Auditing Review

Shareholders Equity

Problem 1

The shareholders equity section of Bahrain Corporation as of Dec 31, 2015 is as follows:

Share Capital ordinary (10par, 750,000 shares authorized,

412,500 issued and outstanding) P4, 125,000
Share Premium 825,000

Unappropriated retained earnings 2,002,500

Appropriated retained earnings 750,000
_________
Total Shareholders Equity P7, 702,500

Bahrain Corporation had the following shareholders equity transaction during 2016:

Jan 15 completed the building renovation for which P750, 000 of the retained earnings had been restricted.
Paid the contractor P727, 500, all of which was capitalized.

Mar 3 Issued P150, 000 additional ordinary shares for P18 per share.

May 18 declared a dividend of P1.50 per share to be paid on July 31, 2016, to the shareholders on record
in June 30, 2016

June 19 approved the additional building renovation to be funded internally. The estimated cost of the
project is P600, 000 and retained earnings are to be restricted for the amount.

July 31 Paid the dividend.

Nov 12 Declared a property dividend to be paid on January 5, 2017. The dividend is to consist of
equipment that has a carrying amount of P360, 000 and a fair value of P472, 500 on November 12

Dec 31 Net income for 2016 (before recognition of impairment loss on the equipment declared as property
dividend) is P1, 327,500. The fair value less cost to distribute of the equipment on Dec 31 is P330,
000

Required:

1. Share Capital ordinary

a. P5,625,000 b. P4,125,000 c. P4,950,000 d. P7,650,000
2. Share premium
a. P2,625,000 b. P825,000 c. P2,025,000 d. P1,200,000
3. Unappropriated retained earnings
a. P2,163,750 b. P2,246,250 c. P2,133,750 d. P2,276,250
4. Total shareholders equity
a. P10,376,250 b.P10,526,250 c. P9,926,250 d. P7,650,000

Problem 2

A CPA was engaged by Birdie Company in 2016 to examine its books and records and to make whatever corrections
are necessary. An examination of the accounts discloses the following:

a. Dividends had been declared on December 15 in 2014 and 2015 but had not been entered in the books until
paid.

b. Improvements in buildings and equipment of P32, 400 had been debited to expense at the end of April 2013.
Improvements are estimated to have a 12 year life. The company uses the straight line method in recording
depreciation and computes depreciation to the nearest month.

c. The physical inventory of merchandise had been understated by P9, 600 at the end of 2014 and by P14,
250 at end 2015.

d. The merchandise inventories at the end of 2015 and 2016 did not include merchandise that was then in
transit and to which the company had title. These shipments of P6, 300 and P8, 700 were recorded as
purchases in January of 2016 and 2017, respectively.

e. The company had failed to record sales commission payable of P10, 800 and P3, 300 at the end of 2015
and 2016, respectively.

f. The company had failed to recognize supplies on hand P2, 550 and P5, 160 at the end of 2015 and 2016,
respectively.
The retained earning account appeared as shown below on the date the CPA began the examination.

Retained Earnings

Date Item Debit Credit Balance

2014
Jan 1 Balance 195,000
Dec 31 Net Income 84,000 279,000
2015
Jan 10 Dividends paid 46,500 232,500
Mar 16 Stocks sold excess over par 63,000 295,500
Dec 31 Net loss for year 53,400 242,100
2016
Jan 10 Dividends paid 46,500 195,600
Dec 31 Net loss for the year 57,900 137,700

5. What is the corrected 2014 net income?

a. P124,200 b. 90,900 c. 121,500 d. 71,700
6. What is the corrected 2015 net loss?
a. P53,400 b. 66,000 c. 54,300 d. 59,700
7. What is the corrected 2016 net loss?
a. P64,740 b. 62,340 c. 56,040 d. 71,040
8. What is the corrected retained earnings on December 31, 2015?
a. P226,200 b. 163,800 c. 100,900 d. 183,060
9. What is the corrected retained earnings on December 31, 2016?
a. P63,000 b. P99,060 c. 92,760 d. 36,060

Investments

Problem 3

Magnolia Corporation invested its excess cash in equity securities during 2015. The business model for these
investments is to profit from trading on price changes.

As of December 31, 2015, the equity investment portfolio consisted of the following:

Investment Quantity Cost Fair value

LJ Inc. 1,000 shares P90, 000 126,000
Poland Co 2,000 shares 240,000 252,000
Alabama Corp 2,000 shares 432,000 360,000

10. In December 31, 2015, statement of financial position, what should be reported as carrying amount of
investments?
a. 738,000 b. 690,000 c. 762,000 d. 810,000

11. In the 2015 income statement, what amount should be reported as unrealized gain or loss?
a. Unrealized gain of P24,000
b. Unrealized loss of P24,000
c. Unrealized loss of P72,000
d. Unrealized gain of P48,000

During the year 2016, Magnolia Corp sold shares of Poland Co for P229, 200 and purchased 2,000 shares of LJ Inc.
and 1,000 shares of Dwary Company. On December 31, 2016, Magnolia equity securities portfolio consisted of the
following:

Investment Quantity Cost Fair value

LJ Inc 1,000 shares P90, 000 120,000
LJ Inc 2,000 shares 198,000 240,000
Dwarfy Company 1,000 shares 96,000 72,000
Alabang Corp 2,000 shares 432,000 132,000

12. What is the gain or loss on the sale of Poland Co Investment?

a. P10,800 gain b. 10,800 loss c. P22,800 gain d. 22,800 loss
13. What is the carrying amount of investment on December 31, 2016?
a. 816,000 b. 888,000 c. 564,000 d. P492,000
14. What is the amount of the unrealized gain or loss reported as of December 31, 2016?
a. P252,000 unrealized gain
b. P252,000 unrealized loss
c. P216,000 unrealized gain
d. P216,000 unrealized loss

During the year 2017, Magnolia sold 3,000 shares of LJ Inc for P239, 400 and 500 shares of Dwarfy Company at a
loss of 16,200. On December 31, 2017, Magnolias equity investment portfolio consisted of the following.
 Investment Quantity Cost Fair value
Dwarfy Company 500 shares 48,000 36,000
Alabang Corp 2,000 shares 432,000 492,000

15. What should be the reported loss on sale of trading securities in 2017?
a. P120,600 b. 64,800 c. 48,600 d. 136,800

16. What is the amount of the unrealized gain or loss reported as of December 31, 2017?
a. P360,000 unrealized gain
b. P360,000 unrealized loss
c. P48,000 unrealized gain
d. P48,000 unrealized loss

17. In the December 31, 2017, statement of financial position, what should be reported as the carrying amount
of trading securities?
a. P480,000 b. 468,000 c. 528,000 d. 540,000

Problem 4

Santol Corp. invested its excess cash in non-trading equity securities during 2016. On initial recognition, the entity
made an irrevocable election to present its securities at fair value through other comprehensive income (FVOCI). As
of December 31, 2016, the companys securities portfolio consisted of the following:

Investee Company Shares Cost Fair value

Kelly, Inc 30,000 450,000 425,000
Eloy Corp 60,000 1,500,000 1,610,000
Yogi Enterprises 60,000 2,160,000 2,300,000

During the year 2017, Santol sold 60,000 shares of Eloy Corp for P1, 700,000 and purchased 60,000 additional
shares of Kelly, Inc and 30,000 shares of Kongga Company.

On December 31, 2017, Santols portfolio of non-trading equity securities comprise the following:

Investee Company Shares Cost Fair value

Kelly, Inc 30,000 450,000 500,000
Kelly, Inc 60,000 1,300,000 1,450,000
Kongga Company 30,000 520,000 480,000
Yogi Enterprises 60,000 2,160,000 700,000

During the year 2018, Santol sold all the Kelly Inc shares for P2, 300, 00 and 15,000 shares of Kongga Company at a
loss of P90, 000. On December 31, 2018, Santols portfolio of non-trading equity securities consisted of the following:

Investee Company Shares Cost Fair value

Kongga Company 15,000 260,000 180,000
Yogi Enterprises 60,000 2,160,000 4,200,000

18. What is the total amount credited in the retained earnings as a result of the sale of Eloy Corp in securities in
2017?
a. P200,000 b. 110,000 c. 90,000 d. 20,000
19. What is the unrealized loss on the remaining financial assets that should be reported in the 2017 statement
of comprehensive income as part of other comprehensive income?
a. P1,600,000 b. 1,640,000 c. 1,415,000 d. 1,300,000
20. What is the cumulative amount of unrealized loss that should be reported as component of other
comprehensive income in the statement of changes in equity in Dec 31, 2017?
a. P1,415,000 b. 1,300,000 c. 335,000 d. 225,000
21. What unrealized gain on the remaining financial assets should be reported in the 2018 statement od
comprehensive income as part of other comprehensive income?
a. P1,960,000 b. 60,000 c. 3,440,000 d. 3,500,000
22. What cumulative amount of unrealized gain should be reported as component of other comprehensive
income in the statement of changes in equity on December 31, 2018?
a. P1,505,000 b. P1,960,000 c. 1,480,000 d. 3,440,000