 years
P 70,000

Cost
Less: Accumulated amortization, 20X4 20X7 (P90,000 + P70,000)
Carrying value, December 31, 20X7
Recoverable value
Impairment loss
Answer: A

P300,000
160,000
P140,000
50,000
P 90,000

3.
Probability-weighted expected cash flows:
P400,000 x 5%
P200,000 x 20%
P80,000 x 50%
P20,000 x 25%
Total
Add: 6% risk adjustment
Total
Present value factor (at 5% for 6 months)
Present value of warranties, December 31, 20X2
Answer: D

P 20,000
40,000
40,000
5,000
P105,000
6,300
P111,300
0.95238
P106,000

4. It is probable that SME B will successfully defend the court case. Therefore, SME B has a
possible obligation and hence a contingent liability. No amounts are recognized for
contingent liabilities. However, disclosure is necessary.
Answer: D
5.
Cost of investment in entity DD (P28,000 x 101%)
Fair value less cost to sell (P15,000 x 95%)
Impairment loss
Answer: B

P28,280
14,250
P14,030

Impairment loss
Cash dividends (P2,000 + P250)
Net
Answer: A

P(14,030)
2,250
P(11,780)

6.

7.
Cost of investment in entity DD (P28,000 x 101%)
Less: Share of entity DDs loss (P20,000 x 25%)
Carrying value, December 31, 20X1
Fair value less cost to sell (P15,000 x 95%)
Impairment loss
Answer: C

P28,280
5,000
P23,280
14,250
P 9,030

Share of income, entities BB and CC (P1,250 + P4,500)

Share of loss, entity DD
Impairment loss
Net
Answer: A

P5,750
(5,000)
(9,030)
P(8,280)

8.

9.
Cost
P10,000
15,000
28,000
P53,000

BB
CC
DD
Increase in fair value (P57,000 P53,000)
Answer: A
10.
Page 6 of 7 Pages

Fair Value
P13,000
29,000
15,000
P57,000
P4,000

Cost model:
Acquisition cost, including transaction cost (P53,000 + P530)
Less: Impairment loss
Carrying value, December 31, 20X1

P53,530
14,030
P39,500

Equity method:
Acquisition cost, including transaction cost
Cash dividends (P250 + P2,000)
Share of income, entities BB and CC (P1,250 + P4,500)
Share of loss, entity DD
Impairment loss
Carrying value, December 31, 20X1

P53,530
(2,250)
5,750
(5,000)
(9,030)
P43,000

Fair value model:

BB
CC
DD
Carrying value, December 31, 20X1
Answer: C

P13,000
29,000
15,000
P57,000

PROBLEM NO. 12 HIATT TEXTILE CORPORATION

ADJUSTING JOURNAL ENTRIES
December 31, 2013
1.

2.

3.

4.

Prepaid insurance (P31,000 x 3/5)

Insurance expense (P31,000 x 1/5)
Retained earnings (P31,000 x 4/5)

18,600
6,200

Allowance for bad debts

Bad debt expense
(2% - 1 % = % x P5,000,000)

25,000

Retained earnings
Cost of goods sold (P99,000 P75,500)
Inventory

75,500
23,500

24,800
25,000

99,000

Equipment
Depreciation expense
(P125,000 x 1/10)
Retained earnings (P150,000 P12,500)
Accumulated depreciation Equipment
(P125,000 x 2/10)

150,000
12,500
137,500
25,000

2013
P1,100,000
(6,200)
25,000

Reported net income

Prepaid insurance charged to expense
Decrease in bad debt expense rate
Ending inventory overstated:
Cost of machine charged to expense
Unrecorded depreciation
Corrected net income
1. A

2. B

3. C

(12,500)
P1,082,800
4. D
--- END ---

Page 7 of 7 Pages

5. C

2012
P975,000
24,800
150,000
(12,500)
P1,061,800