Auditing Problems

CRC-ACE REVIEW SCHOOL The Professional CPA Review School  735-9031 / 735-8901

AUDITING PROBLEMS OCTOBER 2007 BATCH GENERAL INSTRUCTIONS: Select the correct answer for each of the following questions. Mark only one answer for each item by writing a VERTICAL LINE corresponding to the letter of your choice on the answer sheet provided. STRICTLY NO ERASURES ALLOWED. Use PENCIL NO. 1 or NO. 2 only. PROBLEM 1 The CRC-ACE Co. is on a calendar year basis. during your audit:

The following data were found

I. Goods in transit shipped FOB Destination by a supplier in the amount of P20,000 had been excluded from the inventory, and further testing revealed that the purchase had been recorded. II. Goods costing P10,000 had been received, included in the inventory and recorded as a purchase. However, upon inspection, the goods were found to be defective and would be immediately returned. III. Materials costing P50,000 and billed on December 30 at a selling price of P64,000 had been segregated in the warehouse for shipment to a customer. The materials had been excluded from inventory as a signed purchase order had been received from the customer. Terms, FOB destination. IV. Goods costing P14,000 was out on consignment with Libra, Inc. Since the monthly statement from Libra listed those materials as on hand, the items had been excluded from the final inventory and invoiced on December 31 at P16,000. V. The sale of P30,000 worth of materials and Costing P24,000 had been shipped FOB point of shipment on December 31. However, this inventory was found to be included in the final inventory. VI. Goods costing P20,000 and selling for P28,000 had been segregated but not shipped at December 31, and were not included in the inventory. A review of the customer’s purchase order set forth terms as FOB destination. The sale had not been recorded. VII. Your client has an invoice from a supplier, terms FOB shipping point but the goods had not arrived as yet. However, these materials costing P34,000 had been included in the inventory count, but no entry had been made for their purchase. VIII. Merchandise costing P40,000 had been recorded as a purchase but not included in inventory. Terms of shipment are FOB shipping point according to the supplier’s invoice which was received on December 31. Further inspection of the client’s records revealed the following December 31 balances. Inventory, P220,000; Accounts receivable, P116,000; Accounts payable, P138,000; Sales, P1,010,000; Purchases, P640,000; Net Income, P102,000. Compute the adjusted balances of the following items: 1. Inventory a. P310,000 b. P300,000 c. P334,000

d. none of these

2. Accounts receivable a. P100,000 b. P52,000

d. none of these

3. Accounts payable

c. P36,000

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a. P152,000

b. P108,000

c. P142,000

d. none of these

4. Sales a. P946,000

b. P930,000

c. P994,000

d. none of these

5. Purchases a. P644,000

b. P654,000

c. P610,000

d. none of these

6. Net income a. P118,000

b. P108,000

c. P142,000

d. none of these

PROBLEM 2 The account of the XYZ Co. appears as shown below at December 31, 2007: Motor vehicles 1/1 Balance 7/15 CR15 P8,500,000 P300,000 3/1 V5 79,000 7/1 V 8 654,000 Your examination revealed that P79,000 represents the 2007 registration fees of XYZ’s motor vehicles. The charge of P654,000 represents the invoice price of a new carag-carag car, including a P14,000 comprehensive car insurance premium for one year. The credit of P300,000 represents the proceeds from the sale of a truck costing P1,200,000 and had been fully depreciated. Fifty percent (50%) of the beginning balance represents fully depreciated motor vehicles. The Co.’s policy on depreciation is detailed as follows: a. 20% straight-line b.No residual value c. Full in the year of acquisition and none in the year of disposal Compute the following items: 7. The adjusted cost of motor vehicle is a. P7,940,000 b. P4,890,000 c. P8,840,000 8. Insurance expense in 2007 is a. P0 b. P14,000 c. P7,000 9. Gain on disposal of asset on July 15 is a. P0 b. P300,000 c. P1,200,000

d. None of these d. None of these d. None of these

PROBLEM 3 In conducting your audit of Toyota Corporation, a company engaged in import and wholesale business, for the fiscal year ended June 30, 2007, you determined that its internal control system was good. Accordingly, you observed the physical inventory at an interim date, May 31, 2007 instead of at June 30, 2007. You obtained the following information from the company’s general ledger: Sales for eleven months ended May 31, 2007 Sales for the fiscal year ended June 30, 2007 Purchases for eleven months ended May 31, 2007 (before audit adjustments) Purchases for the fiscal year ended June 30, 2007 Inventory, July 1, 2006

P 672,000 768,000 540,000 640,000 70,000

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Physical inventory, May 31, 2007

110,000

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Your audit disclosed the following additional information: (1) (2) (3)

Shipments costing P6,000 were received in May and included in the physical inventory but recorded as June purchases. Deposit of P2,000 made with vendor and charged to purchases in April, 2007. Product was shipped in July, 2007. A shipment in June was damaged through the carelessness of the receiving department. This shipment was later sold in June at its cost of P8,000.

In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratios. 10. The gross profit ratio for eleven months ended May 31, 2007 is a. 20% b. 25% c. 30% d. 35% 11. The cost of goods sold during the month of June 2007 using the gross profit ratio method is a. P22,000 b. P44,000 c. P74,000 d. P88,000 12. The June 30, 2007 inventory using the gross profit method is a. P 88,000 b. P 114,000 c. P 174,000 d. P 130,000 PROBLEM 4 The CARR Corporation manufactures a highly flammable product. On June 30, 2007 a fire completely destroyed its factory and all the work in process inventory therein. However, some records were saved which showed the following inventory balances as of June 30, 2007. Raw materials Finished goods and as of January 1, 2007 the inventories were as follows: Raw materials Work in Process Finished goods

P

60,000 120,000

30,000 100,000 140,000

A review of the records showed that sales and gross profit fort the past five years are as follows: Sales Gross Profit 2002 P 300,000 P 80,000 2003 320,000 100,000 2004 330,000 100,000 2005 270,000 80,000 2006 280,000 90,000 Sales for the first six months of 2007 were P300,000. Raw material purchases were P100,000. Freight on purchase was P20,000. Direct labor for the six months was P80,000. For the past five years manufacturing overhead was 50 percent of direct labor cost. Required: 13. Compute the average gross profit rate for the 5 year period. a. 25% b. 28% c. 30 % d. 32% 14. What was the value of the work in process inventory as of June 30, 2007? a. P 80,000 b. P140,000 c. P 100,000 d. P 120,000 PROBLEM 5

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As the first auditor of the Sunaga Company you discover that the following entries have been made in the property, plant and equipment account: Property, Plant, and Equipment 2005 2005 Plant purchased P 60,000 Depreciation P 6,310 Legal fees 700 Insurance 2,400 2006 2006 Repairs 2,000 Depreciation 6,879 Addition to Building 10,000 2007 2007 Repairs 3,000 Machine sold 500 Insurance 2,800 Depreciation 7,421 Machine purchased 7,000 You discover the following additional information: 1. 2.

3. 4. 5.

The purchase of the plant included a building and machinery. When the plant was purchased, an appraisal showed that the building was valued at P39,000 and the machinery at P26,000. Depreciation has been recorded each year at 10% of the balance in the account. The 10% was chosen because the property is being depreciated over 10 years for tax purposes. Subsequent investigation indicates that the expected lives at the time of acquisition were: Building, 20 years; machinery, 8 years. Each insurance payment was made on January 1 and was for a 2-year policy. The machine that was sold in 2007 had an original cost of P800. All purchases and sales of property, plant, and equipment items occurred at the beginning of the year indicated.

15. The costs of the building and machinery acquired in 2005 should be Building Machinery a. P 36,000 P 24,000 b. P 39,000 P 26,000 c. P 36,700 P 24,000 d. P 36,420 P 24,280 16. The 2005 depreciation expense was: a. correctly b understated by c. overstated by d. overstated by stated P1,510 P1,454 P1,510 17. The 2006 depreciation expense was: a. correctly b overstated by c. overstated by d. overstated by stated P1,579 P1,523 P1,497 18. The gain or loss on machine disposal was: a. P 100 loss b. P 100 gain c. P 300 loss d. P 140 loss 19. The adjusted balance of Machinery account at December 31, 2007 is: a. P 30,200 b. P30,480 c. P 30,780 d. P 31,280 20. The carrying value of the building at December 31, 2007 is: a. P 39,904 b. P 39,600 c. P 39,547 d. P 39,457 PROBLEM 6 The following account balances were included in the balance sheet of the Bromley Company on December 31, 2006: Land 100,000 Land improvements 20,000 Buildings 300,000 Machinery and equipment 500,000 During 2007 the following transactions occurred:

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Land was acquired for P70,000 for a future building site. Commissions of P4,000 were paid to a real estate agent. II. A factory and land were acquired form the Kent Development Company by issuing 20,000 shares of P3 par common stock. At that time the stock was selling for P10 per share on the Philippine Stock Exchange. The independently appraised values of the land and the factory were P60,000 and P180,000, respectively. III. Machinery and equipment was acquired at a cost of P120,000. In addition, sales tax, freight costs, and installation costs were P7,000, P10,000 and P16,000, respectively. During installation, the machinery was damaged and P2,000 was spent in repairs. IV. A new parking lot was installed at a cost of P30,000 V. A machine that had cost P20,000 on January 1, 2003 and had a book value on December 31, 2007 of P4,000 was sold on that date for P6,000 VI. Half the land purchased in item 1 was prepared as a building site. Costs of P26,000 were incurred to clear the land, and the timber recovered was sold for P3,000. A new building was built for P60,000 plus architect’s fees and imputed interest on equity funds used during construction of P18,000 and P15,000, respectively. No debt is outstanding. VII. Costs of P20,000 were incurred to improve some leased office space. The lease will terminate in 2007 and is not expected to be renewed. VIII. A group of new machines was purchased under a royalty agreement that provides for payment of annual royalties based on units produced. The invoice price of the machines was P30,000, freight costs were P2,000, and royalty payments for 2007 were P12,000. Compute the adjusted balances of the following accounts at December 31, 2007. 21. Land a. P 210,000 b. P 213,000 c. P 220,000 d. P 216,000 22. Building a. P 545,000 b. P 543,000 c. P 528,000 d. P 530,000 23. Machinery and equipment a. P 665,000 b. P 663,000 c. P 677,000 d. P 675,000 PROBLEM 7 In connection with the audit of MONDAY Company’s financial statements, you obtained the following information pertaining to its cash account. Cash in bank July 31 Book disbursements- August 136,429 111,423 Book receipts- August August 31 balance 141,230 166,236 Further examination revealed the following:  The cash receipts book in August was underfooted by P10,000.  Included in the book receipts in August is a note collected by the bank in July for P1,500.  July NSF checks of P526 and bank service charges of P50 were recorded by the Company in August.  The bank statement in August showed total debits of P110,098, total credits of P149,951, and an ending balance of P 180,413.  Among the bank debits are: NSF checks P 700 Bank error 900 Correction of July error 1,000

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Service charges 65  Among the bank credits are: Correction of July error P 600 Note collected by bank 4,277 Bank error 3,000  Deposits in transit: July 31, P5,200 ; Aug. 31, 8,330  Outstanding checks as of July 31, P8,007.

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Determine the following: 24. Cash Shortage a. P 6,026 b. P 4,526 c. P 5,474 d. P 4,000 25. Outstanding checks, August 31 a. P 11,421 b. P 9,332 c. P 8,007 d. P 3,876 26. Adjusted cash Balance, August. 31 a. P 175,222 b. P 169,748 c. P 125,841 d. P 166,236 27. Adjusted cash balance, July 31 a. P 136,429 b. P 137,353 c. P 111,612 d. P 148,481 PROBLEM 8 The Allen Company is a wholesale distributor of automotive replacement parts. Initial amounts taken from Allen’s accounting records are as follows: Net income for the year ended December 31, 2007 P 2,172,000 Inventory at December 31, 2007 (based on Physical count of goods in Allen’s warehouse on December 31, 2007) 1,250,000 Net purchases in 2007 3,215,000 Net sales in 2007 9,000,000 Vendor B Company C Company D Company E Company F Company G Company

Terms 2% 10 days, net 30 Net 30 Net 30 Net 30 Net 30 Net 30

Amount P 265,000 210,000 300,000 225,000 P1,000,00 0

Additional information is as follows:  Parts held on consignment from C to Allen, the consignee, amounting to P155,000, were included in the physical count of goods in Allen’s warehouse on December 31, 2007, and in accounts payable at December 31, 2007.  P22,000 of parts which were purchased from F and paid for in December 2007 were sold in the last week of December 2007 for P28,000. Allen appropriately recorded the sale in December. The parts were included in the physical count of goods in Allen’s’ warehouse on December 31, 2007, because the parts were on the loading dock waiting to be picked up by customers.  Parts in transit on December 31, 2007, to customers, shipped F.O.B. shipping point, on December 28, 2007, amounted to P34,000. The customers received the parts on January 6, 2008. Sales of P40,000 to the customers for the parts were recorded by Allen on January 2, 2008.  Retailers were holding P210,000 at cost (P250,000 at retail), of goods on consignment from Allen, the consignor, at their stores on December 31, 2007.

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 Goods were in transit from G to Allen on December 31, 2007. The cost of the goods was P25,000, and they were shipped F.O.B. shipping point on December 29, 2007.  A quarterly freight bill in the amount of P2,000 specifically relating to merchandise purchases in December 2007, all of which was still in the inventory at December 31, 2007, was received on January 3, 2008. The freight bill was not included in either the inventory or in accounts payable at December 31, 2007.  All the purchases from B occurred during the last seven days of the year. These items have been recorded in accounts payable and accounted for in the physical inventory at cost before discount. Allen’s policy is to pay invoices in time to take advantage of all cash discounts, adjust inventory accordingly, and record accounts payable, net of cash discounts. 28. Adjusted inventory balance at the end of 2007. a. P1,326,700 b. P1,306,700 c. P1,304,700 d. P1,310,000 29. Adjusted balance of accounts payable at December 31, 2007. a. P888,700 b. P866,700 c. P1,021,700 d. P872,000 30. Adjusted net purchases in 2007. a. P3,081,700 b. P3,087,000 c. P3,079,000 d. P3,103,000 31. Adjusted net sales in 2007. a. P9,000,000 b. P9,040,000 c. P8,960,000 d. P9,018,000 32. Adjusted net income in 2007. a. P2,400,000 b. P3,422,000 c. P2,425,000 d. P2,403,000 PROBLEM 9 On January 1, 2007, Andromeda, Inc., paid P700,000 for 10,000 shares of Belly Company’s voting ordinary shares, which was a 10% interest in Belly. At that date the net assets of Belly totaled P6,000,000. The fair values of all of Belly’s identifiable assets and liabilities were equal to their book values. Andromeda does not have the ability to exercise significant influence over the operating and financial policies of Belly. Andromeda received dividends of P0.90 per share from Belly on October 1, 2007. Belly reported net income of P400,000 for the year ended December 31, 2007. On July 1, 2008, Andromeda paid P2,300,000 for 30,000 additional shares of Belly Company’s voting ordinary shares, which represents a 30% investment in Belly. The fair values of all of Belly’s identifiable assets net of liabilities were equal to their book values of P6,500,000. As a result of this transaction, Andromeda has the ability to exercise significant influence over the operating and financial policies of Belly. Andromeda received dividends of P1.10 per share from Belly on April 1, 2008, and P1.35 per share on October 1, 2008. Belly reported net income of P500,000 for the year ended December 31, 2008, and P200,000 for the 6 months ended December 31, 2008. Andromeda does not amortize goodwill but evaluates at each year-end its possible impairment. No impairment on goodwill has been observed though. 33.

Investment income in 2007 a. P 9,000 b. P 30,000 c. P 40,000 34. Carrying value of the investment on December 31, 2007 a. P 721,000 b. P730,000 c. P 691,000 35. Investment income in 2008 a. P 110,000 b. P 200,000 c. P 150,000 36. Carrying value of the investment on December 31, 2008. a. P 3,000,000 b. P 3,076,000 c. P 3,110,000

d. P 90,000 d. P 700,000 d. P 140,000 d. P 3,150,000

PROBLEM 10 CITY FAIR Corporation purchased P100,000 8% bonds for P 92,418 on January 1, 2004. CITY FAIR classified the bonds as available for sale. The bonds were purchased to yield 10% interest. Interest is payable annually every January 1.

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The market values of the bonds are as follows: December 31, 2004 P 97,160 December 31, 2005 90,393 December 31, 2006 97,240 37. Interest income in 2004 a. P 9,242 b. P 8,000 c. P 10,000 d. P 9,124 38. Interest income in 2006 a. P 8,000 b. P 9,366 c. P 9,503 d. P 10,000 39. Unrealized gain or loss at the December 31, 2006. a. gain P 711 b. loss P 711 c. gain P 3,267 d. loss P 3,267 40. Carrying value of held-to-maturity investment on December 31, 2006. a. P 95,026 b. P 93,660 c. P 92,418 d. P 96,529 - END -

AUDITING PROBLEMS 1 2 3 4 5 6 7 8 9 10

A C C B A B A C B B

11 12 13 14 15 16 17 18 19 20

C D C D D C D A B A

21 22 23 24 25 26 27 28 29 30

A C A B A A B C B A

31 32 33 34 35 36 37 38 39 40

B A A D A B A C A D