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Page 8

PROBLEM NO. 5 – AUDIT OF SHAREHOLDERS’ EQUITY

iBELIEVE COMPANY began operations on January 1. Authorized were 120,000 shares of P10
par value ordinary shares and 240,000 shares of 10%, P100 par value preference shares. The
following transactions involving shareholders’ equity occurred during the first year of
operations.

Jan. 1 Issued 30,000 ordinary shares to the corporation promoters in exchange for land
valued at P1,020,000 and services valued at P420,000. The property had cost the
promoters P540,000 3 years before and was carried on the promoters’ books at
P300,000.

Feb. 23 Issued 60,000 preference shares with a par value of P100 per share. The shares were
issued at a price of P150 per share, and the company paid P450,000 to an agent for
selling the shares.

Mar. 10 Sold 18,000 ordinary shares for P390 per share. Issue costs were P150,000.

Apr. 10 24,000 ordinary shares were sold under share subscriptions at P450 per share. No
shares are issued until a subscription contract is paid in full. No cash was received.

July 14 Exchanged 4,200 ordinary shares and 8,400 preference shares for a building with a
fair value of P3,060,000. The building was originally purchased for P2,280,000 by the
investors and has a book value of P1,320,000. In addition, 3,600 ordinary shares
were sold for P1,440,000 in cash.

Aug. 3 Received payments in full for half of the share subscriptions and payments on account
on the rest of the subscriptions. Total cash received was P8,400,000. Share
certificates were issued for the subscriptions paid in full.
Dec. 31 Net income for the first year of operations was P3,600,000.

Dec. 31 Declared a cash dividend of P10 per share on preference shares and P20 per share on
ordinary shares, payable on February 10 to shareholders of record on January 15.

Based on the preceding information, calculate the balances of each of the following
accounts:

1. Share premium – preference shares

P2,550,000

P540,000

P3,090,000

P3,270,000

3. Ordinary shares

P528,000

P678,000

P366,000

P372,000

3. Share premium – ordinary shares

P22,242,000
P18,660,000

P11,520,000

P21,432,000

4. Retained earnings

P1,320,000

P3,600,000

P2,100,000

P1,740,000

5. Total shareholders’ equity

P32,160,000

P29,760,000

P33,900,000

P31,080,000

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PROBLEM NO. 6 – AUDIT OF INVESTMENT IN TRADING SECURITIES

Supporting records of MAYON CORPORATION’s trading securities portfolio show the following
debt and equity securities:
Security Cost Fair Value

400 ordinary shares Concave Co. P 254,500 P 243,000

P800,000 Tipo Co. 7% bonds 796,500 774,000

P1,200,000 Turkey Co. 7 ½% bonds 1,207,500 1,218,900

Totals P2,258,500 P2,235,900

Interest dates on the bonds are January 1 and July 1. Mayon Corporation uses the income
approach to record the purchase of bonds with accrued interest. During 2018 and 2019, Mayon
completed the following transactions related to trading securities:

2018

Jan. 1 Received semiannual interest on bonds. Assume that the appropriate adjusting entry
was made on December 31, 2017.

April 1 Sold P600,000 of 7 ½% Turkey bonds at 102 plus accrued interest.

May 21 Received dividend of P1.25 per share on the Concave ordinary share capital. The
dividend had not been recorded on the declaration date.

July 1 Received semiannual interest on bonds and then sold the 7% Tipo bonds at 97 ½.

Aug. 15 Purchased 200 shares of Newman, Inc. ordinary share capital at P580 per share plus
brokerage fees of P500.

Nov. 1 Purchased P500,000 of 8% Toll Co. bonds at 101 plus accrued interest. Brokerage
fees were P1,250. Interest dates are January 1 and July 1.

Dec. 31 Market prices of securities were:

Concave ordinary shares P550


7 ½% Turkey bonds 101 ¾

8% Toll bonds 101

Newman ordinary shares P583.75

2019

Jan. 2 Recorded the receipt of semiannual interest on bonds.

Feb. 1 Sold the remaining 7 ½% Turkey bonds at 101 plus accrued interest.
Page 10

1. What is the total interest and dividend income for 2018?

P125,166

P164,416

P91,417

P98,804

2. What amount should be reported as gain on sale of trading securities in 2018?

P2,550

P6,000

P8,550

P3,450

3. What amount of unrealized gain or loss should be reported in the income statement for the
year ended December 31, 2018?

P21,200 unrealized gain


P21,200 unrealized loss

P6,150 unrealized gain

P6,150 unrealized loss

4. What is the carrying amount of the remaining trading securities on December 31, 2018?

P1,481,000

P1,450,450

P1,473,450

P1,452,250

5. What is the loss on the sale of the remaining Turkey bonds on February 1, 2019?

P4,500

P10,500

P13,500

P750

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