Northern CPAR: Auditing Problems – 2nd Pre-Board Examination

NORTHERN CPA REVIEW CENTER

4F Pelizloy Centrum, Lower Session Rd., Baguio City
Contact Numbers: 09294891758; 09053500161; 09206156076
E-mail: [email protected]
DJOASUNCION

AUDITING PROBLEMS
SECOND PRE-BOARD EXAMINATION
INSTRUCTIONS: CHOOSE THE BEST ANSWER FOR EACH OF THE FOLLOWING. MARK THE
LETTER OF YOUR CHOICE WITH A VERTICAL LINE ON THE ANSWER SHEET PROVIDED.
STRICTLY NO ERASURES ARE ALLOWED.

PROBLEM NO. 1
Benefit Company has two cash generating units. On December 31, 2010, the
assets of one of cash generating unit at carrying amount are:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation (depreciated at P300,000 per annum) 2,600,000
Patent (amortized at P50,000 per annum) 850,000
Goodwill 100,000

The accounts receivable are regarded as collectible and the inventory’s fair
value less cost to sell is equal to the carrying amount. The patent has a
fair value less cost to sell of P750,000.
On December 31, 2010, Benefit Company has undertook impairment testing of
the cash generating unit and determined the value in use of the unit at
P4,050,000.
During 2011, Benefit Corporation decreased the depreciation charge on
property and equipment to P250,000 per annum, and to P45,000 per annum for
the amortization of the patent. The inventory on hand at 31 December 2010
was sold by the end of 2011. At 31 December 2010, Benefit Corporation
assessed the recoverable amount of the cash-generating to be P650,000
greater than the carrying amount of the unit.
Based on the above and the result of your audit, answer the following:

1 How much is the carrying amount of the plant and equipment at 31

. December 2010 after allocating impairment loss?
a 3.400,000 c. 2,800,000
.
b 2,840,000 d. 2,600,000
.

2 How much is the carrying amount of the patent at 31 December 2010

. after allocating impairment loss?
a 850,000 c. 710,000
.
b 750,000 d. 50,000
.

3 How much is the carrying amount of plant and equipment at 31 December

. 2011 after the reversal of impairment loss?
a 3,100,000 c. 3,059,216
.
b 2,550,000 d. 3,650,000
.

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 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
4 How much is the carrying amount of patent at 31 December 2011 after
. the reversal of impairment loss?
a 845,783 c. 705,000
.
b 895,000 d. 800,000
.
PROBLEM NO. 2
You are performing, for the first time, the audit for the year ended
December 31, 2007 of YPA CORP. financial statements. The company reported
the following amounts of net income for the years ended December 31, 2005,
2006 and 2007:
2005 P 381,000
2006 450,000
2007 385,500
During your examination, you discovered the following errors:
A. You observed that there were errors in the physical count: December 31,
2006 inventories were understated by P42,000 and December 31, 2007 were
overstated by P69,000.

B. On December 30, 2007, YPA recorded on account, merchandise in transit

which cost P45,000. The merchandise was shipped FOB Destination and had
not arrived by December 31. The merchandise was not included in the
ending inventory.

C. Accrual sales at each year and were consistently omitted as follows:

2005 P12,000
2006 15,000
2007 10,500

D. Accrual of salaries at each year and were consistently omitted as

follows:
December 31, 2005 30,000
December 31, 2006 42,000

E. On March 5, 2006, a 10% stock dividend was declared and distributed, The
par value of the shares amounted to P30,000 and market value was P39,000.
The stock dividend was recorded as follows:
Other expense 30,000
Ordinary shares 30,000
F. On July 1, 2006, YPA paid a three-year rent. The three-year premium of
P18,000 was paid on that date, and the entire premium was recorded as
insurance expense.

G. On January1, 2007, YPA retired bonds with a book value of P360,000 for
P318,000. The gain was deferred and amortized over 10 years as a
reduction of interest expense on other outstanding bonds.

5. What is the correct net income in 2005?

a. 399,000 b. 363,000 c. 351,000 d. 339,000

6. What is the correct net income in 2006?

a. 477,000 b. 498,000 c. 528,000 d. 534,000

7. What is the correct net income in 2007?

a. 313,200 b. 388,800 c. 393,000 d.418,800

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 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
8. What is the retroactive adjustment to the beginning retained earnings in
2007 to correct the prior years’ errors?
a. 21,000 cr. b. 21,000 dr. c. 69,000 dr. d. 69,000 cr.

9. What is the adjusting entry in 2007 to correct the error in item e above?
a. Accumulated profits 39,000
Other expense 30,000
Share premium 9,000
b. Accumulated profits 30,000
Accumulated profits 30,000
c. Accumulated profits 9,000
Share premium 9,000
d. no adjustment is necessary

PROBLEM NO. 3
You obtain the following information pertaining to PARADISE EARTH Co.’s
property, plant, and equipment for 2010 in connection with your audit of the
company’s financial statements.
Audited balances at December 31, 2009:
Debit Credit
Land P 1,000,000
Buildings 10,000,000
Accumulated depreciation – buildings P 2,710,000
Machinery and equipment 2,000,000
Accumulated depreciation –
Machinery and Equipment 800,000
Delivery Equipment 999,000
Accumulated Depreciation –
Delivery Equipment 416,250

Depreciation Data:
Depreciation Method Useful Life Age
Buildings 200% declining – balance 20 years 3 years
Straight-line
Machinery and Equipment 10 years 4 years
Sum-of-the-years’-digits
Delivery Equipment 8 years 2 years

Transaction during 2010 and other information are as follows:

a. On January 2, 2010, the company estimated the useful life of the
delivery truck is only 2 years.
b. On April 1, 2010, a machine that was purchased for P500,000 was traded
in with a new machine having a cash price of P600,000. The company paid
P250,000 on the purchase.
c. On July 1, 2010, one-half of the remaining beginning balance of the
machine was classified as held for sale. The fair value on that date is
P387,500 and the cost to sell is P17,500. At the end of the year the fair
value of this machine was P450,000 and the cost to sell is P25,000.
d. On October 1, 2010, the company acquired a delivery truck with an
invoice price of P500,000 subject to a cash discount of 10% which was not
taken. PARADISE EARTH Co incurred insurance during shipment of P50,000
and testing cost of P15,000. The useful life of this delivery truck is
still 8 years.

QUESTIONS: Based on the above data, compute for the following:

10. Depreciation expense of the machinery and equipment in 2010.
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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
a. 170,0000 b. 112, 500 c. 157,500 d. 110,000

11. Book value of the machinery and equipment to be presented in the

property, plant and equipment section of the statement of financial
position at the end of 2010.
a. 680,000 b. 1,350,000 c. 930,000 d. 917,500
12. Depreciation of the delivery equipment in 2010.
a. 388,500 b. 417,111 c, 419,889 d. 474,333

13. Impairment loss of the machinery (if any) in 2010.

a. 0 b. 55,000 c. 42,500 d. 180,000

14. The gain to be recognized in profit or loss as a result of increase in

the fair value of the plant in 2010 is
a. 0 b. 55,000 c. 42,500 d. 180,000

15. Gain or loss on trade in for the year 2010.

a. 65,000 b. 62,500 c. 37,500 d. 50,000

PROBLEM NO. 4
You were assigned to audit the financial statements of BIBLE TEACH CORP. for
the year ended December 31, 2008. The liability portion of the company’s
balance sheet shows the following information:

Noncurrent Liabilities
Notes payable P7,195,000
Liability under finance lease 2,240,000 P9,435,000

Current Liabilities
Accounts payable P1,840,500
Warranties Liability (42,500)
Deferred income taxes 250,000 2,048,000
Total P11,483,000

Upon further investigation on the liability’s account, you discovered the

following information:
a. The principal amount of the note payable is P8,000,000 and bears interest
at 12% payable every March 31. The note is dated April 1, 2006 and is due
5 years after issuance. The prevailing market rate of interest when the
notes were issued was at 15%.

b. The capitalized lease is for an eight-year period beginning December 31,

2005. Equal annual payments of P1,200,000 are due on December 31 of each
year beginning December 31, 2005. The implicit rate of the least known to
Bible Teach is 10%. The asset was recorded at the inception of the lease
at the cash selling price of the leased asset. The annual payments
related to the lease transaction has been recorded by the company as a
credit to the liability under finance lease account.

c. The result of a purchase cutoff on the company’s purchases transactions

from December 15 to January 15 you have rendered is shown below:

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 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination

Receiving Invoice Receiving Shipment Terms Amount

Report No. Date Report Date
65212 12/15/2008 12/15/2008 FOB Shipping point P15,000
65213 12/17/2008 12/20/2008 FOB Shipping point 16,000
65214 12/21/2008 12/21/2008 FOB Destination 17,500
65215 12/26/2008 12/30/2008 FOB Destination 20,000
65216 12/30/2008 1/2/2009 FOB Shipping point 30,000
65217 12/30/2008 1/2/2009 FOB Shipping point 28,000
65218 12/31/2008 1/3/2009 FOB Destination 19,000
65219 1/2/2009 1/5/2009 FOB Buyer 30,500
65220 1/5/2009 1/10/2009 FOB Shipping point 41,000
65221 1/7/2009 1/11/2009 FOB Shipping point 22,000
65222 1/10/2009 1/15/2009 FOB Destination 25,000

Investigations revealed that the last receiving report recorded in the

voucher register was RR65220.

d. The company has a two-year warranty on its products. The warranty

estimates in the past years were at 5% of the net sales. During the
current year because of increased returns the company decided to increase
warranty estimates at 8% of its local net sales, 70% of which is expected
to be incurred during the year of sale and the balance on the year
following the year of sale. Presented below are information relevant to
your audit:
2006 2007 2008
Net Sales P24,000,000 P27,150,000 P31,650,000
Actual warranty 1,150,000 1,450,000 1,950,000
Costs paid
The company is yet to update its warranty liabilities as of December 31,
2008.
Required:

16. What is the correct balance of the notes payable as of December 31,
2008?
a. 7,314,250 b. 7,451,388 c. 7,569,669 d. 7,609,096

17. What was the initial amount debited to the asset account at the
inception of the finance lease?
a. 2,240,000 b. 3,440,000 c. 5,640,000 d. 7,040,000

18. How much is the total non-current liabilities to be presented in the

2008 balance sheet?
a. 8,389,565 b. 10,550,813 c. 10,800,813 d. 11,370,709

19. What is the correct accounts payable as of December 31, 2008?

a. 1,722,000 b. 1,750,000 c. 1,778,000 d. 1,797,000

20. What is the correct warranties expense in 2008?

a. 582,000 b. 1,582,500 c. 1,950,000 d. 2,532,000

21. How much should be presented as current liabilities in the balance sheet
of Bible Teach as of December 31, 2008?
a. 2,289,500 b. 2,819,896 c. 3,109,396 d. 5,539,500
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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination

PROBLEM NO. 5
You are engaged to audit the financial statements of ORLANDO CORP. for the
year ended December 31,2003. You gathered the following information
pertaining to the company’s Equipment and Accumulated Depreciation accounts.

EQUIPMENT
1.1.03 Balance 446,000 9.1.03 No. 6 sold 9,000
6.1.03 No. 12 36,000 12.31.03 Balance 474,000
9.1.03 Dismantling
of No. 6 1,000
483,000 483,000

ACCUMULATED DEPRECIATION - EQUIPMENT

12.31.03 Balance 271,000 1.1.03 Balance 224,000

12.31.03 2003
Depreciation 47,400
271,400 271,400

The following are the details of the entries above:

1. The company depreciates equipment at 10 percent per annum. The oldest

equipment owned is seven years old as of December 31,2003.
2. The following adjusted balances appeared on your last year’s working
papers:
Equipment P446,000
Allowance for depreciation 224,000

3. Machine No. 6 was purchased on March 1,2996 at a cost of P30,000 and was
sold on September 1,2003, for P9,000
4. Included in charges to the Repairs expense account was an invoice
covering installation of Machine No. 12 in the amount of P2,500.
5. It is the company’s practice to take a full year’s depreciation in the
year of acquisition and none in the year of disposition.

Required:
22. What is the gain or loss on the sale of Machine No. 6?
a. (4,000) c. (1,000)
b. 8,000 d. 0

23. What is the balance of the Equipment account on December 31,2003?

a. 454,500 c. 475,500
b. 452,000 d. 484,500

24. What is the total depreciation on equipment for 2003?

a. 44,600 c. 51,450
b. 45,846 d. 45,450

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination

25. What is the adjusting entry in connection with the sale of Machine No.
6.
a. Loss on sale of equipment 1,000
Accumulated depreciation 21,000
Equipment 22,000
b. Loss on sale of equipment 4,000
Accumulated depreciation 18,000
Equipment 22,000
c. Accumulated depreciation 21,000
Equipment 21,000
d. Accumulated depreciation 30,000
Equipment 22,000
Gain on sale of equipment 8,000
26. What adjusting entry should be prepared on December 31, to correct the
amount of depreciation recorded on company’s books?
a. Accumulated depreciation 1,950
Depreciation expense 1,950
b. Accumulated depreciation 2,800
Depreciation expense 2,800
c. Accumulated depreciation 1,554
Depreciation expense 1,554
d. Depreciation expense 4,050
Accumulated depreciation 4,050

27. To strengthen control procedures over the custody of heavy mobile

equipment, the client would most likely institute a policy requiring a
periodic
a. Increase in insurance coverage.
b. Inspection of equipment and reconciliation with accounting records.
c. Verification of liens, pledges, and collateralizations.
d. Accounting for work orders.
(AICPA ADAPTED)
28. To improve accountability for fixed asset retirements, management most
likely would implement an internal control structure that includes
a. Continuous analysis of the repairs and maintenance account.
b. Periodic inquiry of plant executives by internal auditors as to
whether any plant assets have been retired.
c. Continuous utilization of serially numbered retirement work orders.
d. Periodic inspection of insurance policies by internal auditors.
(AICPA ADAPTED)

PROBLEM NO. 6
The following trial balance relates to GOD’S LOVE Co at December 31, 2008:
  Debit Credit
Petty cash fund 15,000  
Cash in bank 243,600  
Trading securities 330,000  
Accounts receivable 1,000,000  
Allowance for doubtful accounts   40,000
Lease receivable 6,000,000  
Advances to Officers and employees -  
Inventories 4,398,900  
Prepaid insurance 29,400  
Prepaid benefit cost 500,000
Property, plant and equipment, at
cost 10,945,000  
Accumulated depreciation   703,500
Intangibles 3,000,000
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 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
Trade payables   2,141,550
Unearned revenues   -
Dividends payable   1,250,000
Current portion of long-term Debt   -
Ordinary share capital   7,000,000
Share Premium   1,350,000
Retained earnings, January 1, 2008   5,867,840
Sales (Note 1)   32,250,000
Cost of goods sold 13,084,885  
Marketing and admin. Expenses (Note
2) 8,400,400  
Other income   180,000
Income tax expense 1,585,705  
Dividends declared 1,250,000  
  50,782,890 50,782,890

The following notes are relevant:

1. GOD’S LOVE Company is a dealer in equipment. On January 1, 2008,
an equipment was leased to another entity with the following provisions:
Annual rental payable at the end of each year 1,500,000
Lease term and useful life of machinery 5 years
Cost of equipment 4,000,000
Residual value-unguaranteed 500,000
Implicit interest rate 12%

At the end of the lease term on December 31, 2012, the equipment will
revert to the lessor, GOD’S LOVE Company. The perpetual inventory system
is used. GOD’S LOVE Company incurred initial direct cost of P200,000 in
finalizing the lease agreement. The company recorded this transaction by
the following entries:
Jan. 1 Lease receivable 7,500,000
Cost of sales 4,000,000
Sales 7,500,000
Merchandise inventory 4,000,000

Admin expense 200,000

Cash 200,000
To record the initial direct cost

Dec. 31 Cash 1,500,000

Lease receivable 1,500,000

2. On January 1, 2008, GOD’S LOVE Company provided the following

data in connection with its define benefit plan:
Fair value of plan assets P8,000,000
Unamortized past service cost 1,500,000
Projected benefit obligation (9,000,000)
Prepaid / accrued benefit cost P 500,000

The remaining vesting period for employees covered by the past service
cost is 5 years. Transactions affecting the plan for the current year
are:
Current service cost 1,500,000
Interest cost 800,000
Contribution to the plan 2,000,000
Benefits paid to retirees 1,000,000
Expected and actual return on plan assets 500,000

The company recorded this transaction by a debit to Pension expense (Admin

expense) and credit to cash equal to the contribution to the plan.

3. On January 1, 2008, the Company acquired the intangible asset for

P3,000,000. The intangible asset has an estimated useful life of 10
years. Appropriate journal entry was made at the date of acquisition. On
December 31, 2010, the intangible asset was evaluated to determine
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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
whether it was impaired. On such date, the fair value of the intangible
asset is P2,000,000. The asset is expected to generate future cash flows
of P300,000 annually for the remaining 9 years.
The appropriate discount rate is 5%. The company has yet to made journal
entry for this information.
QUESTIONS: Based on the above data, answer the following: (Round off
present value factors to two decimal places)

29. What is the total financial revenue to be reported by GOD’S LOVE

Company?
a. 2,315,000 b. 1,815,000 c. 2,100,000 d. 2,600,000

30. What is the interest income to be reported by GOD’S LOVE for 2008?
a. 682,200 b. 648,000 c. 900,000 d. 960,000

31. What is the net lease receivable to be presented under the current asset
section of the statement of financial position at the end of 2008?
a. 916,698 b. 915,936 c. 952,240 d. 719,664

32. GOD’S LOVE Company should report total gross profit on the sale at
a. 3,015,000 b. 19,000,115 c. 17,150,115 d. 14,850,115

33. What is the total benefit expense for the year 2008?
a. 1,800,000 b. 2,600,000 c. 2,100,000 d. 2, 500,000

34. The December 31, 2008 statement of financial position should show
prepaid benefit cost at
a. 400,000 b. 500,000 c. 600,000 d. 1,800,000

35. What is the impairment loss to be recognized for the intangible asset
on December 31, 2008?
a. 700,000 b. 567,000 c. 867,000 d. 0

PROBLEM NO. 7
On November 1, 2007 YOU CAN LIVE Company bought 15,000 FOREVER Company
shares acquired at a total cost of P180,000. YOU CAN LIVE Company intends
to profit on the short-term price fluctuations of the above-mentioned
securities and appropriately classifies them as held for trading.

On November 15, 2007 YOU CAN LIVE Company acquired 12,000 common shares and
all of the 5,000, 8%, P100 par value preferred stocks of Jun Company for a
lump sum price of P680,000. At the date of acquisition the common stocks
were quoted at P20 per share, while the preferred were selling at P102. YOU
CAN LIVE Company classified these securities as available-for-sale.

At December 31, 2007, YOU CAN LIVE Company determined the following
information in relation to the quoted prices of the stocks in the market:
FOREVER company common, P13 per share; Jun Company common, P15 per share;
Jun Company preferred P96 per share.
In January 4, 2008 YOU CAN LIVE Company was able to sell all of its FOREVER
Company shares for P14.80 each. The proceeds were used to acquire 100,000
Neville Company shares and were classified as trading securities.

In February 2008 Jun Company declared and distributed a cash dividend to all
its shareholders totaling to P240,000. Jun Company has 100,000 outstanding
common shares when the dividends were declared

YOU CAN LIVE Company, on March 12, 2008, exchanged its preferred stock
investment in Jun Company for a paper copier, which has a carrying amount of
P377,000. At the time of exchange, Jun Company’s preferred stocks were
quoted at P94. The copier has an estimated useful life of 5 years, no
salvage value and to be depreciated using the straight-line method

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
On March 31, 2008, the quoted prices of the equity investments were as
follows: Neville Company common, P2.45 per share; Jun Company common shares,
P18 per share.

36. The amount of unrealized gain/loss to be presented in YOU CAN LIVE

Company’s 2007 balance sheet is
a. unrealized loss of P90,000 c. unrealized loss of P5,000
b. unrealized loss of P20,000 d. unrealized gain of P15,000

37. The amount reported as dividend income in YOU CAN LIVE Company’s
quarterly income statement ending March 31, 2008 is
a. P 0 b. P64,000 c. P28,800 d. P70,000

38. The amount initially capitalized as the cost of the paper copier
included in YOU CAN LIVE Company’s property, plant and equipment account
is
a. P377,000 b. P480,000 c. P470,000 d. P462,400

39. The net effect to net income (increase/decrease) brought about by YOU
CAN LIVE Company’s investment in equity securities for the quarter ending
March 31, 2008 is
a. increase of b. increase of c. increase of d. increase of
P121,600 P81,600 P114,000 P104,000

40. The amount of unrealized gain/loss to be presented in YOU CAN LIVE

Company’s balance sheet as of March 31, 2008 is
a. unrealized gain of P36,000 c. unrealized loss of P54,000
b. unrealized loss of P24,000 d. unrealized loss of P1,600

PROBLEM NO. 8
You gathered the following information related to the Patents account of the
YEARBOOK Cookie Corporation in connection with your audit of the company’s
financial statements for the year 2006.

In 2005, YEARBOOK developed a new machine that reduces the time required to
insert the fortunes into its cookies. Because the process is considered
very valuable to the fortune cookie industry, YEARBOOK patented the machine.
The following expenses were incurred in developing and patenting the
machine:
Research and development laboratory expenses P1,000,000
Metal used in the construction of the machine 320,000
Blueprints used to design of the machine 128,000
Legal expenses to obtain patent 480,000
Wages paid for the employees’ work on the research,
development, and building of the machine (60% of
the time spent in actually building the machine) 1,200,000
Expense of drawing required by the patent office to be
submitted with the patent application 68,000
Fees paid to the government patent office to process
application 100,000

During 2006, YEARBOOK paid P150,000 in legal fees to successfully defend the
patent against an infringement suit by Cookie Monster Corporation.

It is the company’s policy to take full year amortization in the year of

acquisition.

Based on the above and the result of your audit, determine the following:

41. Cost of patent

a. P580,000 c. P1,128,000
b. P648,000 d. P 798,000

42. Cost of machine

a.P1,236,000 c. P1,040,000
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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
b.P1,648,000 d. P1,168,000

43. Amount that should charged to expense when incurred in connection with
the development of the patented machine
a.P1,480,000 c. P1,608,000
b.P1,000,000 d. P 0

44. Carrying amount of patent as of December 31, 2006

a.P522,000 c. P1,015,200
b.P583,200 d. P 837,900

PROBLEM NO. 9
You are engaged in the first-time audit of WATCHTOWER Company. WATCHTOWER
Company reports its shareholders’ equity as follows on December 31, 2010:

Ordinary share capital, 50,000 shares, P100 par P5,000,000

Share premium 1,000,000
Retained earnings 10,000,000

Memorandum records:
On January 1, 2009, Granted share options to its 300 employee working in the
sales department.
Additional information and transactions in 2011:
 On January 1, 2011, the historical balances of the land and building
of WATCHTOWER Company are:
Cost Accumulated depreciation
Land 10,000,000
Building 60,000,000 18,000,000

The land and building were appraised on same date and the revaluation
revealed the following:
Sound value
Land 15,000,000
Building 70,000,000

There were no additions or disposals during 2011. Depreciation is

computed on the straight line. The estimated life of the building is 20
years.
 On April 1, Sold 25,000 ordinary shares at P105.
 On May 1, Purchased 10,000 ordinary shares at P102 to be held as
treasury.
 On August 1, the company declared a P4 per share dividend to the
shareholders’ of record August 30, payable on September 5.
 On September 15, the company sold 6,000 treasury shares at P110.
 The unadjusted net income for 2011 was P5,000,000 before taking into
consideration the effect of share-based payment.

Audit Notes:
Upon investigation of the share-based payment, the following information
were noted:
On January 1, 2009, WATCHTOWER Company granted share options to each of its
300 employees working in the sales department. The share options vest at the
end of a three-year period provided that the employees remain in the
entity’s employ and provided the volume of sales will increase by 10% per
year. The fair value of each share options on grant date is P30.

If the sales increase by 10%, each employee will receive 200 share options.
If the sales increase by 15%, each employee will receive 300 share options.

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NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02
 Northern CPAR: Auditing Problems – 2nd Pre-Board Examination
On December 31, 2009, the sales increased by 10%, and no employees have left
the entity. On December 31, 2010, sales increased by 15% and no employees
have left. On December 31, 2011, the sales increased by 15% and 50 employees
left the entity. No options were exercised yet as of the end of 2011.
Since the inception of this share-based payment, no journal entries have yet
been provided by the company.

45. The depreciation of the building for the year ended December 31, 2011
should be
a. 5,000,000 b. 2,000,000 c. 3,000,000 d. 3,500,000

46. How much is the compensation expense that should be recognized for 2011?
a. 1,200,000 b. 2,250,000 c. 900,000 d. 450,000

47. How much is the adjusted ordinary share capital at the end of 2011?
a. 5,000,000 b. 7,500,000 c. 7,625,000 d. 7,100,000

48. How much is the adjusted balance of share premium end of 2011?
a. 1,125,000 b. 1,048,000 c. 1,173,000 d. 1,000,000

49. How much is the adjusted treasury share at the end of 2011?
a. 0 b. 1,020,000 c. 612,000 d. 408,000
50. How much is the adjusted balance of unappropriated retained earnings at
the end of 2011?
a. 12,490,000 b. 12,082,000 c. 14,740,000 d. 13,482,000

The future depends on what we do in the present.-ANONYMOUS

  "There is only one way to succeed in anything and that is to give

everything. I do and I demand that my players do. Any man's finest hour is
when he has worked his heart out in a good cause and lies exhausted on the
field of battle... victorious."

Vince Lombardi
American Football Coach

---End of Pre-Board Examination---

12
NCPAR…driven for real excellence! AP by Darrell Joe Asuncion, CPA, MBA AP – 5th Batch – PB02