AP mock board exam (NDU)

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

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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 Credit Jan 1 Audited balance 4,000shares P80,000

Feb 28 Cash dividend 2,000

Mar 31 Bought shares 9,000

Apr 1 Sale of rights 6,000

June 30 Sale of shares 10,000

1 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 2,000

Dividend income 2,000

b Retained earnings 2,000

c Dividend Income 2,000

Stock investment 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 16,000

b Stock rights 20,000

c Stock rights 10,000

d Stock rights 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 18,000

b Stock investment 12,000

c Stock rights 12,000

d Stock rights 15,000

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4 On April 1, the remaining rights were sold for P6, 000 The adjusting entry is:

a Stock investment 6,000

Gain on sale of rights 6,000

c Stock investment 4,000 Loss on sale of rights 2,000

d Stock investment 4,000

5 On June 30, 460 shares were sold for P10, 000 Using the average cost method, the adjusting entry is:

Stock investment 7,500 Gain on sale of stock 2,500

Gain on sale of stock 10,000

c Stock investment 2,500

Gain on sale of stock 2,500

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 Branch’s 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 P75,700

b 65,700

c 86,200

d 94,820

7 The net adjustment in Esperanza’s books related to the Home Office account is:

a P33,335

b 31,450

c 20,950

d 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

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9 The adjusted balance of the reciprocal account is:

a P84, 807

b 90, 220

c 99, 200

d 109, 120

CASE 3: LEILA MAE’S FLOWER SHOP (ACCRUAL)

The following information pertains to Leila Ma’s Flower Shop, a calendar-year sole proprietorship, which maintained its books on the cash basis during the year

Leila Ma’s Flower Shop TRIAL BALANCE December 31, 2008

Debit Credit

Accounts receivable 64, 800

Inventory, 12/31/2007 248, 000

Furniture & fixtures 472, 800

Land improvements 180, 000

Accumulated depreciation, 12/31/2007 P129, 600

Accounts payable, 12/31/2007 68, 000

Leila Mae’s, Drawings

Leila Mae’s, Capital, 12/31/2007 498, 400

Living expenses 52, 000

P3, 308, 000 P3, 309, 000

Leila Mae’s 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 Mae’s During the course of a review engagement, Marion, Leila Mae’s 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 inventory was priced at cost, which approximates market value

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 Baron’s 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:

2 0 0 0 2 0 0 1 Utilities P3, 600 P 6, 000

Payroll taxes 4, 400 6, 400

P8, 000 P12, 400

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8 Leila Mae is being sued for P16, 000 The coverage under the comprehensive insurance policy is limited to P1, 000, 000 Leila Mae’s

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attorney believes that an unfavorable outcome is probable and that a reasonable estimate of the settlement is P1, 200, 000

9 The salaries account includes P16, 000 per month paid to the proprietor Leila Mae also receives P1, 000 per week for living expenses

Required: You are to convert the balances of the nine (9) accounts below to

the accrual basis

MULTIPLE CHOICE QUESTIONS:

a b c d

10 Accounts receivableP64, 800 P63, 200 P128, 000 P192, 800

11 Inventory 291, 200 248, 000 43, 200 334, 400

12 Accounts payable 54, 000 68, 000 122, 000 176, 000

13 Sales 2, 612, 000 2, 548, 800 2, 500, 000 2, 675, 200

14 Purchases 1, 274, 400 1, 220, 400 1, 166, 400 1, 250, 000

15 Salaries 888, 000 696, 000 600, 000 504, 000

16 Payroll taxes 51, 600 47, 600 49, 600 50, 000

17 Insurance 34, 800 33, 600 36, 000 35, 000

18 Utilities 50, 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 c P5, 753, 760

b P6, 000, 000 d P5, 749, 440

20 What is the total interest expense for 2001?

a P128, 520 c P141, 480

b P 47, 160 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 c P1, 845, 440

b P1, 965, 440 d P1, 865, 440

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22 What is the gain or loss on bond conversion on July 1, 2007?

a P0 c P1, 865, 440

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b P1, 796, 320 d P 34, 560

23 What is the carrying value of the bonds reacquired on December 31, 2008?

a P989, 200 c P1, 010, 800

b P957, 880 d P 981, 700

24 What is the gain (loss) on bond reacquisition on December 31, 2008?

a P3, 300 c P34, 620

b (P3, 300) d P (P34, 620)

25 What is the carrying value of the bonds retired on July 1, 2009?

a P3, 000, 000 c P2, 873, 640

b P2, 974, 080 d P3, 025, 920

26 What is the gain (loss) on bond retirement on July1, 2009?

a (P25, 920) c (P12, 960)

b P25, 920 d P0

CASE 5: BLUE ICE CO (R/E)

BLUE ICE COMPANY’S stockholders’ equity account balance at December 31,

2008 were as follows:

Common Stock 800, 000

Additional Paid-in capital 1, 600, 000

Retained Earnings 1, 845, 000

The following 2009 transactions and other information relate to the stockholders’ equity accounts:

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 ICE’s 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 ICE’s 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 ICE’s net income for 2009 was P240, 000

Instruction: Based on the information above and other analysis as necessary, answer the following question

27 BLUE ICE’s Common Stock balance at December 31, 2009 is;

a P1, 160, 000 c P800, 000

b P900, 000 d P1, 300, 000

28 BLUE ICE’s 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 ICE’s Retained Earnings balance at December 31, 2009 is;

a P2, 085, 000 c P2, 025, 000

b P2, 010, 000 d P1, 770, 000

30 BLUE ICE’s Treasury Stock balance at December 31, 2009 is;

a P50, 000 c P0

b P75, 000 d P125, 000

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31 BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is;

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a P4, 910, 000 c P4, 720, 000

b P4, 820, 000 d P4, 735, 000

CASE 6: LETICIA’S CO (PPE)

Information pertaining to LETICIA COMPANY’S property, plant and equipment for 2009 is presented below

Account balances at January 1, 2009:

Debit Credit

Buildings 48, 000, 000

Accum Depreciation – Bldg 10, 524, 000

Machinery and equipment 36, 000, 000

Accum Depreciation – Mach/Equip 10, 000, 000

Automotive equipment 4, 600, 000

Accum Depreciation – Auto Equip 3, 384, 000

Depreciation data:

Depreciation Useful Method Life Building 150% declining balance 25 years

Leasehold improvements SLM -

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 above and other analysis as necessary, answer the following question:

32 What is the depreciation on building for 2009?

a P1, 499, 040 c P2, 998, 080

b P2, 880, 000 d P2, 248, 557

33 What is the book value of the building at December 31, 2009?

a P34, 596, 000 c P34, 477, 920

b P35, 976, 960 d P35, 227, 393

34 What is the depreciation on machinery and equipment for 2009?

a P4, 128, 000 c P4, 220, 000

b P4, 151, 000 d P4, 197, 000

35 What is the gain on machine destroyed by fire?

a P620, 000 c P160, 000

b P300, 000 d P460, 000

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36 What is the balance of the accumulated depreciation – machinery and equipment at December 31, 2009?

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a P13, 231, 000 c P13, 760, 000

b P13, 777, 000 d P13, 691, 000

37 What is the depreciation on automotive equipment for 2009?

a P1, 104, 000 c P720, 000

b P816, 000 d P960, 000

38 What is the gain (loss) on car traded in?

a P (240, 000) c P (56, 000)

b P240, 000 d P56, 000

39 What is the depreciation on leasehold improvement for 2009?

a P756, 000 c P560, 000

b P672, 000 d P630, 000

40 What is the book value of leasehold improvements at December 31, 2009?

a P6, 160, 000 c P6, 090, 000

b P6, 048, 000 d P5, 964, 000

CASE 7: ST JOHN AND ST THERESE

Financial Statements for St John and St Therese on December 31, 2009 follows:

Income Statements for the year ended 12/31/02

St John St Therese

Depreciation and interest expense 28, 400 16, 200

Other operating expenses 117, 000 128, 400

Net income from operations 23, 600 9, 400

Gain on sale of equipment 3, 000

Gain on bonds

Equity in subsidiary’s income 8, 460 Net income 35, 060 9, 400

======== ========

Statement of Retained Earnings for the year ended 12/31/02

01/01/02 Retained Earnings 48, 000 41, 000

Net Income (from above) 35, 060 9, 400

Total 83, 060 50, 400

Dividends (15, 000) (4, 000)

12/31/02 Balance 68, 060 46, 400

========= ========

Balance Sheet as of December 31, 2009

Accounts receivable (net) 43, 700 12, 100

Inventories 38, 300 20, 750

Equipment 195, 000 57, 000

Accumulated depreciation (35, 200) (18, 900)

Investment in stock of St John 125, 460

Investment in bonds of St Therese 44, 000

Patents 9, 000

412, 560 130, 350

========= ========

Accounts payable 8, 900 18, 950

Additional paid-capital 81, 600 15, 000

Retained earnings (from above) 68, 060 46, 400

412, 560 130, 350

======== =========

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St John acquired 90% of the common stock of St Therese for P120, 600 on January 1, 2009

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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 Therese’s 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 John’s 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 Therese’s purchase of bonds

QUESTION:

Assume that the combination is accounted for as PURCHASE

41 What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary?

a Equity in subsidiary’s income 8, 460

Investment in stock of St Therese 8, 460

b Equity in subsidiary’s income 8, 460

Dividends declared – St Therese 3, 600 Investment in stock of St Therese 4, 860

c Equity in subsidiary’s income 12, 060

d No Eliminating Entry

42 What is the eliminating entry for St Therese’s stockholders’ equity?

a Capital stock – St Therese 45, 000

Additional paid-in capital – St Therese 13, 500

Retained earnings – St Therese 36, 900

b Capital; stock – St Therese 45, 000

c Capital stock – St Therese 50, 000

Additional paid-in capital 15, 000

d Capital stock – St Therese 50, 000

43 To eliminate the sales made by St John to St Therese, the entry is:

Inventory – St Therese (B/S) 3, 000

Inventory – St Therese (I/S) 3, 000

Inventory – St Therese 3, 000

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Inventory – St Therese 3, 000

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Cost of sales 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)

Cost of sales 16, 000

Retained earnings – St Therese 400

Retained earnings 2, 000

45 To record the items in transit and to eliminate the inter-company’s payable/receivable, the entry is:

a Accounts payable 4, 000

b Accounts receivable 4, 000

Accounts payable 3, 000

Accounts payable 4, 000

46 To eliminate the acquisition made by St Therese from St John, the entry is:

Accumulate depreciation 1, 000

Gain on sale of equipment 3, 000

b Gain on sales of equipment 3, 000

Accumulated depreciation 250 Depreciation expense 750

c Gain on sale of equipment 3, 000

Accumulated depreciation 1, 000

d Gain on sale of equipment 3, 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 St Therese from St John is:

Investment in bonds of St John 44, 000 Gain on extinguishments of debt 6, 000

b Investment of St John 44, 000

Loss on extinguishments of debt 6, 000

Investment in bonds of St John 44, 000

Investment in bonds of St John 44, 000 Retained earnings 6, 000

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For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST

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49 What is the eliminating entry for the Equity in subsidiary’s income and dividends declared by the subsidiary?

a Equity in subsidiary’s income 8, 460

b Equity in subsidiary’s income 8, 460

Dividends declared – St Therese 3, 600 Investment in stock of St Therese 4, 860

c Equity in subsidiary’s income 12, 060

e No eliminating Entry

50 What is the eliminating entry for St Therese’s stockholders’ equity?

a Capital stock – St Therese 45, 000

b Capital stock – St Therese 45, 000

c Capital stock – St Therese 50, 000

d Capital stock – St Therese 50, 000

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