Problem no.1 In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions.. The subsidiary ledge
Trang 1Problem no.1
In connection with the audit of the PAKYO COMPANY for the year ended December 31, 2010 you are called upon to verify the accounts payable transactions You find that the company does not make use of a voucher register but enters all merchandise purchases in a Purchases Journal, from which posting are made to a subsidiary accounts payable ledger The subsidiary ledger balance of P1,500,000 as of December 31, 2010 agrees with the accounts payable balance in the company’s general ledger An analysis
of the account disclosed the following:
Estimated warranty on products sold 100,000
Due to officers and shareholders for advances 50,000
Goods received on consignment at selling price
(offsetting debit made to Purchases) 41,000
P 1,500,000
A further analysis of the “Trade Creditors” debit balances indicates:
Miscellaneous debit balances prior to 2007
No information available due to loss
of records in a fire P 3,000 03/03/07 Manila Co –Merchandise returned for credit,
but the company is now out of business 8,000 06/10/09 Cebu Corp – Merchandise returned but Cebu
07/10/10 Jolo Distributors – Allowance granted on
defective merchandise after the invoice
10/10/10 Bulacan Co – Overpayment of invoice 12,000
12/05/10 Advance to Zambales Co This company agrees
to supply certain articles on a cost –plus basis 24,000 12/05/10 Goods returned for credit and adjustments on
price after the invoices were paid; credit memos from supplier not yet received 4,000
63,000 Your next step is to check the invoices in both the paid and the unpaid invoice files against ledger accounts
In this connection, you discover an invoice from Atlas Co of P45,000 dated December 12, 2010 marked
“Duplicate”, which was entered in the Purchase Journal in January 2011 Upon inquiry, you discover that the merchandise covered by this invoice was received and sold, but the original invoice apparently has not been received
In the bank reconciliation working papers, there is a notation that five checks totaling P 63,000 were prepared and entered in the Cash Disbursements Journal of December, but these checks were not issued until January 10, 2011
The inventory analysis summary discloses good in transit of P 6,000 at December 31, 2010, not taken up by the company under audit during the year 2010 These goods are included in your adjusted inventory
1 The Accounts payable – Trade balance at December 31, 2010 should be
2 The net adjustment to Purchases should include a
A Net debit of P 51,000
Trang 2B Net credit of P 41,000
C Net debit of P 10,000
D Net debit of P 73,000
3 The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
4 The entry to adjust the Accounts payable account for those accounts with debit balances should include a debit to
A Miscellaneous losses if P 23,000
B Advances to suppliers of P 24,000
C Suppliers to debit balances of P 18,000
D Purchases of P 21,000
5 Auditor confirmation of accounts payable balances at the end of the reporting period may be necessary because
A There is likely to be other reliable external evidence to support the balances
B Correspondence with the audit clients attorney will reveal all legal action by vendors for non-payment
C This is a duplication of cutoff test
D Accounts payable at the end of reporting period may not be paid before the audit is completed
Problem 2
You were able to obtain the following from the accountant for Maverics Corp Related to the companys liability as of December 31, 2010
The following additional information pertains to these liabilities:
a All trade notes payable are due within six months of the balance sheet date
b Bank notes payable include two separate notes payable Allied Bank
(1) A P300,000, 8% note issued March 1, 2008, payable on demand Interest is payable every six months
(2) A 1-year, P500,000, 11 ½% note issued January 2, 2010 On December 30, 2010 Mavericks negotiated a written agreement with Allied Bank to replace the note with 2-year, P500,000, 10% note to be iss7ued January 2, 2011 The interest was paid on December 31, 2010
c The 10% mortgage note was issued October 1, 2007 With a term of 10 years Terms of the note give the holder the right to demand immediate payment of the company fails to make a monthly interest payment within 10 days of the date the payment is due As of December 31, 2010, Mavericks is three months behind in paying its required interest payment
d The 12% mortgage note was issued may 1, 2001, with a term of 20 years The current principal amount due is P 1,500,000 Principal and interest payable annually on April 30, A payment of P220,000 is due April 30, 2011 The payment includes interest of P 180,000
e The bonds payable is 10-year, 8% binds, issued June 30, 2001 Interest is payable semi-annually every June 30 and December 31
Based on the above and the result of your audit, answer the following:
1 Interest payable as of December 31, 2010 is
215,000
Trang 32 The portion of the Notes payable – bank to be reported under current liabilities as of December
31, 2010 is
3 Total current liabilities as of December 31, 2010 is
d 3,998,000
4 Total noncurrent liabilities as of December 31, 2010 is
d 1,960,000
Problem no 3
In conjunction with your firm’s examination of the financial statements of PISTONS COMPANY as of December 31, 2010, you obtained from the voucher register the information shown in the working paper below
Item
no.
Entry Date Voucher
Ref.
Description Amount Account Charged
1 12.18.10 12-202 Supplies, purchased FOB
destination, 23.26.20;
received 12.17.10
P 20,000 Supplies on hand
2 12.18.10 12-204 Auto insurance, 12.15.10
12.20.11
24,000 Prepaid insurance
3 12.21.10 12-206 Repairs services; received
12.20.10
maintenance
4 12.21.10 12-214 Merchandise, shipped FOB
Shipping point, 11.20.10;
received 12.04.10
12.20.10 (12 working days)
69,000 Salaries and wages
Reporting Service for 2011
subscription
7 12.28.10 12-230 Utilities for December 2010 29,000 Utilities expense
8 12.28.10 12-234 Merchandise, shipped FOB
destination, 12.24.10;
received 01.02.11
9 12.28.10 12-243 Merchandise, shipped FOB
destination, 12.26.10;
received 12.29.10
10 01.02.11 01-001 Legal services; received
12.28.10
professional expense
11 01.05.11 01-002 Medical services for
employees for December
2010
25,000 Medical expense
12 01.05.11 01-003 Merchandise, shipped FOB
shipping point, 12.29.10;
received 01.04.11
13 01.05.11 01-004 Payroll, 12.21.10 to
01.05.11 (12 working days
in total, 4 working days in Jan 2011
72,000 Salaries and wages
14 01.10.11 01-005 Merchandise, shipped FOB
shipping point, 01.02.11;
received 01.05.11
15 01.12.11 01-006 Manufacturing royalties
December 2010
39,000 Manufacturing cost
16 01.12.11 01-007 Merchandise, shipped FOB
destination, 01.03.11;
received 01.10.11
Trang 417 01.13.11 01-008 Maintenance e services;
received 01.09.11
maintenance
18 01.14.11 01-009 Interest on bank loan,
10-12-10 to 021.10.11
30,000 Interest Expense
19 01.15.11 01-010 Manufacturing equipment
installed on 12.29.10
254,000 Machinery and
equipment
12.15.10
160,000 Dividends payable
Accrues liabilities as December 31, 2010 were as follows:
Accrued interest payable 26,667
Accrues royalties payable 39,000 The accrues payroll, accrued interest payable, and accrued royalties payable accounts were reversed on January 1, 2011
REQUIRED:
Prepare adjusting entries as of December 31, 2010 based on your review of the data given above
PROBLEM NO 4
FEEL NA FEEL, INC has been producing quality reusable adult diapers for more than two decades The company’s fiscal year runs from April 1 to March 31 The following information relates to the obligations of Feel Na Feel as of March 31, 2010
BONDS PAYABLE
Feel Na Feel issued P10,000,000 of 10% bonds on July 1, 2008 The prevailing market rate of interest for these bonds was 12% on the date issue The bonds will mature on July 1, 2018 Interest is paid semiannually on July 1 and January 1 Feel Na Feel uses the effective interest rate method to amortize
NOTES PAYABLE
Feel Na Feel has signed several long-term notes with financial institutions The maturities of these notes are given in the schedule below The total unpaid interest for all of these notes amounts to P600,000 on March 31, 2010
P 7,000,000
ESTIMATED WARRANTIES
Feel Na Feel has a one-year product warranty on some selected items in its product line The estimated warranty liability on sales made during the 2008-2009 fiscal year and still outstanding as of March 31, 2009 amounted to P180,000 The warranty cost on sales made from April 1 2009, through March 31,2010, are estimated as P520,000 The actual warranty cost incurred during the current 2009-2010 fiscal tear are as follows:
Warranty claims honored on 2008-2009 sales P 180,000
Warranty claims honored on 2009-2010 sales 178,000
OTHER INFORMATION
1 TRADE PAYABLES
Accounts payable for supplies, goods and services purchased on open account amount to P740,000 as March 31, 2010
2 PAYROLL RELATED ITEMS
Trang 5Merchandise, shipped FOB destination, 12.24.10; received 01.02.11
Accrued Salaries and wages P 300,000 Withholding taxes payable 94,000 Other payroll deductions 10,000
3 MISCELLANEOUS ACCRUALS
Other accruals not separately classified amount to P150,000 as of March 31, 2010
4 DIVIDENDS
On march 15, 2010, Feel Na Feel’s board of directors declared a cash dividend of P0.20 per common share and a 10% common stock dividend Both dividends were to be distributed on April 12, 2010, to the common stockholders of record at the close of business on march 31, 2010 Data regarding Feel Na Feel common stock are as follows:
5.00 per share
Number of shares issued and outstanding 6,000,000 shares
Market Values of Common Stock:
share
1 How much was received by Feel Na Feel from the bonds issued on July 1, 2008?
10,647,040
2 On March 31, 2010, Feel Na Feel’s statements of financial position would report total current liabilities of
5,642,000
3 On March 31, 201, Feel Na Feel’s statement of financial position would report total noncurrent liabilities of
14,252,960
PROBLEM NO 5
On January 1, 2009, WIZARDS CORPORATION issued 2,000 of its 5-year, P1,000 face value 11% bonds date January 1 at an effective annual interest rate (yield) of 9% Interest is payable each December 31 Wizards uses the effective interest method of amortization On December 31, 2010 The 2,000 bonds were extinguished early through acquisition on the Open Market by Wizard for P1,980,000 plus accrued interest
On July 1, 2009, Wizards issued 5,000 of its P1,000 face value, 10% convertible bonds at pat Interest is payable every June 30 and December 31 On the date of issue, the prevailing market interest rate for similar debt without the conversion option is 12% On July 1, 2010, an investor in Wizards convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Wizards common stock, which had a fair value
of P105 and a par value of P1 at the date of conversion
Based on the above and the result of your audit, determine the following: (Round off present value factors to four decimal places.)
1 The issue price on the 2,000 5-year, P1,000 face value bonds in January 1, 2009 is
d 2,147,800
2 The carrying value of the 2,000 5-year, P1,000 face value bonds on December 31, 2009 is
2,121,100
3 The gain on early retirement of bonds on December 31, 2010 is
4 The carrying value of the 5,000 6 year, P1,000 face value bonds on December 31, 2009 is
Trang 6a P4,605,800 b 5,000,000 c 4,732.875
d 4,615,400
5 The conversion of the 1,500 6-years, P1,000 face value bonds on July 1, 2010 will increase APIC by
d P1,377,697
PROBLEM NO 6
The following data were obtained from the initial audit of BIBI COMPANY:
15%, 10 year, bonds payable, dated January 1, 2009
Balance
Cash proceeds from issue on January 1, 2009
Of 1,000, P1,000 bonds The market rate of
Interest on the date of issue was 12% P 1,172,044 P1,172.044
Bond Interest Expense
Accrued Interest on Bonds
Treasurer bonds
Redemption price and interest to date on
265,000
Based on the preceding information, determine the following:
1 Carrying value of bonds payable at December 31, 2010
921,266
2 Loss on Bond redemption
3 Accrued Interest on Bonds at December 31, 2010
4 Bond Interest Expense for the year ended December 31, 2010
PROBLEM 7
NUGGETS CORPORATION manufactures and sells food products and food processing machinery Its reporting date is December 31 Relevant extracts from its financial statements at December 31, 2009 are as follows:
Current liabilities
Provision
Noncurrent liabilities
Provision
Note 36-Contigent Liabilities
NUGGETS is engaged in the litigation with various parties in relation to allergic reaction t o traces of peanuts alleged to have been found in packets of fruit gums NUGGETS strenuously denies the allegation and , as at the same date authorizing the financial statements for issue, is unable to estimate the financial effect, if any, of any cost or damages that may be [payable to the plaintiffs
The provision for warranties at December 31, 2009 was calculated using the following assumptions: There was no balance carried forward from the prior year
Trang 7Estimated cost of repairs – Products with minor defects P 1,000,000 Estimated cost of repairs – Products with minor defects P 6,000,000 Expected % of products sold during 2008 having no defects in 2010 80%
Expected & of products sold during 2008 having minor defects in 2010 15 %
Expected & of products sold during 2008 having Major defects in 2010 5%
2010
Expected timing of settlement of warranty payments
in 2010
60% in 2010
During the year ended December 31, 2010, the following occurred:
1 In a relation to the warranty provision of P450,000 at December 31, 2009, P200,000 was paid out of the provision Of the amount paid, P150,000 was for products with minor defects and P50,000 was for products with major defects, all of which related to amounts that had been expected to be paid in 2010/
2 In calculating its warranty provision for December 31, 2010, NUGGETS made the following adjustment to the assumptions used for the prior year:
Estimated cost of repairs-products with minor defects no change Estimated cost if repairs – products with major defects P 5,000,000 Expected % of products sold during 209 having no defects in 2011 85% Expected % of products sold during 2009 having minor defects in 2011 13%
Expected % of products sold during 2009 having major defects in 2011 2%
one 2011
Expected timing of settlement of warranty payments 20% in 2011
in 2012
3 NUGGETS determined that part of its plant and equipment needed an overhaul – the conveyor belt on one of it s machines would need to be replaced ion about December 2011
at an estimated cost of P250,000 The carrying amount of the conveyor belt at December
31, 2009 was P140,000 Its original cost was P200,000
4 NUGGETS was unsuccessful in its defense of the peanut allergy case and was ordered to pay P1,5000,000 to the plaintiffs As at December 31, 2010, NUGGETS had paid P800,000
5 NUGGETS commenced litigation against one of its adviser for negligent advice given on the original installation of the conveyor belt referred to in (3) above, in October 2010, the court found in favor of NUGGETS The hearing for damages had not been scheduled as at the date the financial statement for 2010 were authorized for issue NUGGETS estimated that it would receive about P425,000
6 NUGGETS signed an agreement with Choko Bank to the effect that NUGGETS would guarantee a loan made by Choko Bank to NUGGETS’ subsiadiary, ChapaChocks Ltd ChapaChocs’ loan with Choko Bank was P3,200,000 as at December 31, 2010 ChapaChocs was in a strong financial position at 31 December 2010
Based on the above and the result of your audit, answer the following:
1 The warranty expense in 2010 is
230,000
2 The provision for warranties as of December 31, 2010 is
410,000
3 The provision for warranties to be reported as current liability as of December 31, 2010 is
330,000
4 The provision for warranties to be reported as noncurrent liability as of December 31, 2010 is
Trang 8a P 80,000 b P260,000 c 150,000 d 330,000
5 Total provisions to be reported in the statement of financial position as of December 31, 2010 is
1,360,000
PROBLEM NO 8
Select the best answer for each of the following:
1 In Auditing accounts payable, an auditor procedures most likely will focus primarily
on managements assertion of
Completeness
b Presentation and disclosure d Valuation and allocation
2 An auditor performs a test to determine whether all merchandise for which the client was billed was received The population for this test consist of all
reports
3 The primary audit test to determine if accounts payable are valued properly is
a Confirmation of accounts payable
b Vouching accounts payable to supporting documentation
c An analytical procedure
d Verification that accounts payable was reported as a current liability in the balance sheet
4 Which of the following procedures is least likely to be performed before the balance sheet date?
a Observation of inventory count
b Testing of internal control over cash
c Search for unrecorded liabilities
d Confirmation of receivables
5 An audit assistant found a purchase order for a regular supplier in the amount P 5,500 the purchase order was date after receipt of goods The purchasing agent had forgotten to issue the purchase order Also, a disbursement of P450 for materials did not have receiving report The assistant wanted to select additional purchase orders for investigation but was unconcerned about lack of receiving report The audit director should
a Agree with the assistant because the amount of the purchase order exception was considerably larger than the receiving report exception
b Agree with the assistant because the cash disbursement clerk had been assured by the receiving clerk that the failure to fill out a report didn’t happen very often
c Disagree with the assistant because two problems have an equal risk of loss associated with them
d Disagree with the assistant because the lack of a receiving report has a greater risk of loss associated with it
6 When using confirmation to provide evidence about completeness assertion for account payable, the appropriate population most likely is
a Vendors with whom the entity has previously done business
b Amounts recorded in the accounts payable subsidiary ledger
c Payees of checks drawn in the month after the year end
d Invoices filed in the entity’s open invoice file
7 Which of the following is a substantive test than an auditor is most likely to perform to verify the existence and valuation of recorded accounts payable?
a Investigating the open purchase order file to ascertain that pre-numbered purchase orders are used and accounted for
Trang 9b Receiving the client’s mail, unopened, for a reasonable period of time after year end to search for unrecorded vendor’s invoices
c Vouching selected entries in the accounts payable subsidiary ledger to purchase orders and receiving reports
d Confirming accounts payable balances with know suppliers who have zero balances
8 Only one of the following four statements which compare confirmation of accounts payable with suppliers and confirmation of accounts receiving with debtors is false The false statements is that
a Confirmation of accounts receiving with debtors is a more widely accepted auditing procedure than us confirmation of accounts payable with suppliers
b Statistical sampling techniques are more widely accepted in the confirmation of accounts payable than in the confirmation of accounts receivable ]
c As compared with the confirmation of accounts receivable, the confirmation of accounts payable will tend to emphasize accounts with zero balances at the balance sheet date
d It is less likely that the confirmation request sent to the supplier will show the amount owed than that request sent to the debtor will show the amount date
9 When title to merchandise in transit has passed to the audit client the auditor engaged in the performance of a purchase cut-off will encounter the greatest difficulty in gaining assurance with respect to the
10 Which of the following audit procedures is least likely to detect an unrecorded liability?
a Analysis and recomputation of interest expense
b Analysis and recomputation of depreciation expense
c Mailing of standard bank confirmation forms
d Reading of the minutes of meetings of the board of directors
11 Unrecorded liabilities are most likely to be found during the review of which of the following documents?
a Unpaid bills c bills of lading
b Shipping records d Unmatched sales invoice
12 Which of the following audit procedures is best for identifying unrecorded trade accounts payable?
a Reviewing cash disbursement recorded subsequent to the balance sheet date to determine whether the related payables apply to the prior period
b Investigating payables recorded just prior to and just subsequent to the balance sheet date to determine whether they are supported by receiving reports
c Examining unusual relationships between monthly accounts payable balances and recorded cash payments
d Reconciling vendors statement to the file of receiving reports to identify items received just prior to the balance sheet date,
13 In verifying debits to perpetual inventory records of nonmanufacturing firm, the auditor is most interested in examining the purchase
14 Which of the following procedures relating to the examination of accounts payable could the auditor delegate entirely to the clients employees
a Test footings in the accounts payable ledger
b Reconcile unpaid invoices to vendors statements
Trang 10c Prepare a schedule of accounts payable
d Mail confirmation for selected account balances
15 An auditors purpose in reviewing the renewal of a note payable shortly after the balance sheet date most likely is to obtain evidence concerning managements assertions about
b Presentation and disclosure d Valuation
16 An auditors program to audit long-term debt should include steps that require
a Examining bond trust indentures
b Inspecting the accounts payable subsidiary ledger
c Investigating credits to the bond interest income account
d Verifying the existence of the bondholders
17 In an audit of bonds payable, an auditor expects the trust indenture to include the
a Auditee’s debt-to-equity ratio at the same time of issuance
b Effective yield of the bonds issued
c Subscription list
d Description on the collateral
18 In auditing long-term bonds payable, an auditor most likely will
a Perform analytical procedures on the bond premium and discount accounts
b Examine documentation of assets purchased with the bond proceeds or liens
c Com[pare interest with the bond payable amount for reasonableness
d Confirm the existence of individual bondholders at year-end
19 The audit procedures used to verify accrued liabilities differ from those employed for the verification of accounts payable because
a Accrued liabilities usually pertain to services of a continuing nature while account payable are the result of completed transaction
b Accrued liability balances are less material than account payable balances
c Evidence supporting accrued liabilities is nonexistent while evidence supporting account payable is readily available
d Accrued liabilities at year end will become account payable during the following year
20 The auditor is most likely to verify accrued commissions payable in conjunction with the
a Sales cutoff test
b Verification of contingent liabilities
c Review of post-balance sheet date disbursements
d Examination of trade accounts payable