Inventory

Inventory1. An overstatement in the value of closing stock overstates all of the following except; a. Net income b. Current assets c. Capital of the business d. Cost of goods sold 2. Which of the following are generally the inventories of a service business a. Finished goods inventories b. Purchased goods c. Raw Material Inventories d. Work in process inventories 3. All of the following are the methods of inventory costing except; a. FIFO b. LIFO c. Average cost d. stock take 4. Which one of the following methods of inventory costing yields highest taxable income? a. FIFO b. LIFO c. Average cost d. Standard cost method 5. Which of the following inventory costing systems is regarded as the most complex one? a. Periodic inventory system b. Perpetual inventory system c. Average Method 6.Which one of the following double entries is passed when goods are purchased on credit under perpetual inventory system? a. Purchases Debit and Creditor Credit b. Purchases Debit and Account payable Credit c. Purchases Debit and Cash Credit d. Inventory Debit and Account payable Credit 7. Gross profit is 25% on total sales and cost of goods sold amount to 750. Which of the following is the amount of gross profit? a.187.7 b.200 c.150 d.250 8. At the end of XYZ firm's accounting period, the closing stock was found to be 100,000. However, it was realized that a fixed asset of cost 1000 was included in the stock account. Which of the following is the correct amount of ending inventory or stock? a. 10,000 b.11,000 c.9,000 d.8,000 10. NRV or net realizable value of inventory is the expected selling price or market value less a. Carry value of the inventory b. Expenses necessary to complete sale c. Cost of the stock d. Replacement cost 11. Cost of an item in the closing inventory is 100 whereas the net realizable value is 85. at which one of the following amounts the item should be shown in the financial statement? a. 100 b. 115 c. 85 d. 185 12. An item of inventory was purchased for 100. It can be sold for 125 and company can replace the item with the new one at the cost of 105. Which of the following is the historical cost of that item? a. 125 b.105 c.100 d.95 13. Under which method of inventory costing a pre-determined cost is assigned to all items of inventory? a. Replacement cost method b. Standard cost method c. AVCO method d. FIFO method 14. Which of the following inventory systems is the most appropriate for a business that deals in a precious metal such as gold? a. Periodic Inventory system b. Perpetual Inventory system c. Average method d. Weighted average method 15. Which one of the following inventory costing methods is supposed to issue the most recently purchased goods? a. FIFO method b. Average cost method c. LIFO method d. Moving average AUDIT OF RECEIVABLES PROBLEM NO. 1-1 Your audit disclosed that on December 31, 2006, the accounts receivable control account of Alilem Company had a balance of P2,865,000. An analysis of the accounts receivable account showed the following: Accounts known to be worthless P 37,500 Advance payments to creditors on purchase orders 150,000 Advances to affiliated companies 375,000 Customers’ accounts reporting credit balances arising from sales return (225,000) Interest receivable on bonds 150,000 Other trade accounts receivable – unassigned 750,000 Subscriptions receivable for common stock due in 30 days 825,000 Trade accounts receivable - assigned (Finance company’s equity in assigned accounts is P150,000) 375,000 Trade instalment receivable due 1 – 18 months, including unearned finance charges of P30,000 330,000 Trade receivables from officers due currently 22,500 Trade accounts on which post-dated checks are held (no entries were made on receipts of checks) 75,000 P2,865,000 Questions: Based on the above and the result of your audit, determine the adjusted balance of following: 1. The trade accounts receivable as of December 31, 2006 is a. P1,147,500 c. P1,485,000 b. P1,522,500 d. P1,447,500 2. The current trade and other receivables net as of December 31, 2006 is a. P2,647,500 c. P2,272,500 b. P2,610,000 d. P1,822,500 3. How much of the foregoing will be presented under noncurrent assets as of December 31, 2006? a. P1,200,000 c. P525,000 b. P 375,000 d. P 0 PROBLEM NO. 1-2 Your audit of Banayoyo Corporation for the year ended December 31, 2006 revealed that the Accounts Receivable account consists of the following: Trade accounts receivable (current) P3,440,000 Past due trade accounts 640,000 Uncollectible accounts 128,000 Credit balances in customers’ accounts (80,000) Notes receivable dishonoured 240,000 Consignment shipments – at cost The consignee sold goods costing P96,000 for P160,000. A 10% commission was charged by the consignee and remitted the balance to Banayoyo. The cash was received in January, 2007. 320,000 Total P4,688,000 The balance of the allowance for doubtful accounts before audit adjustment is a credit of P80,000. It is estimated that an allowance should be maintained to equal 5% of trade receivables, net of amount due from the consignee who is bonded. The company has not provided yet for the 2006 bad debt expense. Questions: Based on the above and the result of your audit, determine the adjusted balance of following: 1. Trade accounts receivable a. P4,080,000 c. P4,464,000 b. P3,440,000 d. P3,584,000 2. Allowance for doubtful accounts a. P204,000 c. P172,000 b. P216,000 d. P179,200 3. Doubtful accounts expense a. P264,000 c. P252,000 b. P220,000 d. P227,200 PROBLEM NO. 1-3 Presented below are a series of unrelated situations. Answer the following questions relating to each of the independent situations as requested. Bantay Company’s unadjusted trial balance at December 31, 2006, included the following accounts: Debit Credit Accounts receivable P1,000,000 Allowance for doubtful accounts 40,000 Sales P15,000,000 Sales returns and allowances 700,000 1.Bantay Company estimates its bad debt expense to be 1 1/2% of net sales. Determine its bad debt expense for 2006. a. P225,000 c. P214,500 b. P254,500 d. P 55,000 An analysis and aging of Burgos Corp. accounts receivable at December 31, 2006, disclosed the following: Amounts estimated to be uncollectible P 1,800,000 Accounts receivable 17,500,000 Allowance for doubtful accounts (per books) 1,250,000 2.What is the net realizable value of Burgos’ receivables at December 31, 2006? a. P15,700,000 c. P16,250,000 b. P17,500,000 d. P14,450,000 Cabugao Company provides for doubtful accounts based 3% of credit sales. The following data are available for 2006. Credit sales during 2006 P21,000,000 Allowance for doubtful accounts 1/1/06 170,000 Collection of accounts written off in prior years (Customer credit was reestablished) 80,000 Customer accounts written off as uncollectible during 2006 300,000 3.What is the balance in allowance for doubtful accounts at December 31, 2006? a. P630,000 c. P500,000 b. P420,000 d. P580,000 At the end of its first year of operations, December 31, 2006, Caoayan, Inc. reported the following information: Accounts receivable, net of allowance for doubtful accounts P9,500,000 Customer accounts written off as uncollectible during 2006 240,000 Bad debts expense for 2006 840,000 4. What should be the balance in accounts receivable at December 31, 2006, before subtracting the allowance for doubtful accounts? a. P10,100,000 c. P 9,740,000 b. P10,340,000 d. P10,580,000 5. The following accounts were taken from Cervantes Inc.’s balance sheet at December 31, 2006. Debit Credit Accounts receivable P4,100,000 Allowance for doubtful accounts 100,000 Net credit sales P7,500,000 If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2006. a. P123,000 c. P223,000 b. P 23,000 d. P225,000 PROBLEM NO. 1-4 The adjusted trial balance of Galimuyod Company as of December 31, 2005 shows the following: Debit Credit Accounts receivable P1,000,000 Allowance for bad debts P40,000 Additional information: a. Cash sales of the company represents 10% of gross sales. b. 90% of the credit sales customers do not take advantage of the 2/10, n/30 terms. c. It is expected that cash discount of P6,000 will be taken on accounts receivable outstanding at December 31, 2006. d. Sales returns in 2006 amounted to P400,000. All returns were from charge sales. e. During 2006, accounts totaling to P44,000 were written off as uncollectible; bad debt recoveries during the year amounted to P3,000. f. The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2006 is 150% of the rate used on December 31, 2005. Questions: Based on the above and the result of your audit, answer the following: 1. The accounts receivable as of December 31, 2006 is a. P3,000,000 c. P 333,333 b. P 300,000 d. P2,444,000 2. The allowance for doubtful accounts as of December 31, 2006 is a. P 20,000 c. P180,000 b. P120,000 d. P146,640 3. The net realizable value of accounts receivable as of December 31, 2006 is a. P 307,340 c. P2,874,000 b. P2,814,000 d. P2,291,360 4. The doubtful account expense for the year 2006 is a. P181,000 c. P 21,000 b. P121,000 d. P147,640 PROBLEM NO. 1-5 In your audit of Lidlidda Plastic Products Co., you noted that the company’s balance sheet shows the accounts receivable balance at December 31, 2005 as follows: Accounts receivable P3,600,000 Allowance for doubtful accounts 72,000 P3,528,000 During 2006, transactions relating to the accounts were as follows: a) Sales on account, P38,400,000. b) Cash received from collection of current receivable totaled P31,360,000, after discount of P640,000 were allowed for prompt payment. c) Customers’ accounts of P160,000 were ascertained to be worthless and were written off. d) Bad accounts previously written off prior to 2005 amounting to P40,000 were recovered. e) The company decided to provide P184,000 for doubtful accounts by journal entry at the end of the year. f) Accounts receivable of P5,600,000 have been pledged to a local bank on a loan of P3,200,000. Collections of P1,200,000 were made on these receivables (not included in the collections previously given) and applied as partial payment to the loan. Questions: Based on the above and the result of your audit, answer the following: 1. The accounts receivable as of December 31, 2006 is a. P8,680,000 c. P4,240,000 b. P9,840,000 d. P8,640,000 2. The allowance for doubtful accounts as of December 31, 2006 is a. P 8,000 c. P184,000 b. P136,000 d. P176,000 3. The net realizable value of accounts receivable as of December 31, 2006 is a. P8,544,000 c. P8,504,000 b. P8,456,000 d. P4,104,000 AUDIT OF RECEIVABLES - answer PROBLEM NO. 1-1 – Alilem Company Answers: 1)B; 2)A; 3)B Suggested Solution: Question No. 1 Other trade accounts receivable – unassigned P 750,000 Trade accounts receivable - assigned 375,000 Trade installment receivable due 1 – 18 months, net of unearned finance charges of P30,000 300,000 Trade receivables from officers due currently 22,500 Trade accounts on which post-dated checks are held 75,000 Trade accounts receivable P1,522,500 Question No. 2 Trade accounts receivable (see no. 1) P1,522,500 Advance payments to creditors on purchase orders 150,000 Interest receivable on bonds 150,000 Subscriptions receivable, due in 30 days 825,000 Current trade and other receivables P2,647,500 Question No. 3 Advances to affiliated companies P375,000 Note: Advances to affiliated companies are normally presented under noncurrent assets. PROBLEM NO. 1-2 – Banayoyo Corporation Answers: 1)C; 2)B; 3)A Suggested Solution: Question No. 1 Trade receivables (current) P3,440,000 Past due trade accounts 640,000 Notes receivable dishonored 240,000 Consignment goods already sold (P160,000 x 90%) 144,000 Adjusted trade receivables P4,464,000 Question No. 2 Adjusted trade receivables P4,464,000 Less due from consignee 144,000 Basis of allowance for doubtful accounts 4,320,000 Bad debt rate 5% Required allowance for doubtful accounts P 216,000 Question No. 3 Required allowance for doubtful accounts P216,000 Add write-off of uncollectible accounts 128,000 Total 344,000 Less allowance account before adjustment 80,000 Doubtful accounts expense P264,000 PROBLEM NO. 1- 3 Answers: 1)C; 2)A; 3)D; 4)A, 5)C Question No. 4 Suggested Solution: Bad debt expense for 2006 P840,000 Question No. 1 Customer Sales accounts written off as uncollectible P15,000,000 during 2006 and allowances Less sales returns (240,000) 700,000 Allowance Net sales for doubtful accounts, 12/31/06 P600,000 14,300,000 Accounts receivable, net of allowance for doubtful Multiply by bad debt rate 1 1/2% Bad debt expense P 214,500 accounts P 9,500,000 Question No. 2for doubtful accounts, 12/31/06 Allowance 600,000 Accounts receivable, before deducting allowance for Accounts receivable doubtful accounts P17,500,000 P10,100,000 Amount estimated to be uncollectible (1,800,000) Net realizable Question No. 5 value P15,700,000 Accounts receivable P4,100,000 Question No. 3 Percentage 3% Allowance for doubtful Bad debt expense, accounts before 1/1/06 adjustment 123,000 P170,000 Establishment of accounts written off inbalance) Allowance for doubtful accounts (debit prior years 100,000 80,000 Customer accounts written off in 2006 (300,000) Bad debt expense for 2006 P 223,000 Bad debt expense for 2006 (P21,000,000 X 3%) 630,000 Allowance for doubtful accounts 12/31/06 P580,000 PROBLEM NO. 1-4 - Galimuyod Company Answers: 1)A; 2)C; 3)B; 4)A Suggested Solution: Question No. 1 Expected cash discounts P 6,000 Divide by percentage of cash discount 0.02 Portion of AR that will be granted cash discounts 300,000 Divide by percentage of total AR estimated to take advantage of the discount 0.10 Accounts receivable, 12/31/06 P3,000,000 Question No. 2 Accounts receivable, 12/31/06 P3,000,000 Multiply by bad debt rate [(P40,000/P1,000,000) x 1.5] 0.06 Allowance for doubtful accounts, 12/31/06 P 180,000 Question No. 3 Accounts receivable, 12/31/06 P3,000,000 Less: Allowance for doubtful accounts P180,000 Allowance for sales discounts 6,000 186,000 Net realizable value, 12/31/06 P2,814,000 Question No. 4 Allow. for doubtful accounts, 12/31/06 P180,000 Add accounts written off 44,000 Total 224,000 Less: Allow. for doubtful accounts, 12/31/05 P40,000 Bad debt recoveries 3,000 43,000 Doubtful accounts expense for 2006 P181,000 PROBLEM NO. 1-5Lidlidda Plastic Products Co Answers: 1)D; 2)B; 3)C; 4)A 2 AUDIT OF PROPERTY, PLANT AND EQUIPMENT PROBLEM NO. 2-1 Aliaga Corporation was incorporated on January 2, 2006. The following items relate to the Aliaga’s property and equipment transactions: Cost of land, which included an old apartment building P3,000,000 appraised at P300,000 Apartment building mortgage assumed, including related 80,000 interest due at the time of purchase 30,000 Deliquent property taxes assumed by the Aliaga 20,000 Payments to tenants to vacate the apartment building 40,000 Cost of razing the apartment building 10,000 Proceeds from sale of salvaged materials 60,000 Architects fee for new building 40,000 Building permit for new construction 25,000 Fee for title search 20,000 Survey before construction of new building 100,000 Excavation before construction of new building 10,000,000 Payment to building contractor 15,000 Assessment by city for drainage project 50,000 Cost of grading and leveling 80,000 Temporary quarters for construction crew 50,000 Temporary building to house tools and materials Cost of changes during construction to make new building 90,000 more energy efficient Interest cost on specific borrowing incurred during 360,000 construction Payment of medical bills of employees accidentally injured 18,000 while inspecting building construction 60,000 Cost of paving driveway and parking lot 12,000 Cost of installing lights in parking lot 30,000 Premium for insurance on building during construction Cost of open house party to celebrate opening of new 50,000 building Cost of windows broken by vandals distracted by the 12,000 celebration 12,000 QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Cost of Land a. P2,980,000 c. P3,185,000 b. P3,270,000 d. P3,205,000 2. Cost of Building a. P10,810,000 c. P10,875,000 b. P10,895,000 d. P11,110,000 3. Cost of Land Improvements a. P12,000 c. P122,000 b. P72,000 d. P 0 4. Amount that should be expensed when incurred a. P 80,000 c. P62,000 b. P110,000 d. P50,000 5. Total depreciable property and equipment a. P11,182,000 c. P10,947,500 b. P10,967,000 d. P10,882,000 PROBLEM NO. 2-2 The following items relate to the acquisition of a new machine by Bongabon Corporation in 2006: Invoice price of machinery P2,000,000 P2,000,000 Cash discount not taken 40,000 40,000 Freight on new machine 10,000 10,000 Cost of removing the old machine 12,000 12,000 Loss on disposal of the old machine 150,000 150,000 Gratuity paid to operator of the old machine who was laid off 70,000 70,000 Installation cost of new machine 60,000 60,000 Repair cost of new machine damaged in the process of installation 8,000 8,000 Testing costs before machine was put into regular 15,000 15,000 operation Salary of engineer for the duration of the trial run 40,000 40,000 Operating cost during first month of regular use 250,000 250,000 Cash allowance granted because the new machine proved to be of inferior quality 100,000 100,000 Question: How much should be recognized as cost of the new machine? a. P1,985,000 c. P1,930,000 b. P1,993,000 d. P2,025,000 PROBLEM NO. 2-3 On January 1, 2005, Cabiao Corporation purchased a tract of land (site number 101) with a building for P1,800,000. Additionally, Cabiao paid a real state broker’s commission of P108,000, legal fees of P18,000 and title guarantee insurance of P54,000. The closing statement indicated that the land value was P1,500,000 and the building value was P300,000. Shortly after acquisition, the building was razed at a cost of P225,000. Cabiao entered into a P9,000,000 fixed-price contract with Cabanatuan Builders, Inc. on March 1, 2005 for the construction of an office building on the land site 101. The building was completed and occupied on September 30, 2006. Additional construction costs were incurred as follows: Plans, specifications and blueprints P 36,000 P 36,000 Architect’s fees for design and supervision 285,000 285,000 The building is estimated to have a forty-year life from date of completion and will be depreciated using the 150%-declining-balance method. To finance the construction cost, Cabiao borrowed P9,000,000 on March 1, 2005. The loan is payable in ten annual installments of P900,000 plus interest at the rate of 14%. Cabiao used part of the loan proceeds for working capital requirements. Cabiao’s average amounts of accumulated building construction expenditures were as follows: For the period March 1 to December 31, 2005 P2,700,000 P2,700,000 For the period January 1 to September 31, 2006 6,900,000 6,900,000 Cabiao is using the allowed alternative treatment for borrowing cost. Questions: Based on the above and the result of your audit, determine the following: 1. Cost of land site number 101 a. P1,905,000 c. P2,205,000 b. P1,800,000 d. P2,151,000 2. Cost of office building a. P10,581,000 c. P10,329,000 b. P10,360,500 d. P10,960,500 3. Depreciation of office building for 2006 a. P96,800 c. P102,800 b. P97,130 d. P 99,197 PROBLEM NO. 2-4 You noted during your audit of the Carranglan Company that the company carried out a number of transactions involving the acquisition of several assets. All expenditures were recorded in the following single asset account, identified as Property and equipment: Property and equipment Acquisition price of land and building P 960,000 Options taken out on several pieces of property 16,000 List price of machinery purchased 318,400 Freight on machinery purchased 5,000 Repair to machinery resulting from damage during shipment 1,480 Cost of removing old machinery 4,800 Driveways and sidewalks 102,000 Building remodeling 400,000 Property and equipment Utilities paid since acquisition of building 20,800 P 1,828,480 Based on property tax assessments, which are believed to fairly represent the relative values involved, the building is worth twice as much as the land. The machinery was subject to a 2% cash discount, which was taken and credited to Purchases Discounts. Of the two options, P6,000 is related to the building and land purchased and P10,000 related to those not purchased. The old machinery was sold at book value. Questions: Based on the above and the result of your audit, determine the adjusted balance of the following: 1. Land a. P644,000 c. P326,000 b. P322,000 d. P424,000 2. Building a. P 644,000 c. P1,044,000 b. P1,040,000 d. P 722,000 3. Machinery a. P317,032 c. P323,400 b. P318,512 d. P321,832 PROBLEM NO. 2-5 In connection with your audit of Cuyapo Company’s financial statements for the year 2006, you noted the following transactions affecting the property and equipment items of the company: Jan. 1 Purchased real property for P5,026,000, which included a charge of P146,000 representing property tax for 2006 that had been prepaid by the vendor; 20% of the purchase price is deemed applicable to land and the balance to buildings. A mortgage of P3,000,000 was assumed by Cuyapo on the purchase. Cash was paid for the balance. Jan. 15 Previous owners had failed to take care of normal maintenance and repair requirements on the buildings, necessitating current reconditioning at a cost of P236,800. Feb. 15 Demolished garages in the rear of the building, P36,000 being recovered on the lumber salvage. The company proceeded to construct a warehouse. The cost of such warehouse was P540,800, which was P90,000 less than the average bids made on the construction by independent contractors. Upon completion of construction, city inspectors ordered extensive modifications to the building 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 P76,800. Mar. 1 The company exchanged its own stock with a fair value of P320,000 (par P24,000) for a patent and a new equipment. The equipment has a fair value of P200,000. Apr. 1 The new machinery for the new building arrived. In addition, a new franchise was acquired from the manufacturer of the machinery. Payment was made by issuing bonds with a face value of P400,000 and by paying cash of P144,000. The value of the franchise is set at P160,000 while the machine’s fair value is P360,000. May 1 The company contracted for parking lots and waiting sheds at a cost P360,000 and P76,800, respectively. The work was completed and paid for on June 1. 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 P60,000. Questions: Based on the above and the result of your audit, determine the cost of the following: 1. Land a. P 940,000 c. P 976,000 b. P1,005,200 d. P1,052,800 2. Buildings a. P4,645,600 c. P4,762,400 b. P5,005,600 d. P4,681,600 3. Machinery and equipment a. P360,000 c. P576,615 b. P560,000 d. P659,692 4. Land improvements a. P360,000 c. P436,800 b. P 76,800 d. P 0 5. Total property, plant and equipment a. P6,764,400 c. P6,718,092 b. P6,731,200 d. P6,618,400 2 AUDIT OF PROPERTY, PLANT AND EQUIPMENT - answer PROBLEM NO. 2-1Aliaga Corporation Answers: 1)B; 2)A; 3)B; 4)A, 5)D Suggested Solution: PAS 16 par. 6 defines “Property, plant and equipment” as tangible items that: i. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and ii. are expected to be used during more than one period. Par. 15 and 16 further state that an item of property, plant and equipment that qualifies for recognition of an asset shall be measured at its cost. The cost of an item of PPE comprises: a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates. b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period. Question No. 1 Cost of land P3,000,000 Apartment building mortgage assumed, including related interest due at the time of purchase 80,000 Deliquent property taxes assumed by the Aliaga 30,000 Payments to tenants to vacate the apartment building 20,000 Cost of raising the apartment building 40,000 Proceeds from sale of salvaged materials (10,000) Fee for title search 25,000 Survey before construction of new building 20,000 Assessment by city for drainage project 15,000 Cost of grading and leveling 50,000 Total cost of Land P3,270,000 Question No. 2 Architects fee for new building P60,000 Building permit for new construction 40,000 Excavation before construction of new building 100,000 Payment to building contractor 10,000,000 Temporary quarters for construction crew 80,000 Temporary building to house tools and materials 50,000 Cost of changes during construction to make new building more energy efficient 90,000 Interest cost on specific borrowing incurred during construction 360,000 Premium for insurance on building during construction 30,000 Total cost of Building P10,810,000 Question No. 3 Cost of paving driveway and parking lot P60,000 Cost of installing lights in parking lot 12,000 Total cost of Land Improvements P72,000 Question No. 4 Payment of medical bills of employees P18,000 Cost of open house party 50,000 Cost of windows broken by vandals 12,000 Total cost amount that should be expensed P80,000 Question No. 5 Building (see no. 2) P10,810,000 Land improvements (see no. 3) 72,000 Total depreciable PPE P10,882,000 PROBLEM NO. 2-2Bongabon Corporation Answer: A Suggested Solution: PROBLEM NO. 2- Invoice price of machinery P2,000,000 3Cabiao Corp Cash discount not taken (40,000) Answers: 1)C; Freight on new machine 10,000 2)B; 3)B Installation cost of new machine 60,000 Testing costs 15,000 Salary of engineer for the duration of the trial run 40,000 Cash allowance (100,000) Cost of the new machine P1,985,000 Suggested Solution: Question No. 1 Acquisition cost P1,800,000 Real estate broker's commission 108,000 Legal fees 18,000 Title guarantee insurance 54,000 PROBLEM NO. 2- Cost of razing the existing building 225,000 4Carranglan Company Total cost of land site 101 P2,205,000 Answers: 1)B; 2)C; Question No. 2 3)A Suggested Solution: Fixed-price contract cost P 9,000,000 Questions No. 1 and 2 and blueprints Plans, specifications 36,000 Architect's fees and design supervision 285,000 Capitalizable borrowing cost: Land Building Mar. 1 to Allocation ofDec. 31, 2005 acquisition price: Land (P960,000x x14% (P2,700,000 1/3)x 10/12) P315,000 P320,000 Jan. 1 to(960,000 Building Sept. 30,x2006 2/3) P 640,000 Option(P6,900,000 x 14%acquired: paid on property x 9/12) 724,500 1,039,500 Total Landcost(6,000 of office building x 1/3) 2,000 P10,360,500 Building (6,000 x 2/3) 4,000 Question Cost No. 3 of building remodelling 400,000 Depreciation expense [P10,360,500 x (1/40x1.5) x 3/12] P97,130 Adjusted balances P322,000 P1,044,000 Question No. 3 Net purchase price of machinery (P318,400 x .98) P312,032 Freight on machinery purchased 5,000 Adjusted balance P317,032 PROBLEM NO. 2-5Cuyapo Company Answers: 1)C; 2)A; 3)B; 4)C, 5)D Notes: Suggested Solution: 1) The Question No. 1 Total contract price P5,026,000 Less property taxes for 2006 146,000 Adjusted cost of land and building 4,880,000 Percentage applicable to land 20% Cost of Land P 976,000 Question No. 2 Cost allocated to building (P4,880,000 x 80%) P3,904,000 Reconditioning costs prior to use 236,800 Salvage proceeds from demolition of garages (36,000) Construction cost of warehouse 540,800 Cost of Buildings P4,645,600 savings on construction of P90,000 should be ignored. The modification costs of P76,800 and the redecorating and repair costs of P60,000 should be expensed. Question No. 3 Fair value of equipment acquired on Mar. 1 P200,000 Fair value of machine acquired on Apr. 1 360,000 Cost of Machinery and equipment P560,000 Question No. 4 Parking lots P360,000 Waiting sheds 76,800 Cost of Land improvements P436,800 Question No. 5 Land P 976,000 Buildings 4,645,600 Machinery and equipment 560,000 Land improvements 436,800 Total cost of property, plant and equipment P6,618,400 4 AUDIT OF INVENTORIES PROBLEM NO. 4-1 The Anda Company is on a calendar year basis. The following data were found during your audit: a. Goods in transit shipped FOB destination by a supplier, in the amount of P100,000, had been excluded from the inventory, and further testing revealed that the purchase had been recorded. b. Goods costing P50,000 had been received, included in inventory, and recorded as a purchase. However, upon your inspection the goods were found to be defective and would be immediately returned. c. Materials costing P250,000 and billed on December 30 at a selling price of P320,000, had been segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB destination. d. Goods costing P70,000 was out on consignment with Hermie Company. Since the monthly statement from Hermie Company listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at P80,000. e. The sale of P150,000 worth of materials and costing P120,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. The sale was properly recorded in 2005. f. Goods costing P100,000 and selling for P140,000 had been segregated, but not shipped at December 31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as FOB destination. The sale had not been recorded. g. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet. However, these materials costing P170,000 had been included in the inventory count, but no entry had been made for their purchase. h. Merchandise costing P200,000 had been recorded as a purchase but not included as inventory. Terms of sale are FOB shipping point according to the supplier’s invoice which had arrived at December 31. Further inspection of the client’s records revealed the following December 31, 2006 balances: Inventory, P1,100,000; Accounts receivable, P580,000; Accounts payable, P690,000; Net sales, P5,050,000; Net purchases, P2,300,000; Net income, P510,000. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of following as of December 31, 2006: 1. Inventory a. P1,230,000 c. P1,550,000 b. P1,650,000 d. P1,480,000 2. Accounts payable a. P710,000 c. P810,000 b. P540,000 d. P760,000 3. Net sales a. P4,550,000 c. P4,730,000 b. P4,650,000 d. P4,970,000 4. Net purchases a. P2,370,000 c. P2,150,000 b. P2,420,000 d. P2,320,000 5. Net income a. P220,000 c. P540,000 b. P290,000 d. P550,000 PROBLEM NO. 4-2 You were engaged by Asingan Corporation for the audit of the company’s financial statements for the year ended December 31, 2006. The company is engaged in the wholesale business and makes all sales at 25% over cost. Date Reference Amount Balance forwarded P7,800,000 12/27 SI No. 965 60,000 12/28 SI No. 966 225,000 12/28 SI No. 967 15,000 12/31 SI No. 969 69,000 12/31 SI No. 970 102,000 12/31 SI No. 971 24,000 12/31 Closing entry (8,295,000) You observed the physical inventory of goods in the warehouse on December 31 and were satisfied that it was properly taken. When performing sales and purchases cut-off tests, you found that at December 31, the last Receiving Report which had been used was No. 1063 and that no shipments had been made on any Sales Invoices whose number is larger than No. 968. You also obtained the following additional information: a. Included in the warehouse physical inventory at December 31 were goods which had been purchased and received on Receiving Report No. 1060 but for which the invoice was not received until the following year. Cost was P27,000. b. On the evening of December 31, there were two trucks in the company siding: Truck No. XXX 888 was unloaded on January 2 of the following year and received on Receiving Report No. 1063. The freight was paid by the vendor. Truck No. MGM 357 was loaded and sealed on December 31 but leave the company premises on January 2. This order was sold for P150,000 per Sales Invoice No. 968. c. Temporarily stranded at December 31 at the railroad siding were two delivery trucks enroute to ABC Trading Corporation. ABC received the goods, which were sold on Sales Invoice No. 966 terms FOB Destination, the next day. d. Enroute to the client on December 31 was a truckload of goods, which was received on Receiving Report No. 1064. The goods were shipped FOB Destination, and freight of P2,000 was paid by the client. However, the freight was deducted from the purchase price of P800,000. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Sales for the year ended December 31, 2006 a. P8,100,000 c. P7,875,000 b. P7,725,000 d. P8,025,000 2. Purchases for the year ended December 31, 2006 a. P4,500,000 c. P5,631,000 b. P5,727,000 d. P4,527,000 3. Accounts receivable as of December 31, 2006 a. P330,000 c. P525,000 b. P555,000 d. P180,000 4. Inventory as of December 31, 2006 a. P1,452,000 c. P1,200,000 b. P1,221,000 d. P1,296,000 5. Accounts payable as of December 31, 2006 a. P600,000 c. P 531,000 b. P627,000 d. P1,827,000 PROBLEM NO. 4-3 Balungao Company engaged you to examine its books and records for the fiscal year ended June 30, 2006. The company’s accountant has furnished you not only the copy of trial balance as of June 30, 2006 but also the copy of company’s balance sheet and income statement as at said date. The following data appears in the cost of goods sold section of the income statement: Inventory, July 1, 2005 P 500,000 Add Purchases 3,600,000 Total goods available for sale 4,100,000 Less Inventory, June 30, 2006 700,000 Cost of goods sold P3,400,000 The beginning and ending inventories of the year were ascertained thru physical count except that no reconciling items were considered. Even though the books have been closed, your working paper trial balance show all account with activity during the year. All purchases are FOB shipping point. The company is on a periodic inventory basis. In your examination of inventory cut-offs at the beginning and end of the year, you took note of the following: July 1, 2005 a. June invoices totaling to P130,000 were entered in the voucher register in June. The corresponding goods not received until July. b. Invoices totaling P54,000 were entered in the voucher register in July but the goods received during June. June 30, 2006 a) Invoices with an aggregate value of P186,000 were entered in the voucher register in July, and the goods were received in July. The invoices, however, were date June. b) June invoices totaling P74,000 were entered in the voucher register in June but the goods were not received until July.  Invoices totaling P108,000 (the corresponding goods for which were received in June) were entered the voucher register, July.  Sales on account in the total amount of P176,000 were made on June 30 and the goods delivered at that time. Book entries relating to the sales were made in June.   QUESTIONS:  Based on the above and the result of your cut-off tests, answer the following:    1. How much is the adjusted Inventory as of July 1, 2005? a. P500,000 c. P576,000 b. P630,000 d. P370,000 2. How much is the adjusted Purchases for the fiscal year ended June 30, 2006? a. P3,840,000 c. P3,894,000 b. P3,600,000 d. P3,914,000 3. How much is the adjusted Inventory as of June 30, 2006? a. P784,000 c. P892,000 b. P500,000 d. P960,000 4. How much is the adjusted Cost of Goods Sold for the fiscal year ended June 30, 2006? a. P3,316,000 c. P3,510,000 b. P3,970,000 d. P3,564,000   5. The necessary compound adjusting journal entry as of June 30, 2006 would include a net adjustment to Retained Earnings of?  a. P130,000 c. P76,000 b. P184,000 d. P54,000 PROBLEM NO. 4-4 The following accounts were included in the unadjusted trial balance of Bani Company as of December 31, 2006: Cash P 481,600 Accounts receivable 1,127,000 Inventory 3,025,000 Accounts payable 2,100,500 Accrued expenses 215,500 During your audit, you noted that Bani held its cash books open after year-end. In addition, your audit revealed the following:  Receipts for January 2007 of P327,300 were recorded in the December 2006 cash receipts book. The receipts of P180,050 represent cash sales and P147,250 represent collections from customers, net of 5% cash discounts.  Accounts payable of P186,200 was paid in January 2007. The payments, on which discounts of P6,200 were taken, were included in the December 2006 check register.  Merchandise inventory is valued at P3,025,000 prior to any adjustments. The following information has been found relating to certain inventory transactions. o Goods valued at P137,500 are on consignment with a customer. These goods are not included in the inventory figure. o Goods costing P108,750 were received from a vendor on January 4, 2007. The related invoice was received and recorded on January 6, 2007. The goods were shipped on December 31, 2006, terms FOB shipping point. o Goods costing P318,750 were shipped on December 31, 2006, and were delivered to the customer on January 3, 2007. The terms of the invoice were FOB shipping point. The goods were included in the 2006 ending inventory even though the sale was recorded in 2006. o A P91,000 shipment of goods to a customer on December 30, terms FOB destination are not included in the year-end inventory. The goods cost P65,000 and were delivered to the customer on January 3, 2007. The sale was properly recorded in 2007. o The invoice for goods costing P87,500 was received and recorded as a purchase on December 31, 2006. The related goods, shipped FOB destination were received on January 4, 2007, and thus were not included in the physical inventory. o Goods valued at P306,400 are on consignment from a vendor. These goods are not included in the physical inventory. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2006: 1. Cash a. P481,600 c. P334,300 b. P340,500 d. P346,700 2. Accounts receivable a. P1,454,300 c. P1,127,000 b. P1,282,000 d. P1,274,250 3. Inventory a. P3,017,500 c. P2,930,000 b. P3,040,000 d. P2,505,000 4. Accounts payable a. P2,395,450 c. P2,286,500 b. P2,307,950 d. P2,301,750 5. Current ratio a. P2.00 c. P1.84 b. P1.83 d. P2.01 PROBLEM NO. 4-5 The Bolinao Company values its inventory at the lower of FIFO cost or net realizable value (NRV). The inventory accounts at December 31, 2005, had the following balances. Raw materials P 650,000 Work in process 1,200,000 Finished goods 1,640,000 The following are some of the transactions that affected the inventory of the Bolinao Company during 2006. Jan. 8 Bolinao purchased raw materials with a list price of P200,000 and was given a trade discount of 20% and 10%; terms 2/15, n/30. Bolinao values inventory at the net invoice price Feb. 14 Bolinao repossessed an inventory item from a customer who was overdue in making payment. The unpaid balance on the sale is P15,200. The repossessed merchandise is to be refinished and placed on sale. It is expected that the item can be sold for P24,000 after estimated refinishing costs of P6,800. The normal profit for this item is considered to be P3,200. Mar. 1 Refinishing costs of P6,400 were incurred on the repossessed item. Apr. 3 The repossessed item was resold for P24,000 on account, 20% down. Aug. 30 A sale on account was made of finished goods that have a list price of P59,200 and a cost P38,400. A reduction of P8,000 off the list price was granted as a trade-in allowance. The trade-in item is to be priced to sell at P6,400 as is. The normal profit on this type of inventory is 25% of the sales price. QUESTIONS: Based on the above and the result of your audit, answer the following: (Assume the client is usingperpetual inventory system) 1. The entry on Jan. 8 will include a debit to Raw Materials Inventory of a. P200,000 c. P141,120 b. P144,000 d. P196,000 2. The repossessed inventory on Feb. 14 is most likely to be valued at a. P14,000 c. P17,200 b. P24,000 d. P14,400 3. The journal entries on April 3 will include a a. Debit to Cash of P24,000. b. Debit to Cost of Repossessed Goods Sold of P14,000. c. Credit to Profit on Sale of Repossessed Inventory of P3,600. d. Credit to Repossessed Inventory of P20,400. 4. The trade-in inventory on Aug. 30 is most likely to be valued at? a. P8,000 c. P6,000 b. P4,800 d. P6,400 5. How much will be recorded as Sales on Aug. 30? P51,200 c. P57,200 P56,000 d. P57,600 AUDIT OF INVENTORIES - answer PROBLEM NO. 4-1Anda Company Answers: 1) C 2) A 3) B 4) D 5) C Suggested Solution: Questions No. 1 to 5 Accounts Net Net Inventory Payable Net Sales Purchases Income Unadjusted balances P1,100,000 P690,000 P5,050,000 P2,300,000 P510,000 (a) - (100,000) - (100,000) 100,000 (b) (50,000) (50,000) - (50,000) - (c) 250,000 - (320,000) - (70,000) (d) 70,000 - (80,000) - (10,000) (e) (120,000) - - - (120,000) (f) 100,000 - - - 100,000 (g) - 170,000 - 170,000 (170,000) (h) 200,000 - - - 200,000 Adjusted balances P1,550,000 P710,000 P4,650,000 P2,320,000 P540,000 PROBLEM NO. 4-2Asingan Corporation Answers: 1)C; 2)D; 3)A; 4)D, 5) B Suggested Solution: Questions No. 1 to 5 Sales Purchases AR Inventory AP Unadjusted P600,00 balances P8,295,000 P4,500,000 P750,000 P900,000 0 AJE No. 1 (195,000) - (195,00) - - 27,00 AJE No. 2 - 27,000 - - 0 AJE No. 3 - - - 96,000 - AJE No. 4 - - - 120,000 - AJE No. 5 (225,000) - (225,00) - - AJE No. 6 - - - 180,000 - Adjusted P7,875,000 P4,527,000 P330,000 P1,296,000 P627,000 balances Adjusting entries: 1) Sales (P69,000+P102,000+P24,000) P195,000 Accounts receivable P195,000 To adjust unshipped goods recorded as sales (SI No. 969, 970 and 971) 2) Purchases P27,000 Accounts payable P27,000 To take up unrecorded purchases (RR No. 1060) 3) Inventory P96,000 Cost of sales P96,000 To take up goods under RR No. 1063 4) Inventory (P150,000/1.25) P120,000 Cost of sales P120,000 To take up unshipped goods under SI No. 968 5) Sales P225,000 Accounts receivable P225,000 To reverse entry made to record SI No. 966 6) Inventory (P225,000/1.25) P180,000 Cost of sales P180,000 To take up goods under SI No. 966 PROBLEM NO. 4-3Balungao Company Answers: 1)B; 2)A; 3)D; 4)C, 5)C Suggested Solution: Questions No. 1 to 3 Inventory Inventory 7/1/05 Purchases 6/30/06 Unadjusted balances P500,000 P3,600,000 P700,000 Add (deduct) adj.: Item a 130,000 - - Item b - (54,000) - Item c - 186,000 186,000 Item d - - 74,000 Item e - - Item f - 108,000 - Net adjustments 130,000 240,000 260,000 Adjusted balances P630,000 P3,840,000 P960,000 Question No. 4 Inventory, July 1, 2005 P 630,000 Add Purchases 3,840,000 Total goods available for sale 4,470,000 Less Inventory, June 30, 2006 960,000 Cost of goods sold P3,510,000 Question No. 5 Compound adjusting entry: Inventory, 7/1/05 P130,000 Purchases 240,000 Inventory, 6/30/06 260,000 Retained earnings (P130,000 - P54,000) P76,000 Vouchers payable (P186,000 + P108,000) 294,000 Cost of sales 260,000 PROBLEM NO. 4-4 Answers: 1)C; 2)B; 3)A; 4)B, 5) C Suggested Solution: Questions No. 1 to 4 Accounts Accounts Cash Receivable Inventory Payable Unadjusted balances P481,600 P1,127,000 P3,025,000 P2,100,500 Add (deduct): AJE No. 1 (327,300) 155,000 - - AJE No. 2 180,000 - - 186,200 AJE No. 3.a - - 137,500 - AJE No. 3.b - - 108,750 108,750 AJE No. 3.c - - (318,750) - AJE No. 3.d - - 65,000 - AJE No. 3.e - - - (87,500) Adjusted balances P334,300 P1,282,000 P3,017,500 P2,307,950 Adjusting entries: Accounts receivable 1) (P147,250/.95) P155,000 Sales 180,050 Cash P327,300 Sales discount (P147,250/.95 x .05) 7,750 2) Cash P180,000 Purchase discount 6,200 Accounts payable P186,200 3.a) Inventory P137,500 Cost of sales P137,500 3.b) Inventory P108,750 Accounts payable P108,750 3.c) Cost of sales P318,750 Inventory P318,750 3.d) Inventory P 65,000 Cost of sales P 65,000 3.e) Accounts payable P 87,500 Cost of sales P 87,500 3.f) No adjusting entry Question No. 5 Current assets Cash P 334,300 Accounts receivable 1,282,000 Inventory 3,017,500 P4,633,800 Divide by current liabilities Accounts payable 2,307,950 Accrued expenses 215,500 2,523,450 Current ratio 1.84 PROBLEM NO. 4-5 Answers: 1)C; 2)A; 3)D; 4)B, 5)B Suggested Solution: Question No. 1 Amount to be debited to Raw Materials Inventory (P200,000 x .8 x .9 x .98) P141,120 Question No. 2 Estimated selling price P24,000 Less refinishing costs 6,800 Net realizable value 17,200 Less normal profit 3,200 Valuation of repossessed inventory P14,000 Repossessed inventory is valued at fair value or best possible approximation of fair value. Since fair value of the item is not given, the item was valued at net realizable value less the normal profit. Incidentally, this is the valuation of trade-in inventory. Question No. 3 Journal entries on April 3, 2006: Cash (P24,000 x 20%) P 4,800 Accounts receivable (P24,000 – P4,800) 19,200 Sales – Repossessed inventory P24,000 Cost of Repossessed Goods Sold (P14,000+P6,400) P20,400 Repossessed Inventory P20,400 Question No. 4 Estimated selling price (net realizable value) P6,400 Less normal profit (P6,400 x 25%) 1,600 Valuation of trade-in inventory P4,800 Question No. 5 Accounts receivable (P59,200 - P8,000) P51,200 Trade-in inventory (see no. 4) 4,800 Amount to be recorded as sales P56,000 3 AUDIT OF INVESTMENTS PROBLEM NO. 3-1 The following transactions of the Angat Company were completed during the year 2006: Jan. 2 Purchased 20,000 shares of Bulacan Auto Co. for P40 per share plus brokerage costs of P4,500. These shares were classified as trading securities. Feb. 1 Purchased 20,000 shares of Malolos Company common stock at P125 per share plus brokerage fees of P19,000. Angat classifies this stock as and available-for-sale security. Apr. 1 Purchased P2,000,000 of RP Treasury 7% bonds, paying 102.5 plus accrued interest of P35,000. In addition, the company paid brokerage fees of P18,000. Angat classified these bonds as a trading security. Jul. 1 Received semiannual interest on the RP Treasury Bonds. Aug. 1 Sold P500,000 of RP Treasury 7% bonds at 103 plus accrued interest. Oct. 1 Sold 3,000 shares of Malolos at P132 per share. The market values of the stocks and bonds on December 31, 2006, are as follows: Bulacan Auto Co. P45 per share Malolos Company P130 per share RP Treasury 7% bonds 102 QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of P500,000 RP Treasury Bonds on August 1, 2006 a. P15,000 gain c. P2,000 loss b. P 2,500 gain d. P7,500 loss 2. Gain or loss on sale of 3,000 Malolos shares on October 1, 2006 a. P18,150 loss c. P 2,000 gain b. P18,150 gain d. P21,000 gain 3. What amount of unrealized gain should be shown as component of income in 2006? a. P92,500 c. P74,500 b. P97,000 d. P80,000 4. What amount of unrealized gain should be shown as component of equity as of December 31, 2006? a. P68,850 c. P66,000 b. P85,000 d. P 0 PROBLEM NO. 3-2 You were engaged by Balagtas Company to audit its financial statements for the year 2006. During the course of your audit, you noted that the following trading securities were properly reported as current assets at December 31, 2005: Cost Market France Corporation, 5,000 shares, convertible preferred shares P 450,000 P 487,500 Ces, Inc., 30,000 shares of common stock 675,000 742,500 Coo Co., 10,000 shares of common stock 618,750 450,000 P1,743,750 P1,680,000 The following sale and conversion transactions transpired during 2006: Mar. 1 Sold 12,500 shares of Ces for P33.75 per share. April 1 Sold 2,500 shares of Coo for P45 per share. Sept. 21 Converted 2,500 shares of France’s preferred stock into 7,500 shares of France’s common stock, when the market price was P78.75 per share for the preferred stock and P47.25 per share for the common stock. The following 2006 dividend information pertains to stocks owned by Balagtas: Jan. 2 Coo issued a 10% stock dividend when the market price of Coo’s common stock was P49.50 per share. March 31 France paid dividends of P2.50 per share on its preferred and Sept. 30 stock, to stockholders of record on March 15 and September 15, respectively. France did not paydividends on its common stock during 2006. July 1Ces paid a P2.25 per share dividend on its commonstock. Market prices per share of the securities were as follows: 12/31/2006 12/31/2005 France Corp., preferred 92.25 97.50 France Corp., common 42.75 38.25 Ces, Inc., common 22.50 24.75 Coo Co., common 40.50 45.00 All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value from cost would not be considered permanent. QUESTIONS: Based on the above and the result of your audit, you are to provide the answers to the following: 1. How much is the gain on sale of 12,500 Ces shares? a. P112,500 c. P140,625 b. P281,250 d. P 0 2. How much is the gain or loss on sale of 2,500 Coo shares? a. P28,125 gain c. P28,125 loss b. P10,227 gain d. P 0 3. How much is the gain or loss on conversion of 2,500 France preferred stock into 15,000 common stock? a. P 28,125 loss c. P46,875 loss b. P129,375 gain d. P 0 4. How much is the total dividend income for the year 2006? a. P 64,375 c. P 51,875 b. P101,375 d. P364,375 5. How much should be reported as unrealized gain on trading securities in the company’s income statement for the year 2006? a. P 4,500 c. P59,250 b. P67,773 d. P 0 PROBLEM NO. 3-3 You were able to obtain the following ledger details of Trading Securities in connection with your audit of the Bocaue Corporation for the year ended December 31, 2006: Particulars Date Ref. DR CR Purchase of GOOD Co. – 1-14 CV P 960,000 4,000 shares Purchase of LUCK Co. – 4,800 shares 2-20 CV 1,200,000 Sale of LUCK Co. – 1,600 shares 3-01 CR 360,000 Receipt of GOOD Stock Dividend – Offsetting Credit to retained earnings 5-31 JV 88,000 Sale of GOOD Stocks – 3,200 shares 8-15 CR 784,000 Sale of GOOD Stocks – 800 shares 10-1 CR 184,000 From the Philippine Stock Exchange, the GOOD dividends were analyzed as follows: Kind Declared Record Payment Rate Cash 01-02 01-15 01-31 P20/share Stock 05-02 05-15 05-31 10% Cash 08-01 08-30 09-15 P30/share At December 31, 2006, GOOD and LUCK shares were selling at P210 and P240 per share, respectively. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of 1,600 LUCK shares on March 1, 2006 a. P360,000 gain c. P40,000 loss b. P200,000 loss d. P40,000 gain 2. Gain on sale of 3,200 GOOD shares on August 15, 2006 a. P 48,000 c. P16,000 b. P144,000 d. P 0 3. Gain or loss on sale of 800 GOOD shares on October 1, 2006 a. P 8,000 gain c. P 8,000 loss b. P24,000 loss d. P24,000 gain 4. Dividend income for the year 2006 a. P132,000 c. P212,000 b. P300,000 d. P 0 5. Carrying value of Trading Securities as of December 31, 2006 a. P768,000 c. P880,000 b. P852,000 d. P768,000 PROBLEM NO. 3-4 In connection with your audit of the financial statements of the Guiguinto Company for the year 2006, the following Available for Sale Securities and Dividend Income accounts were presented to you: Available for Sale Securities Date Description Ref. Debit Credit 01/08 Purchased 20,000 shares common, par value P50, BUSTOS Co. VR-69 780,000 03/3010,000 shares BUSTOS Co. received as stock dividend CJ-30 500,000 04/03Sold 10,000 shares @ P25 CR-44 250,000 12/02Sold 4,000 shares @ P60 CR-65 240,000 Dividend Income Date Description Ref. Debit Credit 03/30 Stock dividend SJ-8 500,000 08/30 BUSTOS Company common CR-52 100,000 The following information was obtained during your examination: 1. From independent sources, you determine the following dividend information: Type of Date Date of Date of Dividend Declared Record Payment Rate Stock 02/14/2006 02/28/2006 03/30/2006 50% Cash 08/01/2006 08/15/2006 08/30/2006 P5/share Cash 12/01/2006 12/15/2006 01/02/2007 20% 2. Closing market quotation as at December 31, 2006: Bid Asked BUSTOS Company common 13-3/4 16-1/2 QUESTIONS: Based on the above and the result of your audit, answer the following: 1. How much is the gain or loss on the April 3, 2006 sale? a. P10,000 loss c. P140,000 loss b. P10,000 gain d. P0 2. How much is the gain on the December 2, 2006 sale? a. P136,000 c. P84,000 b. P 96,000 d. P 0 3. How much is the total dividend income for the year 2006? a. P600,000 c. P100,000 b. P800,000 d. P300,000 4. How much is the adjusted balance of Available for Sale Securities as of December 31, 2006? a. P290,000 c. P220,000 b. P264,000 d. P416,000 5. How much is the Unrealized Loss on AFS as of December 31, 2006? a. P196,000 c. P152,000 b. P 70,000 d. P 0 PROBLEM NO. 3-5 Your audit of the Baliuag Corporation disclosed that the company owned the following securities on December 31, 2005: Trading securities: Security Shares Cost Market Sputnik, Inc. 4,800 P 72,000 P92,000 Explorer, Inc. 8,000 216,000 144,000 10% , P100,000 face value , Vanguard bonds (interest payable semiannually on Jan. 1 and Jul. 1) 79,200 81,720 Total P367,200 P317,720 Available-for-sale securities: Security Shares Cost Market Score Products 16,000 P688,000 P 720,000 Tiros, Inc. 120,000 3,120,000 2,920,000 Midas, Inc. 40,000 480,000 640,000 Total P4,288,000 P4,280,000 Held to maturity: Cost Book value 12%, 1,000,000 face value, Discoverer bonds (interest payable annually every Dec. 31) P950,000 P963,000 During 2006, the following transactions occurred: Jan. 1 Receive interest on the Vanguard bonds. Mar. 1 Sold 4,000 shares of Explorer Inc. stock for P76,000. May 15 Sold 1,600 shares of Midas, Inc. for P15 per share. July 1 Received interest on the Vanguard bonds. Dec. 31 Received interest on the Discoverer bonds. 31 Transferred the Discoverer bonds to the available-for-sale portfolio. The bonds were selling at 101 on this date. The bonds were purchased on January 2, 2005. The discount was amortized using the effective interest method. The market values of the stocks and bonds on December 31, 2006, are as follows: Sputnik, Inc. P22 per share Explorer, Inc. P15 per share 10% Vanguard bonds P75,600 Score Products P42 per share Tiros, Inc. P28 per share Midas, Inc. P18 per share QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Gain or loss on sale of 4,000 Explorer, Inc. shares on March 1, 2006 a. P4,000 loss c. P32,000 loss b. P4,000 gain d. P32,000 gain 2. Realized gain or loss on sale of 1,600 Midas, Inc. shares on May 15, 2006 a. P4,800 loss c. P1,600 loss b. P4,800 gain d. P1,600 gain 3. Total interest income for the year 2006? a. P130,000 c. P144,820 b. P125,560 d. P143,000 4. The amount that should be reported as unrealized gain in the statement of changes in equity regarding transfer of Discoverer bonds to AFS? a. P47,000 c. P61,820 b. P32,180 d. P 0 5. Carrying value of Trading Securities and Available-for-sale securities as of December 31, 2006 should be Trading securities Available-for-sale securities a. P241,200 P5,733,200 b. P301,200 P4,723,200 c. P241,200 P5,762,000 d. P301,200 P5,720,800 3 AUDIT OF INVESTMENTS - answer PROBLEM NO. 3-1Angat Company Answers: 1)B; 2)B; 3)A; 4)A Suggested Solution: * PAS 39 par. 43 Question No. 1 states that Sales proceeds (P500,000 x 1.03) P515,000 when a Less cost of RP Treasury bonds sold (P500,000 x 1.025)* 512,500 financial Gain on sale of P500,000 RP Treasury Bonds P 2,500 asset or financial liability is recognized initially, an entity shall measure it at its fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of financial asset or financial liability. Therefore, the transaction costs (e.g. brokerage fees) should be expensed for trading securities. Question No. 2 Sales proceeds (3,000 shares x P132) P396,000 Less cost of shares sold {[(20,000 x P125) + P19,000] x 3/20} 377,850 Gain on sale of 3,000 Malolos shares P 18,150 Question No. 3 Cost of Bulacan Auto Co. shares (20,000 x P40) P 800,000 Cost of RP Treasury 7% bonds (P2,000,000 x 1.025) 2,050,000 Cost of P500,000 RP Treasury bonds sold (see no. 1) ( 512,500) Trading securities, 12/31/06 before mark-to-market 2,337,500 Fair value of trading securities, 12/31/06 (see below) 2,430,000 Unrealized gain on TS to be reported on the IS P 92,500 Bulacan Auto Co. (20,000 x P45) P 900,000 RP Treasury 7% bonds (P1,500,000 x 1.02) 1,530,200 Fair value of trading securities, 12/31/06 P2,430,000 Question No. 4 Cost of Malolos Company shares [(20,000 x P125) + P19,000] P2,519,000 Cost of 3,000 shares sold (see no. 2) (377,850) AFS, 12/31/06 before mark-to-market 2,141,150 Fair value of AFS, 12/31/06 [(20,000 - 3,000) x P130] 2,210,000 Unrealized gain-AFS, 12/31/06 to be reported under SHE P 68,850 PROBLEM NO. 3-2Balagtas Company Answers: 1)A; 2)B; 3)C; 4)A; 5)B Suggested Solution: Question No. 1 Sales proceeds (12,500 shares x P33.75) P421,875 Less CV of Ces shares sold (12.5/30 x P742,500) 309,375 Gain on sale of 12,500 Ces shares P112,500 Question No. 2 Sales proceeds (2,500 shares x P45) P112,500 Less CV of Coo shares sold (P450,000 x 2,500/11,000*) 102,273 Gain on sale of 2,500 Coo shares P 10,227 * total number of shares after 10% stock dividends (10,000 x 1.1) Question No. 3 Fair value of preferred stock (2,500 shares x P78.75) P196,875 Less CV of shares converted (P487,500 x 2.5/5) 243,750 Loss on conversion of 2,500 France preferred shares P 46,875 Question No. 4 From France (5,000 shares x P2.50 x 2) P25,000 From Ces [(30,000 - 12,500) x P2.25) 39,375 Total dividend income in 2006 P64,375 Question No. 5 Trading securities, 1/1/06 P1,680,000 CV of Ces shares sold (see no. 1) (309,375) CV of Coo shares sold (see no. 2) (102,273) CV of France preferred shares converted (see no. 3) (243,750) Cost of 7,500 France common shares received (see no. 3) 196,875 Trading securities, 12/31/06 before mark-to-market 1,221,477 Fair value of trading securities, 12/31/06 (see below) 1,289,250 Unrealized gain on trading securities P 67,773 France Corp., preferred [(5,000 - 2,500) x P92.25] P 230,625 France Corp. – Common (7,500 x P42.75) 320,625 Ces, Inc., common [(30,000 - 12,500) x P22.50] 393,750 Coo Co., common {[(10,000 x 1.1) - 2,500] x P40.50} 344,250 Fair value of trading securities, 12/31/06 P1,289,250 PROBLEM NO. 3-3Bocaue Corporation Answers: 1)C; 2)A; 3)D; 4)A, 5) B Suggested Solution: Question No. 1 Sales proceeds P360,000 Less CV of shares sold (P1,200,000 x 1,600/4,800) 400,000 Loss on sale of 1,600 Luck shares on 3/1/06 P 40,000 Question No. 2 Total proceeds P784,000 Less dividends sold (3,200 shares x P30) 96,000 Sales proceeds 688,000 Less CV of investment sold (P880,000* x 3,200/4,400**) 640,000 Gain on sale of 3,200 Good shares on 9/15/06 P 48,000 Computation of adjusted cost of Good Co. shares Total cash paid P960,000 Less purchased dividend (4,000 x P20) 80,000 Adjusted cost P880,000 * **After 10% stock dividend Question No. 3 Sales proceeds P184,000 Less CV of investment sold (P880,000 x 800/4,400) 160,000 Gain on sale of 800 Good shares on 10/1/06 P 24,000 Question No. 4 Dividend income - Declared Aug. 1 (4,400 shares x P30) P132,000 Question No. 5 Good Co. [(4,000 x 1.1) - 3,200 - 800] = 400 x P210 P 84,000 Luck Co. (4,800 - 1,600) = 3,200 x P240 768,000 Carrying value of trading securities, 12/31/06 P852,000 PROBLEM NO. 3-4Guiguinto Company Answers: 1)A; 2)B; 3)D; 4)C, 5)A Question No. 1 Sales proceeds (10,000 shares x P25) P250,000 Less CV of investment sold (P780,000 x 10/30*) 260,000 Loss on sale of AFS on 4/3/06 P 10,000 *After 50% stock dividend Question No. 2 Total proceeds (4,000 shares x P60) P240,000 Less dividends sold (4,000 shares x P50 x 20%) 40,000 Net sales proceeds 200,000 Less CV of investment sold (P780,000 x 4/30) 104,000 Gain on sale of AFS on 12/2/06 P 96,000 Question No. 3 Cash dividends declared, 8/1/2006 P100,000 (20,000 shares x P5) Cash dividends declared, 12/1/2006 200,000 (20,000 shares x P50 x 20%) Total dividend income P300,000 Question No. 4 Shares purchased, 1/08 20,000 Shares received as stock dividend 10,000 Sold, 4/3 (10,000) Sold, 12/2 Balance (4,000) 12/31/06 16,000 Multiply by market value/share, 12/31/06 13.75 Carrying value of AFS, 12/31/06 P220,000 Note: Application guidance par. 72 of PAS 39 states that the appropriate market price for an asset held or liability to be issued is usually the current bid price and, for an asset to be acquired or liability held, the asking price. Question No. 5 Acquisition cost P780,000 CV of 10,000 shares sold, 4/3 (see no. 1) (260,000) CV of 4,000 shares sold, 12/2 (see no. 2) (104,000) AFS, 12/31/06 before mark-to-market 416,000 Fair value of AFS, 12/31/06 220,000 Unrealized loss on AFS, 12/31/06 P196,000 PROBLEM NO. 3-5Baliuag Corporation Answers: 1)B; 2)B; 3)C; 4)B, 5)A Suggested Solution: Question No. 1 Sales proceeds P76,000 Less CV of shares sold (P144,000 x 4/8) 72,000 Loss on sale of 4,000 Explorer, Inc. shares P 4,000 Question No. 2 Sales proceeds (1,600 shares x P15) P24,000 Unrealized gain on the shares sold(P160,000 x 1.6/40) 6,400 Total 30,400 Less CV of shares sold (P640,000 x 1.6/40) 25,600 Realized gain on sale of 1,600 Midas, Inc. shares P 4,800 Alternative computation: Sales proceeds (1,600 shares x P15) P24,000 Cost of shares sold (P480,000 x 1.6/40) 19,200 Realized gain on sale of 1,600 Midas, Inc. shares P 4,800 Question No. 3 Vanguard bonds (P100,000 x 10%) P 10,000 Discoverer bonds (P963,000 x 14%*) 134,820 Total interest income for 2006 P144,820 *Computation of effective interest rate: Carrying value, 12/31/05 P963,000 Less carrying value, 1/2/05 (Cost) 950,000 Discount amortization for 2005 13,000 Add nominal interest (P1,000,000 x 12%) 120,000 Effective interest 133,000 Divide by carrying value, 1/2/05 950,000 Effective interest rate 14% Question No. 4 P Carrying value, 12/31/05 963,000 Add discount amortization in 2006: Effective interest (P963,000 x 14%) P134,820 Nominal interest (P1,000,000 x 12%) (120,000) 14, 820 Carrying value, 12/31/06 977,820 Fair value of Discoverer bonds on 12/31/06 (P1,000,000 x 1.01) 1,010,000 Unrealized gain on transfer of securities to be reported under SHE P 32,180 Question No. 5 Trading securities Sputnik, Inc. (4,800 x P22) P105,600 Explorer, Inc. [(8,000 - 4,000) x P15] 60,000 10% , P100,000 face value , Vanguard bonds 75,600 Total market value P241,200 Available-for-sale securities Score Products (16,000 x P42) P 672,000 Tiros, Inc. (120,000 x P28) 3,360,000 Midas, Inc. [(40,000 - 1,600) x P18] 691,200 Discoverer bonds (P1,000,000 x 1.01) 1,010,000 Total market value P5,733,200