{solved} AUDITING PROBLEMS REVIEWERS /TESTBANKS for Accounting.

AUDITING PROBLEMS REVIEWERS / TESTBANKS Problem 1 The Christine Manufacturing, which started operations on September 1, 2008, is owned by Sheila Ltd. Sheila Ltd’s accounts at December 31 included the following balanc ...

AUDITING PROBLEMS REVIEWERS / TESTBANKS Problem 1 The Christine Manufacturing, which started operations on September 1, 2008, is owned by Sheila Ltd. Sheila Ltd’s accounts at December 31 included the following balances: Machinery (at cost) 91,000 Accumulated depreciation – machinery 48,200 Vehicles (at cost; purchased November 21, 2010) 46,800 Accumulated depreciation – vehicles 19,656 Land (at cost; purchased October 25, 2008) 81,000 Building (at cost; purchased October 25, 2008) 185,720 Accumulated depreciation – building 28,614 Details of machines owned at December 31, 2011 are as follows: Machine Purchase Date Cost useful Life Residual Value 1 October 7, 2008 P 43,000 5 years P 2,500 2 February 4, 2009 P 48,000 6 years P 3,000 Additional information: • Sheila Ltd calculates depreciation to the nearest month and balances the records at month-end. Recorded amounts are rounded to the nearest peso, and the reporting data is December 31. • Sheila Ltd uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated on the diminishing balance at 40% p.a. • The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which cost P23,400. • On acquiring the land and building, Sheila Ltd estimated the building’s useful life and residual value at 20 years and P5,000, respectively. The following transactions occurred from January 1, 2012. 2012 January 3 Bought a new machine (machine 3) for a cash price of P57,000. Freight charges of P442 and installation of P1,758 were paid in cash. The useful life and residual value were estimated at five years and P4,000, respectively. June 22 Bought a second-hand vehicle for P15,200 cash. Repainting cost of P655 and four new tires costing P345 were paid for in cash. August 28 Exchanged machine 1 for furniture that had a fair value of p12,500 at the date of exchange. The fair value of machine 1 at the date of exchange was P11,500. The office furniture originally cost P36,000 and, to the date of exchange, had been depreciated by P24,100 in the previous owner’s books. Sheila Ltd estimated the office furniture’s useful life and residual value at 8 years and P540, respectively. December 31 Recorded depreciation 2013 April 30 Paid for repairs and maintenance on the machinery at a cash cost of P928. May 25 Sold one of the vehicles bought on November 21, 2010 for P6,600 cash. June 26 installed a fence around the property at a cash cost of P5,500. The fence has an estimated useful life of 10 years and zero residual value. December 31 Recorded depreciation Questions: 1. The gain on exchange of machine 1 on August 28, 2012 is a. P 1,225 b. P 900 c. P 225 d. P 0 2. The total depreciation expense in 2012 is a. P 47,572 b. P 47,531 c. P 47,400 d. P 47,131 3. The loss on sale of vehicle on May 25, 2013 is a. P 1,543 b. P 457 c. P 186 d. P 0 4. The total depreciation expense in 2013 is a. P 39,144 b. P 39,019 c. P 38,744 d. P 37,662 5. A weakness in internal accounting control over recording retirements of equipment may cause the auditor to a. Inspect certain items of equipment in the plant and trace those items to the accounting records. b. Review the subsidiary ledger to ascertain whether depreciation was taken on each item of equipment during the year. c. Trace additions to the “other assets” account to search for equipment that is still on hand but no longer being used. d. Select certain items of equipment from the accounting records and locate them in the plant. Problem 2 Mary Joy Company constructs its own buildings. In 2009, a total of P1,228,500 interest was included as part of the cost of a new building just being completed. The following is a summary of construction expenditures in 2010: Accumulated in 2009, including capitalized interest 18,228,500 March 1 7,000,000 September 1 4,000,000 December 31 5,000,000 Total 34,228,500 Mary Joy has the following outstanding loans at December 31, 2010: 12% note related directly to new building; term, 5 years from beginning of construction P10,000,000. General Borrowings: 10% note issued prior to construction of new building; term 10 years 5,000,000 8% note issued prior to construction of new building; term, 5 years 10,000,000 Questions: 6. The capitalization rate is a. 8,67% b. 10% c. 12% d. 8% 7. The average accumulated expenditures in 2010 is a. P 25,811,834 b. P 24,166,667 c. P 34,228,500 d. P 25,395,167 8. The amount of avoidable interest for 2010 is a. P 3,656,500 b. P 2,500,000 c. P 2,739,517 d. P 2,534,761 9. The amount of capitalizable interest in 2010 is a. P 2,500,000 b. P 2,534,761 c. P 2,739,517 d. P 1,200,000 10. The total cost of the new building is a. P 35,500,000 b. P 36,728,500 c. P 36,763,261 d. P 27,895,167 Problem 3 in 2001, Honest Corporation acquired a silver mine in Mr. Diwalwal. Because the mine is located deep in the Mr. Diwalwal, Honest was able to acquire the mine for the low price of P50,000. In 2002, Honest constructed a road to the silver mine costing P5,000,000. Improvements to the mine made in 2002 cost P750,000. Because of the improvements to the mine and the surrounding land, it is estimated that the mine can be sold for P600,000 when the mining activities are complete. During 2003, five buildings were constructed near the mine site to house the mine workers and their families. The total cost of the five buildings was P1,500,000. Estimated residual value is P250,000. In 2001, geologists estimated 4 million tons of silver ore could be removed from the mine for refining. During 2004, the first year of operations, only 5,000 tons silver ore were removed from the mine. However, in 2005, workers mined 1 million tons of silver. During that same year, geologists discovered that the mine contained 3 millions tons of silver in addition to the original 4 million tons Improvements of P275,000 were made to the mine early in 2005 to facilitate the removal of the additional silver. Early in2005, an additional building was constructed at a cost of P225,000 to house the additional workers needed to excavate the added silver. This building is not expected to have any residual value. In 2006, 2.5 million tons of silver were mined and costs P1,100,000 were incurred at the beginning of the year for improvement to the mine. Questions: Based on the above and the result of your audit, determine the following: (round off depletion and depreciation rates to two decimal places) 11. Depletion for 2004 a. P 5,550 b. P 6,300 c. P 6,500 d. 7,250 12. Depletion for 2005 a. P 780,000 b. P 870,000 c. P 1,300,000 d. P 1,820,000 13. Depreciation for 2005 a. P 180,000 b. P 210,000 c. P 250,000 d. P 490,000 14. Depletion for 2006 a. P 1,950,000 b. P 2,150,000 c. P 2,275,000 d. P 2,425,000 15. Depreciation for 2006 a. P 450,000 b. P 525,000 c. P 625,000 d. 1,225,000 Problem 4 At the beginning of year 1, Charmaine Company grants share options to each of its 100 employees working in the sales department. The share options will vets at the end of year 3, provided that the employees remain in the entity’s employ, and provided that the volume of sales a particular product increases by at least an average of 5 percent per year. If the volume of sales of the product increases by an average of between 5 percent and 10 percent per year, each employee will receive 100 share options. If the volume of sales increases by an average of between 10 percent and 15 percent each year, each employee will receive 200 share options. If the volume of sales increases by an average of 15 percent or more, each employee will receive 300 share options. On grant date, Charmaine Company estimates that the share options have a fair value of P20 per option. Charmaine Company also estimates that the volume of sales of the product will increases by an average of between 10% and 15% per year. The Charmaine Company also estimates, on the basis of weighted average probability that 19% of employees will leave before the end of year 3. By the end of year 1, seven employees have left and the entity still expects that a total of 19 employees will leave by the end of year 3. Product sales have increased by 12% and the entity expects this rate of increase to continue over the next 2 years. By the end of year 2, a further six employees have left. The entity now expects only three more employees will leave during year 3. Product sales have increased by 18%. The entity now expects that sales will average 15% or more over the three- year period. By the end of year 3, a further two employees have left. The entity’s sales have increased by an average of 16% over the 3 years. Questions: Based on the above and the result of your audit, determine the following: 16. Compensation expense in year 1 a. P162,000 b. P108,000 c. P124,000 d. P0 17. Compensation expense in year 2 a. P228,000 b. P232,000 c. P224,000 d. P0 18. Share options outstanding end of year 2 a. P348,000 b. P340,000 c. P336,000 d. P0 19. Compensation expense in year 3 a. P510,000 b. P174,000 c. P162,000 d. P0 20. Which of the following is ordinarily the best evidence of fair value? a. Published price quotations in an active market. b. Discounted cash flow analysis. c. Comparative transaction model. d. Intrinsic value. Solution Year 1 – 100 Employees Year 2 - 100 Employees (19) Employees to leave (19%) ( 7) Leave in YR 1 81 Employees to avail the option ( 6) Leave in YR 2 X 200 shares ( 3) Est. employees to leave in YR 3 16,200 shares 84 Employees to avail the option X P20 fair value on date of grant x 300 shares P 324,000 25,200 shares X 1/3 x 20 fair value on date of grant P 108,000 Compensation expense P 504,000 x 2/3 P 336,000 Total Compensation Expense YR 3 - 100 employees - 108,000 Compensation expense in YR 1 ( 7) Leave in YR 1 P 228,000 Compensation expense in YR 2 ( 6) Leave in YR 2 ( 2) Leave in YR 3 85 Employees to avail the option X 300 shares 25,500 shares X P20 fair value on date of grant P 510,000 Total Compensation Expense - 336,000 Compensation expense in Yr 1 & YR 2 P174,000 Compensation expense in YR 3 Answer: 18. b 19. a 20. c 21. b 22. a Problem 5 You gather the following information pertaining to the stockholders’ equity section of the Cleeneth Corporation in connection with your audit of the company’s financial statements for 2009: Common stock, P1 par value; authorized 1,500,000 shares; Issued 750,000 shares; outstanding 700,000 shares P 700,000 Additional paid-in capita: Excess of par 7,000,000 From treasury stock 100,000 Total paid-in capital P 7,800,000 Unappropriated retained earnings 4,050,000 Total stockholders’ equity P11,850,000 All of the outstanding common stock and treasury stock were originally issued in 20002 for P11 per share. The treasury stock is common stock reacquired on March 31, 2004. Cleeneth uses the par value method of accounting for treasury stock. During 2009, the following events or transactions occurred relating to Cleeneth’s stockholders equity: Feb. 12 Issued 200,000 shares of unissued common stock for P12.50 per share. June 15 Declared cash dividend of P0.20 per share to stockholders of record on April 1, 2009 and payable on April 15, 2009. This was the first dividend ever declared by Cleeneth. Sept. 20 Cleeneth’s president retired, Cleeneth purchased from the retiring president 50,000 shares of Cleeneth’s common stock for P13 per share, which was equal to market value on this date. This stock was cancelled. Dec. 15 Declared a cash dividend of P0.20 per share to stockholders of record on January 2, 2006 and payable on January 15, 2006. Cleeneth is being by two separate parties for patent infringements. Cleeneth management and outside legal counsel share the following opinions regarding to these suits. Suit Likelihood of losing the suit Estimated loss #1 Reasonable possible P300,000 #2 Probable 200,000 Questions: Based on the above and the result of your audit, answer the following: 21. The issuance of 200,000 shares of common stock on February 12, 2009 caused Cleeneth’s in additional paid-in capital in excess of par increase by a. P200,000 b. P2,300,000 c. P2,500,000 d. P0 22. The retirement of 50,000 shares of common stock on September 20, 2009 caused Cleeneth’s additional paid-in capital in excess of par to decrease by a. P50,000 b. P500,000 c. P600,000 d. P0 23. Cleeneth wants to appropriate retained earnings for all loss contingencies that are not properly accurate by a charged to expense. How much of Cleeneth loss contingencies retained earnings should be appropriated by charged to unappropriated a. P300,000 b. P500,000 c. P200,000 d. P0 24. How much cash dividends should Cleeneth charge against unappropriated retained earnings in 2009 a. P350,000 b. P370,000 c. P180,000 d. P170,000 25. How much should Cleeneth show in note to financial statements as restriction on retained earnings because of the acquisition of treasury stock? a. P100,000 b. P600,000 c. P450,000 d. P650,000 Solution: Question no. 21 – b Proceeds from issuance (200,000 x P12.50) 2,500,000 Less par value of common stock (200,000 shares x P1) 200,000 Increase in APIC 2,300,000 Question no. 22 – b Common stock (50,000 shares x P1) 50,000 APIC – excess over par [50,000 shares x (P11 – P1)] 500,000 Unappropriated retained earnings 100,000 Cash (50,000 shares x P13) 650,000 Question no. 23 – a Question no. 24 – a Dividends declared, 6/15/09 [(750,000 + 200,000 – 50,000) x P0.20] 180,000 Dividends declared, 12/15/09 [(750,000 + 200,000 – 50,000 – 50,000) x P0.20] 170,000 Total cash dividends 350,000 Question no. 25 – c Treasury stock (50,000 shares x P1) 50,000 APIC – excess over par [50,000 shares x (P11 – P1)] 500,000 APIC – from TS transactions 100,000 Cash (balancing figure) 450,000 Reconstruction of the entry made to record the acquisition of treasury stock Problem 6 Kibungan Company has the following information on January 1, 2010 related to its property, plant and equipment: Land 30,000,000 Building 300,000,000 Accumulated depreciation – building (37,500,000) Machinery (2 machines) 400,000,000 Accumulated depreciation – machinery (100,000,000) Carrying amount 592,500,000 There were no additions or disposals during 2010. Depreciation is computed using straight line over 20 years for building and 10 years for machinery. On June 30, 2010, all of the property, plant and equipment were revalued as follows: Replacement Cost Sound Value Land 40,000,000 40,000,000 Building 500,000,000 425,000,000 Machinery 650,000,000 455,000,000 On June 30, 2011, building was revalued at P300,000,000, its fair market value at that time. One of the two machines was sold on December 31, 2011 at P250,000,000. Questions: 1. What is the revaluation surplus on June 30, 2010? a. 920,000,000 b. 355,000,000 c. 345,000,000 d. 327,500,000 2. What is the total depreciation for 2010? a. 55,000,000 b. 66,750,000 c. 72,500,000 d. 90,000,000 3. What is the revaluation surplus on December 31, 2010? a. 355,000,000 b. 345,000,000 c. 337,500,000 d. 327,500,000 4. What is the impairment loss on December 31, 2011? a. 160,000,000 b. 100,000,000 c. 60,000,000 d. 0 5. What is the revaluation surplus on December 31, 2011? a. 312,500,000 b. 212,500,000 c. 141,875,000 d. 96,250,000 6. Gain on sale on December 31, 2011 is: a. 71,250,000 b. 123,750,000 c. (13,750,000) d. 60,000,000 HC FMV 500 Bldg 300 M M (45 M) 85% 255 M (75 M) 425 M 170 M Mach 400 M (120 M) 280 M 650 M (195 M) 455 M 175 M Land 30 M 40 M 10 M Total Revaluation Surplus 355 M Depreciation: Bldg Mach Total 1/1 - 6/30 6/30 - 12/31 1/1 - 6/30 6/30 - 12/31 7.5 M 12.5 M 20.0 M 32.5 M 72.5 M 425 M / 17 x 6/12 455 M/ 7 x 6/12 Revaluation Surplus Unamortized Amortization: Bldg - 170 M / 17 x 355 M 6/12 (5 M) (12.5 Mach - 175 M/7 x 6/12 Balance June 30: M 337. 5M Bldg fmv - before 500 M (100 M) fmv - now 100 80% 400 M 300 M M (100 M) Rev. Surplus Impairment 0 Revaluation Surplus - 2011 Beg. Bal 337.5 M Loss Amortization: Machinery 25. M Machinery disposed 68.75 M Bldg 100 M Bldg - remaining 1.875 M 141.875 Balance M Cash 250 M 146.25 AD M Machinery 325 M 71.25 Gain on sale M Rev. Surplus 68.75 M Ret. Earnings Problem 7 68.75 M Brandy Company has two cash generating units. On December 31, 2010, the assets of one cash generating unit at carrying amount are: Inventory 200,000 Accounts receivable 300,000 Plant and equipment 6,000,000 Accumulated depreciation 2,600,000 Patent 850,000 Goodwill 100,000 The accounts receivable are regarded as collectible and the inventory’s fair value less cost to sell is equal to the carrying amount. The patent has fair value less cost to sell of P750,000. On December 31, 2010, Brandy Company undertook impairment testing of the cash generating unit and determined the value in use of the unit at P4,050,000. Questions: 7. What is the impairment loss of the cash generating unit on December 31, 2010? a. 800,000 b. 700,000 c. 600,000 d. 0 8. What is the amount of inventory on December 31, 2010? a. P 153,850 b. 167,010 c. 180,000 d. 200,000 9. What is the amount of Accounts Receivable on December 31, 2010? a. 300,000 b. 250,520 c. 256,700 d. 253,850 10. What is the amount of Patents on December 31, 2010? a. 850,000 b. 750,000 c. 709,800 d. 727,320 11. What is the amount of Plant and Equipment, net at December 31, 2010? a. 3,400,000 b. 2,909,280 c. 2,839,180 d. 2,800,000 Recoverable Cost 4,050,0 00 Carrying Value 4,850,0 00 (800,00 Impairment Loss Goodwill IL allocated to other assets 0) 100,00 0 (700,00 0) Impairment loss 0 Goodwill Patent Plant and Equipment 800,00 100,00 0 100,00 0 600,00 0 Problem 8 Ollie Company began its operation in 2007 and has two classes of share capital outstanding: 12% P100 par value preference share and P50 par value ordinary share. Balances on January 1, 2008 are as follows: Preference share capital P500,000 Ordinary share capital 2,500,000 Share premium – Preference 200,000 Share premium – Ordinary 500,000 Accumulated profits 2,000,000 *All the preference shares issued and ordinary shares issued were issued as one lot in 2007. The following reflects the transactions for the year 2008, in chronological order: a. Issued 20,000 ordinary shares at P70 per share b. Reacquired, but not retired, 5,000 ordinary shares at P60 c. Ordinary shares were split on a 2 for 1 basis d. Reissued 3,000 treasury shares at P40 e. Received 10,000 ordinary shares from stockholders as a donation and immediately retired the same f. Reported p1,500,000 net income for the year g. Declared the preferential dividends and p6 dividend per ordinary shares Requirements: 12. How much is the total dividends declared to ordinary shares? a. 780,000 b. 738,000 c. 390,000 d. 348,000 13. What is the balance of the Ordinary shares account as of December 31, 2008? a. 3,075,000 b. 3,250,000 c. 6,150,000 d. 6,500,000 14. What is the total Accumulated-paid-in capital as of December 31, 2008? a. 1,380,000 b. 1,290,000 c. 1,130,000 d. 1,100,000 15. What is the correct Accumulated profits-unappropriated balance as of December 31, 2008? a. 2,702,000 b. 2,660,000 c. 2,492,000 d. 2,450,000 16. What is the correct Stockholders’ equity balance as of December 31, 2008? a. 7,622,000 b. 7,832,000 c. 7,592,000 d. 7,790,000 Preference Share Ordinary Shares SP - PS SP - OS Accm. Prof Treasury Share SP - TS SP - retire 5,0 500,0 50,00 2,500, 200,0 500,0 2,000, 00 00 0 000 00 00 000 20,00 1,000, 400,0 0 000 00 (5,00 (300,0 0) 00) 70,00 (5,00 0 - 0) - 3,00 30,0 0 90,000 00 (10,0 (250,0 (50,0 300,0 00) 00) 00) 00 1,500, 000 (60,00 0) (738,0 - - - - - - 00) - - - - 5,0 500,0 130,0 3,250, 200,0 850,0 2,702, (7,00 (210,0 30,0 300,0 00 00 00 000 00 00 000 0) 00) 00 00 Problem 9 Sabrina Manufacturing Company had several transactions during 2006 and 2007 concerning Plant assets. Several of these transactions are described below, followed by the entry or entries made by the company’s accountant. EQUIPMENT: Several used items were acquired on February 1, 2006, by using a P100,000 noninterest-bearing note. The note is due one year from the date of issuance. No market value of the note or the equipment is available. Sabrina’s most recent barrowing rate was 8%. Feb. 1, 2006 Equipment 100,000 Notes payable 100,000 Dec. 31, 2006 Depreciation expense 10,000 Accumulated Depreciation-Equipment 10,000 Buildings: A building was acquired on June 1, 2006, by issuing 100,000 shares of the company’s P5 par value ordinary shares. The ordinary share is not widely traded, therefore no market price is available. The building was appraised on the transaction date at P650,000. June 1, 2006 Building 500,000 Ordinary Share (100,000xP5) 500,000 Dec. 31, 2006 Depreciation Expense 20,000 Accumulated Depreciation-Building 20,000 Inventory/Fixtures: Inventory and display fixtures were acquired for P125,000 cash on April 1, 20007, from a competitor who was liquidating her business. The estimated value of the inventory was P85,000 and the value of the fixtures was P55,000. April 1, 2007 Inventory 85,000 Display Fixtures 55,000 Cash 125,000 Gain on Acquisition of Inventory & Fixtures 15,000 Land: Land was donated to Sabrina by the City of Cagayan in September 2007 as an inducement to build a facility there. Plans call for construction at an undetermined future date. The land was appraised at P48,500. No entry was made. Machinery: Machinery was acquired an exchange for similar equipment on October 12, and were appraised at P45,000 on the date of the exchange. Sabrina received machinery valued at P40,000 and P5,000 in cash in the transaction. October 12, 2006 Machinery 45,000 Cash 5,000 Accumulated Depreciation-Machinery 16,000 Machinery Gain on Exchange of Machinery 13,500 52,500 4,500 December 31, 2006 Depreciation Expense Accumulated Depreciation-Machinery 4,500 Additional information: Sabrina uses straight-line depreciation, applied to all assets as follows: 1. A full year’s depreciation taken in the year acquisition and no depreciation taken in the year of disposal. 2. Estimated life: 25 years for buildings; 10 years on all other assets (no salvage values are assumed.) Compute for the net adjustments to the following account balances as of December 31, 2007: A B C D 17. Equipment 1,358 16,666 7,404 6,049 18. Buildings 156,000 144,000 124,000 150,000 19. Inventory/Fixtures 5,893 15,000 9,107 10,089 20. Land 48,500 50,000 98,500 38,500 21. Machinery 6,800 5,000 7,556 10,800 What is the correct depreciation expense for the year 2007 for the following items? 22. Equipment 9,259 10,000 8,500 9,000 23. Buildings 10,000 26,000 13,500 20,000 24. Inventory/Fixtures 4,911 5,500 9,107 10,089 25. Machinery 4,000 4,500 3,556 5,400 Problem 10 The Maria Lovella Mining Company purchased for P13,000,000 mining property estimated to contain 1,000,000 tons of ore. The residual value of the property is P1,000,000. Buildings used in mine operations costs P1,000,000 and have an estimated life of ten years with no residual value. Mine machinery costs P2,000,000 with an estimated residual value of P400,000 after its physical life of 4 years. Following is the summary of the company’s operations for the first two years: Tons mined First Year 100,000 tons Second Year 130,000 tons Tons sold 80,000 tons 120,000 tons Unit selling price per ton P 44.00 P 45.00 Direct labor P 800,000 P 840,000 Miscellaneous mining overhead P 160,000 P 240,000 Operating expenses P 720,000 P 760,000 Inventories are valued on a first-in, first-out. Depreciation on the building is to be allocated as follows: 20% to operating expenses, 80% to production. Depreciation on machinery is chargeable to production. Question: 26. The cost of inventory (ore) in the first year is: a. P 532,000 b. P 528,000 c. P 512,000 d. P 480,000 27. The cost of inventory (ore) in the second year is: a. P 735,790 b. P 725,540 c. P 713,590 d. P 697,846 28. Net income in the first year is: a. P 672,000 b. P 668,000 c. P 652,000 d. P 620,000 29. Net income in the second year is: a. P 1,695,234 b. P 1,677,790 c. P 1,667,540 d. P 1,655,590 30. The total amount that may be paid as dividends by the company in the first year is: a. P 1,580,000 b. P 1,612,000 c. P 1,628,000 d. P 1,632,000 31. The total amount that may be paid as dividends by the company in the second year is: a. P 3,135,234 b. P 3,117,790 c. P 3,107,540 d. P 3,095,590 Problem 11 In the course of your first time audit of MISAMIS INC.’s stockholder’s equity accounts for the audit year 2007, the following schedule of the company’s stockholder’s equity accounts as of December 31, 2006 were presented by the client: Ordinary share capital, P100 par; 200,000 shares authorized; 50,000 shares Issued and outstanding; options to purchase 10,000 shares at P100 per Share are held by employees, no value having been assigned to these options P5,000,000 Share premium from ordinary shares 1,000,000 Accumulated profits 3,000,000 Further investigation and inquiry revealed the following information: a. The options referred to above were granted to each of its 100 employees on January 1, 2005 which shall vest three year thereafter provided employees remain in the company’s employ and provided further that sales increase at least by an average of 5% per year. If the sales increase by an average of at least 5% per year each year, employees shall receive 100 share options. If the sales increased by an average of least 10% per year, each employee shall receive 300 options The fair market value of each share option on the grant date was P30 per share. No employee left the company during the said vesting period. Records show that average sales increase over the inclusive vesting period are: 2005, 8%; 2006, 10%, and 2007, 12% b. On May 1, 2007, the company issued bonds of P5,000,000 at 120 giving each P1,000 bond a warrant enabling the holder to purchase4 shares at P120 per share for a one year period. Shares were selling for P140 at this time. The market value of bond ex-warrant is 105. c. On June 1, 2007, half of the warrants issued with bonds were exercised. d. On August 1, the company issued rights to shareholders, permitting holders to acquire for a 60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for P150 at this time. All but 5,000 of these rights were exercised and additional shares were issued e. The company declared a P5 per share cash dividends on December 15, 2007 payable to stockholders as of December 31, 2007 on January 31, 2008 f. Net income before any adjustments amounted to P2,500,000 in 2007. Required: 1. What is the retroactive adjustment to the beginning accumulated profits account related to the options granted in 2005? a. P600,000 b. P400,000 c. P200,000 d. No adjustment necessary 2. What is the correct credit to the share premium account as a result of the exercise of rights referred to in item d? a. 250,000 b. 270,000 c. 285,000 d. 330,000 3. What is the total Additional Paid in Capital to be presented in the stockholders’ equity portion of the balance sheet as of December 31, 2007? a. 3,180,000 b. 3,505,000 c. 2,530,000 d. 2,155,000 4. What is the correct Accumulated Profits as of December 31, 2007? a. 5,145,000 4,245,000 b. 4,900,000 c. 4,745,000 d. SOLUTION: Number of options estimated to vest (100*100) profits, beginning P3,000,000 Multiply by Market value of Options 10,000 30 Accumulated Retroactive adjustment to retained Total options outstanding (200,000) 300,000 earnings (number 17) Multiply by (2005&2006) dividends (71,000*5) (355,000) 2/3 Appropriation for Total Accum. Comp. Exp. As of 12.31.2006 200,0001.ans. B Net income, 2007 (2,500,000-700,000) 1,800,000 P4,245,000 4. ans. D Proceeds from exercise of rights (60,000 – 5,000)/5*130 P1,430,000 Par value of Ordinary share issued (11,000*100) 1,100,000 Share premium P330,000 2. ans. D Share premium from ordinary shares P1,000,000 Share premium from exercise of warrants 575,000 Share premium from exercise of rights 330,000 P1,905,000 Ordinary share options from outstanding (20,000*30) 900,000 Ordinary share warrants outstanding (750,000*50%) 375,000 Total APIC P3,180,0003. ans. B Problem 12 Bugle Company’s property, plant, and equipment and related accumulated depreciation accounts had the following balances at December 31, 2006: Class of PPE Cost Accumulated Depreciation Land P3,900,000 Buildings 36,000,000 P7,962,000 Machinery and equipment 23,250,000 5,886,000 Transportation equipment 3,960,000 2,586,000 Lease improvements 6,630,000 3,315,000 Class of PPE Depreciation method Useful Life Land improvements Straight-line 12 years Buildings 150% declining balance 25 years Machinery and equipment Straight-line 10 years Transportation equipment 150 % declining balance 5 years Lease improvements Straight-line 8 years Bugle computes depreciation to the nearest month. The salvage values of the depreciable assets are considered immaterial. Transactions during 2007 and other information are described below: 1. On January 5, 2007, a plant facility consisting of land and a building was purchased from Torotot Company for P18,000,000. Of this amount, 20% was allocated to land. 2. On April 3, 2007, new parking lots, streets, and sidewalks at the purchased plant facility were completed at a total cost of P5,760,000. These expenditures had an estimated useful life of 12 years. 3. The lease hold improvements were completed on December 31, 2003, and had an estimated useful life of 8 years. The related lease, which would have terminated on December 31, 2009, was renewable for an additional 4-year term. On April 30, 2007, Bugle exercised the renewal option. 4. On July 1, 2007, machinery and equipment were purchased at a total invoice cost of P7,500,000. Additional costs of P300,000 for delivery and P900,000 for installation were incurred. 5. On August 31, 2007, Bugle purchased a new automobile for P450,000. 6. On September 29, 2007, a truck with a cost of P720,000 and a carrying amount of P243,000 on the date of sale was sold for P345,000. Depreciation for the 9 months ended September 30, 2007, was P70,560. 7. On December 22, 2007, a machine with a cost of P510,000 and a carrying amount of P89,250 at date of disposition was scrapped without cash recovery. Based on the preceding information, calculate the 2007 depreciation expense on each of the following classes of PPE: 5. Land improvements a. 480,000 b. 360,000 c. 320,000 d. 923,000 6. Buildings a. 2,546,280 b. 3,024,000 c. 2,762,280 d. 1,682,280 7. Machinery and equipment a. 2,325,000 b. 3,195,000 c. 1,597,500 d. 2,760,000 8. Transportation equipment a. 363,132 b. 454,860 c. 433,962 d. 527,760 9. Leasehold improvements a. 828,750 b. 552,500 c. 663,000 d. 1,326,000 SOLUTION 1. 2007 DEPRECIATION EXPENSE-LAND IMPROVEMENTS: (P5,760,000/12 years x 9*/12) P360,000 Ans. B. *April 1-December 31 2. 2007 DEPRECIATION EXPENSE-BUILDINGS Book value, Jan. 1, 2007 (P36,000-P7,962,000) P28,038,000 Building acquired, Jan. 5, 2007 (P18,000,000 x 80%) 14,400,000 Total 42,438,000 150% declining balance rate (1/25 x 150%) X6% Depreciation P2,546,280 Ans. A. 3. 2007 DEPRECIATION EXPENSE-MACHINERY AND EQUIPMENT: Machinery and equipment, Jan. 1, 2007 (P36,000,000-P7,962,000) P2,325,000 Purchased July 1, 2007 (P8,700,000/10 x 6/12) 435,000 Total P2,760,000 Ans. D. 4. 2007 DEPRECIATION EXPENSE-TRANSPORTATION EQUIPMENT: Book value, Jan. 1, 2007 (P3,960,000-P2,586,000) P1,374,000 Less: Book value on Jan. 1, 2007, of truck sold Sept. 29, 2007 (P243,000 + P70,560) 313,560 Amount subject to depreciation 1,060,440 150% declining balance rate (1/5 x 150%) X30% P318,132 Truck sold Sept. 29, 2007 70,560 Automobile purchased Aug. 31, 2007 (P450,000 x 30% x 4/12) 45,000 Total P433,692 Ans. C. 5. 2007 DEPRECIATION EXPENSE-LEASEHOLD IMPROVEMENTS: Book value, Jan. 1, 2007 (P6,630,000-P3,315,000) P3,315,000 Useful life of leasehold improvements (8-3) / 5years Depreciation P663,000 Ans. C. The useful life of leasehold improvements is used because it is shorter than the extended lease term of 6 years (2 years remaining lease term + 4 years renewal option exercised). Problem 13 The following transactions appear on the “Available-for-sale Marketable Securities” account of Elvisor Company for the year 2007; P35,000 96,000 Shares of Atlas Cons at P12/share 15,200 Dec. 31 Sold the treasury notes at P97 plus accrued interest 101,500 Note: Disregard brokers’ commissions and taxes in your computation. The company received 20% stock dividends from SMC on September 1 and 10% stock dividend from Atlas Cons on December 1. SMC shares and Atlas Cons shares were selling at P15 and P12, respectively on December 31, 2007. Compute for the adjusted balances of the following account balances as of December 31, 2007: A B C D 10. SMC Shares 800 1,000 1,200 600 11. investments ion SMC at cost 15,000 10,000 12,500 7,500 12. Atlas Shares 2,000 1,200 1,320 2,120 13. Investment in Atlas at cost 20,000 11,780 15,000 12,000 14. Treasury Notes 96,000 0 56,000 40,000 15. Carrying value of SMC 15,000 12,000 10,000 8,000 16. Carrying value of Atlas 15,840 11,780 20,000 15,000 17. unrealized gain/loss on the balance sheet 5,840 3,840 3,000 2,000 Problem 14 On January 1, 2010, Reyes Company borrowed P5,000,000 from a bank at a variable rate of interest for 4 years. Interest will be paid annually to the bank on December 31 and the principal is due on December 31, 2013. Under the agreement, the market rate of interest every January 1 resets the variable rate for that period and the amount of interest to be paid on December 31. In conjunction with the loan, Reyes Company entered into a “receive variable, pay fixed” interest swap agreement with another bank speculator as a cash flow hedge. The market rates of interest are 6% on January 1, 2010, 10% on January 1, 2011 and 8% on January 1, 2012. Questions: 18. What is the “notional amount” of the interest rate swap? a. P 0 b. P 2,000,000 c. P 2,500,000 d. P 5,000,000 19. What is the derivative asset or liability on December 31, 2010? a. P 200,000 asset b. P 200,000 liability c. P 498,000 asset d. P 498,000 liability 20. What is the derivative asset or liability on December 31, 2011? a. P 100,000 asset b. P 100,000 liability c. P 178,000 asset d. P 178,000 liability Problem 15 On January 1, 2007, Juliet Company sold equipment to Joed Company of Japan for ¥1,000,000 with payment to be received in two years on January 1, 2009. On January 1, 2007, the exchange rate is ¥0.50 = P1. On the same date, Juliet enters into forward contract and agrees to sell ¥1,000,000 on January 1, 2009 at the rate of ¥0.50 = P1. On December 31, 2007, the exchange rate is ¥0.47 = P1. On December 31, 2008, the exchange rate is ¥0.55 = P1. The appropriate discount rate throughout this period is 10%. Questions: Based on the above and the result of your audit, answer the following: (Round off present value factors to four decimal places) 21. The amount of sales revenue to be recognized in 2007 is a. P2,127,660 b. P2,000,000 c. P1,758,298 d. P1,652,800 22. The carrying amount the accounts receivable on December 31, 2007 is a. P2,127,660 b. P2,000,000 c. P1,934,255 d. P1,758,298 23. The gain on foreign currency in 2007 is a. P281,455 b. P127,660 c. P116,175 d. P105,498 24. The derivative liability (forward contract payable) on December 31, 2007 is a. P127,660 b. P116,055 c. P105,498 d. P0 25. The derivative asset (forward contract receivable) on December 31, 2008 is a. P309,478 b. P181,812 c. P165,291 d. P 0 Solution & Answer 29. D Y 1,000,000/0.50 x .8264 PV factor = P 1,652,800 30. C Y 1,000,000/0.47 x .9091 PV factor = P 1,934,255 31. C Accounts Receivable – 1/1/07 1,652,800 Interest Income (amort. 2007) 165,280 Accounts Receivable @ Y0.50 – P1 1,818,080 Accounts Receivable @ Y0.47 – P1 ( 1,934,255) Gain on Foreign Currency 116,175 32. B Peso equivalent of Futures – 12/31/07 (Y 1,000,000/0.47) 2,127,660 Notional Value 2,000,000 Future Contract Payable 127,660 X PV factor .9091 Future Contract 116,055 33. B Peso equivalent of Futures – 12/31/08 (Y 1,000,000/0.55) 1,818,182 Notional Value 2,000,000 Future Contract Receivable 181,812