Auditing Problems Reviewer – Solution

Problem 1

#21Gross cost of the patents

(Purchase price) 1,000,000

#22Cost of patent 1,000,000Accumulated amortization for

2 years (1,000,000 / 10 x 2) (200,000)Carrying amount, 12/31/2011 800,000

#23Amortization expense, 2012

(1,000,000 / 10) 100,000

#24Carrying amount, 12/31/2012

(800,000 – 100,000) 700,000Recoverable amount

(140,000 x 3.7908) (530,712)Impairment loss, 2012 169,288

#25Recoverable amount 530,712Divided by: Remaining useful life 5 yrsAmortization expense, 2013 106,142

#26Legal costs 70,000Amortization expense

(150,000 / 3) 50,000Total expenses relating to Trademark 120,000

#27Down payment 200,000Present value of installment payment

(200,000 x 3.1699) 633,980Correct cost of the franchise 833,980

#28Carrying amount of notes payable at

1/1/2011 633,980Discount amortization, 2011

(633,980 x 10%) 63,398Principal payment (200,000)Carrying amount, 1/1/2012 497,378

Interest expense, 2012(497,378 x 10%) 49,738

#29Discount on notes payable, 1/1/2011

(800,000 – 633,980) 166,020Discount amortization for 2011 and 2012

(63,398 + 49,738) (113,136)Discount on notes payable,12/31/2012 52,884

#30Carrying amount, 1/1/2011 833,980Amortization expense for 2 years

(833,980 / 10 x 2) (166,796)Carrying amount, 12/31/2012 667,184

#31 ?

#32 ?

#33 ?

Problem 2

#34Accounts payable, per client 5,000,000Supplier’s debit balances 200,000Unrecorded purchase 300,000Goods held on consignment (90,000)Accounts payable, per audit 5,410,000

#35Discount on bonds payable 0

*The bonds were sold at a premium.

#36Carrying value of the bonds, 1/1/2010 2,155,800Premium amortization for:

2010 [220,000 – (2,155,800 x 9%)] (25,978)2011 [220,000 – (2,129,822 x 9%)] (28,316)2012 [110,000 – (2,101,506 x 4.5%)] (15,432)

Carrying value, 7/1/2012 2,086,074Ratio of bonds sold x 1/2Carrying value of bonds sold 1,043,037Retirement price, excluding interest

[1,100,000 – (110,000 x 1/2)] (1,045,000)Gain (loss) on retirement of bonds (1,963)

#37Carrying value, 9/30/2010

(4,000,000 x 0.7513) 3,005,200Discount amortization for

2010 (3,005,200 x 10% x 3/12) 75,1302011 (3,080,330 x 10%) 308,0332012 (3,388,363 x 10%) 338,836

Carrying amount of notes payable 3,727,199

*Difference due to rounding off.

#38Provision for litigation expenses 260,000

#39Minor defects (2,000,000 x 30%) 600,000Major defects (5,000,000 x 10%) 500,000Provision for warranties 1,100,000

Problem 3 (next page)

DATE #40) TREASURY SHARES #41) PREFERENCE SHARES #42) ORDINARY SHARESShares Amount Shares Amount Shares Amount

Beginning balance 4,000 150,000 15,000 300,000January 15 800 40,000February 1 1,500 30,000April 15 200 8,600April 30 10,000 200,000May 31 (150)

(2,000)(6,450)

(75,000)June 1 2,230 44,600TOTAL 2,050 77,150 900 45,000 28,730 574,600

#43Beginning balance 4,160,000January 15 (800 x 5) 4,000February 15 (1,500 x 22) 33,000April 30 (10,000 x 20) 200,000May 1 (2,230 x 35) 78,050May 31 [(150 x 14) + (2,000 x 19.5)] 41,100Additional paid-in capital, end 4,516,150

#44Beginning balance 1,100,000March 15 (12,500 x 1.50) (18,750)May 1 (2,230 x 55) (122,650)September 15 (26,680 x 1.50) (40,020)

(800 x 50 x 8%) (3,200)Profit for the year 500,000Retained earnings, end 1,415,380

Problem 4

#458% preference share 250,000Ordinary shares, no par 210,000Subscribed ordinary shares 50,000Legal capital 510,000

#46Number of preference shares issued

(250,000 / 100) 2,500 shares

Preference share capital 250,000Premium on preference share 20,000Total 270,000Divided by: Number of shares issued 2,500Average issuance price 108

#478% preference share 250,000Ordinary shares, no par 210,000Subscribed ordinary shares 50,000Premium on preference share 20,000Donated capital 20,000Share warrants outstanding 5,000Contributed capital 555,000

Problem 5

#48 ?

#49 ?

#50 ?

Problem 6

#51Interest revenue for 2010

1st half (3,760,000 x 5%) 188,0002nd half [(3,760,000 +8,000) x 5%] 188,400

Total 376,400

#52Carrying value, 1/2/2010 3,760,000Discount amortization for 2010

1st half (188,000 – 180,000) 8,0002nd half (188,400 – 180,000) 8,400

Carrying value, 12/31/2010 3,776,400

#53NONE.

#54Carrying amount, 12/31/2010 3,776,400Discount amortization for 2011

1st half [(3,776,400 x 5%) – 180,000] 8,8202nd half [(3,785,220 x 5%) – 180,000] 9,261

Carrying amount, 12/31/2011 3,794,481Discount amortization for 2012

1st half [(3,794,481 x 5%) – 180,000] 9,724July 1 to November 30

[({3,804,205 x 5%} – 180,000) x 5/6] 8,509Carrying amount, 11/30/2012 3,812,714Ratio of bonds sold x 18/40Carrying amount of bonds sold 1,715,721Selling price (1,800,000 x 98%) 1,764,000Gain on sale of securities 48,279

#55Face value of the remaining bonds 2,200,000Market price at 12/31/2012 x 98.5%Carrying amount of investment 2,167,000

Problem 7

#56 ?

#57 ?

Problem 8

Age Per client Adjustment Per audit % uncollectible #58. Required allowance

0 to 1 month 372,960 8,000 380,960 1% 3,8101 to 3 months 307,280 2,000 309,280 2% 6,1863 to 6 months 88,720 88,720 3% 2,662Over 6 months 24,000 (4,000) 20,000 8,000 – 50%

12,000 – 20%4,0002,400

TOTAL 792,960 6,000 798,960 19,058

#59Accounts receivable, per audit 798,960Allowance for doubtful accounts (19,058)Net realizable value, 12/31/2010 779,902

#60Required allowance 19,058Accounts written-off 10,832Recovery of accounts written-off (1,296)Beginning balance (15,250)Bad debts expense, 2010 13,344

Problem 9

Date #61. LAND #62. BUILDINGS #63. MACHINERY AND

EQUIPMENT

#64. AUTOMOBILES

#65. LEASEHOLD IMPROVEMENTS

Beginning balance 1,850,000 16,000,000 12,250,000 2,720,000 3,160,000January 5 5,625,000 16,875,000July 1 1,398,000September 1 875,000December 20 (525,000)TOTAL 7,475,000 32,875,000 13,123,000 3,595,000 3,160,000