CENTER FORACCOUNTANCYREVIEW&TRAINING
ES T A B L I S H E D 2003
2ndFlr.,ManangoBldg., City Road., Centro East, Santiago City, Philippines; Mobile No.: 09108298588
AUDITING PROBLEMS
Jimmy I. Peru, MBM, MICB, CPA
“Stockholders’ Equity”
Problem # 1
BEBE CO. was formed on July 1,2010. 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 2012-2013 fiscal year, BEBE CO. had
660,000 ordinary shares issued as follows:
1. 510,000 shares were issued for cash in July 1,
2010, at P31 per share.
2. On July 24, 2010, 30,000 shares were
exchanged for a plot of land which cost the seller
P420,000 in 2004 and had an estimated market
value of P1,320,000 on July 24,2010.
3. 120,000 shares were issued on March 1, 2011,
for P42 per share.
During the 2012-2013 fiscal year, the following
transactions regarding ordinary shares took place:
November 30,2012 - BEBE CO. purchases 12,000 of
its own shares on the open market at P39 per share
December 15,2012 - BEBE CO. declared a 5% share
dividend for shareholders of record on January15,
2013, to be issued on January 31, 2013. 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 P53 per share on December
15, 2012.
June 20,2013 - BEBE CO. sold 3,000 of its own
ordinary shares that it had purchased on N
November 30, 2012, for P126,000.
Preference Shares
BEBE CO. issued 240,000 preference shares at P44
per share on July 1, 2011.
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
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month. The cash dividends which have been declared
since inception of the company through June 30,
2013, are shown below:
Declaration Date SC-Ordinary SC-Preference
12/15/11 P0.30 per share P1.00
per share
06/15/12 P0.30 per share P1.00
per share
12/15/12 --- P1.00 per share
No cash dividends were declared during June 2013
due to the company’s liquidity problems.
Retained Earnings
As of June 30,2012, BEBE CO.’s retained earnings
account had a balance of P4,140,000. For the fiscal
year ending June 30, 2013, BEBE CO. reported net
income of P240,000
Required:
Compute the adjusted balances of the following as of
June 30,2013:
Reclassification
PFRS 9, paragraph 5.3, provides that an entity shall
reclassify financial assets only when it changes its
business model for managing the financial assets.
Investment in equity securities
Under the Application Guidance B5.5 of PFRS 9, all
investments in equity instruments and contracts on
those instruments must be measured at fair value
However, in limited circumstances, cost may be an
appropriate estimate of fair value.
When to recognized dividends as income
PAS 18, paragraph 29, provides that “dividends”
shall be recognized as revenue when the
shareholder’s right to receive payment is established
Investment in associate
In certain circumstances, an entity may purchase
enough share of another entity in order to exert
significant influence or control over the financial and
operating policies of the investee entity
* Significance influence is the power to participate
in the financial and operating policy decisions of the
investee but not control or joint control over those
policies
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The assessment of significant influence is a matter of
judgment. However, PAS 28 provides a practical
guidance to assist management in making such
assessment.
Equity method
The equity method is based on the economic
relationship between the investor and the investee.
The investor and the investee are viewed as a single
economic unit.
Investee with heavy losses
Under the equity method, if an investor’s share of
losses of an associate equals or exceeds the carrying
amount of an investment, the investor discontinues
recognizing its share of further losses. The
investment is reported at nil or zero value.
Impairment Loss
PAS 28 in conjunction with PAS 36 on “impairment of
assets” requires that an impairment loss shall be
recognized “whenever the carrying amount of the
investment in associate exceeds its recoverable
amount”.
Investee with preference share
When an associate has outstanding cumulative
preference share, the investor shall compute its
share of earnings or losses after deducting the
preference dividends, whether or not such dividends
are declared.
When an associate has outstanding non cumulative
preference share, the investor shall compute its
share of earning or losses after deducting the
preference dividends only when declared.
Other comprehensive income of associate
PAS 28, paragraph 19A, provides that if an investor
losses significant influence, the investor shall
account for all amounts recognized in other
comprehensive income by the associate on the same
basis as would be required if the associate had
directly disposed of the related assets.
Dividends from preacquisition retained earnings
This provision is now amended. There is no longer
distinction between preacquisition dividends and
postacquisition dividends
Investment in associate achieved in stages
The investment in associate achieved in stages is not
covered by PAS 28. The principles for business
combinations achieved in stages must be applied.
PFRS 3, paragraph 42, provides that in a business
combination achieved in stages, the acquirer shall
remeasure the previously held equity interest at fair
value and recognize the resulting gain or loss in
profit or loss.
Financial Assets at amortized cost
PFRS 9, paragraph 4.2, provides that a financial
asset shall be measured at amortized cost if both of
the following conditions are met:
a. The business model is to hold the financial asset
in order to collect contractual cash flows on specified
dates
b. The contractual cash flows are solely payments
of principal and interest on the principal amount
outstanding
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Amortization of premium or discount
PFRS 9 requires that investment in bonds shall be
measure at amortized cost. This means that any
premium or discount on the acquisition of long term
investment in bonds must be amortized.
Investment property
* Land and building for rental or capital appreciation
* Land held for undetermined use, building under
construction for use as investment property
* Land and building leased by parent to the
subsidiary under an operating lease – investment
property for separate FS and PPE for consolidated
FS
* Cost model – subject to depreciation
* Fair value model – no depreciation but any
changes in fair value are included in profit or loss
Property, plant and equipment
> On account – Invoice price less discount whether
taken or not
> On installment – Cash price or PV of future
payments
> Issuance of shares – FV of assets, FV of shares or
par value of shares
> Issuance of bonds payable – FV of bonds payable,
FV of asset or face value of bonds payable
> Exchange with commercial substance – FV of asset
given plus cash payment on the part of payor or
minus cash received on the part of recipient
> Exchange without commercial substance –
Carrying amount of asset given plus cash payment
or minus cash received. No gain or loss on exchange
is recognized
Multiple Choices:
1. On January 1, 2013, John Company purchased
equity securities held for trading. The cost and
market value on December 31, 2013 were:
Cost Market
Security A 1,000,000 1,200,000
Security B 2,000,000 1,500,000
Security C 3,000,000 3,100,000
On July 1, 2014 the entity sold Security A for
1,800,000. What amount should be reported as loss
on sale of trading securities in the 2014 income
statement?
a. 800,000
b. 600,000
c. 0
d. 400,000
2. Crack Company acquired a financial asset for
5,000,000. Broker fees of 500,000 were incurred in
relation to the purchase. What amount should
initially be recognized for the financial asset,
respectively if it is classified as at FVTPL and as
FVTOCI?
a. 5,000,000 and 5,500,000
b. 5,500,000 and 5,000,000
c. 5,500,000 and 5,500,000
d. 5,000,000 and 5,000,000
3. On January 1, 2013, Ciarra Company acquired a
nontrading equity investment for 5,000,000. On
December 31, 2013, the market value of the
investment was 4,000,000. On December 31, 2014,
the issuer of the equity instrument was in severe
financial difficulty and the fair value of the equity
investment had fallen to 2,300,000.
What amount of cumulative loss should be reported
in the statement of changes in equity for 2014 as
component of other comprehensive income if the
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investment is designated as measured at FVTOCI
(PFRS 9)?
a. 1,000,000
b. 2,700,000
c. 1,700,000
d. 0 and five of these rights. On October 1, 2013, each
4. On January 1, 2013, Shiela Company purchased
bonds with face value of 5,000,000 for 6,000,000.
The bonds were acquired for the purpose of selling in
the short term in order to realize fair value changes.
On December 31, 2013, the entity changed the
business model in managing the bonds from realizing
short term gains to collecting cash flows that are
solely payments of principal and interest. On such
date, the fair value of the bonds is 5,700,000. What
is the initial carrying amount of the trading securities
on December 31, 2013?
a. 5,000,000
b. O
c. 5,700,000
d. 5,500,000
5. Aniway Company provided the following data
pertaining to dividends on ordinary share
investments for the current year
* On October 1, the entity received 600,000
liquidating dividends from A Company. The entity
owned a 10% interest in A Company.
* The entity owned a 20% interest in B Company
which declared and paid a 4,000,000 cash dividend
to shareholders on December 31
* On December 1, the entity received from C
Company a dividend in kind of one share of D
Company for every 4 C Company shares held. The
entity had 100,000 C Company shares which have a
market price of P50 per share on December 1. The
market price of D Company share was 10.
What amount should be reported as dividend income
for the current year?
a. 1,650,000
b. 1,050,000
c. 850,000
d. 250,000
6. On January 1, 2013, Gracelyn Company acquired
50,000 ordinary shares of another entity for a total
consideration of 5,000,000. On October 1, 2013, the
entity received from the investee a preference stock
dividend of one share for every 5 ordinary shares
held. On this date, the market price of the investee’s
ordinary share was 140 and the market price of the
investee’s preference share was 100. What amount
should be reported as investment in preference
shares?
a. 1,000,000
b. 625,000
c. 500,000
d. 0 costing 3,000,000 to Clariza Company for 5,000,000.
7. During 2013, Geraldine Company purchased
shared of another entity as follows:
Jan 1 20,000 shares at 100 2,000,000
Jul 1 30,000 shares at 120 3,600,000
The transactions for 2014 are as follows:
January 1 Received 20% stock dividend
August 1 Received cash dividend of 10 per share
December 1 Sold 30,000 shares at 150 per share
What total amount of income from the investment
should be reported for 2014?
a. 1,900,000
b. 1,700,000
c. 2,500,000
d. 2,300,000
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8. Myra Company owned 50,000 shares of another
entity. These 50,000 shares were originally
purchased for 100 per share. On October 1, 2013,
the investee distributed 50,000 right to the entity.
The entity was entitled to buy one new share for 140
share had a market value of P 150 and each right
had a market value of 10.On December 31, 2013,
the entity exercised all rights. The stock rights are
accounted separately and measured initially at fair
value. What total cost should be recorded for the
new shares that are acquired by exercising the
rights?
a. 1,400,000
b. 1,900,000
c. 1,650,000
d. 1,000,000
9. On January 1, 2013, Arlen Company purchased
50,000 shares of another entity for 3,600,000. On
October 1, 2013, the entity received 50,000 stock
rights from the investee. Each right entitled the
shareholder to acquire one share for 80. The market
price of the investee’s share was 100 immediately
before the rights were issued and 90 immediately
after the rights were issued. On December 1, 2013,
the entity exercised all stock rights. On December
31, 2013, the entity sold 25,000 shares at 90 per
share. The stock rights are not accounted for
separately. What amount of gain on sale of
investment should be recognized in 2013?
a. 450,000
b. 700,000
c. 350,000
d. 250.000
10. On July 1, 2013, Jennifer Company acquired
20% of the outstanding ordinary shares of another
entity for 5,000,000. The carrying amount of the
acquired shares was 4,000,000. The excess of cost
over carrying amount was attributable to an
identifiable asset which was undervalued on the
investee’s statement of financial position and which
had a remaining useful life of 5 years. For the year
ended December 31, 2013, the investee reported net
income of 6,000,000 and paid cash dividends of
1,000,000 on ordinary shares capital and issued
10% stock dividend on December 31, 2013. What is
the carrying amount of the investment in associate
on December 31, 2013?
a. 5,900,000 b. 5,400,000
c. 5,300,000 d. 5,800,000
11. On January 1, 2013, Clariza Company acquired
40% of the ordinary shares of an associate. On such
date, assets and liabilities of the investee were
recorded at fair value and the acquisition showed
that goodwill of 1,000,000 was acquired. The
investee reported net income of 8,000,000 for 2013
In December 2013, the investee sold inventory
The inventory remained unsold by Clariza Company
on December 31, 2013
On January 1, 2013, the investee sold an equipment
to Clariza Company with carrying amount of
2,500,000 for 4,000,000. The remaining life of the
equipment is 5 years.
What amount of investment income should be
reported by Clariza Company for 2013?
a. 1,920,000
b. 1,800,000
c. 3,200,000
d. 2,400,000
12. On January 1, 2013, Rina Company purchased
40% of the outstanding ordinary shares of another
entity for 5,000,000 when the net assets of the
investee amount to 10,000,000. At acquisition date,
the carrying amounts of the identifiable assets and
liabilities of the investee were equal to their fair
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value, except for equipment for which the fair value
was 2,000,000 greater than carrying amount and
inventory whose fair value was 1,000,000 greater
than cost. The equipment has a remaining life of 5
years and the inventory was all sold during 2013.
The investee reported net income of 6,000,000 for
2013 and paid no dividends. What is the maximum
amount which could be included in income before tax
to reflect the investor’s equity in earnings of the
investee for 2013?
a. 2,400,000
b. 2,240,000
c. 2,040,000
d. 1,840,000
13. On January 1, 2013, Cathy Company acquired a
10% interest in an investee for 3,000,000. The
investment was accounted for at fair value through
OCI. The fair value of the investment was 3,500,000
on December 31, 2013. On January 1, 2014, the
entity acquired a further 15% interest in the investee
for 8,500,000. On such date, the carrying amount of
the net assets of the investee was 36,000,000. The
fair value of the net asset of the investee is equal to
carrying amount except for equipment whose fair
value was 4,000,000 greater than carrying amount.
The equipment had a remaining life of 5 years. The
investee reported net income of 8,000,000 for 2014
and paid dividend of 5,000,000 on December 31,
2014. No dividend was paid in 2013 by the investee.
A. Under the “fair value approach”, what is the
goodwill on January 1, 2014?
a. 3,000,000
b. 2,000,000
c. 2,500,000
d. 0
B. What is the carrying amount of the investment in
associate on December 31, 2014?
a. 12,550,000
b. 10,550,000
c. 11,950,000
d. 12,750,000
14. On July 1, 2013, Claire Company pad 1,198,000
for 10% bonds with a face amount of 1,000,000 to
be held to maturity. Interest is paid on June 30 and
December 31. The bonds were purchased to yield
8%. The entity used effective interest method to
recognized interest income from this investment.
What is the carrying amount of the bond investment
on December 31, 2013?
a. 1,207,900
b. 1,198,000
c. 1,195,920
d. 1,193,050
15. On July 1, 2013, Jeza Company purchased as a
long term investment 1,000,000 face value 8%
bonds for 946,000 including accrued interest of
40,000. The bonds were purchased to yield 10%
interest. The bonds pay interest annually on
December 31. The effective interest method of
amortization is used. What is the carrying amount of
the investment in bonds on December 31, 2013?
a. 911,300
b. 916,600
c. 953,300
d. 960,600
16. On January 1, 2013, Alyssa Company purchased
12% bonds with face amount of 5,000,000 for
5,500,000 including transaction cost of 100,000. The
bonds provide an effective yield of 10%. The bonds
are dated January 1, 2013, mature on January 1,
2018 and pay interest annually on December 31 of
each year. The bonds are quoted at 115 on
December 31, 2013. The entity has irrevocably
elected to use the fair value option for the bond
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investment. What total amount of income should be
reported for 2013?
a. 850,000
b. 790,000
c. 950,000
d. 890,000
17. Princess Company purchased an investment
property on January 1, 2011 at a cost of 2,200,000.
The property had a useful life of 40 years and on
December 31, 2013 had a fair value of 3,000,000.
On December 31, 2013 the property was sold for net
proceeds of 2,900,000. The entity used the cost
model to account for investment property. What is
the gain or loss to be recognized for 2013 regarding
the disposal of the property?
a. 865,000 gain
b. 810,000 gain
c. 100,000 loss
d. 700,000 loss
18. Jean Company and its subsidiaries provided the
following properties owned by the group.
Land held for undetermined 1,000,000
future use
Vacant building to be leased out
under an operating lease 2,000,000
Property held for use in production 4,000,000
Property held by a subsidiary, a real
estate firm, in the ordinary course
of business 3,000,000
Building owned by subsidiary and for
which the subsidiary provides security
and maintenance services to the lessee 2,500,000
Land leased to a subsidiary under an
operating lease 1,500,000
Equipment leased to an unrelated party
under an operating lease 500,000
Building under construction for use as
investment property 3,500,000
In the consolidated statement of financial position of
the parent and its subsidiaries, what total amount
should be reported as investment property?
a. 6,000,000
b. 5,500,000
c. 8,000,000
d. 9,000,000
19. Lovely Company commenced operations at the
beginning of the current year. The following costs
are incurred by the entity:
* Payment of land and an old building which is to be
demolished - 1,000,000
* Payment of property taxes in arrears - 130,000
* Title search and insurance – 50,000
* Option paid for an alternative land which was not
acquired – 30,000
* Cost of relocating squatters – 10,000
* Special assessment for city improvements on
water and sewer system – 150,000
* Demolition of old building, net of salvage value of
10,000 – 100,000
* Survey before construction of new building –
60,000
* Contract price for factory building – 5,000,000
* Architect fee – 230,000
* Building permit or payment to city hall for
approval of building construction – 120,000
* Excavation before new construction – 110,000
* Liability insurance during construction – 55,000
* Safety fence around construction site – 35,000
* Removal of safety fence after completion of
factory building – 20,000
* New fence surrounding the factory – 80,000
* Driveways, parking bays and safety lighting –
550,000
* Cost of trees, shrubs and other landscaping –
250,000
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What amount should be reported respectively as
initial measurement of the land and building?
a. 1,500,000 and 5,600,000
b. 1,440,000 and 5,660,000
c. 1,610,000 and 5,490,000
d. 2,380,000 and 5,600,000

20. During the current year, Jose Company

purchased a second hand machine at a price of
5,000,000. A cash payment of 1,000,000 was made
and a two year, non interest bearing note was issued
for the balance of 4,000,000. Recent transactions
involving similar machine indicate that the used
machine has a second hand market value of
4,500,000. A new machine would cost of 6,500,000.
The following costs were incurred during the year.

* Cost of removing old machine

that is replaced – 350,000
* Cash proceeds from the sale of
the old machine replaced – 100,000
* Cost of hauling the machine from
vendor to entity premises – 40,000
* Overhaul and repairs to recondition
machine prior to use – 220,000
* Cost of installation – 190,000
* Cost of testing machine prior to use – 150,000
* Safety device added to the machine - 300,000
* Cost of spare parts to cover
breakdowns - 80,000
* Cost of repairing damage to machine
caused when the machine was
dropped during installation 50,000
* Repairs incurred during the first
year of operation 160,000
* Cost of training workers to operate
the machine 25,000

What total amount should be capitalized as cost of

the second hand machine?
a. 5,900,000
b. 5,400,000
c. 5,650,000
d. 5,425,000

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