FEU DILIMAN

BSA 31
AUDITING PROBLEMS

Name: ________________________________________ Date: ____________________

DIAGNOSTIC EXAMINATION

PROBLEM NO. 1

Presented below are unrelated situations.

HARLINGTON COMPANY buys and sells securities expecting to earn profits on short-term
differences in price. During 2016, Harlington Company purchased the following trading
securities:
Fair Value
Security Cost Dec. 31, 2016
A P 585,000 P 675,000
B 900,000 486,000
C 1,980,000 2,034,000

Before any adjustments related to these trading securities, Harlington Company had net
income of P2,700,000.

1. What is Harlington’s net income after making any necessary trading security adjustments?
A. P2,430,000 B. P2,286,000 C. P2,934,000 D. P2,700,000

2. What would Harlington’s net income be if the fair value of security B were P855,000?
A. P2,601,000 B. P2,799,000 C. P2,700,000 D. P2,655,000

LABADA CO.’s portfolio of trading securities includes the following on December 31, 2015:

Cost Fair Value

15,000 ordinary shares of Camias Co. P1,431,000 P1,251,000
30,000 ordinary shares of Ganda Co. 1,638,000 1,710,000
P3,069,000 P2,961,000

All of the above securities have been purchased in 2015. In 2016, Labada Co. completed the
following securities transactions:

Mar. 1 Sold 15,000 shares of Camias Co. ordinary shares at P93, less brokerage commission
of P13,500.

April 1 Bought 1,800 ordinary shares of Waston, Inc. at P135 plus commission, taxes, and
other transaction costs of P4,950.

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 The Labada Co. portfolio of trading securities appeared as follows on December 31, 2016:
Cost Fair Value
30,000 ordinary shares of Ganda Co. P1,638,000 P1,740,000 1
1,800 ordinary shares of Waston, Inc. 247,950 225,000 2
P1,885,950 P1,965,000
1 Net of P19,500 estimated transaction costs that would be incurred on the sale of the
securities.
2 Net of P4,500 estimated transaction costs that would be incurred on the sale of the securities.

3. What amount of unrealized gain on these securities should be reported in the 2016 income
statement?
A. P31,050 B. P79,050 C. P84,000 D. P36,000

4. What is the gain on the sale of Camias Co. ordinary shares on March 1, 2016?
A. P144,000 B. P27,000 C. P130,500 D. P13,500

5. What amount should be reported as trading securities in Labada’s statement of financial

position on December 31, 2016?
A. P1,965,000 B. P1,989,000 C. P1,885,950 D. P1,909,950

PROBLEM NO. 2

To substantiate the existence of the accounts receivable balances as at December 31, 2015 of
LUKAS COMPANY, you have decided to send confirmation requests to customers. Below is a
summary of the confirmation replies together with the exceptions and audit findings. Gross
profit on sales is 20%. The company is under the perpetual inventory method.

Name of Balance Comments

Customer Per Books From Customers Audit Findings
Concordia P150,000 P90,000 was returned on December 30, Returned goods were
2015. Correct balance as is P60,000. received December 31,
2015.
Falcon P30,000 Your CM representing price adjustment The CM was taken up by
dated December 28, 2015 cancels this. Lukas Company in 2016.
Lazaro P144,000 You have overpriced us by P150. The complaint is valid.
Correct price should be P300.
Silang P112,500 We received the goods only on January Term is shipping point.
6, 2016. Shipped in 2015.
Yakal P135,000 Balance was offset by our December Lukas Company credited
shipment of your raw materials. accounts payable for
P135,000 to record
purchases. Yakal is a
supplier.

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6. If the necessary adjusting journal entry is made regarding the case of Concordia, the net
income will
A. Decrease by P18,000. C. Increase by P18,000.
B. Decrease by P90,000. D. Increase by P90,000.

7. The effect on 2015 net income of Lukas Company of its failure to record the CM involving
transaction with Falcon:
A. P30,000 over. C. P6,000 over.
B. P30,000 under. D. P6,000 under.

8. The overstatement of receivable from Lazaro is

A. P96,000 B. P24,000 C. P72,000 D. P48,000

9. The accounts receivable from Silang is

A. Correctly stated. C. P112,500 under.
B. P112,500 over. D. P225,000 under.

10. The adjusting entry to correct the receivable from Yakal is

A. Purchases 135,000
Accounts receivable 135,000
B. Accounts payable 135,000
Purchases 135,000
C. Accounts receivable 135,000
Accounts payable 135,000
D. Accounts payable 135,000
Accounts receivable 135,000

PROBLEM NO. 3

A portion of the SPARK COMPANY’s statement of financial position appears as follows:

December 31, 2015 December 31, 2014

Assets:
Cash P353,300 P100,000
Notes receivable 0 25,000
Inventory ? 199,875
Liabilities:
Accounts payable ? 75,000

Spark Company pays for all operating expenses with cash and purchases all inventory on credit.
During 2015, cash totaling P471,700 was paid on accounts payable. Operating expenses for 2015
totaled P220,000. All sales are cash sales. The inventory was restocked by purchasing 1,500 units
per month and valued by using periodic FIFO. The unit cost of inventory was P32.60 during
January 2015 and increased P0.10 per month during the year. Spark sells only one product. All
sales are made for P50 per unit. The ending inventory for 2014 was valued at P32.50 per unit.

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Based on the preceding information, compute the following:

11. Number of units sold during 2015

A. 7,066 B. 18,400 C. 4,268 D. 13,400

12. Accounts payable balance at December 31, 2015

A. P190,100 B. P50,000 C. P199,100 D. P200,000

13. Inventory quantity on December 31, 2015

A. 5,750 B. 2,750 C. 17,084 D. 10,750

14. Cost of inventory on December 31, 2015

A. P187,450 B. P186,875 C. P192,950 D. P189,660

15. Cost of goods sold for the year ended December 31, 2015
A. P609,125 B. P609,700 C. P606,915 D. P603,625

PROBLEM NO. 4

The following are items that could be included in the Intangible Assets:

1. Investment in a subsidiary company P1,500,000

2. Timberland 2,000,000
3. Cost of engineering activity required to advance the design 120,000
of product to the manufacturing stage
4. Lease prepayments (6 months’ rent paid in advance) 60,000
5. Cost of equipment obtained under finance lease 700,000
6. Internally generated publishing title 230,000
7. Costs incurred in the formation of the corporation 90,000
8. Operating losses incurred in the start-up of the business 560,000
9. Training costs incurred in the start-up operations 80,000
10. Purchase of a franchise 1,200,000
11. Goodwill internally generated 300,000
12. Cost of testing in search for product alternatives 65,0000
13. Goodwill acquired in the purchase of a business 640,000
14. Cost of developing a patent 140,000
15. Cost of purchasing a patent from an inventor 500,000
16. Legal costs incurred in securing a patent 70,000
17. Costs of a successful legal suit to protect the patent 230,000
18. Costs of conceptual formulation of possible product 160,000
alternatives
19. Cost of purchasing a copyright 900,000
20. Research and development costs 340,000
21. Long-term receivables 310,000
22. Cost of developing a trademark 61,000

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 23. Cost of purchasing a trademark 290,000
24. Computer software for a computer-controlled machine that 130,000
cannot operate without that specific software
25. Operating system of a computer 10,000

16. How much could be recognized as Intangible Assets?

a. P3,600,000 c. P5,830,000
b. P3,740,000 d. P3,530,000

PROBLEM NO. 5

In connection with your audit of the Cabuyao Corporation, you noted the following transactions
during 2010:

Jan. 2 Paid legal fees of P450,000 and stock certificate costs of P249,000 to complete
organization of the corporation.

15 Hired a clown to stand in front of the corporate office for 2 weeks and hound out
pamphlets and candy to create goodwill for the new entity. Clown cost, P30,000;
pamphlets and candy, P15,000.

Apr. 1 Patented a newly developed process with costs as follows:

Legal fees to obtain patent P1,287,000
Patent application and licensing fees 190,500
Total P1,477,500

It is estimated that in 6 years, other companies will have developed improved

processes, making the Cabuyao Corporation process obsolete.

May 1 Acquired both a license to use a special type of container and a distinctive
trademark to be printed on the container in exchange for 18,000 shares of
Cabuyao’s no-par ordinary shares selling for P50 per share. The license is worth
twice as much as the trademark, both of which may be used for 6 years.

July 1 Constructed a shed for P3,930,000 to house prototypes of experimental models to

be developed in future research projects.

Dec 31 Incurred salaries for an engineer and chemist involved in product development
totaling P750,000 in 2010.

It is the company’s policy to take full year amortization in the year of acquisition.

Based on the above and the result of your audit, determine the following:

17. Cost of the patent

c. P1,477,500 c. P1,287,000
d. P 190,500 d. P 0

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 18. Cost of licenses
e. P450,000 c. P600,000
f. P300,000 d. P 0

19. Cost of trademark

g. P1,477,500 c. P1,287,000
h. P 190,500 d. P 0

20. Carrying amount of Intangible Assets as of December 31, 2010

i. P2,031,250 c. P1,981,250
j. P2,026,250 d. P 0

21. Total amount resulting from the foregoing transactions that should be expensed when
incurred
k. P2,971,500 c. P5,424,000
l. P1,494,000 d. P 0

PROBLEM NO. 6

MINA MINING CO. has acquired a tract of mineral land for P50, 000,000. Mina Mining estimates
that the acquired property will yield 150,000 tons of ore with sufficient mineral content to make
mining and processing profitable. It further estimates that 7,500 tons of ore will be mined the first
and last year and 15,000 tons every year in between. (Assume 11 years of mining operations.)
The land will have a residual value of P1, 550,000.

Mina Mining builds necessary structures and sheds on the site at a total cost of P12, 000,000. 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 second-hand at a total cost of P3, 600,000.
The machinery cost the former owner P9, 000,000 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.

22. What are the estimated depletion and depreciation charges for the 1st year?
Depletion Depreciation
A. P4,845,000 P870,000
B. P4,845,000 P780,000
C. P2,422,500 P870,000
D. P2,422,500 P780,000

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 23. What are the estimated depletion and depreciation charges for the 5th year?
Depletion Depreciation
A. P2,422,500 P1,740,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

24. What are the estimated depletion and depreciation charges for the 6th year?
Depletion Depreciation
A. P2,422,500 P1,560,000
B. P2,422,500 P1,740,000
C. P4,845,000 P1,560,000
D. P4,845,000 P1,740,000

25. What are the estimated depletion and depreciation charges for the 7th year?
Depletion Depreciation
A. P2,422,500 P1,380,000
B. P2,422,500 P1,560,000
C. P4,845,000 P1,380,000
D. P4,845,000 P1,560,000

26. What are the estimated depletion and depreciation charges for the 11th year?
Depletion Depreciation
A. P4,845,000 P1,380,000
B. P4,845,000 P690,000
C. P2,422,500 P1,380,000
D. P2,422,500 P690,000

PROBLEM NO. 7

Included in MORGAN Corporation’s liability account balances at December 31, 2014 were the
following:

Note payable, bank P 2,800,000

Liability Under Finance Lease 430,000
Deferred income taxes 360,000

Transactions during 2015 and other information relating to MORGAN’s liabilities were as
follows:

1. The principal amount of the note payable is P2, 800, 000 and bears interest at 15%. The
note is dated April 1, 2014 and is payable in four equal installments of P700,000 beginning
April 1, 2015. The first principal and interest payment was made on April 1, 2015.
2. The capitalized lease is for ten-year period beginning December 31, 2012. Equal annual
payments of P100, 000 are due December 31 of each year, and the 14% interest rate implicit

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 in the lease is known by MORGAN. The present value at December 31, 2014, of the seven
remaining lease payments (due December 31, 2015 through December 31, 2017)
discounted at14% was P430, 000.
3. Deferred income taxes are provided in recognition of timing differences between financial
statement and income tax reporting of depreciation. For the year ended December 31, 2015
depreciation per tax return exceeded book depreciation by P90, 000. MORGAN’s effective
income rate for 2015 was 40%.
4. On July 1, 2015, MORGAN issued for P1774, 000, P2000,000 face amount of its 10%, P1000
bonds. The bonds were issued to yield 12%. The bonds are dated July 1, 2015 and mature
on July 1, 2020. Interest is payable annually on July 1. Morgan uses the interest method to
amortize bond discount.

Compute for the following as of December 31, 2015:

A B C D
2. Long-term liabilities 3,921,268 3,525,268 3,885,268 3,966,640
3. Current Portion of
1,081,622 754,372 745,372 700,000
Long-Term Liabilities

4. Accrued Interest Payable 100,000 336,250 286,250 436,250

5. Interest Expense 401,450 547,690 543,890 507,890

PROBLEM NO. 8

You were engaged to audit the financial statements of FELIX Company for the year ended
December 31, 2015. During the course of the audit, you obtained the following information about
the Company’s liabilities outstanding at December 31, 2015.

1. At December 31, 2015, FELIX Company has an obligation to its suppliers for the purchase
of raw materials amounting to P128,500.
2. At the end of 2015, the company was in breach of a loan covenants in respect of a P600,000
long term loan from a bank that is otherwise repayable three years after. A review of
subsequent events disclosed that before the financial statements were approved for issue,
the bank formally agreed not to demand early repayment of the loan.
3. On 1 January 2015 FELIX issued 1,000 of its P1,000 bonds for P1,000,000 in a private
transaction. On 1 January each year interest at the fixed rate of 5 percent per year is
payable on outstanding capital amount of the bonds. On 31 December each year, the entity
has a contractual obligation to redeem 100 of the bonds at P1,000 per bond.
4. At December 31, 2014, the carrying amount of an entity’s unfunded obligation for long-
service leave was P100,000, P40,000 of which employees are entitled to take as leave in the
twelve months following the end of the reporting period. The balance of P60,000 is in

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 respect of leave that employees are entitled to take only after the end if the next annual
reporting period. The entity anticipates that only 75 percent of its employees will take the
leave due during the next annual reporting period.

Required:

27. Compute the amount of current liability as of December 31, 2015.

A. P313,500
B. P903,500
C. P908,500
D. P303,500

28. Compute the amount of non-current liability as of December 31, 2015.

A. P1,470,000
B. P1,460,000
C. P870,000
D. P860,000