PROJECT IN AUDITNG

QUESTIONS:
1. How much is the gain loss on sale of 12,500 Ces shares?
2. What is the carrying amount of Ces trading securities on December 31, 2006?
3. How much is the unrealized gain or loss on cess trading securities on December 2006?
4. How much is the gain or loss on sale of 2,500 Coo shares?
5. What is the carrying amount of Coo trading securities on December 31, 2006?
6. How much is the unrealized gain or loss on Coo trading securities on December 2006?
7. How much is the gain or loss on conversion of 2,500 France Preference shares into 15,000 ordinary
shares?
8. What is the carrying amount of France trading securities on December 31, 2006?
9. How much is the unrealized gain or loss of France preference and ordinary shares on December 31, 2006?
10. How much is the total dividends income for the year 2006?
11. How much should be reported as unrealized loss on trading securities in the company’s income
statement?
12. How much is the trading securities to be reported in financial position?
 1. How much is the gain on sale of 12,500 Ces shares?
SOLUTION:
Sales Proceed: (12,500 x 33.75) ------------------------------------------------ 421,875
Less carrying amount of Ces shares sold:
12,500 x 24.75---------------------------------------------------------------- ( 309,375)
GAIN ON SALE OF 12,500 CES SHARES--------------------------------------- 112,500

To get the sales proceeds, multiply the shares being sold by its selling price per share, that is
12,500 shares x33.75= 421,875.
Then get the carrying amount of shares being sold, but let’s get first the par value of Ces shares by
dividing the market value of Ces shares which is 742,500 pesos by 30,000 shares and we will get 24.75
pesos. The par value per shares of Ces is 24. 75. We can now get the carrying amount of shares being
sold by multiplying the shares being sold to the par value shares,that is 12,500 x 24.75 = 309,375.
Then to get the gain on sale, get the difference of sales proceed and carrying amount of shares, that is
421,875 minus 309,375 and we will get 112,500.
Note that on December 31, 2005, trading securities should be reported in financial position at market
value 742,500 (NOT on COST) and any increase or decrease in the value of trading securities should be
reported in the income statement. On December 2005, there is increased in value which is recorded as
follows: Trading securities---------------------- 67,500
Unrealized gain-------------------------------67,500
Fair value 742,500 minus 675,000 cost equals 67,500.

2. What is the carrying amount of Ces trading securities on December 31, 2006?
SOLUTION:
30,000 shares minus 12,500 equals 17,500 shares times 22.50 market price per share on December
2006 equals 393,750.
The carrying amount of ces trading securities is 393,750.

3. How much is the unrealized gain or loss on Ces trading securities on December 2006?
SOLUTION:

CARRYING AMOUNT 0N 2006: 17,500 shares x 22. 50= 393,750

LESS CARRYING AMOUNT 0N 2005: 17,500 shares x 24.75 =433,125
UNREALIZED LOSS-------------------------------------------------------(39,375)
Journal entry:
Unrealizes Loss – TS-------------------------39,375
Trading Securities--------------------------------39,375
Note that the market value per share of Ces decrease on December 2006, that’s why there is
unrealized loss.

4. How much is the gain or loss on sale of 2,500 Coo shares?

SOLUTION:
Sales Proceed: (2,500 x 45) -------------------------------------------------------------------------- 112,500
Less carrying amount of Coo shares sold:

( 2,500 x 40.909)-------------------------------------------------------------------- ( 102,273)

GAIN ON SALE OF 2,500 COO SHARES------------------------------------------------------------ 10,227
 To get the sales proceeds, multiply the shares being sold by its selling price per share, that is
2,500 shares x 45= 112,500.
Note: Shareholder may receives additional shares but still has the same proportionate equity
interest in the entity. The shareholder may have more shares but at reduced market value.

On Jan. 2, 2006, there is increased in Coo shares, that is 10,000 x 10% = 1,000
Shares Cost per share Total Cost
Original shares 10,000 45 450,000
Stock Dividends 1,000 - ------------
Total 11,000 40.909 450,000

*The total cost of 450,000 applies now to 11,000 shares with adjusted cost per share of 40.909. The
cost per share is reduced from 45 to 40.909.
* The adjusted cost per share should be used to get the carrying amount of coo shares being sold,
that is 2,500 x 40.909 = 10,227.

Then to get the gain or loss on sale, get the difference of sales proceeds and carrying amount, that is
112,500 minus 102,273 and we will get 10,227 Gain. There is a gain on sale because the selling price of
share is higher that its par value shares.

5. What is the carrying amount of Coo trading securities on December 31, 2006?
SOLUTION:
11, 000 shares minus 2,500 share equals 8,500 times 40.50 market value per shares on December
2006 equals 344,250.
The carrying amount of coo trading securities is 344,250.

6. How much is the unrealized gain or loss on Coo trading securities on December 2006?
SOLUTION:
CARRYING AMOUNT 0N 2006: 8,500 shares x 40. 50= 344,250
LESS CARRYING AMOUNT 0N 2005: 8,500 shares x 40.909 =347,727
UNREALIZED LOSS-------------------------------------------------------(3,477)
Journal entry:
Unrealizes Loss – TS-------------------------3,473
Trading Securities--------------------------------3,473
Note that the market value per share of COO decrease on December 2006, that’s why there is
unrealized loss.

7. How much is the gain or loss on conversion of 2,500 France Preference shares into 15,000 ordinary
shares?
SOLUTION:
FAIR VALUE OF ORDINARY SHARES RECEIVED
(7,500 shares x 40.50) ------------------------------------------------------- 303,750
LESS CARRYING AMNT. OR PREFERENCE SHARES CONVERTED
(2,500 share x 97.50) ------------------------------------------------------(243,750)
GAIN ON CONVERSION OF 2,500 FRANCE
PREFERENCE SHARE-----------------------------------------------------------------60,000

FV OF ORDINARY SHARES RECEIVED:

On sept. 21, when france converted his preference shares to ordinary shares there are two market
price given, which 80.25 per share for the preference shares and 40.50 per share for ordinary shares.
The question that arise is “what fair should be used?’’
 Actually, the conversion of the preference shares into ordinary shares involves derecognition of the
preference shares and recognition of preference shares of financial asset at the holder’s pint of view.
PAS 39 par. 25 provides that if, as a result of a transfer results in the entity obtaining a new financial
asset is derecognized in its entirety but the transfer results in the entity obtaining a new financial asset
or assuming a new financial liability or a servicing liability, the entity shall recognize the new financial
asset, financial liability or servicing liability at fair value. Therefore, the ordinary shares received in
exchange for the preference shares should be measured at the fair value of the ordinary shares
received. 7,500 ordinary shares received times 40.50 m.v of ordinary shares equals 303,750.

To get the carrying amount of preference shares to be converted, just multiply the shares being
converted to its par value.
To get the gain on sale of conversion, get the difference of fair value of ordinary shares and the
carrying amount of preference shares converted. The result of conversion is gain because fair value is
higher than the carrying amount.

8. What is the carrying amount of France trading securities on December 31, 2006?
SOLUTION:
FRANCE PREFERENCE SHARES
2,500 shares x 92.25---------------------------------------------------- 230,625
FRANCE ORDINARY SHARES
7,500 shares x 42.75-----------------------------------------------------320,625
TOTAL CARRYING AMOUNT OF FRANCE
TRADING SECURITIES-------------------------------------------------------551,250

There are only 2,500 preference share left after the conversion,that is 5,000 shares minus 2,500
shares. Then to get the carrying amount of preference shares multiply 2,500 remaining preference
share to the market value price per share in 2006 which is 92.25 then we will get 230,625.
On sept. 21, france converted his 2,500 preference shares into 7,500 ordinary shares, that’s why france
has 7,500 ordinary shares. To get the carrying amount of ordinary shares in 2006, multiply 7,500 share
to the its 42.75 market value price per share then we will get 320,625.
To get the total carrying amount of france trading securities add the carrying amount of preference
shares and ordinary shares.

9. How much is the unrealized gain or loss of France Preference shares and ordinary shares on
December 31, 2006?
SOLUTION:
Carrying amount of preference shares-2005
2,500 x 97.50----------------------------------------------------------------------243,750
LESS: Carrying amount of preference shares-2006
2,500 x 92.25-----------------------------------------------------------------(230,625)
UNREALIZED LOSS in P.S-2006----------------------------------------------------(13,125)

Carrying amount of ordinary shares-2005

7,500 x 40.50----------------------------------------------------------------------303,750
LESS: Carrying amount of ordinary shares-2006
7,500 x 42.75----------------------------------------------------------------(320,625)
UNREALIZED GAIN in O.S-2006-----------------------------------------------------16,875

Note: Total carrying amount Of preference shares in 2006 is lower than the total carrying amount of
preference shares in 2005, meaning that the value of shares decreased that’s is why we recognized
unrealized loss. Entry: Unrealized Loss-T.S-----------------13,125
Trading Securities-----------------------13,125

Note: Total carrying amount Of preference shares in 2006 is Higher than the total carrying amount of
preference shares in 2005, meaning that the value of shares increased that’s is why we recognized
unrealized loss. Entry: Trading Securities------------------16,875
Unrealized Gain-T.S-------------------------16,875
10. How much is the total dividends income for the year 2006?
SOLUTION:
FROM FRANCE (5,000 shares x 2.50 x 2)---------------------------------25,000
FROM CES ( 17,500 shares x 2.25)-----------------------------------------39,375
TOTAL DIVIDEND INCOME-------------------------------------------------64,375

PAS 18 par. 30 states that dividend income shall be recognized when the shareholder’s right to receive
payment is established which is on the date of declaration.
Note that France DECLARED AND RECORDED DIVIDENDS on March 15 and September 15 BEFORE he
converted his preference shares on September 21,thati s why the basis of dividend income of France is
still 5,000 shares. To get the dividend income from France, Multiply 5,000 shares to 2.50 per share x 2
because France declared dividend income two times which is on March 15 and September 15, then we
will get 25,000 pesos.
Note that Ces sold 12,500 shares on March 1, 2006 that is why the remaining(30,000 -12,500) 17,500
shares is the basis for the dividend income when she paid dividends on July 1, 2006. To get the
dividend income from Ces, multiply 17,500 shares to 2.25 and we will get 39,375.
The total dividend income is the sum of 25,000 and 39,375, which is 64,375.

11. How much should be reported as unrealized loss on trading securities in the company’s income
statement?
SOLUTION:
CES UNREALIZED LOSS-----------------------------------------------------------------(39,375) see prob.#3
COO UNREALIZED LOSS----------------------------------------------------------------(3,477) see prob. #4
France UNREALIZED LOSS in P.S-----------------------------------------------------(13,125) see prob. #9
France UNREALIZED GAIN in O.S-----------------------------------------------------16,875 see prob. #9
Unrealized loss on trading securities in the
company’s income statement------------------------------------------------------(39,102)

12. How much is the trading securities to be reported in financial position?

SOLUTION:
CESS CARRYING AMOUNT 0N 2006: (17,500 shares x 22. 50)------------- 393,750
COO CARRYING AMOUNT 0N 2006: (8,500 shares x 40. 50)---------------344,250
FRANCE Carrying amount of preference shares-2006
2,500 x 92.25-------------------------------------------------------------------230,625
FRANCE Carrying amount of ordinary shares-2006
7,500 x 42.75------------------------------------------------------------------320,625
TOTAL trading securities to be reported in financial position-----------1,289,250