Accm458 Acn1 Group 2

PROBLEM NO. 1 Presented below are unaudited balances of selected accounts of Westbrook Corporation as of December 31, 2017. During the course of your audit of Westbrook’s books, you obtained additional information affecting these accounts.

Cash Accounts receivable Inventory Accounts payable Sales, Net

Debit P 2,000,000 6,000,000 10,000,000

Credit

P 4,000,000 50,000,000

Additional information: a)

On December 28, 2017, the entity wrote and recorded checks to creditors totaling P300,000 that were mailed on January 5, 2018.

b)

Checks in the amount of P250,000 were written to vendors and recorded on December 29, 2017. The checks were dated January 5, 2018.

c)

At December 31, 2017, the entity has a P60,000 debit balance in its accounts payable to a supplier resulting from advance payment. This was offset against the accounts with credit balances.

d)

On December 26, 2017, a supplier authorized the entity to return goods shipped and billed at P80,000 on December 3, 2017. The goods were returned on December on December 28, 2017. The supplier’s credit memo was received and recorded on January 5, 2018.

e)

Goods shipped to the entity, f.o.b. seller on December 20, 2017, from a vendor were lost in transit. The invoice price was P20,000. This transaction was not recorded since the common carrier has acknowledged the responsibility for the loss of the merchandise.

f)

The bank returned on December 29, 2017 a customer check for P30,000 marked as “DAIF” but no entry was made.

g)

On December 31, 2017, the company received and recorded customer’s postdated check amounting to P90,000.

h)

You observed the taking of the physical inventory of the entity on December 30, 2017. Only merchandise shipped by the entity to customers up to and including December 30, 2017 has been eliminated from inventory. The inventory of P10,000,000 is based on the physical inventory count. All sales are on account and made on a FOB shipping point basis. The following sales invoices were entered in the sales books for the month of December 2017 and January 2018, respectively.

1) 2) 3) 4) 5)

6) 7) 8)

Sales Invoice Amount P150,000 100,000 50,000 200,000 500,000

DECEMBER 2017 Sales Invoice Date Cost Dec. 21 P100,000 Dec. 31 40,000 Dec. 29 30,000 Dec. 31 120,000 Dec. 30 280,000

P300,000 200,000 600,000

JANUARY 2018 Dec. 31 P200,000 Jan. 02 115,000 Jan. 03 475,000

Date Shipped Dec. 31, 2017 Nov. 03, 2017 Dec. 30, 2017 Jan. 03, 2018 Dec. 29, 2017 (shipped to consignee) Dec. 30, 2017 Jan. 02, 2018 Dec. 31, 2017

QUESTIONS: Based on the above and result of your audit, answer the following: 1 The adjusted cash as of December 31, 2047 is a. P2,430,000 c. P2,520,000 b. P2,460,000 d. P2,550,000 2 The adjusted accounts receivable as of December 31, 2017 is a. P6,220,000 c. P6,290,000 b. P6,230,000 d. P6,230,000 3 The adjusted inventory as of December 31, 2017 is a. P9,585,000 c. P9,285,000 b. P9,705,000 d. P10,180,000 4 The adjusted accounts payable as of December 31, 2017 is a. P4,490,000 c. P4,550,000 b. P4,530,000 d. P4,630,000 5 The adjusted sales for the year ended December 31, 2017 a. P50,080,000 c. P50,200,000 b. P50,100,000 d. P50,320,000

SOLUTION: CASH P 2,000,000

A/R P 6,000,000

INVENTORY P 10,000,000

A/P P 4,000,000

a)

300,000

300,000

b) c) d) e)

250,000 -

250,000

f)

(30,000)

30,000

g) h) 1 2 3

(90,000)

90,000

-

(100,000)

4

(200,000)

5

(500,000)

6 7

300,000

8

600,000

(475,000)

6,320,000

9,705,000

2,430,000

NET SALES P 50,000,000

(200,000) 280,000

(500,000) 300,000

600,000 4,550,000

50,200,000

Under the accrual basis of accounting (or accrual method of accounting), revenues are reported on the income statement when they are earned. When the revenues are earned but cash is not received, the asset accounts receivable will be recorded. IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.25] The revenue recognition principle states that one should only record revenue when it has been earned, not when the related cash is collected. For example, advance payment of the customer should not form part of income account, rather it should be a liability account. It can recognize the revenue immediately upon completion or rendering of service even if it does not expect payment from the customer for several weeks. This concept is incorporated into the accrual basis of accounting.

PROBLEM NO. 2 The following list of accounts and their balances represents the unadjusted trial balance of HARDEN COMPANY at Dec 31, 2017: Debit Cash Equity Investments (trading) Accounts Receivable Allowance for Doubtful Accounts Inventory Prepaid Rent Plant and Equipment Acc. Dep – Plant and Equipment Accounts Payable Bonds Payable Ordinary Share Capital Retained Earnings Sales Costs of Goods Sold Freight-out Salaries and Wages Expense Interest Expense Rental Income Miscellaneous Expense Insurance Expense

Credit

P 290,900 600,000 690,000 P 5000 547,200 360,000 1,600,000 147,400 113,700 900,000 1,700,000 971,800 2,148,000 1,544,000 110,000 320,000 20,400 216,000 8900 ____110,500 P6,201,900

_________ P,6,201,900

Additional Data: 1. The balance in the Insurance Expense Account contains the premium costs of three policies: a. Policy 1, remaining cost of P25,500, 1-year term, taken out on May 1, 2016; b. Policy 2, original cost of P72,000, 3-year term, taken out on October 1, 2017; c. Policy 3, original cost of P13,000, 1-year term, taken out on January 1, 2017. 2. On September 30, 2017, Harden received P216,000 rent from its lessee for eighteenmonth lease beginning on that date. 3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during a year are depreciated at half this rate. There were no purchases during the year. On December 31, 2016, the balance of the Plant and Equipment account was P2,400,000. 4. On December 28,2017, the bookkeeper incorrectly credited Sales for a Receipt on account in the amount of P100,000. 5. At December 31,2017, salaries and wages accrued but unpaid were P4,200,000. 6. Harden estimates that 1% of sales will become uncollectible. 7. On August 1, 2017, Harden purchased, as a short term investment, 600 P1,000, 7% bonds of Russel Corp. at par. The bonds mature on August 1, 2018. Interest payment dates are July 31 and January 31. 8. On April 30, 2017, Harden rented a warehouse for P30,000 per month, paying P360,000 in advance.

QUESTIONS: 1. What are the adjusted balances of the following accounts on December 31, 2017? Prepaid Insurance Insurance Expense a. P 6,000 P 104,500 b. 0 110,500 c. 54,000 56,500 d. 66,000 44,500 2. What is the total depreciation expense for the year ended December 31, 2017? a. P120,000 c. P200,000 b. P240,000 d. P160,000 3. What is the bad debt expense for the year ended December 31,2017? a. b.

P15,480 P25,480

c. P21,480 d. P20,480

4. What amount of interest and rent income should be reported in the income statement for the year ended December 31,2017?

a. b. c. d.

Interest Income P24,500 17,500 24,500 17,500

Rental Income P 36,000 180,000 180,000 36,000

5. What adjusting entry is necessary on December 31,2017 for the Prepaid rent account? a. Rent Expense Prepaid Rent b. Prepaid Rent Prepaid Rent c. Prepaid Rent Rent Expense d. Rent Expense Prepaid Rent

270,000 270,000 270,000 270,000 240,000 240,000 240,000 240,000

Solution: 1. D.  Prepaid Insurance ..................................................................... P66,000 Insurance Expense .............................................................. (Both Policies 1 and 3 have expired and their costs belong in Insurance Expense. The monthly premium on Policy 2 is P72,000 ÷ 36 = P2000. At 12/31/17, 33 months of insurance, or P66,000, remains unexpired)

P66,000

Insurance Expense of P110,500 – 66,000 = P44,500 2. C.  Depreciation Expense .............................................................. 200,000 Accumulated Depreciation ................................................. [(Equipment retired during 2017 = P2,400,000 – 1,600,000 = P800,000) 10% of 1600,000 = P160,000 5% of 800,000 = 40,000 Total depreciation = P200,000]

200,000

3. D.  Sales Revenue ........................................................................... 100,000 Accounts Receivable .......................................................... (To correct the entry made in error) 

Bad Debt Expense .................................................................... 20,480 Allowance for Doubtful Accounts ..................................... (Corrected Sales Revenue balance is P2,148,000 – 100,000 = P2,048,000. 1% of P2,048,000 is P20,480.)

4. D.  Rent Revenue ........................................................................... 180,000 Unearned Rent .................................................................... (Monthly rent is P216,000 ÷ 18 = P12,000. At 12/31/17, 15 mos. of rent, or P180,000, remains unearned)

100,000

20,480

180,000

Rental Revenue of P216,000 – 180,000 = P36,000 

Interest Receivable ................................................................... Interest Revenue ........................................................... (Monthly interest is P600,000 × .07 × 1/12 = P3500. 5 months' accrued interest is P17,500)

17,500 17,500

5. D. 

Rent Expense ....................................................................... 240,000 Prepaid Rent ............................................................ (To record 8 months' of rent expired at P30,000 per month)

240,000

PAS 17 par 50 Lease income from operating leases (excluding amounts for services such as insurance and maintenance) shall be recognized in income on a straight- line basis over the lease term, unless either: a. Another systematic basis or more representative of the time pattern in which use benefit derived from the leased asset is diminished, even if the payments to the lessors are not on that basis; or b. The payments to the lessor are structured to increase in line with expected general inflation to compensate for the lessor’s expected inflationary cost increases. If payments to the lessor vary according to factors other than inflation, then this condition is not met.interes PAS 16 par 50 The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset’s useful life.

PROBLEM NO. 3 James Company had the following bank reconciliation on June 30, 2017: Balance per bank statement, June 30, 2017 Add: Deposit in transit Total Less: Outstanding checks Balance per book statement, June 30, 2017

P3,000,000 400,000 3,400,000 900,000 P2,500,000

The bank statement for the month of July 2017showed the following: Deposits (including P200,000 note collected for James) Disbursements (including P140,000 NSF check and P10,000 service charge)

P9,000,000 P7,000,000

QUESTIONS: Based on the above and the result of your audit, you are to provide the answers to the following: 1 What is the amount of cash receipts per books in July? a. P9,600,000 c. P9,800,000 b. P9,400,000 d. P8,400,000 2 What is the amount of cash disbursement per books in July? a. P6,550,000 c. P7,450,000 b. P6,700,000 d. P5,950,000 3 What is the cash balance per books at July 31? a. P5,400,000 c. b. P5,350,000 d.

P4,950,000 P4,850,000

4 What is the adjusted cash balance at July 31? a. P5,400,000 c. b. P5,350,000 d.

P4,950,000 P4,850,000

5 Which statement is true regarding audit of cash? a. b.

c. d.

When the year-end cash balances is immaterial, the audit of the cash account is unnecessary. The risk of the company issuing checks near year-end and mailing them subsequently is not important to the auditor as the action does not affect cash balances. Cash is no longer considered highly susceptible to theft because of the advent of computers, safes and armored cars. The auditor is responsible for auditing the necessary disclosures when material lines of credit and compensating balance agreements have been made by the client with a lender.

Solution:

PROOF OF CASH

Balance per books Note Collected June July NSF Check June July Bank service charge June July Adj. book balances

Balance per bank Deposit in transit June July Outstanding checks June July Adj. bank balances

Balance June 30 P2,500,000 -

Receipts 9,400,000 200,000

-

Balance June 30 3,000,000 400,000

(140,000)

9,600,000

Receipts 9,000,000

10,000 6,700,000

(10,000) 5,400,000

Disbursements 7,000,000

Balance July 31 5,000,000

(400,000) 1,000,000

(900,000) 2,500,000

200,000 140,000

2,500,000

Disbursements 6,550,000

Balance July 31 5,350,000

9,600,000

1,000,000 (900,000) 600,000 6,700,000

(600,000) 5,400,000

Proof of cash facilitates discovering possible discrepancies in cash. Thus financial statements are fairly presented. PAS 1 presentation of financial statements’ objective is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with financial statements of previous periods and with the financial statements of other entities. The Standard sets out the following; overall requirements for the presentation of financial statements; guidelines for their structure; and minimum requirements for their content. OVERALL CONSIDERATIONS •Fair Presentation and Compliance with IFRSs •Going Concern •Accrual Basis of Accounting •Consistency of Presentation •Materiality and Aggregation •Offsetting •Comparative Information

PROBLEM NO. 4 The December 31, 2016 adjusted trial balance of Leonard Company shows the following:

Accounts receivable Allowance for bad debts

Debit 50,000

Credit 2,000

Additional information:  Cash sales of the company represents 10% of gross sales  90% of the credit sales customers do not take advantage of 2/10, n/30 terms  It is expected that cash discount of 300 will be taken on accounts receivable outstanding at December 31, 2017  Sales returns in 2016 amounted to 20,000. All returns were charge sales.  During 2017, accounts totaling to 2,200 were written off as uncollectible; bad debt recoveries during the year amounted to P150.  The allowance for bad debts is adjusted so that it represents certain percentage of the outstanding accounts receivable at year end. The required percentage at December 31, 2017 is 150% of the rate used on December 31, 2016. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. The accounts receivable as of December 31, 2017 is a) 150,000 b) 15,000 c) 16,667 d) 122,200 2. The allowance for doubtful accounts as of December 31, 2017 is a) 1,000 b) 6,000 c) 9,000 d) 7,332 3. The net realizable value of accounts receivable as of December 31, 2017 is a) 15,367 b) 140,700 c) 143,700 d) 114,568 4. The doubtful account expense for the year 2017 is a) 9,050 b) 6,050 c) 1,050 d) 7,382 5. When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would a) Inspect the allowance account to verify whether the accounts were subsequently written off. b) Increase the assessed level of detection risk for the valuation and completeness assertions c) Ask the client to contact the customers to request that the confirmations be returned. d) Increase the assessed level of inherent risk for the revenue cycle.

Solution: 1. A Expected cash discount Divide by percentage of cash discount Portion of AR that will be granted cash discounts Divide by percentage of total AR estimated to take advantage of the discount Accounts receivable, 12/31/2017

300 0.02 15,000 0.10 150,000

2. C Accounts receivable 12/31/2017 Multiply by bad debt rate (( 2,000 ÷ 50,000) x 1.50)) Allowance for doubtful accounts, 12//21/2017 3. B Accounts receivable 12/31/2017 Less: Allowance for doubtful accounts Allowance for sales discounts 300 . Net Realizable value, 12//21/2017 4. A Allowance for doubtful accounts, 12/31/2017 Add: Accounts written off Total Less: Allowance for doubtful accounts, 12/31/2016 Bad debt recoveries 150 Doubtful accounts expense for 2017 5. Answer auditors auditors auditors

150,000 0.06 9,000

150,000 9,000 9,300 140,700

9,000 2,200 11,200 2,000 2,150 9,050

(C) is correct. Where no response is received for a positive confirmation, the ordinarily send a reminder. Where there is still no response to the request, the consider contacting the recipient of the request to elicit a response. Where the are unable to obtain a response, the auditors use alternative audit procedures.



Accounts receivable is the result of selling goods and services on credit. Companies typically offer customers a certain number of days, most often 30, to pay outstanding balances from purchases.



Beginning balance of accounts receivable + net credit sales - cash collections - write-offs = ending balance of accounts receivable



Allowance for Doubtful Accounts is a contra current asset account associated with Accounts Receivable. When the credit balance of the Allowance for Doubtful Accounts is subtracted from the debit balance in Accounts Receivable the result is known as the net realizable value of the Accounts Receivable.

PROBLEM 5 Thomas Company has the following equity securities classified as available for sale at December 31, 2016: Cost 50,000 ordinary shares P1,600,000 of OK Corp. 100,000 ordinary 1,700,000 shares of PA

Fair Value 12/31/16 P1,500,000

12/31/15 P1,400,000

1,900,000

1,600,000

All of the securities had been purchased in 2015. In 2017, Thomas completed the following securities transactions:   

January 1 – purchased P1,000,000 8% bonds of X Corporation for P924 ,164 (including broker’s commission of P50,000). Interest is payable annually every January 1. The bonds mature on January 1, 2022. March 1 – sold 50,000 shares of OK Corp @ P35 less fees of P15,000. December 1 – bought 6,000 shares of BA Stores @ P50 less fees of P5,500. These shares are held for trading.

The fair values of the securities appeared as follows on December 31, 2017: Fair Value 100,000 shares of PA P2,000,00 6,000 shares of BA stores 315,000 X Corporation Bonds 980,000 Based on the above and the result of your audit, answer the following: 1. In relation to investment in shares classified as available for sale, the net amount to be recognized in 2017 profit or loss is a. Nil c. P150,000 b. P235,000 d. P135,000 2. In relation to investment in shares classified as held for trading, the net amount to be recognized in 2017 profit or loss is a. P20,500 c. P9,500 b. P15,000 d. Nil

3. Assuming the investment in bonds was acquired for the purpose of selling it in the near term, the net amount to be recognized in 2017 profit or loss is a. P135,836 c. P92,416 b. P105,836 d. Nil 4. Assuming the investment in bonds is available for sale, the net amount to be recognized in 2017 profit or loss is a. P135,836 c. P92,416 b. P105,836 d. Nil 5. Assuming the investment in bonds was acquired for the purpose of holding it until maturity, the net amount to be recognized in 2017 profit or loss is a. P135,836 c. P92,416 b. P105,836 d. Nil Solutions: 1. 50,000 shares of OK Corp Sold @ P35 Legal Fees Proceeds

P1,750,000 (15,000) 1,735,000

Cost of OK Corp Gain on Sale of OK Corp

(1,600,000) P135,000 (D)

2. 6,000 shares of BA Stores bought @P50 P300,000 Fair Value @ Dec. 31, 2017 315,000 Unrealized Gain 15,000 Legal Fees incurred in purchasing 6,000 shares (5,500) Net amount to be recognized in 2017 profit or loss P9,500 (C) 3. Fair Value of X Corp Bonds P980,000 Carrying Amount of Bonds (924,164) Unrealized Gain 55,836 Interest on Bonds (1,000,000 x 8%) 80,000 Net amount to be recognized in 2017 profit or loss P135,836 (A) Explanation: The bonds were acquired for the purpose of selling it in the near term. Thus, it is classified as FA@FVTPL held for trading which changes in Fair Value is recognized in P/L as well as the interest on bonds using the nominal interest rate.

4. Effective Interest on Note is 10% Carrying Amount of Bonds Multiplied by 10% rate Interest Income

P924,164 10% P 92,416 (C)

The basic theory I to find the effective rate that would equate the acquisition cost and the present value of the future cash flows from the bonds. Using Interpolation, the effective interest rate was found to be 10%. Using the present value table, the PV of 1 @ 10% for 5 periods is 0.6209 and the PV of annuity of 1 @ 10% for 5 periods is 3.7908.

PV of Principal PV of future interest payments Total PV OF Cash Flows

(P 1,000,000 x .6209) P 620,900 (P 1,000, 000 x 8%) x 3.7908 303,264 P 924,164

If investment in bonds is available for sale; thus, it is recognized as Financial Assets-Available for Sale where at initial measurement it is fair value plus transaction costs, then subsequent measurement is fair value unless a hedge item and changes in fair value is recognized in equity, unless a hedge item. Amounts in equity recycled to profit or loss when the asset is derecognized. 5. Effective Interest on Note is 10% Carrying Amount of Bonds Multiplied by 10% rate Interest Income

P924,164 10% P 92,416 (C)

If investment in bonds is recognized as Investments held-to-maturity; thus, it is measured as Financial Assets @ Amortized Cost. Unrealized gain and loss are not recognized simply because such investments are not reported at fair value. PFRS 9, Paragraph 5.7.2, provides that gain and loss on financial asset measured at amortized cost and is not part of hedging relationship shall be recognized in profit or loss when the financial assets are derecognized, sold, impaired or reclassified, and through the amortization process.

Problem No. 6 Curry Co. purchases land and constructs a service station and car wash for total of P360,000. At January 2, 2016, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for P400,000 and immediately leased from the oil company by Curry. Fair value of the land at time of the sale was P40,000. The lease is a 10-year , noncancelable lease. Curry uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pas to Curry at termination of the lease. A partial amortization schedule for this lease is as follows: January 2, 2016 December 31, 2016 December 31, 2017 December 31, 2018

Payments

Interest

Amortization

P65,098.13 65,098.13 65,098.13

P40,000.00 37,490.19 34,729.39

P25,098.13 27,607.94 30,368.74

Balance P400,000.00 374,901.87 347,293.93 316,925.19

QUESTIONS: Based on the above and the result of your audit, answer the following: 1. What is the discount rate implicit in the amortization schedule presented above? a. 12% c. 8% b. 10% d. 6% 2. The total lease-related expenses recognized by the lessee during 2017 is which of the following? (Rounded to the nearest peso.) a. P64,000 c. P73,490 b. P65,098 d. P61, 490 3. What is the amount of the lessee’s liability to the lessor after the December 31, 2018 payment? (Rounded to the nearest peso.) a. P400,000 c. P347,294 b. P 374,902 d. P316,925 4. The total lease-related income recognized by the lessee during 2017 is which of the following? a. P-0c. P4,000 b. P2,667 d. P40,000 5. Which of he following statements is true? a. If a lease qualifies as a finance lease for the lessor, it will also always qualify as a finance lease for the lessee. b. A lessor’s debt equity ratio is not increased if the lease is a finance lease, whereas, it would be if the asset were purchases outright. c. There is always “accounting symmetry” for recording and reporting leases between the lessor and lessee. d. It is possible for neither the lessor nor lessee to depreciate the asset under lease. Solutions: 1. Rate = Interest Expense Carrying Amount = P40,000 P400,000 = 10% (B)

2. Total lease-related expenses, 2017 Interest expense(2017) Depreciation expense (400,000-40,000/ 15 years) TOTAL

3. Carrying amount,2017 Less: Amortization Carrying Amount,2018

P37, 490.19 24,000.00 61,490.19 (D)

P347,293.93 30,368.74 P316,925.19 (D)

4. Selling Price P400,000 Less: Cost of Facility 360,000 Gain on sale and leaseback 40,000 Divided by lease term 10 yrs Gain to be recognized P4,000 (C)

5. (D) It is possible for neither the lessor nor lessee to depreciate the asset under lease.

Problem No. 7 Wall, Inc., is a public enterprise whose shares are traded in the over-the-counter market. At December 31, 2016, Wall had 6,000,000 authorized shares of P10 par value ordinary shares, of which 2,000,000 shares were issued and outstanding. The shareholder’s equity accounts at December 31, 2016, had the following balances. Ordinary Shares Share Premium Retained Earnings

P 20,000,000 7,500,000 6,470,000

Transactions during 2017 and other information relating to the shareholder’s equity accounts were as follows: 1. On January 5, 2017, Wall issued at P54 per share, 100,000 shares of P50 par value, 9% cumulative convertible preference shares. Each share of preference is convertible, at the option of the holder, into two ordinary shares. Wall had 600,000 authorized preference shares. 2. On February 1, 2017, Wall reacquired 20,000 of its ordinary shares for P16 per share. Wall uses the cost method to account for treasury shares. 3. On April 30, 2017, Wall sold 500,000 shares (previously unissued) of P10 par value ordinary shares to the public at P17 per share. 4. On June 18, 2017, Wall declared a cash dividend of P1 per ordinary shares, payable on July 12, 2017, to shareholders of record on July 1, 2017. 5. On November 10, 2017, Wall sold 10,000 treasury shares for P21 per share. 6. On December 14, 2017, Wall declared the yearly cash dividend on preference shares, payable on January 14, 2018, to shareholders of record on December 31, 2017. 7. On January 20, 2018, before the books were closed for 2017, Wall became aware that the ending inventories at December 31, 2016, were understated by P300,000 (the aftertax effect on 2016 net income was P210,000). The appropriate correcting entry was recorded the same day. 8. After correcting the beginning inventory, net income for 2017 was P4,500,000. QUESTIONS: Based on the above and the result of your audit, answer the following: 1. The Retained Earnings balance as of January 1, 2017 is a. b. c. d.

P6,680,000 P6,260,000 P6,770,000 P6,170,000

2. The Retained Earnings balance as of December 31, 2017 is a. b. c. d.

P8,520,000 P8,340,000 P7,830,000 P8,250,000

3. The total share premium as of December 31, 2017 is a. P11,510,000 b. P11,450,000

c. P11,050,000 d. P11,000,000 4. The total shareholder’s equity as of December 31, 2017 is a. b. c. d.

P49,540,000 P49,700,000 P49,450,000 P49,504,000

5. An Auditor usually obtains evidence of stockholder’s equity transactions by reviewing the entity’s a. b. c. d.

Minutes of board of directors meetings Transfer agent’s records Canceled stock certificates Treasury stock certificate book.

Solution: Questions 1-4 Retained Earnings 01/01/17 P 6,470,000 Correction on understatement of ending Inventory on 12/31/16 210,000 Corrected Retained Earnings Balance on 01/01/17 P 6,680,000 (66) ----------------------------------------------------------------------------------------------------Preference Share Capital P 5,000,000 Ordinary Share Capital 25,000,000 Share Premium 11,450,000 (68) Retained Earnings: Appropriated P 160,000 Unappropriated 8,090,000 8,250,000 (67) Treasury Shares (160,000) Total Equity P49,540,000 (69)

Journal Entries Affecting the Equity Accounts during 2017 01/05 Cash (100,000 shares x P54) .......................................................... 5,400,000 Preference Share Capital (100,000 x P50) ......................... Share Premium (excess over par PS)……………………………… 400,000 02/01 Treasury Shares (20,000 x P16) ...................................................... 320,000 Cash .................................................................................... 04/30 Cash (500,000 shares x P17) .......................................................... 8,500,000 Ordinary Share Capital (500,000 shares x 10) ................... Share Premium (excess over par 0S)………………………………. 3,500,000 06/18 Retained Earnings .......................................................................... 2,480,000 Dividends Payable .............................................................. [(2,000,000 + 500,000 – 20,000) x P1] = 2,480,000

5,000,000

320,000

5,000,000

2,480,000

11/10 Cash (10,000 x P21) ....................................................................... 210,000 Treasury Shares at cost (10,000 x P16) ............................. Share Premium (Treasury Share Transaction)………………… 50,000

160,000

12/15 Retained Earnings (5,000,000 x 9%) ............................................. 450,000 Dividends Payable - Preference .........................................

450,000

12/31 Inventory 01/01/17 ......................................................................... 300,000 Retained Earnings .............................................................. Income Tax Payable ...........................................................

210,000 90,000

12/31 Profit and Loss Summary................................................................ 4,500,000 Retained Earnings ..............................................................

4,500,000

02/01 Retained Earnings ........................................................................... 320,000 Retained Earnings Appropriated (cost of TS) ....................

320,000

PAS 32 par 33

If an entity reacquires its own equity instruments, those instruments (“treasury shares”) shall be deducted from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by other members of the consolidated group. Consideration paid or received shall be recognized directly in equity.

PAS 32 par 35

Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial liability shall be recognized as income or expense in profit or loss. Distribution to holders of an entity instrument shall be recognized by the entity directly in equity. Transaction costs of an equity transaction shall be accounted for as a deduction from equity. T- Accounts