You are on page 1of 18

PROBLEM NO.

Presented below are unaudited balances of selected accounts of Westbrook Corporation as of


December 31, 2017. During the course of your audit of Westbrook’s books, you obtained
additional information affecting these accounts.

Debit Credit
Cash P 2,000,000
Accounts receivable 6,000,000
Inventory 10,000,000
Accounts payable P 4,000,000
Sales, Net 50,000,000

Additional information:

a) On December 28, 2017, the entity wrote and recorded checks to creditors totaling
P300,000 that were mailed on January 5, 2018.

b) Checks in the amount of P250,000 were written to vendors and recorded on December
29, 2017. The checks were dated January 5, 2018.

c) At December 31, 2017, the entity has a P60,000 debit balance in its accounts payable to a
supplier resulting from advance payment. This was offset against the accounts with credit
balances.

d) On December 26, 2017, a supplier authorized the entity to return goods shipped and
billed at P80,000 on December 3, 2017. The goods were returned on December on
December 28, 2017. The supplier’s credit memo was received and recorded on January 5,
2018.

e) Goods shipped to the entity, f.o.b. seller on December 20, 2017, from a vendor were lost
in transit. The invoice price was P20,000. This transaction was not recorded since the
common carrier has acknowledged the responsibility for the loss of the merchandise.

f) The bank returned on December 29, 2017 a customer check for P30,000 marked as
“DAIF” but no entry was made.

g) On December 31, 2017, the company received and recorded customer’s postdated check
amounting to P90,000.

h) You observed the taking of the physical inventory of the entity on December 30, 2017.
Only merchandise shipped by the entity to customers up to and including December 30,
2017 has been eliminated from inventory. The inventory of P10,000,000 is based on the
physical inventory count. All sales are on account and made on a FOB shipping point
basis.
The following sales invoices were entered in the sales books for the month of December 2017
and January 2018, respectively.
DECEMBER 2017
Sales Sales
Invoice Invoice
Amount Date Cost Date Shipped
1) P150,000 Dec. 21 P100,000 Dec. 31, 2017
2) 100,000 Dec. 31 40,000 Nov. 03, 2017
3) 50,000 Dec. 29 30,000 Dec. 30, 2017
4) 200,000 Dec. 31 120,000 Jan. 03, 2018
5) 500,000 Dec. 30 280,000 Dec. 29, 2017
(shipped to
consignee)
JANUARY 2018
6) P300,000 Dec. 31 P200,000 Dec. 30, 2017
7) 200,000 Jan. 02 115,000 Jan. 02, 2018
8) 600,000 Jan. 03 475,000 Dec. 31, 2017

QUESTIONS:

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

1 The adjusted cash as of December 31, 2047 is


a. P2,430,000 c. P2,520,000
b. P2,460,000 d. P2,550,000
2 The adjusted accounts receivable as of December 31, 2017 is
a. P6,220,000 c. P6,290,000
b. P6,230,000 d. P6,230,000
3 The adjusted inventory as of December 31, 2017 is
a. P9,585,000 c. P9,285,000
b. P9,705,000 d. P10,180,000
4 The adjusted accounts payable as of December 31, 2017 is
a. P4,490,000 c. P4,550,000
b. P4,530,000 d. P4,630,000
5 The adjusted sales for the year ended December 31, 2017
a. P50,080,000 c. P50,200,000
b. P50,100,000 d. P50,320,000
SOLUTION:

CASH A/R INVENTORY A/P NET SALES


P 2,000,000 P 6,000,000 P 10,000,000 P 4,000,000 P 50,000,000

a) 300,000 300,000

b) 250,000 250,000
c) -
d) -
e) -

f) (30,000) 30,000

g) (90,000) 90,000
h)
1 - (100,000)
2
3

4 (200,000) (200,000)

5 (500,000) 280,000 (500,000)

6 300,000 300,000
7

8 600,000 (475,000) 600,000

2,430,000 6,320,000 9,705,000 4,550,000 50,200,000

Under the accrual basis of accounting (or accrual method of accounting), revenues are reported
on the income statement when they are earned. When the revenues are earned but cash is not
received, the asset accounts receivable will be recorded.

IAS 1 requires that an entity prepare its financial statements, except for cash flow information,
using the accrual basis of accounting. [IAS 1.25]

The revenue recognition principle states that one should only record revenue when it has
been earned, not when the related cash is collected. For example, advance payment of the
customer should not form part of income account, rather it should be a liability account. It
can recognize the revenue immediately upon completion or rendering of service even if it
does not expect payment from the customer for several weeks. This concept is incorporated
into the accrual basis of accounting.
PROBLEM NO. 2

The following list of accounts and their balances represents the unadjusted trial balance of
HARDEN COMPANY at Dec 31, 2017:

Debit Credit
Cash P 290,900
Equity Investments (trading) 600,000
Accounts Receivable 690,000
Allowance for Doubtful Accounts P 5000
Inventory 547,200
Prepaid Rent 360,000
Plant and Equipment 1,600,000
Acc. Dep – Plant and Equipment 147,400
Accounts Payable 113,700
Bonds Payable 900,000
Ordinary Share Capital 1,700,000
Retained Earnings 971,800
Sales 2,148,000
Costs of Goods Sold 1,544,000
Freight-out 110,000
Salaries and Wages Expense 320,000
Interest Expense 20,400
Rental Income 216,000
Miscellaneous Expense 8900
Insurance Expense ____110,500 _________
P6,201,900 P,6,201,900

Additional Data:
1. The balance in the Insurance Expense Account contains the premium costs of three
policies:
a. Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2016;
b. Policy 2, original cost of P72,000, 3-year term, taken out on October 1, 2017;
c. Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2017.
2. On September 30, 2017, Harden received P216,000 rent from its lessee for eighteen-
month lease beginning on that date.
3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a
year are depreciated at half this rate. There were no purchases during the year. On
December 31, 2016, the balance of the Plant and Equipment account was P2,400,000.
4. On December 28,2017, the bookkeeper incorrectly credited Sales for a Receipt on
account in the amount of P100,000.
5. At December 31,2017, salaries and wages accrued but unpaid were P4,200,000.
6. Harden estimates that 1% of sales will become uncollectible.
7. On August 1, 2017, Harden purchased, as a short term investment, 600 P1,000, 7% bonds
of Russel Corp. at par. The bonds mature on August 1, 2018. Interest payment dates are
July 31 and January 31.
8. On April 30, 2017, Harden rented a warehouse for P30,000 per month, paying P360,000
in advance.
QUESTIONS:
1. What are the adjusted balances of the following accounts on December 31, 2017?
Prepaid Insurance Insurance Expense
a. P 6,000 P 104,500
b. 0 110,500
c. 54,000 56,500
d. 66,000 44,500

2. What is the total depreciation expense for the year ended December 31, 2017?
a. P120,000 c. P200,000
b. P240,000 d. P160,000

3. What is the bad debt expense for the year ended December 31,2017?

a. P15,480 c. P21,480
b. P25,480 d. P20,480

4. What amount of interest and rent income should be reported in the income statement for
the year ended December 31,2017?

Interest Income Rental Income


a. P24,500 P 36,000
b. 17,500 180,000
c. 24,500 180,000
d. 17,500 36,000

5. What adjusting entry is necessary on December 31,2017 for the Prepaid rent account?

a. Rent Expense 270,000


Prepaid Rent 270,000
b. Prepaid Rent 270,000
Prepaid Rent 270,000
c. Prepaid Rent 240,000
Rent Expense 240,000
d. Rent Expense 240,000
Prepaid Rent 240,000

Solution:

1. D.
 Prepaid Insurance ..................................................................... P66,000
Insurance Expense .............................................................. P66,000
(Both Policies 1 and 3 have expired and their costs
belong in Insurance Expense. The monthly premium
on Policy 2 is P72,000 ÷ 36 = P2000. At 12/31/17,
33 months of insurance, or P66,000, remains unexpired)

Insurance Expense of P110,500 – 66,000 = P44,500

2. C.
 Depreciation Expense .............................................................. 200,000
Accumulated Depreciation ................................................. 200,000
[(Equipment retired during 2017 =
P2,400,000 – 1,600,000 = P800,000)
10% of 1600,000 = P160,000
5% of 800,000 = 40,000
Total depreciation = P200,000]
3. D.
 Sales Revenue ........................................................................... 100,000
Accounts Receivable .......................................................... 100,000
(To correct the entry made in error)

 Bad Debt Expense .................................................................... 20,480


Allowance for Doubtful Accounts ..................................... 20,480
(Corrected Sales Revenue balance is P2,148,000 – 100,000
= P2,048,000. 1% of P2,048,000 is P20,480.)

4. D.
 Rent Revenue ........................................................................... 180,000
Unearned Rent .................................................................... 180,000
(Monthly rent is P216,000 ÷ 18 = P12,000. At 12/31/17,
15 mos. of rent, or P180,000, remains unearned)

Rental Revenue of P216,000 – 180,000 = P36,000

 Interest Receivable ................................................................... 17,500


Interest Revenue ........................................................... 17,500
(Monthly interest is P600,000 × .07 × 1/12 = P3500.
5 months' accrued interest is P17,500)

5. D.

 Rent Expense ....................................................................... 240,000


Prepaid Rent ............................................................ 240,000
(To record 8 months' of rent expired at P30,000 per month)

PAS 17 par 50 Lease income from operating leases (excluding amounts for services such as
insurance and maintenance) shall be recognized in income on a straight- line basis over the lease
term, unless either:
a. Another systematic basis or more representative of the time pattern in which use benefit
derived from the leased asset is diminished, even if the payments to the lessors are not on
that basis; or
b. The payments to the lessor are structured to increase in line with expected general
inflation to compensate for the lessor’s expected inflationary cost increases. If payments
to the lessor vary according to factors other than inflation, then this condition is not
met.interes

PAS 16 par 50 The depreciable amount (cost less residual value) should be allocated on a
systematic basis over the asset’s useful life.
PROBLEM NO. 3

James Company had the following bank reconciliation on June 30, 2017:

Balance per bank statement, June 30, 2017 P3,000,000


Add: Deposit in transit 400,000
Total 3,400,000
Less: Outstanding checks 900,000
Balance per book statement, June 30, 2017 P2,500,000

The bank statement for the month of July 2017showed the following:
Deposits (including P200,000 note
collected for James) P9,000,000
Disbursements (including P140,000 NSF
check and P10,000 service charge) P7,000,000

QUESTIONS:

Based on the above and the result of your audit, you are to provide the answers to the following:

1 What is the amount of cash receipts per books in July?


a. P9,600,000 c. P9,800,000
b. P9,400,000 d. P8,400,000
2 What is the amount of cash disbursement per books in July?
a. P6,550,000 c. P7,450,000
b. P6,700,000 d. P5,950,000
3 What is the cash balance per books at July 31?
a. P5,400,000 c. P4,950,000
b. P5,350,000 d. P4,850,000
4 What is the adjusted cash balance at July 31?
a. P5,400,000 c. P4,950,000
b. P5,350,000 d. P4,850,000
5 Which statement is true regarding audit of cash?
a. When the year-end cash balances is immaterial, the audit of the cash
account is unnecessary.
b. The risk of the company issuing checks near year-end and mailing
them subsequently is not important to the auditor as the action does
not affect cash balances.
c. Cash is no longer considered highly susceptible to theft because
of the advent of computers, safes and armored cars.
d. The auditor is responsible for auditing the necessary disclosures
when material lines of credit and compensating balance agreements
have been made by the client with a lender.
Solution:

PROOF OF CASH
Balance Balance
June 30 Receipts Disbursements July 31
Balance per books P2,500,000 9,400,000 6,550,000 5,350,000
Note Collected
June - -
July 200,000 200,000
NSF Check
June - -
July 140,000 (140,000)
Bank service charge
June - -
July 10,000 (10,000)
Adj. book balances 2,500,000 9,600,000 6,700,000 5,400,000

Balance Balance
June 30 Receipts Disbursements July 31
Balance per bank 3,000,000 9,000,000 7,000,000 5,000,000
Deposit in transit
June 400,000 (400,000)
July 1,000,000 1,000,000
Outstanding checks
June (900,000) (900,000)
July 600,000 (600,000)
Adj. bank balances 2,500,000 9,600,000 6,700,000 5,400,000

Proof of cash facilitates discovering possible discrepancies in cash. Thus financial statements are
fairly presented.

PAS 1 presentation of financial statements’ objective is to prescribe the basis for presentation of
general purpose financial statements, to ensure comparability both with financial statements of
previous periods and with the financial statements of other entities. The Standard sets out the
following; overall requirements for the presentation of financial statements; guidelines for their
structure; and minimum requirements for their content.

OVERALL CONSIDERATIONS

•Fair Presentation and Compliance with IFRSs


•Going Concern
•Accrual Basis of Accounting
•Consistency of Presentation
•Materiality and Aggregation
•Offsetting
•Comparative Information
PROBLEM NO. 4

The December 31, 2016 adjusted trial balance of Leonard Company shows the following:

Debit Credit
Accounts receivable 50,000
Allowance for bad debts 2,000

Additional information:
 Cash sales of the company represents 10% of gross sales
 90% of the credit sales customers do not take advantage of 2/10, n/30 terms
 It is expected that cash discount of 300 will be taken on accounts receivable outstanding
at December 31, 2017
 Sales returns in 2016 amounted to 20,000. All returns were charge sales.
 During 2017, accounts totaling to 2,200 were written off as uncollectible; bad debt
recoveries during the year amounted to P150.
 The allowance for bad debts is adjusted so that it represents certain percentage of the
outstanding accounts receivable at year end. The required percentage at December 31,
2017 is 150% of the rate used on December 31, 2016.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. The accounts receivable as of December 31, 2017 is
a) 150,000
b) 15,000
c) 16,667
d) 122,200
2. The allowance for doubtful accounts as of December 31, 2017 is
a) 1,000
b) 6,000
c) 9,000
d) 7,332
3. The net realizable value of accounts receivable as of December 31, 2017 is
a) 15,367
b) 140,700
c) 143,700
d) 114,568
4. The doubtful account expense for the year 2017 is
a) 9,050
b) 6,050
c) 1,050
d) 7,382
5. When an auditor does not receive replies to positive requests for year-end accounts receivable
confirmations, the auditor most likely would
a) Inspect the allowance account to verify whether the accounts were subsequently written
off.
b) Increase the assessed level of detection risk for the valuation and completeness assertions
c) Ask the client to contact the customers to request that the confirmations be returned.
d) Increase the assessed level of inherent risk for the revenue cycle.
Solution:
1. A
Expected cash discount 300
Divide by percentage of cash discount 0.02
Portion of AR that will be granted cash discounts 15,000
Divide by percentage of total AR estimated to take
advantage of the discount 0.10
Accounts receivable, 12/31/2017 150,000

2. C
Accounts receivable 12/31/2017 150,000
Multiply by bad debt rate 0.06
(( 2,000 ÷ 50,000) x 1.50))
Allowance for doubtful accounts, 12//21/2017 9,000

3. B
Accounts receivable 12/31/2017 150,000
Less: Allowance for doubtful accounts 9,000
Allowance for sales discounts 9,300
300 .
Net Realizable value, 12//21/2017 140,700

4. A
Allowance for doubtful accounts, 12/31/2017 9,000
Add: Accounts written off 2,200
Total 11,200
Less: Allowance for doubtful accounts, 12/31/2016 2,000
Bad debt recoveries 2,150
150
Doubtful accounts expense for 2017 9,050

5. Answer (C) is correct. Where no response is received for a positive confirmation, the
auditors ordinarily send a reminder. Where there is still no response to the request, the
auditors consider contacting the recipient of the request to elicit a response. Where the
auditors are unable to obtain a response, the auditors use alternative audit procedures.

 Accounts receivable is the result of selling goods and services on credit. Companies
typically offer customers a certain number of days, most often 30, to pay outstanding
balances from purchases.

 Beginning balance of accounts receivable


+ net credit sales
- cash collections
- write-offs
= ending balance of accounts receivable

 Allowance for Doubtful Accounts is a contra current asset account associated with
Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts
is subtracted from the debit balance in Accounts Receivable the result is known as the net
realizable value of the Accounts Receivable.
PROBLEM 5

Thomas Company has the following equity securities classified as available for sale at December
31, 2016:

Fair Value
Cost 12/31/16 12/31/15
50,000 ordinary shares P1,600,000 P1,500,000 P1,400,000
of OK Corp.
100,000 ordinary 1,700,000 1,900,000 1,600,000
shares of PA

All of the securities had been purchased in 2015. In 2017, Thomas completed the following
securities transactions:
 January 1 – purchased P1,000,000 8% bonds of X Corporation for P924 ,164 (including broker’s
commission of P50,000). Interest is payable annually every January 1. The bonds mature on
January 1, 2022.
 March 1 – sold 50,000 shares of OK Corp @ P35 less fees of P15,000.
 December 1 – bought 6,000 shares of BA Stores @ P50 less fees of P5,500. These shares are held
for trading.

The fair values of the securities appeared as follows on December 31, 2017:
Fair Value
100,000 shares of PA P2,000,00
6,000 shares of BA stores 315,000
X Corporation Bonds 980,000

Based on the above and the result of your audit, answer the following:
1. In relation to investment in shares classified as available for sale, the net amount to be
recognized in 2017 profit or loss is
a. Nil c. P150,000
b. P235,000 d. P135,000

2. In relation to investment in shares classified as held for trading, the net amount to be
recognized in 2017 profit or loss is
a. P20,500 c. P9,500
b. P15,000 d. Nil

3. Assuming the investment in bonds was acquired for the purpose of selling it in the near term,
the net amount to be recognized in 2017 profit or loss is
a. P135,836 c. P92,416
b. P105,836 d. Nil

4. Assuming the investment in bonds is available for sale, the net amount to be recognized in
2017 profit or loss is
a. P135,836 c. P92,416
b. P105,836 d. Nil

5. Assuming the investment in bonds was acquired for the purpose of holding it until maturity,
the net amount to be recognized in 2017 profit or loss is
a. P135,836 c. P92,416
b. P105,836 d. Nil

Solutions:
1. 50,000 shares of OK Corp Sold @ P35 P1,750,000
Legal Fees (15,000)
Proceeds 1,735,000
Cost of OK Corp (1,600,000)
Gain on Sale of OK Corp P135,000 (D)

2. 6,000 shares of BA Stores bought @P50 P300,000


Fair Value @ Dec. 31, 2017 315,000
Unrealized Gain 15,000
Legal Fees incurred in purchasing 6,000 shares (5,500)
Net amount to be recognized in 2017 profit or loss P9,500 (C)

3. Fair Value of X Corp Bonds P980,000


Carrying Amount of Bonds (924,164)
Unrealized Gain 55,836
Interest on Bonds (1,000,000 x 8%) 80,000
Net amount to be recognized in 2017 profit or loss P135,836 (A)

Explanation:
The bonds were acquired for the purpose of selling it in the near term. Thus, it is
classified as FA@FVTPL held for trading which changes in Fair Value is recognized in P/L as
well as the interest on bonds using the nominal interest rate.

4. Effective Interest on Note is 10%


Carrying Amount of Bonds P924,164
Multiplied by 10% rate 10%
Interest Income P 92,416 (C)

The basic theory I to find the effective rate that would equate the acquisition cost and the present
value of the future cash flows from the bonds.

Using Interpolation, the effective interest rate was found to be 10%. Using the present value
table, the PV of 1 @ 10% for 5 periods is 0.6209 and the PV of annuity of 1 @ 10% for 5
periods is 3.7908.

PV of Principal (P 1,000,000 x .6209) P 620,900


PV of future interest payments (P 1,000, 000 x 8%) x 3.7908 303,264
Total PV OF Cash Flows P 924,164

If investment in bonds is available for sale; thus, it is recognized as Financial Assets-Available


for Sale where at initial measurement it is fair value plus transaction costs, then subsequent
measurement is fair value unless a hedge item and changes in fair value is recognized in equity,
unless a hedge item. Amounts in equity recycled to profit or loss when the asset is derecognized.

5. Effective Interest on Note is 10%


Carrying Amount of Bonds P924,164
Multiplied by 10% rate 10%
Interest Income P 92,416 (C)

If investment in bonds is recognized as Investments held-to-maturity; thus, it is measured as


Financial Assets @ Amortized Cost. Unrealized gain and loss are not recognized simply because
such investments are not reported at fair value.
PFRS 9, Paragraph 5.7.2, provides that gain and loss on financial asset measured at amortized
cost and is not part of hedging relationship shall be recognized in profit or loss when the
financial assets are derecognized, sold, impaired or reclassified, and through the amortization
process.
Problem No. 6

Curry Co. purchases land and constructs a service station and car wash for total of P360,000. At
January 2, 2016, when construction is completed, the facility and land on which it was
constructed are sold to a major oil company for P400,000 and immediately leased from the oil
company by Curry. Fair value of the land at time of the sale was P40,000. The lease is a 10-year ,
noncancelable lease. Curry uses straight-line depreciation for its other various business holdings.
The economic life of the facility is 15 years with zero salvage value. Title to the facility and land
will pas to Curry at termination of the lease. A partial amortization schedule for this lease is as
follows:
Payments Interest Amortization Balance
January 2, 2016 P400,000.00
December 31, 2016 P65,098.13 P40,000.00 P25,098.13 374,901.87
December 31, 2017 65,098.13 37,490.19 27,607.94 347,293.93
December 31, 2018 65,098.13 34,729.39 30,368.74 316,925.19

QUESTIONS:

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

1. What is the discount rate implicit in the amortization schedule presented above?
a. 12% c. 8%
b. 10% d. 6%

2. The total lease-related expenses recognized by the lessee during 2017 is which of the
following? (Rounded to the nearest peso.)
a. P64,000 c. P73,490
b. P65,098 d. P61, 490

3. What is the amount of the lessee’s liability to the lessor after the December 31, 2018 payment?
(Rounded to the nearest peso.)
a. P400,000 c. P347,294
b. P 374,902 d. P316,925

4. The total lease-related income recognized by the lessee during 2017 is which of the following?
a. P-0- c. P4,000
b. P2,667 d. P40,000

5. Which of he following statements is true?


a. If a lease qualifies as a finance lease for the lessor, it will also always qualify as a
finance lease for the lessee.
b. A lessor’s debt equity ratio is not increased if the lease is a finance lease, whereas, it
would be if the asset were purchases outright.
c. There is always “accounting symmetry” for recording and reporting leases between the
lessor and lessee.
d. It is possible for neither the lessor nor lessee to depreciate the asset under lease.

Solutions:

1. Rate = Interest Expense


Carrying Amount
= P40,000
P400,000
= 10% (B)
2. Total lease-related expenses, 2017

Interest expense(2017) P37, 490.19


Depreciation expense
(400,000-40,000/ 15 years) 24,000.00
TOTAL 61,490.19 (D)

3. Carrying amount,2017 P347,293.93


Less: Amortization 30,368.74
Carrying Amount,2018 P316,925.19 (D)

4. Selling Price P400,000


Less: Cost of Facility 360,000
Gain on sale and leaseback 40,000
Divided by lease term 10 yrs
Gain to be recognized P4,000 (C)

5. (D) It is possible for neither the lessor nor lessee to depreciate the asset under lease.
Problem No. 7

Wall, Inc., is a public enterprise whose shares are traded in the over-the-counter market. At
December 31, 2016, Wall had 6,000,000 authorized shares of P10 par value ordinary shares, of
which 2,000,000 shares were issued and outstanding. The shareholder’s equity accounts at
December 31, 2016, had the following balances.

Ordinary Shares P 20,000,000


Share Premium 7,500,000
Retained Earnings 6,470,000

Transactions during 2017 and other information relating to the shareholder’s equity accounts
were as follows:

1. On January 5, 2017, Wall issued at P54 per share, 100,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at
the option of the holder, into two ordinary shares. Wall had 600,000 authorized
preference shares.
2. On February 1, 2017, Wall reacquired 20,000 of its ordinary shares for P16 per share.
Wall uses the cost method to account for treasury shares.
3. On April 30, 2017, Wall sold 500,000 shares (previously unissued) of P10 par value
ordinary shares to the public at P17 per share.
4. On June 18, 2017, Wall declared a cash dividend of P1 per ordinary shares, payable on
July 12, 2017, to shareholders of record on July 1, 2017.
5. On November 10, 2017, Wall sold 10,000 treasury shares for P21 per share.
6. On December 14, 2017, Wall declared the yearly cash dividend on preference shares,
payable on January 14, 2018, to shareholders of record on December 31, 2017.
7. On January 20, 2018, before the books were closed for 2017, Wall became aware that
the ending inventories at December 31, 2016, were understated by P300,000 (the after-
tax effect on 2016 net income was P210,000). The appropriate correcting entry was
recorded the same day.
8. After correcting the beginning inventory, net income for 2017 was P4,500,000.

QUESTIONS:

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

1. The Retained Earnings balance as of January 1, 2017 is

a. P6,680,000
b. P6,260,000
c. P6,770,000
d. P6,170,000

2. The Retained Earnings balance as of December 31, 2017 is

a. P8,520,000
b. P8,340,000
c. P7,830,000
d. P8,250,000

3. The total share premium as of December 31, 2017 is

a. P11,510,000
b. P11,450,000
c. P11,050,000
d. P11,000,000

4. The total shareholder’s equity as of December 31, 2017 is

a. P49,540,000
b. P49,700,000
c. P49,450,000
d. P49,504,000

5. An Auditor usually obtains evidence of stockholder’s equity transactions by reviewing the


entity’s

a. Minutes of board of directors meetings


b. Transfer agent’s records
c. Canceled stock certificates
d. Treasury stock certificate book.

Solution: Questions 1-4


Retained Earnings 01/01/17 P 6,470,000
Correction on understatement of
ending Inventory on 12/31/16 210,000
Corrected Retained Earnings Balance on 01/01/17 P 6,680,000 (66)
---------------------------------------------------------------------------------------------------
---
Preference Share Capital P 5,000,000
Ordinary Share Capital 25,000,000
Share Premium 11,450,000 (68)
Retained Earnings:
Appropriated P 160,000
Unappropriated 8,090,000 8,250,000 (67)
Treasury Shares (160,000)
Total Equity P49,540,000 (69)

Journal Entries Affecting the Equity Accounts during 2017


01/05 Cash (100,000 shares x P54) .......................................................... 5,400,000
Preference Share Capital (100,000 x P50) ......................... 5,000,000
Share Premium (excess over par PS)………………………………
400,000

02/01 Treasury Shares (20,000 x P16) ...................................................... 320,000


Cash .................................................................................... 320,000

04/30 Cash (500,000 shares x P17) .......................................................... 8,500,000


Ordinary Share Capital (500,000 shares x 10) ................... 5,000,000
Share Premium (excess over par 0S)……………………………….
3,500,000

06/18 Retained Earnings .......................................................................... 2,480,000


Dividends Payable .............................................................. 2,480,000

[(2,000,000 + 500,000 – 20,000) x P1] = 2,480,000


11/10 Cash (10,000 x P21) ....................................................................... 210,000
Treasury Shares at cost (10,000 x P16) ............................. 160,000
Share Premium (Treasury Share Transaction)…………………
50,000

12/15 Retained Earnings (5,000,000 x 9%) ............................................. 450,000


Dividends Payable - Preference ......................................... 450,000

12/31 Inventory 01/01/17 ......................................................................... 300,000


Retained Earnings .............................................................. 210,000
Income Tax Payable ........................................................... 90,000

12/31 Profit and Loss Summary................................................................ 4,500,000


Retained Earnings .............................................................. 4,500,000

02/01 Retained Earnings ........................................................................... 320,000


Retained Earnings Appropriated (cost of TS) .................... 320,000

PAS 32 par 33 If an entity reacquires its own equity instruments, those instruments (“treasury
shares”) shall be deducted from equity. No gain or loss shall be recognized in
profit or loss on the purchase, sale, issue or cancellation of an entity’s own
equity instruments. Such treasury shares may be acquired and held by the
entity or by other members of the consolidated group. Consideration paid or
received shall be recognized directly in equity.

PAS 32 par 35 Interest, dividends, losses and gains relating to a financial instrument or a
component that is a financial liability shall be recognized as income or
expense in profit or loss. Distribution to holders of an entity instrument shall
be recognized by the entity directly in equity. Transaction costs of an equity
transaction shall be accounted for as a deduction from equity.

T- Accounts