Final Exam Audapp2 2020

Accountancy Program FINAL Examination in AUDAPP2 Name of student: __________________________________ Class Schedule: __________________________________

Score: ___________ Date: ___________

INSTRUCTIONS: Read each problem carefully. Answer the question(s) for each problem. Show all supporting computations on your answer sheet. Use T-accounts to support your answers. Write your final answers in the table given below. 1.

6.

11.

16.

21.

2.

7.

12.

17.

22.

3.

8.

13.

18.

23.

4.

9.

14.

19.

24.

5.

10.

15.

20.

25.

PART I: THEORIES (1PT EACH) 1. All share capital transactions should ultimately be traced to the a. Numbered stock certificates. b. Minutes of the Board of Directors. c. Cash receipts journal. d. Cash disbursements journal. 2. Which of the following information is most important when auditing shareholder’s equity? a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings. b. Share dividends and/or shares splits during the year were approved by the shareholders. c. Share dividends are capitalized at par or stated value on dividend declaration date. d. Changes in the share capital account are verified by an independent stock transfer agent. 3. When a corporate client maintains its own stocks records, the auditor primarily will rely upon a. Confirmation with the company secretary of shares outstanding at year-end. b. Review of the corporate minutes for data as to shares outstanding. c. Confirmation of the number of shares outstanding at year-end with the appropriate state official. d. Inspection of the stock book at year-end and accounting for all certificate numbers.

4. When a client company does not maintain its own stock records, the auditor most likely will 2nd semester AY 2019 – 2020

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a. Obtain written confirmation from the transfer agent and registrar concerning the number of shares issued and outstanding. b. Inspect the stock book at year-end and accounting for all certificate numbers. c. Review of the corporate minutes for information as to shares outstanding. d. Confirm the number of shares outstanding at year-end with the appropriate state official. 5. The primary responsibility of a bank acting as registrar of capital stock is to a. Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation. b. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions, and the sale of treasury stock. c. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. d. Account for stock certificates by comparing the total shares outstanding to the total in the shareholders’ subsidiary ledger. 6. During the course of an audit, an auditor observes that the recorded interest expense seems excessive in relation to the balance in the long term debt. This observation could lead the auditor to suspect that a. Long term debt is overstated. b. Long term debt is understated. c. Premiums on bonds payable is understated. d. Discounts on bonds payable is overstated. 7. An auditor`s program to examine long term debt most likely would include steps that require a. Correlating interest expense recorded for the period with outstanding debt. b. Inspecting the accounts payable subsidiary ledger for unrecorded long term debt. c. Comparing the carrying amount of the debt to its year-end market value. d. Verifying the existence of the holders of the debt by direct confirmation. 8. A CPA analyzes the accrued interest payable accounts for the year, recomputes the amounts of payments and beginning and ending balances and reconciles to the interest expense account. Which error or questionable practice below has the best chance of being detected by this specific audit procedure? a. Interest paid on an open account was charged to the purchase account. b. Interest revenue of P120 on a note receivable was credited against miscellaneous expense. c. A note payable had not been recorded. Interest of P300 on the note was properly paid and charged to the interest expense account. d. There was a violation of a term in the client`s loan agreement prohibiting dividends on common stocks unless net income available for interest and dividends is at least three times interest requirements.

2nd semester AY 2019 – 2020

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9. An audit procedure that provides evidence about proper valuation of trading securities arising from a short-term investment of excess cash is a. Recalculation of investment carrying value by applying the equity method. b. Comparison of carrying value with current market quotations. c. Confirmation of securities held by broker. d. Calculation of premium or discount amortization. 10. To satisfy the valuation assertion when auditing an investment accounted for by the equity method, an auditor most likely would a. Review the broker’s advice or canceled check for the investment’s acquisition. b. Obtain market quotations from the financial newspapers of periodicals. c. Examine the audited financial statements of the investee company. d. Inspect the stock certificates evidencing the investment.

CASE NO. 1 CLICK Corp., organized on June1,2020, was authorized to issue stock as follows: 800,000 shares of 9%preferred stock,convertible,P100 par 2,500,000 shares of common stock,P2.50 stated value During the remainder of the fiscal year ended May 31,2021 the following transactions were completed in the order given:  300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares of common stock were subscribed for at P26. Both subscriptions were payable 30% upon subscription, the balance in one payment.  The second subscription payment was received, except one subscriber for 60,000 shares of common stock defaulted on payment. The full amount paid by this subscriber was returned, and all of the fully paid stock was issued.  150,000 shares of common stock were reacquired by purchase at P28.  Each share of preferred was converted into four shares of common stock.  The treasury stock was exchanged for machinery with a fair market value ofP4,300,000.  There was a 2-for-1stock split, and the stated value of the new common stock is P1.25.  Net income was P830,000. Based on the above and the result of your audit, determine the following as of MAY 31, 2021: 11. Common Stock 12. Total additional Paid-In Capital 13. Total Contributed Capital 14. Total Legal Capital 15. Total Stockholders Equity

2nd semester AY 2019 – 2020

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CASE NO. 2 Benshoppe Inc. had the following portfolio of financial assets as of December 31, 2015. All the financial asset were acquired in 2015: Financial asset Aye Corp. Stocks, 20,000 shares Bee Inc. Stocks, 40,000 shares See Co. 10%, P2M bonds Dee Corp. Stocks, 50,000 shares

Acquisition Cost P590,000 1,100,000 1,973,000 2,400,000

Audit notes: a. Aye Corp. shares were acquired with an intention of generating short-term profits from the share price’s fluctuations. The company paid P29.50 per share, which included the P0.50 per share broker’s fees and commissions. The shares were acquired on February 20, 2015. A P2 per share cash dividends were received on March 30. These dividends were declared by Aye Corp. on January 20, 2015 to stockholders as of record date March 1, 2015. b. The company paid P27.50 per share, including P0.50 per share brokers’ fee on the acquisition of Bee Inc. on March 1, 2015. These shares were acquired for trading purposes. A P3 per share dividends were received from the said shares on May 3, 2015. These dividends were declared on April 1 to stockholders as of record date April 20. c. See Co. bonds which pay semi-annual interest every June 30 and December 31, were acquired on October 1, 2015 at P1,973,000, when the prevailing effective interest rate on similar instrument was at 12%. The bonds shall mature on December 31, 2017. The company has a business model of holding debt securities for short-term profits. d. Dee Corp. stocks were acquired P48 per share, including P3 per share brokers’ fees and commissions on June 30, 2015. Dee Corp. had a total of 200,000 shares outstanding on the same date. The company received P5 dividends per share form Dee on December 20, 2015. e. The following information were deemed relevant at year-end and no entries had been made yet by the company to reflect any of the following information: Net income in 2015 Fair Value

Aye Corp. Bee Inc. See Co. Dee Corp. P1,200,000 P1,500,000 P2,000,000 P2,240,000 P35/sh P25/sh 11% P51/sh

Requirements: 16. What is the unrealized holding gain/loss to be reported in the 2015 statement of comprehensive income? 17. What is the correct carrying value of investments that should be presented as current asset? 18. What is the correct carrying value of investment in Dee Corp. shares that should be presented in the 2015 Statement of Financial Position? 19. Assuming that the company’s business model regarding debt securities has an objective of collecting contractual cash flows, what is the correct carrying value of investment in See Co. Bonds that should be presented in the 2015 Statement of Financial Position? 2nd semester AY 2019 – 2020

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CASE NO. 3 An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the employees remain in its employ for the next three years. During Year 1, 35 employees left. The entity estimates that a further 60 will leave during Years 2 and 3. During Year 2, 40 employees have left and the entity estimates that a further 25 will leave during the Year 3. During Year 3, 22 employees left. At the end of Year 3, 150 employees exercised their SARs, another 140 employees exercised their SARs at the end of year 4 and the remaining 113 employees exercised their SARs at the end of Year 5. The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the end of Year 3, all SARs held by the remaining employees vested. The intrinsic values of the SARs at the date of exercise (which equal cash paid out) at the end of Years 3, 4, and 5 are shown below. YEAR 1 2 3 4 5

FAIR VALUE P10 11 12 15

INTRINSIC VALUE

P8 10 12

REQUIRED: 20. What amount of compensation expense should be recognized in Year 2? 21. What amount of compensation expense should be recognized in Year 4? 22. What amount of salaries payable should the entity report at the end of Year 3?

CASE NO. 4 On January 1, 2020, Oroquieta Co. issued a 3-year bonds with a face value of ₱3,000,000 for ₱2,850,756. The bonds carry an interest of 8% per year payable annually on December 31. On the date of issuance, the company incurred and paid commission to underwriters of ₱15,000. The bonds payable is measured at fair value through profit or loss.The bonds are to be appropriately classified as financial liabilities at fair value through profit or loss. On December 31, 2020, the bonds are quoted at 103%. Assume that there are no changes due to credit risk. On January 1, 2021, the bonds were retired at 104. Assuming the bonds payable is measured at FVPTL: 23. How much is the interest expense for 2020? 24. How much is the unrealized loss (or gain) in 2020 to be recognized in the profit or loss? 25. How much is the realized loss (or gain) on derecognition in 2021 to be recognized in the profit or loss?

2nd semester AY 2019 – 2020

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