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
page 5
31. BLUE ICE’s Stockholders’ Equity balance at December 31, 2009 is;
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
Land 6, 000, 000
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
Machinery/Equip. SLM 10 years
Automotive Equip. SYD 4 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
page 6
36. What is the balance of the accumulated depreciation – machinery and equipment at December 31, 2009?
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
Sales 750, 000 420, 000
Cost of sales 581, 000 266, 000
Gross Margin 169, 000 154, 000
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
Cash 45, 300 6, 400
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
Bonds payable 100, 000
Capital Stock 154, 000 50, 000
Additional paid-capital 81, 600 15, 000 Retained earnings (from above) 68, 060 46, 400 412, 560 130, 350
======== =========
page 7
St. John acquired 90% of the common stock of St. Therese for P120, 600 on January 1, 2009.
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
Investment in stock of St. Therese 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
Goodwill 25, 200
Investment in stock of St. Therese 120, 600 b. Capital; stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000
Additional paid-in capital 15, 000 Retained earnings – St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Investment in stock of St. Therese 111, 400 43. To eliminate the sales made by St. John to St. Therese, the entry is:
a. Sales 20, 000
Inventory – St. Therese (B/S) 3, 000
Purchases 20, 000
Inventory – St. Therese (I/S) 3, 000
b. Sales 20, 000
Cost of sales 17, 000
Inventory – St. Therese 3, 000
c. Sales 20, 000
Inventory – St. Therese 3, 000
Cost of sales 23, 000
Page 8
d. Retained Earnings 3, 000
Sales 20, 000
Inventory – St. Therese 3, 000
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)
a. Sales 18, 000
Inventory 2, 000
Cost of sales 16, 000
b. Sales 18, 000
Investment in stock of St. Therese 1, 600 Retained earnings – St. Therese 400
Cost of sales 18, 000
Inventory 2, 000
c. Sales 18, 000
Retained earnings 2, 000
Cost of sales 18, 000
Inventory 2, 000
d. Sales 18, 000
Inventory 2, 000
Cost of sales 20, 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
Accounts receivable 4, 000
b. Accounts receivable 4, 000
Cash 1, 000
Accounts payable 5, 000
c. Cash 1, 000
Accounts payable 3, 000
Accounts receivable 4, 000
d. Cash 1, 000
Accounts payable 4, 000
Accounts receivable 5, 000
46. To eliminate the acquisition made by St. Therese from St. John, the entry is:
a. Equipment 2, 000
Accumulate depreciation 1, 000
Gain on sale of equipment 3, 000
b. Gain on sales of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 250
Depreciation expense 750
c. Gain on sale of equipment 3, 000
Equipment 2, 000
Accumulated depreciation 1, 000
d. Gain on sale of equipment 3, 000
Equipment 2, 000
Depreciation expense 1, 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:
a. Bonds payable 50, 000
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
Bonds payable 50, 000
c. Bonds payable 44, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
d. Bonds payable 50, 000
Investment in bonds of St. John 44, 000
Retained earnings 6, 000
page 9
For items 49-50, assume that the combination is accounted for as POOLING OF INTEREST.
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
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
Investment in stock of St. Therese 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 Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Goodwill 25, 200
Investment in stock of St. Therese 120, 600 b. Capital stock – St. Therese 45, 000
Additional paid-in capital – St. Therese 13, 500
Retained earnings – St. Therese 36, 900
Investment in stock of St. Therese 95, 400 c. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Goodwill 14, 060
Investment in stock of St. Therese 125, 460 d. Capital stock – St. Therese 50, 000
Additional paid-in capital – St. Therese 15, 000
Retained earnings – St. Therese 46, 400
Investment in stock of St. Therese 111, 400
Page 10
Punongbayan & Araullo’s Auditing Problems Quiz
EASY
1. On July 01, 2007, one of FLOYD INC.'S delivery trucks was destroyed in an accident. On that date, the truck's book value was P900,000. On July 15, 2007, FLOYD INC. received and recorded a P42,000 invoice for a new engine installed in the truck in May 2007 and another P6,000 invoice for various repairs.
What amount should FLOYD INC. use to determine the gain or loss on disposal of the truck?
a.P900,000 b.P942,000 c.P948,000 d.P936,000
2. Henry Company had the following bank reconciliation at March 31:
Balance per bank statement, March 31 P 93,000
Add deposit in transit 20,600
P 113,600
Less outstanding checks 25,200
Balance per books, March 31 P 88,400 Data per bank statement for the month of April follow:
Deposits P 116,800
Disbursements P 99,400
All reconciliation items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled P15,000.
What is the amount of cash disbursements per books in April?
a.P 89,200 b.P 99,400 c.P109,600 d.P114,400
3. BRAND CO. reported P9,000 of net income for 2007. The correct net income however was P11,000. It was determined that the ending inventory was overstated by P1,000.
The only other error was with the beginning inventory which must have been:
a. Understated by P1,000 b. Understated by P3,000 c. Overstated by P1,000 d. Overstated by P3,000
4.* On December 30, 2007, SWIFT CO. shipped to a customer merchandise with selling price of P37,500; terms net 30, FOB Shipping Point. The sale which is 125% of cost was recorded in January 2007 when the check was received from the customer. Ending inventory was determined by physical count on December 31, 2007.
As a result of the above transactions, SWIFT CO.’s cost of goods sold for the year ended December 31, 2007 was:
a. Understated by P3,000 b. Overstated by P30,000 c. Overstated by P37,500 d. Correctly stated
5. BART Company started operations on January 01, 2008. The following are available as of June 30, 2008:
Purchase of merchandise P 450,000
Inventory, June 30, 2008 75,000
Goods were sold at 50% above cost; 75% ofsales were on account
Estimated bad debts 1% of credit sales
Collections from charge customers 315,000
Allowance for doubtful accounts, June 30,2008
after write off of uncollectible accounts 3,903.75 The outstanding accounts receivable as of June 30, 2008 were:
a.P110,000 b.P106,875 c.P106,560 d.P285,000
6. PRIME Co. received from a customer a one year, P500,000 note bearing annual interest of 8%. After holding the note for six months, PRIME discounted the note at Asian Bank at an effective interest rate of 10%.
At the date of discounting, PRIME should recognize
a. P 40,000 interest revenue b. P23,810 interest revenue c.
P13,000 interest revenue d. P 4,762 interest expense
7. Information pertaining to Trace Company for the month of August appears below:
Balance per bank statement P 310,000
Balance per books 187,500
Deposit in transit 70,000
Service charges 2,500
Note collected by bank 75,000
Outstanding checks ?
An analysis of the cancelled checks returned with the bank statement reveals the following:
a. Check for the purchase of merchandise was drawn for P155,000 but was recorded as P150,000.
b. The management wrote a check for traveling expenses of P25,000 while out of town. The check was not recorded.
What is the amount of outstanding checks on August 31, 2006?
a.P150,000 b.P140,000 c.P125,000 d.P230,000
8. The inventory on hand on December 31, 2006 of LEISA CORP. is valued at a cost of P300,000. The following items were not included in the inventory:
a. Purchased goods in transit shipped FOB Destination, with price of P30,000 which included freight charge of P5,000.
b. Goods held on consignment by LEISA CORP. at a sales price of P10,000, excluding a 20% commission on the sales price. Freight paid by LEISA CORP. was P1,000.
c. Goods sold in transit FOB Destination with invoice price of P49,000 which included freight charge of P4,000 to deliver the goods.
d. Purchased goods in transit FOB Shipping Point with invoice price of P60,000. Freight costs amount to P6,000.
Goods out on consignment with sales price of P30,000. Shipping costs amounts to P3,000.
What is the correct inventory on December 31, 2006 assuming LEISA’s selling price is 150% of costs?
a.P419,000 b.P416,000 c.P410,000 d.P 17,500
9. In analyzing the shareholders’ equity section of the PEARSON CORP. The following information was abstracted from the accounts at December 31, 2007:
Total income since incorporation P 7,875,000
Total cash dividends paid 2,437,500
Proceeds from sale of donated stock 843,750
Total value of stock dividends distributed 562,500
Excess of proceeds over cost of treasury stock sold 131,250
What should be the balance of the Retained earnings account as of December 31, 2007?
a.P 4,875,000 b. P 6,218,750 c. P 7,031,250 d. P 10,031,250
10. Still Trading made investments in available for sale securities. The Unrealized gain or loss account has a debit balance of P38,700 at December 31, 2006. An analysis of the investment account on December 31, 2006 showed the following:
No. of shares Cost Market A common 600 shares P922,500 P810,000 B common 225 shares 229,500 270,000 C common 2,000 shares 808,500 841,800
On July 01, 2007, the shares of B common were sold for P210,000. On December 31, 2007, A shares were quoted at P1,320 per share and C common shares were quoted at P414 per share.
How much is the required increase in the Unrealized gain or loss account at the end of 2007?
a.P130,500 b.P111,000 c.P 91,800 d.P 31,800
AVERAGE
1. While preparing its 2008 financial statements, Dell Corp. discovered computational errors in its 2007 and 2006 depreciation expenses. These errors resulted in the overstatement of each year’s income by P25,000 net of income taxes. The following amount were reported in the previously issued financial statements.
2007 2006
Retained earnings, January 1 700,000 500,000
Net income 150,000 200,000
Retained earnings, December 31 850,000 700,000 Dell Corp. net income is correctly reported at P180,000.
Which of the following amounts should be reported as prior period adjustments and net income in Dell Corp.’s 2008 and 2007 comparative financial statements?
Year Prior period Adj. Net Income
a. 2007 - 150,000
2008 ( 50,000) 180,000
b. 2007 ( 50,000) 150,000
2008 - 180,000
c. 2007 ( 25,000) 125,000
2008 - 180,000
d. 2007 - 125,000
2008 - 180,000
2. Henri Company purchased for cash on January 01, 2003, three machines which cost a total of P1,800,000.
Estimated selling prices of the machines were:
Machine 1 P 600,000
Machine 2 750,000
Machine 3 900,000
The machines were believed to have a useful life of 10 years without residual value. The company records depreciation annually on a monthly basis. On January 01, 2006, Machine 1 was sold for P375,000 cash. The proceeds were credited to the Machinery account.
On July 01, 2007, Machine 3 was traded in for a new machine (No. 4) which had a cash price of P750,000, Henri paying P300,000 for the difference with the trade in value of the old machine.
What should be the balance of the Accumulated depreciation – Machinery on December 31, 2007 after adjustment of the books?
a.P805,500 b.P481,500 c.P337,500 d.P387,500
3.The following data are taken from the shareholders’ equity section of the balance sheet of FLOOD CORP.
12.31.6 12.41.07 Ordinary shares (P100 par value) 625,000 637,500 Share premium in excess of par 312,500 362,500
Retained earnings 625,000 653,750
During 2007, the company declared and paid cash dividend of P93,750 and also declared and issued a stock dividend. There were no other changes in stock issued and outstanding during 2007.
Net income for 2006 is:
a. P 28,750 b. P 122,500 c. P 135,000 d. P 185,000
4. During 2007, Pen Corporation acquired common stock of Rap Company as follows:
LOT DATE NO. OF SHARES COST PER SHARE TOTAL COST
A January 25 800 560 448,000
B April 5 600 600 360,000
Rap Company issued a 20% stock dividend on February 14, 2007. Common stock rights were issued on October 30, 2007 entitling holders to purchase one new common share at P450 for each ten shares held. On this date, the rights were being traded at P20 each and the stock ex-rights were being traded at P620 per share.
On November 8, 2007, Pen sold 500 rights that pertained to Lot A. Sales price was P25 per right. The corporation paid a brokerage fee of P500 on the sale of the stock rights. Pen exercised the remaining rights on November 11, 2007.
The gain on the sale of right is:
a.P5,208 b.P4,708 c.P3,750 d.P3,250
5. Use the same information used in Number 4. How many new shares of RPP common were acquired by Peninsula through the exercise of the stock rights?
a.168 shares b.140 shares c.118 shares d.106 shares
6. On July 1, 2007, Marcus Company purchased 4,000 of the P1,000 face amount , 8% bonds of Olay Corporation for P3,692,000 to yield 10% per annum.
The bonds which mature on July 1, 2010, pay interest semiannually on January 1 and July 1. Marcus Company classifies the securities as held to maturity.
What is the investment carrying value at December 31, 2007?
a.P3,975,400 b.P3,741,200 c.P3,716,600 d.P3,667,400
7. Use the same information in number 6 above. How much is the interest revenue reported by Marcus Company’s income statement for year ended December 31, 2007?
a.P200,000 b.P190,800 c.P184,600 d.P160,000
Use the following information for questions 8 and 9.
Cline Company's December 31 year-end financial statements contained the following errors:
Dec. 31, 2007 Dec. 31, 2008_________
Ending inventory P3,000 understated P4,400 overstated Depreciation expense P 800 understated
An insurance premium of P7,200 was prepaid in 2007 covering the years 2007, 2008, and 2009. The prepayment was recorded with a debit to insurance expense. In addition, on December 31, 2008, fully depreciated machinery was sold for P3,800 cash, but the sale was not recorded until 2009. There were no other errors during 2007 or 2008 and no corrections have been made for any of the errors. Ignore income tax considerations.
8. What is the total net effect of the errors on the amount of Cline's working capital at December 31, 2008?
a.Working capital overstated by P2,000. b.Working capital overstated by P600.
c.Working capital understated by P1,800. d.Working capital understated by P4,800.
9. What is the total effect of the errors on the balance of Cline's retained earnings at December 31, 2008?
a.Retained earnings understated by P4,000. b.Retained earnings understated by P1,800.
c.Retained earnings understated by P1,000. d.Retained earnings overstated by P1,400.
10. In your examination of the books and accounts of PLUM Company for the year 2008, you have noted that the entire past due accounts of the company amounting to P200,000 should be set up as Allowance for Doubtful accounts. On these past due accounts, management with proper recommendation from the company’s legal counsel, has decided to write off accounts with balance totaling P40,000. As of December 31, 2008, the balance of Allowance for Doubtful Accounts was P125,000.
The additional provision required for the company’s doubtful accounts is:
a.P 35,000 b.P 75,000 c.P160,000 d.P200,000
DIFFICULT