Auditing and Principles 2 Major Examination PDF

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Name :______________________________________________ Year and Section :______________________________________________ Date :______________________________________________Problem No.A CPA was engaged by BOOMPANES COMPANY in 2014 to examine its books and records and to make whatever corrections are ne...

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Name Year and Section Date

:______________________________________________ :______________________________________________ :______________________________________________

Problem No.1 A CPA was engaged by BOOMPANES COMPANY in 2014 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 2012 and 2013 but had not been entered in the books until paid. b) Improvements in buildings and equipment of P324,000had been debited to expense at the end of April 2011. Improvements are estimated to have 12 year life. The company uses straight line method in recording depreciation and computes depreciation to the nearest month. c) The physical inventory of merchandise had been overstated by P 96,000 at the end of 2012 and by P42,500 at the end of 2013. d) The merchandise inventories at the end of 2013 and 2014 did not include merchandise that was then in transit and to which the company had title. These shipments of P63,000 and P 87,000 were recorded as purchases in January of 2014 and 2015, respectively. e) The company had failed to record sales commission payable of P98,000 and P33,000 at the end of 2013 and 2014 ,respectively. f) The company had failed to recognize supplies on hand of P25,500 and P51,700 at the end of 2013 and 2014, respectively. g) A delivery vehicle was sold for P100,000 on July 1,2014 and the proceeds were credited to the Sales Account. The vehicle was acquired on January 1,2011, for P600,000. At that time, it had an estimated life of 6 years with no residual value. No depreciation was recorded on this vehicle in 2014. The retained earnings account appeared as shown below on the date the CPA began the examination. Retained Earnings Date 2012 Jan.1 Dec. 31 2013 Jan.10 Mar. 6 Dec. 31 2014 Jan.10 Dec. 31

Item

Debit

Balance Net income for the year Dividends paid Stock sold excess over par Net income for the year Dividends paid Net loss for year

Credit

P344,000

P195,000 539,000

123,000 269,000

152,500 275,500 544,500

P386,500

297,500 9,200

1.What is the corrected 2012 net income? a.P413,000 b. P230,000 c. P221,000

d. P178,500

2.What is the corrected 2013 net income? a.P 116,000 b. P223,000 c. P419,000

d. P386,000

3.What is the corrected 2014 net loss? a. P297,500 b.P 254,900 c. P287,500

d. P 202,500

4. What is the corrected retained earnings on December 31,2013? a. P 261,000 b. P 279,000 c. P252,000 d. P 270,000 5. What is the corrected retained earnings on December 31,2014?

Balance

247,000 237,800

a. P 6,100 Problem No. 2

b. P 58,500

c. P76,500

d. P67,500

BERNADETTE CO. began operatios on January 1,2014. Authorized were 100,000 ordinary shares of P50 par value and 50,000 convertible preference shares of 10% P50 parvalue. The following transactions involving shareholders’ equity occurred during the first year of operations. Jan. 1 Issued 10,000 ordianry shares to the corporation promoters in exchange for property valued at P 1,250,000 and services valued at P250,000. The property had cost the promoters P900,000 three years before and was carried on the promoters’ books at P750,000. Feb. 22 Issued 15,000 preference shares at a price of P60 per share. Each share can be converted to five ordinary shares. The entity paid P25,000 to an agent for selling the shares. Mar 10

Sold 25,000 ordinary shares for P130 per share. Issue cost were P100,000.

Apr 10

20,000 ordinary shares were sold under share subscriptions at P175 per share. No share certificates are issued until a subscription contract is paid in full. No cash was received. July 15 Exchange 12,000 ordinary sharesand 20,000 preferences shares for a building with a fairvalue of P3,500,000. The building was originally purchased for P3,250,000 by the owner and has a book value of P2,400,000. In addition, 10,000 ordinary shares were sold for P 1,500,000 cash. Aug 1 Received payments in full for half of the share subscriptions and partial payments on the rest of the subscriptions. Total cash received was P2,250,00. Share certificates were issued for the subscriptions paid in full.

Aug 31

Received notice from holders of share subscriptions for 5,000 shares that they would not pay further on the subscriptions because the price of the share had fallen to P95 per share. The amount still due on those contracts was P750,000. Amount previously paid on the contracts areforfeited according to the agreement. Dec31 Net income for the first year of operations was P 1,500,000. Based on the preceeding information, determine the correct balances of the following at December31,2014: 1. Ordinary Share capital a. P 2,850,000 b. P3,350,000

c. P 4,550,000

d. P 2,750,000

2.Share premium ordinary a. P 5,775,000 b. P 7,675,000

c. P6,975,000

d. P 6,850,000

3. Share premium preference a. P825,000 b. P950,000

c. P875,000

d. P850,000

4. Subscription receivable a. P2,250,000 b. P 750,000

c. P1,250,000

d. P500,000

5. Total shareholders equity a. P14,275,000 b. P12,775,000

c. P13,775,000

d. P15,275,000

Problem no. 3

Presented below are three (3) independent cases relating to the audit of shareholders’ equity. Answer the question/s at the end of each case. CHINITO COMPANY began operation on January 1,2013 by issuing at P15 per share one half of the 500,000 ordinary shares (P1 par value) that had been authorized for issue. In addition , CHINITO has 250,000 6% preference shares (P5 par value) authorized. During 2013, Chinito reported net income of P620,000 and declared dividends of P130,000. During 2014, Chinito completed the following transactions: Jan 10 Apr 2 July 21

Oct 25 Dec 31

Issued an additional 40,000 ordinary shares for P18 per share. Issued 115,000 preference shares for P7 per share. Authorized the acquisition of a custom made machine to be delivered in January 2015. Chinito appropriated of P147,500 of reta ned earnings for the purchase of the machine. Issued an additional 55,000 preferences shares for P9 pershare. Reported P610,000 of net income and declared a dividend of P317,500 to shareholders of record on January 31,2015, to be paid on February 4,2015.

1. What is the total shareholders’ equity on December31,2014? a. P 6,552,500 b. P 4,240,000 c. P6,405,000 d. P6,870,000 2. What is the unappropriated retained earnings balance on December 31,2014? a. P 490,000 b. P952,500 c. P 635,000 d. P 782,500 BURITO CO> is authorized to issue 300,000 of P2 par value ordinary shares. The company has the following transactions: a) Issued 60,000 shares at P8 per share; received cash. b) Issued 750 shares, selling at P35 per share, to lawyers for services in connection with the organization of the corporation. The value of the legal services was P27,000. c) Issued 900 shares, valued objectively at P30,000 to the employees instead of paying them cash wages. d) Issued 70,000 shares in exchange for a building valued at P885,000 and land valued at P240,000. (The building was originally acquired by the investor for P750,000 and has P300,000 of accumulated depreciation; the land was originally acquired for P90,000.) e) Received cash for P19,500 shares issued at P38 per share. f) Issued 12,000 shares at P45 per share;received cash. 3. The statement of financial position will report share premium of a. P2,591,200 b. P2,616,700 c. P2,588,500 d. P2,563,000 CHIQUITO COMPANY has been paying regularly quarterly dividends of P1.50 and wants to pay the same amount in the third quarter of 2014. The following information relates to the company’s equity: Jan 1 Feb 15 Mar 31 May 12

Share outstanding, 350,000; P2 par(750,000 shares authorized). Issued 30,000 new shares at P10.50. Paid quarterly dividends of P1.50 per share. Converted P1,000,000 of P1,000bonds to ordinary shares at the rate of 40 shares per P1,000 bond. June 15 Issued a 10% stock dividend. 30 Paid quarterly dividends of P1.50 per share. 4. What is the total amount that chiquito will have to pay in dividends in the third

quarter in order to pay P1.50 per share? a. P 525,000 b. P627,000 c. P570,000

d. P693,000

5. What is the total amount of dividends to be distributed during the year assuming no equity transaction occur after June 30? a. P2,280,000 b. P2,649,000 c. P2,772,000 d. P2,202,000

Problem No.4 BEBE CO. was formed on July 1,2011. It was authorized to issue 1,800,000 shares of P10 par value ordinary shares and 600,000 shares of 8 percent P25 par value, cumulative and non participating preference shares. BEBE CO. has a July 1 – June 30 fiscal year. The following information relates to the shareholders equity accounts of BEBE CO.: Ordinary Shares Prior to the 2013 – 2014 fiscal year, BEBE CO. had 660,000 ordinary shares issued as follows: 1. 510,000 shares were issued for cash on July 1,2011, at P31 per share. 2. On July 24,2011, 30,000 shares were exchange for a plot of land which cost the seller P 420,000 in 2005 and had an estimated market value of P1,320,000 on July 24,2011. 3. 120,000 shares were issued on March 1,2012, for P42 per share. During the 2013 – 2014 fiscal year, the following transactions regarding ordinary shares took place: November 30,2013 BEBE CO. purchased 12,000 of its own shares on the open market at P39 per share. December 15,2013 BEBE CO. declared a 5% stock dividends for shareholders of record on January 15,2014, to be issued on January 31,2014. BEBE CO. was having a liquidity problem and could not afford a cash dividend at the time. BEBE CO.’s ordinary shares were selling at P52 per share on December 15,2013 June 20,2014 BEBE CO. sold of its own ordinary shares that it had purchased on November30,2013 for P126,000. Preference Shares BEBE Co. issued 240,000 preference shares at P44 per share on July 1,2012. Cash Dividends BEBE CO. has followed a schedule of declaring cash dividends in December and June, with payment being made to shareholders of record in the following month. The cash dividends which have been declared sinceinception of the company through June 30,2014, are shown below: Declaration Date

Share Capital Ordinary

Share Capital Preference

12/15/2012

P0.30 per share

P1.00 per share

6/15/2013

P0.30 per share

P1.00 per share

-

P1.00 per share

12/15/2013

No cash dividends were declared during June 2014 due to the company’s liquidity problems.

Retained Earnings As of June 30,2013, BEBE Co’s retained earnings account had a balance of P4,140,000. For the fiscal year ending June 30,2014, BEBE CO. reported net income of P240,000. Required: Compute the adjusted balances of the following as of June 30,2014: a. b. c. d. e. f. g. h.

Share capital - preference Share capital - ordinary Share premium - preference Share premium - ordinary Share premium - treasury Retained earnings (before appropriation for treasury shares) Treasury shares Total shareholders' equity

Problem No. 5 The shareholders’ equity section of BAHRAIN CORPORATION’s statement position as of December 31,2013, is as follows: Share capital – Ordinary (P10 par,750,000 shares Authorized, 412,500 issued and outstanding Share premium Total paid in capital Unappropriated retained earnings Appropriated retained earnings Total retained earnings Total sharesholders’ equity

P4,125,000 825,000 P4,950,000 P2,002,500 750,000 2,752,500 P7,702,500

Bahrain Corporation had the following shareholders’ equity transaction during 2014: Jan 15 Completed the building renovation for which P750,000 of retained earnings had been restricted. Paid the contractor P727,500, all of which is capitalized. Mar 3 Issued 150,000additional ordinary shares for P18 per share. May 18 Declared a dividend of P1.50 per share to be paid on July 31,2014, to shareholders of record on June 30,2014. June 19 Approved additional building renovation to be funded enternally. The estimated cost of the project is P600,000, and retained earnings are to be restricted for that amount. July 31 Paid the dividend. Nov 12 Declared a property dividend to be paid on January 5,2015. 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 2014 ( before recognition of impairment loss on the equipment declared as property dividend) is P1,327,500. The equipment’s fair value less cost to distribute on December 31 is P330,000. 1.Share capital ordinary on December 31,2014 is a. P5,625,000 b. P4,125,000 c. P4,950,000

d. P7,650,000

2. Share premium on December 31,2014 is a. P2,625,000 b. P825,000 c. P2,025,000

d. P1,200,000

3.Unappropriated retained earnings on December 31,2014 is a. P2,163,750 b. P2,246,250 c. P 2,133,750

d.P 2,276,250

4.The total shareholder s equity on December 31,2014 is a. P10,376,250 b. P10,526,250 c. P9,926,250 PROBLEM NO.6

d. P7,650,000...