Ateneo De Zamboanga University

School of Management and Accountancy

A.Y. 2018-2019

Auditing Problem
Practice Set

ProblemNo. 1-

The stockholders’ equity section of the Mr. Goodwill Inc. showed the following data on December 31,
2017: Common stock, P3 par, 450,000 shares authorized, 375,000 shares issued and outstanding,
P1,125,000; Paid-in capital in excess of par, P10,575,000; Additional paid-in capital from stock options,
P225,000; Retained earnings, P720,000. The stock options were granted to key executives and provided
them the right to acquire 45,000 shares of common stock at P35 per share. Each option has a fair value of
P5 at the time the options were granted.

The following transactions occurred during 2018:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31, 2017. The

market price per share was P44 at this time.

Apr. 1 The company issued bonds of P3,000,000 at par, giving each P1,000 bond a

detachable warrant enabling the holder to purchase two shares of stock at P40

each for a 1-year period. The bonds would sell at P996 per P1,000 bond

without the warrant.

July 1 The company issued rights to stockholders (one right on each share, exercisable

within a 30-day period) permitting holders to acquire one share at P40 with

every 10 rights submitted. All but 9,000 rights were exercised on July 31, and

the additional stock was issued.

Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised.

Dec. 1 The market price per share dropped to P33 and options came due. Because the
market price was below the option price, no remaining options were exercised.

Dec. 31 Net income for 2018 was P375,750.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31, 2018:

1. Common stock
a. P1,165,950
b. P1,250,775
c. P1,275,075
d. P1,273,050

2. Total additional paid-in capital

a. P12,629,175
b. P11,283,300
c. P12,329,475
d. P12,604,200

3. Retained earnings
a. P870,750
b. P1,095,750
c. P1,287,000
d. P981,225

4. Total stockholders’ equity

a. P13,545,000
b. P15,000,000
c. P14,676,000
d. P14,973,000

PROBLEM NO. 2

Topnotcher Company’s accounting records showed the following investments at January 1, 2018:

Common stock:
Ying Company (1,000 shares) P 500,000
Yang Company (5,000 shares) 5,000,000
Parking lot (leased to Yipee Company) 2,500,000
Trademark 2,000,000
Total investments P10,000,000

Additional information:

Topnotcher owns 1% of Ying and 30% of Yang. During the year ended December 31, 2018, Topnotcher
received cash dividends of P350,000 from Ying and P750,000 from Yang, whose 2018 net earnings were
P4,000,000 and P10,000,000 respectively.

The Yipee lease which commenced on January 1, 2017 is for 5 years at an annual rental of P1,250,000.
In addition, on January 1, 2017, Yipee paid a nonrefundable deposit of P400,000 as well as a security
deposit of P250,000, to be refunded upon expiration of lease. Topnotcher received P1,250,000 rent from
Yipee in 2018.

The trademark was licensed to Palace Company for royalties of 10% of sales of the trademark items.
Royalties are payable semiannually on March 1, for sales in July through December of the prior year, and
on September 1, for sales in January through June of same year. On March 1, 2018 and 2018, Topnotcher
received royalties of P500,000 and P750,000, respectively. On September 1, 2017 and 2018, Topnocther
received royalties of P1,000,000 and P1,500,000 respectively. Palace Company’s sales of the trademarked
items totaled P4,000,000 for the last half of 2018.

QUESTIONS:

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

1. Total income from investments in equity securities

a. P3,350,000
b. P4,100,000
c. P1,100,000
d. P3,000,000

2. Rent income for 2018

a. P1,250,000
b. P1,650,000
c. P1,330,000
d. P1,380,000

3. Royalty income for 2018

a. P1,500,000
b. P2,500,000
c. P2,000,000
d. P1,900,000

PROBLEM NO. 3
The following independent situations relate to the audit of shareholders’ equity. Answer the questions at
the end of each situation.
MANDY CO. was organized at the beginning of the current year. The following shareholders’ equity
accounts are included in the entity’s year-end trial balance.

Preference share capital, P100 par, authorized 100,000 shares,

issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000

Ordinary share capital, P10 par value, authorized 200,000 shares,

issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000

The following current year transactions relate to Mandy Co.’s shareholders’ equity:
Immediately after Mandy Co. was organized, it received subscriptions to 60,000 preference shares.
Subscriptions to ordinary shares were also received on the same date.

During the year, subscriptions were received for an additional 12,000 preference shares at a price of P120
per share.

Cash payments were received from subscribers at frequent intervals for several months after subscription.
The company’s policy is to issue share certificates only upon full payment of the share subscription.

Also during the current year, Mandy Co. issued 24,000 ordinary shares in exchange for a tract of land with
a fair value of P690,000.

1. What is the total subscription price of the ordinary shares originally subscribed?
a. P4,290,000
b. P3,840,000
c. P3,600,000
d. P4,050,000

2. How much was collected from the subscribers of preference shares?

a.P1,440,000
b.P5,640,000
c. P7,440,000
d. P7,080,000

3. The company’s statement of financial position at the end of the current year should report contributed
capital of
Preference Ordinary
a. P7,440,000 P4,290,000
b. 7,080,000 3,210,000
c. 6,480,000 2,490,000
d. 6,840,000 360,000