REY OCAMPO ONLINE! AUDITING PROBLEMS DIAGNOSTIC EXAMINATION OCTOBER 2020 CPALE INSTRUCTION: Select the correct answer for each of the following questions. Mark only one answer for each item by shading the box corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED, SITUATIONAL SITUATION 1 PRTC, Ine. Is an importer and wholesaler of cellphone accessories. Its merchandise is purchased from a number of suppliers and is warehoused until sold to customers. In conducting your audit of PRTC’s financial statements for the year ended December 31, 2020, you determined that the internal contral system is functioning effectively. You observed the physical count of inventory on Novernber 30, 2020. ‘The following information were obtained from PRTC’s accounting records: Sales for 11 months ended November 30 Sales for the year ended December 31 Purchases for 11 months ended Nov. 30 Purchases for the year ended Dec. 31 Inventory, January 1 Inventory, Nov. 30 (per physical count) 3,400,000 3,840,000 2,700,000 3,200,000 350,000 380,000 Your audit disclosed the following information: 2) Shipments received in unsalable condition and excluded fram physi inventory. The returns were not recorded because no credit memos were received from vendors: Total at Nevember 30 Total at December 31 (including the November 30 unrecorded returns) b) Deposit made with vendor and charged to Purchases in Oetober. The goods were shipped in January 2021, ©) Deposit made with vendor and charged to Purchases in November. The goods were shipped FOB destination ‘an November 29 and were included in physical inventory as goods in transit, d) Shipments received in November and included In the physical count at November 30 but recorded as December purchases, 4,000 6,000 8,000 22,000 30,000 ) Due to the carelessness of the receiving department, a December shipment was damaged by rain. ‘These goods were later sold at cost 40,000 In December, Based on the preceding information, determine the following: QUESTIONS: 1, Adjusted net purchases ‘A. Up to November 30: P2,666,000; Up to December 31; P3,190,000 8. Up to November 30: P2,700,000; Up to December 31: P3,164,000 C. Up to November 30: P2,696,000; Up to December 31: P3,186,000 D, Up to November 30: P2,704,000; Up to December 31: P3,184,000 2. Gross profit ratio for 11 months ended Novernber 30, 2020 A. 21.58% C. 21.47% B, 20.94% D. 20.82% 3. Gross profit for the month of December 2020 A. P92,136 C. PR3,760 8. P91,236 D. 88,000 4, Estimated inventory at December 31, 2020 A. P491,760 C. 490,000 8. 456,000 D. P4S5,120 5. An auditor selected items for test counts while observing a client’s physical inventory. The auditor then traced the test counts to the client's inventory listing, This procedure mast likely obtained evidence concerning A, Existence, Rights, 8. Completeness, D. Valuation. ‘SITUATION 2 In the audit of the books of Manila Corporation for the year 2020, the following items and information appeared In the Production Machine account of the client: Date Particulars Debit Credit 01/01 —Balance-Machine 1, 2, 3, and 4 at 180,000 -P:720,000 each 02/28 Machine 5 396,000 Machine 2 P 6,000 09/01 Machine 6 192,000 12/01 Machine 7 432,000The Accumulated Depreciation account contained no entries for the year 2020. The balance on January 1, 2020 per your audit, was as follows: Machine 1 pi68,750 Machine 2 78,750 Machine 3 67,500 Machine 4 45,000 Based on your further inquiry and verification, you noted the following: 4, Machine 5 was purchased for cash; it replaced Machine 1, which was sold on this date for Pé,000, 2, Machine 2 was destroyed by the thickness of engine oll used leading to explosion an December 1, 2020. Machine 7 wes to replece Machine 2. 3, Machine 3. was traded in for Machine 6 at an allowance of P24,000; the difference was paid in cash and charged to Production Machine eccount. 4, Depreciation rate is recognized at 25% ner annum. QuesTIONS: Based on the above end the result of your audit, enswer the following: 6. The gain of loss on sale of Machine 1 is A. P6,000 gain C. P2500 joss B. P5,250 lose D. 2,250 gain 7, ‘The loss on trade in of Machine 3s AL P58,500 c. Ps2,000 B. 54,750 D, Pa8,500 &. The Production Machine account is overstated by A, P534,000 c. P714,000 B. P510,000 D. Ps90,000 9, The total depreciation for the year ended December 31, 2020 is A.” 237,000 c. p233,250 B, 232,500 DB, 236,250 20. The carrying amount of production machine as of December 31, 2020 is A. 1,024,500 c. Pt,069,500 B. P1,023,000 DB. P 990,750 SITUATION 3 Davao Corporation, a real estate entity, has total asoats of not more than P350 millian and total liabilities of nat mere than P250 million. Davao's debt and equity instruments are not traded in a public market. Davao Corporation incurred (and paid) the following expenditures in acquiring property consisting of ten Identical freehold detached houses each with separate egal title including the land on whieh it is bullt: Amount bate Gin-Php) Additianal information 1 Jan, 2020 200,000,000 20 per cent of the orice js attributable to the land 1 Jan. 2020 20,000,000 Non-refundable transfer taxes (not included in the #200,000,000 purchase price) Jan, 2020 2,000,000 Lega! costs directly attributable to the acquisition 2 Jan, 2020 10,000 Reimbursing the previaus owner for repaying the non- refundable local government property taxes for the six-month period ending 30 June 2020 4 Jan, 2020 $00,000 Advertising campaign to attract tenants 2Jan. 2020 200,000 Opening function to celebrate new rental business that attracted extensive coverage by the loca) press 30 June 2020 20,000 Non-refundable annual focal government praperty taxes for the year ending 30 June 2021 Throughout 120,000 Day-to-day repairs and 2020 maintenance, including the salary and other costs of the administration and maintenance staff, These costs are attributable equally to each of the ten units, ‘The entity uses one of the ten units to accommodate its administration and maintenance staff. The other nine Units are rented to Independent thitd parties under non- cancellable operating leases. At 31 December 2020, the entity made the following assessments about the units: + Useful life of the buildings: $0 years from the date of acquisition + The entity will consume the buildings’ future economic benefits evenly over 50 years from the date of acquisition. The fair value of the units can be determined rellably without undue cost or effert on an angoing basis and thet the residual value of the owner-occupied unit is ml.At 31 December 2020 the fair value of each unit wes reliably estimated as 25,000,000. QUESTIONS: Based on the above end the result of your audit, answer ‘the following as of and for the year ended December 31, 2020: 11. Davao Corporation is a A. Large entity 8. Medium-sized entity C. Small entity D,. Micro entity 12. How much should be reported as property, plant end equipment? AL P21,747,384 CP 21,746,400 B, P21,648,000 DB. Ni 13. How much should be recognized in profit or loss regarding the Increase in fair value of investment properties? A. P26,200,000 c. P27,000,000 B, P26,091,000 DB, 23,636,000 14. How much Is the total expense to be recognized in profit ar loss? A. P1,193,616 c. P1,193,600 B, 2,192,000 DB, 4,376,000 15. Assume that the fair value of the units cannot be determined reliably without undue cost or effort on an ‘angaing basis, how much is the total expense to be recognized in profit or loss? A, P5,360,000 C, P4,366,000 5, P4,376,000 DB. P4,376,160 SITUATION 4 The statement of financiel position of Bacolod Corporation as of December 31, 2019 reported the Intangible Assets, net as fallows: Patent A 1,680,000 Patent B 2,450,000 4,130,000 During the course of your audit, you noted the following. @. Patent A was purchased for P1,920,000 on January 2, 2018, at which dete the remaining legal life was sixteen years. On January 1, 2020, Bacolod determined that the useful life of the patent was only eight years from the date of acquisition, b, On May 1, 2020, Bacolod sold Patent B in exchange for 2 P5,000,000 non-interest bearing note due on May 1, 2023, There was no established exchange price for the patent, and the nate had no ready market, The prevailing rate of interest far 2 note of this type at May 1, 2020 was 14%. The patent wes purchased for 3,150,000 on September 1, 2016. On that date, the remeining legal life was fifteen years, which was also determined to be the useful life ©. On January 3, 2020, in connection with the purchase of 2 trademark from Joe Corporation, the parties entered into 2 noncompetition agreement and 2 consulting contract. Bacolod paid Joe P8,000,000, of which three-quarters was for the trademark and one-quarter Was for Joe's agreement not to compete for 2 five-year period in the line of business covered by the trademark, Bacolod considers the life of the trademark to be indefinite, Under the consulting contract, Bacolod agreed to pay Joe PS00,000 annually on January 3 for five years. The first payment was made an January 3, 2020. d. At December 31, 2020, Bacolod determined the recaverable amount of the intangible assets 2s follows: Patent A P1,250,000 Trademark 5,500,000 Noncompetition agreement 1,800,000 QUESTIONS: Based on the above and the result of your audit, determine the following: 16. Gain on sale of Patent 8 A. 2,620,000 c. P 995,000 B. P1,022,500 D, P 877,500 17. Total amortization to be recognized in 2020 A. P680,000 c. P 767,500 B. P750,000 D, P1,950,000 18, Total impairment loss to be recognized in 2020 A, P750,000 Cc. P550,000 B, P620,000 ©. P 50,000 19. Intangible assets to be recognized in the statement of financial position as of December 31, 2020 A. P7,750,000 C. P8,450,000 B. 7,950,000 DB. P6,850,000 20. In auditing intangible assets, an auditor most tkely would review or recompute amortization and determine whether the amortization period is reasonable in support of management's financial stetement assertion of A. Valuation, C. Existence B. Completeness. D. RightsSITUATION 5 You were able to gather the following from the Décember 31, 2020 trisl balance of Santiago Corporation in connection with your audit of the company: Cash on hand P 372,000 Petty cash fund 10,000 BPI current account 950,000 Security Gank current account No.0i 1,280,000 Security Bank current account No.02 (40,000) PNB savings account 500,000 PNB time deposit 300,000 Cash on hand includes the following items: 3. Customer's check for 60,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently redeposited and cleared by the bank on January 8, 2021, b, Customer's check for P30,000 dated January 2, 2021, received on December 25, 2020. ¢. Postal money orders received from 36,000, customers, The petty cash fund consisted of the following items as of December 31, 2020, Currency and coins P 2,100 Employees’ vales 1,600 Currency in an envelope marked “collections for charity” with names attached 1,200 Unreplenished petty cash vouchers 800 Check drawn by Santiago Corporation, payable to the petty cashier 4,600 P10,300 Included among the checks drawn by Santiago Corporation against the BPY current account and recorded in December 2020 are the following: a. Check written and dated December 29, 2020 and delivered to payee on January 2, 2021, P50,000. b. Check written on December 27, 2020, dated January 2, 2021, delivered to payee on December 23, 2020, BG, 000. ‘The credit balance in the Security Bank current account No. 2 represents checks drawn in excess of the deposit balance. These checks were still eutstanding at December 31, 2020. ‘The savings account deposit in PNB has been set aside by the board of directors for acquisition of new equipment. This account is expected to be disbursed in the next 3 manths from the balance sheet date. QUESTIONS. Based on the above and the result of your audit, compute for the adjusted balances of following 21. Cash on hand A. P282,000 c. Pa0g,000 B. P246,000 D, P342,000 22. Petty cash fund AL 6,700 c. P 2,100 B. P9,100 D. 10,000 BPI current account A. 1,086,000 C. P1,000,000 B, P 914,000 D, P 950,000 24. Cash and cash equivalents A. 2,914,700 Cc. P2,614,700 B. P2,954,700 D. P3,414,700, 25. Which of the following balance-related audit objectives typically is assessed as having hish Inherent risk for cash? ‘A. Presentation and disclosure B. Valuation <. Cutoff D. Existence SITUATION 6 The Cavite Corp. sells direct to retall customers and also to wholesalers. Accounts receivable and an allowance for bad debts are maintained separately for each division, On January 1, 2020 the balance of the retail accounts receivable wes ?209,000 while the bad debts with respect to retail customers was a credit of P7,600, The following summary pertains only to retail sales since 2017: Bad Debts Bad Debts Credit Sales Written Off Recoveries, 2017 -P1,110,000 26,000 P2,150 2018 4,225,000 23,500 3,750 2019 1,465,000 30,000 3,600 2020 1,500,000 31,000 4,200 Bad debts are provided for as @ percentage of credit saies. The accountant caiculates the percentage annually by using the experience of the three years prior to the current year. The formula is bad debts written off less recoveries expressed as 2 percentage of the credit sales for the same period. Cash receipts In 2020 from credit sales to retall customers was 1,380,200.QUESTIONS: Based on the above and the result of your audit, answer the following: 26. The percentage to be used to compute the allawance for bad debts on December 31, 2020 Is AL 1% ic B, 19% D 2% 3% 27, For 2020, the pravision for bad debts with respect to credit sales |s AL P28,802 c. P30,000 B, P45,000 DB. P57,604 28. The ledger balance of the accounts receivable after necessary adjustments on December 31, 2020 was 2 debit of A, P275,396 ¢. P303,000 8. P288,000 D. P297;800, The ledger balance of the allowance for bad debts after necessary adjustments an December 31, 2020 Was a credit of A. 10,800 c. P25,800 B, P 6,600 BD. P31,800 30. All of the following are exemples of substantive tests to verify valuation of net accounts receivable except the A. Re-comautatian of the allowance for bad debts, B, Inspection of the aging schedule and credit records of past due accounts, C. Comparison of the allowance far bad debts with past records. D, Inspection of accounts for current versus non- current status in the statement of financial Position, & SITUATION 7 Laguna Corporation's accounting records included the following investments: Investment in Ordinary Shares 11/8 1,000,000 | 7/1/20 PBOO,000 42/31/18 200,000 12/31/19 300,000 Investment in Bonds a/i720 PL,051,510 During the course of your audit, you neted the following. Investment in Ordinary Shares + The investment Is not designated at FVTOCI. + Acquired on January 1, 2018 at 950,000 plus transaction costs of 50,000. + On July 1, 2020, the entity sold half of the Investment for its fair value of P800,000. + Fair value of the investment: December 31, 2018, 1,200,000, December 31, 2019, 2,500,000; December 31, 2020, 800,000, Investment in Bonds + The entity uses the ‘held for collection’ business mode! for acquired and ariginated debt instruments. + P1,000,000, 10% bonds, purchased for F1,051,510 Including transaction costs of P20,000. Interest Is payable annually every December 31, The bonds mature on December 31, 2022.. + The prevailing market rate for the bonds | 9% at December 31, 2020. Questions: Based on the above and the result of your audit, answer the following: AL. The carrying amount of Investment in Ordinary ‘Shares as of December 31, 2020 Is misstated by A, P200,000 over €. P50,000 aver 'B. P200,000 under D. PS0,000 under 32. The effective interest rate on Investment in Bonds |s A 7% C. 9% B, B% D, 10% 33. The carrying amount of Investment in Bonds as of December 31, 2020 is averstated by A. P13,900 c. P1a,020 B, PL5,880 BD, p33,900 34. The net amount to be recognized in 2620 profit or loss related to these Investments is AL P3B4,121 c P134,121 B, P2B4,121. D, ping,121 35. Whien statement is correct regarding audit of investment securities? Ac An auditor's audit ebjectve is to determine whether the securities are authentic. 'B, Examination of paid checks issued in payment of securities purchased is the mest effective procedure to verify existence. €, In performing tests of the carrying amount of investments in equity securities, the auditar would usually refer to the quoted market prices of the securities. D. Ifa client has @ large and active investment portfalio that is keat in a Hank safe-deposit box and the auditor Is unable to count the securities at the end of the resorting period, the auditer mast likely will request the bank to confirm to the auditor the contents of the safe deposit box at the end of the reporting periodSITUATION 8 Cebu Music Emporium carries a wide variety of music promatian techniques ~ warranties and premiums = to attract customers, Musical instrument and sound equipment are sold In a one-year warranty for replacement of parts and labor. The estimated warranty cost, based on past experience, © 2% of sales. The premium Is offered on the recorded and sheet music. Customers receive 2 coupon for each peso spent an recorded music or sheet music. Customers may exchange 200 coupons and P20 for an AM/FM radio. Cebu pays P34 for each radio and estimates that 60% of the coupons given to customers will be receemec, Cebu's total sales for 2020 were P7,200,000 - PS,400,000 from musical Instrument and’ sound repreductian equipment and 1,800,000 from recorded music and sheet music. Replacement parts and labor for warranty Work totaled P164,000 curing 2020. A total of 6,500 AM/FM radio used in the premium program were purchased curing the year and there were 1,200,000 coupons redeemed in 2020. SITUATION 9 ‘The acerual method Is used by Cebu to account for the warranty and premium costs for financial reporting purposes. The balance in the accounts related to warranties and premiums on January 1, 2020, were as shawn below: Inventory of Premium AM/FM radio 39,950 Estimates Premium Claims Outstanding 43,800 Estimates Liability from Warranties 136,000 Questions: Based on the above and the result of your audit, determine the amounts that will be shown on the 2020 Financial statements for the following: 36. Warranty expense A. P108,000 €. PL64,000 B. Pise,000 D. 80,000 37, Estimated fiability from warranties A. P108,000 C. P136,000 B. Pi64,000 D. P80,000 38, Premium expense AP 75,600 . p108,000 B. P1B3/600 D. P126,000 39, Inventory of AM/FM radio ®. P46,950 c. P77,350 B. P39,950 D. P56,950 40, Estimated liability for premiums. AL 75,600 c. P63,450 B. P36,400 D. P4s,800 CDO Corporation was organized on January 1, 2018, and began operations immeciately. Unfortunately, the company hired an incompetent bookkeeper. For the years 2018 through 2020, the bookkeeper presented an annual balance ‘sheet that reparted only one amount for shareholders’ equity. Also, the condensed income statement reported as follows: 2018, net loss, P275,000; 2018, net profit, P220,000; and 2020, net profit, P410,000. The president has recommended to the board of directors that a cash dividend of P4S0,000 he deciared and paid during January 2021. The outside director on the board has objected on the basis that the company’s financial statements contain major errors (there has never been an audit). You have been engaged to clarify the situation. ‘The single shareholders’ equity account, provided by the bookkeeper, appeared as follows Shareholders! Equity 2018 Share issue costs P 15,000] 2018 Ordinary shares, par PS 2018 Net loss 175,000 200,000 shares issued P1,600,000 2019 Bought 10,000 shares from an unhappy 2019 Net profit (including PL00,000 -sharenolder X 70,000 land write-up based on president's estimate) 220,000 Depreciation expense 2019 Ordinary shares, 2,000 (2018, P15,000; 2039, P17,000; 2020, shares issued 18,000 P23,000) 55,000 Miscellaneous expenses* 2020 © Sold 5,000 of X's shares 27,000 (2018, P20,000; 2019, P25,000; 2020, 5,000) 50,000 2020 Cash loan to the company president 200,000 | 2020 Net profit 410,000 P565,000 2,275,000 * Recorded as expense but nat shown on the income statement.QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of following as af December 31, 2020; 41. Share capitat A, P 985,000 cc. P1,603,000 B. P2,020,000 D. P2,618,000 42, Share premium A. 593,000 c. P801,000 B. PS95,000 DB. Ps08,000 43, Retained earnings A. P342,000 c. P242,000 B. P250,000 DB. 227,000 44, Total equity A. P1,980,000 ¢. P2,810,000 B. P1,696,000 DB. 3,710,000 45, An auditor usually obtains evidence of sharenolders’ equity transactions by reviewing the entity’s A. Canceled stock certificates. » Transfer agent's recards, C. Treasury stock certificate book. D. Minutes of board of cirecters meetings. ‘SITUATION 10 The following financial statements are for Naga Company. Naga Company Comparative Statements of Financial Position December 31, 2020 and 2019 2020 2019 Assets Cash P4000 P 3,400 ‘Accounts receivable 25,000 28,000 Inventory 30,000 34,000 Prepaid genera! expenses 5,700 5,000 Properly, plant, and equipment 305,000 320,000 Accumulated depreciation (203,500) . (128,900) Patent 36,000 49,000 Total assets 302,200 _ 293,500 Liabilities and Equity Accounts Payable P 25,000 P 22,000 ‘Wages Payable 22,000 20,300 ‘Interest Payable 2,800 © 4,000 Dividends Payable 44,000 - Income taxes Payable 3,800 3,200 ‘Bonds Payable 100,000 120,000 Share capital 50,000 50,000 Retained Earnings = __84,000_ Total Liabilities ang Shareholders’ Equity 302,200 _ 293,500 Naga Company Statement af Cash Flaws For the Year Ended December 31, 2020 Cash flows from operating activities; Cash collected from customers Cash payments for: Inventory purchases General expenses Wages expense Interest expense Income tax expense Net cash provided by ‘operating activities Cash flaws from investing aetivities: Sale of property, plant, and ‘equipment Purchase of property, slant, ‘and equioment Net cash used in investing activities ‘Cash flows from financing activities: Retirement of bonds payable (23,000) Payment of dividends (42,000) _ Net cash used in finaneing activities (65,000 Net increase in cash P 600 Cash at the beginning of the year 3,490 Cash at the end ofthe year P__4,000 Consider the following additional information: {a} All accounts payable relate to inventory purchases. {b) Property, plant, and equipment sold nad an ariginal cost of P75,000 and a carrying amount of P22,000. 685,300 300,000 102,000 150,000 11,000 23,900 $86,900 P 98,400 P 27,200 (69,000) (32,800) QUESTIONS: Based on the foregoing, compute the following for the year ended December 32, 2020: 46. Cost of goods said A. #307,000 ¢. 298,000 B. 300,000 D. p293,000 47. Depreciation expense A. 727,600 . 53,000 B. 25,400 D. P78,400 48, Total operating expenses AL P282,400 €. P310,000 B. P284,600 ‘D, P335,400 49, Loss on retirement of bonds payable A. P 3,000 c. P23,000 B. 20,000 DP OO 50. Net Income A. 12,800 ¢. 40,800 B. P54,800 D. P68,800BeeNoMeeND S >owroo>nea SUGGESTED ANSWERS 11.8 21.A 31.3 41.8 12.C 22.A 32.8 42.4 13.4 23.4 33.8 43.C 14.¢ 24.0 34.8 44.C 15.B 25.D 35.C 45.D 16.C 26.C 36.4 46.A 17.B 22:6. 37.D 47.4 18.C 28.D 38.4 48.8 19.C 29.A 39.D 49.4 20.4 30.D 40.3 50.D