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Auditing Problems: Investing Cycle

Problem 1
The trial balance of Aguilar Enterprises on December 31, 2006 shows P350,000 as the
unaudited balance of the Machinery account. On April 1, 2006, a Jucuzzi machine costing
P40,000 with accumulated depreciation of P30,000 was sold for P20,000, which proceeds
was credited to the Machinery account. On June 30, 2006, a Goulds machine, costing
P50,000 and with accumulated depreciation of P22,000 was traded in for a new Pioneer
machine with an invoice price of P100,000. The cash paid of P90,000 for the Pioneer
machine (P100,000 less trade-in allowance of P10,000 was debited to the Machinery
account).
Company policy on depreciation which you accept, provides an annual rate of 10% without
salvage value. A full years depreciation is charged in the year of acquisition and none in
the year of disposition.
Question
1 The adjusted balance of the Machinery account at December 31, 2006 is:
a P 290,000
b. P 370,000
c. P 260,000
d. P 300,000
2

The correct depreciation expense for the machinery for the year ended December 31,
2006 is:
a P 37,000
b. P 29,000
c. P 30,000
d. P 26,000

Problem 2
Two independent companies, KAYA and MUYAN, are in the home building business. Each
owns a tract of land for development, but each company would prefer to build on the others
land. Accordingly, they agreed to exchange their land. An appraiser was hired and from the
report and the companies records, the following information was obtained:
KAYA Co.s Land
MUYAN Co.s Land
Cost (same as book value)
P 800,000
P 500,000
Market value, per appraisal
1,000,000
900,000
The exchange of land was made and based on the difference in appraised values, MUYAN
Company paid P100,000 cash to KAYA Company.
Question
1. For financial reporting purposes, KAYA Company would recognize a pretax gain on the
exchange in the amount of:
a P 20,000
b. P 60,000
c. P 100,000
d. P 200,000
2. For financial reporting purposes, MUYAN Company recognize a pretax gain on the
exchange in the amount of:
a P0
b. P 100,000
c. P 300,000
d. P 400,000
3. After the exchange, KAYA Company record its newly acquired land at:
a P 700,000
b. P 720,000
c. P 800,000
d. P 900,000
4. After the exchange, MUYAN Company record its newly acquired land at:
a

P 1,000,000

b. P

900,000

c. P 600,000

d. P 500,000

Auditing Problems: Investing Cycle

Problem 3
In connection with your audit of Bing-Bong Corporation, you noted that on January 2, 2002,
the corporation purchased a building site for its proposed research and development
laboratory at a cost of P2,400,000. Construction of the building was started in 2002. The
building was completed on December 31, 2003, at a cost of P11,200,000 and was placed in
service on January 1, 2004. The estimated useful life of the building for depreciation
purposes was 20 years; the straight-line method of depreciation was to be employed and
there was no estimated salvage value.
Management estimates that about 50% of the projects of the research and development
group will result in long-term benefits to the corporation. The remaining projects either
benefit the current period or are abandoned before completion. A summary of the number
of projects and the direct costs incurred in conjunction with the research and development
activities for 2004 appears below.
No. of
Salaries and
Other expenses
Projects
employees benefits
(excluding depn.)
Completed projects with
long-term benefits
60
3,600,000
2,000,000
Abandoned projects that
benefit the current year
40
2,600,000
600,000
Projects in process results
indeterminate
20
1,600,000
480,000
Upon the recommendation of the research and development group, Bing-Bong Corporation
acquired a patent for manufacturing rights at a cost of P3,200,000. The patent was
acquired on March 31, 2003, and has an economic life of 10 years.
Questions
1 Carrying value of the patent as of December 31, 2004 is:
a. P 3,600,000
b. P 3,200,000
c. P 2,880,000

d. P 2,640,000

Carrying value of the building as of December 31, 2004 is:


a. P 5,320,000
b. P 10,640,000
c. P 10,080,000

d. P 0

Carrying value of the land as of December 31, 2004 is:


a. P 1,200,000
b. P 2,400,000
c. P 2,160,000

d. P 0

Research and development expense for 2004 is:


a. P 5,280,000
b. P 10,880,000
c. P 11,440,000

d. P 11,760,000

Problem 4
On January 1, 2003, the Prince Gabriel Manufacturing Company began construction of a
building to be used as its office headquarters. The building was completed on June 30,
2004.
Expenditures on the project were as follows:
January 3, 2003
March 31, 2003
June 30, 2003
October 31, 2003
January 31, 2004

P 500,000
600,000
800,000
600,000
300,000

Auditing Problems: Investing Cycle

March 31, 2004


May 31, 2004

500,000
600,000

On January 3, 2003, the company obtained a P2 million construction loan with a 10%
interest rate. The loan was outstanding all of 2003 and 2004. The companys other
interest-bearing debt included a long-term note of P5,000,000 with an 8% interest rate, and
a mortgage of P3,000,000 on another building with an interest rate of 6%. Both debts were
outstanding during all of 2003 and 2004. The companys fiscal year end is December 31.
Questions
1 The interest capitalized at the end of December 31, 2003 is:
a P 113,100
b. P 145,000
c. P 150,000
2

d. P 200,000

The interest capitalized at the end of December 31, 2004 is:


a P 145,132
b. P 159,632
c. P 290,263

d. P 319,263

The total cost of the Building at December 31, 2004 is:


a P 3,535,132
b. P 4,190,131
c. P 4,480,263

d. P 4,535,263

The total interest expense at the end of December 31, 2003 is:
b P 780,000
b. P 635,000
c. P 630,000

d. P 560,000

The total interest expense at the end of December 31, 2004 is:
a P 460,737
b. P 489,737
c. P 620,368

d. P 634,868

Problem 5
The following information pertains to Marlisa Companys delivery trucks:
Date
1/1/04
3/15/05
7/1/05
7/10/05
9/1/05
10/1/05
4/1/06
5/2/06
6/30/06
12/1/06

Particulars
Trucks 1, 2, 3, & 4
Replacement of truck 3 tires
Truck 5
Reconditioning of truck 4, which was
damaged in a collision
Insurance recovery on truck 4 accident
Sale of truck 2
Truck 6
Repainting of truck 4
Truck 7
Cash received on lease of truck 7

Debit
3,200,000
25,000
800,000
35,000
1,000,000
27,000
720,000

Credit

33,000
600,000
150,000
22,000

ACCUM. DEPRECIATION - DELIVERY EQUIPMENT


Date
12/31/04
12/31/05
12/31/06

Particulars
Depreciation expense
Depreciation expense
Depreciation expense

Debit

Credit
300,000
300,000
300,000

a. On July 1, 2005, Truck 3 was traded-in for a new truck. Truck 5, costing P850,000; the
selling party allowed a P50,000 trade in value for the old truck.

Auditing Problems: Investing Cycle

b. On April 1, 2006, Truck 6 was purchased for P1,000,000; Truck 1 and cash of P850,000
being given for the new truck.
c. The depreciation rate is 20% by unit basis.
d. Unit cost of Trucks 1 to 4 is at P800,000 each.
Questions
1. What is the loss on trade-in of truck 3?
a. P 50,000
b. P 430,000

c. P 510,000

d. P 560,000

2. The correct cost of truck 5 is


a. P 560,000
b. P 610,000

c. P 800,000

d. P 850,000

3. The book value of truck 5 at December 31, 2006 is


a. P 850,000
b. P 595,000
c. P 560,000

d. P 510,000

4. What is the loss in trade-in of Truck 1?


a. P 150,000
b. P 250,000

d. P 410,000

c. P 290,000

5. The correct cost of truck 6 is


a. P 590,000
b. P 800,000
c. P 850,000
6. The carrying value of Truck 6 at December 31, 2006 is
a. P 501,500
b. P 680,000
c. P 850,000
7. The gain (loss) on sale of truck 2 is
a P 80,000
b. P 331,600

d. P 1,000,000
d. P 1,100,000

c. P 495,000

d. P 496,200

8. The book value of truck 4 at December 31, 2006 is


a. P 320,000
b. P 331,600
c. P 495,000

d. P 496,200

9. The 2006 depreciation expense is understated by


a. P 92,000
b. P 252,000
c. P 292,000

d. P 372,000

10. The cost of repainting truck 4 should have been charged to:
a. Claims receivable - insurance company
b. Retained earnings
c. Accumulated depreciation
d. Repairs and maintenance
11. Which of the following controls would most likely allow for a reduction in the scope of the
auditors tests of depreciation expense?
a. Review and approval of the periodic property depreciation entry by a supervisor who
does not actively participate in its preparation.
b. Comparison of property account balances for the current year with the current year
budget and prior-year actual balance.
c. Review of the miscellaneous revenue account for salvage credits and scrap sales of
partially depreciated property.
d. Authorization of payment of vendors invoices by a designated employee who is
independent of the property receiving functions.

Auditing Problems: Investing Cycle

Problem 6
You are engaged to audit the financial statements of TRIUMPH CORPORATION for the year
ended December 31, 2006. You gathered the following information pertaining to the
companys Equipment and Accumulated Depreciation accounts.
EQUIPMENT
1.1.06 Balance
P 446,000 9.1.06 No. 6 sold
6.1.06 No. 12
36,000 12.31.06 Balance
3
Dismantling
of No. 6
1,000
P 483,000

9,000
474,000

______
P 483,000

ACCUMULATED DEPRECIATION EQUIPMENT


12.31.06 Balance P 271,400 1.1.06
Balance
P 224,000
______ 12.31.06 2006 Depn
47,400
P 271,400
P 271,400
The following are the details of the entries above:
1

The company depreciates equipment at 10% per year. The oldest equipment owned
is seven years old as of December 31, 2006.

The following adjusted balances appeared on your last years working papers:

Equipment
P 446,000
Accumulated depreciation
224,000
Machine No. 6 was purchased on March 1, 1999 at a cost of P30,000 and was sold on
September 1, 2006, for P9,000.

Included in charges to the Repairs Expense account was an invoice covering


installation of Machine No. 12 in the amount of P2,500.

It is the companys practice to take a full years depreciation in the year of


acquisition and none in the year of disposition.

Questions
1. The gain/(loss) on sale of Machine 6 is:
a P 1,000
b. P 500

c. P (1,000)

d. P (500)

2. The Equipment balance of TRIUMPH CORPORATION at December 31, 2006 is:


a P 446,000
b. P 452,000
c. P 454,500
d. P 475,500
3. The Depreciation expense Equipment of TRIUMPH CORPORATION at December 31,
2006 is:
a P 45,200
b. P 45,450
c. P 46,525
d. P 53,525
4. The entry to correct the sale of Machine 6 is:
a. Loss on sale of equipment
1,000

Auditing Problems: Investing Cycle

Accumulated depreciation
Equipment

21,000

22,000

b. Accumulated depreciation 22,500


Equipment
22,000
Gain on sale
500
c. Accumulated depreciation 21,500
loss on sale of equipment
500
Equipment
22,000
d. Accumulated depreciation 23,000
Equipment
22,000
Gain on sale of equipment
1,000
5. The Depreciation Expense at December 31, 2006 is:
a. Overstated by P6,125
c. Understated by P1,950
b. Understated by P6,125
d. Overstated by P1,950
Problem 7
On an audit engagement for calendar year 2003, you handled the audit of Fixed Assets of
Crame Corporation. Plant assets consists of:
Land
Leasehold improvements
Equipment
Total per WBS

P 100,000
190,000
450,000
P 740,000

The land was acquired on October 1, 2003, at a cost of P500,000. Crame Corporation made
a cash downpayment of P100,000 and signed a 18% mortgage note payable in four equal
annual installments of P100,000. The first interest and principal payment is due on October
1, 2004. No interest has been accrued as of December 31, 2003.
In October 1, 2003, a lawyer was engaged to title the property at a fee of P10,000 which
was charged to operating expenses.
You ascertained that due to obsolescence, computer equipment with an original cost of
P80,000 and accumulated depreciation of P16,000 at January 1, 2003 had suffered a
permanent impairment in value and, as a result, should have a carrying value of only
P40,000 at the beginning of the year. In addition, the remaining useful life of the
equipment was reduced from 4 to 2 years. No entry has yet been made in the books. For
2003, the company recorded depreciation of P16,000 for the said equipment.
At present, Crame Corporations office and warehouse are located in a rented building. The
rental contract was signed on July 1, 2003 and has a term of five (5) years renewable for
another five (5) years. On October 1, 2003, Crame Corporation spent P190,000 to install
walls and fixtures. The leasehold improvements have a useful life of five years. No
amortization has been booked as of December 31, 2003.
Questions
1. The adjusted cost of land amounted to:
a P 528,000
b. P 510,000

c. P 500,000

d. P 410,000

2. The carrying value of leasehold improvements as of December 31, 2003 amounted to:
a P 190,000
b. P 183,000
c. P 180,500
d. P 180,000

Auditing Problems: Investing Cycle

Audit adjustments will increase depreciation/amortization expense by:


a P 38,000
b. P 24,000
c. P 14,000
d. P 13,500

4. Loss due to impairment in value amounted to:


a P 30,000
b. P 28,000
c. P 24,000

d. P 20,000

Problem 8
You are engaged to examine the financial statement of the Rabago Manufacturing
Corporation for the year ended December 31, 2004. The following schedules for property,
plant, and equipment and the related accumulated depreciation accounts have been
prepared by your client. The opening balances agree with your prior years audit working
papers.
Rabago Manufacturing Corporation
Analysis of Property, Plant, and Equipment and
Related Accumulated Depreciation Accounts
Year Ended December 31, 2004
COST

Final
12/31/03
Land
P
450,000
Buildings
2,400,000
Machinery/Equip 2,770,000
P 5,620,000

ACCUMULATED DEPRECIATION
Final
12/31/03
Buildings
P 1,200,000
Machinery/Equip
546,500
P 1,746,200

Additions
P 100,000
350,000
808,000
P1,258,000

Retirements
P

Additions

Retirements

P 103,000
313,600
P 416,600

520,000
P 520,000

Per Books
12/31/04
P
550,000
2,750,000
3,526,000
P 6,826,000
Per Books
12/31/04
P 1,303,000
860,100
P 2,163,100

Further investigation revealed the following:


a. All equipment is depreciated on the straight-line basis (with no salvage value) based on
the following estimated lives: Building 25 years, all other items 10 years.
b. The company entered into a 10-year lease contract for a derrick machine with annual
rental of P100,000, payable in advance every April 1. The parties to the contract
stipulated that a 30-day written notice is required to cancel the lease. Estimated useful
life is 10 years. The derrick was recorded under machinery and equipment at P808,000
and P60,000 applicable to the machine was included in the depreciation expense during
the year.
c. The company finished construction of a new building wing in June 30. The useful life of
the main building was not prolonged. The lowest construction bid was P350,000 which
was the amount recorded. Company personnel constructed the building at a total cost
of P330,000.
d. P100,000 was paid for the construction of a parking lot which was completed on July 1,
2004. The expenditure was charged to land.

Auditing Problems: Investing Cycle

e. The P520,000 equipment under retirement column represent cash received on October
1, 2004 for a machinery bought in October 1, 2000 for P960,000. The bookkeeper
recorded depreciation expense of P72,000 on this machine in 2004.
f.

Mr. Rabago, the companys president donated land and building appraised at P200,000
and P400,000 respectively to the company to be used as plant site. The company began
operating the plant on September 30, 2004. Since no money was involved, the
bookkeeper did not make any entry for the above transaction.

Questions
1. The balance of rent expense as of December 31, 2004 is:
a P0
b. P 25,000
c. P 75,000

d. P 100,000

2. The balance of prepaid rent as of December 31, 2004 is:


a. P 0
b. P 25,000
c. P 75,000

d. P 100,000

3. The life of the building wing is


a 25 years
b. 11 years

d. 13 years

c. 12 years

4. The carrying value of the building as of December 31, 2004 is


a P 1,447,000
b. P 1,816,250
c. P 1,820,250

d. P 1,827,400

5. The value of the land account for balance sheet presentation as of December 31, 2004
is:
a P 450,000
b. P 545,000
c. P 650,000
d. P 750,000
6. The loss on the disposal of the machinery sold for P520,000 is
a P0
b. P 30,000
c. P 56,000

d. P 152,000

Problem 9
Siacor Inc. acquired 30% of Lozano Co.s voting stock for P200,000 on January 2, 2007.
Siacors 30% interest in Lozano gave Siacor the ability to exercise significant influence over
Lozanos operating and financial policies. During 2007, Lozano earned P80,000 and paid
dividends of P50,000. Lozano reported earnings of P100,000 for the six months ended June
30, 2008, and P200,000 for the year ended December 31, 2008. On July 1, 2008, Siacor
sold half of its stock in Lozano for P150,000 cash. Lozano paid dividends of P60,000 on
October 1, 2008.
1. Before income taxes, what amount should Siacor include in its 2007 income statements
as a result of investment?
a. P15,000
b. P24,000
c. P50,000
d. P80,000
2. In Siacors December 31, 2007 balance sheet, what should be the carrying amount of
this investment?
a. P200,000
b. P209,000
c. P224,000
d. P230,000
3. In its 2008 income statement, what amount should Siacor report as gain from the sale of
half of its investment?
a. P24,500
b. P30,500
c. P35,000
d. P45,500

Auditing Problems: Investing Cycle

Problem 10
In connection with your audit of the financial statement of the William Company for the year
2007, the following investment in stock and dividend income accounts were presented to
you:
Investment in Stock
Debit
Credit
June 18, 2006
10,000 shares common par
value P50, Samson Company
390,000
April 30, 2007
5,000 shares Samson Company
received as stock dividend
250,000
May 20, 2007
Sold 5,000 shares @ P25
125,000
Dec. 10, 2007
Sold 2,000 shares @ P60
120,000
April 30, 2007
Nov. 30, 2007

Dividend Income
Stock dividend
Samson Company common

250,000
50,000

The following information was obtained during your examination:


1.

The balance in the investment in stock account at December 31, 2006 per your last
years working papers, was P390,000.

2. From independent sources, you determine the following dividend information:


Type of
Dividend
Stock
Cash
Cash

Date
Declared
March 15, 2007
Nov. 1, 2007
Dec. 1, 2007

Date of
Record
April 1, 2007
Nov. 15, 2007
Dec. 15, 2007

Date of
Payment
April 30, 2007
Nov. 28, 2007
Jan. 2, 2008

Rate
50%
P5/share
20%

3. Closing market quotation as at December 31, 2007:


Bid
Asked
Samson Company common
13
16
Questions:
Based on the above and the result of your audit, answer the following:
1. How much is the gain (loss) on the May 20, 2007 sale?
a. P (70,000)
b. P (5,000)
c. P 5,000

d. P 0

2. How much is the gain on the December 10, 2007 sale?


a P 68,000
b. P 48,000
c. P 42,000

d. P 0

3. How much is the total dividend income for the year 2007?
a. P 400,000
b. P 300,000
c. P 150,000

d. P

50,000

4. How much is the adjusted balance of investment in stock as of December 31, 2007?
a. P 208,000
b. P 145,000
c. P 117,000
d. P 110,000

Auditing Problems: Investing Cycle

5. How much is the Allowance for Unrealized loss as of December 31, 2007?
a. P 98,000
b. P 35,000
c. P 7,000
d. P 0

Problem 11
Macky Corporations accounting records showed the following investment at January 1,
2007:
Common stock
Johny Corp (1,000 shares)
P 10,000
Sony Corp (5,000 shares)
100,000
Real estate:
Parking lot (leased to Ruel Co.)
300,000
Other:
Trademark (at cost, less accumulated amortization
25,000
Total investment
P435,000
Macky owns 1% of Johny and 30% of Sony. Makys directors constitute a majority of Sonys
directors. The Ruel lease, which commenced on January 1, 2002, is for ten year, at an
annual rental of P48,000. In addition, on January 1, 2002, Ruel paid a nonrefundable
deposit of P50,000, as well as security deposit of P8,000 to be refunded upon expiration of
the lease. The trademark was licensed to Nappy Co. for royalties of 10% of sales of the
trademark items. Royalties are payable semiannually on March 1 (for sales in July though
December of the prior year), and on September 1 for the sales in January through June of
the same year).
During the year ended December 31, 2007, Macky received cash dividends of P1,000 from
Johny, and P15,000 from Sony, whose 2007 net incomes were P75,000 and P150,000
respectively. Macky also received P48,000 rent from Ruel in 2007 and the following royalties
from Nappy:
March 1
September 1
2006
P3,000
P5,000
2007
4,000
7,000
Nappy estimated that sales of the trademark items would total to P20,000 for the last half
of 2007.
Questions
1

In Mackys 2007 income statement, how much should be reported for royalty revenue?
a. P 14,000
b. P 13,000
c. P 11,000
d. P 9,000

In Mackys 2007 income statement, how much should be reported for rental revenue?
a. P 43,000
b. P 48,000
c. P 53,000
d. P 53,800

3. In Mackys 2007 income statement, how much should be reported as the total
investment income?
a. P 63,000
b. P 78,000
c. P 108,000
d. P 111,000

Auditing Problems: Investing Cycle

Problem 12
The INVESTMENT account, as of December 31, 2007, appearing in the records JOY
CORPORATION is as follows:
Date
Particular
January 1
Balance
January 31
Sold Ventanilla Stock
March 31
Bought Don Dave Common
June 30
Dividend on Suson Common
July 31
Sold Suson Common
August 31
Sold Jasmin bonds
September 30 Interest on Sucuahi Mortgage

Debit
188,300
12,125
10,000

Credit
21,364
8,750
22,083
500

The audit working papers of the preceding year show that the account balances as of
January 1, 2007, consisted of the following:
Ventanilla Company Common
1,000 shares, purchased in June 1997 at P20 per share, P20,000.
2,000 shares, purchased in August 1999 at P16 per share, P32,000.
1,500 shares, purchased in May 2002 at P22 per share, P33,000
Don Dave Company Common
2,000 shares. Purchased in January 2003 at P33 per share, P66,000
Suson Company Common
100 shares purchased in August 2003 at P73 per share, P7,300
Jasmin Company 5% bonds
2 bonds, P10,000 each purchased in July 2001 at par, P20,000
(Interest dates February 1 and August 1).
Sucuahi Company chattel mortgage on machinery
5, P10,000 mortgage taken in September 2004 in settlement of a receivable,
P10,000
Your examination discloses the following information:
2

In January 2007, 1,000 shares of the Ventanilla company common stock purchased in
May 2002 were sold for P21,364 net.

In March 2007, 500 shares of Don Dave common stock were purchased at P24 per
share plus brokerage, for P12,125.

In June 2007, the Suson Company paid a 100% stock dividend on common.

Auditing Problems: Investing Cycle

In July 2007, JOY CORPORATION sold to its president, for P125 per share, 100 shares of
Suson common stock, for which the president gave his check for P8,750 and a letter in
which he agreed to pay the balance upon demand of the treasurer of
JOY
CORPORATION.

On August 2007, the Jasmin Company redeemed its 5% bonds at 110 plus accrued
interest.

In September 2007, JOY CORPORATION received one year interest on the P10,000
chattel mortgage of Sucuahi.

Question
1 The adjusted balance of Gain or Loss of Sale/Redemption on Investment at December
31, 2007 is:
a. P 8,214
b. P 10,214
c. P 10,850
d. P 10,714
2

The adjusted balance of Investment at December 31, 2007 is:


a. P 157,728
b. P 155,411
c. P 154,775

The Investment at December 31, 2007 is:


a. Overstated by P 2,953
c. Overstated by P5,036
b. Overstated by P 2,317
d. Overstated by P3,056

d. P 152,692

4. Investment in Ventanilla Company common stock at year-end is:


a. P 65,000
b. P 63,000
c. P 63,636

d. P 52,000

5. Investment in Don Dave Company common stock at year-end is:


a. P 78,125
b. P 66,000
c. P 61,625

d. P 49,500

6. Investment in Suson Company common stock at year-end is:


a. P 7,300
b. P 3,650
c. P 2,500

d. P 1,450