AUDITING PROBLEMS – SOLUTION MANUAL

PROBLEM NO. 1 – HOWARD COMPANY

1. C Actual return P450,000

Interest income (315,000)
Remeasurement gain on plan assets 135,000
Increase in projected benefit obligation – actuarial loss (100,000)
Net remeasurement gain – other comprehensive income P 35,000

2. A Past service cost P750,000

Unrecognized actuarial gain (650,000)
Net adjustment to Retained earnings, Jan. 1 – credit P100,000

PROBLEM NO. 2 – ALTERADO COMPANY

3. D Policy 1 P25,500
Policy 2 (P72,000 x 3/36) 6,000
Policy 3 13,000
Insurance expense P44,500

4. C Equipment retired during 2013 (P2,400,000 – P1,600,000 =

P800,000 x 5%) P 40,000
P1,600,000 x 10% 160,000
Total depreciation expense P200,000

5. D Interest income (P600,000 x 7% x 5/12) P17,500

Rental income (P216,000 x 3/18) P36,000

PROBLEM NO. 3 – ISIDRO MANUFACTURING COMPANY

6. A Cost:
Truck #2 P220,000
Truck #5 400,000
Truck #6 420,000 P1,040,000
Accumulated depreciation:
Truck #2 (fully depreciated 7/1/12) P220,000
Truck #5, 7/1/10 – 12/31/13 (P400,000/5 x 3.5) 280,000
Truck #6, 7/1/12 – 12/31/13 (P420,000/5 x 1.5) 126,000 626,000
Book value, Dec. 31, 2013 P414,000

7. C 2010 2011 2012 2013 Total

Truck #1 P36,000 -- -- -- P36,000
Truck #2 44,000 44,000 22,000 -- 110,000
Truck #3 30,000 -- -- -- 30,000
Truck #4 48,000 48,000 24,000 -- 120,000
Truck #5 40,000 80,000 80,000 80,000 280,000
Truck #6 -- -- 42,000 84,000 126,000
Correct depreciation P198,000 P172,000 P168,000 P164,000 P702,000
Per client 210,000 225,000 250,500 304,000 989,500
Overstatement P12,000 P53,000 P82,500 P140,000 P287,500

8. B Accumulated depreciation 665,500

Trucks 480,000
Retained earnings 45,500
Depreciation expense 140,000

PROBLEM NO. 4 – TOY COMPANY

9. A Acquisition cost (P8,297,000 – P297,000 = P8,000,000 x75%) P6,000,000

Reconditioning cost 342,000
Salvaged materials – garage (66,000)
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 Construction of warehouse 1,013,000
Total cost - Buildings P7,289,000

10. C Share premium (P640,000 – P40,000) + (P1,110,000 – P1,000,000) P710,000

11. A Patent (P640,000 – P310,000) P330,000

Franchise 500,000
Total intangibles P830,000

PROBLEM NO. 5 – LAFAYETTE CORPORATION

Computation of Estimated Loss on Returns on Sales Warranties

Subsequent to June 30, 2013
Percentage of Total
Percentage Estimated Estimated
of Total Returns Sub- Returns Sub-
Estimated Estimated sequent to sequent to
Month Sales Returns Returns 6/30/13 6/30/13
January P4,200,000 7% P294,000 10% P29,400
February 4,700,000 7 329,000 20 65,800
March 3,900,000 7 273,000 30 81,900
April 3,250,000 7 227,500 50 113,750
May 2,400,000 10 240,000 70 168,000
June 1,900,000 10 190,000 100 190,000
P1,553,500 P648,850

Total estimated returns ............... P648,850 Required liability balance ....... P421,753
Loss percentage on returns ........ 65%* Less balance, 6/30/12............ 120,400
Total estimated loss on returns ... P421,753 Required adjustment to
liability account P301,353

*Estimated loss on component replacement (in percentage of sales price):

Cost of unit replacement 70%
Add freight charges on return and replacement 5
75%
Deduct salvage value of components returned 10
Net loss on components returned 65%

Adjusting Entry

Warranty Expense 301,353

Estimated Liability for Product Warranty 301,353

12. A 13. B 14. B

PROBLEM NO. 6 – MALOX SPECIALTY COMPANY

FG WIP RM FS
Down tube shifters at NRV P266,000
Bar end shifters at cost 182,000
Head tube shifters at cost 195,000
Work-in-process at NRV P108,700
Derailleurs at NRV P110,0001
Remaining items at NRV 127,400
Supplies at cost P64,8002
Totals P643,000 P108,700 P237,400 P64,800
1P264,000 x ½ = P132,000; P132,000/1.2 = P110,000
2P69,000 – P4,200 = P64,800

15. B 16.C 17. D

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PROBLEM NO. 7

18.
Cost of trademark P300,000
Less: Accumulated amortization, 20X4 – 20X6 (P300,000/10 x 3 yrs.) 90,000
Carrying value, December 31, 20X6 P210,000
Remaining useful life, 20X7 – 20X9 3 years
Amortization for 20X7 P 70,000
Answer: B

19.
Cost P300,000
Less: Accumulated amortization, 20X4 – 20X7 (P90,000 + P70,000) 160,000
Carrying value, December 31, 20X7 P140,000
Recoverable value 50,000
Impairment loss P 90,000
Answer: A

20.
Probability-weighted expected cash flows:
P400,000 x 5% P 20,000
P200,000 x 20% 40,000
P80,000 x 50% 40,000
P20,000 x 25% 5,000
Total P105,000
Add: 6% risk adjustment 6,300
Total P111,300
Present value factor (at 5% for 6 months) 0.95238
Present value of warranties, December 31, 20X2 P106,000
Answer: D

21. It is probable that SME B will successfully defend the court case. Therefore, SME B has a possible
obligation and hence a contingent liability. No amounts are recognized for contingent liabilities.
However, disclosure is necessary.
Answer: D

22.
Impairment loss P(14,030)
Cash dividends (P2,000 + P250) 2,250
Net P(11,780)
Answer: A

23.
Share of income, entities BB and CC (P1,250 + P4,500) P5,750
Share of loss, entity DD (5,000)
Impairment loss (9,030)
Net P(8,280)
Answer: A

24.
Cost Fair Value
BB P10,000 P13,000
CC 15,000 29,000
DD 28,000 15,000
P53,000 P57,000

Increase in fair value (P57,000 – P53,000) P4,000

Answer: A
25.
Cost model:
Acquisition cost, including transaction cost (P53,000 + P530) P53,530
Less: Impairment loss 14,030
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 Carrying value, December 31, 20X1 P39,500

Equity method:
Acquisition cost, including transaction cost P53,530
Cash dividends (P250 + P2,000) (2,250)
Share of income, entities BB and CC (P1,250 + P4,500) 5,750
Share of loss, entity DD (5,000)
Impairment loss (9,030)
Carrying value, December 31, 20X1 P43,000

Fair value model:

BB P13,000
CC 29,000
DD 15,000
Carrying value, December 31, 20X1 P57,000
Answer: C

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