edoc.site_applied-auditing-2017-answer-key.pdf - APPLIED AUDITING With Comprehensive Review of Philippine Financial Reporting Standards(PFRSs A guide in

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Unformatted text preview: APPLIED AUDITING With Comprehensive Review of Philippine Financial Reporting Standards (PFRSs) A guide in applying auditing procedures to specific accounts of the financial statements. TEACHERS MANUAL 2017 Edition By DARRELL JOE O. ASUNCION, MBA, CPA MARK ALYSON B. NGINA, CMA, CPA RAYMUND FRANCIS A. ESCALA, MBA, CPA Dear fellow teacher, This “Teacher’s Manual” should be used solely by the teacher and for classroom purposes only. This manual should NOT be reproduced either manually (e.g., printing or photocopy) or electronically (e.g., copying or uploading in the net) without our written consent (or the publisher’s written authorization). If you have comments, queries or suggestions, please do not hesitate to contact us at: Telephone: 074-2441894 Mobile No.: Darrell Joe O. Asuncion – 0923-424-8286 Mark Alyson B. Ngina – 0915-510-7281 Raymund Francis A. Escala – 0917-715-1226 Email ad: [email protected] Thanks and God bless. Sincerely, Darrell Joe O. Asuncion, MBA, CPA Mark Alyson B. Ngina, CMA, CPA Raymund Francis A. Escala, MBA, CPA Table of Contents CHAPTER 5: CASH TO ACCRUAL.................................... ............................................ 4 CHAPTER 6: CORRECTION OF ERRORS ..................................... ...........................19 CHAPTER 8: CASH AND CASH EQUIVALENTS ..................................... ..............28 CHAPTER 10: LOANS AND RECEIVABLES ...................................... .....................46 CHAPTER 12: INVENTORIES ....................................... ..............................................75 CHAPTER 14: INTRODUCTION TO FINANCIAL ASSET AND INVESTMENT IN EQUITY SECURITIES ..................................... ....................................................... 100 CHAPTER 15: INVESTMENT IN DEBT SECURITIES ..................................... . 117 CHAPTER 16 INVESTMENT IN ASSOCIATE...................................................... 133 CHAPTER 18 PROPERTY, PLANT AND EQUIPMENT....................................148 CHAPTER 19 WASTING ASSETS............... ..................................................... ........ 172 CHAPTER 20 INVESTMENT PROPERTY ..................................... ....................... 178 CHAPTER 22 INTANGIBLE ASSETS ...................................... ............................... 184 CHAPTER 23 REVALUATION, IMPAIRMENT AND NONCURRENT ASSET HELD FOR SALE ...................................... ................................................................ ..... 195 CHAPTER 25 INTRODUCTION TO LIABILITIES....... . .. .. . . ..... .................. 212 CHAPTER 26 FINANCIAL LIABILITIES AND DEBT RESTRUCTURING.. 226 CHAPTER 27 LEASE ..................................... ..............................................................245 CHAPTER 29 SHAREHOLDERS’ EQUITY................. .......................................... .271 CHAPTER 30 BOOK VALUE AND EARNINGS PER SHARE ......................... .293 CHAPTER 32 STATEMENT OF FINANCIAL POSITION AND COMPREHENSIVE INCOME .................................................................................... .305 CHAPTER 33 STATEMENT OF CASH FLOWS..................................... ............. .324 Chapter 5: Cash to Accrual CHAPTER 5: CASH TO ACCRUAL PROBLEM 5-1 (Computation of Sales under cash basis) Accounts receivable/Notes receivable trade/Advances from customers Beg. balance – AR 200,000 180,000 Balance end - AR Beg. balance – NR 240,000 170,000 Balance end - NR Balance end - Advances 40,000 55,000 Beg. balance - Advances Sales on account 600,000 4,000 Sales ret. and allowance Recoveries 2,000 Salesdiscounts Total 666,000 3,000 1,080,000 1,080,000 Collections recoveries Write-off including Suggested answer: A PROBLEM 5-2 Computatio n of Bad Debts Allowance for bad debts Ending balance Write-off 40,000 8,000 25,000 21,000 2,000 Total 48,000 48,000 Beginning balance Bad debts expense Recoveries Suggested answer: C PROBLEM 5-3 (Computation of Purchases) Accounts Payable / Notes Payable / Advances to Suppliers Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 400,000 Beg. balance - NP Purchase discount 3,000 68,000 Balance end - Advances Beg. balance - Advances 50,000 651,000 Purchases (gross) Balance end – AP 250,000 Balance end – NP 210,000 Total 1,319,000 1,319,000 Suggested answer: A 4 Chapter 5: Cash to Accrual PROBLEM 5-4 Computatio n of Cost of Sales Accounts Payable (AP) / Notes Payable (NP) Payments 800,000 200,000 Beg. balance - AP Purchase ret. and allow. 6,000 - Beg. balance - NP Purchase discount 3,000 859,000 Purchases (gross) Balance end - AP 250,000 Balance end-NP Total 1,059,000 1,059,000 Beginning balance Net purchases Total Merchandise Inventory 400,000 210,000 Ending balance 860,000 1,050,000 Cost of sales 1,260,000 1,260,000 Computation of the net purchases: Grossp urchases onaccount Addcash purchases Total Less: Purchase returns and allowances Purchase discount Netpurchases 859,000 10,000 869,000 6,000 3,000 860,000 Suggested answer: B PROBLEM 5-5 (Computation of Income Other Than Sales) Rent Receivable/Unearned rent income Beg. Balance - Rent Receivable Balance end - Unearned rent income Rent Income (squeeze) Total 200,000 250,000 Balance end - Rent Receivable 90,000 Beg. Balance – Unearned rent income 660,000 Collections 30,000 770,000 1,000,000 1,000,000 Suggested answer: B PROBLEM 5-6 (Computation of Expenses in General) Prepaid Rent/Rent payable Beg. Balance - Prepaid Salaries Balance end - Accrued Salaries Payments Total 200,000 250,000 Balance end - Prepaid Rent 80,000 Beg. Ba lance – Re nt payable 785,000 Rent Expense 65,000 850,000 1,115,000 1,115,000 5 Chapter 5: Cash to Accrual Suggested answer: C PROBLEM 5-7 (Computation of Cost of Machine Acquired and Sold) Question No. 1 Carrying amount of equipment sold Add: Accumulated depreciation Cost 25,000 15,000 40,000 Question No. 2 Equipment Beg. Balance Cost of PPE (squeeze) acquired Total 100,000 60,000 120,000 40,000 160,000 160,000 Balance end Cost of PPE disposed Accumulated depreciation Balancee nd Accumulated depreciation ofP PE disposed 18,000 15,000 Total 33,000 15,000 Beg. Balance 18,000 Depreciation expense 33,000 SUMMARY OF ANSWERS: 1. 2. D A PROBLEM 5-8 Question No. 1 Prepaid Insurance Beg.Balance Payments 7,500 41,500 Total 49,000 6,000 Balancee nd 43,000 Expenses (squeeze) 49,000 Question No. 2 Interest Receivable Beg.Balance Income (squeeze) 14,500 112, 700 3,700 Balancee nd 123,500 Collections Total 127,200 127,200 6 Chapter 5: Cash to Accrual Question No. 3 Salaries payable Balancee nd Payments 61,500 481,000 Total 542,500 53,000 Beg. Balance 489,500 Expenses 542,500 Question No. 4 Accounts receivable trade Beg. Balance Sales 415,000 1,980,000 550,000 Balance end 1,845,000 Collections (squeeze) Total 2,395,000 2,395,000 Question No. 5 Accounts receivable trade Beg. Balance Sales 415,000 1,980,000 550,000 Balance end 1,820,000 Collections (squeeze) 25,000 Write-off Total 2,395,000 2,395,000 Question No. 6 Accounts receivable trade Beg. Balance Sales Recoveries 415,000 1,980,000 20,000 550,000 Balance end 1,840,000 Collections (squeeze) 25,000 Write-off Total 2,415,000 2,415,000 SUMMARY OF ANSWERS: 1. 2. 3. C B C 4. A 5. 6. A B PROBLEM 5-9 Question No. 1 Accounts/Notes receivable trade Decrease in A/R Sales on account (squeeze) 100,000 100,000 I ncrease in N/R 10,000 Write-off 4,260,000 4,200,000 Collections 30,000 20,000 Total 4,360,000 4,360,000 7 Sales discounts Sales ret. and allow. Chapter 5: Cash to Accrual Question No. 2 Accounts payable Cash paid to creditors 2,800,000 Purchase discounts 200,000 Decrease in Accounts payable purchases 2,650,000Gross (squeeze) 40,000 Purchase returns 10,000 Total 2,850,000 2,850,000 Question No. 3 Merchandise inventory Decrease in Inventory Gross purchases 25,000 2,650,000 40,000 P urchase discounts 10,000 Purchase returns 2,625,000 Cost of sales (squeeze) Total 2,675,000 2,675,000 Question No. 4 Rental receivable/Unearned Rent Income Rental (squeeze) revenue Total 14,000 I ncrease in Rental receivable 40,000 Decrease in Unearned rental 400,000 Collections from tenants 454,000 454,000 454,000 Question No 5 Prepaid interest/Interest Payable Decrease in interest Increase in payable Interestpaid Total Prepaid 5,500 Interest 8,500 114,000Interest (squeeze) 100,000 114,000 SUMMARY OF ANSWERS: 1. D 2. D 3. A 4. A 114,000 5. 8 D expense Chapter 5: Cash to Accrual PROBLEM 5-10 Question No. 1 Accounts Receivable/Notes receivable trade Beg. Balance – A/R Beg. Balance – N/R Sales on account (squeeze) 200,000 300,000 1,000,000 Total 1,500,000 250,000 Bal. end – A/R 100,000 Bal. end – N/R 20,000 Sales ret. and allow. 10,000 Sales discount 1,120,000 Collections 1,500,000 Question No. 2 Accounts payable/Notes payable Balance end – A/P Balance end – N/P Purchase returns allow Purchase discount Payments and Total 25,000 75,000 40,000 50,000 Beg. Balance – A/P 100,000 Beg. Balance – N/P 650,000 Gross purchases (squeeze) 10,000 650,000 800,000 800,000 Gross purchases Less: Purchase ret and allow Purchased iscounts 650,000 40,000 10,000 Net Purchases 50,000 600,000 Question No. 3 Sales Less:Salesret and allow Salesdiscounts Net Sales Less: Cost of Sales Merchandiseinventorybeg. Add: Net Purchases Purchases Add:Freight-in GrossPurchases Less: Purch.R et and allow Purchase discounts 1,000,000 20,000 10,000 30,000 970,000 200,000 600,000 650,000 40,000 10,000 Totalg oodsavailablefors ale Less: Merchandisei nventory,e nd Gross Income / Gross Profit 6 00,000 800,000 100,000 9 700,000 270,000 Chapter 5: Cash to Accrual Question No. 4 Prepaid/Accrued Salaries Beg. Balance -Prepaid Salaries Balance end - Accrued Salaries Payments 100,000 350,000 Total 500,000 125,000 Balance end - Pr epaid Salaries 75,000 Beg. Balance - Accrued Salaries expense 300,000Salaries (squeeze) 50,000 500,000 Question No. 5 Accrued rent/Unearned rent Beg. Balance - Accrued rent Balance end - Unearned rent Rent income (squeeze) 70,000 40,000 490,000 Balance end - Accrued rent 80,000 Beg. Balance - Unearned rent 300,000 Collection of rent Total 600,000 600,000 40,000 SUMMARY OF ANSWERS: 1. A 2. B 3. C 4. B 5. B PROBLEM 5-11 Question No. 1 Beg. Balance Recoveries Sales (squeeze) Total Sales Less: Sales discount Net Sales Accounts receivable trade 200,000 300,000 Balance end 8,000 20,000 Sales discounts 1,570,000 1,408,000 Collections including recoveries (1,498,00080,000+20,00-30,000) 50,000 Accounts written-off 1,778,000 1,778,000 1,570,000 20,000 1,550,000 Question No. 2 Payment (1,210,00020,000+30,000) Purchase ret. and allow. Balance end Accounts payable trade 150,000 Beg. Balance 1,210,000 1 ,170,000 Purchases (squeeze) 10,000 100,000 10 Chapter 5: Cash to Accrual Total 1,320,000 Purchases Less: Purchases discount Net Purchases 1,320,000 1,170,000 10,000 1,160,000 Question No. 3 Merchandise inventory Beg. Balance 380,000 Net Purchases (1,170,000-10,000) Total 330,000 Balancee nd 1,160,000 1,210,000 Cost of Sales (squeeze) 1,540,000 1,540,000 Question No. 4 Rent Receivable Beg. Balance Rent income (squeeze) 70,000 130, 000 80,000 Balancee nd 120,000 Collections Total 200,000 200,000 Question No. 5 Allowance for Doubtful accounts Accounts written off 50,000 20,000 Beg. Balance Balancee nd 30,000 account 52,000Doubtful expense (squeeze) 8,000 Recoveries Total 80,000 SUMMARY OF ANSWERS: 1. 2. 3. B B B 80,000 4. A 5. A PROBLEM 5-12 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance Professional fees 500,000 5,250,000 750,000 5,000,000 5,750,000 5,750,000 (squeeze) Total 11 Balance end Collections Chapter 5: Cash to Accrual Question No. 2 ProfessionalFees(SeeN o.1) Less: Rent expense (1.2M +100,000) Supplies expense (800,000+300,000-250,000) Othero peratingexpense Interest expense (1M x 12% x 9/12) Depreciation expense (2,500,000/10) Net income Question No. 3 Cash AccountsReceivable Supplies Total Current Assets 850,000 750,000 90,000 250,000 3,240,000 2,010,000 1,500,000 750,000 250,000 2,500,000 Question No. 4 Furniture and fixtures Less: Accumulated Depreciation (125,000+ 250,000) Total Noncurrent Assets 2,500,000 375,000 2,125,000 Question No. 5 Total current assets (See No. 3) Total noncurrent assets (See No. 4) 2,500,000 2,125,000 Total Assets 4,625,000 Question No. 6 NotesPayable Accruedrent Accrued interest on notes payable (1,000,000 x1 2% x9/12) Total Current Liabilities 1,000,000 100,000 90,000 1,190,000 Question No. 7 Total assets (See No.5 ) Less: Total liabilities (See No. 6) – all are current Total Owner’s Equity SUMMARY OF ANSWERS: 1. 2. 3. B B A 5,250,000 1,300,000 4. A 12 4,625,000 1,190,000 3,435,000 5. A 6. C 7. B Chapter 5: Cash to Accrual PROBLEM 5-13 Question No. 1 Accounts receivable trade Beg. Balance Salesonaccount (squeeze) 124,000 1,535,000 Total 146,000 Balancee nd 13,000 Salesdiscount 1,500,000 Collections 1,659,000 1,659,000 Salesonaccount 1,535,000 Add: sales TotalCash sales 160,000 1,695,000 Question No. 2 Grosss ales(seeNo.1) Less:Sales discount Net sales 1,695,000 13,000 1,682,000 Question No. 3 Accounts Payable Payments Balancee nd 1,206,000 410,000 382,000 1,234,000 Total 1,616,000 1,616,000 Beg. Balance Purchases (squeeze) Purchasesona ccount 1,234,000 Add:C ashp urchases Total Purchases 120,000 1,354,000 Question No. 4 Merchandise Inventory Beg. Balance Net purchases 186,000 1,354,000 190,000 Balance end 1,350,000 Cost of sales (squeeze) Total 1,540,000 1,540,000 Question No. 5 Prepaid G&A/Accrued G&A Beg. Balance - Prepaid Interest Balance end – Accrued Interest Payments 9,600 204,000 Total 222,600 8,400 Balance end - Prepaid Interest 7,000 Beg. Balance – Accrued Interest 207,200 Expenses 9,000 222,600 13 Chapter 5: Cash to Accrual Question No. 6 General and administrative expense (see No. 5) Depreciationexpense Warrantyexpense Total operating expense 207,200 84,000 6,400 297,600 Question No. 7 Sellingprice of land Less:Bookvalue of land Gain on sale of land 20,000 16,000 4,000 Question No. 8 SellingPrice Less Book value Cost Less: Accumulated depreciation Gain on sale of warehouse equipment 12,000 25,000 16,000 Question No. 9 SellingPrice Less: Book value Cost Less: Accumulated depreciation Gain on sale of boiler 9,000 3,000 42,000 48,000 20,000 28,000 14,000 Question No. 10 NetSales 1,682,000 Less:Cost ofSales Gross Profit Less:Operatingexpenses Gain on sale (14,000+3,000+4,000) Net income 1,350,000 332,000 297,600 21,000 55,400 SUMMARY OF ANSWERS: 1. 2. 3. B C 6. 7. 8. A A D C 4. 9. A B 5. 10. B A PROBLEM 5-14 Comprehensive Question No. 1 Accounts receivable trade Beg. Balance 150,000 Sales (squeeze) 800, 000 Total 950,000 200,000 Balancee nd 10,000 Sales returns 740,000 Collections 950,000 14 Chapter 5: Cash to Accrual Question No. 2 Salesonaccount Add:Cash sales Total sales Less: Salesr eturns anda llowances Net sales Less:Costo fsales( squeeze) Grossprofit(200,000/40%) 800,000 100,000 900,000 10,000 890,000 390,000 500,000 Merchandise inventory Beg. Balance Net Purchase s (squeeze) 190,000 420,000 220,000 390,000 Total 610,000 610,000 Balancee nd Cost of Sales Question No. 3 Accounts Payable trade Payments (squeeze) Purchase returns and allowances Balance end – Accounts payable Total 230,000 Beg. Ba lance - Accounts payable 428,000 Gross purchases (420,000+8,000) 470, 000 8,000 180,000 658,000 658,000 Question No. 4 Total payment of Accounts payable and admin expenses Less: Payment ofA ccounts payable Payment of admin expe nses Question No. 5 Paymentof adminexpenses Divided by: Percentage of cash expenses to total admin expense Totaladminexpenses Add:Sellingexpenses Total selling and administrative expense Question No. 6 Totaladministrativeexpenses Less: Payment of administrative expense Non-cash administrative expenses Less: Depreciation for building (440,000 x60%x 5% x9/12) 15 518,000 470,000 48,000 48,000 80% 60,000 200,000 260,000 60,000 48,000 12,000 9,000 Chapter 5: Cash to Accrual Depreciation for furniture andf ixtures Divided by: Number of months used over 12 months Annual depreciation Dividedby: Depreciationrate Cost of Furniture and Fix tures (no res idual value ) SUMMARY OF ANSWERS: 1. A 2. A 3. B 4. A 5. C PROBLEM 5-15 Question No. 1 Cash Receipts: Fromcustomers From issue of ordinary shares Frombankloan Cash disbursements: Purchaseo fi nventory Rent Salaries Utilities Insurance Purchase of equipment and furniture Cash 3,000 6/12 6,000 10% 60,000 6. 360,000 100,000 100,000 300,000 15,000 30,000 5,000 3,000 40,000 Question N os. 2 and 3 Current assets Cash Inventories Prepaidrent(1,000x3) Total current assets (No. 2) Noncurrent assets Property, plant and equipment Less accumulated depreciation Total assets (No. 3) A 560,000 393,000 167,000 167,000 100,000 3,000 270, 000 40,000 4,000 Question No. 4 Accountspayable Utilitiespayable Loanspayable 36,000 306, 000 20,000 1,000 100,000 Interest on loans payable (100,000 x 12% x 9/12) Total current liabilities 16 9,000 130,000 Chapter 5: Cash to Accrual Question No. 5 Ordinary shares Retained earnings (net income) Shareholders’ equity SUMMARY OF ANSWERS: 1. 2. 3. B B 100,000 176,000 176,000 A 4. D 5. A PROBLEM 5-16 Question No. 1 Notesreceivable–December3 1 Accountsreceivable– December31 Collectiono fnotesandaccounts Notereceivablediscounted Total Less: Notes receivable – January 1 Accounts receivable– January1 Sales on account 210,000 950,000 2,950,000 200,000 4,310,000 200,000 740,000 Question No. 2 Notespayable –December31 Less:Notepayable–bank Notespayable –trade Accountspayable–December31 Paymentofn otesanda ccounts Total Less: Notes payable – January 1 Accounts payable – January 1 Purchases on account 940,000 3,370,000 580,000 300,000 280,000 750,000 2,100,000 3,130,000 750,000 600,000 Question No. 3 Equipment –January1 Add:Acquisition Total Less:Equipment–December3 1 Depreciation 1,350,000 1,780,000 1,000,000 280,000 1,280,000 1,200,000 80,000 Question No. 4 Interest accrued on note issued to bank (300,000 x 12% x 10/12) Interest expense Question No. 5 Volks Company Income Statement Year ende d Decembe r 31, 2016 17 30,000 30,000 Chapter 5: Cash to Accrual Sales Cost of sales: Inventory – January1 Purchases Goods available for sale Less: Inventory – December 31 Gross income Expenses: *Expenses 3,370,000 1,600,000 1,780,000 3,380,000 1,500,000 820,000 Depreciation **Losso ns ale ofi nvestment ***Loss on note receivable discounted Interestexpense Net income 80,000 50,000 10,000 30,000 *Expensespaid Add:Prepaidexpenses–January1 Accruedexpenses–December31 Total Less: Prepaid expenses – December 31 Accrued expenses – January 1 Expenses 990,000 500,000 790,000 120,000 50,000 960,000 100,000 40,000 140,000 820,000 **Salesprice Less:Cost ofinvestmentsold Loss on saleof investment 250,000 300,000 ( 50,000) ***Loss on note receivable discounted (200,000 – 190,000) OR Retained earnings – December 31 Add:Dividends Total Less: Retained earnings – January1 Net income SUMMARY OF ANSWERS: 1. 2. 3. A A 1,880,000 1,490,000 C 10,000 600,000 400,000 1,000,000 500,000 500,000 4. 18 C 5. D Chapter 6: Correction of Errors CHAPTER 6: CORRECTION OF ERRORS PROBLEM 6-1 Income Statement and SFP Errors Que stions Nos. 1-6 2016 Unadjusted balances 1 2 Adjusted balances 2017 RE, end of the year Net income 160,000 260,000 360,000 160,000 260,000 360,000 Net income Workin g capital 200,000 180,000 200,000 - - - - 200,000 - 180,000 Workin g capital - 200,000 Questions No. 7 Assuming errors were discover ed in 2016 ADJUSTING ENTRIES Debit 1) Miscellaneousi ncome 25,000 Rent income 25,000 2) Notespayable Accountspayable 28,000 Credit 28,000 Assuming errors were discover ed in 2017 1) ADJUSTING ENTRIES Noentry 2) Noentry Assuming errors were discover ed in 2018 ADJUSTING ENTRIES 1) Noentry 2) Debit Credit Debit Credit Noentry SUMMARY OF ANSWER S: 1. A 2. B 3. A 4. RE, end of the year C 19 5. C 6. C Chapter 6: Correction of Errors PROBLEM 6-2 Counterb alancing Erro rs Que stions Nos. 1-6 2016 Workin g capital Net income Net income R/E 2017 Workin g capital R/E Unadjuste...
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