AUDITING PROBLEMS REVIEWERS / TESTBANKS Problem 1 The Christine Manufacturing, which started operations on September 1, 2008, is owned by Sheila Sheila Ltd Sheila Ltd!s accounts at "ecember "ecember #1 included the the following balances$
Machinery %at cost& (ccumulated depreciation ) machinery +ehicles %at cost purchased -o -o.ember 21 21, 20 2010& (ccumulated depreciation ) .ehicles Land %at cost purchased ctober 2, 2008& uil uildin ding %at cost purcha rchas sed ctober ber 2, 2008& (ccumulated depreciation ) building
'1,000 *8,200 */,800 1',// 81,000 18 18,320 28,/1*
"etails of machines owned at a t "ecember #1, 2011 are as follows$ Machine 1 2
4urchase "ate Cost useful Life 5esidual +alue ctober 3, 2008 4 *#,000 years 4 2,00 6ebruary *, 200' 4 *8,000 / years 4 #,000
Additional information: •
•
•
•
Sheila Ltd calculates depreciation to the nearest month and balances the records at month7end 5ecorded amounts are rounded to the nearest peso, and the reporting data is "ecember #1 Sheila Ltd uses straight7line depreciation for all depreciable assets ecept .ehicles, which are depreciated on the diminishing balance at *09 pa The .ehicles account balance reflects the total paid for two identical deli.ery .ehicles, each of which cost 42#,*00 n ac:uiring the land and building, building, Sheila Ltd estimated estimated the building!s building!s useful life and residual .alue at 20 years and 4,000, respecti.ely
The following transactions occurred from ;anuary 1, 2012 2012 ;anua anuary ry # oug ought ht a new new machi achine ne %mac %machi hine ne #& for for a cash cash pric price e of 43,0 3,000 00 6reight charges of 4**2 and installation of 41,38 were paid in cash The useful life and residual .alue were estimated at fi.e years and 4*,000, respecti.ely respecti.ely ;une ;une 22
oug ought ht a sec secon ond7 d7ha hand nd .eh .ehic icle le for for 41 41,2 ,200 00 cas cash h 5epa 5epain inti ting ng cos costt of 4/ and four new tires costing 4#* were paid for in cash
(ugust 28 <changed machine 1 for furniture that had a fair .alue of p12,00 at the the date of echan echange ge The The fair .alue .alue of machi machine ne 1 at the date date of echange echange was 411, 411,00 00 The office office furniture furniture originally originally cost 4#/,000 4#/,000 and, to the date of echange, had been depreciated by 42*,100 in the pre.iou pre.ious s owner!s boo=s boo=s Sheila Sheila Ltd estimate estimated d the office office furnitur furniture! e!s s useful life and residual .alue at 8 years and 4*0, respecti.ely "ecember #1
5ecorded depre eprec ciation 1
201# (pril #0
4aid for repairs and maintenance on the machinery at a cash cost of 4'28
May 2
Sold Sold one one of of the the .eh .ehic iclles bou bough ghtt on -o. -o.em embe berr 21, 21, 2010 2010 for for 4/, 4/,/0 /00 0 cash
;une ;une 2/
inst instal alle led d a fenc fence e arou around nd the the pro prope pert rty y at a cas cash h cost cost of of 4, 4,00 00 The fence has an estimated useful life of 10 years and >ero residual .alue
"ecember #1
5ecorded depre eprec ciation
?uestions$ 1
The The gai gain n on on ec echa hang nge e of of mac machi hine ne 1 on on (ugus ugustt 28, 28, 2012 2012 is a 4 1,22 b 4 '00 c 4 22 d 4 0
2
The The tot total al depr deprec ecia iattion ion ep epen ens se in in 201 2012 2 is is a 4 *3 *3,32 b 4 *3,#1 c 4 *3,*00
#
*
The The los loss s on on sal sale e of of .eh .ehic icle le on May May 2, 2, 201 201# # is is a 4 1,*# b 4 *3 c 4 18/
d 4 *3,1#1
d 4 0
The The tot total al depr deprec ecia iattion ion ep epen ens se in in 201 201# # is is a 4 #' #',1** b 4 #',01' c 4 #8,3**
d 4 #3,//2
( wea= wea=ne ness ss in inter nterna nall acc account ountin ing g cont contro roll o.er o.er rec recordi ording ng reti retire rem ment ents of e:uipment may cause the auditor to a @nspec @nspectt certain certain items items of e:uipmen e:uipmentt in the plant plant and trace trace those items items to the accounting records b 5e.iew the the subsidiary subsidiary ledger to ascertain ascertain whether whether depreciation depreciation was ta=en on each item of e:uipment during the year c Trace Trace additions additions to the Aother Aother assetsB assetsB account to search search for e:uipment e:uipment that is still on hand but no longer being used d Sel Select ect certain certain items items of e:uipment e:uipment from the accountin accounting g rec records ords and locate locate them in the plant
Problem 2 Mary ;oy Company Company constructs constructs its own own buildings buildings @n 200', a total of 41,228,00 41,228,00 interest was included as part of the cost of a new building ust being completed
The following is a summary of construction ependitures in 2010$ (ccumulated in 200', including capitali>ed interest March 1 September 1 "ecember #1 Total
18,228,00 3,000,000 *,000,000 ,000,000 #*,228,00
Mary ;oy has the following outstanding loans at "ecember #1, 2010$
2
129 note related directly to new building term, years from beginning of construction 410,000,000 Deneral orrowings$ 109 note issued prior to construction of new building term 10 years ,000,000 89 note issued prior to construction of new building term, years 10,000,000 ?uestions$ /
3
8
'
The capitali>ation rate is a 8,/39 b 109
c 129
d 89
The a.erage accumulated ependitures in 2010 is a 4 2,811,8#* b 4 2*,1//,//3 c 4 #*,228,00 2,#',1/3
d
4
The amount of a.oidable interest for 2010 is a 4 #,//,00 b 4 2,00,000 2,#*,3/1
c 4 2,3#',13
d
4
The amount of capitali>able interest in 2010 is a 4 2,00,000 b 4 2,#*,3/1 c 4 2,3#',13 1,200,000
d
4
d
4
10 The total cost of the new building is a 4 #,00,000 b 4 #/,328,00 23,8',1/3
c 4 #/,3/#,2/1
Problem 3 in 2001, Eonest Corporation ac:uired a sil.er mine in Mr "iwalwal ecause the mine is located deep in the Mr "iwalwal, Eonest was able to ac:uire the mine for the low price of 40,000 @n 2002, Eonest constructed a road to the sil.er mine costing 4,000,000 @mpro.ements to the mine made in 2002 cost 430,000 ecause of the impro.ements to the mine and the surrounding land, it is estimated that the mine can be sold for 4/00,000 when the mining acti.ities are complete
"uring 200#, fi.e buildings were constructed near the mine site to house the mine wor=ers and their families The total cost of the fi.e buildings was 41,00,000
3
@n 200/, 2 million tons of sil.er were mined and costs 41,100,000 were incurred at the beginning of the year for impro.ement to the mine ?uestions$ ased on the abo.e and the result of your audit, determine the following$ %round off depletion and depreciation rates to two decimal places& 11
"epletion for 200* a 4 ,0
b 4 /,#00
12 "epletion for 200 a 4 380,000 b 4 830,000 1,820,000 1# "epreciation for 200 a 4 180,000 b 4 210,000 1* "epletion for 200/ a 4 1,'0,000 2,*2,000
b 4 2,10,000
1 "epreciation for 200/ a 4 *0,000 b 4 2,000
c 4 /,00
d 3,20
c 4 1,#00,000
d
c 4 20,000
d 4 *'0,000
c 4 2,23,000
c 4 /2,000
4
d
4
d 1,22,000
Problem 4 (t the beginning of year 1, Charmaine Company grants share options to each of its 100 employees wor=ing in the sales department The share options will .ets at the end of year #, pro.ided that the employees remain in the entity!s employ, and pro.ided that the .olume of sales a particular product increases by at least an a.erage of percent per year @f the .olume of sales of the product increases by an a.erage of between percent and 10 percent per year, each employee will recei.e 100 share options @f the .olume of sales increases by an a.erage of between 10 percent and 1 percent each year, each employee will recei.e 200 share options @f the .olume of sales increases by an a.erage of 1 percent or more, each employee will recei.e #00 share options
n grant date, Charmaine Company estimates that the share options ha.e a fair .alue of 420 per option Charmaine Company also estimates that the .olume of sales of the product will increases by an a.erage of between 109 and 19 per year The Charmaine Company also estimates, on the basis of weighted a.erage probability that 1'9 of employees will lea.e before the end of year # y the end of year 1, se.en employees ha.e left and the entity still epects that a total of 1' employees will lea.e by the end of year # 4roduct sales ha.e increased by 129 and the entity epects this rate of increase to continue o.er the net 2 years y the end of year 2, a further si employees ha.e left The entity now epects only three more employees will lea.e during year # 4roduct sales ha.e increased by 189 The entity now epects that sales will a.erage 19 or more o.er the three7 year period y the end of year #, a further two employees ha.e left The entity!s sales ha.e increased by an a.erage of 1/9 o.er the # years 4
?uestions$ ased on the abo.e and the result of your audit, determine the following$ 1/ 1/ Comp Compen ensa sati tion on epe epens nse e in year ear 1 a 41 41/2,000 b 4108,000 c 412*,000 d 40 13 13 Comp Compen ensa sati tion on epe epens nse e in year ear 2 a 42 4228,000 b 42#2,000
c 422*,000
d 40
18 18 Shar Share e opt optio ions ns outs outsta tand ndin ing g end end of year ear 2 a 4# 4#*8,000 b 4#*0,000 c 4##/,000
d 40
1' 1' Comp Compen ensa sati tion on epe epens nse e in year ear # a 4 410,000 b 413*,000
d 40
20 a b c d
c 41/2,000
Fhich Fhich of the the follow following ing is is ordina ordinarily rily the best best e.idenc e.idence e of fair fair .alu .alueG eG 4ublished 4ublished price price :uotations :uotations in in an acti.e acti.e mar=et mar=et "iscou "iscounte nted d cash flow flow analysis analysis Compara Comparati. ti.e e transac transactio tion n model model @ntr @ntrin insi sic c .alu .alue e
Solution Year Year 1 –
100 Employees Year Year 2 (19) Employees to leave (19%) #1 #1 Employees to avail t$e option & 200 s$ares leave in Y" ' 1200 1200 s$ares s$ares t$e option & +20 fair value on date of ,rant + '2*000 & 1/' + 10#000 o ompensation epense
100 Employees ( ) !eave in Y" 1 ( ) !eave in Y" 2 ( ') Est employees to #* Employ Employees ees to avail avail '00 s$ares 2.200 s$ares 20 fair value on date da te of ,rant + .0*000
+
2/' '' ''00 000 0
otal tal
Epense Y" ' 100 employees ompensation epense in Y" 1 ( ) !eave in Y" 1 + 22#000 epense in Y" 2 ( ) !eave in Y" 2 ( 2) !eave in Y" ' #. Employees to avail t$e option & '00 s$ares 2..00 s$ares & +20 fair value on date of ,rant + .10000 otal ompensation Epense - ''000 ompensation epense in Yr 1 Y" 2 +1*000 ompensation epense in Y" ' Ans3er:
omp ompen ens satio ation n 10#000 ompensation
1# 4 19 a 20 5 21 4 22 a 5
Problem 5 Hou gather the following information pertaining to the stoc=holders! e:uity section of the Cleeneth Corporation in connection with your audit of the company!s financial statements for 200'$
Common stoc=, 41 par .alue authori>ed 1,00,000 shares @ssued 30,000 shares outstanding 300,000 shares 300,000 (dditional paid7in capita$ <cess of par 6rom treasury stoc= Total paid7in capital Inappropriated retained earnings Total stoc=holders! e:uity
4
3,000,000 100,000 4 3,800,000 *,00,000 411,80,000
(ll of the outstanding common stoc= and treasury stoc= were originally issued in 20002 for 411 per share The treasury stoc= is common stoc= reac:uired on March #1, 200* Cleeneth uses the par .alue method of accounting for treasury stoc= "uring 200', the following e.ents or transactions occurred relating to Cleeneth!s stoc=holders e:uity$ 6eb 12 @ssued 200,000 shares of unissued common stoc= for 4120 per share ;une 1 "eclared cash di.idend of 4020 per share to stoc=holders of record on (pril 1, 200' and payable on (pril 1, 200' This was the first di.idend e.er declared by Cleeneth Sept 20 Cleeneth!s president retired, Cleeneth purchased from the retiring president 0,000 shares of Cleeneth!s common stoc= for 41# per share, which was e:ual to mar=et .alue on this date This stoc= was cancelled "ec 1 "eclared a cash di.idend of 4020 per share to stoc=holders of record on ;anuary 2, 200/ and payable on ;anuary 1, 200/ Cleeneth is being by two separate parties for patent infringements Cleeneth management and outside legal counsel share the following opinions regarding to these suits Suit J1 J2
Li=elihood of losing the suit 5easonable possible 4robable
6uestions: ased on the abo.e and the result of your audit, answer the following$ 21 The issuance of 200,000 shares of common stoc= on 6ebruary 12, 200' caused Cleeneth!s in additional paid7in capital in ecess of par increase by a 4200,000 b 42,#00,000 c 42,00,000 d 40 6
22 The retirement of 0,000 shares of common stoc= on September 20, 200' caused Cleeneth!s additional paid7in capital in ecess of par to decrease by a 40,000 b 400,000 c 4/00,000 d 40 2# Cleeneth wants to appropriate retained earnings for all loss contingencies that are not properly accurate by a charged to epense Eow much of Cleeneth loss contingencies should be appropriated by charged to unappropriated retained earnings a 4#00,000 b 400,000 c 4200,000 d 40 2* Eow much cash di.idends should Cleeneth charge against unappropriated retained earnings in 200' a 4#0,000 b 4#30,000 c 4180,000 d 4130,000 2 Eow much should Cleeneth show in note to financial statements as restriction on retained earnings because of the ac:uisition of treasury stoc=G a 4100,000 b 4/00,000 c 4*0,000 d 4/0,000 Solution: 6uestion no 21 – 4 +ro5eeds from issuan5e (200000 +12.0) 2.00000 !ess par value of 5ommon sto57 (200000 s$ares +1) 200000 8n5rease in A+8 2'00000 6uestion no 22 – 4 ommon sto57 (.0000 s$ares +1) A+8 – e5ess over par .0000 s$ares (+11 – +1) ;nappropriated retained earnin,s as$ (.0000 s$ares +1')
.0000 .00000 100000 .0000
6uestion no 2' – a 6uestion no 2* – a
1#0000 10000 '.0000
6uestion no 2. – 5 reasury sto57 (.0000 s$ares +1) .0000 A+8 – e5ess over par .0000 s$ares (+11 – +1) .00000 A+8 – from S transa5tions 100000 as$ (4alan5in, fi,ure) *.0000 "e5onstru5tion of t$e entry made to re5ord t$e a5>uisition of treasury sto57 7
Problem Kibungan Company has the following information on ;anuary 1, 2010 related to its property, plant and e:uipment$
Land uilding (ccumulated depreciation ) building Machinery %2 machines& (ccumulated depreciation ) machinery Carrying amount
#0,000,000 #00,000,000 %#3,00,000& *00,000,000 %100,000,000& '2,00,000
There were no additions or disposals during 2010 "epreciation is computed using straight line o.er 20 years for building and 10 years for machinery n ;une #0, 2010, all of the property, plant and e:uipment were re.alued as follows$ 5eplacement Cost Sound +alue Land *0,000,000 *0,000,000 uilding 00,000,000 *2,000,000 Machinery /0,000,000 *,000,000 n ;une #0, 2011, building was re.alued at 4#00,000,000, its fair mar=et .alue at that time ne of the two machines was sold on "ecember #1, 2011 at 420,000,000 ?uestions$ 1 Fhat is the re.aluation surplus on ;une #0, 2010G a '20,000,000 b #,000,000 c #*,000,000 #23,00,000
d
2 Fhat is the total depreciation for 2010G a ,000,000 b //,30,000 '0,000,000
d
c 32,00,000
# Fhat is the re.aluation surplus on "ecember #1, 2010G a #,000,000 b #*,000,000 c ##3,00,000 #23,00,000
d
* Fhat is the impairment loss on "ecember #1, 2011G a 1/0,000,000 b 100,000,000 c /0,000,000
d 0
Fhat is the re.aluation surplus on "ecember #1, 2011G a #12,00,000 b 212,00,000 c 1*1,83,000 '/,20,000 / Dain on sale on "ecember #1, 2011 is$ a 31,20,000 b 12#,30,000 /0,000,000 EC ldg
#00 M
c %1#,30,000&
d
d
6M+ 00 M 8
%* M& 89
2 M
Mach
*00 M %120 M& 280 M
Land To!"l S$r'l$(
%3 M& *2 M
130 M
/0 M %1' M& * M
13 M
#0 M *0 M Re#"l$"!%o&
10 M 355 M
De're)%"!%o&*
ldg
Mach
11 /#0 /#0 12#1 11 /#0 /#0 12#1
To!"l
7 3 M 7 12 M 7 200 M 7 #2 M +2,5 M
*2. ? / 1 /12
*.. ?/ /12
Re#"l$"!%o& S$r'l$(
# M
Inamorti>ed (morti>ation$ ldg 7 130 M 13 /12 % M& %12 Mach 7 13 M3 /12 M ##3 alance M ;une #0$ ldg
809
fm. 7 fm. before now 00 M %100 M& *00 M
#00 M
7
100 M %100 M& 0
5e. Surplus @mpairment Loss
5e.aluation Surplus 7 2011 eg al ##3 M 9
(morti>ation$ Machinery Machinery disposed ldg ldg 7 remaining alance Cash (" Machinery
2 M /83 M 100 M 183 M 1*183 M 20 M 1*/2 M #2 M 312 M
Dain on sale 5e. Surplus
/83 M
5et
/83 M
Problem + randy Company has two cash generating units n "ecember #1, 2010, the assets of one cash generating unit at carrying amount are$
@n.entory (ccounts recei.able 4lant and e:uipment (ccumulated depreciation 4atent Doodwill
200,000 #00,000 /,000,000 2,/00,000 80,000 100,000
The accounts recei.able are regarded as collectible and the in.entory!s fair .alue less cost to sell is e:ual to the carrying amount The patent has fair .alue less cost to sell of 430,000 n "ecember #1, 2010, randy Company undertoo= impairment testing of the cash generating unit and determined the .alue in use of the unit at 4*,00,000 ?uestions$ 3 Fhat is the impairment loss of the cash generating unit on "ecember #1, 2010G a 800,000 b 300,000 c /00,000 d 0 8 Fhat is the amount of in.entory on "ecember #1, 2010G a 4 1#,80 b 1/3,010 c 180,000 d 200,000 ' Fhat is the amount of (ccounts 5ecei.able on "ecember #1, 2010G a #00,000 b 20,20 c 2/,300 d 2#,80 10 Fhat is the amount of 4atents on "ecember #1, 2010G a 80,000 b 30,000 c 30',800 d 323,#20 10
11 Fhat is the amount of 4lant and <:uipment, net at "ecember #1, 2010G a #,*00,000 b 2,'0',280 c 2,8#',180 d 2,800,000
5eco.erable Cost
*,00,00 0 *,80,00 Carrying +alue 0 %800,00 @mpairment Loss 0& 100,00 Doodwill 0 @L allocated to %300,00 other assets 0&
@mpairment loss
800,00 0
Doodwill 4atent 4lant and <:uipment
100,00 0 100,00 0 /00,00 0
Problem llie Company began its operation in 2003 and has two classes of share capital outstanding$ 129 4100 par .alue preference share and 40 par .alue ordinary share alances on ;anuary 1, 2008 are as follows$
4reference share capital rdinary share capital Share premium ) 4reference Share premium ) rdinary (ccumulated profits
400,000 2,00,000 200,000 00,000 2,000,000
(ll the preference shares issued and ordinary shares issued were issued as one lot in 2003 The following reflects the transactions for the year 2008, in chronological order$ a @ssued 20,000 ordinary shares at 430 per share b 5eac:uired, but not retired, ,000 ordinary shares at 4/0 c rdinary shares were split on a 2 for 1 basis d 5eissued #,000 treasury shares at 4*0 e 5ecei.ed 10,000 ordinary shares from stoc=holders as a donation and immediately retired the same f 5eported p1,00,000 net income for the year g "eclared the preferential di.idends and p/ di.idend per ordinary shares 5e:uirements$ 12 Eow much is the total di.idends declared to ordinary sharesG 11
a
380,000
b 3#8,000
c #'0,000
d #*8,000
1# Fhat is the balance of the rdinary shares account as of "ecember #1, 2008G a #,03,000 b #,20,000 c /,10,000 d /,00,000 1* Fhat is the total (ccumulated7paid7in capital as of "ecember #1, 2008G a 1,#80,000 b 1,2'0,000 c 1,1#0,000 d 1,100,000 1 Fhat is the correct (ccumulated profits7unappropriated balance as of "ecember #1, 2008G a 2,302,000 b 2,//0,000 c 2,*'2,000 d 2,*0,000 1/ Fhat is the correct Stoc=holders! e:uity balance as of "ecember #1, 2008G a 3,/22,000 b 3,8#2,000 c 3,'2,000 d 3,3'0,000 4reference Share ,0 00
rdinary Shares
S4 7 4S
S4 7 S
00,0 0,00 00 0
2,00, 000
200,0 00,0 00 00
20,00 0
1,000, 000
*00,0 00
(ccm Treasury 4rof Share
S4 7 S4 7 TS retire
2,000, 000
%,00 %#00,0 0& 00& 30,00 0
%,00 0& 7
7
#,00 0 %10,0 00&
%20,0 00&
#0,0 '0,000 00
%0,0 00&
#00,0 00 1,00, 000 %/0,00 0&
7
7
7
,0 00
00,0 1#0,0 00 00
7
7
7
#,20, 000
200,0 80,0 00 00
%3#8,0 00&
7
2,302, 000
%3,00 %210,0 0& 00&
7
7
7
#0,0 00
#00,0 00 12
Problem . Sabrina Manufacturing Company had se.eral transactions during 200/ and 2003 concerning 4lant assets Se.eral of these transactions are described below, followed by the entry or entries made by the company!s accountant
<:uipment -otes payable
100,000
100,000 "ec #1, 200/
"epreciation epense (ccumulated "epreciation7<:uipment
10,000
10,000 uildings$ ( building was ac:uired on ;une 1, 200/, by issuing 100,000 shares of the company!s 4 par .alue ordinary shares The ordinary share is not widely traded, therefore no mar=et price is a.ailable The building was appraised on the transaction date at 4/0,000 ;une 1, 200/
uilding rdinary Share %100,0004&
00,000
00,000 "ec #1, 200/
"epreciation <pense (ccumulated "epreciation7uilding
20,000
20,000 @n.entory6itures$ @n.entory and display fitures were ac:uired for 412,000 cash on (pril 1, 20003, from a competitor who was li:uidating her business The estimated .alue of the in.entory was 48,000 and the .alue of the fitures was 4,000 (pril 1, 2003
@n.entory "isplay 6itures Cash Dain on (c:uisition of @n.entory
8,000 ,000 12,000 N 6itures
1,000 Land$ Land was donated to Sabrina by the City of Cagayan in September 2003 as an inducement to build a facility there 4lans call for construction at an undetermined future date The land was appraised at 4*8,00 -o entry was made Machinery$ 13
Machinery was ac:uired an echange for similar e:uipment on ctober 12, and were appraised at 4*,000 on the date of the echange Sabrina recei.ed machinery .alued at 4*0,000 and 4,000 in cash in the transaction ctober 12, 200/ Machinery *,000 Cash ,000 (ccumulated "epreciation7Machinery 1/,000 Machinery 2,00 Dain on <change of Machinery 1#,00 "ecember #1, 200/
"epreciation <pense (ccumulated "epreciation7Machinery
*,00
*,00 (dditional information$ Sabrina uses straight7line depreciation, applied to all assets as follows$ 1
( full year!s depreciation ta=en in the year ac:uisition and no depreciation ta=en in the year of disposal 2
<:uipment uildings 10,000 @n.entory6itures Machinery
',2' 2/,000
10,000 1#,00
*,'11 *,000
8,00
,00 *,00
',000 20,000 ',103
#,/
10,08' ,*00
Problem 1 The Maria Lo.ella Mining Company purchased for 41#,000,000 mining property estimated to contain 1,000,000 tons of ore The residual .alue of the property is 41,000,000
uildings used in mine operations costs 41,000,000 and ha.e an estimated life of ten years with no residual .alue Mine machinery costs 42,000,000 with an estimated residual .alue of 4*00,000 after its physical life of * years 14
6ollowing is the summary of the company!s operations for the first two years$ 6irst Hear Second Hear Tons mined 100,000 tons 1#0,000 tons Tons sold 80,000 tons 120,000 tons Init selling price per ton 4 **00 4 *00 "irect labor 4 800,000 4 8*0,000 Miscellaneous mining o.erhead 4 1/0,000 4 2*0,000 perating epenses 4 320,000 4 3/0,000 @n.entories are .alued on a first7in, first7out "epreciation on the building is to be allocated as follows$ 209 to operating epenses, 809 to production "epreciation on machinery is chargeable to production ?uestion$ 2/ The cost of in.entory %ore& in the first year is$ a 4 #2,000 b 4 28,000 c 4 12,000
d 4 *80,000
23 The cost of in.entory %ore& in the second year is$ a 4 3#,3'0 b 4 32,*0 c 4 31#,'0
d 4 /'3,8*/
28 -et income in the first year is$ a 4 /32,000 b 4 //8,000
d 4 /20,000
2' -et income in the second year is$ a 4 1,/',2#* b 4 1,/33,3'0 1,/,'0
c 4 /2,000
c 4 1,//3,*0
d
4
#0 The total amount that may be paid as di.idends by the company in the first year is$ a 4 1,80,000 b 4 1,/12,000 c 4 1,/28,000 d 4 1,/#2,000 #1 The total amount that may be paid as di.idends by the company in the second year is$ a 4 #,1#,2#* b 4 #,113,3'0 c 4 #,103,*0 d 4 #,0','0
Problem 11 @n the course of your first time audit of M@S(M@S @-C!s stoc=holder!s e:uity accounts for the audit year 2003, the following schedule of the company!s stoc=holder!s e:uity accounts as of "ecember #1, 200/ were presented by the client$
rdinary share capital, 4100 par 200,000 shares authori>ed 0,000 shares @ssued and outstanding options to purchase 10,000 shares at 4100 per Share are held by employees, no .alue ha.ing been assigned to these options 4,000,000 15
Share premium from ordinary shares 1,000,000 (ccumulated profits #,000,000 6urther in.estigation and in:uiry re.ealed the following information$ a The options referred to abo.e were granted to each of its 100 employees on ;anuary 1, 200 which shall .est three year thereafter pro.ided employees remain in the company!s employ and pro.ided further that sales increase at least by an a.erage of 9 per year @f the sales increase by an a.erage of at least 9 per year each year, employees shall recei.e 100 share options @f the sales increased by an a.erage of least 109 per year, each employee shall recei.e #00 options The fair mar=et .alue of each share option on the grant date was 4#0 per share -o employee left the company during the said .esting period 5ecords show that a.erage sales increase o.er the inclusi.e .esting period are$ 200, 89 200/, 109, and 2003, 129 b n May 1, 2003, the company issued bonds of 4,000,000 at 120 gi.ing each 41,000 bond a warrant enabling the holder to purchase* shares at 4120 per share for a one year period Shares were selling for 41*0 at this time The mar=et .alue of bond e7warrant is 10 c n ;une 1, 2003, half of the warrants issued with bonds were eercised d n (ugust 1, the company issued rights to shareholders, permitting holders to ac:uire for a /07day period, 1 share at 41#0 with e.ery rights submitted Shares were selling for 410 at this time (ll but ,000 of these rights were eercised and additional shares were issued e The company declared a 4 per share cash di.idends on "ecember 1, 2003 payable to stoc=holders as of "ecember #1, 2003 on ;anuary #1, 2008 f -et income before any adustments amounted to 42,00,000 in 2003 5e:uired$ 1 Fhat is the retroacti.e adustment to the beginning accumulated profits account related to the options granted in 200G a 4/00,000 b 4*00,000 c 4200,000 d -o adustment necessary 2 Fhat is the correct credit to the share premium account as a result of the eercise of rights referred to in item dG a 20,000 b 230,000 c 28,000 d ##0,000 # Fhat is the total (dditional 4aid in Capital to be presented in the stoc=holders! e:uity portion of the balance sheet as of "ecember #1, 2003G a #,180,000 b #,0,000 c 2,#0,000 d 2,1,000 16
* Fhat is the correct (ccumulated 4rofits as of "ecember #1, 2003G a ,1*,000 b *,'00,000 c *,3*,000 *,2*,000
d
S@!;8@: um4er of options estimated to vest (100B100) 10000 A55umulated profits 4e,innin, +'000000 ?ultiply 4y ?ar7et value of @ptions '0 "etroa5tive adCustment to retained (200000) otal options outstandin, '00000 earnin,s (num4er 1) ?ultiply 4y (200.200) 2/' Appropriation for dividends (1000B.) ('..000) otal A55um omp Ep As of 12'1200 200,0001.ans. B et in5ome 200 (2.00000-00000) 1#00000 P4,245,000 4. ans. D
+ro5eeds from eer5ise of ri,$ts (0000 – .000)/.B1'0 +1*'0000 +ar value of @rdinary s$are issued (11000B100) 1100000 S$are premium P330,000 2. ans. D S$are premium from ordinary s$ares +1000000 S$are premium from eer5ise of 3arrants ..000 S$are premium from eer5ise of ri,$ts ''0000 +190.000 @rdinary s$are options from outstandin, (20000B'0) 900000 @rdinary s$are 3arrants outstandin, (.0000B.0%) '.000 otal A+8 P3,180,0003. ans. B
Problem 12 ugle Company!s property, plant, and e:uipment and related accumulated depreciation accounts had the following balances at "ecember #1, 200/$
Class of 44< Land uildings Machinery and e:uipment Transportation e:uipment Lease impro.ements Class of 44< Land impro.ements uildings Machinery and e:uipment Transportation e:uipment Lease impro.ements
Cost
(ccumulated "epreciation
4#,'00,000 #/,000,000 2#,20,000 #,'/0,000 /,/#0,000
43,'/2,000 ,88/,000 2,8/,000 #,#1,000
"epreciation method Iseful Life Straight7line 12 years 109 declining balance 2 years Straight7line 10 years 10 9 declining balance years Straight7line 8 years
ugle computes depreciation to the nearest month The sal.age .alues of the depreciable assets are considered immaterial Transactions during 2003 and other information are described below$ 17
1
2
#
*
/
3
n ;anuary , 2003, a plant facility consisting of land and a building was purchased from Torotot Company for 418,000,000 f this amount, 209 was allocated to land n (pril #, 2003, new par=ing lots, streets, and sidewal=s at the purchased plant facility were completed at a total cost of 4,3/0,000 These ependitures had an estimated useful life of 12 years The lease hold impro.ements were completed on "ecember #1, 200#, and had an estimated useful life of 8 years The related lease, which would ha.e terminated on "ecember #1, 200', was renewable for an additional *7year term n (pril #0, 2003, ugle eercised the renewal option n ;uly 1, 2003, machinery and e:uipment were purchased at a total in.oice cost of 43,00,000 (dditional costs of 4#00,000 for deli.ery and 4'00,000 for installation were incurred n (ugust #1, 2003, ugle purchased a new automobile for 4*0,000 n September 2', 2003, a truc= with a cost of 4320,000 and a carrying amount of 42*#,000 on the date of sale was sold for 4#*,000 "epreciation for the ' months ended September #0, 2003, was 430,/0 n "ecember 22, 2003, a machine with a cost of 410,000 and a carrying amount of 48',20 at date of disposition was scrapped without cash reco.ery
ased on the preceding information, calculate the 2003 depreciation epense on each of the following classes of 44<$ Land impro.ements a *80,000 b #/0,000 / uildings a 2,*/,280
c #20,000
b #,02*,000
d '2#,000
c 2,3/2,280
3 Machinery and e:uipment a 2,#2,000 b #,1',000 2,3/0,000
d 1,/82,280
c 1,'3,00
8 Transportation e:uipment a #/#,1#2 b **,8/0
c *##,'/2
d 23,3/0
' Leasehold impro.ements a 828,30 b 2,00
c //#,000
d 1,#2/,000
S@!;8@ 1 200 uired Gan . 200 (+1#000000 #0%) 1**00000 otal
d
+'0000
*2*'#000
18
1.0% de5linin, 4alan5e rate (1/2. 1.0%) &%
+2.*2#0
' 200 uipment Gan 1 200 (+'000000-+92000) +2'2.000 +ur5$ased Guly 1 200 (+#00000/10 /12) *'.000 otal +20000 <
Ans
Ans
* 200
Problem 13 The following transactions appear on the A(.ailable7for7sale Mar=etable SecuritiesB account of
(pril 1 ;uly 1
-o.
4urchased 1,000 shares of SMC at 41share (nd 2,000 shares of (tlas Cons (t 410share 4#,000 4urchased 7year Treasury -otes at 4'/ face +alue 4100,000 @nterest dates, ;uly 1 and ;an 1 @nterest rate, '9 '/,000 Sold *00 shares of SMC at 41*share and 800 19
Shares of (tlas Cons at 412share 1,200 "ec #1 101,00
Sold the treasury notes at 4'3 plus accrued interest
-ote$ "isregard bro=ers! commissions and taes in your computation The company recei.ed 209 stoc= di.idends from SMC on September 1 and 109 stoc= di.idend from (tlas Cons on "ecember 1 SMC shares and (tlas Cons shares were selling at 41 and 412, respecti.ely on "ecember #1, 2003 Compute for the adusted balances of the following account balances as of "ecember #1, 2003$ (
800
C
"
10 SMC Shares 1,000 1,200 /00 11 in.estments ion SMC at cost 1,000 10,000 3,00 12 (tlas Shares 2,000 1,200 2,120 1# @n.estment in (tlas at cost 20,000 11,380 1,000 12,000 1* Treasury -otes '/,000 0 *0,000 1 Carrying .alue of SMC 1,000 12,000 8,000 1/ Carrying .alue of (tlas 1,8*0 11,380 1,000 13 unreali>ed gainloss on the balance sheet ,8*0 #,8*0 #,000
12,00 1,#20
/,000 10,000 20,000
2,000
Problem 14 n ;anuary 1, 2010, 5eyes Company borrowed 4,000,000 from a ban= at a .ariable rate of interest for * years @nterest will be paid annually to the ban= on "ecember #1 and the principal is due on "ecember #1, 201#
Inder the agreement, the mar=et rate of interest e.ery ;anuary 1 resets the .ariable rate for that period and the amount of interest to be paid on "ecember #1 @n conunction with the loan, 5eyes Company entered into a Arecei.e .ariable, pay fiedB interest swap agreement with another ban= speculator as a cash flow hedge The mar=et rates of interest are /9 on ;anuary 1, 2010, 109 on ;anuary 1, 2011 and 89 on ;anuary 1, 2012 ?uestions$ 18 Fhat is the Anotional amountB of the interest rate swapG a 4 0 b 4 2,000,000 c 4 2,00,000 ,000,000
d
4 20
1' Fhat is the deri.ati.e asset or liability on "ecember #1, 2010G a 4 200,000 asset b 4 200,000 liability c 4 *'8,000 asset *'8,000 liability
d
4
20 Fhat is the deri.ati.e asset or liability on "ecember #1, 2011G a 4 100,000 asset b 4 100,000 liability c 4 138,000 asset 138,000 liability
d
4
Problem 15 n ;anuary 1, 2003, ;uliet Company sold e:uipment to ;oed Company of ;apan for O1,000,000 with payment to be recei.ed in two years on ;anuary 1, 200' n ;anuary 1, 2003, the echange rate is O00 P 41 n the same date, ;uliet enters into forward contract and agrees to sell O1,000,000 on ;anuary 1, 200' at the rate of O00 P 41
n "ecember #1, 2003, the echange rate is O0*3 P 41 n "ecember #1, 2008, the echange rate is O0 P 41 The appropriate discount rate throughout this period is 109 ?uestions$ ased on the abo.e and the result of your audit, answer the following$ %5ound off present .alue factors to four decimal places& 21 The amount of sales re.enue to be recogni>ed in 2003 is a 42,123,//0 b 42,000,000 c 41,38,2'8 41,/2,800
d
22 The carrying amount the accounts recei.able on "ecember #1, 2003 is a 42,123,//0 b 42,000,000 c 41,'#*,2 d 41,38,2'8 2# The gain on foreign currency in 2003 is a 4281,* b 4123,//0 410,*'8
c 411/,13
d
2* The deri.ati.e liability %forward contract payable& on "ecember #1, 2003 is a 4123,//0 b 411/,0 c 410,*'8 d 40 2 The deri.ati.e asset %forward contract recei.able& on "ecember #1, 2008 is a 4#0',*38 b 4181,812 c 41/,2'1 d 4 0 Solution Ans3er 29 '0 '1
< Y 1000000/0.0 #2* +D fa5tor I + 1.2#00 Y 1000000/0* 9091 +D fa5tor I + 19'*2.. A55ounts "e5eiva4le – 1/1/0 1.2#00 8nterest 8n5ome (amort 200) 1.2#0 A55ounts "e5eiva4le J Y0.0 – +1 1#1#0#0 A55ounts "e5eiva4le J Y0* – +1 ( 19'*2..) Fain on Korei,n urren5y 111. 21
'2
+eso e>uivalent of Kutures – 12/'1/0 (Y 1000000/0*) 2120 otional Dalue 2000000 Kuture ontra5t +aya4le 120 & +D fa5tor 9091 Kuture ontra5t 110.. '' +eso e>uivalent of Kutures – 12/'1/0# (Y 1000000/0..) 1#1#1#2 otional Dalue 2000000 Kuture ontra5t "e5eiva4le 1#1#12
22
