Auditing Problems Reviewer – Solution

Problem 1

A.

#21Interest expense (5,000,000 x 10%) 500,000Interest income (125,000)Capitalized interest 375,000

#22Actual expenditures

(1.4M+1M+1.2M+1M+0.4M) 5,000,000Capitalized interest 375,000Cost of the building 5,375,000

B.

#23Average expenditures

January 1 (1,400,000 x 12/12) 1,400,000March 31 (1,000,000 x 9/12) 750,000July 1 (1,200,000 x 6/12) 600,000September 20 (1,000,000 x 3/12) 250,000December 31 (400,000 x 0/12) -Total 3,000,000

Specific borrowing (1,800,000)Allocated to general borrowing 1,200,000Average interest rate* x 11.11%Interest on general borrowing 133,320Interest on specific borrowing

(1,800,000 x 10%) 180,000Interest income (10,000)Capitalized interest 303,320

*

2-year note interest(1,600,000 x 10%) 160,000

5-year note interest(2,000,000 x 12%) 240,000

Total interest 400,000Divided by: Total principal

(1,600,000 + 2,000,000) 3,600,000Average interest rate on general

Borrowings 11.11%

Problem 2

#24

Carrying value of patent, 1/1/13(1,920,000 – 240,000) 1,680,000

Divided by: Remaining useful life(6yrs – 2 yrs) 4 years

Amortization for 2013 420,000 Carrying amount, 1/1/13 1,680,000Amortization for 2013 (420,000)Carrying amount, 12/31/2013 1,260,000

#25Cost of trademark

(800,000 x 3/4) 600,000

#26Amortization expense for:

Patent 420,000Agreement with the other party

(800,000 x 1/4 x 1/5) 40,000Total amortization expense, 2013 460,000

Problem 3

#27Palay stalks 1,600,000Growing stocks 1,800,000Biological assets – current 3,400,000

#28Freestanding trees 7,000,000Breeding stocks 960,000Biological assets – non-current 7,960,000

#29Land on which trees are planted 3,000,000Road in orchard 2,000,000Land on which palay stalks were

planted 2,500,000Poultry housing, net 520,000Property, plant and equipment 8,020,000

#30Inventory of agricultural produce 200,000

Problem 4

#31Beginning balance 9,100,000Jan. 3 purchase

(5,700,000 + 44,200 + 175,800) 5,920,000Aug. 28 exchange (4,300,000)Machinery, 12/31/2010 10,720,000

#32Beginning balance 4,820,000Depreciation for:

Machine 1(4,050,000 / 5 x 39/12) (2,632,500)

Machine 2 (4,500,000 / 6) 750,000Machine 3 (5,520,000 / 5) 1,104,000

Accumulated depreciation –Machinery, 12/31/2010 4,041,500

#33Beginning balance 4,680,000

June 22 purchase(1,520,000 + 65,500 + 34,500) 1,620,000

Vehicles, 12/31/2010 6,300,000

#34Beginning balance 1,965,600Depreciation for:

Vehicle 1 and 2[(4,680,000 – 1,965,600) x 40%) 1,085,760

Vehicle 3 (1,620,000 x 40% x 6/12) 324,000Accumulated depreciation –

Vehicles, 12/31/2010 3,375,360

#35Depreciation for:

Machine 1 (4,050,000 / 5 x 8/12) 540,000Machine 2 750,000Machine 3 1,104,000

Depreciation expense –Machinery, 12/31/2010 2,394,000

#36Carrying value of the vehicle sold

at 12/31/2010[(4,680,000 – 3,051,360) x 1/2) 814,320

Depreciation from 1/1/11 to 5/25/11(814,320 x 40% x 5/12) (135,720)

Carrying value at 5/25/11 678,600Proceeds from sale of vehicle 660,000Loss on sale of vehicle 18,600

#37Accumulated depreciation –

Building, 12/31/2009 2,861,400Depreciation for 2010 and 2011

[(18,572,000 – 500,000) / 20* x 2) 1,807,200Accumulated depreciation –

Building, 12/31/2011 4,668,600

#38Carrying value of Machine 2

at 12/31/2009(4,800,000 – 2,187,500) 2,612,500

Depreciation for 2010 and 2011(4,500,000 / 6 x 2) (1,500,000)

Carrying value, 12/31/2011 1,112,500Overhaul cost 1,200,000Revised residual value (500,000)Revised depreciable cost 1,812,500Divided by: Remaining useful life 4 yearsDepreciation expense for

Machine 2, 2012 453,125

#39Carrying value of land, 12/31/2012 8,100,000

*Land is not subject to depreciation.

#40Depreciation expense on land

Improvements for:2011 (550,000 / 10 x 6/12) 27,5002012 (550,000 / 10) 55,000

Accumulated depreciation –Land improvements, 12/31/2012 82,500

Problem 5

#41Unrealized gain (loss) on:

Vincent Corp. (110,000 – 125,000) (15,000)Eric Corp. (180,000 – 160,000) 20,000Laly Corp. (750,000 – 700,000) 50,000

Net unrealized gain 55,000

#42Vincent Corp.

Beginning balance 5,000 sharesBonus issue (5,000 x 10%) 500Total 5,500Cash dividend per share x 1.00

Dividend income, 2014 5,500

#43Laly Corp.

Net income for six monthsended 12/31/2013 470,000

% share of Tomrod x 30%Income from associates 141,000

#44Fair value of the old shares

(1,550,000 / 50,000 x 25,000) 775,000Purchase price of the new shares 1,550,000Initial investment 2,325,000Income from associate 141,000Dividends received (75,000 x 1.5) (112,500)Investment in associate 2,353,500

#45Vincent Corp. (5,500 sh x 24) 132,000Eric Corp. (10,000 sh x 20) 200,000Equity investments at fair value,

12/31/2013 332,000

#46Beginning balance 55,000Unrealized gain from Laly Corp.

shares (50,000)Unrealized gain recognized

[(132,000–110,000)+(200,000–180,000)] 42,000

Net unrealized gain, 12/31/2013 47,000

#47Income from associate 141,000Dividend income 5,500Total income 146,500

Problem 6

#48 to #50

DATE #48) TREASURY SHARES #49) PREFERENCE SHARES #50) ORDINARY SHARESShares Amount Shares Amount Shares Amount

Beginning balance 5,000 187,500 20,000 400,000January 15 900 45,000February 1 1,500 30,000April 15 200 8,600April 30 10,000 200,000May 1 (150)

(2,000)(6,450)

(75,000)TOTAL 3,050 114,650 900 45,000 31,500 630,000

#51Beginning balance 5,160,000January 15 [900 x (55 – 5)] 4,500February 1 [1,500 x (43 – 20)] 34,500April 30 [10,000 x (48 – 20) 280,000May 1 [150 x (58 – 43)] 2,250

[2,000 x (58 – 37.50)] 41,000Additional paid-in capital, 12/31/12 5,522,250

#52Beginning balance 2,100,000March 15 (16,500 x 2.50) (41,250)September 15 (28,450 x 2.50) (71,125)

(900 x 50 x 8%) (3,600)Profit for the year 600,000Retained earnings, 12/31/12 2,584,025

Problem 7

#53Semi-annual interest payment

(70,000 / 2) 35,000Divided by: Bond face value 500,000Semi-annual stated interest rate 7%

x 2Annual stated interest rate 14%

#54 Semi-annual interest payment

(70,000 / 2) 35,000Premium amortization from

01/02/12 to 06/30/12 (1,562)Interest expense from 01/01/12 to

06/30/2012 33,438Divided by: Carrying amount of bonds

as of 12/30/2012(555,738 + 1,562) 557,300

Semi-annual effective interest rate 6% x 2

Annual effective interest rate 12%

#55Interest payment for 07/01/12 to

12/31/2012 35,000Interest expense for 07/01/12 to

12/31/2012 (555,738 x 12% x 1/2) (33,344)Premium amortization from

07/01/12 to 12/31/12 1,656Premium amortization from

01/02/12 to 06/30/12 1,562Total premium amortization for 2012 3,218

#56Interest expense for:

01/01/12 to 06/30/12 33,43807/01/12 to 12/31/12 33,344

Total interest expense for 2012 66,872

Problem 8

#57Income from associate, 2012

(800,000 x 30%) 240,000

#58Acquisition cost 2,000,000Income from associate 240,000Dividends received (500,000 x 30%) (150,000)Investment in associate, 12/31/12 2,090,000#59Beginning balance 2,090,000

Income from associate from01/01/13 to 07/01/2013(1,000,000 x 30%) 300,000

Carrying amount of investment at07/01/13 2,390,000

Ratio of investment sold x 1/2Carrying amount of investment sold 1,195,000Proceeds from sale of investment 1,500,000Gain on sale of investment 305,000

#60Laboratory research 300,000Radical modification 217,500Testing for evaluation 337,500Depreciation expense 100,000Research and development cost 955,000