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

Unadjusted bank balances

Outstanding checks
June
July
Deposits in transit
June
July
NSF check redeposited - July
Withdrawal error - July

66,405

76,800

Adjusted bank balances

64,819
(1)

Unadjusted book balances

Bank service charges
June
July
Interest earned
June
July
Direct deposits
June
July
Book errors
June
July

62,150

Adjusted book balances

64,819

(4,742)

3,156

3,054

675

Ending

77,395

65,810

(4,742)
5,857

(5,857)

2,238
(472)
(386)

386

75,410
(2)

77,652
(3)

62,577
(4)

75,304

77,150

60,304

(165)
175

(175)

(165)

(3,054)
3,160

3,160

(675)
675

675

(895)

1. B
2. A
3. D
4. A
5. C

(3,156)
2,238
(472)

Disb

75,410
-

492

(895)
(492)

77,652

62,577

PROBLEM NO. 2 - Carlos Uno Company

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

181,808
125,000
56,808

Amortization schedule:
Interest income
Jan. 1, 2005
Dec. 31, 2005
18,181
Dec. 31, 2006
20,011

Question No. 7 - C
Year
2006
2007
2008

Principal
200,000
200,000
200,000
600,000

Carrying amount
181,808
199,989
220,000

Interest
24,000
16,000
8,000

Total
224,000
216,000
208,000

PV of Note (see above computation)

Less cost of land
Gain on sale
Amortization schedule:
Eff. Int.
Jan. 1, 2006
Dec. 31, 2006
70,435
Dec. 31, 2007
48,936
Dec. 31, 2008
25,524

PVF
0.8772
0.7695
0.6750

PV
196,493
166,212
140,400
503,105

503,105
400,000
103,105

Nom. Int.

Disc. Amort.

24,000
16,000
8,000

46,435
32,936
17,524

Principal

Carrying amount
503,105
200,000
349,540
200,000
182,476
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)]
NR - 1/1/06 sale (P503,105 x 14%)
Total interest income in 2006

20,011
70,435
90,446

Question No. 10 - D
Carrying amount, 1/1/06 (NR 1/1/06 sale)
Add discount amortization in 2006:
Effective interest (P503,105 x 14%)
70,435
Nominal interest (P600,000 x 2%)
24,000
Carrying amount, 12/31/06 before collection of principal
Less principal amount received
Carrying amount, 12/31/06

503,105

46,435
549,540
200,000
349,540

PROBLEM NO. 3 - J & B Retail Store

Question No. 11 - B
Accounts receivable, 12/31/06 per books
Add credits to accounts receivable in 2006:
Accounts written off
Sales returns
Cash receipts from customers
Sales discounts
Total
Less other debits to accounts receivable in 2006:
Accounts receivable, 12/31/05
Erroneous debit to AR for sales returns
Gross sales for 2006
Question No. 12 - D
Accounts payable, 12/31/06
Add debits to accounts payable in 2006:
Purchase returns
Cash payments to trade creditors
Total
Less accounts payable, 12/31/05
Gross purchases for 2006
Less purchase returns
Net purchases for 2006

140,000
8,000
4,000
2,400,000
12,000

80,000
3,200

2,424,000
2,564,000

83,200
2,480,800

168,000
12,000
1,600,000

Question No. 13 - A
Inventory, 12/31/05
Add net purchases for 2006
Total goods available for sale
Less cost of sales for 2006 [(P2,480,800-P4,000) x (960/1,600)]
Inventory, 12/31/06
Question No. 14 - D
Estimated inventory, 12/31/06
Physical inventory, 12/31/06
Estimated inventory shortage

1,612,000
1,780,000
200,000
1,580,000
12,000
1,568,000

180,000
1,568,000
1,748,000
1,486,080
261,920

261,920
168,000
93,920

Question No. 15 - C
PROBLEM NO. 4 - Remy Company
Question No. 16 - C
Item a [2,000 units x (P9.50-P5.90)]
Item b
Item c
Item d
Net understatement

Under(over)
7,200
17,500
(2,900)
1,500
23,300

Question No. 17 - D
Question No. 18 - B
Unadjusted net income
Add(deduct) adjustments:
Item a
Item b
Item c
Item d
Corrected net income

2005
370,000

2006
526,000

7,200
17,500
(2,900)
21,800
391,800
(17)

(7,200)
(17,500)
2,900
(21,800)
504,200

2005
370,000
391,800
(21,800)

2006
526,000
504,200
21,800

(18)

Question No. 19 - D
Originally reported net income
Corrected net income
Difference
Question No. 20 - D

Total
896,000
896,000
-

PROBLEM NO. 5 - Johnnie Marketing Company

Question No. 21 - B
Total proceeds
Less accrued interest (P200,000 x 9% x 5/12)
Net proceeds
Less cost of treasury notes:
Total amount paid
Less accrued interest (P200,000 x 9% x 3/12)
Gain on sale of treasury notes
Question No. 22 - B
Sales proceeds
Carrying value
Realized loss on sale of S-Mart shares

206,500
7,500
199,000
198,500
4,500

70,000
90,000
(20,000)

Question No. 23 - C
Interest income on Virgo Co. bonds (P300,000 x 12%)
Interest income on Phil. tresury notes (P200,000 x 9% x 8/12)
Total
Question No. 24 - D
Asia Textile Common (6,000 shares x P44)
Virgo Co. Bonds (P300,000/P1,000 x P950)
Carrying value, 12/31/06
Question No. 25 - C
Trading securities, 1/1/06
Purchase of Phil. treasury notes, 4/1
Carrying value of S-Mart shares sold, 7/1
Sale of Phil. treasury notes, 12/1
Trading securities, 12/31/06 before mark-to-market
FV of trading securities, 12/31/06
Unrealized loss on TS

194,000
5,000

36,000
12,000
48,000

264,000
285,000
549,000

640,600
194,000
(90,000)
(194,000)
550,600
549,000
1,600

PROBLEM NO. 6 - Jose Company

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

3,000
6,000
7,000
16,000

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

60,000
44,000
40,800
144,800

Question no. 28 - C
Cost of Silko Company (3,000 x P16)
Cost of Monroe Company (2,000 x P33)
Cost of Treasury notes (P40,000 x 1.01)
Total
Total FV of trading securities, 12/31/05
Unrealized loss on trading securities

48,000
66,000
40,400
154,400
144,800
9,600

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

34,000
44,000
40,200
40,800

(10,000)

(600)
(10,600)

PROBLEM NO. 7 - Napoleon Manufacturing Company

31 C
Balance, 12/31/05
Total cost of building wing
Donated building
Total
Less accumulated depreciation:
Balance, 12/31/05
Depreciation for 2006
Main building (P2,400,000/25)

2,400,000
330,000
400,000
3,130,000
1,200,000
96,000

Building wing (P330,000/12 x 6/12)

Donated building (P400,000/25 x 3/12)
Carrying value, 12/31/06

13,750
4,000

Original life
Less expired life:
Age on 12/31/05 (P1,200,000/P2,400,000) x 25 yrs
Additional expired life (from Jan. to June)

1,313,750
1,816,250
25
12.50
0.50

Remaining life of main building on 6/30/06

32 A
Land, 12/31/05
Donated land
Carrying value, 12/31/06

13
12

450,000
200,000
650,000

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

520,000
960,000
(384,000)

Loss on sale

576,000
56,000

34 C

Land
Land improvements
Buildings
Machinery & equipment
Total

Balance
12.31.05
450,000
2,400,000
2,770,000
5,620,000

Accumulated depreciation
Land improvements
Buildings
Machinery & equipment
Total

1,200,000
546,500
1,746,500

Cost

Carrying value
Land
Land improvements
Buildings
Machinery & equipment

35 A

450,000
1,200,000
2,223,500
3,873,500

Additions
Retirements
200,000
100,000
730,000
960,000
1,030,000
960,000

5,000
113,750
253,000
371,750

384,000
384,000

Balance
12.31.06
650,000
100,000
3,130,000
1,810,000
5,690,000

5,000
1,313,750
415,500
1,734,250

650,000
95,000
1,816,250
1,394,500
3,955,750

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)
Semitruck No. 6 (P360,000/5)
Should be depreciation expense for 2006
Depreciation expense per books
Overstatement

68,000
72,000
140,000
278,000
138,000

Question No. 37 - D

Cost, 12/31/06
Semitruck No. 1 (sold, 1/1/04)
Semitruck No. 2 (acquired, 7/1/00)
Semitruck No. 3 (traded-in, 7/1/03)
Semitruck No. 4 (damaged and sold, 7/1/05
Semitruck No. 5 (acquired, 7/1/03)
Semitruck No. 6 (acquired, 7/1/05)
Accumulated depreciation, 12/31/06
Semitruck No. 2 (fully depreciated as of 7/1/05)
Semitruck No. 5 (P340,000 x 3.5/5)
Semitruck No. 6 (P360,000 x 1.5/5)
Carrying amount, 12/31/06

220,000
340,000
360,000
220,000
238,000
108,000

920,000

566,000
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
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
2004:
Unrecorded loss on sale:
Sales proceeds
35,000
Carrying value (P180,000 x 1/5)
36,000
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
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
Erroneous credit to Miscellaneous Income
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
2006:
Overstatement of depreciation expense (see no. 36)
Net understatement of Retained Earnings as of 12/31/06

20,000

(11,000)

9,000 (38)

1,000

(51,000)

(50,000) (39)

64,000
7,000

(94,500)

(23,500) (40)
(138,000)
(202,500)

PROBLEM NO. 9 - ESQ Corporation

Question no. 41 - A
Projected benefit obligation, 1/1/06
Benefits paid to retirees
Interest cost (P9,200,000 x 10%)
Current service cost (squeeze)
Projected benefit obligation, 12/31/06

9,200,000
(780,000)
920,000
118,000
9,458,000

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

118,000
920,000
(900,000)
(65,000)
73,000

Question no. 43 - C
Fair value of plan assets, January 1
Employer contributions
Actual return on plan assets
Benefits paid to retirees
Fair value of plan assets, 12/31/06

10,070,000
850,000
990,000
(780,000)
11,130,000

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

650,000
1,007,000
1,657,000
(65,000)
90,000
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

Unrecognized gain

9,200,000
1,657,000
10,857,000

9,458,000
1,682,000
11,140,000

(787,000)

(10,000)

Prepaid (Accrued) benefit cost

PROBLEM NO. 10 - Ginebra Corporation

2006
Transactions

12.31.05
Preferred stock
Common stock

48,000

1/15
2/01
4/15
6/01

Additional paid in capital

832,000

1/15
2/01
4/15
5/01
5/31

Retained earnings

220,000

3/15
5/01
9/15
12/31

Treasury stock - common

(75,000)

4/15
5/31

80,000
6,000
4,000
5,320
8,000
120,000
96,000
127,680
12,000
(3,750)
(133,000)
(8,494)
100,000
(17,200)
27,900

1,025,000

12.31.06
80,000
63,320

46 B
47 A

1,195,680

48 B

174,756

50 D

(64,300) 49 A
1,449,456

Journal entries for 2006 affecting stockholders' equity accounts:

1/15

2/01

3/15

Cash (1,600 shares x P55)

Preferred stock (1,600 shares x P50)
APIC - excess over par value of preferred

88,000

Cash (3,000 shares x P42)

Common stock (3,000 shares x P2)
APIC - excess over par value of common

126,000

Retained earnings
Dividends payable - common

80,000
8,000
6,000
120,000
3,750
3,750

* (22,000 + 3,000) x P0.15

4/15
4/15

5/01

5/31

6/01
9/15

Treasury stock
Cash (400 shares x P43)
Cash (2,000 shares x P50)
Common stock (2,000 shares x P2)
APIC - excess over par value of common

17,200
17,200
100,000
4,000
96,000

Retained earnings (26,600 x 10% x P50)

133,000
Stock dividends payable - common (26,600 x 10% x P2)
APIC - excess over par value of common
Cash (700 shares x P57)
Treasury stock [(300 shares x P43) + P15,000]
APIC - treasury stock

39,900
27,900
12,000

Stock dividends payable - common

Common stock

5,320

Retained earnings
Dividends payable - preferred (80,000 x 5%)
Dividends payable - common (29,960 x P15)

8,494

12/31 Income summary

Retained earnings

5,320
127,680

5,320
4,000
4,494
100,000
100,000