audit of stockholders equity

7/25/2019 Audit of Stockholders Equity

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CHAPTER 9Audit of Shareholders Equity

Problem 1You have been assigned to the audit of Aguillon Inc., a manufacturing company. You have

been asked to summarize the transactions for the year ended December 31, 2004, affecting

shareholders equity and other related accounts. The shareholders equity section ofAguillons December 31, 2003, balance sheet follows:

Shareholders Equity

Contributed capital:

Ordinary share P2 par value, 500,000 shares authorized,90,000 shares issued, 88,790 shares outstanding P 180,000

Paid-in capital in excess of par 1,820,000

Paid-in capital from treasury share 22,500

Total contributed capital P2,022,500Retained earnings 324,689

Total contributed capital and retained earnings P2,347,189

Less: Cost of 1,210 shares of treasury share 72,600Total shareholders equity P2,274,589

You have extracted the following information from the accounting records and audit working

papers.

2004

Jan. 15 Aguillon reissued 650 shares of treasury share for P40 per share. The 1,210shares of treasury share on hand at December 31, 2001, were purchased in

one block in 2001. Aguillon used the cost method for recording the treasuryshares purchased.

Feb. 2 Sold 90, P1,000, 9% bonds due February 1, 2005, at 103 with one detachableshare warrant attached to each bond. Interest is payable annually onFebruary 1. The fair market value of the bonds without the share warrants is

97. The detachable warrants have a fair value of P60 each and expire onFebruary 1, 2005. Each warrant entitles the holder to purchase 10 shares of

Ordinary share at P40 per share.

Mar. 6 Subscriptions for 1,400 shares of Ordinary share were issued at P44 per

share, payable 40% down and the balance by March 20.

20 The balance due on 1,200 shares was received and those shares were issued.

The subscriber who defaulted on the 200 remaining shares forfeited the downpayment in accordance with the subscription agreement.

Nov. 1 There were 55 share warrants detached from the bonds and exercised.

Net income for the year is P600,000.

Questions- Based on the information above, answer the following questions:

1. The Ordinary Share at December 31, 2004 is:

a. P 215,000 b. P 204,000 c. P 191,000 d. P 183,500


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2. The Additional paid capital in excess of par at December 31, 2004 is:

a. P 1,903,000 b. P 1,894,600 c. P 1,870,400 d. P 1,835,800

3. The APIC treasury share at December 31, 2004 is:

a. P 22,500 b. P 13,000 c. P 9,500 d. P 0

4. The Ordinary Share Warrants Outstanding at December 31, 2004 is:a. P 5,400 b. P 3,300 c. P 2,100 d. P 0

5. The Subscribed Ordinary Share at December 31, 2004 is:

a. P 2,800 b. P 2,400 c. P 400 d. P 0

6. The APIC forfeited share at December 31, 2004 is:

a. P 0 b. P 3,520 c. P 3,920 d. P 5,280

7. The Treasury Share at December 31, 2004 is:a. P 0 b. P 72,600 c. P 39,000 d. P 33,600

8. The Total Shareholders Equity at December 31, 2004 is:

a.

P 2,984,309 b. P 2,659,620 c. P 2,384,309 d. P 2,059,620

SolutionJan 15 Cash (650 shares x P40) 28,000

Paid-in capital from treasury share 13,000Treasury Share 39,000

Cost of treasury share: P72,000/1,210 shares = P60 per shareCost of shares sold: 650 shares x P60 = P 39,000

Feb 2 Cash (P90,000 x 103) 92,700Discount on bonds payable 2,700

Bonds payable 90,000Ordinary share warrants 5,400

Price of bonds without warrants attached: 97 x P90,000 = P87,300Value of detached warrants: 90 x P60 = P 5,400

Because value of bonds plus value of detachable warrants is equal to the total issuance price

(P87,300 + P5,400 = P92,700), the value assigned to the bonds and warrants is the fair value ofeach.

Mar 6 Cash 24,640Ordinary share subscription receivable 36,960

Ordinary share subscribed 2,800Paid-in capital in excess of par 58,800

Mar 20 Cash 31,680Ordinary share subscription receivable 31,680

Mar 20 Ordinary share subscribed 2,400Ordinary share 2,400

Mar 20 Ordinary share subscribed 400Paid-in capital in excess of par 8,400

Ordinary share subscription receivable 5,280Paid in capital from forfeited share subscription 3,520

Nov 1 Cash (550 s P40) 22,000Ordinary share warrants (55 x P60) 3,300

Ordinary share 1,100Paid-in capital in excess of par 24,200

Answer:1. D 2. B 3. C 4. C 5. D 6. B 7. D 8. D


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Problem 2

The shareholders equity of the Amongan Lumber Co. on June 30, 2004, was as follows:

Contributed capital:

5% preference share, P50 par, cumulative, 30,000 shares issued,dividends 5 years in arrears P1,500,000

Ordinary share, P30 par, 100,000 shares issued 3,000,000P4,500,000

Deficit from operations (600,000)Total shareholders equity P3,900,000

On July 1, the following actions were taken:

a. Ordinary shareholders turned in their old Ordinary share and received in exchange new

ordinary share, 1 share of the new share being exchanged for every 4 shares of the old.New ordinary share was given a stated value of P60 per share.

b. One-half share of the new ordinary share was issued on each share of preference share

outstanding in liquidation of dividends in arrears on preference share.

c. The deficit from operations was applied against the paid-in capital arising from the

ordinary share restatement.

Transactions for the remainder of 2004 affecting the shareholders equity were as follows:

Oct. 1 10,000 shares of preference share were called at P55 plus dividends for 3

months at 5%. Share was formally retired.

Nov. 10 60,000 shares of new ordinary share were sold at P65.

Dec. 31 Net income for the 6 months ended on this date was P400,000. (Assume that

revenues and expenses were closed to a temporary account, Incomesummary. Use this account to complete the closing process.) The semiannualdividend was declared on preference shares, and a P0.75 dividend on ordinary

shares, dividends being payable January 20, 2003.

QuestionsBased on the information above, answer the following questions:

1. The balance of 5% Preference Share at December 31, 2004 is:a. P 1,500,000 b. P 1,000,000 c. P 500,000 d. P 0

2. The balance of Ordinary Share at December 31, 2004 is:a. P 3,000,000 b. P 4,000,000 c. P 4,500,000 d. P 6,000,000

3. The balance of Additional paid in capital at December 31, 2004 is:a. P 0 b. P 300,000 c. P 1,500,000 d. P 1,800,000

4. The balance of Retained Earnings at December 31, 2004 is:

a. P 0 b. P (600,000) c. P 243,750 d. P 293,750

SolutionJuly 1 Ordinary share, P30 par 3,000,000

Ordinary share, P60 stated value 1,500,000Exchanged 100,000 shares of old ordinary share with a par value of P30 for 25,000 shares of new ordinaryshare with a stated value of P60.


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July 1 Retained earnings 900,000Ordinary share, P60 stated value 900,000

Eliminate dividends in arrears on preference share through issuance of 15,000 shares of new ordinaryshare.

July 1 Paid-in capital in excess of stated value 1,500,000Retained earnings 1,500,000

Applied deficit against paid-in capital created through recapitalizationOct 1 5% Preference share 600,000

Retained earnings 56,250Cash 556,250

Retired 10,000 shares of preference share10,000 shares preference share retired:

Amount paid (10,000 shares x P55) P550,000Dividends for 3 months (P500,000 x .05 x 3/12) 6,250 P 556,250

Nov 10 Cash 3,900,000Ordinary share, P60 stated value 3,600,000Paid-in capital in excess of stated value 300,000

Sold 60,000 shares of ordinary share P65.Dec 31 Income summary 400,000

Retained earnings 400,000Recorded earnings for the 6-month period ended December 31.

Dec 31 Dividends (Retained earnings) 100,000Dividend payable preference 25,000

(20,000 x P50 x .05 x )Dividend payable ordinary 75,000(100,000 shares x P.75)

SHAREHOLDERS EQUITYContributed Capital

5% preference share 1,000,000Ordinary share 6,000,000Paid-in capital in excess of stated value ordinary 300,000

Total 7,300,000Retained earnings (accumulated since July 1, 2002) 243,750Total Shareholders Equity 7,543,750

On July 1, 2004, 100,000 shares of ordinary share, P30 par, were exchanged for 25,000 shares of ordinary sharewith a P60 stated value, thus creating additional paid-in capital. Such paid-in capital was applied to the eliminationof a P600,00 deficit on this date and also the liquidation of dividends in arrears on preference share of P900,000

through the issue of 15,000 shares of new ordinary. Earnings since July 1, 2004, were P400,000. Charges fordividends since this date were P106,250, and the call premium on 10,000 shares of preference share redeemedwas P50,000, resulting in a retained earnings balance of P243,750.

Answer:1. B 2. D 3. B 4. C

Problem 3

Alcain COMPANYs shareholders equity account balance at December 31, 2003, were asfollows:

Ordinary share 800,000

Additional paid-in capital 1,600,000Retained earnings 1,845,000

The following 2004 transactions and other information relate to the shareholders equity

accounts:

a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares

were issued and outstanding.

b. On March 5, 2004, Alcain acquired 5,000 shares of its ordinary share for P10 per share

to hold as treasury share. The shares were originally issued at P15 per share. ALCAIN


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uses the cost method to account for treasury share. Treasury share is permitted in

Alcains state of incorporation.

c. On July 15, 2004, Alcain declared and distributed a property dividend of inventory. The

inventory had a P75,000 carrying value and a P60,000 fair market value.

d.

On January 2, 2002, Alcain granted share options to employees to purchase 20,000share of Alcains ordinary share at P18 per share, which was the market on that date.

The option may be exercised within a three year period beginning January 2, 2004. Themeasurement date is the same as the grant date. On October 1, 2004, employees

exercised all 20,000 options when the market value of the share was P25 per share.

ALCAIN issued new shares to settle the transaction.

e. Alcains net income for 2004 was P240,000.

QuestionsBased on the information above and other analysis as necessary, answer the following

question:

1.

Alcains Ordinary share balance at December 31, 2004 is:a. P 1,300,000 b. P 1,160,000 c. P 900,000 d. P 800,000

2. Alcains Additional paid-in capital balance at December 31, 2004 is:a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000

3. Alcains Retained Earnings balance at December 31, 2004 is:a. P 2,085,000 b. P 2,025,000 c. P 2,010,000 d. P 1,770,000

4. Alcains Treasury Share balance at December 31, 2004 is:a. P 0 b. P 50,000 c. P 75,000 d. P 125,000

5.

Alcains Shareholders Equity balance at December 31, 2004 is:a. P 4,910,000 b. P 4,820,000 c. P 4,735,000 d. P 4,720,000

Solutiona. Memo entryb. Treasury share 50,000

Cash 50,000c. Retained earnings 75,000

Property dividends payable 75,000d. Cash 360,000

Ordinary share 100,000APIC 260,000

e. Income summary 240,000Retained earnings 240,000

Answer:1. C 2. A 3. C 4. B 5. D

Problem 4Ashary COMPANY is a publicly held company whose shares are traded in the over the

counter market. The shareholders equity account at December 31, 2003, had the following

balances:Preference share, P100 par value. 6% cumulative;5,000 shares authorized; 2,000 shares issued

and outstanding P 200,000


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Ordinary share, P1 par value; 150,000 shares

authorized; 100,000 issued and outstanding 100,000

Additional paid-in capital 800,000Retained earnings 1,586,000

Transactions during 2004 and other information relating to the shareholders equity account

were as follows:

February 1, 2004 Issued 13,000 shares of ordinary share to Keith Company inexchange for land. On the date issued, the share had a market price of P11 per share.

The land had a carrying value on Keiths books of P135,000, and the assessed value for

property taxes of P90,000.

March 1, 2004 Purchased 5,000 shares of its own ordinary share to be held as

treasury for P14 per share. Ashary uses the cost method to account for treasury share.Transactions in treasury share are legal in Asharys state of incorporation.

May 10, 2004 Declared a property dividend of marketable securities held by Ashary to

ordinary shareholders. The securities had a carrying value of P600,000, fair value on

relevant dates were:

Date of declaration (May 10, 2004) P 720,000Date of record (May 25, 2004) 758,000Date of distribution (June 1, 2004) 736,000

October 1, 2004 Reissued 2,000 shares of treasury share for P16 per share.

November 4, 2004 Declared a cash dividend of P1.50 per share to all ordinary

shareholders of record November 15, 2004. The dividend was paid on November 25,2004.

December 20, 2004 Declared the required annual cash dividend on preference sharefor 2004. The dividend was paid on January 5, 2005.

January 16, 2005 Before closing the accounting records for 2004, Ashary became

aware that no amortization had been recorded for 2004 for a patent purchased on July1, 2003. The patent was properly capitalized at P320,000 and had an estimated usefullife of eight years when purchased. Asharys income tax rate is 30%.

Net income after tax for 2004 was P838,000.

Questions

1. The total additional paid-in capital at year-end is:a. P 881,000 b. P 877,000 c. P 922,000 d. P 934,000

2. The total fundamental errors is

a. P 14,000 b. P 20,000 c. P 27,200 d. P 40,000

3. The total cash dividends ordinary at year-end is:

a. P 172,500 b. P 169,500 c. P 165,000 d. P 162,000

4. The total property dividends ordinary at year-end is:

a. P 600,000 b. P 720,000 c. P 736,000 d. P 758,000


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5. The number of ordinary share issued and outstanding at year-end is:

a. 102,000 b. 110,000 c. 111,000 d. 113,000

SolutionFeb 1 - Land 143,000

Ordinary share 13,000APIC CS 130,000

Mar 1 - Treasury share 70,000Cash 70,000

May 10 - Retained earnings 600,000Property dividend payable 600,000

Oct 1 - Cash 32,000Treasury share 28,000

APIC TS 4,000Nov 4 - Retained earnings 165,000

Cash 165,000Dec 20 - Retained earnings 12,000

Dividends payable 12,000Dec 31 - Retained earnings 14,000

Income tax payable 6,000Patents 20,000

Dec 31 - Income summary 838,000Retained earnings 838,000

Answer:1. D 2. A 3. C 4. A 5. B

Problem 5During your audit of Asumbra Company for the year 2004, its initial year of operations, youfind the following entries in its Shareholders Equity account:

____________________SHAREHOLDERS EQUITY___________________Jan. 01Issuance of 150,000 shares of capital share, P10 par;

authorized 500,000 shares in exchange for realestate property with a market value of P2 million 1,500,000

Jan. 15Sale of 200,000 shares of capital share at P12 per

share 2,400,000

Mar. 01Purchase 20,000 shares of its own share at P15 per

Share 300,000

May 15Loss on sale of motor equipment 100,000

Jun 10 Proceeds from sale of 10,000 treasury shares 170,000

Dec 31 Declared cash dividends payable quarterlybeginning April 1, 1998 200,000

Dec 31 Net profit for the year 790,000

Questions

1. The adjusted balance of the Shareholders Equity account of the companys balancesheet as of December 31, 2004 is:

a. P 4.36 million b. P 4.46 million c. P 4.76 million d. P 4.91 million


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2. The book value per share of the companys share as of December 31, 2004 is

a. P 14.44 b. P 14.00 c. P 13.12 d. P 12.82

SolutionLand 2,000,000

Ordinary share 1,500,000APIC 500,000

Cash 2,400,000Ordinary share 2,000,000

APIC 400,000Treasury share 300,000

Cash 300,000Retained earnings 100,000

Loss on sale 100,000Cash 170,000

Treasury share 150,000APIC TS 20,000

Retained earnings 200,000Cash 200,000

Answer:1. C 2. B

Problem 6

You are auditing the balance sheet of the Ballares Company on December 31, 2004, whichhas the following items on the equity side of the balance sheet:

Current Liabilities 2,858,000

Bonds Payable 3,000,000Reserve for Bonds Retirement 1,600,000

6% Cumulative Preference Share, P100 par value

(entitled to P110 and accumulated dividendsper share in voluntary liquidation). Authorized,

30,000 shares; issued, 20,000 shares; in treasury,

1,500 shares 1,850,000

Ordinary share, P100 par value, authorized,100,000 shares; issued and outstanding, 40,000

shares 4,000,000

Premium on preference share 100,000Premium on ordinary share 673,000

Retained earnings 1,312,600

The company proposes to finance a plant expansion program by issuing an additional20,000 shares of ordinary share. Ordinary shareholders of record October 1, 2004 were

notified that they will be permitted to subscribe to the new issue at P150 per share up to

50% of their holdings. The market value of the share on October 1, 2004, was P172.50.The share goes ex-rights in the market on October 3, 2004.

Questions1. Total shareholders equity as of December 31, 2004 is:

a. P 2,035,000 b. P 5,535,000 c. P 7,500,000 d. P 9,535,600

2. Total book value of the 40,000 shares of ordinary share is:a. P 9,535,000 b. P 7,500,600 c. P 2,035,000 d. P 1,875,150


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3. The book value per share of ordinary share as of December 31, 2004 is:

a. P 203.55 b. P 187.52 c. P 172.50 d. P 165.00

Solution1 D. Reserve for bond retirement P1,600,000

6% cumulative Preference share 1,850,000Ordinary share 4,000,000

Premium on preference share 100,000Premium on ordinary share 673,000Retained earnings 1,312,600

Total shareholders equity P9,535,600Less equity identified to preference share

Liquidation value (18,500 shares x P110) 2,035,000

2 B Total BV of the 40,000 shares of ordinary share P7,500,600

3 B BV per share of ordinary share P7,500,600/ 40,000 P187.52

Problem 7On January 1, 2003, the shareholders equity of Bantaya Companysbalance sheet revealedthe following information:

P5 Convertible Preference Share (P40 par value; 50,000 sharesauthorized, 20,000 shares issued and outstanding) 800,000

Ordinary share (P5 stated value; 200,000 shares

authorized, 120,000 shares issued and outstanding) 600,000Paid-in capital in excess of par 3,000,000Retained earnings 4,500,000

Total shareholders equity 8,900,000

In addition, the following information is known:

a. On February 2, 2003, 15,000 ordinary shares were acquired by the company for P33 per

share.

b. On September 30, 2003, 5,000 preference shares were converted to ordinary shares.

One share of preference share is convertible into one share of ordinary share. At thetime of conversion, the ordinary share had a market value of P42 per share.

c. On December 21, 2003, the company received a share subscription of 10,000 ordinaryshares at a subscription price of P33 per share. The subscription contract required acash down payment equal to 60% of the subscription price, with the balance due on

February 1, 2004.

d. On February 1, 2004, 8,500 ordinary shares were issued according to the subscriptioncontract. Because of default by a subscriber, 1,500 shares were not issued. Thesubscription contract requires the subscriber to forfeit all cash advance.

e. On April 15, 2004, 10,000 shares held in treasury were reissued at P50 per shares.

f. On May 16, 2004, a special dividend of preference share was distributed to ordinary

shareholders. One hundred shares of ordinary share entitled a shareholder to one shareof preference share. The market price of preference share was P40 per share at thattime.


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g. Net income for 2003 was P660,000 and for 2004, P890,000.

Questions

1. The total preference share at December 31, 2003 is:a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

2. The total ordinary share at December 31, 2003 is:

a.

P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

3. The total additional-paid in capital at December 31, 2003 is:a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

4. The total retained earnings at December 31, 2003 is:a. P 4,706,887.50 b. P 5,160,000.00 c. P 5,491,925.00 d. P 5,596,887.50

5. The Treasury share at December 31, 2003 is:a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

6. The total preference share at December 31, 2004 is:

a. P 548,600 b. P 600,000 c. P 625,000 d. P 651,400

7. The total ordinary share at December 31, 2004 is:

a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

8. The total additional paid-in capital at December 31, 2004 is:

a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

9. The total retained earnings at December 31, 2004is:a. P 5,998,900.00 b. P 5,491,925.00 c. P 4,965,000.00 d. P 4,706,887.50

10. The Treasury share at December 31, 2004 is:a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

Solution2003

Treasury share 495,000Cash 495,000

Preference share 200,000Ordinary share 25,000

Additional paid-in capital 175,000Subscription receivable 132,000Cash 198,000

Subscribed ordinary share 50,000Additional paid-in capital 280,000

Income summary 660,000Retained earnings 660,000

2002

Cash 112,200

Subscription receivable 112,200Subscribed ordinary share 42,500

Ordinary share 42,500Subscribed ordinary share 7,500

Additional paid-in capital 42,000Subscription receivable 19,800

APIC forfeiture of share 29,700Cash 500,000

Treasury share 330,000Additional paid-in capital 170,000

Retained earnings 51,400


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Preference share 51,400Income summary 890,000

Retained earnings 890,000Answer:1. A 2. B 3. D 4. B 5. A 6. D 7. D 8. C 9. A 10. C

Problem 8

You are a senior accountant responsible for the annual audit of Calunsag Company for theyear ended December 31, 2003. The information available to you is presented below. You

may assume that any pertinent information not presented below has already been checkedfound satisfactory.

Excerpts from trial balance, December 31, 2003:Debit Credit


Allowance for decline in value of inventory 36,500Capital share (1,000 shares) 100,000

The books have not been closed, but all adjusting entries which the company expects to

make have been posted. Their trial balance shows a P60,000 net profit for the year.

Ledger details of Retained Earnings:

RETAINED EARNINGS08/06/03 CD 2,000 12/31/02 Balance 134,50010/10/03 J 10,000 04/29/03 CR 500

12/31/03 J 30,000

NOTE: The balance at 12/31/02 agrees with last years working papers.

Analysis of selected cash Receipts:

Date Account credited Amount Explanation

04/29/03 Capital Share P10,000 Sold P100 par share at 105Retained Earnings 500

10/10/03 Building P530,000 See corollary entry datedOctober 10, 2003.

Analysis of selected cash disbursement:

Date Account debited Amount Explanation

08/06/03 Retained Earnings P2,000 Freak accident to company

truck not covered by insurance;repairs by JET & Co.

Selected entries in the general journal:

Date Entry and explanation Debit Credit

10/10/03 Allowance for depreciation 370,000Retained Earnings 10,000

Building 380,000Sale of main office Building.

12/31/03 Retained Earnings 30,000Allowance for Decline in MarketValue of Inventory 30,000


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Provision to value materials Inventory at lower of cost or NRV, in accordance

with Company pricing policy.

Questions1. The Ordinary Share balance of Calunsag Company at December 31, 2003 is:

a. P 100,500 b. P 100,000 c. P 99,500 d. P 89,500

2. The Additional paid-in capital balance of Calunsag Company at December 31, 2003 is:a. P 1,000 b. P 500 c. P 0 d. cannot be

determined

3. The Retained Earnings January 1, 2003 balance of Calunsag Company is:

a. P 155,000 b. P 154,500 c. P 135,000 d. P 134,500

4. Net income of Calunsag Company at December 31, 2003 is:

a. P 18,000 b. P 20,000 c. P 28,000 d. P 48,000

5. The Retained Earnings December 31, 2003 balance of Calunsag Company is:

a. P 182,500 b. P 175,000 c. P 172,500 d. P 152,500

SolutionAdj: Retained earnings 500

Additional paid-in capital 500OE: Cash 530,000

Accum. depn 370,000Retained earnings 10,000

Building 910,000CE: Cash 530,000

Accum. depn 370,000Loss on sale 10,000

Building 910,000

Adj: Loss on sale 10,000Retained earnings 10,000

Adj: Repairs 2,000Retained earnings 2,000

Adj: Loss on market decline 30,000Retained earnings 30,000Answer:1. B 2. B 3. D 4. A 5. D

Problem 9

You were engaged by Catacutan Company, a publicity held company whose shares aretraded in the Philippines Share Exchange, to conduct an examination of its 2004 financialstatements. You were told by the companys controller that there were numerous equity

transactions that took place in 2004. The shareholders equity accounts at December 31,

2003, had the following balances:

Preference share, P100 par value, 6% cumulative; 15,000shares authorized; 9,000 shares issued and outstanding P 900,000

Ordinary share, P1 par value, 900,000 shares authorized:

600,000 shares issued and outstanding 600,000Additional paid-in capital 1,200,000


Total shareholders equity P5,898,000

You summarized the following transactions during 2004 and other information relating to

the shareholders equity in your working papers as follows:


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January 6, 2004 issued 22,500 shares of ordinary share to Difficult Company in

exchange or land. On the date issued, the share had a market price of P16.50 per share.The land had a carrying value of P201,000, and an assessed value for property taxes of

P135,000.

January 31, 2004 Sold 1,350, P1,000, 12% bonds due January 31, 2006, at 98 withone detachable share warrant to each bond. Interest is payable annually on January 31.

The fair value of the bonds without the share warrants is 95. The detachable warrantentitles the holder to purchase 10 shares of ordinary share at P10 per share.

February 22, 2004 Purchased 7,500 shares of its own ordinary share to be held astreasury share for P24 per share.

February 28, 2004 Subscriptions for 21,000 shares of ordinary share were received atP26 per share, payable 50% down and the balance by March 15.

March 15, 2004 The balance due on 18,000 shares was received and those shares

were issued. The subscriber who defaulted on the 3,000 remaining shares forfeited the

down payment in accordance with the subscription agreement.

April 30, 2004 Declared a dividend of inventory to ordinary shareholders. Theinventory had a carrying value of P910,000:fair value on relevant dates were:

Date of declaration (April 30, 2004) P950,000

Date of record (May 15, 2004) 900,000Date of distribution(May 31, 2004) 920,000

August 30, 2004 Reissued 3,000 shares of treasury share for P20 per share.

September 14, 2004 There were 945 warrants detached from the bonds and

exercised.

November 30, 2004 Declared a cash dividend of P2 per share to all ordinaryshareholders of record December 15, 2004. The dividend was paid on December 30,

2004.

December 15, 2004 Declared the required annual cash dividends on preference share

for 2004. the dividend was paid on January 15, 2004.

January 8, 2005 Before closing the accounting records for 2004. Catacutan becameaware that no amortization had been recorded for 2003 for a patent purchased on July

2, 2003. The patent was properly capitalized at P480,000 and had an estimated usefullife of eight years when purchased. Catacutan is subject to 32% regular corporate

income tax. The appropriate correcting entry was recorded on the same day.

Adjusted net income after tax for 2004 was P1,860,900.

Questions

Based on the foregoing and the result of your audit, answer the following :

1. By how much should the retained earnings be decreased as a result of the property

dividend declaration on April 30, 2004?


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a. P 950,000 b. P 920,000 c. P 910,000 d. P 0

2. How much is the total dividends declared on preference and ordinary share in 2004?

a. P 2,294,900 b. P 2,263,900 c. P 2,254,900 d. P 2,200,900

3. Preference share at December 31, 2004 isa. P 1,500,000 b. P 954,000 c. P 900,000 d. P 0

4. Ordinary share at December 31, 2004 is

a. P 640,500 b. P 645,450 c. P 649,950 d. P 652,950

5. How much is the total additional paid-in-capital as of December 31, 2004

a. P 2,163,300 b. P 2,178,220 c. P 2,765,600 d. P 2,774,000

6. The adjusted balance of retained earnings on December 31,2004 is

a. P 2,783,600 b. P 2,774,000 c. P 2,771,600 d. P 2,743,600

7. How much is the treasury share as of December 31, 2004?

a. P 180,000 b. P 120,000 c. P 108,000 d. P 0

8. How much is the total shareholders equity on December 31, 2004?a. P 6,376,850 b. P 4,271,550 c. P 4,232,550 d. P 4,194,350

SolutionJan 6 - Land 371,250


Jan 31 - Cash 1,323,000Discount on BP 67,500

Ordinary share warrants 40,500Bonds Payable 1,350,000

Proceeds 1,323,000Less: Market Value of Bonds (P1,350,000 x 95%) 1,282,500

Allocated Cost of the warrants 40,500Feb 22 - Treasury share 180,000

Cash 180,000Feb 28 - Cash 273,000

Subscription receivable 273,000Subscribed ordinary share 21,000

APIC 525,000Mar 15 - Cash 234,000

Subscription receivable 234,000Subs. ordinary share 18,000

Ordinary share 18,000Subs. Ordinary share 3,000

APIC 75,000Subscription receivable 39,000

APIC forfeiture of share 39,000Apr 30 - Dividends/RE 910,000

Inventory 910,000

Aug 30 - Cash 60,000Retained earnings 12,000Treasury share 72,000

Sep 14 - Cash 94,500Ordinary share warrants 28,350


Nov 30 - Dividends/RE 1,290,900Cash 1,290,900

Dec 15 - Dividends 54,000Dividends payable 54,000

Dec 31 - Retained earnings 20,400


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Income tax payable (32%) 9,600Patents 30,000

Income summary 1,860,900Retained earnings 1,860,900

Answer:1. C 2. C 3. C 4. C 5. A 6. C 7. C 8. A

Problem 10

The Ceniza Company engaged Mr. Coliseo, a CPA, in 2003 to examine its books and recordsand to make whatever adjustments are necessary.

The CPAs examination disclosed the following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS

BalanceDate Particular Debit Credit Debit Credit2001

Jan. 1 Balance 580,000Dec. 31 Net income for the year 310,000 890,0002002Jan 31 Dividends paid 140,000 750,000

Apr. 3 Paid in capital in excess of par 90,000 840,000Aug. 30 Gain on retirement of preference

Share at less than issue price 64,500 904,500

Dec. 31 Net loss for the year 205,000 699,500

2003

Jan 31 Dividends paid 100,000 599,500

Dec. 31 Net loss for the year 165,500 434,000

b. Dividends had been declared on December 31, 2001 and 2002 but had not been entered

in the books until paid.

c. The company purchased a machine worth P360,000 on April 30, 2000. The company

charged the purchase to expense. The machine has an estimated useful life of 3 years.

The company uses the straight line method and residual values are deemed immaterial.

d. The company received at transportation equipment as donation from one of its

shareholders on September 30, 2002. The equipment was used to deliver goods to

customers. The equipment costs P750,000 and has a remaining life of 3 years on thedate of donation. The equipment has a fair value of P240,000 and P30,000 was incurred

for registering the transfer of ownership. The company did not record the donation on its

books. The expenses paid related to the donated equipment were charged to expense.

e. The physical inventory of merchandise had been understates by P64,000 and byP44,500 at the end of 2001 and 2003, respectively.

f. The merchandise inventoried at the end of 2002 and 2003 did not include merchandise

that was then in transit shipped FOB shipping point. These equipments of P43,400 and

P32,600 were recorded a purchases in January 2003 and 2004, respectively.


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Questions

Based on the above audit findings, the adjusted balances of the following are: (Disregardtax implication)

1. Retained earnings, 12/31/00

a.

P 860,000 b. P 850,900 c. P 790,900 d. P 760,900

2. Net income for 2001a. P 373,100 b. P 369,800 c. P 254,000 d. P 215,800

3. Retained earnings, 12/31/01a. P 976,700 b. P 974,000 c. P 860,700 d. P 720,700

4. Net loss for 2002a. P 379,000 b. P 359,700 c. P 349,700 d. P 269,700


a. P 341,000 b. P 411,000 c. P 481,000 d. P 495,000

6. Net loss for 2003

a. P 241,000 b. P 228,300 c. P 178,300 d. P 148,300


a. P 362,700 b. P 332,700 c. P 302,700 d. P 254,000

Solution2001 2002 2003

Unadjusted net income/(loss) 310,000 (205,000) (165,500)Adjustments:c Depreciation (120,000) (120,000) (40,000)d Error in charging to expense 30,000

Depreciation (20,000) (80,000)

e Understatement of inv. 2001 64,000 (64,000)Understatement of inv. - 2003 44,500

f Understatement of inv. - 2002 43,400 (43,400)Understatement of inv. 2003 32,600Under. of purchases 2002 (43,400) 43,400Under. of purchases 2003 ___________ ___________ (32,600)

Adjusted Net income 254,000 (379,000) (241,000)Plus: Retained Earnings beg unadj. 580,000

Prior period adjustmentError in charging to expense 360,000Unrecorded depreciation (80,000)

Retained Earnings beg adjusted 860,000 974,000 495,000Less: Dividends (140,000) (100,000) _________Retained earnings end 974,000 495,000 254,000

Answer:

1. A 2. C 3. B 4. A 5. D 6. A 7. D

Problem 11

The shareholders Equity of Cosare Corporation at December 31, 2003, showed

Capital share, Ordinary, P100 par value per share (Authorized10,000 shares; issued and outstanding 6,000 shares) P600,000

Retained Earnings 300,000


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Total P900,000

An audit disclosed that the treasurer was short in his cash to the extent of P50,000. He hadconcealed his shortage by increasing inventory values by p15,000; land values by P20,000

and accounts receivables- trade by P15,000

Upon discovery of the shortage, the Treasure offered to surrender at book value 500 sharesof the Capital Share which he owns in the settlement of the shortage. The board of directors

accepted his offer and remitted cash to the Treasurer for any excess value over shortage.The treasurers 500 shares, after being acquired by the company were distributed pro rata

to the remaining shareholders.

Questions

1. What amount of money should the company pay the Treasurer?

a. P 50,000 b. P 25,000 c. P 15,000 d. P 0

2. What is the corporate retained earnings after distribution?

a. P 225,000 b. P 200,000 c. P 100,000 d. P 75,000

SolutionInventory 15,000Land 20,000

Accounts receivable 15,000Cash 50,000

Treasury share 75,000Inventory 15,000Land 20,000

Accounts receivable 15,000Cash 25,000


Treasury share 75,000Answer:1. B 2. A

Problem 12You have been engaged to audit the financial statements of Cuajotor Corporation for the

calendar year 2003. The company was organized on January 2, 2002 and has not beenaudited before.

The following items relating to equity and income statement accounts appear in yourWorking Balance Sheet (WBS) and Working Income Statement (WIS)

WBS- December 31, 2003: Balance Per Books

Long- term liabilities P240,800

Capital Share issued 560,000Additional Paid in capital 100,000Revaluation increment- Land 90,000

Retained Earnings 54,000

WIS- Year ended December 31, 2003

Income before tax 150,000

Provision for income tax 45,000Income before extraordinary items 105,000Extraordinary items(net of tax) 77,000

Net income 28,000


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Following are your audit findings:

1. Long- term liabilities- This consist

Mortgage payable P180,000Accrued interest on mortgage payable 10,800

Reserve for general contingencies 50,000Total P240,800

The company mortgage its land to the Philippine National Bank for P180,000 onSeptember 1, 2003. The mortgage liability is payable in 18 semi-annual installments of

P10,000 plus accrued interest of 18% to date. The first installments due March 1, 2004.

The reserve for general contingencies was set up by resolution of the Board of Directorson December 27, 2003. its purpose is to provide for possible future losses due to the

risk of an impending business recession. A corresponding charge was made to general

contingency losses which is classified as an extraordinary item.

2. Capital Share issued- The company is authorized to issue 10,000 shares of P100 par

value ordinary share. Your analysis of the capital share issued account shows:

2003 DESCRIPTION AMOUNT

Jan. 1 Balance, 4,500 shares issued P450,000Mar. 1 Sold 500 shares at P120 per share 60,000Nov. 1 Assessment on shareholders P10 per share 50,000

Dec. 31 Balance P 560,000

3. Additional paid in capital - The account balance represents the fair value of property

donated to the company in 2002. There was no managers check account in 2002.

4. Revaluation increment (Land) Land was written up to appraised value on December of2003. The appraised value of P90,000 was determined by the company engineer. The

property was acquired in 2002 at a cost of P40,000.

5. Retained earnings, December 31, 2003 Analysis of the retained earnings account for

2003 shows:

Balance, January 1, 2003 P18,000Net income 2003 28,000

Gain on sale of treasury share 8,000Balance, December 31, 2003 P54,000

6. Over/Understatement The following over/understatements were discovered in the

course of your audit:2002 2003

Inventory, end 4,000 under 10,000 under

Depreciation expense 2,500 under 2,000 underAccrued expenses payable end 1,000 under 1,600 over


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7. Extraordinary items Extraordinary items consists of:

General contingency losses P50,000Write-off of obsolete inventory 20,000

Loss due to earthquake 40,000Total 110,000

Less: Tax savings, 30% 33,000Extraordinary items, net of tax 77,000

8. Provision for income tax - The income tax rate is 30%. There are no permanentdifferences between financial and taxable income.

Required: For each item below, determine the amount per audit that should appear in yourworking balance sheet and working income statement. Assume that client approves alladjustments.

Questions

1. Capital share issueda. P 580,000 b. P 550,000 c. P 510,000 d. P 500,000

2. Additional paid-in capitala. P 168,000 b. P 150,000 c. P 110,000 d. P 100,000

3. Long-term liabilitiesa. P 230,000 b. P 190,800 c. P 180,000 d. P 160,000

4. Current portion of long-term debta. P 80,000 b. P 20,000 c. P 10,000 d. P 0

5. Revaluation increment Landa. P 90,000 b. P 50,000 c. P 40,000 d. P 0


a. P 21,850 b. P 20,800 c. P 18,350 d. P 18,000

7. Extraordinary items (net of tax)

a. P 0 b. 42,000 c. 40,000 d. 28,000

8. Income before taxa. P 96,600 b. 136,600 c. 134,600 d. 120,400

9. Provision for income tax

a. P 40,980 b. P 40,380 c. P 36,120 d. P 28,980

10. Net incomea. P 67,620 b. P 54,220 c. P 42,280 d. P 24,280

11. Retained earnings, 12/31/2003a. P 85,970 b. 72,220 c. 63,080 d. 47,720

Solution


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Long-term liability 20,000Mortgage Payable current 20,000

Long-term liability 10,800Interest payable 10,800

Long-term liability 50,000Extraordinary item 35,000Income tax payable 15,000

Capital share 10,000APIC 10,000

Capital share 50,000APIC 50,000

APIC 100,000APIC - Donated capital 100,000

Revaluation increment 40,000Land 40,000

Gain on sale 8,000APIC TS 8,000

Beg. Inventory 4,000Retained earnings - beg 2,800Income tax payable 1,200

Inventory 10,000Cost of sales 10,000

Retained earnings beg 1,750Income tax payable 750Depreciation 2,000

Accum. Depreciation 4,500Retained earnings beg 700Income tax payable 300

Expenses 1,000Accrued expenses 1,600

Expenses 1,600Loss on inventory 20,000Loss on damages 40,000

Extraordinary items 42,000Income tax payable 18,000

Answer:1. D 2. A 3. D 4. B 5. D 6. P 18,350 7. P 08. P 96,600

Unadjusted NI 150,000Under beg. Inv. ( 4,000)Under ending invent. 10,000Under depreciation ( 2,000)Under AE beg 1,000Over AE end 1,600Loss on inventory (20,000)Loss on damages (40,000)Income before tax 96,600Provision 28,980Net income 67,620

9. P 28,980 10. A 11. P 85,970

Problem 13

Listed below are the transactions that affected the shareholders equity of Christian PaulCorporation during the period 2003-2005. At December 31, 2002, the corporations

accounts included:

(P in 000s)Ordinary share, 315 million shares at P1 par P 315,000Paid-in capital excess of par 1,890,000



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a. November 2, 2003, the board of directors declared a cash dividend of P0.80 per share

on its ordinary shares, payable to shareholders of record November 16, to be paid

December 2.

b. On March 3, 2004, the board of directors declared a property dividend consisting ofbonds of Maria Mikaela County that Christian Paul was holding as an investment. The

bonds had a fair market value of P4.8 million, but were purchased two years previouslyfor P3.9 million. Because they were intended to be held-to-maturity, the bonds had not

been previously written up. The property dividend was payable to shareholders ofrecord March 14, to be distributed April 6.

c. On July 13, 2004, the corporation declared and distributed a 5% ordinary share dividend(when the market value of the ordinary share was P21 per share). Cash was paid for

fractional share rights representing 750,000 equivalent whole shares.

d. On November 2, 2004, the board of directors declared a cash dividend of P0.80 pershare on its ordinary shares, payable to shareholders of record November 16, to be paid

December 2.

e. On January 16, 2005, the board of directors declared and distributed a 3-for-2 sharesplit effected in the form of a 50% share dividend when the market value of the ordinary

share was P23 per share.

f. On November 2, 2005, the board of directors declared a cash dividend of P0.65 per

share on its ordinary shares, payable to shareholders of record November 16, to be paid

December 2.

g. The reported net income of Christian Paul was P990 million, P1,185 million, and P1,365

million for 2003, 2004, and 2005, respectively.

Questions

1.

The Retained earnings of Christian Paul Corporation at the end of 2005 is: (P in 000s)a. P 5,276,700 b. P 5,276,600 c. P 5,112,600 d. P 5,095,850

2. The Additional paid-in capital of Christian Paul Corporation at the end of 2005 is: (P in

000s)a. P 5,860,000 b. P 5,655,000 c. P 2,190,000 d. P 2,025,000

3. The Ordinary share of Christian Paul Corporation at the end of 2005 is: (P in 000s)

a. P 495,750 b. P 495,000 c. P 330,750 d. P 330,000

4. The total Shareholders Equity of Christian Paul Corporation at the end of 2005 is: (P in

000s)a. P 11,097,450 b. P 7,797,600 c. P 7,796,700 d. P 7,615,850

Solution

(in 000s)A. Retained earnings 252,000

Cash 252,000B. Retained earnings 3,900

Investment HTM 3,900C. Retained earnings 330,750

Ordinary share 15,000APIC 300,000Cash 15,750


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D. Retained earnings 264,000Cash 264,000

E. Retained earnings 165,000 Ordinary share, old 330,000Ordinary share 165,000 OR Retained earnings 165,000

Ordinary share, new 495,000F. Retained earnings 321,750

Cash 321,750Answer:

1. P 5,112,600 2. C 3. B 4. P 7,797,600

Problem 14VELASCO COMPANY was formed on July 1, 2000. It was authorized to issue 300,000 sharesof P20 par value ordinary share and 100,000 shares of 8 percent P50 par value, cumulated

and nonparticipating preference share. VELASCO COMPANY has a July 1 June 30 fiscal

year.

The following information relates to the shareholders equity accounts of VELASCO

COMPANY:

Ordinary share

Prior to the 2002-2003 fiscal year, Velasco Company had 110,000 shares of outstandingordinary share issued as follows:

1. 95,000 shares were issued for cash on July 1, 2000, at P62 per share.2. On July 24, 2000, 5,000 shares were exchanged for a plot of land which cost the

seller P140,000 in 1994 and had an installment market value of P440,000 on July 24,

2000.

3. 10,000 shares were issued on March 1, 2001; the shares had been subscribed forP84 per share on October 31, 2001.

During the 2002-2003 fiscal year, the following transactions regarding ordinary share took

place:

October 1, 2002

Subscriptions were received for 10,000 shares at P92 per share. Cash of P184,000 was

received in full payment for 2,000 shares and share certificates were issued. The

remaining subscription for 8,000 shares were to be paid in full by September 30, 2004,at which time the certificates were to be issued.

November 30, 2002

Velasco Company purchased 2,000 shares of its own share on the open market at P78per share. Velasco Company uses the cost method for treasury share.

December 15, 2002

Velasco declared a 5% share dividend for shareholders of record on January 15, 2003,

to be issued on January 31, 2003. Velasco Company was having a liquidity problem

and could not afford a cash dividend at that time. Velasco Companys ordinary sharewas selling at P104 per share on December 15, 2002.

June 20, 2003


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Velasco Company sold 500 shares of its own ordinary share that it had purchased on

November 30, 2002, for P42,000.Preference share

Velasco Company issued 50,000 shares of preference share at P88 per share on July 1,

2001.

Cash Dividends

Velasco Company has followed a schedule of declaring cash dividends in December and June

with payment being made to shareholders of record in the following month. The cashdividends which have been declared since inception of the company through June 30, 2003,

are shown below:

Declaration Date Ordinary share Preference Share12/15/01 P0.60 per share P2.00 per share

6/15/02 P0.60 per share P2.00 per share

12/15/02 - P2.00 per share

No cash dividends were declared during June 2003, due to the companys liquidity problem.

Retained Earnings

As of June 30, 2002, Velasco Companys retained earnings account had a balance of

P1,380,000. For the fiscal year ending June 30, 2003, Velasco Company reported netincome of P80,000.

In March of 2002, Velasco Company received a loan from Davao Bank. The bank requiresVelasco Company to establish a sinking fund and restrict retained earnings for an amountequal to the sinking fund and restrict retained earnings for an amount equal to the sinking

fund deposit. The annual sinking fund payment of P100,000 is due on April 30 each year,the first payment was made on schedule on April 30, 2003.

Questions

1. What is the balance of the ordinary share account at June 30, 2003?a. P 2,352,000 b. P 2,350,000 c. P 2,320,500 d. P 2,320,500

2. What is the balance of the Treasury Share account at June 30, 2003?

a. P 156,000 b. P 124,800 c. P 117,000 d. P 114,000

3. What is the entry to record the dividend in arrears on the preference share?

a. Retained earnings 100,000 c. Dividend payable 100,000Dividend payable 100,000 Cash 100,000

b. Retained earnings 100,000 d. No journal entryCash 100,000

4. What is the total additional paid-in capital at June 30, 2003?

a. P 8,171,000 b. P 8,055,000 c. P 7,593,000 d. P 6,155,000

5. How much is the retained earnings at June 30, 2003?a. P 1,250,000 b. P 1,150,000 c. P 788,000 d. P 688,000


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6. What is the total shareholders equity at June 30, 2003?

a. P 13,736,000 b. P 13,116,000 c. P 13,000,000 d. P 12,900,000

SolutionCash 5,890,000

Ordinary share 1,900,000

APIC 3,990,000Land 440,000


Cash 840,000Ordinary share 200,000

APIC 640,000Cash 184,000


Subscription receiv. 736,000Subscribed CS 160,000

APIC 576,000Treasury share 156,000

Cash 156,000

Retained earnings 572,000(110,000 + 2,000 2,000 x 5% x P104)


Cash 42,000Treasury share 39,000

APIC TS 3,000Cash 4,400,000 Dividends:

Preference share 2,500,000 Ordinary shareAPIC PS 1,900,000 12/15/01 110,000 x .60 = P 66,000

6/15/02 110,000 x .60 = 66,000Retained earnings 432,000 Preference share

Cash 432,000 12/15/01 50,000 x 2 = 100,0006/15/02 50,000 x 2 = 100,000

Income summary 80,000 12/15/02 50,000 x 2 = 100,000Retained earnings 80,000 Total 432,000

RE unappropriated 100,000RE appropriated 100,000

Answer:1. B 2. C 3. D 4. B 5. C 6. A

Problem 15

On April 1,1994, the Jen-Jen, inc. issued P6,000,000 of 7% convertible bonds w/ interestpayment dates of April and Oct. 1. The bond were sold ion July 1,1994, and mature on April1, 2014. The bond discount totaled P319,950. The bond contract entitles the bondholders to

received 10 shares of P20 par value ordinary share in exchange for each P1,000 bond. On

April 1, 2004, the holders of the bonds with total face value of P750,000 exercised theirconversion privilege. On July 1, 2004, the company reacquired at 125, bonds with a face

value of P375,000.

The balances in the capital accounts as of December 31, 2003 were

Ordinary share P20 par, authorized 3 million shares,Issued and outstanding, 187,00 shares P 3,750,000

Premium on ordinary share 1,875,000

Market value of the ordinary share and bonds were as follows:


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DATE BONDS ORDINARY SHARE

April 1, 2004 122 52July 1, 2004 125 56

Questions:Based on the above and the result of your audit, answer the following:

1. How much the total cash received from the sale of the P6,000,000 bonds on April 1,

1994?a. P 6,000,000 b. P 5,680, 050 c. P 5,785,050 d. P 5,820, 050

2. How much is the interest expense for the year 1994?a. P 323,100 b. P 315,000 c. P 218,100 d. P 201,900

3. How much is the carrying value of the bonds payable as of December 31, 1994?a. P 6,311, 850 b. P 6,000,000 c. P 5,692,048 d. P 5,688,150

4. The entry to record the conversion on April 1, 2004 will include

a. A debit to bonds payable of P729,750.

b. A debit to discount on bonds payable of P20,250.c. A credit to APIC of P579,750.

d. A credit to gain on bond conversion of P579,750.

5. How much is the gain (loss) on bond reacquisition on July 1, 2004?

a. P 103,622 b. P(103,622) c. P (83,878) d. 0

Solution

4/1/94 Cash 5,785,050 (squeezed figure)Discount on BP 319,950

Bonds payable 6,000,000Interest expense 105,000

10/1/94 Interest expense 210,000Cash 210,000

12/31/94 Interest expense 105,000Interest payable 105,000

Interest expense 8,100Discount on BP 8,100

(P319,950/237 x 6 = P8,100)4/1/04 Bonds payable 750,000

Discount on BP 20,250APIC 579,750

6/1/04 Bonds payable 375,000Loss on retirement 103,622

Discount on BP 9,872Cash 468,750

Answer:1. C 2. C 3. D 4. C 5. B

audit of stockholders equity

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