TARIPE, Jennifer A.
TABO, Janelle
IV- BS Accountancy
X- Audit of Equity
PROBLEM NO. 1 – Components of equity
Alcoy Corporation’s post-closing trial balance at December 31, 2010 was as follows:
Alcoy Corporation
Post-Closing Trial Balance
December 31, 2010
Debit
Accounts payable
Accounts Receivable
Reserve for depreciation
Reserve for doubtful accounts
Premium on ordinary shares
Gain on sale treasury shares
Bonds Payable
Building and equipment
Cash
Dividends payable on preference shares
Ordinary share capital (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
Preference share capital (P50 par value)
Prepaid expenses
Donated Capital
Share warrants outstanding
Retained earnings
Treasury shares – ordinary, 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
P 6,480,000
P 6,480,000
At December 31, 2010, Alcoy had the following number of ordinary and preference shares:
Ordinary
900,000
270,000
252,000
Authorized
Issued
Outstanding
Preference
90,000
18,000
18,000
The dividends on preference shares are P 0.40 cumulative. In addition, the preference share 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,
2010:
1. Share premium/ Additional paid-in capital
a. P3,213,000
c. P3,050,000
b. P3,258,000
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
c. P91,800
b. 739,800
d. P37,800
4. Total equity
a. P4,266,800
b. P4,519,800
c. P4,888,800
d. P4,474,800
Answers: 1) B; 2) A; 3) C; 4) D
Suggested Solution:
Question No. 1
Premium on ordinary shares
Gain on sale of treasury shares
Donated capital
Share warrants outstanding
P1,800,000
450,000
800,000
208,000
Total share premium/additional paid-in-capital
P3,258,000
Question No. 2
Preference share capital (P50 par value)
Ordinary share capital (P1 par value)
Share Premium (see no. 1)
Total contributed capital
P900,000
270,000
3,258,000
P 4, 428, 000
Question No. 3
Total retained earnings
Less appropriate for treasury shares
Unappropriated retained earnings
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 shares
Total
Less : Treasury shares
Net unrealized loss on AFS
P4,428,000
P 91,800
324,000
415,800
4,843,800
324,000
45,000
369,000
Total equity
P 4,474,800
PROBLEM NO.2 – Adjusted components of equity
The “shareholders equity” account of Alegria Corporation, after its initial year of operation in
2010 shows the following:
Date
Jan. 01
Jan. 15
Mar. 10
May 15
June 10
Dec. 31
Dec. 31
Particulars
Issued 6,000 shares at par of P100 in
exchange for real property with a
market value of P800,000;
authorized 20,000 shares
Sold 8,000 shares at P120
Purchased 800 shares at P150
Loss on sale of machinery
Sold 400 treasury shares
Cash dividends declared payable
January 15, 2011
Profit for the year
Debit
Credit
P600,000
960,000
P120,000
40,000
68,000
80,000
316,000
Questions:
Based on the information presented above and the result of your audit, answer the following:
1. The adjusted share capital as of December 31, 2010 is
a. P1,360,000
c. P1,400,000
b. P1,560,000
d. P1,340,000
2. The total share premium as of December 31, 2010 is
a. P360,000
c. P368,000
b. P160,000
d. P168,000
3. The unappropriate retained earnings as of December 31, 2010 is
a. P196,000
c. P136,000
b. P156,000
d. P144,000
4. The adjusted total equity on December 31, 2010 is
a. P1,944,000
c. P1,744,000
b. P1,704,000
d. P1,904,000
5. The book value per share of Alegria Corporation on December 31, 2010 was
a. P140.00
c. P128.20
b. P132.22
d. P125.29
Answers: 1) C; 2) C; 3) C; 4) D; 5) A
Suggested Solution:
Share
Date
Capital
Jan. 1
P600,000
Jan. 15
800,000
Mar. 10
May 15
June 10
Dec. 31
Profit(P316,000P40,000)
Bal.,
(12/31/10)
P1,400,000
Share
premium
P200,000
160,000
Retained
Earnings
Treasury
shares
P120,000
(60,000)
8,000
(P80,000)
276,000
P368,000
P196,000
P60,000
PROBLEM NO. 3 – Various equity transactions
Your audit client, Argao, Inc., is a public entity whose shares are traded in the over- the- counter
market. At December 31, 2009, Argao had 3,000,000 authorized, P10 par value, ordinary shares,
of which 1,000,000 shares were issued and outstanding. The equity accounts at December 31,
2009 had a following balances.
Ordinary share capital
Share Premium
Retained earnings
P10,000,000
3,750,000
3,250,000
Transactions during 2010 and other information relating to the equity accounts were as follows:
• On January 2. 2010. Argao issued at P54 per share, 50,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each preference share is convertible into two ordinary
shares. Argao had 300,000 authorized shares of preference shares. The preference share has a
liquidation value equal to its par value.
• On February 1, 2010, Argao reacquired 10,000 ordinary shares for P16 per share.
• On April 30, 2010, Argao sold 250,000, P10 par value, ordinary shares (previously unissued)
to the public at P17 per share.
• On June 15, 2010, Argao declared a cash dividend of P1 per share on ordinary shares, payable
on July 15, 2010, to shareholders of record on July 1, 2010.
• On November 10, 2010, Argao sold 5,000 treasury shares for P21 per share.
• On December 15, 2010, Argao declared the yearly cash dividend on preference share, payable
on January 15, 2011, to shareholders of record on December 31, 2010.
• On January 20, 2011, before the books were closed for 2010, Argao became aware that the
ending inventories at December 31, 2009 were understated by P150,000 (after tax effect on 2009
profit was P90,000). The appropriate correction entry was recorded the same day.
• After correcting the beginning inventory, profit for 2010 was P2, 250,000.
Questions:
Based on the above and the result of your audit, determine the following as of December 31,
2010.
1. Share premium
a. P5700,000
b. P5,525,000
c. P5,500,000
d. P5,725,000
2. Unappropriated retained earnings
a. P4,125,000
c. P4,045,000
b. P4,035,000
d. P3,955,000
3. Treasury shares
a. P160,000
b. P80,000
c. P55,000
d. 50,000
4. Total equity
a. P22,190,000
b. P24,770,000
c. P24,690,000
d. P24,840,000
5. Book value per share of ordinary
a. P17.89
c. P17.71
b. P17.82
d. P15.41
Answers: 1) D; 2) C; 3) B; 4) B; 5) A
Suggested Solution:
Questions No. 1 to 4
Preference share capital
Ordinary share capital
Share premium
Retained earnings:
Appropriated
Unappropriated
Treasury shares
Total equity, 12/31/10
P 2,500,000
12,500,000
5,725 (1)
P 80,000
4,045,000
4,125,000 (2)
(80,000) (3)
P 24,770,000 (4)
Question No. 5
Total equity (see no. 4)
Less liquidation value of preference shares
Ordinary shareholders’ equity
Divide by ordinary shares outstanding
Book value per share of ordinary
P24,770,000
2,500,000
22,270,000
1,245,000
P
17.89
Prepare T accounts for each component of equity. Place the balances as of January I, 2010,
journalize the transactions affecting the equity accounts post the entries to the accounts, then
extract the balances.
Journal entries affecting the equity accounts during 2010:
1/2
Cash (50,000 shares x P54)
P2,700,000
Preference share capital (50,000 shares x P50)
Share Premium excess over par PS
2/1
Treasury shares (10,000 x P16)
Cash
P2,500,000
200,000
P 160,000
P 160,000
4/30 Cash (250,000shares x P17)
Ordinary share capital (250,000 shares x P10)
Share premium -excess over par OS
P4,250,000
6/ 15 Retained earnings
Dividends payable - ordinary
* ((1,000, 000 + 250,000 10, 000) xP1]
P1,240,000*
P1,240,000
11/ 10 Cash (5,000 shares x P21)
Treasury shares (5,000 shares x P16)
Share premium - treasury shares transactions
P 105,000
P2,500,000
1,750,000
P 80,000
25,000
12/ 15 Retained earnings (2,500,000 x 9%)
Dividends payable – preference
P 225,000
P225,000
12/31
P 150,000
Inventory, 1/1/ 10
Retained earnings
Income tax payable
12/31
Profit or loss summary
Retained earnings
12/31
Retained earnings
Retained earnings - appropriated (cost of TS)
P 90,000
60,000
P2,250,000
P2,250,000
P 80,000
P 80,000
PROBLEM NO. 4 – Various equity transactions
The equity section of the Asturias Inc. showed the following data on December 31, 2009: Share
capital, P3 par, 300,000 shares authorized, 250,000 shares issued and outstanding, P750,000;
Share premium – excess over par, P7,050,000. The share options were granted to key executives
and provided them the right to acquire 30,000 ordinary shares at P35 per share. Each option has a
fair value of P5 at the time the options were granted.
The following transactions occurred during 2010:
Feb. 1 Key executives exercised 4,500 options outstanding at December 31, 2009. 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 ordinary shares at P40 each for a 1- year
period. The bonds would sell at P996 per 1000 bond without the warrant.
July 1 The company issued rights to shareholders (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 shares were
issued.
Oct. 1 All warrants issued in connection with the bonds on April 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 Profit for 2010 was P250,500.
Questions:
Based on the above and the result of your audit, determine the following as of Dec. 31, 2010:
1. Share capital
a. P777,300
b. P848,700
c. P833,850
d. P850,050
2. Total share premium
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. P580,000
b. P858,000
c. P730,500
d. P654,150
5. Total equity
a. P10,000,000
b. P9,784,000
c. P9,030,000
d. P9,982,000
Answers: 1) D; 2) D; 3) C; 4) C; 5) A
Suggested Solution:
Questions No. 1 to 5
Share capital
Share premium
Contributed capital
Retained earnings
Total equity, 12/31/10
P 850,050
8,419,450
9,269,500
730,500
P10,000,000 (5)
(1)
(2)
(3)
Note: Follow the same approach in Problem no. 3.
Journal entries affecting the equity accounts during 2010:
2/1
4/1
Cash (4,500 options x P35)
P157,500
Share premium-share options (4,500 x P5)
22,500
Share capital (4,500 shares x P3)
Share premium excess over par
P 13,500
166,500
Cash
P2,000,000
Bond discount [P2,000,000-(2,000xP996)]
8,000
Bonds payable
2,000,000
Share premium-share 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 994,000
Share capital (24,850 shares x P3) P
Share premium excess over par
10/1
12/ 1
12/31
Cash (2,000 x 2 x P40)
Share premium-share warrants
Share capital (2,000 shares x 2 x P3)
Share premium excess over par
P 160,000
8,000
Share premium-share options
[P150,000-(4,500xP5)]
Share premium - expired share options
Profit or loss summary
74,550
919,450
P 12,000
156,000
P127,500
P127,500
P250,500
Retained earnings
P250,500
PROBLEM NO. 5 – Various equity transactions
Balamban Corporation was authorized at the beginning of 2008 with 540,000, P100 par
value, ordinary shares. At December 31, 2008, the equity section of Balamban was as follows:
Share capital, par value P100 per share; authorized
540,000 shares; issued 54,000 shares
Share premium
Retained earnings
Total equity
P 5,400,000
540,000
810 000
P6,750,000
On May 10,2009, Balamban issued 90,000 ordinary shares for P10,800,000. A 5% share
dividend was declared on September 30, 2009 and issued on November 10, 2009 to shareholders
of record on October 31, 2009. Market value of ordinary share was P110 per share on declaration
date. The profit of Balamban for the year ended December 31, 2009 was P855,000.
During 2010, Balamban had the following transactions;
Feb. 15
Balamban reacquired 5,400 ordinary shares for P95 per share.
May 15
Balamban sold 2,700 treasury shares for P120 per share.
Jun. 30 Issued to shareholders one right for each share held to purchase two additional
ordinary shares for P125 per share. The rights expire on December 31, 2010.
Aug. 15
share.
45,000 rights were exercised when the market value of ordinary share was P130 per
Sep. 30 72,000 rights were exercised when the market value of the ordinary share was
P140 per share.
Dec. 01 Balamban declared a cash dividend of P2 per share payable on January 15, 2011 to
shareholders of record on December 31, 2010. .
Dec. 15 Balamban retired 1,800 treasury shares. On this date, the market value of the ordinary
share was P150 per share.
Dec. 31 Profit for 2010 was P900,000.
QUESTIONS:
Based on the above and the result of our audit, determme the following as of December
31, 2010:
1. Share capital
a. P38.520,000
b. P26,640,000
c. P38.340,000
d.P38,250,000
2. Share premium
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 shares
a. P18,000
b. P90,000
c. P85,500
d. P 0
Answers: 1) C; 2) B; 3) D; 4) C
Suggested Solution:
Questions No. 1 to 4
Balances, 1/1/09
May 10, 2009
Sept. 30, 2009
Profit- 2009
Balances, 12/31/09
Feb. 15, 2010
May 15, 2010
Aug. 15, 2010
Sept. 30, 2010
Dec. 01, 2010
Share
Capital
P5,400,000
9,000,000
720,000
Share
premium
P540,000
1,800,000
72,000
15,120,000
2,412,000
9,000,000
14,400,000
Retained
Earnings
P810,000
(792,000)
855,000
873,000
67,500
2,250,000
3,600,000
(765,000)
Treasury
shares
P0
0
513,000
(256,500)
Dec. 15, 2010
Profit 2010
Balances, 12/31/10
(180,000)
P38,340,000
9,000
P8,338,500
(171,000)
900,000
P1,008,000
P85,000
PROBLEM NO. 6 – Various equity transactions
Bogo Corporation began operations on January 1, 2010. The company was authorized to issue
60,000, P10 par value, ordinary shares and 120,000 shares of 10%, P100 par value convertible
preference shares.
In connection with your audit of the company’s financial statements, you noted the following
transactions involving shareholders’ equity during 2010:
Jan. 1 Issued 1,500 ordinary shares 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 convertible preference shares at P150 per share. Each share can be
converted to five ordinary shares. The corporation paid P225,000 to an agent for selling the
shares.
Feb. 15 Sold 9,000 ordinary shares at P390 per share. The corporation paid issue costs of
P75,000.
May 30
Received subscriptions for 12,000 ordinary shares at P450 per share.
Aug. 30 Issued 2,100 ordinary shares and. 4,200 preference shares in exchanged for a building
with a fair value of P1,530,000. The building was originally purchased for P1,140,000 by the
investors and has a carrying amount of P660,000. In addition, 1,800 ordinary shares 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 stock were issued for
the fully paid subscriptions. The balance is collectible next year.
Dec. 1
Declared a cash dividend of P10 per share on preference shares, payable on December
31 to shareholders of record on December 15, and P20 per share cash dividend on ordinary
shares, payable on January 15, 2011 to shareholders of record on December 15.
Dec. 31
Paid the preference share dividend.
Profit for the 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,
2010:
1. Ordinary share capital
a. P204,000
b. P144,000
c. P264,000
d. P186,000
2. Share premium- preference
a. P1,500,000
b. P1, 545,000
c. P1,275,000
d. P1,860,000
3. Share premium – ordinary
a. P8,211,000
b. P10,851,000
c. P11,121,000
d. P10,032,000
4. Retained earnings
a. P1,050,000
b. P1,170,000
c. P930,000
d. P1,458,000
5. Total equity
a. P17,295,000
b. P16,950,000
c. P15,810,000
d. P17,010,000
Answers: 1) A; 2) B; 3) B; 4) C; 5) D
Suggested Solution:
Questions No. 1 to 5
Preference share capital
Ordinary share capital
Subscribed ordinary share capital
Share premium – preference
Share premium – ordinary
Retained earnings
Total equity, 12/31/10
P3,420,000
204,000
60,000
1,545,000
10,851,000
930,000
P17,010,000 (5)
Journal entries affecting equity during 2010:
(1)
(2)
(3)
(4)
1/ 1 Equipment
P510,000
Organization expenses
210,000
Ordinary share capital (1,500 shares 1: P10)
Share premium - ordinary
P 15,000
705,000
1/31 Cash (30,000 shares x P150)
P4,500,000
Preference share capital (30,000 shares x P100) P3,000,000
Share premium preference
1 ,500,000
Share premium -preference
Cash
P225,000
P225,000 '
2/20 Cash (9,000 shares x P390)
P3,510,000
Ordinary share capital (9,000 shares x P10)
Share premium - ordinary
Share premium – ordinary
Cash
5/30 Subscriptions rec. (12,000 sh. X P450)
Subscribed ordinary share capital
(12,000 shares x P10)
Share premium - ordinary
8/30
P 90,000
3,420,000
P75 000
P75,000
P5,400,000
P120,000
5,280,000
Cash
P720,000
Ordinary share capital (1,800 shares x P10)
P18,000
Share Premium – ordinary
702,000
Building
P1,530,000
Ordinary share capital (2100 shares x P10)
Share premium- ordinary
[(2,100 sh x P400*)-21,000]
Preference share capital (4,200 shares x P100)
Share premium -preference (balance)
P21,000
819,000
420,000
270,000
* (P720, 000/ 1,800 shares)
Note: The fair value of the building should be allocated to the preference and ordinary shares
based on fair values. The problem did not specifically mention the fair value of the ordinary
shares. However, on the same date the company issued 1,800 ordinary shares for
P720, 000 cash. Therefore, ordinary shares were selling at P400/ share (P720,000/ 1,800).
Since the fair value of the preference share is not determinable, it will be assigned the
residual amount after deducting the fair value of ordinary shares from the fair value of the
building.
1 1/07
Cash
Subscriptions receivable
P4,200,000
P4,200,000
Subscribed ordinary share capital
(120,000 x 1/2)
Ordinary share capital
P60,000
P60,000
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 as a deduction within the equity section.
12/01
Retained earnings
Dividends payable - Preference
Dividends payable - Ordinary
P870,000
P342,900
528,000
Preference - (P3,420,000/P100 x P10)
Ordinary - {[P204,000+P60,000)/P10] x P20}
Note: Shares issued plus subscribed less treasury shares are entitled to dividends.
12/ 31
Profit or loss summary
Retained earnings
P1,800,000
P 1,800,000
PROBLEM NO. 7 - Various equity transactions
The Borbon Corporation has requested you to audit its financial statements for the year 2010.
During your audit, Borbon presented to you its statement of financial position as of December
31, 2009 containing the following equity section:
Preference share capital P10 par; 60,000 shares
authorized and issued, of which 6,000 are treasury
shares costing P90,000 and shown as an asset
Ordinary share capital, par value P4; 600,000 shares
authorized, of which 450,000 are issued and
outstanding
Share premium (P5 per share on preference shares
issued in 2001)
Allowance for doubtful accounts receivable
Reserve for depreciation
Reserve for fire insurance
Retained earnings
Total equity
P 600,000
1,800,000
300,000
12,000
840,000
198,000
2,250,000
P 6,000,000
Additional information:
1) Of the preference share capital, 3,000 shares were sold for P18 per share on August
30, 2010. Borbon credited the proceeds to the Preference share capital account. The
treasury shares as of December 31, 2009 were acquired in one purchase in 2009.
2) The preference share carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 2009, unpaid cumulative dividends amounted to P5 per
share. The entire accumulation was liquidated in June, 2010, by issuing to the preference
shareholders 54,000 ordinary shares.
3) A cash dividend of P1 per share was declared on December 1, 2010 to preference
shareholders of record December 15, 2010. The dividend is payable on January 15, 2011.
4) At December 31, 2010, the Allowance for Doubtful Accounts Receivable and Reserve
for Depreciation had balances of P25,000 and P1,050,respectively.
5) On March 1 2010, the Reserve for Fire Insurance was increased by P60,000; Retained
Earnings was debited.
6) On December 31, 2010, the Reserve for Fire Insurance was decreased by P30,000, which
represents the carrying amount of a machine destroyed by fire on that date. Estimated the
fire cleanup costs of P6,000 does not appear on the records.
7) The December 31, 2009 Retained Earnings consists of the following;
Donated land from a shareholder
(Fair value on date of donation)
P450,000
Gains from treasury share transactions
51,000
Earnings retained in business
1,749,000
P2,250,000
8) Profit for the year ended December 31, 2010 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, 2010. (Disregard tax implications)
1. Total share premium
a. P414,000
b. P804,000
c. P810,000
d. 864,000
2. Retained earnings- Appropriated
a. P258,000
b. P303,000
c. P228,000
d. P 0
3. Retained earnings- Unappropriated
a. P2,677,500
b. P2,626,500
c. P2,578,500
d. P2,623,500
4. Treasury shares
a. P45,000
b. P90,000
5.Total equity
a. P3,700,500
b. P5,812,500
c. P36,000
d. P 0
c. P6,316,500
d. P6,319,500
Answers: 1) D; 2) B; 3) C; 4) A; 5) C
Suggested Solution:
Questions No. 1 to 5
Preference share capital
Ordinary share capital
Share Premium
Retained eanrings – Appropriated
Retained earnings – Unappropriated
Treasury shares
Total equity, 12/31/10
P600,000
2,106,000
864,000 (1)
303,000 (2)
2,578,000 (3)
(45,000) (4)
P6,316,600 (5)
Journal entries affecting the equity accounts during 2010:
1. Cash (3,000 shares x P18)
P54,000
Treasury shares [(90,000/6,000 shares) x 3,000 shares]
P45,000
Share Premium
9,000
2. Retained earnings
P270,000 *
Ordinary share capital (54,000 shares xP4)
P216,000
Share premium
54,000
*[(60,000 – 6,000) x P5]
3. Retained earnings
Dividends payable
**[(60,000 – 3,000) x P1]
4. Ignore
5. Retained earnings
Retained earnings – appropriated
P57,000**
P57,000
P60,000
P60,000
6. See no. 8
7. Retained earnings
Share premium
P501,000
8. Profit or loss summary
Retained earnings
P1,261,500
Profit per company’s records
Fire loss erroneously charged to reserve
For fire insurance
Estimated fire clean up cost
Adjusted profit
P501,000
P1,261,500
P1,297,000
(30,000)
(6,000)
P 1,261,500
9. Retained earnings
P45,000
Retained earnings – appropriated (cost of TS)
P45,000
PROBLEM NO. 8 - Various Equity Transaction
The shareholders equity of Cordova Corporation shared the following data on December
31, 2009:
12% Preference Share capital, P30 par, 135,000
share issued and outstanding
Ordinary share capital, P50 par, 180,000 shares
issued and outstanding
Share premium – preference
Share premium – ordinary
Retained earnings
P4,050,000
P9,000,000
P1,080,000
P3,240,000
1,395,000
The 2010 transactions of the company affecting its equity summarized chronologically as
follows:
1.
2.
3.
4.
5.
6.
7.
Issued 27,000 preference shares at P40.
Issued 94,500 ordinary shares at P70.
Retired 5,400 preference shares at P45.
Purchased 13,500 ordinary shares at P80.
Split ordinary shares two for one (par value reduce toP25)
Reissued 13,500 treasury shares at P50.
Shareholders donated to the company 9,000 ordinary shares 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 ordinary shares at P2 per share
and on the preference shares at the preference rate.
9. Profit for the year was 2,520,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31,
2010:
1. Preference share capital
a. P4,617,000
b. P4,698,000
c. P4,968,000
d. P4,860,000
2. Ordinary share capital
a. P15,615,000
c. P13,968,000
b. P13,500,000
d. P13,725,000
3.
Share premium
a. P6,777,000
b. P6,858,000
c. P6,679,800
d. P 6,814,800
4. Unappropriated retained earnings
a. P1,749,240
c. P1,711,440
b. 2,251,240
d. P1,684,440
5. Total equity
a. P26,949,240
b. P26,922,240
c. P26,958,960
d. P26,940,240
Answers: 1) B; 2) D; 3) D; 4) C; 5) A
Suggested Solution:
Questions No. 1 to 5
Preference share capital
Ordinary share capital
Share premium
Retained earnings – Appropriate
Retained earnings – Unappropriate
Treasury shares
Total equity, 12/31/10
P 4,698,000 (1)
13,725,000 (2)
6,814,800 (3)
540,000
1,711,440 (4)
( 540,000)
P 26,949,240 (5)
Journal entries affecting the equity accounts during 2010:
1. Cash (27,000 shares x P40)
P1,080,000
Preference share capital (27,000 shares x P30)
Share premium - preference
2.
3.
P 810,000
270,000
Cash (94,500 shares x P70)
P 6,615,000
Ordinary share capital ( 94,500 shares x P50)
Share premium – ordinary
P 4,725,000
1,890,000
Preference share capital (5,400 shares x P30)
P 162,000
Share premium - preference (1,080,000 x 5.4 /135)
43,200
Retained earnings
37,800
Cash (5,400 shares x P45)
P243,000
4. Treasury shares (13,500 shares x P80)
P 1,080,000
Cash P
P1,080,000
5.
Memo entry.
6.
Cash (13,500 shares x P50).
P 675,000
Treasury shares (1,080,000 x 1/2)
P 540,000
Share premium - treasury shares transaction
135,000
7.
Memo entry
Cash (9,000 shares x 1/2 x P54)
Share premium - donated capital
8.
Retained earnings
Cash
P 243,000
P 243,000 �
P 1,625,760
P 1,625,760
Ordinary shares issued and outstanding, 1/1/10
2) Shares issued
4) Purchase of treasury shares
5) Share split
6) Re-issuance of treasury shares
7) Donated shares
Re-issuance of donated shares
Ordinary shares issued and outstanding, 12/31/10
x Dividend per share.
Dividends to ordinary
Dividends to preference (P4,698,000 x 12%)
Total
9) Profit or loss summary
Retained earnings
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
1,625,760
P 2,520,000
10) Retained earnings
P 540,000
Retained earnings - appropriated (cost of TS) P
P 2,520,000
540,000
PROBLEM NO. 9 - Various equity transactions
In connection with your audit of the Colon Corporation, you were able to obtain the following
information pertaining to the corporation's equity accounts.
Colon Corporation has 32,000, P2 par value, ordinary shares authorized. Only 75% of these
shares have been issued, and of the shared issued, only 22,000 are outstanding. On December 31,
2009, the equity section revealed that the balance in Share premium - ordinary was P832,000,
and the Retained Earnings balance was P220,000. The Treasury shares were purchased at an
average price of P37.50 per share.
During 2010, Colon had the following transactions:
Jan. 15 Colon issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative preference
shares, 4,000 shares are authorized.
Feb. 01
Colon sold 3,000 newly issued ordinary shares at P42 per share.
Mar. 15 Colon declared a cash dividend on ordinary shares of P0.15 per share, payable on
April 30 to all shareholders of record on April 1.
Apr. 15
Colon reacquired 400 ordinary shares for P43 per share.
Employees exercised 2,000 share options granted in 2004. When the options were
granted, each option entitled the employees to purchase 1 ordinary share for P50 per share.
The share price on the date of grant was also P50 per share. Colon issued new shares to the
employees.
May 01 Colon declared a 10% share dividend to be distributed on June 1 to shareholders of
record on May 7. The market price of the ordinary share was P50 per share on May 1.
31
Colon sold 300 treasury shares reacquired on April 15 and an additional 400 shares
costing P15,000 taht had been on hand since the beginning of the year. The selling price was
P57 per share.
Sept. 15 The semiannual cash dividend on ordinary shares was declared, amounting to P0.15
per share. Colon also declared the the yearly dividend on preference shares. Both are payable on
October 15 to shareholders of record on October 1.
Profit for 2010 was P100,000.
QUESTIONS: Based on the above and the result of your audit, determine the balances of the
following as of December 31, 2010:
1.
Preference share capital
a. P86,000
b. P90,000
c. P80,000
d. P84,000
2.
Ordinary share capital
a. P63,320
b. P23,320
c. P183,320
3.
Share premium
a. P1,175,680
b. P1,068,000
d. P58,000
c. P1,195,680
4. Treasury shares
a. P64,300
b. P77,200
c. P92,200
5. Total retained earnings
a. P74,756
b. P99,756
c. P183,250
d. P1,099,680
d. P75,000
d. P174,756
Suggested Solution:
Questions No. 1 to 5
Preference share capital
Ordinary share capital
Share premium
Retained earnings
Treasury shares
Total Equity, 12/31/10
P 80,000 (1)
63,320 (2)
1,195,680 (3)
174,756 (5)
(64,300) (4)
P1,449,456
Journal entries affecting the equity accounts during 2010:
1/15 Cash (1,600 shares x P55)
P 88,000
Preference share capital (1,600 shares x P50) P 80,000
Share premium - preference
8,000
2/1
Cash (3,000 shares x P42)
P 126,000
Ordinary share capital (3,000 shares x P2)
P 6,000
Share premium - ordinary
120,000
3/15 Retained earnings [(22,000+3000)xP0.15)]
Dividends payable - ordinary
P 3,750
4/15
P 17,200
4/15
Treasury shares
Cash (400 shares x P43)
P 3,750
P 17,200
Cash (2,000 shares x P50)
P 100,000
Ordinary share capital (2,000 shares x P2)
P 4,000
Share premium - ordinary
5/1
96,000
Retained earnings (26,600 x 10% x P50)
Share dividends payable - ordinary
(26,600 x 10% x P2)
Share premium - ordinary
P 133,000
P 5,320
127,680
5/31
Cash (700 shares x P57)
P 39,900
Treasury shares [(300 shares x P43) + P15,000)]
P 27,900
Share premium - treasury shares transactions
12,000
6/1
Share dividends payable -ordinary
Ordinary share capital
9/15
P 5,320
P 5,320
Retained earnings
Dividends payable - preference (80,000 x 5%)
Dividends payable - ordinary (29,960 x P15)
12/31 Profit or loss summary
Retained earnings
P 8,494
P 4,000
4,494
P 100,000
P 100,000
PROBLEM NO. 10 – Various equity transactions
Following is the equity section of Carcar Corporation’s statement of financial position at
December 31, 2009:
Share capital, P10 par value; authorized
1,500,000 shares; issued and outstanding
900,000 shares
Share premium
Retained earnings
Total equity
P9,000,000
750,000
2,700,000
P12,450,000
Transactions during 2010 and other information relating to the equity accounts were as follows:


On January 26, Carcar reacquired 75,000 ordinary shares for P11 per share.
On April 4, Carcar sold 45,000 treasury shares for P14 per share.






On June 1, Carcar declared a cash dividend of P1 per share, payable on July 15, 2010 to
shareholders of record on July 1, 2010.
On August 15, each shareholder was issued one right for each share held to purchase two
additional shares for P12 per share. The rights expire on October 31, 2010
On September 30, 150,000 rights were exercised when the market value of the share was
P12.50 per share.
On November 2, Carcar declared a two for one share split up and changed the par value
of the share from P10 to P15 per share. On November 20, shares were issued for the
share split
On December 5, 60,000 shares were issued in exchanged for a secondhand equipment. It
originally cost P600,000 was carried by the previous owner at a carrying amount of
P300,000, and was recently appraised at P390,000.
Profit for 2010 was P720,000.
Questions:
Based on the above and the result of your audit, determine the following as of December
31, 2010:
1. Share Capital
a. P12,600,000
b. P10,050,000
2. Share Premium
a. P1,485,000
b. P3,825,000
3. Unappropriated Retained Earnings
a. P2,550,000
b. P2,220,000
4. Total Equity
a. P16,425,000
b. P16,095,000
c. P10,800,000
d. P12,300,000
c. P1,575.000
d. P1,275,000
c. P2,422,500
d. P2,190,000
c. P14,295,000
d. P16,065,000
Answers: 1) D; 2) C; 3) B; 4) B
Suggested Solution:
Questions No. 1-4
Share Capital
Share Premium
Appropriated Retained Earnings
Retained Earnings
Treasure shares
Total Equity 12/31/10
Journal entries affecting the equity accounts during 2010:
P112,300,000 (1)
1,575,000 (2)
330,000
2,220,000 (3)
(330,000)
P16,095,000 (4)
1/26
4/4
6/1
Treasury shares (75,000 x P11)
Cash
P 825,000
Cash (45,000 x P14)
Treasury shares (45,000 x P11)
Share Premium
P 630,000
Retained Earnings [(900,000-30,000) x P1]
Dividends Payable
P 870,000
P 825,000
P 495,000
P 135,000
P870,000
8/15
Memo entry
9/30
Cash (150,000 x 2x P12)
Share Capital (150,000 x 2 x P10)
Share Premium
P 3, 600,000
Equipment
Share Capital
P 390,000
P 3,000 000
600,000
P
300,000
Share Premium
P90,000
12/31 Profit or loss summary
Retained Earnings
P 720,000
12/31 Retained Earnings
Appropriated Retained Earnings
P 330,000
P 720,000
P 330,000
PROBLEM NO.11 –Various equity Transactions
You were able to gather the following information in connection with your audit of the equity
section of the statement of financial position of Liloan, Inc. The company is a manufacturer of
school and office equipment. As of December 31, 2009, the equity of the company is presented
below:
Cumulative preference share capital
(P15 par value; 100,000 shares authorized,
12,000 shares issued and outstanding)
Ordinary share capital
(P10 par value: 1,000,000 shares authorized, 330,000 shares issued
and outstanding)
Retained Earnings
Liloan’s equity transaction during 2010 were as follows:
P 180,000
3,300,000
1,866,000
P 5,346,000
a. On January 31, 24 000 Preference shares were issued in exchange for land with a fair
value of P300,000, Six months ago, 2,000 shares of Liloan’s preference shares were
exchanged “over the counter “ for P14 per share.
b. On February 14, 13,500 ordinary shares were sold to Ms. P. Saway at P25 per share.
c. On Decemer 14, Liloan purchased dissident shareholder 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 ordinary 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, 2011.
e. On December 31, Liloan retired 12,000 preference shares at P18 per share.
f. A cash dividend of P2 per share was declared on the preference shares on October 15,
and paid on November 15.
g. A cash dividend of P1.50 per ordinary shares was declared on December 15 and payable
on January 15, 2011.
h. Liloan’s profit for the year 2010 was P750,000.
Questions:
Based on the above and the result of your audit, determine the following as of December 31,
2010:
1. Preference share capital
a. P360,000
b. P300,000
c. P264,000
d.P324,000
2. Ordinary share capital
a. P3,435,000
b. P4,020,000
c.P3,735,000
d.P3,637,500
3. Share Premium
a. P592,500
b. P202,500
c.P652,500
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 equity
a. P6,171,000
b. P6,036,000
c. P6,396,000
d. P6,336,000
Answers: 1) A; 2) A; 3) C; 4) C; 5) D
Suggested solutions:
Questions No. 1 to 5
Preference share capital
Ordinary share capital
Subscribed ordinary share capital
Share premium
Total retained earnings
Treasury shares
Discount on preference share capital
Total Equity, 12/31/10
P6,336,000
Journal entries affecting the equity accounts during 2010:
P 360,000 (1)
3,435,000 (2)
300,000
652,500 (3)
2,013,000 (4)
(364,500)
(60,000)
(5)
a. Land (at fair value)
P300,000
Discount on Preference share capital
60,000
Preference share capital (24,000 shares x P15)
P360,000
b. Cash (13,500 shares x P25)
P337,500
Ordinary share capital (13,500 shares x P10)
Share Premium
202,500
c. Treasury shares
Cash(13,500 shares x P27)
P135,000
P364,500
P364,500
d. Cash
P585,000
Subscriptions Receivables
165,000*
Subscribed ordinary share capital (30,000 shares x P10)
Share Premium
P300,000
450,000
*[(30,000 shares x P25) – P585,000]
e. Preference share capital (12,000 shares x P15)
Retained earnings
Cash (12,000 shares x P18)
P180,000
36,000
f. Retained earnings
Cash [(12,000+24,000 x P2)]
P72,,000
P216,000
P 72,000
g. Retained earnings
P495,000
Dividends payable [(12,000 + 24,000 x P2)
**[(330,000 + 13,500) x P1.5]
h. Profit or loss summary
P750,000
P495,000
Retained Earnings
P750,000
PROBLEM NO. 12-Various equity transactions
You gather the following information pertaining to the equity section of the Oslob Corporation in
connection with your audit of the company’s financial statements for 2010:
Ordinary share capital, P1 par value; authorized
1,500,000 shares; issued 750,000 shares; outstanding 700, 000 shares
Share Premium:
Excess over par
From Treasury shares
Total paid-in capital
Unappropriated retained earnings
Total equity
P700,000
P7,000,000
100,000
P7,800,000
4,050,000
P11,850,000
All of the outstanding ordinary and treasury shares were originally issued in 2007 for P11 per
share. The treasury shares were acquired on March 31, 2009. Oslob uses the par value method of
accounting for treasury shares.
During 2010, the following events or transactions occurred relating to Oslob’s equity:
Feb. 10
March 15
Aug. 30
Dec. 15
Issued 200,000 of unissued ordinary shares for P12.50 per share.
Declared cash dividend of P0.20 per share to shareholders of record. April 1, 2010
and payable April 15, 2010. This was the first dividend ever declared by Oslob.
Oslob’s president retired, Oslob purchased from the retiring president 50,000
ordinary shares of Oslob for P13 per share, which was equal to market value on
this date
Declared a cash dividend of P0.20 per share to shareholders of record on January
2, 2011 and payable on January 15, 2011.
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 ordinary shares on February 10, 2010 caused Oslob’s share
premium to increase by
a. P 200,000
c. P 2,300,000
b. P2,500,000
d. P
0
2. The retirement of 50,000 ordinary shares on August 30, 2010 caused Oslob’s share
premium to decrease by
a. P 50,000
c. P 500,000
b. P 600,000
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. P 230,000
c. P 500,000
b. P 200,000
d. P
0
4. How much cash dividends should Oslob charge against unappropriated retained earnings
in 2010?
a. P 350,000
c. P 370,000
b. P 180,000
d. P 170,000
5. How much should Oslob show in note to financial statements as a restrictions on retained
earnings because of the acquisitions of treasury shares?
a. P 100,000
c. P 600,000
b. P 450,000
d. P 650,000
Answers: 1) C; 2) C; 3) A; 4) A; 5) B
Suggested solutions:
Question No. 1
Proceeds from issuance (200,000 x P12.50)
Less par value of shares issued (200,000 shares x P1)
Increase in share premium
Question No. 2
Journal entry to record the retirement:
Ordinary share capital (50,000 shares x P1)
Share Premium (50,000 shares x (P11-1)
Unappropriated retained earnings
Cash
P 2,500,000
200,000
P 2,300,000
P 50,000
500,000
100,000
P 550,000
Question No. 3
Loss contingency that is not properly accruable by a charged to expense:
Suit # 1 – Reasonably possible
P 300,000
Question No. 4
Dividends declared, 3/15/10 [(700,000+200,000) x P0.20]
Dividends declared, 12/15/10 [(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 shares:
Treasury shares (50,000 shares x P1)
P 50,000
Share Premium – excess over par (50,000 shares x (P11-1) 500,000
Share premium – TS transactions
Cash (balancing figure)
P100,000
450,000
PROBLEM NO. 13 – Analysis of share and dividend transactions
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 gathered during your audit:
a. Poro Company’s charter became effective on January 2, 2006, when 80,000, P10 par
value, ordinary shares and 400,000, 5% cumulative, nonparticipating, preference shares
were issued. The ordinary shares was sold at P12 per share and preference shares was
sold at its par value of P100 per share.
b. Poro was unable to pay preference dividends at the end of its first year, The owners of the
preference shares agreed to accept 2 ordinary shares for every 50 shares of preference
shares owned in discharge of the preference share dividends due on December 31, 2006.
The shares were issued on January 2 , 2007. The fair value was P30 per share for ordinary
on the date of issue.
c. Poro Company acquired all outstanding shares of Pos Corporation on May 1, 2008, in
exchange for 40,000 ordinary shares of Poro.
d. Poro split its ordinary shares 3 for 2 on January 1, 2009, and 2 for 1 on January 1, 2010.
e. Poro offered to convert 20% of the preference shares to ordinary on the basis of 2
ordinary shares for 1 preference share. The offer was accepted, and the conversion was
made on July 1, 2010.
f. No cash dividends were declared on ordinary shares until December 31, 2008. Cash
dividends per ordinary share were declared and paid as follows:
December 31
June 30
2008
P 4.00
2009
P 5.00
P 3.00
2010
P 2.00
P 2.50
Questions:
Based on the above and the result of your audit, determine the following:
1. Outstanding number of ordinary shares as of December 31, 2010
a. 364,800
c. 372,800
b. 684,800
d. 380,800
2. Outstanding number of preference shares as of December 31, 2010
a. 40,000
c. 32,000
b. 24,000
d. 96,000
3. Amount of cash dividends declared and paid to ordinary shareholders for the year 2009
a. P 972,800
c. P 1,459,200
b. P 608,000
d. P 1,981,440
4. Amount of cash dividends declared and paid to ordinary shareholders for the year 2010
a. P 3,911,040
c. P 1,713,600
b. P 3,041,600
d. P 1,673,600
Answers: 1) D; 2) C; 3) C; 4) D
Suggested solutions:
Questions 1 and 2
Jan. 02, 2006
Jan. 02, 2007
Ordinary issued to preference
Shareholders (40,000/50 x 2)
Dec. 31, 2007
May 01, 2008Acquisition of Pos Corp.
Dec. 31, 2008
Jan. 01, 2009 3:2 Ordinary share split
[(121,600 x 3/2) – 121,600]
Dec. 31, 2009
Jan. 01, 2010 2:1 Ordinary share split
Jan. 01, 2010 Conversion of preference
(40,000 x 20% x 2)
Dec, 31, 2010
Ordinary
80,000
Preference
40,000
1,600
81,600
40,000
121,600
40,000
40,000
60,800
182,400
182,400
40,000
16,000
380,000
(8,000)
32,000
Questions No. 3
Dividends declared, 7/1/09 (182,400 x P3.00)
Dividends declared, 12/31/09 (182,400 x P5.00)
Cash dividends to ordinary shareholders in 2009
P 547,200
912,000
P 1,459,200
Question No. 4
Dividends declared, 7/1/10 (364,800 x P2.50)
Dividends declared, 12/31/10 (380,800 x P2.00)
Cash dividends to ordinary shareholders in 2010
P 912,000
761,600
P 1,673,600
PROBLEM NO. 14 – Analysis of equity transactions
The equity section of Ronda Corporation’s statement of financial position as of December 31,
2009 is as follows:
Shareholders’ Equity
Share Capital, P5 par value; authorized,
2,000,000 shares; issued, 400,000 shares
Share Premium
Retained earnings
P 2,000,000
850,000
3,000,000
5,850,000
The following events occurred during 2010:
Jan. 5
Jan 16
Feb 10
Mar. 1
Apr. 1
July 1
Aug 1
Dec. 31
10,000 shares were sold for P9 per share.
Declareda cash dividend of P0.40 per share, payable February 15 to shareholders
of record on February 5.
40,000 shares were sold for P11 per share.
A 40% share dividend was declared and issued. Market value is currently P15.
A two-for-one split was carried out. The par value of the share was to be reduced
to 2.50 per share. Market value on March 31 was P18 per share.
A 10% share dividend was declared and issued. Market value is currently P10 per
share.
A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Profit for 2010 was P 1,880,0000.
Questions:
Based on the above and the result of your audit, answer the following:
1. The number of shares issued and outstanding as of December 31, 2010 is
a. 2,079,000
c. 1,188,000
b. 1,386,000
d.
346,500
2. The balance of share capital as of December 31, 2010 is
a. P 3,465,000
b. P 3,780,000
c.
d.
P 3,228,750
P 3,622,500
3. The balance of share premium as of December 31,2010 is
a. P 2,075,000
c.
b. P 2,547,500
d.
P 1,760,000
P 3,695,000
4. The balance of retained earnings as of December 31, 2010 is
a. P 381,600
c.
b. P 3,362,400
d.
P 1,094,400
P 2,001,600
Answers: 1) B; 2) A; 3) A; 4) D
Suggested solution:
Date
Shares issued
and outstanding
Bal. 12/31/09
400,000
January 5
10,000
410,000
January 16
February 10
40,000
450,000
March 1
180,000
630,000
April 1
630,000
1,260,000
July 1
126,000
1,386,000
August 1
December 31
Bal. 12/31/10 1,386,000
Share Capital
Share Premium
Retained earnings
P 2,000,000
50,000
2,050,000
P 850,000
40,000
890,000
200,000
2,250,000
900,000
3,150,000
3,150,000
315,000
3,465,000
P3,465,000
240,000
1,130,000
P 3,000,000
3,000,000
(164,000)
2,836,000
(900,000)
1,936,000
1,936,000
(1.260,000)
676,000
(554,400)
1,880,000
P2,001,600
1,130,000
1,130,000
945,000
2,075,000
P2,075,000
PROBLEM NO.15-Share Options
You were able to gather the following information in connection with your audit of Sagod
Corporation:



On January 1, 2008, Sogod Corporation granted share options to officers and key
employees for the purchase of 30,000, P10 par value, ordinary shares of the company at
P25 per share. The options are exercisable within a 5-year period beginning January 1,
2010 by grantees still in the employ of the company, and expiring December 31, 2014.
The service period for this award is 2 years. The fair value option pricing model
determined total compensation expense to be P525,000 . The share was selling at P35 at
the time the options were granted.
On April 1, 2009, 3,000 option were terminated when the employees resigned from the
company. The market value of ordinary share was P35 per share on this date.
On March 31,2010, 18,000 option shares were exercised when the market value of
ordinary shares was P40 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Compensation expenses in 2008
a. P 525,000
c. P 236,250
b. P 262,500
d. P 150,000
2. Net compensation expense in 2009
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 Share premium-excess over
par of
a. P585,000
c. P270,000
b. P620,000
d. P450,000
4. Share Premium-share options as of December 31,2010
a. P
0
b. P 90,000
c. P472,500
d. P157,500
Answers: 1) B; 2) B; 3) A; 4) D
Suggested solutions:
Question No. 1
Compensation expense in 2008 (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 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 of 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 in 2009 (P525,000 x 1/2 )
Less: Share options of terminated employees (P525,000 x 3/30)
Net compensation expense in 2009
P262,500
52,500
P210,000
Question No. 3
Journal entry to record the exercise of the options:
Cash (18,000 x P26)
Share Premium-options (P472,500 x 18/27)
Share Capital ( P18,000 x P10 )
P450,000
315,000
P180,000
Share premium-excess over par
Question No. 4
Compensation expense, 2008
Compensation expense, 2009
Share options exercised (see no. 3)
585,000
P262,500
210,000
(315,000)
Share premium- share options, 12/31/10
P157,500
PROBLEM NO. 16 Share options
At the beginning of 2010, Sibonga Company grants 100 share options to each of its 200
employees. Each grant is conditional upon the employee working for the entity over the next
three years. The entity estimates that the fair value of each share option is P45.
On the basis of a weighted average probability, the entity estimates that 25 per cent of employees
will leave during the three-year period and therefore forfeit their rights to the share options.
During 2010, 10 employees leave. The entity revises it estimates of total employee departures
over the three-year period from 25 per cent to 20 per cen. During 2011, a further 8 employees
leave. The entity revises its estimate of total employee departures over the three-year period from
20 per cent to 15 per cent. During 2012, a further 6 employees leave.
Questions:
Based on the above and the result of the audit, determine the following:
1. Compensation expense in 2010
a. P240,000
b. P225,000
c. P720,000
d. P
0
2. Compensation expense in 2011
a. P240,000
b. P270,000
c. P510,000
d. P
0
3. Compensation expense in 2012
a. P240,000
b. P720,000
c. P282,000
d. P792,000
Answers: 1) A; 2) B; 3) C
Suggested solutions:
Question No. 1
Compensation expense in 2010
(200 employees x 100 options x 80% x P45 x 1/3)
Question No. 2
P240,000
Cumulative compensation expense, 12/31/11
(200 employees x 100 options x 85% x P45 x 2/3)
Less: compensation expense for 2010
Compensation expense in 2011
P510,000
240,000
P270,000
Question No. 3
Cumulative compensation expense, 12/31/12
(176 employees x 100 options x P45)
Less: Cumulative compensation expense, 12/31/11
Compensation expense in 2012
P792,000
510,000
P282,000
PROBLEM NO. 17- Share options
At the beginning of 2010, Santander grants share options to each of its 100 employees working
in the sales department. The share options will vest at the end of 2012, provided that the
employees remain in the entity’s employ, and provided that the volume of sales of a particular
product increases by at least an average of 5 percent per year. If the volume of sales of the
product increases by an average of between 5 per cent and 10 per cent of the year, each employee
will receive 100 share options. If the volume of sales increases by an average of between 10 per
cent and 15 per cent each year, each employee will receive 200 share options. If the volume of
sales increases by an average of 15 per cent or more, each employee will receive 300 share
options.
On grant date, Santander estimates that the share options have a fair value of P20 per option.
Santander also estimates that the volume of sales of the product will increase by an average of
between 10 per cent and 15 per cent per year. The entity also estimates, on the basis of a
weighted average probability, that 19 per cent of employees will leave before the end of 2012.
By the end of 2010, seven employees have left and the entity still expects that aa total of 19
employees will leave by the end of 2012. Product sales have increased by 12 per cent and the
entity expects this rate of increase to continue over the next 2 years.
By the end of 2011, further six employees have left. The entity now expects only three more
employees will leave during 2012. Product sales have increased by 18 percent. The entity now
expects that sales will average 15 percent or more over three-year period.
By the end of 2012, a further two employees have left. The entity’s sales have increased by an
average of 16 percent over the three years
Questions:
Based on the above and the result, determine the following:
1.Compensation expense in 2010
a. P162,000
c.
P108,000
b.
P124,000
d.
P
0
2. Share premium-share options at the end of 2011
a. P348,000
b. P336,000
c. P340,000
d. P
0
3.Compensation expense in 2011
a. P228,000
b. P224,000
c. P232,000
d. P
0
4.Compensation expense in 2012
a. P510,000
b. P162,000
c. P174,000
d. P
0
Answers: 1) C; 2) B; 3) A; 4) C
Suggested solutions:
Question No. 1
Compensation expense in 2010
(8 employees x 200 options x P20 x 1/3)
P108,000
Question No. 2
Share premium-share options,12/31/11
(84 employees x 300 options x P20 x 2/3)
P336,000
Question No. 3
Cumulative compensation expense, 12/31/11
Less: compensation expense in 2010
Compensation expense in 2011
P336,000
108,000
P228,000
Question No. 4
Cumulative compensation expense, 12/31/12
(85 employees x 300 options x P20)
Less: cumulative compensation expense, 12/31/12
Compensation expense in 2012
P510,000
336,000
P174,000
PROBLEM NO. 18 –Share appreciation rights
On January 1, 2010, Tabogan Corp. grants 100 cash share appreciation rights (SARs) to each of
to 200 employees, on condition that the employees remain in its employ for the next three years.
During 2010, 14 employees leave. The entity estimates that a further 24 will leave during 2011
and 2012. During 2011, 10 employees leave and the entity estimates that a further 8 will leave
during 2012. During 2012, 6 employees leave. At the end of 2012, 60 employees exercise their
SARs, another 40 employees exercise their SARs at the end of 2013 and the remaining
employees exercise their SARs at the end of 2014.
The entity estimates the fair value of the SARs at the end of each year in which a liability exist as
shown below. At the end of 2012, all SARs held by the remaining employees vest. The intrinsic
values of the SARs at the date of exercise (which equal the cash paid out) at the end of 2012,
2013 and 2014 are also shown below.
YEAR
Fair value
Intrinsic value
2010
P30
2011
32
2012
36
P35
2013
42
40
2014
46
Questions:
Based on the above and the result of the audit, determine the following:
1. Compensation expense in 2011
a. P189,467
c. P196,400
b. P117,840
d. P
0
2. Compensation expense in 2012
a. P247,600
b. P232,560
c. P230,533
d. P
0
3. Compensation expense in 2013
a. P 58,000
b. P160,000
c. P157,600
d. P
0
4. Compensation expense in 2014
a. P322,000
b. P 86,800
c. P 28,000
d. P
0
Answers: 1) B; 2) C; 3) A; 4) A; 5) C
Suggested solutions:
Question No. 1
Compensation expense in 2010
(162 employees x 100 SARs x P30 x 1/3)
P162,000
For cash settled share based-payment transactions, the entity shall measure the goods or services
acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the
entity shall remeasure the fair value of the liability at each reporting date and at the date of
settlement, with any changes in fair value recognized in profit or loss for the period. (PFRS 2 par.
30)
Question No. 2
Liability on SARs, 12/31/11
(168 employees x 100 SARs x 32x 2/3)
Less: compensation expense in 2010
Compensation expense in 2011
Question No. 3
Liability on SARs, 12/31/12
(110 employees x 100 SARs x 36)
Less liability on SARs, 12/31/11
Increase in liability
SARs exercised (60 employees x 100 SARs X P35)
Compensation expense in 2012
Question No. 4
Liability on SARs, 12/31/13
(7 employees x 100 SARs x 42)
Less liability on SARs, 12/31/12
Decrease in liability
SARs exercised (100 employees x 100 SARs X P40)
Compensation expense in 2013
Question No. 5
Liability on SARs, 12/31/14
Less liability on SARs, 12/31/13
Decrease in liability
SARs exercised (70 employees x 100 SARs X P46)
Compensation expense in 2014
P358,400
162,000
P196,400
P396,000
358,400
37,600
210,000
247,600
P294,000
396,000
(102,000)
160,000
58,000
P
0
294,000
(294,000)
322,000
28,000
PROBLEM NO. 19-Share options with cash alternatives
An entity grants to an employee the right to choose either 5,000 phantom shares, ie a right to a
cash payment equal to the value of 5,000 shares or 6,000 shares. The grant is conditional upon
the completion of three years’ service. If the employee chooses the share alternative, the shares
must be held for three years after vesting date.
A grant date, the entity’s share price is P81 per share. At the end of years 1, 2 and 3, the share
price is P82, P85 and P90 respectively. The entity does not expect to pay dividends in the next
three years. After taking into account the effects of the post-vesting transfer restrictions, the
entity estimates that the grant date fair value of the share alternative is P78 per share.
Questions:
Based on the above and the result of the audit, determine the following:
1. Compensation expense in year 1
a. P156,000
c. P157,667
b. P136,667
d. P
0
2. Compensation expense in year 2
a. P156,000
b. P167,666
c. P146,666
d. P
0
2. Compensation expense in year 3
a. P156,000
b. P167,666
c. P187,667
d. P
0
Answers: 1) C; 2) B; 3) C;
Suggested solutions:
Question No. 1
Liability component (P5,000 x P82 x 1/3)
Equity component (63,000/3)
Compensation expense in year 1
P136,667
21,000
P157,667
Computation of equity component:
Fair value of equity alternative (6,000 shares x P78)
Fair value of cashalternative (5,000 shares x P81)
Fair value of equity component
P468,000
405,000
P 63,000
For share-based payment transactions in which the terms of arrangement provide either the entity
or the counterparty with the choice of whether the entity settles the transactions in cash (or other
assets) by issuing equity instruments, the entity shall account for the share-based payment
transaction of, and to the extent that, the entity has incurred a liability to settle in cash or other
assets, or as an equity settle share-based payment transaction if, and to the extent that, such a
liability has been incurred.
If an entity has granted the counterparty the right to choose whether a share-based payment
transaction is settled in cash or by issuing equity instruments, the entity has granted a compound
financial instrument, which includes a debt component (ie the counterparty’s right to demand
payment in cash) and an equity component (ie the counterparty’s right to demand settlement in
equity instruments rather than in cash).( PFRS 2 par. 35)
The entity shall account separately for the goods or services received or acquired in respect of
each component of the compound financial instrument. For the debt component, the entity shall
recognize the goods or services acquired, and a liability to pay for those goods or services, as the
counterparty supplies goods or renders service, in accordance with the requirements applying to
cash-settled share-based payment transactions. For the equity component, the entity shall
recognize the goods or services received, and an increase in equity, as the counterparty supplies
goods or render service, in accordance with the requirements applying to equity-settled sharebased payment transactions. (PFRS 2 par. 38)
Question No. 2
Cumulative liability component end of year 2
(P5,000 x P85 x 2/3)
Less: Cumulative liability component end of year 1
Expense liability
Equity component (63,000/3)
Compensation expense in year 2
Question No. 3
Cumulative liability component end of year 3
(P5,000 x P90)
Less cumulative liability component end of year 2
Expense-liability
Equity component (P63,000/3)
Compensation expense in year 3
P283,333
136,667
146,666
21,000
P167,666
P450,000
283,333
P166,667
21,000
P187,667
PROBLEM NO. 20 –Substantive audit procedures for equity
Select the best answer for each of the following:
1. All share capital transaction should ultimately be traced to the
a. Numbered stock certificates
b. Minutes of the Board of Directors.
c. Cash receipts journal
d. Cash disbursement journal
2. Which of the following information is most important when auditing shareholders’
equity?
a. Entries in the share capital account can be traced to a resolution in the minutes of the
board of directors’ meetings.
b. Share dividends and/or share splits during the year were approved by the
shareholders.
c. Share dividends are capitalized at par or stated value on the dividend declaration date.
d. Changes in the share capital account are verified by an independent stock transfer
agent.
3. When a corporate client maintains its own stock records, the auditor primarily will rely
upon
a. Confirmation with the company secretary of shares outstanding at year end.
b. Review of the corporate minutes for data as to shares outstanding,
c. Confirmation of the number of shares outstanding at year end with the appropriate state
official.
d. Inspection of the stock book at year end and accounting for all certificate numbers.
4. When a client company does not maintain its own stock records, the auditor most likely
will
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. Confirmation the number of shares outstanding at year end with the appropriate state
official.
5. The primary responsibility of a bank acting as registrar of capital stock is to
a. Verify that stock 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
shareholders’ subsidiary ledger.
6.
a.
b.
c.
The CPA’s examination normally need not include
Determining that dividend declaration is in compliance with debt agreements
Tracing the authorization for the dividends from the directors’ meetings
Testing the propriety of the payment list to the capital stock records.
7. The board of directors of Mega Supermarkets declared a 20% cash dividend at its
meeting on March 12, 2010 payable on May 15, 2010 to shareholders on record as of
April 15, 2010. The dividend declaration should be taken up in the company’s financial
statements on
a. March 12, 2010
c. December 31, 2010
b. May 15, 2010
d. April 15, 2010
8. An auditor usually obtains evidence of shareholders equity transactions by reviewing the
entity’s
a. Cancelled stock certificates
b. Transfers agent’s records
c. Treasury stock certificate book
d. Minutes of board of directors meetings
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 shareholder’s 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. A
2. A
3. D
4. A
5. A
6. D
7. A
8. D
9. B
10. C