VIII – AUDIT OF STOCKHOLDERS’ EQUITY
PROBLEM NO. 1
Alcoy Corporation’s post-closing trial balance at December 31, 2006 was as
follows:
Alcoy Corporation
Post-Closing Trial Balance
December 31, 2006
Debit
Accounts payable
Accounts receivable
Reserve for depreciation
Reserve for doubtful accounts
Premium on common stock
Gain on sale of treasury stock
Bonds payable
Building and equipment
Cash
Cash dividends payable on preferred stock
Common stock (P1 par value)
Inventories
Land
Available-for-sale securities at fair value
Trading securities at fair value
Net unrealized loss on available-for-sale
securities
Preferred stock (P50 par value)
Prepaid expenses
Donated capital
Stock warrants outstanding
Retained earnings
Treasury stock – common, at cost
Totals
Credit
P 495,000
P 963,000
360,000
54,000
1,800,000
450,000
720,000
1,980,000
396,000
7,200
270,000
1,116,000
684,000
513,000
387,000
45,000
900,000
72,000
800,000
208,000
415,800
324,000
P6,480,000
P6,480,000
At December 31, 2006, Alcoy had the following number of common and
preferred shares:
Common
900,000
270,000
252,000
Authorized
Issued
Outstanding
225
Preferred
90,000
18,000
18,000
The dividends on preferred stocks are P0.40 cumulative. In addition, the
preferred stock has a preference in liquidation of P50 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Additional paid-in capital
a. P3,213,000
b. P3,258,000
c. P3,050,000
d. P2,600,000
2. Total contributed capital
a. P4,428,000
b. P4,220,000
c. P3,770,000
d. P1,170,000
3. Unappropriated retained earnings
a. P415,800
b. P739,800
c. P91,800
d. P37,800
4. Total stockholders’ equity
a. P4,266,800
b. P4,519,800
c. P4,888,800
d. P4,474,800
Suggested Solution:
Question No. 1
Premium on common stock
Gain on sale of treasury stock
Donated capital
Stock warrants outstanding
Total additional paid-in capital
P1,800,000
450,000
800,000
208,000
P3,258,000
Question No. 2
Preferred stock (P50 par value)
Common stock (P1 par value)
Additional paid-in capital (see no. 1)
Total contributed capital
P 900,000
270,000
3,258,000
P4,428,000
Question No. 3
Total retained earnings
Less appropriation for treasury stock
Unappropriated retained earnings
226
P415,800
324,000
P 91,800
Question No. 4
Total contributed capital (see no. 2)
Retained earnings:
Unappropriated (see no. 3)
Appropriated for treasury stock
Total
Less : Treasury stock
Net unrealized loss on AFS
Total stockholders equity
P4,428,000
P 91,800
324,000
415,800
4,843,800
324,000
45,000
369,000
P4,474,800
Answers: 1) B; 2) A; 3) C; 4) D
PROBLEM NO. 2
Your audit client, Argao, Inc., is a public enterprise whose shares are
traded in the over-the-counter market. At December 31, 2005, Argao had
3,000,000 authorized shares of P10 par value common stock, of which
1,000,000 shares were issued and outstanding. The stockholders’ equity
accounts at December 31, 2005 had a following balances.
Common stock
Additional paid-in capital
Retained earnings
P10,000,000
3,750,000
3,250,000
Transactions during 2006 and other information
stockholders’ equity accounts were as follows:
relating
to
the
•
On January 2, 2006, Argao issued at P54 per share, 50,000 shares of
P50 par value, 9% cumulative convertible preferred stock. Each share
of preferred stock is convertible into two shares of common stock.
Argao had 300,000 authorized shares of preferred stock. The preferred
stock has a liquidation value equal to its par value.
•
On February 1, 2006, Argao reacquired 10,000 shares of its common
stock for P16 per share.
•
On April 30, 2006, Argao sold 250,000 shares (previously unissued) of
P10 par value common stock to the public at P17 per share.
•
On June 15, 2006, Argao declared a cash dividend of P1 per share of
common stock, payable on July 15, 2006, to stockholders of record on
July 1, 2006.
227
•
On November 10, 2006, Argao sold 5,000 shares of treasury stock for
P21 per share.
•
On December 15, 2006, Argao declared the yearly cash dividend on
preferred stock, payable on January 15, 2007, to stockholders of record
on December 31, 2006.
•
On January 20, 2007, before the books were closed for 2006, Argao
became aware that the ending inventories at December 31, 2005 were
understated by P150,000 (after tax effect on 2005 net income was
P90,000). The appropriate correction entry was recorded the same day.
•
After correcting the beginning inventory, net income for 2006 was
P2,250,00.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Additional paid-in capital
a. P5,700,000
b. P5,525,000
c. P5,500,000
d. P5,725,000
2. Unappropriated retained earnings
a. P4,125,000
b. P4,035,000
c. P4,045,000
d. P3,955,000
3. Treasury stock
a. P160,000
b. P 80,000
c. P55,000
d. P50,000
4. Total stockholders’ equity
a. P22,190,000
b. P24,770,000
c. P24,690,000
d. P24,840,000
5. Book value per share of common stock
a. P17.89
c. P17.71
b. P17.82
d. P15.41
228
Suggested Solution:
Questions No. 1 to 4
Preferred stock
Common stock
Additional paid in capital
Retained earnings:
Appropriated
Unappropriated
Treasury stock
Total SHE, 12/31/06
P 80,000
4,045,000
P 2,500,000
12,500,000
5,725,000
(1)
4,125,000
(
80,000)
P24,770,000
(2)
(3)
(4)
Prepare T-accounts for each component of the stockholders’ equity. Place
the balances as of January 1, 2006, journalize the transactions affecting
the SHE accounts, post the entries to the affected accounts, then extract
the balances.
Journal entries affecting the stockholders equity accounts during 2006:
1/2 Cash (50,000 shares x P54)
P2,700,000
Preferred stock (50,000 shares x P50)
P2,500,000
APIC - excess over par of preferred stock
200,000
2/1
Treasury stock (10,000 x P16)
Cash
P 160,000
P 160,000
4/30 Cash (250,000 shares x P17)
P4,250,000
Common stock (250,000 shares x P10)
P2,500,000
APIC - excess over par of common stock
1,750,000
6/15
Retained earnings
Dividends payable - common
P1,240,000*
P1,240,000
* [(1,000,000 + 250,000 – 10,000) x P1]
11/10 Cash (5,000 shares x P21)
P 105,000
Treasury stock (5,000 shares x P16)
APIC - from treasury stock transactions
12/15 Retained earnings (2,500,000 x 9%)
Dividends payable - preferred
P 225,000
12/31 Inventory, 1/1/06
Retained earnings
Income tax payable
P 150,000
229
P
80,000
25,000
P225,000
P 90,000
60,000
12/31 Income summary
Retained earnings
P2,250,000
P2,250,000
12/31 Retained earnings
P
80,000
Retained earnings - appropriated (cost of TS)
P
80,000
Question No. 5
Total stockholders' equity (see no. 4)
Less liquidation value of preferred stock
Common stockholders' equity
Divide by common shares outstanding
Book value per share of common stock
P24,770,000
2,500,000
22,270,000
1,245,000
P
17.89
Answers: 1) D; 2) C; 3) B; 4) B, 5) A
PROBLEM NO. 3
The stockholders’ equity section of the Asturias Inc. showed the following
data on December 31, 2005: Common stock, P3 par, 300,000 shares
authorized, 250,000 shares issued and outstanding, P750,000; Paid-in
capital in excess of par, P7,050,000; Additional paid-in capital from stock
options, P150,000; Retained earnings, P480,000. The stock options were
granted to key executives and provided them the right to acquire 30,000
shares of common stock at P35 per share. Each option has a fair value of
P5 at the time the options were granted.
The following transactions occurred during 2006:
Feb.
1
Key executives exercised 4,500 options outstanding at
December 31, 2005. The market price per share was P44 at
this time.
Apr.
1
The company issued bonds of P2,000,000 at par, giving each
P1,000 bond a detachable warrant enabling the holder to
purchase two shares of stock at P40 each for a 1-year period.
The bonds would sell at P996 per P1,000 bond without the
warrant.
July
1
The company issued rights to stockholders (one right on each
share, exercisable within a 30-day period) permitting holders
to acquire one share at P40 with every 10 rights submitted.
All but 6,000 rights were exercised on July 31, and the
additional stock was issued.
230
Oct.
1
All warrants issued in connection with the bonds on April 1
were exercised.
Dec. 1
The market price per share dropped to P33 and options came
due. Because the market price was below the option price, no
remaining options were exercised.
Dec. 31
Net income for 2006 was P250,500.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P777,300
b. P848,700
c. P833,850
d. P850,050
2. Total additional paid-in capital
a. P7,522,200
b. P8,402,800
c. P8,219,650
d. P8,419,450
3. Total contributed capital
a. P8,299,500
b. P9,053,500
c. P9,269,500
d. P9,251,500
4. Retained earnings
a. P580,500
b. P858,000
c. P730,500
d. P654,150
5. Total stockholders’ equity
a. P10,000,000
b. P 9,784,000
c. P9,030,000
d. P9,982,000
Suggested Solution:
Questions No. 1 to 5
Common stock
Additional paid in capital
Contributed capital
Retained earnings
Total SHE, 12/31/06
P
850,050
8,419,450
9,269,500
730,500
P10,000,000
Note: Follow the same approach in Problem no. 2.
231
(1)
(2)
(3)
(4)
(5)
Journal entries affecting the stockholders equity accounts during 2006:
2/1 Cash (4,500 options x P35)
P 157,500
APIC-stock options (4,500 x P5)
22,500
Common stock (4,500 shares x P3)
P
13,500
APIC - excess over par
166,500
4/1 Cash
P2,000,000
Bond discount [P2,000,000-(2,000xP996)]
8,000
Bonds payable
P2,000,000
APIC-stock warrants
8,000
7/1 Memorandum: Issued rights to shareholders permitting holder to
acquire for a 30-day period one share at P40 with every 10 rights
submitted - a maximum of 25,450 shares (254,500 shares ÷ 10).
7/31 Cash {[25,450 - (6,000/10)] x P40}
P
Common stock (24,850 shares x P3)
APIC - excess over par
994,000
P
74,550
919,450
10/1 Cash (2,000 x 2 x P40)
P 160,000
APIC-stock warrants
8,000
Common stock (2,000 shares x 2 x P3)
P
12,000
APIC - excess over par
156,000
12/1 APIC-stock options [P150,000-(4,500xP5)] P 127,500
APIC - expired stock options
P 127,500
12/31 Income summary
Retained earnings
P
250,500
P250,500
Answers: 1) D; 2) D; 3) C; 4) C, 5) A
PROBLEM NO. 4
Balamban Corporation was authorized at the beginning of 2004 with
540,000 authorized shares of P100, par value common stock. At December
31, 2004, the stockholders’ equity section of Balamban was as follows:
Common stock, par value P100 per share; authorized
540,000 shares; issued 54,000 shares
Additional paid-in capital
Retained earnings
Total stockholders’ equity
232
P5,400,000
540,000
810,000
P6,750,000
On May 10, 2005, Balamban issued 90,000 shares of its common stock for
P10,800,000. A 5% stock dividend was declared on September 30, 2005
and issued on November 10, 2005 to stockholders of record on October 31,
2005. Market value of common stock was P110 per share on declaration
date. The net income of Balamban for the year ended December 31, 2005
was P855,000.
During 2006, Balamban had the following transactions;
Feb. 15
Balamban reacquired 5,400 shares of its common stock for
P95 per share.
May 15
Balamban sold 2,700 shares of its treasury stock for P120
per share.
Jun 30
Issued to stockholders one stock right for each share held to
purchase two additional shares of common stock for P125 per
share. The rights expire on December 31, 2006.
Aug. 15
45,000 stock rights were exercised when the market value of
common stock was P130 per share.
Sep. 30
72,000 stock rights were exercised when the market value of
the common stock was P140 per share.
Dec. 01
Balamban declared a cash dividend of P2 per share payable
on January 15, 2007 to stockholders of record on December
31, 2006.
Dec. 15
Balamban retired 1,800 shares of its treasury stock and
reverted them to an unused basis. On this date, the market
value of the common stock was P150 per share.
Dec. 31
Net income for 2006 was P900,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P38,520,000
b. P26,640,000
c. P38,340,000
d. P38,250,000
233
2. Additional paid-in capital
a. P8,329,500
b. P8,338,500
c. P5,413,500
d. P8,266,500
3. Retained earnings
a. P1,080,000
b. P1,002,600
c. P1,017,000
d. P1,008,000
4. Treasury stock
a. P18,000
b. P90,000
c. P85,500
d. P
0
Suggested Solution:
Questions No. 1 to 4
Balances, 1/1/05
May 10, 2005
Sept. 30, 2005
Net income-2005
Balances, 12/31/05
Feb. 15
May 15
Aug. 15
Sep. 30
Dec. 01
Dec. 15
Net income-2006
Balances, 12/31/06
Common
Stock
P 5,400,000
9,000,000
720,000
APIC
P 540,000
1,800,000
72,000
15,120,000
2,412,000
9,000,000
14,400,000
67,500
2,250,000
3,600,000
(180,000)
9,000
Retained
Earnings
P 810,000
(792,000)
855,000
873,000
Treasury
stock
P
0
0
513,000
(256,500)
(765,000)
P38,340,000
P8,338,500
(171,000)
900,000
P1,008,000
P 85,500
Answers: 1) C; 2) B; 3) D; 4) C
PROBLEM NO. 5
Bogo Corporation began operations on January 1, 2006. The company was
authorized to issue 60,000 shares of P10 par value common stock and
120,000 shares of 10%, P100 par value convertible preferred stock.
In connection with your audit of the company’s financial statements, you
noted the following transactions involving stockholders’ equity during 2006:
234
Jan.
1
Issued 1,500 shares of common stock to the corporation
promoters in exchange for equipment valued at P510,000 and
services valued at P210,000. The property costs P270,000 3
years ago and was carried on the promoters’ books at
P150,000.
Jan. 31
Issued 30,000 shares of convertible preferred stock at P150
per share. Each share can be converted to five shares of
common stock. The corporation paid P225,000 to an agent
for selling the shares.
Feb. 15
Sold 9,000 shares of common stock at P390 per share. The
corporation paid issue costs of P75,000.
May 30
Received subscriptions for 12,000 shares of common stock at
P450 per share.
Aug. 30
Issued 2,100 shares of common stock and 4,200 shares of
preferred stock in exchanged for a building with a fair market
value of P1,530,000. The building was originally purchased
for P1,140,000 by the investors and has a book value of
P660,000. In addition, 1,800 shares of common stock were
sold for P720,000 cash.
Nov. 15
Payments in full for half of the subscriptions and partial
payments for the rest of the subscriptions were received.
Total cash received was P4,200,000. Shares of stock were
issued for the fully paid subscriptions.
The balance is
collectible next year.
Dec.
Declared a cash dividend of P10 per share on preferred stock,
payable on December 31 to stockholders of record on
December 15, and P20 per share cash dividend on common
stock, payable on January 15, 2007 to stockholders of record
on December 15.
1
Dec. 31
Paid the preferred stock dividend.
Net income for the first year of operations was P1,800,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
235
1. Common stock
a. P204,000
b. P144,000
c. P264,000
d. P186,000
2. Paid-in capital in excess of par value of preferred stock
a. P1,500,000
c. P1,275,000
b. P1,545,000
d. P1,860,000
3. Paid-in capital in excess of par value of common stock
a. P 8,211,000
c. P11,121,000
b. P10,851,000
d. P10,032,000
4. Retained earnings
a. P1,050,000
b. P1,170,000
c. P 930,000
d. P1,458,000
5. Total stockholders’ equity
a. P17,295,000
b. P16,950,000
c. P15,810,000
d. P17,010,000
Suggested Solution:
Questions No. 1 to 5
Preferred stock
Common stock
Subscribed common
Additional paid in capital - preferred
Additional paid in capital - common
Retained earnings
Total SHE, 12/31/06
P3,420,000
204,000
60,000
1,545,000
10,851,000
930,000
P17,010,000
(1)
(2)
(3)
(4)
(5)
Journal entries affecting the stockholders equity accounts during 2006:
1/1 Equipment
P 510,000
Organization expenses
210,000
Common stock (1,500 shares x P10)
P
15,000
APIC - excess over par of CS
705,000
1/31 Cash (30,000 shares x P150)
P4,500,000
Preferred stock (30,000 shares x P100)
P3,000,000
APIC - excess over par of PS
1,500,000
APIC - excess over par of PS
Cash
236
P 225,000
P 225,000
2/20 Cash (9,000 shares x P390)
P3,510,000
Common stock (9,000 shares x P10)
P
90,000
APIC - excess over par of CS
3,420,000
APIC - excess over par of CS
Cash
P
75,000
P
75,000
5/30 Subscriptions rec. (12,000 sh. x P450)
P5,400,000
Subscribed common stock (12,000 shares x P10) P 120,000
APIC - excess over par of CS
5,280,000
8/30 Cash
P 720,000
Common stock (1,800 shares x P10)
P
18,000
APIC - excess over par of CS
702,000
Building
P1,530,000
Common stock (2,100 shares x P10)
P
21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000]
P 819,000
Preferred stock (4,200 shares x P100)
P 420,000
APIC - excess over par of PS (balance)
P 270,000
* (P720,000/1,800 shares)
Note: The fair value of the building should be allocated to the
preferred stock and common stock based on fair values. The
problem did not specifically mention the fair value of the common
stock. However, on the same date the company issued 1,800
common shares for P720,000 cash. Therefore, common shares
were selling at P400/share (P720,000/1,800). Since the fair value
of the preferred stock is not determinable, it will be assigned the
residual amount after deducting the fair value of common stock
from the fair value of the building.
11/07 Cash
Subscriptions receivable
P4,200,000
P4,200,000
Subscribed common stock (120,000 x 1/2) P60,000
Common stock
P
60,000
Note: Since the subscriptions receivable is collectible next year, it
will be presented under current assets.
Incidentally, if the
subscriptions receivable is not collectible currently, it will be
presented under stockholders’ equity.
237
12/01 Retained earnings
Dividends payable - Preferred
Dividends payable – Common
P 870,000
P 342,000
528,000
Preferred - (P3,420,000/P100 x P10)
Common - {[(P204,000 + P60,000)/P10] x P20}
Note: Shares issued plus subscribed less treasury shares are entitled
to dividends.
12/31 Income summary
Retained earnings
P1,800,000
P1,800,000
Answers: 1) A; 2) B; 3) B; 4) C, 5) D
PROBLEM NO. 6
The Borbon Corporation has requested you to audit its financial statements
for the year 2006. During your audit, Borbon presented to you its balance
sheet as of December 31, 2005 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized and
issued, of which 6,000 are treasury shares costing
P90,000 and shown as an asset
Common stock, par value P4; 600,000 shares authorized,
of which 450,000 are issued and outstanding
Additional paid in capital (P5 per share on preferred stock
issued in 2000)
Allowance for doubtful accounts receivable
Reserve for depreciation
Reserve for fire insurance
Retained earnings
Total stockholders’ equity
P 600,000
1,800,000
300,000
12,000
840,000
198,000
2,250,000
P6,000,000
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on
August 30, 2006. Borbon credited the proceeds to the Preferred Stock
account. The treasury shares as of December 31, 2005 were acquired
in one purchase in 2005.
2) The preferred stock carries an annual dividend of P1 per share. The
dividend is cumulative. As of December 31, 2005, unpaid cumulative
dividends amounted to P5 per share. The entire accumulation was
238
liquidated in June, 2006, by issuing to the preferred stockholders
54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2006 to
preferred stockholders of record December 15, 2006. The dividend is
payable on January 15, 2007.
4) At December 31, 2006, the Allowance for Doubtful Accounts Receivable
and Reserve for Depreciation had balances of P25,000 and P1,050,000,
respectively.
5) On March 1, 2006, the Reserve for Fire Insurance was increased by
P60,000; Retained Earnings was debited.
6) On December 31, 2006, the Reserve for Fire Insurance was decreased
by P30,000, which represents the carrying value of a machine
destroyed by fire on that date. Estimated fire cleanup costs of P6,000
does not appear on the records.
7) The December 31, 2005 Retained Earnings consists of the following:
Donated land from a stockholder
(Market value on date of donation)
Gains from treasury stock transactions
Earnings retained in business
P450,000
51,000
1,749,000
P2,250,000
8) Net income for the year ended December 31, 2006 was P1,297,500 per
company’s records.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balances of the following as of December 31, 2006.
(Disregard tax
implications)
1. Total Additional paid-in capital
a. P414,000
b. P804,000
c. P810,000
d. P864,000
2. Retained earnings - Appropriated
a. P258,000
b. P303,000
c. P228,000
d. P
0
239
3. Retained earnings - Unappropriated
a. P2,677,500
b. P2,626,500
c. P2,578,500
d. P2,623,500
4. Treasury stock
a. P45,000
b. P90,000
c. P36,000
d. P
0
5. Total stockholders’ equity
a. P3,700,500
b. P5,812,500
c. P6,316,500
d. P6,319,500
Suggested Solution:
Questions No. 1 to 5
Preferred stock
Common stock
Additional paid in capital
Retained earnings - Appropriated
Retained earnings - Unappropriated
Treasury stock
Total SHE, 12/31/06
P 600,000
2,106,000
864,000
303,000
2,578,500
( 45,000)
P6,316,500
(1)
(2)
(3)
(4)
(5)
Journal entries affecting the stockholders equity accounts during 2006:
1) Cash (3,000 shares x P18)
Treasury stock-preferred
P
54,000
P
[(90,000/ 6,000 shares) x 3,000]
APIC - from treasury stock transactions
2) Retained earnings
Common stock (54,000 shares x P4)
APIC - excess over par
45,000
9,000
P 270,000*
P 216,000
54,000
* [(60,000 – 6,000) x P5]
3) Retained earnings
Dividends payable
P
57,000**
P
57,000
** [(60,000 – 3,000) x P1]
4) Ignor.
5) Retained earnings
Retained earnings - appropriated
6) See no. 8.
240
P
60,000
P
60,000
7) Retained earnings
P 501,000
APIC - donated capital
P 450,000
APIC - from treasury stock transactions
51,000
8) Income summary
Retained earnings
P1,261,500
P1,261,500
Net income per company's records
P1,297,500
(
30,000)
(
6,000)
P1,261,500
Fire loss erroneously charged to reserve for fire insurance
Estimated fire clean up cost
Adjusted net income
9) Retained earnings
P
45,000
Retained earnings - appropriated (cost of TS)
P
45,000
Answers: 1) D; 2) B; 3) C; 4) A, 5) C
PROBLEM NO. 7
The stockholders equity of Cordova Corporation showed the following data
on December 31, 2005:
12% preferred stock, P30 par, 135,000 shares
issued and outstanding
Common stock, P50 par, 180,000 shares issued
and outstanding
Premium on preferred stock
Premium on common stock
Retained earnings
P4,050,000
9,000,000
1,080,000
3,240,000
1,395,000
The 2006 transactions of the company affecting its stockholders’ equity are
summarized chronologically as follows:
1. Issued 27,000 shares of preferred stock at P40.
2. Issued 94,500 shares of common stock at P70.
3. Retired 5,400 shares of preferred stock at P45.
4. Purchased 13,500 shares of its common stock at P80.
5. Split common stock two for one (par value reduce to P25).
6. Reissued 13,500 shares of treasury stock – common at P50.
241
7. Stockholders donated to the company 9,000 shares of common stock
when shares had a market price of P52. One half of these shares were
subsequently issued for P54.
8. Dividends were paid at the end of the calendar year on the common
stock at P2 per share and on the preferred stock at the preferred rate.
9. Net income for the year was P2,520,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P4,617,000
b. P4,698,000
c. P4,968,000
d. P4,860,000
2. Common stock
a. P15,615,000
b. P13,500,000
c. P13,968,000
d. P13,725,000
3. Additional paid-in capital
a. P6,777,000
b. P6,858,000
c. P6,679,800
d. P6,814,800
4. Unappropriated retained earnings
a. P1,749,240
b. P2,251,440
c. P1,711,440
d. P1,684,440
5. Total stockholders’ equity
a. P26,949,240
b. P26,922,240
c. P26,958,960
d. P26,940,240
Suggested Solution:
Questions No. 1 to 5
Preferred stock
Common stock
Additional paid in capital
Retained earnings - Appropriated
Retained earnings - Unappropriated
Treasury stock
Total SHE, 12/31/06
242
P 4,698,000
13,725,000
6,814,800
540,000
1,711,440
(
540,000)
P26,949,240
(1)
(2)
(3)
(4)
(5)
Journal entries affecting the stockholders equity accounts during 2006:
1) Cash (27,000 shares x P40)
P1,080,000
Preferred stock (27,000 shares x P30)
P 810,000
APIC - premium on preferred stock
270,000
2) Cash (94,500 shares x P70)
P6,615,000
Common stock (94,500 shares x P50)
P4,725,000
APIC - premium on common stock
1,890,000
3) Preferred stock (5,400 shares x P30)
P 162,000
APIC - premium on PS (P1,080,000x5.4/135)
43,200
Retained earnings
37,800
Cash (5,400 shares x P45)
P 243,000
4) Treasury stock-CS (13,500 shares x P80)
Cash
P1,080,000
P1,080,000
5) Memo entry.
6) Cash (13,500 shares x P50)
P 675,000
Treasury stock (P1,080,000 x 1/2)
P 540,000
APIC - from treasury stock transactions
135,000
7) Memo entry.
Cash (9,000 shares x 1/2 x P54)
APIC - Donated capital
8) Retained earnings
Cash
P 243,000
P 243,000
P1,625,760
P1,625,760
Common shares issued and outstanding, 1/1/06
2) Shares issued
4) Purchase of treasury shares
5) Stock split
6) Reissuance of treasury shares
7) Donated shares
Reissuance of donated shares
Common shares issued and outstanding,12/31/06
x Dividend per share
Dividends to common
Dividends to preferred (P4,698,000 x 12%)
Total
243
180,000
94,500
(13,500)
261,000
261,000
13,500
( 9,000)
4,500
531,000
P
2
P1,062,000
563,760
P1,625,760
9) Income summary
Retained earnings
P2,520,000
P2,520,000
10) Retained earnings
P 540,000
Retained earnings - appropriated (cost of TS)
P 540,000
Answers: 1) B; 2) D; 3) D; 4) C, 5) A
PROBLEM NO. 8
You were able to gather the following information in connection with your
audit of the stockholders’ equity section of the balance sheet of Liloan, Inc.
The company is a manufacturer of school and office equipment. As of
December 31, 2005, the stockholder’s equity of the company is presented
below:
Cumulative preferred stock (P15 par value; 100,000
shares authorized, 12,000 shares issued and
outstanding)
Common stock (P10 par value; 1,000,000 shares
authorized, 330,000 shares issued and outstanding
Retained earnings
P 180,000
3,300,000
1,866,000
P5,346,000
Liloan’s capital stock transactions during 2006 were as follows:
a.
On January 31, 24,000 preferred shares were issued in exchange for
land with a fair value of P300,000. Six months ago, 2,000 shares of
Liloan’s preferred stock were exchanged “over the counter” for P14
per share.
b.
On February 14, 13,500 shares of common stock were sold to Ms. P.
Saway at P25 per share.
c.
On December 14, Liloan purchased dissident stockholder Saway’s
13,500 shares at P27 per share. The shares are to be held as
treasury shares. (Saway violently opposed Liloan’ business strategy
and Liloan’s management decided to eliminate her interest.)
d.
On December 20, Liloan contracted with Ms. Buti for the sale of
30,000 previously unissued shares at P25 per share to be issued
when the purchase price is fully paid. At December 31, only
P585,000 had been paid. Buti agreed to pay the balance on or before
January 31, 2007.
244
e.
On December 31, Liloan retired 12,000 preferred shares at P18 per
share.
f.
A cash dividend of P2 per share was declared on the preferred shares
on October 15, and paid on November 15.
g.
A cash dividend of P1.50 per share was declared on December 15,
and payable on January 15, 2007.
h.
Liloan’s net income for the year 2006 was P750,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P360,000
b. P300,000
c. P264,000
d. P324,000
2. Common stock
a. P3,435,000
b. P4,020,000
c. P3,735,000
d. P3,637,500
3. Additional paid-in capital
a. P592,500
b. P202,500
c. P625,500
d. P142,500
4. Total retained earnings
a. P1,977,000
b. P1,648,500
c. P2,013,000
d. P2,037,000
5. Total stockholders’ equity
a. P6,171,000
b. P6,036,000
c. P6,396,000
d. P6,336,000
245
Suggested Solution:
Questions No. 1 to 5
Preferred stock
Common stock
Subscribed common stock
Additional paid in capital
Total retained earnings
Treasury stock
Discount on preferred stock
Total SHE, 12/31/06
P 360,000
3,435,000
300,000
652,500
2,013,000
(364,500)
(60,000)
P6,336,000
(1)
(2)
(3)
(4)
(5)
Journal entries affecting the stockholders equity accounts during 2006:
a) Land (at fair value)
P 300,000
Discount on preferred stock
60,000
Preferred stock (24,000 shares x P15)
P 360,000
b) Cash (13,500 shares x P25)
P 337,500
Common stock (13,500 shares x P10)
P 135,000
APIC - excess over par of common stock
202,500
c) Treasury stock - common
Cash (13,500 shares x P27)
P 364,500
d) Cash
P 585,000
Subscriptions receivable
165,000*
Subscribed common stock (30,000 shares x P10)
APIC - excess over par of common stock
P 364,500
P 300,000
450,000
* [(30,000 shares x P25)- P585,000]
e) Preferred stock (12,000 shares x P15)
Retained earnings
Cash (12,000 shares x P18)
P 180,000
36,000
f) Retained earnings
Cash [(12,000 + 24,000 x P2)]
P
P 216,000
72,000
P
72,000
g) Retained earnings
P 495,000**
Dividends payable [(12,000 + 24,000 x P2)]
P 495,000
** [(330,000 + 13,500 – 13,500) x P1.5]
h) Income summary
Retained earnings
P 750,000
246
P 750,000
Answers: 1) A; 2) A; 3) C; 4) C, 5) D
PROBLEM NO. 9
You gathered the following information pertaining to the stockholders’
equity section of the Oslob Corporation in connection with your audit of the
company’s financial statements for 2006:
Common stock, P1 par value; authorized 1,500,000
shares; issued 750,000 shares; outstanding
700,000 shares
Additional paid-in capital:
Excess of par
From treasury stock
Total paid-in capital
Unappropriated retained earnings
Total stockholders’ equity
P
700,000
7,000,000
100,000
P7,800,000
4,050,000
P11,850,000
All of the outstanding common stock and treasury stock were originally
issued in 2003 for P11 per share. The treasury stock is common stock
reacquired on March 31, 2005. Oslob uses the par value method of
accounting for treasury stock.
During 2006, the following events or transactions occurred relating to
Oslob’s stockholders equity:
Feb. 10
Issued 200,000 shares of unissued common stock for P12.50
per share.
Mar. 15
Declared cash dividend of P0.20 per share to stockholders of
record on April 1, 2006 and payable on April 15, 2006. This
was the first dividend ever declared by Oslob.
Aug. 30
Oslob’s president retired, Oslob purchased from the retiring
president 50,000 shares of Oslob’s common stock for P13 per
share, which was equal to market value on this date. This
stock was cancelled.
Dec. 15
Declared a cash dividend of P0.20 per share to stockholders of
record on January 2, 2007 and payable on January 15, 2007.
247
Oslob is being used by two separate parties for patent infringements.
Oslob management and outside legal counsel share the following opinions
regarding to these suits:
Suit
#1
#2
Likelihood of losing the suit
Reasonably possible
Probable
Estimated loss
P300,000
200,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The issuance of 200,000 shares of common stock on February 10, 2006
caused Oslob’s additional paid-in capital in excess of par to increase by
a. P 200,000
c. P2,300,000
b. P2,500,000
d. P
0
2. The retirement of 50,000 shares of common stock on August 30, 2006
caused Oslob’s additional paid-in capital in excess of par to decrease by
a. P 50,000
c. P500,000
b. P600,000
d. P
0
3. Oslob wants to appropriate retained earnings for all loss contingencies
that are not properly accruable by a charged to expense. How much of
Oslob loss contingencies should be appropriated by charged to
unappropriated retained earnings?
a. P300,000
c. P500,000
b. P200,000
d. P
0
4. How much cash dividends should Oslob charge against unappropriated
retained earnings in 2006?
a. P350,000
c. P370,000
b. P180,000
d. P170,000
5. How much should Oslob show in note to financial statement as a
restriction on retained earnings because of the acquisition of treasury
stock?
a. P100,000
c. P600,000
b. P450,000
d. P650,000
248
Suggested Solution:
Question No. 1
Proceeds from issuance (200,000 x P12.50)
Less par value of common stock (200,000 shares x P1)
Increase in APIC
P2,500,000
200,000
P2,300,000
Question No. 2
Journal entry to record the retirement:
Common stock (50,000 shares x P1)
P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
Unappropriated retained earnings
100,000
Cash (50,000 shares x P13)
P 650,000
Question No. 3
Loss contingency that is not properly accruable by a charged to expense:
Suit # 1 – Reasonably possible
P300,000
Question No. 4
Dividends declared, 3/15/06
[(700,000 + 200,000) x P0.20]
Dividends declared, 12/15/06
[(700,000 + 200,000 - 50,000) x P0.20]
Total cash dividends
P180,000
170,000
P350,000
Question No. 5
Reconstruction of the entry made to record the acquisition of treasury
stock:
Treasury stock (50,000 shares x P1)
P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
APIC - from TS transactions
P 100,000
Cash (balancing figure)
450,000
Answers: 1) C; 2) C; 3) A; 4) A, 5) B
249
PROBLEM NO. 10
In connection with your audit of the Poro Company, you were asked to
prepare comparative data from the company’s inception to the present.
The following were gathered during your audit:
a. Poro Company’s charter became effective on January 2, 2002, when
80,000 shares of P10 common and 40,000 shares of 5% cumulative,
nonparticipating, preferred stock were issued. The common stock was
sold at P12 per share and the preferred stock was sold at its par value
of P100 per share.
b. Poro was unable to pay preferred dividends at the end of its first year.
The owners of the preferred stock agreed to accept 2 shares of common
stock for every 50 shares of preferred stock owned in discharge of the
preferred dividends due on December 31, 2002. The shares were
issued on January 2, 2003. The fair market value was P30 per share
for common on the date of issue.
c.
Poro Company acquired all outstanding stock of Pos Corporation on
May 1, 2004, in exchange for 40,000 shares of Poro common stock.
d. Poro split its common stock 3 for 2 on January 1, 2005, and 2 for 1 on
January 1, 2006.
e.
Poro offered to convert 20% of the preferred stock to common stock on
the basis of 2 shares of common for 1 share of preferred. The offer was
accepted, and the conversion was made on July 1, 2006.
f.
No cash dividends were declared on common stock until December 31,
2004. Cash dividends per share on common stock were declared and
paid as follows:
2004
2005
2006
July 1
P3.00
P2.50
December 31
P4.00
P5.00
P2.00
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Outstanding number of common shares as of December 31, 2006
a. 364,800
c. 372,800
b. 684,800
d. 380,800
250
2. Outstanding number of preferred shares as of December 31, 2006
a. 40,000
c. 32,000
b. 24,000
d. 96,000
3. Amount of cash dividends declared and paid to common stockholders
for the year 2005
a. P972,800
c. P1,459,200
b. P608,000
d. P1,981,440
4. Amount of cash dividends declared and paid to common stockholders
for the year 2006
a. P3,911,040
c. P1,713,600
b. P3,041,600
d. P1,673,600
Suggested Solution:
Question Nos. 1 and 2
Jan. 02, 2002
Jan. 02, 2003
Dec. 31, 2003
May 01, 2004
Dec. 31, 2004
Jan. 01, 2005
Dec. 31, 2005
Jan. 01, 2006
Jul. 01, 2006
Common
80,000
Common issued to preferred
shareholders (40,000/50 x 2)
Acquisition of Pos Corp.
3:2 Common stock split
[(121,600 x 3/2) - 121,600]
2:1 Common stock split
Conversion of preferred
(40,000 x 20% x 2)
Dec. 31, 2006
1,600
81,600
40,000
121,600
Preferred
40,000
40,000
40,000
60,800
182,400
182,400
40,000
16,000
380,800
(8,000)
32,000
Question No. 3
Dividends declared, 7/1/05 (182,400 x P3.00)
Dividends declared, 12/31/05 (182,400 x P5.00)
Cash dividends to common in 2005
P 547,200
912,000
P1,459,200
Question No. 4
Dividends declared, 7/1/06 (364,800 x P2.50)
Dividends declared, 12/31/06 (380,800 x P2.00)
Cash dividends to common in 2006
Answers: 1) D; 2) C; 3) C; 4) D
251
P 912,000
761,600
P1,673,600
PROBLEM NO. 11
You were able to gather the following information in connection with your
audit of Sogod Corporation:
•
On January 1, 2004, Sogod Corporation granted stock options to
officers and key employees for the purchase of 30,000 shares of the
company’s P10 par value common stock at P25 per share. The options
are exercisable within a 5-year period beginning January 1, 2006, by
grantees still in the employ of the company, and expiring December 31,
2010. The service period for this award is 2 years. The fair value
option pricing model determined total compensation expense to be
P525,000. The stock was selling at P35 at the time the options were
granted.
•
On April 1, 2005, 3,000 options were terminated when the employees
resigned from the company. The market value of common stock was
P35 per share on this date.
•
On March 31, 2006, 18,000 option shares were exercised when the
market value of common stock was P40 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Compensation expense for 2004
a. P525,000
b. P262,500
c. P236,250
d. P150,000
2. Net compensation expense for 2005
a. P262,500
b. P210,000
c. P120,000
d. P150,000
3. The exercise of the 18,000 options will result in a credit to APIC-excess
over par of
a. P585,000
c. P270,000
b. P620,000
d. P450,000
4. APIC from stock options as of December 31, 2006
a. P
0
c. P472,500
b. P90,000
d. P157,500
252
Suggested Solution:
Question No. 1
Compensation expense for 2004 (P525,000 x 1/2)
P262,500
PFRS 2 par. 10 states that for equity-settled share-based payment
transactions, the entity shall measure the goods or services received, and
the corresponding increase in equity, directly, at the fair value of the
goods or services rendered, unless the fair value cannot be estimated
reliably. If the entity cannot estimate reliably the fair value of the goods
or services received, the entity shall measure their fair value, and the
corresponding increase in equity, indirectly, by reference to the fair value
of the equity instruments granted.
In cases, that the entity is unable to estimate reliably the fair value of the
equity instruments granted at measurement date, the entity may
measure the equity instruments at their intrinsic value.
If the equity instruments granted do not vest until the counterparty
completes a specified period of service, the entity shall presume that the
services to be rendered by the counterparty as consideration for those
equity instruments will be received in the future, during the vesting
period. On the other hand, if the equity instruments granted vest
immediately, the entity shall recognize the services received in full, with
a corresponding increase in equity.
Question No. 2
Compensation expense for 2005 (P525,000 x 1/2)
Less stock options of terminated employees
(P525,000 x 3/30)
Net compensation expense for 2005
P262,500
52,500
P210,000
Question No. 3
Journal entry to record the exercise of the options:
Cash (18,000 x P25)
APIC-stock options (P472,500 x 18/27)
Common stock (18,000 x P10)
APIC-excess over par
253
P 450,000
315,000
P180,000
585,000
Question No. 4
Compensation expense, 2004
Compensation expense, 2005
Stock options exercised (see no. 3)
APIC from stock options
P262,500
210,000
(315,000)
P157,500
Answers: 1) B; 2) B; 3) A; 4) D
PROBLEM NO. 12
Select the best answer for each of the following:
1. When no independent stock transfer agents are employed and the
corporation issues its own stocks and maintains stock records,
canceled stock certificates should
a. Be destroyed to prevent fraudulent reissuance.
b. Be defaced and sent to the SEC.
c. Not be defaced but segregated from other stock certificates and
retained in a canceled certificates file.
d. Be defaced to prevent reissuance and attached to their
corresponding stubs.
2. All corporate capital stock 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.
3. Which of the following information is most important when auditing
shareholders’ equity?
a. Entries in the capital stock account can be traced to a resolution in
the minutes of the board of directors' meetings.
b. Stock dividends and/or stock splits during the year were approved
by the shareholders.
c. Stock dividends are capitalized at par or stated value on the
dividend declaration date.
d. Changes in the capital stock account are verified by an independent
stock transfer agent.
254
4. 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.
5. The CPA's examination normally need not include
a. Determining that dividend declaration is in compliance with debt
agreements.
b. Tracing the authorization for the dividends from the directors'
meetings.
c. Testing the propriety of the payment to the individual stockholders.
d. Detailed checking from the dividend payment list to the capital stock
records.
6. The board of directors of Mega Supermarkets declared a 20% cash
dividend at its meeting on March 12, 2005 payable on May 15, 2005 to
stockholders on record as of April 15, 2005. The dividend declaration
should be taken up in the company's financial statements of
a. March 12, 2005.
c. December 31, 2005.
b. May 15, 2005.
d. April 15, 2005.
7. When a client company does not maintain its own stock records, the
auditor most likely will
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.
255
8. An auditor usually obtains evidence
transactions by reviewing the entity’s
a. Canceled stock certificates.
b. Transfer agent’s records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
of
shareholders’
equity
9. In audit of a medium-sized manufacturing concern, which one of the
following areas can be expected to require the least amount of audit
time?
a. Revenue
c. Liabilities
b. Owner’s equity
d. Assets
10. During an audit of an entity’s shareholders’ equity accounts, the
auditor determines whether there are restrictions on retained earnings
resulting from loans, agreements, or law. This audit procedure most
likely is intended to verify management’s assertion of
a. Completeness
c. Presentation and disclosure
b. Existence
d. Valuation
Answers: 1) D; 2) B; 3) A; 4) A, 5) D; 6) A; 7) A; 8) D; 9) B; 10) C
256