ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY
CPA Review Batch 41 Ÿ May 2021 CPA Licensure Examination Ÿ Quizzer
AUDITING (Auditing Problems)
S. Ireneo Ÿ C. Espenilla
AP-200Q: QUIZZER ON FINANCING CYCLE:
AUDIT OF STOCKHOLDERS’ EQUITY
PROBLEM 1:
A partial list of the accounts and ending account balances taken from the post-closing trial balance of
Robert Corporation on December 31, 2020 is shown as follows:
Account
Amount
Accumulated profits – unappropriated
P410,000
Bonds payable
220,000
Ordinary shares subscribed
50,000
Long term investments in equity securities
210,000
Additional paid-in capital on ordinary shares
460,000
Premium on bonds payable
30,000
Authorized ordinary shares at P10 par value
900,000
Preference shares subscribed
45,000
Additional paid-in capital on preference shares
112,000
Authorized preference shares at P50 par value
400,000
Gain on sale of treasury shares
4,000
Unrealized increase in value of securities available for sale
3,000
Ordinary share warrants outstanding
20,000
Unissued ordinary shares
500,000
Unissued preference shares
100,000
Cash dividends payable – preference
50,000
Donated capital
25,000
Reserve for bond sinking fund
220,000
Reserve for depreciation
150,000
Revaluation increment in properties
100,000
Subscription receivable – preference (long term)
15,000
Subscription receivable – common (long term)
20,000
REQUIRED:
Compute the following:
1.
2.
3.
4.
5.
Ordinary shares issued
Preference shares issued
Additional paid-in capital
Total contributed capital
Total stockholders’ equity
A
950,000
445,000
592,000
1,332,000
2,744,000
B
900,000
400,000
596,000
1,352,000
2,244,000
C
450,000
345,000
621,000
1,377,000
2,114,000
D
400,000
300,000
651,000
1,381,000
2,144,000
6. In auditing shareholders’ equity balances and transactions, the auditor puts forward the higher risk
that account balances may be deliberately overstated, in attempt to show a better financial
position, which of the following financial statements assertion would the auditor be placing more
attention to in auditing shareholders’ equity accounts?
a. Existence/Occurrence
b. Completeness
c. Classification
d. Cut-off
PROBLEM 2:
Aaron Corp. has the following items in the stockholders’ equity portion of its statement of financial
position as of December 31, 2020, after all necessary year- end closing entries:
9% Cumulative preference shares, P25 par value,
110,000 shares issued and outstanding;
Ordinary shares, P30 par value, 240,000 shares issued;
Subscribed preference shares, net of P350,000 subscription receivable
Share premium from preference shares
Share premium from ordinary shares
Share premium from treasury stock transactions – ordinary shares
Retained Earnings
Treasury stock – common stock, 30,000 shares
P2,750,000
7,200,000
650,000
137,500
1,125,000
281,250
5,500,000
525,000
Upon investigation of the transactions which has transpired in 2020, you have discovered the following
information:
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0915-2303213 Ÿ www.resacpareview.com
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
a) On June 30, the company issued on a basket price of P900,000, 18,000 shares of preference
shares and 10,000 shares of ordinary shares. The ordinary shares were selling at that time at P37
per share while the preference shares were selling at P35 per share. Moreover, the issuance was
recorded by debiting cash for the cash consideration received, crediting preference shares and
ordinary shares for their corresponding par values with credit to retained earnings for the amount
of the difference.
b) On August 1, the company reissued 15,000 shares of its treasury shares ordinary shares at P15.
The company recorded the issuance as a debit to cash at the cash consideration received, credit to
treasury stock at the cost of the reissued stocks. Any difference was charged to other
income/expense account. All treasury shares were reacquired as one bloc in 2019.
c)
The company retired 20,000 shares of its ordinary shares from the treasury on September 1. The
company recorded the retirement as a debit to ordinary shares at par value and credit to treasury
stock for the total cost of the treasury stocks being retired. Any difference was debited/credited to
the retained earnings account. All ordinary shares, with the exception of those issued on June 30
of the current year were issued during the company’s initial public offering.
d) Subscribed preference shares and subscription receivable is in relation to the subscription of
Robert Inc. on January 1 of the company’s 40,000 shares of preferred shares at P33 per share.
Robert defaulted on its remaining balance on October 1, the company then offered the delinquent
shares on a public auction on December 31, where Charrie Corporation won as the highest bidder
since the company is willing to pay the offer price for the least number of shares. The company
incurred auction expenses amounting to P50,000, which it had paid on December 30 and charged
to operating expense. Interest related to the default amounted to P25,000. Settlement was done
on December 31. All the foregoing transactions were recorded on the subsequent period.
Requirements:
1. What is the necessary adjusting journal entry related to the share issuance on
a.
Dr. Retained earnings
250,000
Cr. Share premium from preference shares
Cr. Share premium from ordinary shares
b.
Dr. Retained earnings
150,000
Cr. Share premium from preference shares
c.
Dr. Retained earnings
150,000
Cr. Share premium from preference shares
Cr. Share premium from ordinary shares
d.
Dr. Retained earnings
150,000
Cr. Share premium from preference shares
Cr. Share premium from ordinary shares
June 30?
180,000
70,000
150,000
117,000
33,000
139,961
10,039
2. What is the necessary adjusting journal entry related to the treasury shares reissue on August 1?
a.
No adjustment is necessary.
b.
Dr. Retained earnings
50,000
Cr. Share premium from treasury stock transactions
50,000
c.
Dr. Share premium from ordinary shares
70,313
Cr. Share premium from treasury stock transactions
70,313
d.
Dr. Share premium from treasury stock transactions
37,500
Cr. Retained earnings (Other expense)
37,500
3. What is the necessary adjusting journal entry related to the treasury
September 1?
a.
Dr. Share premium from ordinary shares
Dr. Retained earnings
Cr. Share premium from treasury stock transactions
b.
Dr. Share premium from ordinary shares
Dr. Retained earnings
Cr. Share premium from treasury stock transactions
c.
Dr. Share premium from ordinary shares
Dr. Retained earnings
Cr. Share premium from treasury stock transactions
d.
Dr. Retained earnings
Cr. Share premium from treasury stock transactions
shares retirement on
93,750
250,000
100,000
250,000
90,000
250,000
250,000
343,750
350,000
340,000
250,000
4. What is the necessary journal entry to record the subscription settlement on December 31?
a.
Dr. Cash
425,000
Cr. Subscriptions receivable
350,000
Cr. Retained earnings
75,000
b.
Dr. Cash
375,000
Cr. Subscriptions receivable
350,000
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
c.
d.
Cr. Retained earnings
Dr. Cash
Cr. Subscriptions receivable
No entry adjustment is necessary.
AP-200Q
350,000
25,000
350,000
5. As an audit staff, you were asked by your superior to ask the company’s minutes of meeting of the
Board of Directors to trace authorization through Board Resolutions of significant stockholders
equity transactions, this is consistent with the auditor’s attempt to gather evidence regarding
which financial statements assertion?
a. Valuation
b. Completeness
c. Existence/Occurrence
d. Presentation and Disclosure
PROBLEM 3:
Nevada Square has the following selected accounts in its shareholders’ equity section as of December
31, 2019:
Preference shares, P100 par, 10 percent cumulative,
100,000 shares issued and outstanding
P10,000,000
Ordinary shares, P20 par, 1,000,000 shares authorized,
700,000 shares issued and outstanding
18,000,000
Share premium
8,000,000
Accumulated profits
30,000,000
There are no dividends in arrears on the preference shares. During 2020, the following transactions
occurred:
a.
The board of directors declared a cash dividend totaling to P2,800,000 to be paid to preference
and ordinary shareholders. Later, a share dividend of 100,000 ordinary shares were declared
on ordinary shares. The market value of ordinary shares is P68 per share on the date the
share dividends were declared.
b. Sometime after the above dividends were declared and settled, the board of directors declared
as property dividends one shares of its investment in Bingo Corp. stocks being held by the
company as trading securities for every two ordinary share outstanding. Bingo Corp. stocks
were originally purchased by the company at P12 per share and have a carrying value based
on their fair value as per the last remeasurement (balance sheet) date, at P20 per share.
Bingo Corp. shares were selling at P24 when the property dividends were declared and were
selling at P25 when the property dividends were settled. The company had a total of 500,000
shares of Bingo Corp. shares.
c.
At the end of 2020, the board declares a four-for-one share split. With the split, the number of
ordinary shares authorized to be issued increased to 4,000,000. At the date of the share split,
the market value of ordinary share is P75 per share.
d. Net earnings during 2020 total P6,000,000.
Requirements:
1. What is the adjusted balance of the company’s Accumulated profit account at the end of year?
a. 26,400,000
b. 21,600,000
c. 18,400,000
d. 16,400,000
2. What is the balance of the ordinary shares account as of December 31, 2020?
a. 14,000,000
b. 16,000,000
c. 18,000,000
d. 20,800,000
3. What is the balance of the share premium account as of December 31, 2020?
a. 8,000,000
b. 10,800,000
c. 12,800,000
d. 14,800,000
4. What is the adjusted balance of the company’s Shareholders’ equity account at the end of the
year?
a. 54,400,000
b. 55,200,000
c. 57,200,000
d. 60,400,000
PROBLEM 4:
In the course of your first time audit of Misamis Inc.’s stockholder’s equity accounts for the audit year
2020, the following schedule of the company’s stockholder’s equity accounts as of December 31, 2019
were presented by the client:
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AP-200Q
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
Ordinary share capital, P100 par; 200,000 shares authorized; 50,000
shares issued and outstanding; options to purchase 10,000 shares at P100
per share are held by employees, no value having been assigned to these
options
Share premium from ordinary shares
Accumulated profits
P5,000,000
1,000,000
3,000,000
Further investigation and inquiry revealed the following information:
a.
The options referred to above were granted to each of its 100 employees on January 1, 2018
which shall vest three years thereafter provided employees remain in the company’s employ
and provided further that sales increase at least by an average of 5% per year. If the sales
increase by an average of at least 5% per year, each year, employees shall receive 100 share
options. If the sales increase by an average of at least 10% per year, each employee shall
receive 200 share options. If the sales increase by an average of at least 15% per year, each
employee shall receive 300 options.
The fair value of each share option on the grant date was P30 per share. No employee left the
company during the said vesting period. Records show that average sales increase over the
inclusive vesting period are: 2018, 8%; 2019, 10%, and 2020, 13%.
b. On May 1, 2020, the company issued bonds of P5,000,000 at 120 giving each P1,000 bond a
warrant enabling the holder to purchase 4 shares at P120 per share for a one year period.
Shares were selling for P140 at this time. The market value of bond ex-warrant is 105.
c.
On June 1, 2020, half of the warrants issued with bonds were exercised.
d. On August 1, the company issued rights to shareholders, permitting holders to acquire for a
60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for P150 at
this time. All but 5,000 of these rights were exercised and additional shares were issued.
e.
The company declared a P5 per share cash dividends on December 15, 2020 payable to
stockholders as of December 31, 2020 on January 31, 2021.
f.
Net income before any adjustments amounted to P2,500,000 in 2020.
Required:
1. What is the retroactive adjustment to the beginning accumulated profits account related to the
options granted in 2018?
a. 600,000
b. 400,000
c. 200,000
d. no adjustment.
2. What is the correct credit to the share premium account as a result of the exercise of rights
referred to in item d?
a. 250,000
b. 270,000
c. 285,000
d. 330,000
3. What is the total Additional Paid in Capital to be presented in the stockholders’ equity portion of
the balance sheet as of December 31, 2020?
a. 3,130,000
b. 2,880,000
c. 2,530,000
d. 2,155,000
4. What is the correct Accumulated Profits as of December 31, 2020?
a. 5,145,000
b. 4,900,000
c. 4,745,000
d. 4,545,000
PROBLEM 5:
On December 31, 2017, Santiago Inc.’s ordinary shares were selling for P55 per share. On this date,
the company creates a compensatory share option plan for its 70 employees. The plan document
states that each employee may purchase 500 shares of its P20 par ordinary shares for P35 per share
after one year if revenues reach P15M, after 2 years if revenues reach P18M, or after three years if
revenues reach P20M. On this date, based on a reliable option pricing model, Santiago Inc. estimates
that each option which can be exercised up to 2022 under the condition that the employee is still
within the employ of the company, has a fair value of P18.
The company has experience a stable 25% increase in revenues for the past 5 years and reasonably
expects the same trend for the upcoming years.
The following information are available from the company’s records:
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AP-200Q
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
Year
2018
2019
2020
Actual
Revenues
Earned
P14.5M
17.5M
20.5M
Remaining
employees
at year end
68
65
63
Expected
additional
employee
resignation
8
5
-
Forty-five employees exercised their vested options on June 15, 2021 while three employees resigned
on the same year without exercising their options, thus were forfeited.
Required:
1. What is the compensation expense related to the share option plan to be recognized in the 2018
financial statements?
a. 315,000
c. 207,000
b. 270,000
d. 90,000
2. What is the balance of the additional paid-in-capital account related to the share options as of
December 31, 2020?
a. 207,000
c. 567,000
b. 540,000
d. 630,000
3. What is the balance of the ordinary share options outstanding account as of December 31, 2021.
a. 135,000
c. 270,000
b. 162,000
d. 405,000
4. What is the resulting Share premium from the issuance of shares from the exercise of the
employee options.
a. 405,000
c. 742,500
b. 432,000
d. 877,500
PROBLEM 6:
On January, 2018, Pandora Corp. granted to 600 employees, 100 share options each exercisable after
3 years, subject to the employees staying with the company until the end of 2020. Options can be
exercised (at a rate of four options to one share) if share price increases from P40 at the beginning of
2018 to above P60 at the end 2020. The exercise price is P32 (par value P10). The share options can
be exercised at any time during the next five years, that is by the end of 2021. The company
estimates the fair value of the share options on the grant date at P5 per option. This estimate takes
into account the possibility that the share price will exceed P60 per share at the end of 2020, thus
options are exercisable and the possibility that the share price will not exceed P60 at the end of 2020,
thus the share options will be forfeited.
The following information are deemed relevant:
Fair value Fair
Actual number of
of Shares value of employees actually
Options
leaving the company
during the year
Dec. 31. 2018
Dec. 31, 2019
Dec. 31, 2020
P48
44
56
P4
3
0
5
20
30
Estimated number of
additional employees
expected to leave the
company by the end
of 2020
45
35
-
Requirements:
1. What is the ordinary share options outstanding as of December 31, 2019?
a. 180,000
b. 191,667
c. 188,333
d. none
2. What is the compensation expense in 2020?
a. 92,500
b. 91,667
d. none
c. 88,333
3. What is the effect to total APIC assuming that 60% of the options ultimately becoming
exerciseable by the end of the vesting period were eventually exercised?
a. 163,500
b. 343,500
c. 179,850
d. 251,600
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
PROBLEM 7:
On January, 2018 Jubee Corp. grants each of its 100 employees in the sales department share options.
The share options will vest at the end of 2020, provided that the employees remain in the entity’s
employ and provided that the volume of sales increases by at least an average of 5% per year. If the
sales volume increase by an average of 5% to 10% per year, each employee will receive 100 options
each. If sales volume increase by 11% to 15%, each employee will receive 200 options each. If sales
volume increases by more than 15%, each employee will receive 300 options each. Each option can be
exercised to acquire ordinary shares (P100 par) at P120 per share at any time up to December 31,
2021.
On the grant date, the company estimates that the share options have a fair value of P40 per option.
The company also estimates that the volume of sales for the product will increase by an average of
11% to 15% per year. The entity also estimates, based on weighted probability that 20% of the
employees will leave before the end of 2020.
By the end of 2018, seven employees have left the company and the entity still estimates that a total
of 20 employees will leave by the end of 2020. Product sales have increased by 12% and the entity
expects that this rate will continue over the next 2 years.
By the end of 2019, further five employees left the company. The entity now expects due to low
turnover that 15% of employees will leave by the end of 2020. Product sales increased by 20% and
expects the same increase in 2020.
By the end of 2020, additional two employees left. The entity sales have increased by 16% in 2020.
Requirements:
1. What is the compensation expense in 2018?
a. 640,000
b. 213,333
c. 466,667
d. 352,000
2. What is the compensation expense in 2020?
a. 640,000
b. 213,333
c. 466,667
d. 352,000
3. Assuming that 60% of the options granted to employees were exercised, the entry to record the
exercise shall require a credit share premium at:
a. 928,800
b. 925,200
c. 309,600
d. 306,000
PROBLEM 8:
On December 31, 2017, Kalinga Co. issued share appreciation rights to 20 of its employees. The
rights will vest at the end of 3 years provided the employees remain with the company and provided
further that the average revenue growth over the same period is at 10%. The following are the
approved terms of the said rights:
•
•
•
If the average revenue is 10 to 15%, each employee will receive 10,000 share appreciation
rights.
If the average revenue is 16 to 20%, each employee will receive 20,000 appreciation rights.
If the average growth more than 20%, each employee will receive 30,000 rights.
On the grant date, each share appreciation right is determined to have a fair value of P6, Kalinga
expects an average growth rate of 12.5 percent during the 3 year vesting period and that 4 employees
will ultimately resign before the vesting period ends.
The following information are available from the company’s records:
Fair Market
Actual revenue
Estimated
Value of the
growth rate for the resignations
share
Year
year
appreciation
rights
2018
10%
4
6.00
2019
15%
4
6.75
2020
25%
5*
7.00
*actual
Requirements:
1. How much is the compensation expense in relation to the share appreciation rights to be
recognized in 2018?
a. 320,000
c. 720,000
b. 660,000
d. 960,000
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
2. How much is the compensation expense in relation to the share appreciation rights to be
recognized in 2019?
a. 1,080,000
c. 720,000
b. 960,000
d. 4000,000
3. How much is the compensation expense in relation to the share appreciation rights to be
recognized in 2020?
a. 2,100,000
c. 1,710,000
b. 1,820,000
d. 1,380,000
4. What is the liability for the share appreciation rights to be recognized as of December 31, 2020?
a. 1,440,000
c. 2,160,000
b. 2,100,000
d. 3,150,000
PROBLEM 9:
On January 1, 2019, Symphony grants its president the right to choose either 10,000 ordinary shares
or to receive cash payment equal to 8,000 shares. These are to vest after rendition of three years of
service. Par value of the company’s share of stock is P40. The president exercised his rights on
September 30, 2022. The fair value information follow:
FMV
Compound instrument, 1/1/2019
P50
Shares 1/1/2019
52
Shares 12/31/2019
65
Shares 12/31/2020
74
Shares 12/31/2021
85
Required:
1. What is the total salaries expense to reported in relation to the compensation plan in 2019?
a. 520,000
c. 84,000
b. 173,333
d. 201,333
2. How much from the salaries expense in 2020 in relation to the compensation plan is attributed to
the liability component?
a. 394,667
c. 221,333
b. 249,333
d. 84,000
3. How much from the salaries expense in 2021 in relation to the compensation plan is attribute to
the equity component?
a. 28,000
c. 285,333
b. 313,333
d. 84,000
PROBLEM 10:
The shareholders’ equity section of Dawson Corporation’s statement of financial position as of
December 31, 2019, is as follows:
Ordinary shares, P10, par value;
authorized, 2,000,000 shares;
P4,000,000
issued 400,000 shares
Share premium
1,700,000
Accumulated profits
6,000,000
Total
P11,700,000
The following transactions occurred during 2020:
Jan. 5
10,000 shares of authorized and unissed ordinary shares were sold P18 per share.
The company incurred share issue cost at P20,000.
Jan. 16
Declared a cash dividends of P0.60 per share, payable February 15 to
shareholders of record February 5.
Feb. 20
Reacquired 50,000 shares as treasury shares at P22 per share.
Feb. 25
20,000 shares of authorized and unissued ordinary shares were issued in
exchange of an equipment having a fair market value of P500,000.
Mar. 1
A 20% stock dividend was declared and issued. Market value of shares on this
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
date was at P30.
May 30
Reissued half of the treasury shares at P14 per share.
Aug. 15
A 15% stock dividend was declared and issued. Market value is currently at P19
per share.
Sept. 30
A cash dividend of P.80 per share was declared payable September 1 to
shareholders of record on August 21.
Dec. 31
Adjusted net income for the year is at P2,150,000.
Required: Determine the balance of the following stockholders’ equity accounts:
1. What is the debit to retained earnings as a result of the share dividends declaration on March 1?
a. 760,000
c. 850,000
b. 810,000
d. 860,000
2. What is the debit to retained earnings as a result of the share dividends declaration on August 15?
a. 721,500
c. 1,299,500
b. 1,154,250
d. 1,370,850
3. What is the debit to retained earnings as a result of the cash dividends declaration on September
30?
a. 482,520
c. 442,520
b. 452,520
d. 424,520
4. What is the total additional paid-in capital as of December 31, 2020?
a. 2,649,350
c. 2,509,350
b. 2,709,350
d. 2,560,630
5. What is the balance of the Accumulated Profits – unappropriated as of December 31, 2020?
a. 5,330,630
c. 4,780,630
b. 5,026,630
d. 4,580,630
6. What is the balance of Treasury shares as of December 31, 2020?
a. Zero
c. 550,000
b. 1,100,000
d. 110,000
PROBLEM 11:
The following information has been taken from the Accumulated profits ledger accounts of Jen Corp. in
connection with your audit of its financial statements as of and for the period ended December 31,
2020:
a.
Total net income since incorporation in 2019
P7,490,000
b.
Total cash dividends paid since 2019
c.
Carrying value of the company’s equipment declared as property
dividend in 2019 and distributed in 2020
d.
Proceeds from sale of 10,000 reacquired shares in 2019 reissued in
2020
e.
Aggregate par value of stock dividends declared and distributed in
2020
f.
Par value of 10,000 preference shares which were converted to
25,000 ordinary
g.
Appropriated for plant expansion
h.
Excess of proceeds from new shares issued over par
i.
Share issuance expenses related to h.
(600,000)
(1,200,000)
300,000
(750,000)
500,000
(700,000)
275,000
50,000
Additional notes:
•
The company reacquired 20,000 ordinary shares in 2019 at P40 per share. No other treasury
share transactions except for item d.
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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
•
AP-200Q
The equipment declared in c as dividends had the following fair values, cost to dispose is
considered immaterial:
Declaration date in 2019
P900,000
December 31, 2019
1,000,000
Payment date in 2020
1,100,000
The property dividends were recorded as follows:
Declaration (2019):
Accumulated Profits
1,200,000
Dividends Payable
1,200,000
Payments (2020):
Dividends Payable
Equipment
1,200,000
1,200,000
•
The stock dividends distributed in e was based on a 15% share dividend. On the date of
declaration the total ordinary shares issued was at 230,000 with 30,000 shares still in the
treasury. The shares have a P25 par value. The market value of shares on the date of
declaration was at P42 per share.
•
The 10,000, P50 par value preference shares in f, converted into 25,000 ordinary shares were
originally issued at P75 per share.
Requirements:
1. How much should be the correct debit to retained earnings for the property dividends upon
declaration?
a.
900,000
c.
1,100,000
b.
1,000,000
d.
1,200,000
2. How much is the total/net gain or loss to reported in the profit or loss in 2019 in relation to the
Noncurrent asset held for sale under IFRS 5?
a.
None.
c.
200,000
b.
300,000
d.
100,000
3. How much is the gain/loss to be recognized in the profit or loss in 2020 upon the settlement of the
property dividends payable?
a.
None.
c.
200,000
b.
300,000
d.
100,000
4. How much should be the correct debit to retained earnings for the share dividends?
a.
1,340,000
c.
750,000
b.
1,260,000
d.
510,000
5. What is the correct amount to be credited to the share premium account as a result of the
conversion of the preference shares to ordinary shares in item f?
a.
250,000
c.
625,000
b.
125,000
d.
500,000
6. How much is the correct balance of the accumulated profits – unappropriated as of December 31,
2020?
a.
3,230,000
c.
2,460,000
b.
3,160,000
d.
2,060,000
PROBLEM 12:
Pacey Company presented the following “Surplus” account in relation to its financial statements audit
for the year December 31, 2020. The company never undertook audit of its financial records ever
since its incorporation on January 1, 2016.
SURPLUS
2016 – 2019 Cash dividends
12/31/17 To reserve for bond
sinking fund (Note 3)
Page 9 of 12
P1,560,000
P60,000
2016 – 2019 Net income/loss
(Note 1)
2011 Goodwill recognition (Note
2)
P2,400,000
150,000
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
12/31/18 Reserve for sinking
fund
60,000
12/31/17 Contributed capital in
excess of par value.
12/31/19 Reserve for sinking
fund
60,000
1/1/18 Donation to company
by a stockholder, operational
asset at fair value
9/1/20 50% share dividend (Note
5)
750,000
3/31/18 Refund of prior years’
income taxes due to carryback
of a 2012 net loss to 2013
7/1/19 Reduction in share
capital (Note 4)
12/31/20 Net income
18,000
15,000
27,000
1,500,000
510,000
Additional information:
Note 1: On June 30, 2017 the company recognized as an outright expense an equipment with a cost
of P160,000. As per your audit, you have ascertained that the equipment has a useful life of 5 years
and is supposed to be depreciated using straight-line method to zero residual value.
Note 2: Goodwill has been recognized by the company upon approval of the board of directors.
Note 3: The company issued a P300,000, 12% bonds payable on January 2017. The bond indenture
requires the company to appropriate retained earnings at P60,000 annually starting December 31,
2017 until the bonds’ maturity on December 31, 2021.
Note 4: This pertains to a board of directors approved recapitalization reducing the par value of the
company’s shares from P25 to P10 without change in the number of shares outstanding (100,000
shares).
Note 5: The company declared and distributed 50% stock dividends on its 100,000, P10 par value
ordinary shares outstanding. The fair market value of the shares was at P15.
Based on the information above, determine the adjusted balance of the following:
1. What is the retroactive adjustment to the retained earnings beginning 2020 as a result of the error
identified in Note 1?
a.
64,000
c.
48,000
b.
80,000
d.
96,000
2. What is the adjusted net income in 2020?
a.
478,000
b.
494,000
c.
d.
500,000
510,000
3. What is the correct debit to retained earnings as a result of the stock dividend declaration on
September 1, 2020?
a.
750,000
c.
550,000
b.
700,000
d.
500,000
4. What is the adjusting entry in relation to you audit in note 4?
a. Debit: Share premium
1,500,000
Credit: Retained earnings
1,500,000
b. Debit: Ordinary shares 1,500,000
Credit
Share premium
1,500,000
c. Debit: Retained earnings 1,500,000
Credit: Share premium
1,500,000
d. Debit: Retained earnings 1,500,000
Credit: Ordinary shares
1,500,000
5. What is the correct balance of Retained Earnings, Unappropriated, as of December 31, 2020?
a.
925,000
c.
685,000
b.
745,000
d.
658,000
Page 10 of 12
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
PROBLEM 13:
The shareholders’ equity section of Stuart Company’s statement of financial position as of December
31, 2019, is as follows:
Ordinary shares, P10, par value; authorized,
2,000,000 shares; issued 400,000 shares
Preference shares, P5 par value; authorized,
1,000,000 shares; issued 200,000
Share premium – Ordinary shares
Share premium – Preference shares
Retained earnings
Total
P4,000,000
1,000,000
1,800,000
600,000
6,000,000
P13,400,000
The following transactions occurred during 2020:
Jan. 5
The company issued for P2,350,000, 100,000 ordinary shares and 50,000 preference shares.
The company incurred share issue cost at P150,000. The ordinary shares were currently
selling at P15 per share while the preference shares at P10.
Feb. 16
50,000 preference shares were subscribed at P12 per share.
Mar. 25
20,000 previously unissued ordinary shares were issued in exchange of an equipment having
a fair market value of P500,000. The company incurred share issue costs at P20,000.
Apr. 20
Reacquired 40,000 ordinary shares as treasury shares at P18 per share.
Jun. 30
The company declared and paid P0.50 cash dividends to ordinary shares and P1 per share
cash dividends to preference shares.
Jul. 30
Reissued half of the treasury shares at P16 per share.
Aug. 30
A 10% ordinary stock dividend was declared and issued to ordinary shares. Market value is
currently at P17 per share.
Sep. 16
Collected full payments on 80% of the preference shares subscribed on February 16.
Dec. 31
The company declared and paid P0.50 cash dividends to ordinary shares and P1 per share
cash dividends to preference shares.
Dec. 31
Adjusted net income for the year is at P3,510,000.
Required:
1. What is the credit to the share premium from preference shares accounts as a result of the
issuance of ordinary and preference shares on January 5?
a.
250,000
c.
650,000
b.
300,000
d.
700,000
2. The entry to record cash dividends on June 30 requires a debit to retained earnings at:
a.
560,000
c.
575,000
b.
540,000
d.
585,000
3. The entry to record the reissue treasury shares on July 30 requires a debit to
a. Share premium P40,000
b. Retained earnings P40,000
c. Share premium P80,000
d. Retained earnings P80,000
4. The entry to record the stock dividends on August 30 requires a debit to retained earnings at:
a.
500,000
c.
850,000
b.
540,000
d.
918,000
5. What is the balance of the share premium in excess over par from ordinary shares as of December
31, 2020?
a.
3,040,000
c.
3,152,500
b.
3,080,000
d.
2,842,500
6. What is the balance of the Preference shares account as of December 31, 2020?
a.
1,000,000
c.
1,250,000
b.
1,200,000
d.
1,450,000
7. What is the balance of the Retained earnings – unappropriated as of December 31, 2020?
a.
7,436,000
c.
7,103,000
b.
7,436,000
d.
7,145,000
Page 11 of 12
ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
Quizzer: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY
AP-200Q
PROBLEM 14:
On May, 2018 Joey Inc., was organized with 3,000,000 authorized shares of P10 par value ordinary
shares, and 300,000 of its ordinary shares were issued for P3,300,000. Net income through December
31, 2018 was P525,000.
On July 23, 2019, when the shares were selling at P13 per share, Joey Inc. issued 500,000 of its
ordinary shares in exchange of a real estate properties which were fairly valued at P6,250,000. A 5%
share dividend was declared on October 2, 2019, to shareholders of record on October 23, 2019. The
market value of the ordinary shares was P11 per share on the declaration date. Joey Inc.’s net income
for the year ended December 31, 2019 was P350,000.
During 2020, Joey Inc. had the following transactions:
a. In February, Joey Inc. reacquired 30,000 of its ordinary shares (originally issued in 2018) for
P9 per share.
b. In June, Joey Inc. sold 15,000 of its treasury shares for P12 per share.
c.
In September, each shareholder was issued (for each share held) one right to purchase two
additional ordinary shares for P13 per share. The rights shall expire on December 31, 2020.
d. In October, 250,000 rights issues were exercised when the market value of the ordinary shares
was P14 per share.
e.
In November, 400,000 rights issues were exercised when the market value of the ordinary
shares was P15 per share.
f.
On December 15, Joey Inc. declared its first cash dividend to shareholders of P0.30 per share,
payable on January 10, 2021, to shareholders of record on December 31, 2020.
g. On December 31, in accordance with the applicable law, Joey Inc. formally retired 10,000 of its
treasury shares and had them revert to an unissued basis. The market value of the ordinary
share was P16 per share on this date.
h. Net income for 2020 was P800,000.
Based on the information presented above, determine the following:
1. The stock dividends declaration on October 2, 2019 includes a debit to retained earnings at
a.
400,000
c.
250,000
b.
440,000
d.
275,000
2. The cash dividends declaration on December 15, 2020 includes a debit to retained earnings at
a.
349,500
c.
637,500
b.
351,000
d.
639,000
3. What is the credit to the share premium account as a result of the reissue of treasury shares on
item b?
a.
None
c.
180,000
b.
45,000
d.
135,000
4. What is the adjusted additional-paid in capital as of December 31, 2020?
a.
5,545,000
c.
3,585,000
b.
5,505,000
d.
3,595,000
5. What is the adjusted retained earnings-total (appropriated and unappropriated) balance, as of
December 31, 2020?
a.
885,500
c.
597,500
b.
884,000
d.
596,000
6. What is the total stockholders’ equity as of December 31, 2020?
a.
27,397,500
c.
14,822,500
b.
27,442,500
d.
14,867,500
Page 12 of 12