AUDITING PROBLEMS

PROBLEM NO. 1 STATEMENT OF CASH FLOWS

(Intermediate Accounting 16th Edition Stice)
The schedule below shows the account balances of BENEFICIO CORPORATION at the
beginning and end of the year ended December 31, 2015:
DEBITS
Cash and cash equivalents
Investment in trading securities
Accounts receivable
Inventories
Prepaid insurance
Land and building
Equipment
Discount on bonds payable
Treasury shares (at cost)
Cost of goods sold
Selling and general expenses
Income taxes
Unrealized loss on trading securities
Loss on sale of equipment
Total debits
CREDITS
Allowance for bad debts
Accumulated depreciation Building
Accumulated depreciation Equipment
Accounts payable
Notes payable current
Miscellaneous expenses payable
Taxes payable
Unearned revenue
Notes payable long-term
Bonds payable long-term
Deferred income tax liability
Ordinary shares, P2 par
Retained earnings appropriated for
treasury shares
Retained earnings appropriated for
possible building expansion
Unappropriated retained earnings
Share premium
Sales
Gain on sale of investment securities
Total credits

Dec. 31, 2015

P222,000
10,000
148,000
291,000
2,500
195,000
305,000
8,500
5,000
539,000
287,000
35,000
4,000
1,000
P2,053,000

8,000
26,250
39,750
55,000
70,000
18,000
35,000
1,000
40,000
250,000
47,000
359,400

Dec. 31, 2014

P 50,000
40,000
100,000
300,000
2,000
195,000
170,000
9,000
10,000

P 876,000

5,000
22,500
27,500
60,000
20,000
8,700
10,000
9,000
60,000
250,000
53,300
200,000

5,000

10,000

38,000
34,600
116,000
898,000
12,000
P2,053,000

23,000
112,000
5,000
P 876,000

Additional information:
a) All purchases and sales were on account.
b) Equipment with an original cost of P15,000 was sold for P7,000.
c) Selling and general expenses include the following:
Building depreciation
P 3,750
Equipment depreciation 25,250
Bad debt expense
4,000
Interest expense
18,000
d) A six-month note payable for P50,000 was issued toward the purchase of new
equipment.

Page

e) The long-term note payable requires the payment of P20,000 per year plus
interest until paid.
f) Treasury shares were sold for P1,000 more than their cost.
g) During the year, a 30% stock dividend was declared and issued. At that time,
there were 100,000 shares of P2 par ordinary shares outstanding. However,
1,000 of these shares were held as treasury shares at the time and were
prohibited from participating in the stock dividend. Market price was P10 per
share when the stock dividend was declared.
h) Equipment was overhauled, extending its useful life, at a cost of P6,000. The
cost was debited to Accumulated DepreciationEquipment.
i) Beneficio has determined that its purchases and sales of trading securities are
operating activities.
Based on the given data, calculate the following:
1. Net income for 2015
A. P45,000
B. P50,300

C. P43,500

D. P44,000

2. Cash dividends declared and paid during 2015

A. P8,000
B. P52,000
C. P7,400

D. P 0

3. Proceeds from issuance of ordinary shares in 2015

A. P100,000
B. P110,000
C. P210,000

D. P269,400

4. Proceeds from sale of trading securities

A. P26,000
B. P38,000

D. P14,000

C. P42,000

5. Accumulated depreciation of equipment sold

A. P7,000
B. P15,000
C. P8,000

D. P9,000

6. Cash paid for purchase of equipment

A. P50,000
B. P106,000

C. P150,000

D. P100,000

7. Proceeds from sale of treasury shares

A. P6,000
B. P5,000

C. P4,000

D. P10,000

8. Net cash provided by operating activities

A. P45,000
B. P87,000
C. P83,000

D. P89,300

9. Net cash used in investing activities

A. P106,000
B. P99,000

D. P93,000

C. P61,000

10. Net cash provided by financing activities

A. P188,000
B. P187,000
C. P182,000

PROBLEM NO. 2 CORRECTION OF ERRORS

(Test Bank Intermediate Accounting 14th Edition - Kieso)

D. P106,000

Page

The following list of accounts and their balances represents the unadjusted trial
balance of ALTERADO COMPANY at December 31, 2015:
Cash
P290,900
Equity investments (trading)
600,000
Accounts receivable
690,000
Allowance for doubtful accounts
Inventory
547,200
Prepaid rent
360,000
Plant and equipment
1,600,000
Accumulated depreciation Plant and equipment
Accounts payable
Bonds payable
Ordinary share capital
Retained earnings
Sales
Cost of goods sold
1,544,000
Freight-out
110,000
Salaries and wages expense
320,000
Interest expense
20,400
Rental income
Miscellaneous expense
8,900
Insurance expense
110,500
P6,201,900

P 5,000

147,400
113,700
900,000
1,700,000
971,800
2,148,000

216,000
P6,201,900

Additional data:
1. The balance in the Insurance expense account contains the premium costs of
three policies:
Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2014;
Policy 2, original cost of P72,000, 3-year term, taken out on October 1,
2015;
Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2015.
2. On September 30, 2015, Alterado received P216,000 rent from its lessee for
eighteen-month lease beginning on that date.
3. The regular rate of depreciation is 10% per year. Acquisitions and retirements
during a year are depreciated at half this rate. There were no purchases during
the year. On December 31, 2014, the balance of the Plant and equipment
account was P2,400,000.
4. On December 28, 2015, the bookkeeper incorrectly credited Sales for a receipt
on account in the amount of P100,000.
5. At December 31, 2015, salaries and wages accrued but unpaid were
P4,200,000.
6. Alterado estimates that 1% of sales will become uncollectible.
7. On August 1, 2015, Alterado purchased, as a short-term investment, 600
P1,000, 7% bonds of Alendog Corp. at par. The bonds mature on August 1,
2016. Interest payment dates are July 31 and January 31.
8. On April 30, 2015, Alterado rented a warehouse for P30,000 per month, paying
P360,000 in advance.

1. What are the adjusted balances of the following accounts on December 31,
2015?

Page

A.
B.
C.
D.

Prepaid insurance
P 6,000
0
54,000
66,000

Insurance expense
P104,500
110,500
56,500
44,500

2. What is the total depreciation expense for the year ended December 31, 2015?
A. P120,000
B. P240,000
C. P200,000
D. P160,000
3. What is the bad debt expense for the year ended December 31, 2015?
A. P15,480
B. P25,480
C. P21,480
D. P20,480
4. What amount of interest and rent income should be reported in the income
statement for the year ended December 31, 2015?
Interest income
Rental income
A.
P24,500
P 36,000
B.
17,500
180,000
C.
24,500
180,000
D.
17,500
36,000
5. What adjusting entry is necessary on December 31, 2015 for the Prepaid rent
account?
A. Rent expense
270,000
Prepaid rent
270,000
B. Prepaid rent
270,000
Prepaid rent
270,000
C. Prepaid rent
240,000
Rent expense
240,000
D. Rent expense
240,000
Prepaid rent
240,000

PROBLEM NO. 3 PROPERTY, PLANT, AND EQUIPMENT (PPE)

(Intermediate Accounting 14th Edition - Kieso)

Page

A depreciation schedule for semi-trucks of ISIDRO MANUFACTURING COMPANY was

requested by your auditor soon after December 31, 2015, showing the additions,
retirements, depreciation, and other data affecting the income of the company in
the 4-year period 2012 to 2015, inclusive.
The following data were ascertained.
Balance of Trucks account, Jan. 1, 2012
Truck No. 1 purchased Jan. 1, 2009, cost
Truck No. 2 purchased July 1, 2009, cost
Truck No. 3 purchased Jan. 1, 2011, cost
Truck No. 4 purchased July 1, 2011, cost
Balance, Jan. 1, 2012

P180,000
220,000
300,000
240,000
P940,000

The Accumulated DepreciationTrucks account previously adjusted to January 1,

2012, and entered in the ledger, had a balance on that date of P302,000
(depreciation on the four trucks from the respective dates of purchase, based on a
5-year life, no salvage value). No charges had been made against the account
before January 1, 2012.
Transactions between January 1, 2012, and December 31, 2015, which were
recorded in the ledger, areas follows.
July 1, 2012 Truck No. 3 was traded for a larger one (No. 5), the agreed purchase
price of which was P400,000. Isidro Mfg. Co. paid the automobile
dealer P220,000 cash on the transaction. The entry was a debit to
Trucks and a credit to Cash, P220,000. The transaction has commercial
substance.
Jan. 1, 2013 Truck No. 1 was sold for P35,000 cash; entry debited Cash and credited
Trucks, P35,000.
July 1, 2014 A new truck (No. 6) was acquired for P420,000 cash and was charged
at that amount to the Trucks account. (Assume truck No. 2 was not
retired.)
July 1, 2014 Truck No. 4 was damaged in a wreck to such an extent that it was sold
as junk for P7,000 cash. Isidro Mfg. Co. received P25,000 from the
insurance company. The entry made by the bookkeeper was a debit to
Cash, P32,000, and credits to Miscellaneous Income, P7,000, and
Trucks, P25,000.
Entries for depreciation had been made at the close of each year as follows: 2012,
P210,000; 2013, P225,000; 2014, P250,500; 2015, P304,000.
1. What is the total depreciation expense for the year ended December 31, 2012?
A. P180,000
B. P198,000
C. P172,000
D. P228,000
2. What is the gain (loss) on trade in of Truck #3 on July 1, 2012?
A. (P30,000)
B. P10,000
C. (P60,000)
D. P190,000
3. What is the net book value of the Trucks on December 31, 2015?
A. P414,000
B. P348,000
C. P228,500
D. P894,000

Page

4. The total depreciation expense recorded for the 4-year period (2012-2015) is
overstated by
A. P185,500
B. P265,500
C. P287,500
D. P275,500
5. Assuming that the books have not been closed for 2015, what is the compound
journal entry on December 31, 2015 to correct the companys errors for the 4year period (2012-2015)?
A. Accumulated depreciation
629,500
Trucks
480,000
Retained earnings
9,500
Depreciation expense
140,000
B. Accumulated depreciation
665,500
Trucks
480,000
Retained earnings
45,500
Depreciation expense
140,000
C. Accumulated depreciation
665,500
Trucks
480,000
Retained earnings
185,500
D. Accumulated depreciation
665,500
Trucks
665,500

PROBLEM NO. 4 PPE AND INTANGIBLES

(Intermediate Accounting 17th Edition Stice)

Page

The TOY COMPANY completed the following transactions during 2015:

Mar.

1 Purchased real property for P8,297,000, including a charge for P297,000

representing property tax for March 1 June 30 which was prepaid by the
vendor. Of the purchase price, 25% is deemed applicable to land and the
remaining 75% to buildings. The Toy Company assumed a mortgage of
P4,600,000 on the purchase and paid cash for the balance.
30 The building acquired necessitates current reconditioning at a cost of
P342,000 because previous owners had failed to take care of normal
maintenance and repair requirements on it.

May 15 Garages in the rear of the building were demolished. The Toy Company
recovered P66,000 on the lumber salvage. It then proceeded to construct
a warehouse at P1,013,000, which was almost exactly the same as bids
made by construction companies. Upon completion of construction, city
inspectors ordered extensive modifications to the warehouse as a result of
failure on the part of the company to comply with building safety code.
Such modifications, which could have been avoided, cost P124,000.
June

1 The company exchanged its own ordinary share capital with a market
value of P640,000 (par, P40,000) for a patent and new toy-making
machine. The machine has a market value of P310,000.

July

1 The new machinery for the new building arrived. In addition to the
machinery, a new franchise was acquired from the manufacturer of the
machinery to produce toy robots. Payment was made by issuing the
companys own ordinary shares (par, P1,000,000). The value of the
franchise is set at P500,000, while the machines fair value is P610,000.

Nov. 20 The company contracted for parking lots and landscaping at a cost of
P420,000 and P89,000, respectively. The work was completed and paid
for on November 20.
Dec. 31

The business was closed to permit taking the year-end inventory. During
this time, required redecorating and repairs were completed at a cost of
P64,000.

After considering the preceding transactions, compute the year-end balances of the
following:
1. Buildings
A. P7,289,000

B. P7,511,750

C. P7,413,000

D. P7,635,750

2. Land
A. P2,074,250

B. P2,000,000

C. P2,583,250

D. P2,509,000

3. Machinery
A. P1,070,000

B. P920,000

C. P770,000

D. P931,000

4. Share premium
A. P10,000

B. P500,000

C. P710,000

D. P600,000

5. Intangibles
A. P830,000

B. P500,000

C. P330,000

D. P840,000

PROBLEM NO. 5 PROVISION FOR WARRANTY

Page

(Intermediate Accounting 17th Edition Stice)

LAFAYETTE CORPORATION, a client, requests that you compute the appropriate
balance of its estimated liability for product warranty account for a statement as of
June 30, 2015.
Lafayette Corporation manufactures television components and sells them with a 6month warranty under which defective components will be replaced without charge.
On December 31, 2014, Estimated Liability for Product warranty had a balance of
P620,000. By June 30, 2015, this balance had been reduced to P120,400 by debits
for estimated net cost of components returned that had been sold in 2014.
The corporation started out in 2015 expecting 7% of the peso volume of sales to be
returned. However, due to the introduction of new models during the year, this
estimated percentage of returns was increased to 10% on May 1. It is assumed that
no components sold during a given month are returned in that month. Each
component is stamped with a date at time of sale so that the warranty may be
properly administered. The following table of percentages indicates the likely
pattern of sales returns during the 6-month period of the warranty, starting with the
month following the sale of components.
Percentage of Total
Returns Expected
30%
20
20
30
100%

Month Following Sale

First
Second
Third
Fourth through sixth10% each month

Gross sales of components were as follows for the first six months of 2015:
Month
January
February
March

Amount
P4,200,000
4,700,000
3,900,000

Month
April
May
June

Amount
P3,250,000
2,400,000
1,900,000

The corporations warranty also covers the payment of freight cost on defective
components returned and on the new components sent out as replacements. This
freight cost runs approximately 5% of the sales price of the components returned.
The manufacturing cost of the components is roughly 70% of the sales price, and
the salvage value of returned components averages 10% of their sales price.
Returned components on hand at December 31, 2013, were thus valued in
inventory at 10% of their original sales price.
Based on the given information, determine the following:
1. Total estimated returns from the sales made during the first 6 months of 2015
A. P1,481,500
B. P1,651,000
C. P1,424,500
D. P1,553,500
2. Total estimated returns subsequent to June 30, 2015
A. P678,250
B. P648,850
C. P591,850

D. P615,950

3. Estimated loss on component replacement (in percentage of sales price)

A. 65%
B. 75%
C. 70%
D. 80%
4. Required Estimated Liability for Product Warranty balance at June 30, 2015
A. P301,353
B. P421,753
C. P120,400
D. P77,847
5. Required adjustment to liability account
A. P301,353 debit
C. P421,753 debit
B. P301,353 credit
D. P421,753 credit
PROBLEM NO. 6 - INVENTORIES

Page

(Intermediate Accounting 13TH ED - KIESO)

MALOX Specialty Company manufactures three models of gear shift components for
bicycles that are sold to bicycle manufacturers, retailers, and catalog outlets. Since
beginning operations in 2012, Malox has used normal absorption costing and has
assumed a first-in, first-out cost flow in its perpetual inventory system. The
balances of the inventory accounts at the end of Maloxs fiscal year, November 30,
2015, are shown below. The inventories are stated at cost before any year-end
adjustments.
Finished goods
Work in process
Raw materials
Factory supplies

P647,000
112,500
264,000
69,000

The following information relates to Maloxs inventory and operations.

1. The finished goods inventory consists of the items analyzed below.
Cost

NRV

Down tube shifter

Standard model
Click adjustment model
Deluxe model
Total down tube shifters

P 67,500
94,500
108,000
270,000

P 67,000
89,000
110,000
266,000

Bar end shifter

Standard model
Click adjustment model
Total bar end shifters

83,000
99,000
182,000

90,050
97,550
187,600

78,000
117,000
195,000
P647,000

77,650
119,300
196,950
P650,550

Head tube shifter

Standard model
Click adjustment model
Total head tube shifters
Total finished goods

2. One-half of the head tube shifter finished goods inventory is held by catalog
outlets on consignment.
3. Three-quarters of the bar end shifter finished goods inventory had been
pledged as collateral for a bank loan.
4. One-half of the raw materials balance represents derailleurs acquired at a
contracted price 20 percent above the net realizable value.
The net
realizable value of the rest of the raw materials is P127,400.
5. The total net realizable value of the work in process inventory is P108,700.
6. Included in the cost of factory supplies are obsolete items with historical cost
of P4,200. The net realizable value of the remaining factory supplies is
P65,900.
7. Malox applies the lower of cost or net realizable value method to each of the
three types of shifters in finished goods inventory. For each of the other three
inventory accounts, Malox applies the lower of cost or net realizable value
method to the total of each inventory account.
8. Consider all amounts presented above to be material in relation to Maloxs
financial statements taken as a whole.
Based on the preceding information, determine the proper values of the following
on November 30, 2015.

Page

1. Finished goods inventory

A. P647,000
B. P643,000

C. P650,550

D. P654,550

2. Work in process inventory

A. P108,300
B. P112,500

C. P108,700

D. P104,500

3. Raw materials inventory

A. P264,000
B. P227,400

C. P242,000

D. P237,400

4. Factory supplies
A. P64,800

C. P61,700

D. P69,000

B. P65,900

5. Which of the following best describes the PAS 2 requirement for applying the
same cost formula to all inventories?
A. When they are purchased from different suppliers.
B. When they are purchased from the same geographic region.
C. When they are similar in nature or use.
D. When they sell for the same price.

PROBLEM NO. 7 BIOLOGICAL ASSETS

(IFRS Practical Implementation Guide and Workbook 2nd edition)

10

Page

11

GATAS, INC. produces milk on its farms. It produces 30% of the countrys milk that
is consumed. Gatas owns 450 farms and has a stock of 21,000 cows and 10,500
heifers. The farms produce 8 million kilograms of milk a year, and the average
inventory held is 150,000 kilograms of milk. However, the company is currently
holding stocks of 500,000 kilograms of milk in powder form.
At October 31, 2015, the herds are:

21,000 cows (3 years old), all purchased on or before November 1, 2014

7,500 heifers, average age 1.5 years, purchased on April 1, 2015
3,000 heifers, average age 2 years, purchased on November 1, 2014

No animals were born or sold in the year.

The unit fair values less estimated point-of-sale costs were:
1-year-old animal at October 31, 2015
P3,200
2-year-old animal at October 31, 2015
4,500
1.5-year-old animal at October 31, 2015
3,600
3-year-old animal at October 31, 2015
5,000
1-year-old animal at November 1, 2014 and
April 1, 2015
3,000
2-year-old animal at November 1, 2014
4,000
The company has had problems during the year: Contaminated milk was sold to
customers. As a result, milk consumption has gone down. The government has
decided to compensate farmers for potential loss in revenue from the sale of milk.
This fact was published in the national press on September 1, 2015. Gatas received
an official letter on October 10, 2015, stating that P5 million would be paid to it on
January 2, 2016.
The companys business is spread over different parts of the country. The only
region affected by the contamination was Central Visayas, where the government
curtailed milk production in the region.
The cattle were unaffected by the
contamination and were healthy.
The company estimates that the future
discounted cash flow income from the cattle in the Central Visayas region amounted
to P4 million, after taking into account the government restriction order. The
company feels that it cannot measure the fair value of the cows in the region
because of the problems created by the contamination. There are 6,000 cows and
2,000 heifers in the region. All these animals had been purchased on November 1,
2014. A rival company had offered Gatas P3 million for these animals after point-ofsale costs and further offered P6 million for the farms themselves in that region.
Gatas has no intention of selling the farms at present. The company has been
applying PAS 41 since November 1, 2014.
1. What is the fair value of the cattle (excluding Central Visayas region) at
November 1, 2014?
A. P93 million
B. P64 million
C. P63 million
D. P48 million
2. What is the fair value of the cattle (excluding Central Visayas region) at
October 31, 2015?
A. P106.5 million
B. P113.25 million C. P105.6 million D. P105.75
million
3. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to price change?
A. P10.7 million
B. P12.8 million
C. P9.2 million
D. P16.7 million
4. What is the increase in fair value of the cattle (excluding Central Visayas
region) due to physical change?
A. P9.2 million
B. P11.8 million
C. P18.55 million D. P9.4 million
5. On October 31, 2015, the cattle in the Central Visayas region would be valued
at
A. P39 million
B. P3 million
C. P4 million
D. P5 million

Page

12

PROBLEM NO. 8 - DEPLETION

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)
MINA MINING CO. has acquired a track of mineral land for P27,000,000. Mina Mining
estimates that the acquired property will yield 120,000 tons of ore with sufficient
mineral content to make mining and processing profitable. It further estimates that
6,000 tons of ore will be mined the first and last year and 12,000 tons every year in
between. (Assume 11 years of mining operations.) The land will have a residual
value of P900,000.
Mina Mining builds necessary structures and sheds on the site at a total cost of
P1,080,000. The company estimates that these structures can be used for 15 years
but, because they must be dismantled if they are to be moved, they have no
residual value. Mina Mining does not intend to use the buildings elsewhere.
Mining machinery installed at the mine was purchased secondhand at a total cost of
P1,800,000. The machinery cost the former owner P4,500,000 and was 50%
depreciated when purchased. Mina Mining estimates that about half of this
machinery will still be useful when the present mineral resources have been
exhausted but that dismantling and removal costs will just about offset its value at
that time. The company does not intend to use the machinery elsewhere. The
remaining machinery will last until about one-half the present estimated mineral ore
has been removed and will then be worthless. Cost is to be allocated equally
between these two classes of machinery.
1. What are the estimated depletion and depreciation charges for the first year?
Depletion
Depreciation
A.
P2,610,000
P189,000
B.
P1,305,000
P378,000
C.
P2,610,000
P234,000
D.
P1,305,000
P189,000
2. What are the estimated depletion and depreciation charges for the 5 th year?
Depletion
Depreciation
A.
P1,305,000
P378,000
B.
P2,610,000
P234,000
C.
P2,610,000
P378,000
D.
P1,305,000
P234,000
3. What are the estimated depletion and depreciation charges for the 6 th year?
Depletion
Depreciation
A.
P2,610,000
P378,000
B.
P1,305,000
P288,000
C.
P1,305,000
P189,000
D.
P2,610,000
P288,000
4. What are the estimated depletion and depreciation charges for the 11 th year?
Depletion
Depreciation
A.
P1,305,000
P99,000
B.
P1,305,000
P189,000
C.
P2,610,000
P99,000
D.
P2,610,000
P234,000
5. What are the depletion and depreciation charges for the first year assuming
actual production of 5,000 tons of mineral ore? (Nothing occurred during the
year to cause the company engineers to change their estimates of either the
mineral resources or the life of the structures and equipment.)
Depletion
Depreciation
A.
P1,087,500
P157,500
B.
P1,305,000
P99,000
C.
P1,305,000
P189,000
D.
P1,087,500
P82,500

Page

13

PROBLEM NO. 9PPE/DEPRECIATION

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)
DEBBY CORP., a manufacturer of computer parts, has been experiencing growth in
the demand for its products over the last several years. This prompted the
company to obtain additional manufacturing facility. A real estate firm located an
available factory near Debbys production facility, and Debby agreed to purchase
the factory and used machinery from Que Company on October 1, 2014.
Renovations were necessary to convert the factory for Debbys manufacturing use.
The terms of the agreement required Debby to pay Que P1,500,000 when
renovations started on January 1, 2015, with the balance to be paid as renovations
were completed. The overall purchase price for the factory and machinery was
P12,000,000. The building renovations were contracted to Malibay Construction
Company at P3,000,000. The payments made, as renovations progressed during
2015, are shown below. The factory was placed in service on January 1, 2016.
Que
January 1
April 1
October 1
December 31

Malibay

P 1,500,000
2,700,000
3,300,000
4,500,000
P12,000,000

P 900,000
900,000
1,200,000
P3,000,000

On January 1, 2015, Debby obtained a 2-year, P3 million loan with a 12% interest
rate to finance the renovation of the acquired factory. This is Debbys only
outstanding loan during 2015.
Debbys policy regarding purchases of this nature is to use the appraisal value of
the land for book purposes and prorate the balance of the purchase price over the
remaining items. The building had originally cost Que P9,000,000 and had a net
book value of P1,500,000, while the machinery originally cost P3,750,000 and had a
net book value of P1,200,000 on the date of sale. The land was recorded on Ques
books at P1,200,000.
The following values were determined based
independent appraisers at the time of acquisition.
Land
Building
Machinery

on

appraisal

conducted

by

P8,700,000
3,150,000
1,350,000

Gin G. Neer, Debbys chief engineer estimated that the renovated plant would be
used for 15 years, with an estimated residual value of P900,000. Neer estimated
that the productive machinery would have a remaining useful life of 5 years and
residual value of P90,000. Debbys depreciation policy is to apply the 200%
declining balance method for machinery and the 150% declining balance method
for the plant. One-half years depreciation is taken in the year the plant is placed in
service and one-half year is allowed when the property is disposed of or retired.

Determine the amounts to be recorded on the books of Debby Corp. as of December

31, 2015, for each of the following properties.

Page

14

1. Land
A. P7,909,000

B. P8,700,000

C. P9,060,000

D. P10,909,000

2. Building
A. P5,670,000

B. P6,223,600

C. P3,223,600

D. P5,310,000

3. Machinery
A. P1,227,300

B. P1,098,000

C. P1,335,300

D. P990,000

Calculate the 2016 depreciation expense for each of the following properties.
4. Building
A. P238,500

B. P311,180

C. P283,500

D. P265,500

5. Machinery
A. P180,000

B. P198,000

C. P219,600

D. P227,460

PROBLEM NO. 10 INVENTORIES/BIOLOGICAL ASSETS

(INTERMEDIATE ACCOUNTING-IFRS - KIESO)

Page

15

Presented below are two independent situations. Answer the questions at the end
of each situation.
GARLA HOME IMPROVEMENTS installs replacement siding, windows, and louvered
glass doors for single family homes and condominium complexes in Quezon City.
The company is in the process of preparing its annual financial statements for the
fiscal year ended May 31, 2015, and Jimmy Lansang, controller for GARLA, has
gathered the following data concerning inventory.
At May 31, 2015, the balance in GARLAs Raw Materials Inventory account was
P1,224,000, and the Allowance to Reduce Inventory to NRV had a credit balance of
P82,500. Lansang summarized the relevant inventory cost and market data at May
31, 2015, in the schedule below.

Aluminum siding
Cedar shake siding
Louvered glass doors
Thermal windows

Cost
P 210,000
258,000
336,000
420,000
P1,224,000

Sales Price
P 192,000
282,000
559,200
464,400
P1,497,600

Net Realizable Value

P 168,000
254,400
504,900
420,000
P1,347,300

1. What amount should be reported as Allowance to Reduce Inventory to Net

Realizable Value at May 31, 2015?
A. P168,900
B. P45,600
C. P273,600
D. P123,300
2. What amount of gain or loss should be recorded for the year ended May 31,
2015, due to the change in the Allowance to Reduce Inventory to Net
Realizable Value?
A. P36,900 gain
B. P86,400 loss
C. P40,800 loss
D. P82,500
gain
MANGO BANGGO purchased a mango farm in August 2015 for P2,250,000. The
purchase was risky because the growing season was coming to an end, the
mangoes must be harvested in the next few weeks, and Mango has limited
experience in carrying off a mango harvest.
At the end of the first quarter of operations, Mango is feeling pretty good about his
early results. The first harvest was a success; 30,000 kilos of mangoes were
harvested with a value of P90,000 (based on current local commodity prices at the
time of harvest). The fair value of Mangos mango farm has increased by P45,000
at the end of the quarter. After storing the mangoes for a short period of time,
Mango was able to sell the entire harvest for P105,000.
3. What amount of gain should be recognized on the change in fair value of
Mangos mango farm?
A. P150,000
B. P45,000
C. P90,000
D. P135,000
4. At what amount should the mangoes harvested be initially recorded on
Mangos books?
A. P90,000
B. P105,000
C. P60,000
D. P150,000
5. What is the total effect on income for the quarter related to Mangos biological
asset and agricultural produce?
A. P150,000
B. P45,000
C. P15,000
D. P60,000

Page

16

PROBLEM NO. 11 - SMEs

(IFRS for SMEs Training Modules Modules 14, 18 and 21)
The following independent cases relate to different SMALL AND MEDIUM-SIZED
ENTITIES (SMEs):
Case 1
On January 1, 20X4, SME A acquired a trademark for a line of products in a separate
acquisition from a competitor for P300,000. SME A expected to continue marketing
the line of products using the trademark indefinitely. An analysis of (i) product life
cycle studies, (ii) market, competitive and environmental trends, and (iii) brand
extension opportunities provides evidence that the line of trademarked products
may generate net cash inflows for the acquiring entity for an indefinite period.
Because management is unable to estimate the useful life of the trademark, SME A
amortizes the cost of the trademark over 10 years (i.e., its presumed useful life)
using the straight-line method.
In 20X7, a competitor unexpectedly revealed a technological breakthrough that is
expected to result in a product, that when launched by the competitor, will
extinguish for SME As patented product-line. Demand for SME As patented
product-line is expected to remain strong until December 20X9, when the
competitor is expected to launch its new product.
On December 31, 20X7, SME A assessed the recoverable amount of the trademark
at P50,000. SME A intends to continue manufacturing the patented products until
December 31, 20X9. SME A has a December 31 financial year-end.
Case 2
SME B gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract of sale, SME B undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from the
date of sale. On the basis of experience, it is probable (i.e., more likely than not)
that there will be some claims under the warranties.
At December 31, 20X1, SME B appropriately recognized P50,000 warranty provision.
SME B incurred and charged P140,000 against the warranty provision in 20X2.
P80,000 of this related to warranties for sales made in 20X2. The increase during
20X2 in the discounted amount recognized as a provision at December 31, 20X2
arising from the passage of time is P2,000.
At December 31, 20X2, SME B estimated that it would incur expenditures in 20X3 to
meet its warranty obligations at December 31, 20X2, as follows:

5 percent probability of P400,000

20 percent probability of P200,000
50 percent probability of P80,000
25 percent probability of P20,000

Assume for simplicity that the 20X3 cash flows for warranty repairs and
replacements take place, on average, on June 30, 20X3.
An appropriate discount rate is 10 percent per year. An appropriate risk adjustment
factor to reflect the uncertainties in the cash flow estimates is an increment of 6
percent to the probability-weighted expected cash flows.

Page

17

SME B is also the defendant in a breach of patent lawsuit. Its lawyers believe there
is a 70 percent chance that SME B will successfully defend the case. However, if the
court rules in favor of the claimant, the lawyers believe that there is a 60 percent
chance that the entity will be required to pay damages of P2 million (the amount
sought by the claimant) and a 40 percent chance that the entity will be required to
pay damages of P1 million (the amount that was recently awarded by the same
judge in a similar case). Other amounts of damages are unlikely.
The court is expected to rule in late December 20X3. There is no indication that the
claimant will settle out of court.
A 7 percent risk adjustment factor to the cash flows is considered appropriate to
reflect the uncertainties in the cash flow estimates. An appropriate discount rate is
10 percent per year.
Case 3
On January 1, 20X1, SME AA acquired 25 percent of the equity of each of entities
BB, CC and DD for P10,000, P15,000 and P28,000, respectively. SME AA has
significant influence over entities BB, CC and DD. Transaction costs of 1 percent of
the purchase price of the shares were incurred by SME AA.
On January 2, 20X1, entity BB declared and paid dividends of P1,000 for the year
ended 20X0. On December 31, 20X1, entity CC declared a dividend of P8,000 for
the year ended 20X1. The dividend declared by entity CC was paid in 20X2.
For the year ended December 31, 20X1, entities BB and CC recognized profit of
respectively P5,000 and P18,000. However, entity DD recognized a loss of P20,000
for that year.
Published price quotations do not exist for the shares of entities BB, CC and DD.
Using appropriate valuation techniques, SME AA determined the fair value of its
investment in entities BB, CC and DD at December 31, 20X1 as P13,000, P29,000
and P15,000, respectively. Costs to sell are estimated at 5 percent of the fair value
of the investments.
Based on the above information, calculate the following:
1. Trademark amortization for the year ended December 31, 20X7
A. P90,000
B. P70,000
C. P30,000
D. P 0
2. Impairment loss to be recognized for the trademark at December 31, 20X7
A. P90,000
B. P50,000
C. P130,000
D. P60,000
3. The carrying amount of the warranties provision at December 31, 20X2
A. P88,000
B. P50,000
C. P52,000
D. P106,000
4. The amount of loss on litigation that should be reported by SME B at December
31, 20X2
A. P1,000,000
B. P1,070,000
C. P1,019,050
D. P 0

Page

18

Assume SME AA measures all its investments in associates using the

cost model.
5. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750
B. P14,030
C. P9,030
D. P 0
6. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P11,780
B. P14,030
C. P2,000
D. P2,250
Assume SME AA measures all its investments in associates using the
equity method. Assume that there is neither implicit goodwill nor fair
value adjustments.
7. The amount of impairment loss that SME AA should recognize at December 31,
20X1
A. P13,750
B. P14,030
C. P9,030
D. P 0
8. The net amount to be recognized by SME AA in profit or loss for the year ended
December 31, 20X1
A. P8,280
B. P6,030
C. P6,780
D. P2,250
Assume SME AA measures all its investments in associates after initial
recognition using the fair value model.
9. The increase in fair value that SME AA should recognize in profit or loss for the
year ended December 31, 20X1
A. P4,000
B. P3,470
C. P1,150
D. P620
10. The carrying amount of the investment in associates under each of the
following assumptions
Cost
Equity
Fair Value
Model
Method
Model
A.
P38,970
P43,000
P57,000
B.
38,970
52,030
54,150
C.
39,500
43,000
57,000
D.
39,500
52,030
54,150

Page

19

PROBLEM NO. 12 CORRECTION OF ERRORS

(Intermediate Accounting 17Th Edition Stice)
HIATT TEXTILE CORPORATION is in the process of obtaining a loan at City Bank. The
bank has requested audited financial statements. Hiatts financial statements have
never been audited before. It has prepared the following comparative financial
statements for the years ended December 31, 2015 and 2014.
HIATT TEXTILE CORPORATION
COMPARATIVE STATEMENTS OF FINANCIAL POSITION
December 31, 2015 and 2014
2015
2014
Assets
Current assets:
Cash and cash equivalents
P1,205,000
P 800,000
Accounts receivable
1,960,000
1,480,000
Allowance for bad debts
(185,000)
(90,000)
Inventory
1,035,000
1,010,000
Total current assets
4,015,000
3,200,000
Noncurrent assets:
Property, plant, and equipment
Accumulated depreciation
Total noncurrent assets
Total assets
Liabilities and Shareholders Equity
Liabilities:
Accounts payable
Shareholders equity:
Ordinary shares, P20 par value;
150,000 shares authorized;
65,000 shares issued and outstanding
Retained earnings
Total shareholders equity
Total liabilities and shareholders equity

835,000
(608,000)
227,000
P4,242,000

847,500
(532,000)
315,500
P3,515,500

P 607,000

P 980,500

1,300,000
2,335,000
3,635,000
P4,242,000

1,300,000
1,235,000
2,535,000
P3,515,500

HIATT TEXTILE CORPORATION

COMPARATIVE INCOME STATEMENTS
For the Years Ended December 31, 2015 and 2014
2015
Sales
Cost of goods sold
Gross income
Operating expenses:
Selling expenses
Administrative expenses
Total operating expenses
Net income

The 2015 audit revealed the following facts:

2014

P5,000,000
2,150,000
2,850,000

P4,500,000
1,975,000
2,525,000

1,150,000
600,000
1,750,000
P1,100,000

1,025,000
525,000
1,550,000
P 975,000

Page

20

a. On January 5, 2014, Hiatt Textile Corporation had charged a 5-year insurance

premium to expense. The premium totaled P31,000.
b. The amount of loss due to bad debts has steadily decreased over the last 2
years. Hiatt Textile Corporation has decided to reduce the amount of bad debt
expense from 2% to 1 % of sales, beginning with 2015. (A charge of 2% has
already been made for 2014.)
c. Hiatt Textile Corporation uses the periodic inventory system. The following are
the inventory errors for the last 2 years.
2014 - Ending inventory overstated by P75,500
2015 - Ending inventory overstated by P99,000
d. An equipment costing P150,000 was acquired on January 3, 2014. The purchase
was recorded by a charge to operating expense. The equipment has a useful life
of 10 years and a residual value of P25,000. Hiatt Textile Corporation uses the
straight-line method in depreciating its assets.
e. Assume that the books for 2015 have not yet been closed.
implications.

Ignore tax

Based on the above information, answer the following:

1. The December 31, 2015 adjusting entry to correct the expensing of insurance
premium paid is
A. Prepaid insurance
18,600
Insurance expense
6,200
Retained earnings
24,800
B. Prepaid insurance
18,600
Retained earnings
18,600
C. Insurance expense
18,600
Retained earnings
18,600
D. Insurance expense
6,200
Retained earnings
6,200
2. The December 31, 2015 adjusting entry to correct the expensing of the
equipment purchased on January 3, 2014 should include a credit to
A. Accumulated depreciationP12,500.
B. Retained earningsP137,500.
C. EquipmentP12,500.
D. Depreciation expenseP12,500.
3. The December 31, 2015 adjusting entry to correct the inventory errors should
include a debit to
A. Cost of goods soldP99,000.
B. InventoryP23,500.
C. Retained earningsP75,500.
D. Cost of goods soldP75,500.
4. What is Hiatts corrected net income for the year ended December 31, 2014?
A. P1,012,200
B. P1,212,800
C. P786,800
D. P1,061,800
5. What is Hiatts corrected net income for the year ended December 31, 2015?
A. P1,095,200
B. P1,129,800
C. P1,082,800
D. P1,107,800
--- END ---