CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

AUDITING
FIRST PRE-BOARD EXAMINATION

1. B 6. D 11. B 16. C 21. D 26. D 31. D

2. B 7. D 12. D 17. B 22. B 27. B 32. A
3. D 8. C 13. C 18. C 23. B 28. A 33. D
4. D 9. C 14. B 19. B 24. C 29. A 34. C
5. D 10. C 15. C 20. B 25. D 30. B 35. C

SITUATION 1 – RRR CORPORATION

36. D Trade-in – June 30, 2019

Cost P157,200
Accum. depreciation, 1/1/17 – 6/30/19 (P157,200 x 20% x 2.5 yrs.) 78,600
Carrying value 78,600
Trade-in value 129,000 P50,400
Sale – Jan. 1, 2020
Cost P132,000
Accum. depreciation, 1/1/17 – 1/1/20 (P132,000 x 20% x 3 yrs.) 79,200
Carrying value 52,800
Net proceeds 71,250 18,450
Sale – October 1, 2021
Cost P120,000
Accum. depreciation, 1/1/17 – 10/1/21 (P120,000 x 20% x 4 9/12) 114,000
Carrying value 6,000
Proceeds 24,000 18,000
Total gain P86,850

37. C Machine acquired on Sept. 30, 2017 (P180,000 + P6,000) P186,000

Machine acquired on June 30, 2018 (P240,000 x 98%) 235,200
Machine acquired on June 30, 2020 (list price) 279,000
Total P700,200

38. C Machine acquired on:

Sept. 30, 2017 (P186,000 x 20% x 4 3/12) P158,100
June 30, 2018 (P235,200 x 20% x 3 6/12) 164,640
June 30, 2019 (P279,000 x 20% x 2 6/12) 139,500
Accumulated depreciation, December 31, 2021 P462,240

39. B
Date of
Acquisition Cost 2017 2018 2019 2020 2021 Total
1/1/2017 P157,200 P31,440 P31,440 P15,720 P0 P0 P 78,600
120,000 24,000 24,000 24,000 24,000 18,000 114,000
132,000 26,400 26,400 26,400 0 0 79,200
9/30/2017 186,000 9,300 37,200 37,200 37,200 37,200 158,100
6/30/2018 235,200 0 23,520 47,040 47,040 47,040 164,640
6/30/2019 279,000 0 0 27,900 55,800 55,800 139,500
Correct depreciation P91,140 P142,560 P178,260 P164,040 P158,040 P734,040
Depreciation per client 97,440 154,752 153,802 108,791 82,233 597,018
Over (under)statement P 6,300 P 12,192 (P 24,458) (P 55,249) (P 75,807) (P 137,022)

40. A Depreciation expense (2021) 75,807

Retained earnings (2017 – 2020) 61,215
Accumulated depreciation 137,022

Page 1 of 5 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA
AUDITING PROBLEMS

SITUATION 2 – MONDRAGON COMPANY

41. C Actual borrowing cost:

Specific borrowing (P5 million x 10%) P500,000
General borrowings:
P25 million x 8% P2,000,000
P15 million x 6% 900,000 2,900,000
Total P3,400,000
Capitalization rate (P2,900,000/P40 million) 7.25%
Average expenditures – 2020 P7,250,000
Capitalizable interest – 2020:
Specific borrowing (P5 million x 10%) P500,000
General borrowings (P7,250,000 – P5,000,000 = P2,250,000 x 7.25%) 163,125
Total P663,125

42. B Average expenditures – 2021 P16,163,125

Capitalizable interest – 2021:
Specific borrowing (P5 million 10% x 6/12) P250,000
General borrowings (P16,163,125 – P5,000,000 = P11,163,125 x 7.25% x 6/12) 404,663
Total P654,663

43. A 2020 interest expense (P3,400,000 – P663,125) P2,736,875

44. D 2021 interest expense (P3,400,000 – P654,663) P2,745,337

45. B Accumulated expenditures before interest P19,500,000

Interest capitalized in 2020 and 2021 (P663,125 + P654,663) 1,317,788
Total cost of building P20,817,788

SITUATION 3 – KNIGHT LABORATORIES

46. D Cost to obtain patent (January 2014) P186,150

2014 amortization (P186,150/17) (10,950)
Carrying value, Dec. 31, 2014 P175,200

47. C Carrying value, Jan. 1, 2015 P175,200

Amortization, 2015-2018 (P10,950 x 4 years) (43,800)
Carrying value, Dec. 31, 2018 P131,400

48. C Carrying value, Jan. 1, 2019 P131,400

Amortization, 2019-2021 (P131,400 x 3/5) (78,840)
Carrying value, Dec. 31, 2021 P 52,560

HASMIN COMPANY

49. A Cost of patent purchased on Jan. 1, 2020 P4,000,000

2020 amortization (P4,000,000/10) (400,000)
Carrying value, Dec. 31, 2020 3,600,000
2021 amortization (P3,600,000/5) (720,000) P2,880,000
Cost of franchise P960,000
2021 amortization (P960,000/10) (96,000) 864,000
Total carrying value of intangibles P3,744,000

50. B Amortization of patent – 2021 P720,000

Amortization of franchise – 2021 96,000
Payment to Yassy (P5,000,000 x 5%) 250,000
Research and development costs 866,000
Total charges against 2021 income P1,932,000

Page 2 of 5 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA
AUDITING PROBLEMS

SITUATION 4 – BAYANI CORPORATION

51. A
Trademark* -
Goodwill* -
Customer list (P220,000/3) 73,333
Total amortization 73,333

*The useful life is indefinite, so no amortization expense is recognized.

52. B
Trademark:
Carrying value 300,000
Recoverable amount (P10,000/0.06) 166,667 133,333
Goodwill*:
Carrying value of Pika Manufacturing unit
(P2,700,000 + P1,500,000 - P1,800,000) 2,400,000
Recoverable amount (P250,000 x 12.0416) 3,010,400 -
Customer list
Carrying value (P220,000 - P73,333) 146,667
Recoverable amount:
2022: (P120,000 x 0.9434) 113,208
2023: (P80,000 x 0.8900) 71,200 184,408 -
Total impairment loss 133,333

*Since goodwill does not generate cash flows independently from other assets or group
of assets, the recoverable amount of goodwill as an individual asset cannot be
determined. Therefore, the recoverable amount is determined for the cash
generating unit to which goodwill belongs.

53. C
Cost 300,000
Less impairment loss 133,333
Carrying value, 12/31/21 166,667

54. A
Since goodwill is not amortized and is not impaired as of 12/31/21,
the carrying value is P1,500,000.

55. B
Cost 220,000
Less amortization for 2021 73,333
Carrying value, 12/31/21 146,667

SITUATION 5 – CANDABA COMPANY

2021
Mar. 6 Cash (P40 x 2,400) 96,000
Subscriptions receivable 96,000

Preference shares subscribed 120,000

Preference share capital 120,000

April 24 Cash (P55 x 900) 49,500

Preference share capital (P50 x 900) 45,000
Share premium – preference 4,500

Page 3 of 5 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA
AUDITING PROBLEMS

May 5 Cash (P6 x 3,000) 18,000

Subscriptions receivable – ordinary (P11 x 3,000) 33,000
Ordinary shares subscribed (P10 x 3,000) 30,000
Share premium – ordinary 21,000

June 6 Cash (P17 x 1,800) 30,600

Ordinary share capital (P10 x 1,800) 18,000
Share premium – ordinary 12,600

July 3 Cash 33,000

Subscriptions receivable – ordinary 33,000

Ordinary shares subscribed 30,000

Ordinary share capital 30,000

Sept. 22 Equipment 149,550

Cash 27,000
Ordinary share capital (P10 x 2,400) 24,000
Share premium – ordinary (P9 x 2,400) 21,600
Preference share capital (P50 x 1,350) 67,500
Share premium – preference (P7 x 1,350) 9,450

Oct. 13 Treasury shares – ordinary 52,650

Cash (P19.50 x 2,700) 52,650

Nov. 14 Cash 96,000

Bond discount 1,800
Ordinary share capital (P10 x 2,100 21,000
Share premium – ordinary (P8 x 2,100) 16,800
Bonds payable 60,000

Dec. 15 Cash (P20.50 x 2,700) 55,350

Treasury shares – ordinary 52,650
Share premium – treasury 2,700

Dec. 28 Retained earnings 112,500

Cash 112,500
Ordinary (P1.50 x 45,300) P 67,950
Preference (P3 x 14,850) 44,550
Total P112,500

31 Compensation expense 81,000

Ordinary share options outstanding 81,000
(P243,000 / 3 years)

56. A Preference share capital P 742,500

57. B Ordinary share capital 453,000
58. A Share premium – preference 52,350
Share premium – ordinary 288,000
Ordinary share options outstanding 81,000
59. C Share premium – treasury 2,700
60. A Total contributed capital P1,619,550

SITUATION 6

DIAS COMPANY
61. A Present value of principal (P4,000,000 x 0.77218) P3,088,720
Present value of interest payments (P4,000,000 x 6% = P240,000 x 2.53130) 607,512
Liability component of convertible debt P3,696,232
Proceeds P4,000,000
Liability component 3,696,232
Equity component of convertible debt P 303,768

Page 4 of 5 Pages
CPA REVIEW SCHOOL OF THE PHILIPPINES (CPAR) - MANILA
AUDITING PROBLEMS

62. D
Interest Interest Discount Carrying
Date Paid Expense Amortization Value
01/01/20 -- -- -- P3,696,232
12/31/20 P240,000 P332,661 P 92,661 3,788,893
12/31/21 240,000 341,000 101,000 3,889,893
12/31/22 240,000 350,107* 110,107 4,000,000
* Adjustment due to rounding.

63. C Carrying value of bonds, Dec. 31, 2021 P3,889,893

Share premium – conversion privilege 303,768
Total consideration 4,193,661
Par value of ordinary shares [P2 x (4,000 x 200)] 1,600,000
Share premium – issuance P2,593,661

CANDELARIA COMPANY
64. Unrealized gain (P1,989,000 FV – P1,953,000 CV) P36,000
Carrying Value Fair Value
Dec. 31, 2021 Dec. 31, 2021
Gandara Co. P1,710,000 P1,759,500
Westin, Inc. 243,000 229,500
P1,953,000 P1,989,000
Answer: A

65. Trading securities at fair value P1,989,000

Answer: B

SITUATION 7

PROBLEM NO. 3
Compensation Cumulative
Expense Compensation
Year Calculation for Period Expense
1 30,000 options x P5 fair value x 1⁄3 P 50,000 P 50,000
2 30,000 options x P5 fair value x 1⁄3 50,000 100,000
3 30,000 options x P5 fair value x 1⁄3 50,000 150,000

66. A 67. A 68. A 69. D 70. B

---END---

Page 5 of 5 Pages