PROBLEM NO.

1
You were engaged by MISMO COMPANY to audit its financial statements for the year 2005.
During the course of your audit, you noted that the following trading securities were properly
reported as current assets at December 31, 2004:

Cost Market
Aquata Corporation, 10,000 shares,
convertible preferred shares P 900,000 P 975,000
Andrina, Inc., 60,000 shares of common stock 1,350,000 1,485,000
Attina Co., 20,000 shares of common stock 1,237,500 900,000
P3,487,500 P3,360,000

The following sale and conversion transactions transpired during 2005:

Mar. 27 Sold 25,000 shares of Andrina for P33.75 per share.
April 15 Sold 5,000 shares of Attina for P45 per share.
Sept. 21 Converted 5,000 shares of Aquata’s preferred stock into 15,000 shares of
Aquata’s common stock, when the market price was P78.75 per share for the
preferred stock and P47.25 per share for the common stock.

The following 2005 dividend information pertains to stocks owned by MISMO:

Jan. 12 Attina issued a 10% stock dividend when the market price of Attina’s
common stock was P49.50 per share.
March 31 and Aquata paid dividends of P2.50 per share on its preferred stock, to
Sept. 30 stockholders of record on March 15 and September 15, respectively.
Aquata did not pay dividends on its common stock during 2005.
July 1 Andrina paid a P2.25 per share dividend on its common stock.
June 30 Adella paid semi-annual dividends of P1.50 on each of these dates.
and Dec. 31 Adella’s net income for the year ended December 31, 2005 was
P2,400,000.

On January 2, 2005, MISMO purchased 100,000 shares of Adella Corporation common stock for
P3,600,000, representing 20% of Adella’s outstanding common stock and an underlying equity of
P3,150,000 in Adella’s net assets on January 2, 2005.

MISMO intends to hold Adella’s stock as a long-term investment, with the remaining investments
being considered as held for trading. Market prices per share of the securities were as follows:
12/31/2005 12/31/2004
Aquata Corp., preferred 92.25 97.50
Aquata Corp., common 42.75 38.25
Andrina, Inc., common 22.50 24.75
Attina Co., common 40.50 45.00
Adella Corp., common 40.00 36.75

All of the foregoing stocks are listed in the Philippine Stock Exchange. Declines in market value
from cost would not be considered permanent.