Auditing Problems: Investing Cycle

Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).

Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full year’s depreciation is charged in the year of acquisition and none in
the year of disposition.

Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a P 290,000 b. P 370,000 c. P 260,000 d. P 300,000

2 The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a P 37,000 b. P 29,000 c. P 30,000 d. P 26,000

Problem 2
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the other’s
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the
report and the companies records, the following information was obtained:

KAYA Co.’s Land MUYAN Co.’s Land

Cost (same as book value) P 800,000 P 500,000
Market value, per appraisal 1,000,000 900,000
The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.

Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a P 20,000 b. P 60,000 c. P 100,000 d. P 200,000

2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a P0 b. P 100,000 c. P 300,000 d. P 400,000

3. After the exchange, KAYA Company record its newly acquired land at:
a P 700,000 b. P 720,000 c. P 800,000 d. P 900,000

4. After the exchange, MUYAN Company record its newly acquired land at:
a P 1,000,000 b. P 900,000 c. P 600,000 d. P 500,000
 Auditing Problems: Investing Cycle

Problem 3
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.

Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.
No. of Salaries and Other expenses
Projects employees benefits (excluding dep’n.)
Completed projects with
long-term benefits 60 3,600,000 2,000,000
Abandoned projects that
benefit the current year 40 2,600,000 600,000
Projects in process – results
indeterminate 20 1,600,000 480,000

Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2003, and has an economic life of 10 years.

Questions
1 Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000 b. P 3,200,000 c. P 2,880,000 d. P 2,640,000

2 Carrying value of the building as of December 31, 2004 is:

a. P 5,320,000 b. P 10,640,000 c. P 10,080,000 d. P 0

3 Carrying value of the land as of December 31, 2004 is:

a. P 1,200,000 b. P 2,400,000 c. P 2,160,000 d. P 0

4 Research and development expense for 2004 is:

a. P 5,280,000 b. P 10,880,000 c. P 11,440,000 d. P 11,760,000

Problem 4
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.

Expenditures on the project were as follows:

January 3, 2003 P 500,000

March 31, 2003 600,000
June 30, 2003 800,000
October 31, 2003 600,000
January 31, 2004 300,000
 Auditing Problems: Investing Cycle

March 31, 2004 500,000

May 31, 2004 600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The company’s other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The company’s fiscal year end is December 31.

Questions
1 The interest capitalized at the end of December 31, 2003 is:
a P 113,100 b. P 145,000 c. P 150,000 d. P 200,000

2 The interest capitalized at the end of December 31, 2004 is:

a P 145,132 b. P 159,632 c. P 290,263 d. P 319,263

3 The total cost of the Building at December 31, 2004 is:

a P 3,535,132 b. P 4,190,131 c. P 4,480,263 d. P 4,535,263

4 The total interest expense at the end of December 31, 2003 is:
b P 780,000 b. P 635,000 c. P 630,000 d. P 560,000

5 The total interest expense at the end of December 31, 2004 is:
a P 460,737 b. P 489,737 c. P 620,368 d. P 634,868

Problem 5
The following information pertains to Marlisa Company’s delivery trucks:

Date Particulars Debit Credit

1/1/04 Trucks 1, 2, 3, & 4 3,200,000
3/15/05 Replacement of truck 3 tires 25,000
7/1/05 Truck 5 800,000
7/10/05 Reconditioning of truck 4, which was
damaged in a collision 35,000
9/1/05 Insurance recovery on truck 4 accident 33,000
10/1/05 Sale of truck 2 600,000
4/1/06 Truck 6 1,000,000 150,000
5/2/06 Repainting of truck 4 27,000
6/30/06 Truck 7 720,000
12/1/06 Cash received on lease of truck 7 22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT

Date Particulars Debit Credit

12/31/04 Depreciation expense 300,000
12/31/05 Depreciation expense 300,000
12/31/06 Depreciation expense 300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.
 Auditing Problems: Investing Cycle

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.

c. The depreciation rate is 20% by unit basis.

d. Unit cost of Trucks 1 to 4 is at P800,000 each.

Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000 b. P 430,000 c. P 510,000 d. P 560,000

2. The correct cost of truck 5 is

a. P 560,000 b. P 610,000 c. P 800,000 d. P 850,000

3. The book value of truck 5 at December 31, 2006 is

a. P 850,000 b. P 595,000 c. P 560,000 d. P 510,000

4. What is the loss in trade-in of Truck 1?

a. P 150,000 b. P 250,000 c. P 290,000 d. P 410,000

5. The correct cost of truck 6 is

a. P 590,000 b. P 800,000 c. P 850,000 d. P 1,000,000
6. The carrying value of Truck 6 at December 31, 2006 is
a. P 501,500 b. P 680,000 c. P 850,000 d. P 1,100,000

7. The gain (loss) on sale of truck 2 is

a P 80,000 b. P 331,600 c. P 495,000 d. P 496,200

8. The book value of truck 4 at December 31, 2006 is

a. P 320,000 b. P 331,600 c. P 495,000 d. P 496,200

9. The 2006 depreciation expense is understated by

a. P 92,000 b. P 252,000 c. P 292,000 d. P 372,000

10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance

11. Which of the following controls would most likely allow for a reduction in the scope of the
auditor’s tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors’ invoices by a designated employee who is
independent of the property receiving functions.
 Auditing Problems: Investing Cycle

Problem 6
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.06 Balance P 446,000 9.1.06 No. 6 sold P 9,000
6.1.06 No. 12 36,000 12.31.06 Balance 474,000
3 Dismantling
of No. 6 1,000 ______
P 483,000 P 483,000

ACCUMULATED DEPRECIATION – EQUIPMENT

12.31.06 Balance P 271,400 1.1.06 Balance P 224,000
______ 12.31.06 2006 Dep’n 47,400
P 271,400 P 271,400

The following are the details of the entries above:

1 The company depreciates equipment at 10% per year. The oldest equipment owned
is seven years old as of December 31, 2006.

2 The following adjusted balances appeared on your last year’s working papers:

Equipment P 446,000
Accumulated depreciation 224,000
3 Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.

4 Included in charges to the Repairs Expense account was an invoice covering

installation of Machine No. 12 in the amount of P2,500.

5 It is the company’s practice to take a full year’s depreciation in the year of

acquisition and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
a P 1,000 b. P 500 c. P (1,000) d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:

a P 446,000 b. P 452,000 c. P 454,500 d. P 475,500

3. The Depreciation expense – Equipment of TRIUMPH CORPORATION at December 31,

2006 is:
a P 45,200 b. P 45,450 c. P 46,525 d. P 53,525

4. The entry to correct the sale of Machine 6 is:

a. Loss on sale of equipment 1,000
 Auditing Problems: Investing Cycle

Accumulated depreciation 21,000

Equipment 22,000

b. Accumulated depreciation 22,500

Equipment 22,000
Gain on sale 500
c. Accumulated depreciation 21,500
loss on sale of equipment 500
Equipment 22,000
d. Accumulated depreciation 23,000
Equipment 22,000
Gain on sale of equipment 1,000

5. The Depreciation Expense at December 31, 2006 is:

a. Overstated by P6,125 c. Understated by P1,950
b. Understated by P6,125 d. Overstated by P1,950

Problem 7
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:

Land P 100,000
Leasehold improvements 190,000
Equipment 450,000
Total per WBS P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.

In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.

You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.

At present, Crame Corporation’s office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.

Questions
1. The adjusted cost of land amounted to:
a P 528,000 b. P 510,000 c. P 500,000 d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:
a P 190,000 b. P 183,000 c. P 180,500 d. P 180,000
 Auditing Problems: Investing Cycle

3 Audit adjustments will increase depreciation/amortization expense by:

a P 38,000 b. P 24,000 c. P 14,000 d. P 13,500

4. Loss due to impairment in value amounted to:

a P 30,000 b. P 28,000 c. P 24,000 d. P 20,000

Problem 8
You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior year’s audit working
papers.

Rabago Manufacturing Corporation

Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST
Final Per Books
12/31/03 Additions Retirements 12/31/04
Land P 450,000 P 100,000 P P 550,000
Buildings 2,400,000 350,000 2,750,000
Machinery/Equip 2,770,000 808,000 520,000 3,526,000
P 5,620,000 P1,258,000 P 520,000 P 6,826,000

ACCUMULATED DEPRECIATION
Final Per Books
12/31/03 Additions Retirements 12/31/04

Buildings P 1,200,000 P 103,000 P 1,303,000

Machinery/Equip 546,500 313,600 860,100
P 1,746,200 P 416,600 P 2,163,100

Further investigation revealed the following:

a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building – 25 years, all other items 10 years.

b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.

c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.

d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
2004. The expenditure was charged to land.
 Auditing Problems: Investing Cycle

e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
recorded depreciation expense of P72,000 on this machine in 2004.

f. Mr. Rabago, the company’s president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began
operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.

Questions
1. The balance of rent expense as of December 31, 2004 is:
a P0 b. P 25,000 c. P 75,000 d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is:

a. P 0 b. P 25,000 c. P 75,000 d. P 100,000

3. The life of the building wing is

a 25 years b. 11 years c. 12 years d. 13 years

4. The carrying value of the building as of December 31, 2004 is

a P 1,447,000 b. P 1,816,250 c. P 1,820,250 d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a P 450,000 b. P 545,000 c. P 650,000 d. P 750,000

6. The loss on the disposal of the machinery sold for P520,000 is

a P0 b. P 30,000 c. P 56,000 d. P 152,000

Problem 9
Siacor Inc. acquired 30% of Lozano Co.’s voting stock for P200,000 on January 2, 2007.
Siacor’s 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozano’s operating and financial policies. During 2007, Lozano earned P80,000 and paid
dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June
30, 2008, and P200,000 for the year ended December 31, 2008. On July 1, 2008, Siacor
sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on
October 1, 2008.

1. Before income taxes, what amount should Siacor include in its 2007 income statements
as a result of investment?
a. P15,000 b. P24,000 c. P50,000 d. P80,000

2. In Siacor’s December 31, 2007 balance sheet, what should be the carrying amount of
this investment?
a. P200,000 b. P209,000 c. P224,000 d. P230,000

3. In its 2008 income statement, what amount should Siacor report as gain from the sale of
half of its investment?
a. P24,500 b. P30,500 c. P35,000 d. P45,500
 Auditing Problems: Investing Cycle

Problem 10
In connection with your audit of the financial statement of the William Company for the year
2007, the following investment in stock and dividend income accounts were presented to
you:
Investment in Stock
Debit Credit
June 18, 2006 10,000 shares common par
value P50, Samson Company 390,000
April 30, 2007 5,000 shares Samson Company
received as stock dividend 250,000
May 20, 2007 Sold 5,000 shares @ P25 125,000
Dec. 10, 2007 Sold 2,000 shares @ P60 120,000

Dividend Income
April 30, 2007 Stock dividend 250,000
Nov. 30, 2007 Samson Company common 50,000

The following information was obtained during your examination:

1. The balance in the investment in stock account at December 31, 2006 per your last
year‘s working papers, was P390,000.

2. From independent sources, you determine the following dividend information:

Type of Date Date of Date of

Dividend Declared Record Payment Rate
Stock March 15, 2007 April 1, 2007 April 30, 2007 50%
Cash Nov. 1, 2007 Nov. 15, 2007 Nov. 28, 2007 P5/share
Cash Dec. 1, 2007 Dec. 15, 2007 Jan. 2, 2008 20%

3. Closing market quotation as at December 31, 2007:

Bid Asked
Samson Company common 13¾ 16½

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

1. How much is the gain (loss) on the May 20, 2007 sale?
a. P (70,000) b. P (5,000) c. P 5,000 d. P 0

2. How much is the gain on the December 10, 2007 sale?

a P 68,000 b. P 48,000 c. P 42,000 d. P 0

3. How much is the total dividend income for the year 2007?
a. P 400,000 b. P 300,000 c. P 150,000 d. P 50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007?
a. P 208,000 b. P 145,000 c. P 117,000 d. P 110,000
 Auditing Problems: Investing Cycle

5. How much is the Allowance for Unrealized loss as of December 31, 2007?
a. P 98,000 b. P 35,000 c. P 7,000 d. P 0

Problem 11
Macky Corporation’s accounting records showed the following investment at January 1,
2007:
Common stock
Johny Corp (1,000 shares) P 10,000
Sony Corp (5,000 shares) 100,000
Real estate:
Parking lot (leased to Ruel Co.) 300,000
Other:
Trademark (at cost, less accumulated amortization 25,000
Total investment P435,000

Macky owns 1% of Johny and 30% of Sony. Maky’s directors constitute a majority of Sony’s
directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an
annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable
deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of
the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1 (for sales in July though
December of the prior year), and on September 1 for the sales in January through June of
the same year).

During the year ended December 31, 2007, Macky received cash dividends of P1,000 from
Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000
respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties
from Nappy:
March 1 September 1
2006 P3,000 P5,000
2007 4,000 7,000

Nappy estimated that sales of the trademark items would total to P20,000 for the last half
of 2007.

Questions

1 In Macky’s 2007 income statement, how much should be reported for royalty revenue?
a. P 14,000 b. P 13,000 c. P 11,000 d. P 9,000

2 In Macky’s 2007 income statement, how much should be reported for rental revenue?
a. P 43,000 b. P 48,000 c. P 53,000 d. P 53,800

3. In Macky’s 2007 income statement, how much should be reported as the total
investment income?
a. P 63,000 b. P 78,000 c. P 108,000 d. P 111,000
 Auditing Problems: Investing Cycle

Problem 12
The INVESTMENT account, as of December 31, 2007, appearing in the records JOY
CORPORATION is as follows:

Date Particular Debit Credit

January 1 Balance 188,300
January 31 Sold Ventanilla Stock 21,364
March 31 Bought Don Dave Common 12,125
June 30 Dividend on Suson Common 10,000
July 31 Sold Suson Common 8,750
August 31 Sold Jasmin bonds 22,083
September 30 Interest on Sucuahi Mortgage 500

The audit working papers of the preceding year show that the account balances as of
January 1, 2007, consisted of the following:

Ventanilla Company – Common

1,000 shares, purchased in June 1997 at P20 per share, P20,000.
2,000 shares, purchased in August 1999 at P16 per share, P32,000.
1,500 shares, purchased in May 2002 at P22 per share, P33,000

Don Dave Company – Common

2,000 shares. Purchased in January 2003 at P33 per share, P66,000

Suson Company – Common

100 shares purchased in August 2003 at P73 per share, P7,300

Jasmin Company 5% bonds

2 bonds, P10,000 each purchased in July 2001 at par, P20,000
(Interest dates February 1 and August 1).

Sucuahi Company chattel mortgage on machinery

5, P10,000 mortgage taken in September 2004 in settlement of a receivable,
P10,000

Your examination discloses the following information:

2 In January 2007, 1,000 shares of the Ventanilla company common stock purchased in
May 2002 were sold for P21,364 net.

3 In March 2007, 500 shares of Don Dave common stock were purchased at P24 per
share plus brokerage, for P12,125.

4 In June 2007, the Suson Company paid a 100% stock dividend on common.
 Auditing Problems: Investing Cycle

5 In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100 shares of
Suson common stock, for which the president gave his check for P8,750 and a letter in
which he agreed to pay the balance upon demand of the treasurer of JOY
CORPORATION.

6 On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued
interest.

7 In September 2007, JOY CORPORATION received one year interest on the P10,000
chattel mortgage of Sucuahi.

Question
1 The adjusted balance of Gain or Loss of Sale/Redemption on Investment at December
31, 2007 is:
a. P 8,214 b. P 10,214 c. P 10,850 d. P 10,714

2 The adjusted balance of Investment at December 31, 2007 is:

a. P 157,728 b. P 155,411 c. P 154,775 d. P 152,692

3 The Investment at December 31, 2007 is:

a. Overstated by P 2,953 c. Overstated by P5,036
b. Overstated by P 2,317 d. Overstated by P3,056

4. Investment in Ventanilla Company common stock at year-end is:

a. P 65,000 b. P 63,000 c. P 63,636 d. P 52,000

5. Investment in Don Dave Company common stock at year-end is:

a. P 78,125 b. P 66,000 c. P 61,625 d. P 49,500

6. Investment in Suson Company common stock at year-end is:

a. P 7,300 b. P 3,650 c. P 2,500 d. P 1,450