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 month. The cash dividends which have been declared

since inception of the company through June 30,
BEBE CO. was formed on July 1,2010. It was 2013, are shown below:
authorized to issue 1,800,000 shares of P10 par
value ordinary shares and 600,000 shares of 8 Declaration Date SC-Ordinary SC-Preference
percent P25 par value, cumulative and non
participating preference shares. BEBE CO. has a July 12/15/11 P0.30 per share P1.00
1-June 30 fiscal year. per share
06/15/12 P0.30 per share P1.00
per share
The following information relates to the shareholders’
12/15/12 --- P1.00 per share
equity accounts of BEBE CO.:

Ordinary Shares No cash dividends were declared during June 2013

due to the company’s liquidity problems.
Prior to the 2012-2013 fiscal year, BEBE CO. had
660,000 ordinary shares issued as follows: Retained Earnings

1. 510,000 shares were issued for cash in July 1, As of June 30,2012, BEBE CO.’s retained earnings
2010, at P31 per share. account had a balance of P4,140,000. For the fiscal
year ending June 30, 2013, BEBE CO. reported net
2. On July 24, 2010, 30,000 shares were
income of P240,000
exchanged for a plot of land which cost the seller
P420,000 in 2004 and had an estimated market Required:
value of P1,320,000 on July 24,2010.
Compute the adjusted balances of the following as of
3. 120,000 shares were issued on March 1, 2011, June 30,2013:
for P42 per share.
Reclassification
During the 2012-2013 fiscal year, the following
transactions regarding ordinary shares took place: PFRS 9, paragraph 5.3, provides that an entity shall
reclassify financial assets only when it changes its
November 30,2012 - BEBE CO. purchases 12,000 of business model for managing the financial assets.
its own shares on the open market at P39 per share
Investment in equity securities
December 15,2012 - BEBE CO. declared a 5% share
Under the Application Guidance B5.5 of PFRS 9, all
dividend for shareholders of record on January15,
investments in equity instruments and contracts on
2013, to be issued on January 31, 2013. BEBE CO. those instruments must be measured at fair value
was having a liquidity problem and could not afford a
cash dividend at the time. BEBE CO.’s ordinary However, in limited circumstances, cost may be an
shares were selling at P53 per share on December appropriate estimate of fair value.
15, 2012.
When to recognized dividends as income
June 20,2013 - BEBE CO. sold 3,000 of its own
PAS 18, paragraph 29, provides that “dividends”
ordinary shares that it had purchased on N shall be recognized as revenue when the
November 30, 2012, for P126,000. shareholder’s right to receive payment is established

Preference Shares Investment in associate

BEBE CO. issued 240,000 preference shares at P44 In certain circumstances, an entity may purchase
per share on July 1, 2011. enough share of another entity in order to exert
significant influence or control over the financial and
operating policies of the investee entity
Cash Dividends
* Significance influence is the power to participate
BEBE CO. has followed a schedule of declaring cash in the financial and operating policy decisions of the
dividends in December and June, with payment investee but not control or joint control over those
being made to shareholders of record in the following policies

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The assessment of significant influence is a matter of Amortization of premium or discount
judgment. However, PAS 28 provides a practical
guidance to assist management in making such PFRS 9 requires that investment in bonds shall be
assessment. measure at amortized cost. This means that any
premium or discount on the acquisition of long term
Equity method investment in bonds must be amortized.

The equity method is based on the economic Investment property

relationship between the investor and the investee.
The investor and the investee are viewed as a single * Land and building for rental or capital appreciation
economic unit. * Land held for undetermined use, building under
construction for use as investment property
Investee with heavy losses * Land and building leased by parent to the
subsidiary under an operating lease – investment
Under the equity method, if an investor’s share of property for separate FS and PPE for consolidated
losses of an associate equals or exceeds the carrying FS
amount of an investment, the investor discontinues * Cost model – subject to depreciation
recognizing its share of further losses. The * Fair value model – no depreciation but any
investment is reported at nil or zero value. changes in fair value are included in profit or loss

Impairment Loss Property, plant and equipment

PAS 28 in conjunction with PAS 36 on “impairment of > On account – Invoice price less discount whether
assets” requires that an impairment loss shall be taken or not
recognized “whenever the carrying amount of the > On installment – Cash price or PV of future
investment in associate exceeds its recoverable payments
amount”. > Issuance of shares – FV of assets, FV of shares or
par value of shares
Investee with preference share > Issuance of bonds payable – FV of bonds payable,
FV of asset or face value of bonds payable
When an associate has outstanding cumulative > Exchange with commercial substance – FV of asset
preference share, the investor shall compute its given plus cash payment on the part of payor or
share of earnings or losses after deducting the minus cash received on the part of recipient
preference dividends, whether or not such dividends > Exchange without commercial substance –
are declared. Carrying amount of asset given plus cash payment
or minus cash received. No gain or loss on exchange
When an associate has outstanding non cumulative is recognized
preference share, the investor shall compute its
share of earning or losses after deducting the Multiple Choices:
preference dividends only when declared.
1. On January 1, 2013, John Company purchased
Other comprehensive income of associate equity securities held for trading. The cost and
market value on December 31, 2013 were:
PAS 28, paragraph 19A, provides that if an investor
losses significant influence, the investor shall Cost Market
account for all amounts recognized in other Security A 1,000,000 1,200,000
comprehensive income by the associate on the same Security B 2,000,000 1,500,000
basis as would be required if the associate had Security C 3,000,000 3,100,000
directly disposed of the related assets.
On July 1, 2014 the entity sold Security A for
1,800,000. What amount should be reported as loss
Dividends from preacquisition retained earnings on sale of trading securities in the 2014 income
statement?
This provision is now amended. There is no longer a. 800,000
distinction between preacquisition dividends and b. 600,000
postacquisition dividends c. 0
d. 400,000
Investment in associate achieved in stages
2. Crack Company acquired a financial asset for
The investment in associate achieved in stages is not 5,000,000. Broker fees of 500,000 were incurred in
covered by PAS 28. The principles for business relation to the purchase. What amount should
combinations achieved in stages must be applied. initially be recognized for the financial asset,
respectively if it is classified as at FVTPL and as
PFRS 3, paragraph 42, provides that in a business FVTOCI?
combination achieved in stages, the acquirer shall a. 5,000,000 and 5,500,000
remeasure the previously held equity interest at fair b. 5,500,000 and 5,000,000
value and recognize the resulting gain or loss in c. 5,500,000 and 5,500,000
profit or loss. d. 5,000,000 and 5,000,000

Financial Assets at amortized cost 3. On January 1, 2013, Ciarra Company acquired a

nontrading equity investment for 5,000,000. On
PFRS 9, paragraph 4.2, provides that a financial December 31, 2013, the market value of the
asset shall be measured at amortized cost if both of investment was 4,000,000. On December 31, 2014,
the following conditions are met: the issuer of the equity instrument was in severe
a. The business model is to hold the financial asset financial difficulty and the fair value of the equity
in order to collect contractual cash flows on specified investment had fallen to 2,300,000.
dates
b. The contractual cash flows are solely payments What amount of cumulative loss should be reported
of principal and interest on the principal amount in the statement of changes in equity for 2014 as
outstanding component of other comprehensive income if the

VJ De Leon AP - 01 Page 2
investment is designated as measured at FVTOCI 8. Myra Company owned 50,000 shares of another
(PFRS 9)? entity. These 50,000 shares were originally
a. 1,000,000 purchased for 100 per share. On October 1, 2013,
b. 2,700,000 the investee distributed 50,000 right to the entity.
c. 1,700,000 The entity was entitled to buy one new share for 140
d. 0 and five of these rights. On October 1, 2013, each
4. On January 1, 2013, Shiela Company purchased share had a market value of P 150 and each right
bonds with face value of 5,000,000 for 6,000,000. had a market value of 10.On December 31, 2013,
The bonds were acquired for the purpose of selling in the entity exercised all rights. The stock rights are
the short term in order to realize fair value changes. accounted separately and measured initially at fair
On December 31, 2013, the entity changed the value. What total cost should be recorded for the
business model in managing the bonds from realizing new shares that are acquired by exercising the
short term gains to collecting cash flows that are rights?
solely payments of principal and interest. On such a. 1,400,000
date, the fair value of the bonds is 5,700,000. What b. 1,900,000
is the initial carrying amount of the trading securities c. 1,650,000
on December 31, 2013? d. 1,000,000

a. 5,000,000 9. On January 1, 2013, Arlen Company purchased

b. O 50,000 shares of another entity for 3,600,000. On
c. 5,700,000 October 1, 2013, the entity received 50,000 stock
d. 5,500,000 rights from the investee. Each right entitled the
shareholder to acquire one share for 80. The market
5. Aniway Company provided the following data price of the investee’s share was 100 immediately
pertaining to dividends on ordinary share before the rights were issued and 90 immediately
investments for the current year after the rights were issued. On December 1, 2013,
the entity exercised all stock rights. On December
* On October 1, the entity received 600,000 31, 2013, the entity sold 25,000 shares at 90 per
liquidating dividends from A Company. The entity share. The stock rights are not accounted for
owned a 10% interest in A Company. separately. What amount of gain on sale of
* The entity owned a 20% interest in B Company investment should be recognized in 2013?
which declared and paid a 4,000,000 cash dividend a. 450,000
to shareholders on December 31 b. 700,000
* On December 1, the entity received from C c. 350,000
Company a dividend in kind of one share of D d. 250.000
Company for every 4 C Company shares held. The
entity had 100,000 C Company shares which have a 10. On July 1, 2013, Jennifer Company acquired
market price of P50 per share on December 1. The 20% of the outstanding ordinary shares of another
market price of D Company share was 10. entity for 5,000,000. The carrying amount of the
acquired shares was 4,000,000. The excess of cost
What amount should be reported as dividend income over carrying amount was attributable to an
for the current year? identifiable asset which was undervalued on the
a. 1,650,000 investee’s statement of financial position and which
b. 1,050,000 had a remaining useful life of 5 years. For the year
c. 850,000 ended December 31, 2013, the investee reported net
d. 250,000 income of 6,000,000 and paid cash dividends of
1,000,000 on ordinary shares capital and issued
6. On January 1, 2013, Gracelyn Company acquired 10% stock dividend on December 31, 2013. What is
50,000 ordinary shares of another entity for a total the carrying amount of the investment in associate
consideration of 5,000,000. On October 1, 2013, the on December 31, 2013?
entity received from the investee a preference stock a. 5,900,000 b. 5,400,000
dividend of one share for every 5 ordinary shares c. 5,300,000 d. 5,800,000
held. On this date, the market price of the investee’s 11. On January 1, 2013, Clariza Company acquired
ordinary share was 140 and the market price of the 40% of the ordinary shares of an associate. On such
investee’s preference share was 100. What amount date, assets and liabilities of the investee were
should be reported as investment in preference recorded at fair value and the acquisition showed
shares? that goodwill of 1,000,000 was acquired. The
a. 1,000,000 investee reported net income of 8,000,000 for 2013
b. 625,000
c. 500,000 In December 2013, the investee sold inventory
d. 0 costing 3,000,000 to Clariza Company for 5,000,000.
The inventory remained unsold by Clariza Company
7. During 2013, Geraldine Company purchased on December 31, 2013
shared of another entity as follows:
On January 1, 2013, the investee sold an equipment
Jan 1 20,000 shares at 100 2,000,000 to Clariza Company with carrying amount of
Jul 1 30,000 shares at 120 3,600,000 2,500,000 for 4,000,000. The remaining life of the
equipment is 5 years.
The transactions for 2014 are as follows: What amount of investment income should be
reported by Clariza Company for 2013?
January 1 Received 20% stock dividend a. 1,920,000
August 1 Received cash dividend of 10 per share b. 1,800,000
December 1 Sold 30,000 shares at 150 per share c. 3,200,000
d. 2,400,000
What total amount of income from the investment
should be reported for 2014? 12. On January 1, 2013, Rina Company purchased
a. 1,900,000 40% of the outstanding ordinary shares of another
b. 1,700,000 entity for 5,000,000 when the net assets of the
c. 2,500,000 investee amount to 10,000,000. At acquisition date,
d. 2,300,000 the carrying amounts of the identifiable assets and
liabilities of the investee were equal to their fair

VJ De Leon AP - 01 Page 3
value, except for equipment for which the fair value investment. What total amount of income should be
was 2,000,000 greater than carrying amount and reported for 2013?
inventory whose fair value was 1,000,000 greater a. 850,000
than cost. The equipment has a remaining life of 5 b. 790,000
years and the inventory was all sold during 2013. c. 950,000
The investee reported net income of 6,000,000 for d. 890,000
2013 and paid no dividends. What is the maximum
amount which could be included in income before tax 17. Princess Company purchased an investment
to reflect the investor’s equity in earnings of the property on January 1, 2011 at a cost of 2,200,000.
investee for 2013? The property had a useful life of 40 years and on
a. 2,400,000 December 31, 2013 had a fair value of 3,000,000.
b. 2,240,000 On December 31, 2013 the property was sold for net
c. 2,040,000 proceeds of 2,900,000. The entity used the cost
d. 1,840,000 model to account for investment property. What is
the gain or loss to be recognized for 2013 regarding
13. On January 1, 2013, Cathy Company acquired a the disposal of the property?
10% interest in an investee for 3,000,000. The a. 865,000 gain
investment was accounted for at fair value through b. 810,000 gain
OCI. The fair value of the investment was 3,500,000 c. 100,000 loss
on December 31, 2013. On January 1, 2014, the d. 700,000 loss
entity acquired a further 15% interest in the investee
for 8,500,000. On such date, the carrying amount of 18. Jean Company and its subsidiaries provided the
the net assets of the investee was 36,000,000. The following properties owned by the group.
fair value of the net asset of the investee is equal to
carrying amount except for equipment whose fair Land held for undetermined 1,000,000
value was 4,000,000 greater than carrying amount. future use
The equipment had a remaining life of 5 years. The Vacant building to be leased out
investee reported net income of 8,000,000 for 2014 under an operating lease 2,000,000
and paid dividend of 5,000,000 on December 31, Property held for use in production 4,000,000
2014. No dividend was paid in 2013 by the investee. Property held by a subsidiary, a real
estate firm, in the ordinary course
A. Under the “fair value approach”, what is the of business 3,000,000
goodwill on January 1, 2014? Building owned by subsidiary and for
a. 3,000,000 which the subsidiary provides security
b. 2,000,000 and maintenance services to the lessee 2,500,000
c. 2,500,000 Land leased to a subsidiary under an
d. 0 operating lease 1,500,000
Equipment leased to an unrelated party
B. What is the carrying amount of the investment in under an operating lease 500,000
associate on December 31, 2014? Building under construction for use as
a. 12,550,000 investment property 3,500,000
b. 10,550,000
c. 11,950,000 In the consolidated statement of financial position of
d. 12,750,000 the parent and its subsidiaries, what total amount
should be reported as investment property?
14. On July 1, 2013, Claire Company pad 1,198,000 a. 6,000,000
for 10% bonds with a face amount of 1,000,000 to b. 5,500,000
be held to maturity. Interest is paid on June 30 and c. 8,000,000
December 31. The bonds were purchased to yield d. 9,000,000
8%. The entity used effective interest method to
recognized interest income from this investment. 19. Lovely Company commenced operations at the
What is the carrying amount of the bond investment beginning of the current year. The following costs
on December 31, 2013? are incurred by the entity:
a. 1,207,900
b. 1,198,000 * Payment of land and an old building which is to be
c. 1,195,920 demolished - 1,000,000
d. 1,193,050 * Payment of property taxes in arrears - 130,000
* Title search and insurance – 50,000
15. On July 1, 2013, Jeza Company purchased as a * Option paid for an alternative land which was not
long term investment 1,000,000 face value 8% acquired – 30,000
bonds for 946,000 including accrued interest of * Cost of relocating squatters – 10,000
40,000. The bonds were purchased to yield 10% * Special assessment for city improvements on
interest. The bonds pay interest annually on water and sewer system – 150,000
December 31. The effective interest method of * Demolition of old building, net of salvage value of
amortization is used. What is the carrying amount of 10,000 – 100,000
the investment in bonds on December 31, 2013? * Survey before construction of new building –
a. 911,300 60,000
b. 916,600 * Contract price for factory building – 5,000,000
c. 953,300 * Architect fee – 230,000
d. 960,600 * Building permit or payment to city hall for
approval of building construction – 120,000
16. On January 1, 2013, Alyssa Company purchased * Excavation before new construction – 110,000
12% bonds with face amount of 5,000,000 for * Liability insurance during construction – 55,000
5,500,000 including transaction cost of 100,000. The * Safety fence around construction site – 35,000
bonds provide an effective yield of 10%. The bonds * Removal of safety fence after completion of
are dated January 1, 2013, mature on January 1, factory building – 20,000
2018 and pay interest annually on December 31 of * New fence surrounding the factory – 80,000
each year. The bonds are quoted at 115 on * Driveways, parking bays and safety lighting –
December 31, 2013. The entity has irrevocably 550,000
elected to use the fair value option for the bond * Cost of trees, shrubs and other landscaping –
250,000

VJ De Leon AP - 01 Page 4
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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