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SELF TEST-SHE - Test Banks in Shareholders Equity both
auditing problems and auditing theory
Auditing (Marian College)
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CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
CPA Review
AUDITING PROBLEMS
SELF TEST
AUDIT OF SHAREHOLDERS’ EQUITY
PROBLEM NO. 1
At December 31, 2020, ROBUSTA, INC. had 1,800,000 authorized shares of P10 par value
ordinary shares, of which 600,000 shares were issued and outstanding.
The shareholders’ equity accounts at December 31, 2020, had the following balances.
Ordinary shares .............................................. P6,000,000
Share premium.................................................2,250,000
Retained earnings .............................................1,941,000
Transactions during 2021 and other information relating to the shareholders’ equity accounts
were as follows:
1. On January 7, 2021, ROBUSTA issued at P54 per share, 30,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at the
option of the holder, into two ordinary shares. ROBUSTA had 180,000 authorized preference
shares.
2. On February 2, 2021, ROBUSTA reacquired 6,000 of its ordinary shares for P16 per share.
ROBUSTA uses the cost method to account for treasury shares.
3. On April 29, 2021, ROBUSTA sold 150,000 shares (previously unissued) of P10 par value
ordinary shares at P17 per share.
4. On June 17, 2021, ROBUSTA declared a cash dividend of P1 per ordinary share, payable on
July 14, 2021, to shareholders of record on July 1, 2021.
5. On November 12, 2021, ROBUSTA sold 3,000 treasury shares for P21 per share.
6. On December 15, 2021, ROBUSTA declared the yearly cash dividend on preference shares,
payable on January 14, 2022, to shareholders of record on December 31, 2021.
7. On January 22, 2022, before the books were closed for 2020, ROBUSTA became aware that
the ending inventories at December 31, 2020, were understated by P63,000. The appropriate
correcting entry was recorded the same day.
8. After correcting the beginning inventory, net income for 2021 was P1,350,000.
Ignore income tax implications.
Questions:
1. The retained earnings, as restated, as of January 1, 2021, is
A. P1,941,000
B. P2,004,000
C. P2,031,000
D. P2,034,000
2. The retained earnings balance as of December 31, 2021, is
C. P2,475,000
A. P1,875,000
B. P2,460,000
D. P2,556,000
3. The share premium from preference shares as of December 31, 2021, is
A. P30,000
B. P90,000
C. P105,000
D. P120,000
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SELF-TEST – AUDIT OF SHAREHOLDERS’ EQUITY
CPAR - MANILA
4. The share premium from ordinary shares (including sale of treasury shares) as of December
31, 2021, is
C. P3,315,000
D. P3,450,000
A. P3,000,000
B. P3,300,000
5. Total shareholders’ equity as of December 31, 2021, is
A. P14,835,000
B. P14,851,200
C. P14,862,000
D. P14,910,000
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PROBLEM NO. 2
A CPA was engaged by BIRDIE Company in 2021 to examine its books and records and to make
whatever corrections are necessary. An examination of the accounts discloses the following:
a) Dividends had been declared on December 15 in 2019 and 2020 but had not been entered
in the books until paid.
b) Improvements in buildings and equipment of P97,200 had been debited to expense at the
end of April 2018. Improvements are estimated to have 12-year life. The company uses
the straight-line method in recording depreciation and computes depreciation to the
nearest month.
c) The physical inventory of merchandise had been overstated by P28,800 at the end of 2019
and by P42,750 at the end of 2020.
d) The merchandise inventories at the end of 2020 and 2021 did not include merchandise
that was then in transit and to which the company had title. These shipments of P18,900
and P26,100 were recorded as purchases in January of 2021 and 2022, respectively.
e) The company had failed to record sales commissions payable of P32,400 and P9,900 at
the end of 2020 and 2021, respectively.
f) The company had failed to recognize supplies on hand of P7,650 and P15,480 at the end
of 2020 and 2021, respectively.
The retained earnings account appeared as shown below on the date the CPA began the
examination.
Retained Earnings
Date
2019
Jan.
1
Dec. 31
2020
Jan.
10
Mar.
6
Dec. 31
2021
Jan. 10
Dec. 31
Item
Debit
Balance
Net income for year
Credit
Balance
P252,000
Dividends paid
Stock sold – excess over par
Net loss for year
P139,500
189,000
160,200
Debit
139,500
173,700
Dividends paid
Net loss for year
Credit
P585,000
837,000
697,500
886,500
726,300
Balance
586,800
413,100
6. What is the corrected 2019 net income?
A. P215,100
B. P272,700
C. P364,500
D. P372,600
7. What is the corrected 2020 net loss?
A. P160,200
B. P179,100
C. P198,000
D. P207,000
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SELF-TEST – AUDIT OF SHAREHOLDERS’ EQUITY
CPAR - MANILA
8. What is the corrected 2021 net loss?
A. P108,720
B. P168,120
C. P194,220
D. P213,120
9. Meyor, CPA, is auditing shareholder’s equity. Tests typically include all the following except
A. Tracing individual dividend payments to the share capital records.
B. Reviewing the bank reconciliation for the imprest dividend account.
C. Verifying the authorization of dividends by inspecting the minutes of meetings of the
board of directors.
D. Determining that dividend declarations comply with debt agreements.
10. Where no independent stock transfer agents are employed and the corporation issues its
own stocks and maintains stock records, cancelled stock certificates should
A. Not be defaced, but segregated from other stock certificates and retained in a cancelled
certificates file.
B. Be destroyed to prevent fraudulent reissuance.
C. Be defaced and sent to the Secretary of the Department of Finance.
D. Be defaced to prevent reissuance and attached to their corresponding stubs.
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PROBLEM NO. 3
As the newly appointed auditor in 2021 for AMA COMPANY, you have analyzed the company's
“Share Premium” account. The following is a summary of the account since the inception of Ama
Company.
Debits
Credits
Cash dividends – preference shares
Cash dividends – ordinary shares
Excess of amount paid in over
par value of ordinary shares
Net income
Gain on early extinguishment of debt
Treasury ordinary shares; issued
and reacquired at par
Loss on litigation
Correction of a prior period error
P320,000
390,000
P 750,000
1,000,000
84,000
180,000
150,000
46,000
P1,086,000
748,000
P1,834,000
Credit balance of share premium account
11. What is Ama’s correct net income for 2021?
A. P1,000,000
B. P934,000
C. P888,000
P1,834,000
P1,834,000
D. P954,000
12. What is the correct retained earnings balance (before appropriation for treasury shares) as
at the end of the current year?
C. P178,000
D. P224,000
A. P888,000
B. P270,000
13. What is the correct share premium balance as at the end of the current year?
A. P1,108,000
B. P1,200,000
C. P1,562,000
D. P750,000
14. When a client company does not maintain its own stock records, the auditor should obtain
written confirmation from the transfer agent and registrar concerning
A. Restrictions on the payment of dividends.
B. The number of shares issued and outstanding.
C. Guarantees of preferred stock liquidation value.
D. The number of shares subject to agreement to repurchase.
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SELF-TEST – AUDIT OF SHAREHOLDERS’ EQUITY
CPAR - MANILA
PROBLEM NO. 4
At the beginning of year 1, an entity grants 200 shares each to 500 employees. The grant is
conditional upon the employees remaining in the entity’s employ until the performance condition
described below is satisfied.
Performance Condition
The shares will vest at the end of:
• Year1 - if the entity’s earnings increase by 15%.
• Year2 - if the entity’s earnings increase by more than an average of 11% per year over
the two-year period.
• Year3 - if the entity’s earnings increase by more than an average of 8% per year over the
three-year period.
The shares have a fair value of P15 at the beginning of year 1, which equals the share price at
grant date. The entity does not expect to pay dividends over the three-year period.
The following events occurred:
Year 1
• 30 employees have left during year 1 and the entity expects, on the basis of a weighted
average probability, that a further 40 will leave during year 2.
• The entity’s earnings have increased by 14% by the end of year 1 and the entity expects that
the earnings will continue to increase at a similar rate in year 2. Therefore, the entity expects
that the shares will vest at the end of year 2.
Year 2
• 35 employees have resigned by the end of year 2 and the entity expects that a further 30 will
leave during year 3.
• Earnings have increased by only 7% during year 2. Hence, the shares do not vest at the end
of year 2 as expected by the end of year 1. The entity expects that by the end of year 3, its
earnings will increase by at least 5%, thereby achieving the average of 8% per year.
Year 3
• 28 employees have resigned by the end of year 3.
• The entity’s earnings have increased by 6% during year 3. This results in an average increase
of 9% per year over the three-year vesting period.
Based on the preceding information, determine the following:
15. Cumulative compensation expense at the end of year 1
A. P407,000
C. P430,000
B. P645,000
D. P82,500
16. Cumulative compensation expense at the end of year 2
C. P810,000
A. P1,290,000
B. P330,000
D. P822,000
17. Cumulative compensation expense at the end of year 3
A. P1,221,000
C. P1,215,000
B. P1,290,000
D. P1,500,000
18. Share options outstanding at the end of year 2
A. P822,000
C. P645,000
B. P810,000
D. P430,000
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SELF-TEST – AUDIT OF SHAREHOLDERS’ EQUITY
CPAR - MANILA
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PROBLEM NO. 5
TAKYO COMPANY has been paying regular quarterly dividends of P1.50 and wants to pay the
same amount in the third quarter of 2020.
The following information relates to the company’s equity:
Jan.
Feb.
Mar.
May
1
15
31
12
June 15
30
Shares outstanding, 400,000; P2 par (750,000 shares authorized).
Issued 25,000 new shares at P10.50.
Paid quarterly dividends of P1.50 per share.
Converted P1,000,000 of P1,000 bonds to ordinary shares at the rate of 50 shares
per P1,000 bond.
Issued an 11% stock dividend.
Paid quarterly dividends of P1.50 per share.
19. What is the total amount that Takyo will have to pay in dividends in the third quarter in order
to pay P1.50 per share?
A. P790,875
C. P637,500
B. P712,500
D. P749,250
20. What is the total amount of dividends to be distributed during the year assuming no equity
transactions occur after June 30?
C. P3,010,125
A. P3,163,500
B. P3,085,125
D. P3,121,875
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