Accountancy Department College of Business and Accountancy Notre Dame University Cotabato City, Philippines

CPA MOCK BOARD EXAMINATION AUDITING PROBLEMS MR. RONALD GERMO MAMARIL 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 sheet provided. STRICLY NO ERASURES ALLOWED. Use pencil no. 1 only.
CASE 1: STOCK INVESTMENT IN SAN MIGUEL

1. The Stock Investment showed the following details during year 2008
STOCK INVESTMENT IN SAN MIGUEL Debit P80,000 9,000 10,000 Credit 2,000 6,000

Jan. Feb. Mar. Apr. June 1.

1 28 31 1 30

Audited balance 4,000shares Cash dividend Bought shares Sale of rights Sale of shares

A cash dividend of P0.50 per share were received on Feb. 28. The adjusting entry (assuming the use of the cost method) is: a. Stock Investment Dividend income b. Retained earnings Dividend income c. Dividend Income Stock investment d. Cash Dividend income 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000

2. On March 15, stock rights were received entitling shareholders to purchase one share for every five held at P15 per share. Market values on this date were: shares, P20; rights, P5. The adjusting entry to recognize the cost allocated to the rights is: a. Stock rights Stock investment b. Stock rights Stock investment c. Stock rights Stock investment d. Stock rights Stock investment 16,000 20,000 10,000 30,000 16,000 20,000 10,000 30,000

3. On March 31, 600 shares were purchased with the partial exercise of these rights. The adjusting entry, after the adjustment in No. 7 above has been given effect, is a. Stock investment Stock rights b. Stock investment Stock rights c. Stock rights Stock investment d. Stock rights Stock investment 18,000 12,000 12,000 15,000 18,000 12,000 12,000 15,000

4. On April 1, the remaining rights were sold for P6, 000. The adjusting entry is: a. Stock investment Gain on sale of rights b. Stock investment Stock rights Gain on sale of rights c. Stock investment Loss on sale of rights Stock rights d. Stock investment Gain on sale of rights 6,000 6,000 4,000 2,000 4,000 6,000 4,000 6,000 4,000 2,000

5. On June 30, 460 shares were sold for P10, 000. Using the average cost method, the adjusting entry is: a. Cash Stock investment Gain on sale of stock b. Stock investment Gain on sale of stock c. Stock investment Gain on sale of stock d. None of the above CASE 2: HOME OFFICE AND ESPERANZA BRANCH The following were found in your examination of the interplant accounts between the Home Office and Esperanza Branch. a. Transfer of fixed assets from Home Office amounting to P53, 960 was not booked by the branch. b. P10,000 covering marketing expenses of another branch was charged by Home Office to Esperanza. c. Esperanza recorded a debit note on inventory transfers from Home Office of P75,000 twice. d. Home Office recorded cash transfer of P65,700 from Esperanza Branch as coming from Upi Branch. e. Esperanza reversed a previous debit memo from Cotabato Branch mounting to P10,500. Home Office debited that this charge is appropriately Upi Branchs cost. f. Esperanza recorded a debit memo from Home Office of P4, 650 as P4,650. 6. The net adjustment in the Home Office books related to the Esperanza Branch current amount is: a. b. c. d. P75,700 65,700 86,200 94,820 10,000 7,500 2,500 10,000 2,500 10,000 2,500

7. The net adjustment in Esperanzas books related to the Home Office account is: a. b. c. d. P33,335 31,450 20,950 10,450

8. Before the above discrepancies were given effect, the balance in the Home Office books of its Esperanza Branch Current account was debit balance of P165, 920. The unadjusted balance in the Esperanza Branch books of its Home Office Current account must be: a. P92,336 b. 98,230 c. 104,500 d. 111,170

page 2 9. The adjusted balance of the reciprocal account is: a. b. c. d. P84, 90, 99, 109, 807 220 200 120

CASE 3: LEILA MAES FLOWER SHOP (ACCRUAL) The following information pertains to Leila Mas Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year. Leila Mas Flower Shop TRIAL BALANCE December 31, 2008 Debit Cash P 102, 400 Accounts receivable 64, 800 Inventory, 12/31/2007 248, 000 Furniture & fixtures 472, 800 Land improvements 180, 000 Accumulated depreciation, 12/31/2007 Accounts payable, 12/31/2007 Leila Maes, Drawings Leila Maes, Capital, 12/31/2007 Sales Purchases 1, 220, 400 Salaries 696, 000 Payroll taxes 49, 600 Insurance 34, 800 Rent 136, 800 Utilities 50, 400 Living expenses 52, 000 P3, 308, 000 Credit

P129, 600 68, 000 498, 400 2, 612, 000

P3, 309, 000

Leila Maes has developed plans to extend into wholesale flower market and is in the process of negotiating a bank loan to finance the expansion. The bank is requesting 2008 financial statements prepared on the accrual basis of accounting from Leila Maes. During the course of a review engagement, Marion, Leila Maes accountant, obtained the following additional information.

1. Amounts due from customers totaled P128, 000 at December 31, 2008.
2. An analysis of the above receivables revealed that an allowance for uncollectible accounts of P15, 200 should be provided.

3. Unpaid invoices for flower purchases totaled P122, 000 and P68, 000, at
December 31, 2008, and December 31, 2007, respectively.

4. The inventory totaled P291, 200 based on a physical count of the goods
at December 31, 2008. The approximates market value. inventory was priced at cost,

which

5. On May 1, 2008, Leila Mae paid P34, 800 to renew its comprehensive
insurance coverage for 1 year. The premium on the previous policy, which expired on April 30, 2008, was P31, 200.

6. On January 2, 2008, Leila Mae entered into 25-year operating lease for

the vacant lot adjacent to Barons retail store for use as a parking lot. As agreed in the lease, Leila Mae paved and fenced in the lot at a cost P180, 000. The improvements were completed on April 1, 2008, and have an estimated useful life of 15 years. No provision for depreciation or amortization has been recorded. Depreciation on furniture and fixtures was P48, 000 for 2008.

7. Accrued expenses at December 31, 2007 and 2008, were as follows:

Utilities Payroll taxes

2 0 P3, 4, P8,

0 0 600 400 000

2 0 0 1 P 6, 000 6, 400 P12, 400

page 3 8. Leila Mae is being sued for P16, 000. The coverage under the comprehensive insurance policy is limited to P1, 000, 000. Leila Maes attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000. 9. The salaries account proprietor. Leila Mae expenses. includes P16, also receives 000 per month paid to the P1, 000 per week for living

Required: You are to convert the balances of the nine (9) accounts below to the accrual basis. MULTIPLE CHOICE QUESTIONS: a 10. 11. 12. 13. 14. 15. 16. 17. 18. Accounts receivableP64, Inventory 291, Accounts payable 54, Sales 2, 612, Purchases 1, 274, Salaries 888, Payroll taxes 51, Insurance 34, Utilities 50, b c d

800 P63, 200 P128, 000 P192, 800 200 248, 000 43, 200 334, 400 000 68, 000 122, 000 176, 000 000 2, 548, 800 2, 500, 000 2, 675, 200 400 1, 220, 400 1, 166, 400 1, 250, 000 000 696, 000 600, 000 504, 000 600 47, 600 49, 600 50, 000 800 33, 600 36, 000 35, 000 400 48, 000 50, 000 52, 800

CASE 4: J& M CO. (BONDS) The J & M Co. sold P6, 000, 000 of 9% bonds on October 1, 2001, at P5, 747, 280 plus accrued interest. The bonds were dated July 1, 2001; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2006 to June 30, 2007, at 101, and thereafter until maturity at 100; and convertible into P10 par value common stock as follows. Until June 30, 2006, at the rate of 6 shares for each P1, 000 bond. From July 1, 2006 to June 30, 2009, at the rate of 5 shares for each P1, 000 bond. After June 30, 2009, at the rate of 4 shares for each P1, 000 bond. The bonds mature 10 years from their issue date. The company adjusts its books monthly and closes its books as of December 31 each year. The following transactions occur in connection with the bonds: 2007 July 1 P2, 000, 000 of bonds were converted into stock. 2008 Dec. 31 P1, 000, 000 face value of bonds were reacquired at 99-1/4 plus accrued interest. These were immediately retired.

2009 July 1 The remaining bonds were called for redemption and accrued interest was paid. For purposes of obtaining funds for redemption and business expansion, a P8, 000, 000 issue of 7% bonds was sold at 97. These bonds are dated July 1, 2009, and are due in 20 years.

19. What are the carrying value of bonds payable at December 31, 2001? a. P5, 747, 280 b. P6, 000, 000 c. P5, 753, 760 d. P5, 749, 440

20. What is the total interest expense for 2001? a. P128, 520 b. P 47, 160 c. P141, 480 d. P135, 000

21. In recording the bond conversion on July 1, 200, how much should be credited to the additional paid-in capital account?

a. P1, 796, 320 b. P1, 965, 440

c. P1, 845, 440 d. P1, 865, 440 page 4

22. What is the gain or loss on bond conversion on July 1, 2007? a. P0 b. P1, 796, 320 c. P1, 865, 440 d. P 34, 560

23. What is the carrying value of the bonds reacquired on December 31, 2008? a. P989, 200 b. P957, 880 c. P1, 010, 800 d. P 981, 700

24. What is the gain (loss) on bond reacquisition on December 31, 2008? a. P3, 300 b. (P3, 300) c. P34, 620 d. P (P34, 620)

25. What is the carrying value of the bonds retired on July 1, 2009? a. P3, 000, 000 b. P2, 974, 080 c. P2, 873, 640 d. P3, 025, 920

26. What is the gain (loss) on bond retirement on July1, 2009? a. (P25, 920) b. P25, 920 d. P0 c. (P12, 960)

CASE 5: BLUE ICE CO. (R/E) BLUE ICE COMPANYS stockholders equity account balance at December 31, 2008 were as follows: Common Stock Additional Paid-in capital Retained Earnings The following 2009 transactions stockholders equity accounts: 800, 000 1, 600, 000 1, 845, 000 and other information relate to the

a. BLUE ICE had 400, 000 authorized shares of P5 par common stock, of which 160, 000 shares were issued and outstanding. b. On March 5, 2009, BLUE ICE acquired 5, 000 shares of its common stock for P10 per share to hold as treasury stock. The shares were originally issued at P15 per share. BLUE ICE uses the cost method to account for treasury stock. Treasury stock is permitted in BLUE ICEs state of incorporation. c. On July 15, 2009, BLUE ICE declared and distributed a property dividend of inventory. The inventory had a P75, 000 carrying value and a P60, 000 fair market value. d. On January 2, 2009, BLUE ICE granted stock options to employees to purchase 20, 000 share of BLUE ICEs common stock at P18 per share, which was the market on that date. The option may be exercised all 20, 000 options when the market value of the stock was P25 per share. BLUE ICE issued new shares to settle the transaction. e. BLUE ICEs net income for 2009 was P240, 000. Instruction: Based on the information necessary, answer the following question. above and other analysis as

27. BLUE ICEs Common Stock balance at December 31, 2009 is; a. P1, 160, 000 b. P900, 000 c. P800, 000 d. P1, 300, 000

28. BLUE ICEs Additional Paid-in capital balance at December 31, 2009 is; a. P1, 860, 000 c. P2, 000, 000 b. P1, 960, 000 d. P2, 100, 000 29. BLUE ICEs Retained Earnings balance at December 31, 2009 is; a. P2, 085, 000 b. P2, 010, 000 c. P2, 025, 000 d. P1, 770, 000

30. BLUE ICEs Treasury Stock balance at December 31, 2009 is; a. P50, 000 b. P75, 000 c. P0 d. P125, 000

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31. BLUE ICEs Stockholders Equity balance at December 31, 2009 is; a. P4, 910, 000 b. P4, 820, 000 c. P4, 720, 000 d. P4, 735, 000

CASE 6: LETICIAS CO. (PPE) Information pertaining to LETICIA equipment for 2009 is presented below. Account balances at January 1, 2009: Land 6, Buildings 48, Accum. Depreciation Bldg. Machinery and equipment 36, Accum. Depreciation Mach/Equip. Automotive equipment 4, Accum. Depreciation Auto. Equip. Depreciation data: Building Machinery/Equip. Automotive Equip. Leasehold improvements Debit 000, 000 000, 000 000, 000 600, 000 Credit 10, 524, 000 10, 000, 000 3, 384, 000 COMPANYS property, plant and

Depreciation Method 150% declining balance SLM SYD SLM

Useful Life 25 years 10 years 4 years -

Depreciation is computed to the nearest month. Transactions during 2009 and other information are as follows: On January 2, 2009, LETICIA purchased a new car for P800, 000 cash and trade-in of a 2-year-old car with a cost of P720, 000 and a book value of P216, 000. The new car has a cash price of P960, 000; market value of the trade-in is not known. On May 1, 2009, costs of P6, 720, 000 were incurred to improve leased office premises. The leasehold improvements have a useful life of 8 years. The related lease terminates on December 31, 2008. On July 1, 2009, machinery and equipment were purchased at a total invoice cost of P11, 200, 000; additional costs of P200, 000 for freight and P1, 000, 000 for installation were incurred. LETICIA determined that the automotive equipment comprising the P4, 600, 000 balance at January 1, 2009, would have been depreciated at a total amount of P720, 000 for the year ended December 31, 2009. Instruction: Based on the information necessary, answer the following question: above and other analysis as

32. What is the depreciation on building for 2009? a. P1, 499, 040 b. P2, 880, 000 c. P2, 998, 080 d. P2, 248, 557

33. What is the book value of the building at December 31, 2009? a. P34, 596, 000 b. P35, 976, 960 c. P34, 477, 920 d. P35, 227, 393

34. What is the depreciation on machinery and equipment for 2009? a. P4, 128, 000 b. P4, 151, 000 c. P4, 220, 000 d. P4, 197, 000

35. What is the gain on machine destroyed by fire?

a. P620, 000 b. P300, 000

c. P160, 000 d. P460, 000 page 6

36. What is the balance of the accumulated depreciation machinery and equipment at December 31, 2009? a. P13, 231, 000 b. P13, 777, 000 c. P13, 760, 000 d. P13, 691, 000

37. What is the depreciation on automotive equipment for 2009? a. P1, 104, 000 b. P816, 000 c. P720, 000 d. P960, 000

38. What is the gain (loss) on car traded in? a. P (240, 000) b. P240, 000 c. P (56, 000) d. P56, 000

39. What is the depreciation on leasehold improvement for 2009? a. P756, 000 b. P672, 000 c. P560, 000 d. P630, 000

40. What is the book value of leasehold improvements at December 31, 2009? a. P6, 160, 000 b. P6, 048, 000 c. P6, 090, 000 d. P5, 964, 000

CASE 7: ST. JOHN AND ST. THERESE Financial Statements for St. John and St. follows: Income Statements for the year ended 12/31/02 St. John Sales Cost of sales Gross Margin Depreciation and interest expense Other operating expenses Net income from operations Gain on sale of equipment Gain on bonds Equity in subsidiarys income Net income 750, 581, 169, 28, 117, 23, 3, 000 000 000 400 000 600 000 Therese on December 31, 2009

St. Therese 420, 266, 154, 16, 128, 9, 000 000 000 200 400 400

8, 460 . 35, 060 9, 400 ======== ======== Statement of Retained Earnings for the year ended 12/31/02 01/01/02 Retained Earnings Net Income (from above) Total Dividends 12/31/02 Balance 48, 000 35, 060 83, 060 (15, 000) 68, 060 ========= 41, 000 9, 400 50, 400 (4, 000) 46, 400 ========

Balance Sheet as of December 31, 2009 Cash Accounts receivable (net) Inventories Equipment Accumulated depreciation Investment in stock of St. John Investment in bonds of St. Therese Patents 45, 43, 38, 195, (35, 125, 300 700 300 000 200) 460 . 6, 12, 20, 57, (18, 400 100 750 000 900)

412, 560 ========= 8, 900 100, 000 154, 000

44, 000 9, 000 130, 350 ======== 18, 950 50, 000

Accounts payable Bonds payable Capital Stock

Additional paid-capital Retained earnings (from above)

81, 600 68, 060 412, 560 ========

15, 000 46, 400 130, 350 ========= page 7

St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009. The following additional information is available in the first year after the acquisition. 1. During 2009, St. John sold merchandise to St. Therese that originally cost St. John P15, 000, and the sale was made for P20, 000. On December 31, 2008, St. Thereses inventory included merchandise purchased from St. John at a cost to St. Therese of P12, 000. 2. Also, during 2009, St. John acquired P18, 000 of merchandise from St. Therese. St. Therese uses normal markup of 25% above cost. St. Johns ending inventory includes P10, 000 of the merchandise acquired from St. Therese. 3. St. Therese reduced its intercompany account payable to St. John to a balance of P4, 000 as of December 31, 2009, by making a payment of P1, 000 on December 30. This P1, 000 payment was still in transit on December 31, 2009. 4. On January 2, 2009, St. Therese acquired equipment from St. John for P7, 000. The equipment was originally purchased by St. John for P5, 000 and had a book value of P4, 000 at the date of sale to ST. Therese. The equipment had an estimated remaining life of 4 years as of January 2, 2009. 5. On December 31, 2009, St. Therese purchased for P44, 000, 50% of the outstanding bonds issued by St. John. The bonds mature on December 31, 2005, and were originally issued at par. The bonds pay interest annually on December 31 of each year, and the interest was paid to the prior investor immediately before St. Thereses purchase of bonds. QUESTION: Assume that the combination is accounted for as PURCHASE. 41. What is the eliminating entry for the Equity in subsidiarys income and dividends declared by the subsidiary? a. Equity in subsidiarys income 8, 460 Investment in stock of St. Therese 8, 460 b. Equity in subsidiarys income 8, 460 Dividends declared St. Therese 3, 600 Investment in stock of St. Therese 4, 860 c. Equity in subsidiarys income 12, 060 Investment in stock of St. Therese 12, 060 d. No Eliminating Entry 42. What is the eliminating entry for St. Thereses stockholders equity? a. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Goodwill 25, 200 Investment in stock of St. Therese 120, 600 b. Capital; stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Investment in stock of St. Therese 95, 400 c. Capital stock St. Therese 50, 000 Additional paid-in capital 15, 000 Retained earnings St. Therese 46, 400 Goodwill 14, 060 Investment in stock of St. Therese 125, 460 d. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400 Investment in stock of St. Therese 111, 400 43. To eliminate the sales made by St. John to St. Therese, the entry is: a. Sales Inventory St. Therese (B/S) Purchases Inventory St. Therese (I/S) b. Sales 20, 000 3, 000 20, 000 3, 000 20, 000

Cost of sales Inventory St. Therese c. Sales Inventory St. Therese Cost of sales d. Retained Earnings Sales Inventory St. Therese Cost of sales

17, 000 3, 000 20, 000 3, 000 23, 000 Page 8 3, 000 20, 000

3, 000 20, 000

44. To eliminate the entry made by St. Therese to St. John, the entry is: (assume that Equity in subsidiary income has not been recorded by parent) a. Sales 18, 000 Inventory 2, 000 Cost of sales 16, 000 b. Sales 18, 000 Investment in stock of St. Therese 1, 600 Retained earnings St. Therese 400 Cost of sales 18, 000 Inventory 2, 000 c. Sales 18, 000 Retained earnings 2, 000 Cost of sales 18, 000 Inventory 2, 000 d. Sales 18, 000 Inventory 2, 000 Cost of sales 20, 000 45. To record the items in transit and to eliminate the payable/receivable, the entry is: a. Accounts payable 4, 000 Accounts receivable 4, b. Accounts receivable 4, 000 Cash 1, 000 Accounts payable 5, c. Cash 1, 000 Accounts payable 3, 000 Accounts receivable 4, d. Cash 1, 000 Accounts payable 4, 000 Accounts receivable 5, inter-companys 000 000 000 000

46. To eliminate the acquisition made by St. Therese from St. John, the entry is: a. Equipment 2, 000 Accumulate depreciation 1, 000 Gain on sale of equipment 3, 000 b. Gain on sales of equipment 3, 000 Equipment 2, 000 Accumulated depreciation 250 Depreciation expense 750 c. Gain on sale of equipment 3, 000 Equipment 2, 000 Accumulated depreciation 1, 000 d. Gain on sale of equipment 3, 000 Equipment 2, 000 Depreciation expense 1, 000 47. The depreciation recorded by St. John at December 31, 2009 is: a. Overstated by P750 c. Overstated by P1, 750 b. Overstated by P250 d. Understated by P1, 000 48. The entry to eliminate the bonds purchased by is: a. Bonds payable 50, Investment in bonds of St. John Gain on extinguishments of debt b. Investment of St. John 44, Loss on extinguishments of debt 6, Bonds payable c. Bonds payable 44, Investment in bonds of St. John Retained earnings d. Bonds payable 50, Investment in bonds of St. John Retained earnings St. Therese from St. John 000 000 000 000 000 44, 000 6, 000 50, 000 44, 000 6, 000 44, 000 6, 000

page 9

For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST. 49. What is the eliminating entry for the Equity in dividends declared by the subsidiary? a. Equity in subsidiarys income 8, Investment in stock of St. Therese b. Equity in subsidiarys income 8, Dividends declared St. Therese Investment in stock of St. Therese c. Equity in subsidiarys income 12, Investment in stock of St. Therese e. No eliminating Entry subsidiarys income and 460 460 060 8, 460 3, 600 4, 860 12, 060

50. What is the eliminating entry for St. Thereses stockholders equity? a. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Goodwill 25, 200 Investment in stock of St. Therese 120, 600 b. Capital stock St. Therese 45, 000 Additional paid-in capital St. Therese 13, 500 Retained earnings St. Therese 36, 900 Investment in stock of St. Therese 95, 400 c. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400 Goodwill 14, 060 Investment in stock of St. Therese 125, 460 d. Capital stock St. Therese 50, 000 Additional paid-in capital St. Therese 15, 000 Retained earnings St. Therese 46, 400 Investment in stock of St. Therese 111, 400

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