CPA REVIEW SCHOOL OF THE PHILIPPINES

Final Preboard Examination on Auditing Problems

Suggested answers/solutions

PROBLEM NO. 1
Hangover Company
Proof of Cash
For the month of July, 2005

Beginning Receipts Disb Ending

Unadjusted bank balances 66,405 76,800 77,395 65,810

Outstanding checks
June (4,742) (4,742)
July 5,857 (5,857)
Deposits in transit
June 3,156 (3,156)
July 2,238 2,238
NSF check redeposited - July (472) (472)
Withdrawal error - July (386) 386

Adjusted bank balances 64,819 75,410 77,652 62,577

(1) (2) (3) (4)

Unadjusted book balances 62,150 75,304 77,150 60,304

Bank service charges
June (165) (165)
July 175 (175)
Interest earned
June 3,054 (3,054)
July 3,160 3,160
Direct deposits
June 675 (675)
July 675 675
Book errors
June (895) (895)
July 492 (492)

Adjusted book balances 64,819 75,410 77,652 62,577

- - - -

1. B
2. A
3. D
4. A
5. C
PROBLEM NO. 2 - Carlos Uno Company

Question No. 6 - B
PV of Note (P220,000 x 0.8264) 181,808
Less cost of land 125,000
Gain on sale 56,808

Amortization schedule:
Interest income Carrying amount
Jan. 1, 2005 181,808
Dec. 31, 2005 18,181 199,989
Dec. 31, 2006 20,011 220,000

Question No. 7 - C
Year Principal Interest Total PVF PV
2006 200,000 24,000 224,000 0.8772 196,493
2007 200,000 16,000 216,000 0.7695 166,212
2008 200,000 8,000 208,000 0.6750 140,400
600,000 503,105

PV of Note (see above computation) 503,105

Less cost of land 400,000
Gain on sale 103,105

Amortization schedule:
Eff. Int. Nom. Int. Disc. Amort. Principal Carrying amount
Jan. 1, 2006 503,105
Dec. 31, 2006 70,435 24,000 46,435 200,000 349,540
Dec. 31, 2007 48,936 16,000 32,936 200,000 182,476
Dec. 31, 2008 25,524 8,000 17,524 200,000 -

Question No. 8 - B
Interest income for 2005 (P181,808 x 10%) 18,181

Question No. 9 - A
NR - 1/1/05 sale [P220,000-(P181,808+P18,181)] 20,011
NR - 1/1/06 sale (P503,105 x 14%) 70,435
Total interest income in 2006 90,446

Question No. 10 - D

Carrying amount, 1/1/06 (NR 1/1/06 sale) 503,105

Add discount amortization in 2006:
Effective interest (P503,105 x 14%) 70,435
Nominal interest (P600,000 x 2%) 24,000 46,435
Carrying amount, 12/31/06 before collection of principal 549,540
Less principal amount received 200,000
Carrying amount, 12/31/06 349,540
PROBLEM NO. 3 - J & B Retail Store
Question No. 11 - B
Accounts receivable, 12/31/06 per books 140,000
Add credits to accounts receivable in 2006:
Accounts written off 8,000
Sales returns 4,000
Cash receipts from customers 2,400,000
Sales discounts 12,000 2,424,000
Total 2,564,000
Less other debits to accounts receivable in 2006:
Accounts receivable, 12/31/05 80,000
Erroneous debit to AR for sales returns 3,200 83,200
Gross sales for 2006 2,480,800

Question No. 12 - D
Accounts payable, 12/31/06 168,000
Add debits to accounts payable in 2006:
Purchase returns 12,000
Cash payments to trade creditors 1,600,000 1,612,000
Total 1,780,000
Less accounts payable, 12/31/05 200,000
Gross purchases for 2006 1,580,000
Less purchase returns 12,000
Net purchases for 2006 1,568,000

Question No. 13 - A
Inventory, 12/31/05 180,000
Add net purchases for 2006 1,568,000
Total goods available for sale 1,748,000
Less cost of sales for 2006 [(P2,480,800-P4,000) x (960/1,600)] 1,486,080
Inventory, 12/31/06 261,920

Question No. 14 - D
Estimated inventory, 12/31/06 261,920
Physical inventory, 12/31/06 168,000
Estimated inventory shortage 93,920

Question No. 15 - C

PROBLEM NO. 4 - Remy Company

Question No. 16 - C
Under(over)
Item a [2,000 units x (P9.50-P5.90)] 7,200
Item b 17,500
Item c (2,900)
Item d 1,500
Net understatement 23,300
Question No. 17 - D
Question No. 18 - B
2005 2006
Unadjusted net income 370,000 526,000
Add(deduct) adjustments:
Item a 7,200 (7,200)
Item b 17,500 (17,500)
Item c (2,900) 2,900
Item d - -
21,800 (21,800) (18)
Corrected net income 391,800 504,200
(17)
Question No. 19 - D
2005 2006 Total
Originally reported net income 370,000 526,000 896,000
Corrected net income 391,800 504,200 896,000
Difference (21,800) 21,800 -
Question No. 20 - D
PROBLEM NO. 5 - Johnnie Marketing Company
Question No. 21 - B
Total proceeds 206,500
Less accrued interest (P200,000 x 9% x 5/12) 7,500
Net proceeds 199,000
Less cost of treasury notes:
Total amount paid 198,500
Less accrued interest (P200,000 x 9% x 3/12) 4,500 194,000
Gain on sale of treasury notes 5,000

Question No. 22 - B
Sales proceeds 70,000
Carrying value 90,000
Realized loss on sale of S-Mart shares (20,000)

Question No. 23 - C
Interest income on Virgo Co. bonds (P300,000 x 12%) 36,000
Interest income on Phil. tresury notes (P200,000 x 9% x 8/12) 12,000
Total 48,000

Question No. 24 - D
Asia Textile Common (6,000 shares x P44) 264,000
Virgo Co. Bonds (P300,000/P1,000 x P950) 285,000
Carrying value, 12/31/06 549,000

Question No. 25 - C
Trading securities, 1/1/06 640,600
Purchase of Phil. treasury notes, 4/1 194,000
Carrying value of S-Mart shares sold, 7/1 (90,000)
Sale of Phil. treasury notes, 12/1 (194,000)
Trading securities, 12/31/06 before mark-to-market 550,600
FV of trading securities, 12/31/06 549,000
Unrealized loss on TS 1,600

PROBLEM NO. 6 - Jose Company

Question no. 26 - A
Silko Company (3,000 x P1) 3,000
Monroe Company (2,000 x P3) 6,000
Barclay Company (3,500 x P2) 7,000
Total dividend income in 2005 16,000

Question no. 27 - A
Silko Company (3,000 x P20) 60,000
Monroe Company (2,000 x P22) 44,000
Treasury notes (P40,000 x 1.02) 40,800
Total FV of trading securities, 12/31/05 144,800

Question no. 28 - C
Cost of Silko Company (3,000 x P16) 48,000
Cost of Monroe Company (2,000 x P33) 66,000
Cost of Treasury notes (P40,000 x 1.01) 40,400
Total 154,400
Total FV of trading securities, 12/31/05 144,800
Unrealized loss on trading securities 9,600

Question no. 29 - D
Monroe shares sold, 3/23/06:
Selling price (2,000 shares x P17) 34,000
Less CV of shares sold 44,000 (10,000)
Treasury notes sold, 6/30/06
Selling price (P40,000 x 1.005) 40,200
Less CV of treasury notes 40,800 (600)
Total realized loss (10,600)

Question no. 30 - A
PROBLEM NO. 7 - Napoleon Manufacturing Company

31 C
Balance, 12/31/05 2,400,000
Total cost of building wing 330,000
Donated building 400,000
Total 3,130,000
Less accumulated depreciation:
Balance, 12/31/05 1,200,000
Depreciation for 2006
Main building (P2,400,000/25) 96,000
Building wing (P330,000/12 x 6/12)
*
13,750
Donated building (P400,000/25 x 3/12) 4,000 1,313,750
Carrying value, 12/31/06 1,816,250

Original life 25
Less expired life:
Age on 12/31/05 (P1,200,000/P2,400,000) x 25 yrs 12.50
Additional expired life (from Jan. to June) 0.50 13
Remaining life of main building on 6/30/06 12 *

32 A
Land, 12/31/05 450,000
Donated land 200,000
Carrying value, 12/31/06 650,000

33 A
Proceeds from sale 520,000
Less book value on the date of sale (10/1/06)
Cost 960,000
Accumulated depreciation (P960,000/10 x 4) (384,000) 576,000
Loss on sale 56,000

34 C
Balance Balance
Cost 12.31.05 Additions Retirements 12.31.06
Land 450,000 200,000 - 650,000
Land improvements - 100,000 - 100,000
Buildings 2,400,000 730,000 - 3,130,000
Machinery & equipment 2,770,000 - 960,000 1,810,000
Total 5,620,000 1,030,000 960,000 5,690,000

Accumulated depreciation
Land improvements - 5,000 5,000
Buildings 1,200,000 113,750 1,313,750
Machinery & equipment 546,500 253,000 384,000 415,500
Total 1,746,500 371,750 384,000 1,734,250

Carrying value
Land 450,000 650,000
Land improvements - 95,000
Buildings 1,200,000 1,816,250
Machinery & equipment 2,223,500 1,394,500
3,873,500 3,955,750

35 A
PROBLEM NO. 8 - Matador Corporation
Question No. 36 - A
Semitruck No. 2 (fully depreciated as of 7/1/05) -
Semitruck No. 5 (P340,000/5) 68,000
Semitruck No. 6 (P360,000/5) 72,000
Should be depreciation expense for 2006 140,000
Depreciation expense per books 278,000
Overstatement 138,000

Question No. 37 - D
Cost, 12/31/06
Semitruck No. 1 (sold, 1/1/04) -
Semitruck No. 2 (acquired, 7/1/00) 220,000
Semitruck No. 3 (traded-in, 7/1/03) -
Semitruck No. 4 (damaged and sold, 7/1/05 -
Semitruck No. 5 (acquired, 7/1/03) 340,000
Semitruck No. 6 (acquired, 7/1/05) 360,000 920,000
Accumulated depreciation, 12/31/06
Semitruck No. 2 (fully depreciated as of 7/1/05) 220,000
Semitruck No. 5 (P340,000 x 3.5/5) 238,000
Semitruck No. 6 (P360,000 x 1.5/5) 108,000 566,000
Carrying amount, 12/31/06 354,000

Question No. 38 - A
Question No. 39 - B
Question No. 40 - A
Net income
over (under)
2003:
Unrecorded loss on trade-in:
Trade-in value (P340,000 - P150,000) 190,000
Carrying value (P300,000 x 3.5/5) 210,000 20,000
Overstatement of depreciation expense:
Semitruck No. 1 (P180,000/5) 36,000
Semitruck No. 2 (P220,000/5) 44,000
Semitruck No. 3 (P300,000/5 x 6/12) 30,000
Semitruck No. 4 (P240,000/5) 48,000
Semitruck No. 5 (P340,000/5 x 6/12) 34,000
Should be depreciation expense 192,000
Depreciation expense per books 203,000 (11,000) 9,000 (38)
2004:
Unrecorded loss on sale:
Sales proceeds 35,000
Carrying value (P180,000 x 1/5) 36,000 1,000
Overstatement of depreciation expense:
Semitruck No. 2 (P220,000/5) 44,000
Semitruck No. 4 (P240,000/5) 48,000
Semitruck No. 5 (P340,000/5) 68,000
Should be depreciation expense 160,000
Depreciation expense per books 211,000 (51,000) (50,000) (39)
2005:
Unrecorded loss on disposal:
Sales proceeds 7,000
Insurance proceeds 25,000
Total 32,000
Carrying value (P240,000 x 2/5) 96,000 64,000
Erroneous credit to Miscellaneous Income 7,000
Overstatement of depreciation expense:
Semitruck No. 2 (P220,000/5 x 6/12) 22,000
Semitruck No. 4 (P240,000/5 x 6/12) 24,000
Semitruck No. 5 (P340,000/5) 68,000
Semitruck No. 6 (P360,000/5 x 6/12) 36,000
Should be depreciation expense 150,000
Depreciation expense per books 244,500 (94,500) (23,500) (40)
2006:
Overstatement of depreciation expense (see no. 36) (138,000)
Net understatement of Retained Earnings as of 12/31/06 (202,500)
PROBLEM NO. 9 - ESQ Corporation
Question no. 41 - A
Projected benefit obligation, 1/1/06 9,200,000
Benefits paid to retirees (780,000)
Interest cost (P9,200,000 x 10%) 920,000
Current service cost (squeeze) 118,000
Projected benefit obligation, 12/31/06 9,458,000

Question no. 42 - A
Current service cost (see no. 41) 118,000
Interest cost (P9,200,000 x 10%) 920,000
Expected return on plan assets (900,000)
Amortization of deferred gain (65,000)
Net benefit expense 73,000

Question no. 43 - C
Fair value of plan assets, January 1 10,070,000
Employer contributions 850,000
Actual return on plan assets 990,000
Benefits paid to retirees (780,000)
Fair value of plan assets, 12/31/06 11,130,000

Question no. 44 - B
Excess over corridor (P65,000 x 10) 650,000
Corridor (P10,070,000 x 10%) 1,007,000
Unrecognized gain, 1/1/06 1,657,000
Amortization of deferred gain - 2006 (65,000)
Excess actual over expected return on plan assets
(P990,000 - P900,000) 90,000
Unrecognized gain, 12/31/06 1,682,000

Question no. 45 - D
Jan. 1, 2006 Dec. 31, 2006

Debit: Fair value of plan assets 10,070,000 11,130,000

Credit: Projected benefit obligation 9,200,000 9,458,000

Unrecognized gain 1,657,000 1,682,000
10,857,000 11,140,000

Prepaid (Accrued) benefit cost (787,000) (10,000)

PROBLEM NO. 10 - Ginebra Corporation
2006
12.31.05 Transactions 12.31.06

Preferred stock - 1/15 80,000 80,000 46 B

Common stock 48,000 2/01 6,000 63,320 47 A
4/15 4,000
6/01 5,320
Additional paid in capital 832,000 1/15 8,000 1,195,680 48 B
2/01 120,000
4/15 96,000
5/01 127,680
5/31 12,000
Retained earnings 220,000 3/15 (3,750) 174,756 50 D
5/01 (133,000)
9/15 (8,494)
12/31 100,000
Treasury stock - common (75,000) 4/15 (17,200) (64,300) 49 A
5/31 27,900
1,025,000 1,449,456

Journal entries for 2006 affecting stockholders' equity accounts:

1/15 Cash (1,600 shares x P55) 88,000

Preferred stock (1,600 shares x P50) 80,000
APIC - excess over par value of preferred 8,000
2/01 Cash (3,000 shares x P42) 126,000
Common stock (3,000 shares x P2) 6,000
APIC - excess over par value of common 120,000
3/15 Retained earnings 3,750
Dividends payable - common 3,750
* (22,000 + 3,000) x P0.15

4/15 Treasury stock 17,200

Cash (400 shares x P43) 17,200
4/15 Cash (2,000 shares x P50) 100,000
Common stock (2,000 shares x P2) 4,000
APIC - excess over par value of common 96,000
5/01 Retained earnings (26,600 x 10% x P50) 133,000
Stock dividends payable - common (26,600 x 10% x P2) 5,320
APIC - excess over par value of common 127,680
5/31 Cash (700 shares x P57) 39,900
Treasury stock [(300 shares x P43) + P15,000] 27,900
APIC - treasury stock 12,000
6/01 Stock dividends payable - common 5,320
Common stock 5,320
9/15 Retained earnings 8,494
Dividends payable - preferred (80,000 x 5%) 4,000
Dividends payable - common (29,960 x P15) 4,494
12/31 Income summary 100,000
Retained earnings 100,000