Auditing Problems Review

PRELIM EXAMINATION December 21, 2016

INSTRUCTION: Answer the requirements for each problem below, SHOW YOUR SOLUTION.

Problem 1
You were engage by MIRACLE Corporation, a publicly held company whose shares are traded on the Philippine
Stock Exchange, to conduct an audit of its financial statements. You were told by the companys controller that
there were numerous equity transactions that took place in 2016. The shareholders equity accounts at December
31, 2015 had the following balances:

Share capital- Preference, P100 par value, 6 % cumulative; 30,000 shares authorized; P1,800,000
18,000 shares issued and outstanding
Share capital-Ordinary, P1 par value, 1,800,000 share authorized 1,200,000 shares 1,200,000
issued and outstanding
Share premium 2,400,000
Retained Earnings 980,000
TOTAL SHAREHOLDERS EQUITY P6,380,000
You summarized the following transactions during 2016 and other information relating to the shareholders
equity in your working papers as follows:

JANUARY 6, 2016- Issued 45,000 ordinary shares in exchange for land. On the date issued, the shares had
a market price of 16.5 per share. The land had a carrying value of P420,000, and an assessed value for
property taxes of P490,000.

JANUARY 31, 2016- Sold 2, 400, P1,000, 12% bonds due January 31, 2026, at 98 with one detachable
share warrants attached to each bond. Interest is payable annually on January 31. The fair value of the
bonds without share warrants is 95. The detachable warrants have a fair value of P50 each and expire on
January 31, 2017. Each warrant entitles the holder to purchase 10 ordinary shares at P10 per share.

FEBRUARY 22, 2016- Purchased 15,000 of its own shares to be held as treasury shares for P24 per share.

FERUARY 28, 2016- Subscription for 42,000 ordinary shares were received at P26 per share, payable 50%
down and the balance by March 15.

MARCH 15, 2016- The balance due on 36,000 ordinary shares was received and those shares were issued.
The subscriber who defaulted on the 6,000 remaining shares forfeited the down payment in accordance
with the subscription agreement.

AUGUST 30, 2016-Reissued 6,000 treasury shares for 20 per share.

SEPTEMBER 14, 2016- there were 1,890 warrants detached from the bonds and exercised.

NOVEMBER 30, 2016- Declared a cash dividend of P0.50 per share to all ordinary shareholders of record
December 15, 2016. The dividends were paid on December 30, 2016.

DECEMBER 15, 2016- Declared the annual cash dividends on preference shares for 2016. The dividend
was paid on January 15, 2017.

JANUARY 8, 2017- Before closing the accounting records for 2016. MIRACLE became aware the no
depreciation had been recorded for 2015 for a machine purchased on July 1, 2015. The machine was
properly capitalized at P960,000 and had an estimated useful life of eight years when purchased. The
appropriate correcting entry was recorded on the same date

ADJUSTED net income for 2016 was P840,000

Based on the foregoing and the results of your audit, answer the following: (Ignore income tax implications)

1. Share capital-ordinary at December 31, 2016, is

a. 1,290,900 b. 1,305,900 c. 1,281,000 d.1,299,900
2. How much is the total share premium as of December 31, 2016?
a. 4,239,600 b. 4,317,600 c. 4,363,200 d. 4,065,100
3. The Unappropriated retained earnings on December 31, 2016, is
a. 982,550 b. 622,550 c. 766,550 d. 790,550
4. How much is the total shareholders equity on December 31, 2016?
a. 8,184,050 b. 7,968,050 c. 8,168,750 d. 8,190,050
Problem 2
On January 1, 2015, S4 Corporation issued 2,000 of its 5-year, 1,000 face value, 11% bonds dated January 1 at an
effective annual interest rate of 9%. Interest is payable each December 31. S4 uses the effective interest method
of amortization. On December 31, 2016, the 2,000 bonds were extinguished early through acquisition in the open
market by S4 for 1,980,000 plus accrued interest.

On July 1 2015, S4 issued 5,000 of its 6-year, 1000 face value, 10% convertible bonds at par. Interest is payable
every June 30 and December 31. On the date of issue, the prevailing market interest rate for similar debt without
the conversion option is 12%. On July1, 2016 an investor in S4 convertible bonds tendered 1,500 bonds for
conversion into 15,000 shares of S4s ordinary shares, which had a fair value of P105 and a par value of P1 at the
date of conversion

Based on the above and the result of your audit, determine the following: (Round off present value factors to four
decimal places.)

1. The issue price of the 2,000 50year, P1,000 face value bonds on January 1, 2015 is
a. 2,155,500 b. 2,000,000 c. 1,844,400 d. 2,147,800
2. The carrying amount of the 2,000 5-year, P1,000 face value bonds on December 31, 2015 is
a.1,898,400 b. 2,129,500 c. 2,000,000 d. 2,121,100
3. The gain on early retirement of bonds on December 31, 2016 is
a. 20,000 b. 112,000 c. 121,200 d. 0
4. The carrying amount of the 5,000 6-year, P1,000 face value bonds on December 31, 2015, is
a. 4,605,800 b. 5,000,000 c. 4,732,875 d. 4, 615,400
5. The conversion of the 1,500 6-year, P1,000 face value bonds on July 1, 2016, will increase the share premium by
a. 1,485,000 b. 1,374,600 c. 1,415,054 d. 1,377,697

END

Good Luck!
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