Accountancy Program

FINAL Examination in AUDAPP2

Name of student: __________________________________ Score: ___________

Class Schedule: __________________________________ Date: ___________

INSTRUCTIONS: Read each problem carefully. Answer the question(s) for each problem. Show
all supporting computations on your answer sheet. Use T-accounts to support your answers.
Write your final answers in the table given below.

1. 6. 11. 16. 21.

2. 7. 12. 17. 22.
3. 8. 13. 18. 23.
4. 9. 14. 19. 24.
5. 10. 15. 20. 25.

PART I: THEORIES (1PT EACH)

1. All share capital transactions should ultimately be traced to the

a. Numbered stock certificates.
b. Minutes of the Board of Directors.
c. Cash receipts journal.
d. Cash disbursements journal.

2. Which of the following information is most important when auditing shareholder’s equity?
a. Entries in the share capital account can be traced to a resolution in the minutes of the
board of directors’ meetings.
b. Share dividends and/or shares splits during the year were approved by the
shareholders.
c. Share dividends are capitalized at par or stated value on dividend declaration date.
d. Changes in the share capital account are verified by an independent stock transfer
agent.

3. When a corporate client maintains its own stocks records, the auditor primarily will rely
upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate
state official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.

4. When a client company does not maintain its own stock records, the auditor most likely will
2nd semester AY 2019 – 2020 Page 1 of 5
 a. Obtain written confirmation from the transfer agent and registrar concerning the
number of shares issued and outstanding.
b. Inspect the stock book at year-end and accounting for all certificate numbers.
c. Review of the corporate minutes for information as to shares outstanding.
d. Confirm the number of shares outstanding at year-end with the appropriate state
official.

5. The primary responsibility of a bank acting as registrar of capital stock is to

a. Verify that stock is issued in accordance with the authorization of the board of directors
and the articles of incorporation.
b. Act as an independent third party between the board of directors and outside investors
concerning mergers, acquisitions, and the sale of treasury stock.
c. Ascertain that dividends declared do not exceed the statutory amount allowable in the
state of incorporation.
d. Account for stock certificates by comparing the total shares outstanding to the total in
the shareholders’ subsidiary ledger.

6. During the course of an audit, an auditor observes that the recorded interest expense
seems excessive in relation to the balance in the long term debt. This observation could lead
the auditor to suspect that
a. Long term debt is overstated.
b. Long term debt is understated.
c. Premiums on bonds payable is understated.
d. Discounts on bonds payable is overstated.

7. An auditor`s program to examine long term debt most likely would include steps that
require
a. Correlating interest expense recorded for the period with outstanding debt.
b. Inspecting the accounts payable subsidiary ledger for unrecorded long term debt.
c. Comparing the carrying amount of the debt to its year-end market value.
d. Verifying the existence of the holders of the debt by direct confirmation.

8. A CPA analyzes the accrued interest payable accounts for the year, recomputes the
amounts of payments and beginning and ending balances and reconciles to the interest
expense account. Which error or questionable practice below has the best chance of being
detected by this specific audit procedure?
a. Interest paid on an open account was charged to the purchase account.
b. Interest revenue of P120 on a note receivable was credited against miscellaneous
expense.
c. A note payable had not been recorded. Interest of P300 on the note was properly paid
and charged to the interest expense account.
d. There was a violation of a term in the client`s loan agreement prohibiting dividends on
common stocks unless net income available for interest and dividends is at least three
times interest requirements.

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9. An audit procedure that provides evidence about proper valuation of trading securities
arising from a short-term investment of excess cash is
a. Recalculation of investment carrying value by applying the equity method.
b. Comparison of carrying value with current market quotations.
c. Confirmation of securities held by broker.
d. Calculation of premium or discount amortization.

10. To satisfy the valuation assertion when auditing an investment accounted for by the equity
method, an auditor most likely would

a. Review the broker’s advice or canceled check for the investment’s acquisition.
b. Obtain market quotations from the financial newspapers of periodicals.
c. Examine the audited financial statements of the investee company.
d. Inspect the stock certificates evidencing the investment.

CASE NO. 1

CLICK Corp., organized on June1,2020, was authorized to issue stock as follows:

800,000 shares of 9%preferred stock,convertible,P100 par

2,500,000 shares of common stock,P2.50 stated value

During the remainder of the fiscal year ended May 31,2021 the following transactions were
completed in the order given:

 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares of
common stock were subscribed for at P26. Both subscriptions were payable 30% upon
subscription, the balance in one payment.
 The second subscription payment was received, except one subscriber for 60,000
shares of common stock defaulted on payment. The full amount paid by this subscriber
was returned, and all of the fully paid stock was issued.
 150,000 shares of common stock were reacquired by purchase at P28.
 Each share of preferred was converted into four shares of common stock.
 The treasury stock was exchanged for machinery with a fair market value ofP4,300,000.
 There was a 2-for-1stock split, and the stated value of the new common stock is P1.25.
 Net income was P830,000.

Based on the above and the result of your audit, determine the following as of MAY 31, 2021:
11. Common Stock
12. Total additional Paid-In Capital
13. Total Contributed Capital
14. Total Legal Capital
15. Total Stockholders Equity

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CASE NO. 2

Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2015. All the
financial asset were acquired in 2015:

Financial asset Acquisition Cost

Aye Corp. Stocks, 20,000 shares P590,000
Bee Inc. Stocks, 40,000 shares 1,100,000
See Co. 10%, P2M bonds 1,973,000
Dee Corp. Stocks, 50,000 shares 2,400,000

Audit notes:

a. Aye Corp. shares were acquired with an intention of generating short-term profits from
the share price’s fluctuations. The company paid P29.50 per share, which included the
P0.50 per share broker’s fees and commissions. The shares were acquired on February
20, 2015. A P2 per share cash dividends were received on March 30. These dividends
were declared by Aye Corp. on January 20, 2015 to stockholders as of record date
March 1, 2015.
b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the
acquisition of Bee Inc. on March 1, 2015. These shares were acquired for trading
purposes. A P3 per share dividends were received from the said shares on May 3, 2015.
These dividends were declared on April 1 to stockholders as of record date April 20.
c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were
acquired on October 1, 2015 at P1,973,000, when the prevailing effective interest rate
on similar instrument was at 12%. The bonds shall mature on December 31, 2017. The
company has a business model of holding debt securities for short-term profits.
d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and
commissions on June 30, 2015. Dee Corp. had a total of 200,000 shares outstanding on
the same date. The company received P5 dividends per share form Dee on December
20, 2015.
e. The following information were deemed relevant at year-end and no entries had been
made yet by the company to reflect any of the following information:

Aye Corp. Bee Inc. See Co. Dee Corp.

Net income in 2015 P1,200,000 P1,500,000 P2,000,000 P2,240,000
Fair Value P35/sh P25/sh 11% P51/sh

Requirements:

16. What is the unrealized holding gain/loss to be reported in the 2015 statement of
comprehensive income?
17. What is the correct carrying value of investments that should be presented as current
asset?
18. What is the correct carrying value of investment in Dee Corp. shares that should be
presented in the 2015 Statement of Financial Position?
19. Assuming that the company’s business model regarding debt securities has an
objective of collecting contractual cash flows, what is the correct carrying value of
investment in See Co. Bonds that should be presented in the 2015 Statement of
Financial Position?

2nd semester AY 2019 – 2020 Page 4 of 5

CASE NO. 3

An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on
condition that the employees remain in its employ for the next three years.
During Year 1, 35 employees left. The entity estimates that a further 60 will leave during Years 2
and 3. During Year 2, 40 employees have left and the entity estimates that a further 25 will leave
during the Year 3. During Year 3, 22 employees left. At the end of Year 3, 150 employees
exercised their SARs, another 140 employees exercised their SARs at the end of year 4 and the
remaining 113 employees exercised their SARs at the end of Year 5.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists
as shown below. At the end of Year 3, all SARs held by the remaining employees vested. The
intrinsic values of the SARs at the date of exercise (which equal cash paid out) at the end of
Years 3, 4, and 5 are shown below.

YEAR FAIR VALUE INTRINSIC VALUE

1 P10
2 11
3 12 P8
4 15 10

5 12

REQUIRED:
20. What amount of compensation expense should be recognized in Year 2?
21. What amount of compensation expense should be recognized in Year 4?
22. What amount of salaries payable should the entity report at the end of Year 3?

CASE NO. 4
On January 1, 2020, Oroquieta Co. issued a 3-year bonds with a face value of ₱3,000,000 for
₱2,850,756. The bonds carry an interest of 8% per year payable annually on December 31. On
the date of issuance, the company incurred and paid commission to underwriters of ₱15,000.
The bonds payable is measured at fair value through profit or loss.The bonds are to be
appropriately classified as financial liabilities at fair value through profit or loss. On December
31, 2020, the bonds are quoted at 103%. Assume that there are no changes due to credit risk.
On January 1, 2021, the bonds were retired at 104.

Assuming the bonds payable is measured at FVPTL:

23. How much is the interest expense for 2020?
24. How much is the unrealized loss (or gain) in 2020 to be recognized in the profit or loss?
25. How much is the realized loss (or gain) on derecognition in 2021 to be recognized in
the profit or loss?

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