FAR EASTERN UNIVERSITY – MANILA

INSTITUTE OF ACCOUNTS, BUSINESS AND FINANCE

NICANOR REYES SR. ST., SAMPALOC, MANILA
APPLIED AUDITING

EQUITY

PROBLEM 1

At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The grant is conditional upon the executive remaining in the
entity’s employ until the end of year 3.

The share options can be exercised if the entity’s share price increases from P20 at the beginning of year 1 to above P30 at the end of year 3. If the
share price is above P30 at the end of year 3, the share options can be exercised at any time during the next five years, i.e., by the end of year 8.

The entity estimates the fair value of the share options on grant date to be P5 per option. This estimate takes into account the following market
condition:
The possibility that the share price will exceed P30 at the end of year 3, i.e., the share options become exercisable; and
The possibility that the share price will not exceed P30 at the end of year 3, i.e., the share options will be forfeited.

The following actual events occurred in years 1 to 3:

Year 1
The share price has increased to P24.
The entity’s estimate of the fair value of the options is P4 at the end of year 1. This takes into account whether the market condition will be
satisfied by the end of year 3.

Year 2
The share price has decreased to P22. However, the entity remains optimistic that the share price target will be met by the end of year 3.
The estimated fair value of the share options is P3. Again, this estimate takes into account the market condition noted above.

Year 3
The share price only reaches P28 by the end of year 3.
The estimated fair value of the share options is zero, as the market condition has not been satisfied.

1. Compensation expense for year 1

A. P30,000 B. P40,000 C. P50,000 D. P60,000

2. Compensation expense for year 2

A. P30,000 B. P40,000 C. P50,000 D. P60,000

3. Compensation expense for year 3

A. P 0 B. P30,000 C. P40,000 D. P50,000

4. Share options outstanding at the end of year 2

A. P70,000 B. P80,000 C. P90,000 D. P100,000

5. Cumulative compensation expense for the three-year period

A. P 0 B. P70,000 C. P100,000 D. P150,000

PROBLEM 2

The following independent situations relate to the audit of shareholders’ equity. Answer the questions at the end of each situation.

BRANDY CO. was organized at the beginning of the current year. The following shareholders’ equity accounts are included in the entity’s year-end
trial balance.

Preference share capital, P100 par, authorized 100,000 shares,

issued and outstanding, 66,000 shares P6,600,000
Preference share capital subscribed, 6,000 shares 600,000
Share premium – preference 240,000
Subscriptions receivable – preference 360,000
Ordinary share capital, P10 par value, authorized 200,000 shares,
issued and outstanding, 72,000 shares 720,000
Ordinary share capital subscribed, 72,000 shares 720,000
Share premium – ordinary 2,850,000
Subscriptions receivable – ordinary 1,080,000

The following current year transactions relate to Brandy Co.’s shareholders’ equity:

 Immediately after Brandy Co. was organized, it received subscriptions to 60,000 preference shares. Subscriptions to ordinary shares were also
received on the same date.

 During the year, subscriptions were received for an additional 12,000 preference shares at a price of P120 per share.

 Cash payments were received from subscribers at frequent intervals for several months after subscription. The company’s policy is to issue
share certificates only upon full payment of the share subscription.

 Also during the current year, Brandy Co. issued 24,000 ordinary shares in exchange for a tract of land with a fair value of P690,000.
 6. What is the total subscription price of the ordinary shares originally subscribed?
A. P4,290,000 B. P3,840,000 C. P3,600,000 D. P4,050,000

7. How much was collected from the subscribers of preference shares?

A. P1,440,000 B. P5,640,000 C. P7,440,000 D. P7,080,000

8. The company’s statement of financial position at the end of the current year should report contributed capital of
Preference Ordinary
A. P7,440,000 P4,290,000
B. 7,080,000 3,210,000
C. 6,480,000 2,490,000
D. 6,840,000 360,000

PROBLEM 3

The following shareholders’ equity accounts are included in the statement of financial position of CONDESSA CO. on December 31, 2017.

Preference share capital, 8%, P100 par (200,000 shares authorized,

60,000 shares issued and outstanding) P6,000,000
Ordinary share capital, P5 par (2,000,000 shares authorized,
600,000 shares issued and outstanding) 3,000,000
Share premium 3,750,000
Retained earnings 3,500,000
Total P16,250,000

During 2018, Condessa took part in the following transactions concerning equity.

Paid the annual 2017 P8 per share dividend on preference shares and a P2 per share dividend on ordinary shares. These dividends had been declared
on December 31, 2017.

Purchased 81,000 shares of its own outstanding ordinary shares for P40 per share.

Reissued 21,000 treasury shares for land valued at P900,000.

Issued 15,000 preference shares at P105 per share.

Declared a 10% stock dividend on the outstanding ordinary shares when the shares are selling for P45 per share.

Issued the stock dividend.

Declared the annual 2018 P8 per share dividend on preference shares and the P2 per share dividend on ordinary shares. These dividends are payable
in 2019.

Reported net income of P9,900,000 for the current year.

9. What is the retained earnings balance (before appropriation for treasury shares) on December 31, 2018?
A. P9,182,000 B. P718,000 C. P6,782,000 D. P11,000,000

10. What amount should be reported as total shareholders’ equity on December 31, 2018?
A. P25,997,000 B. P23,597,000 C. P21,197,000 D. P14,415,000

PROBLEM 4

Grizzlies Inc. was organized on January 2, 2017, with authorized capital stock of 50,000 shares of 10%, P200 par value preferred, and 200,000 shares
of no-par, no stated value common. During the first 2 years of the company's existence, the following selected transactions took place:

2017

Jan. 2 Sold 10,000 shares of common stock at P16.

Sold 3,000 shares of preferred stock at P216.
Mar. 2 Sold common stock as follows: 10,800 shares at P22; 2,700 shares at P25.
Jul. 10 Acquired a nearby piece of land, appraised at P400,000, for 600 shares of preferred stock and 27,000 shares of common. (Preferred
stock was recorded at P216, the balance being assigned to common.)
Dec. 16 Declared the regular preferred dividend and a P1.50 common dividend.
28 Paid dividends declared on December 16.
31 The Income Summary account showed a credit balance of P450,000.

2018

Feb. 27 Reacquired 12,000 shares of common stock at P19.

Jun. 17 Resold 10,000 shares of the treasury stock at P23.
Jul. 31 Resold all of the remaining treasury stock at P18.
Sep. 30 Sold 11,000 additional shares of common stock at P21.
Dec. 16 Declared the regular preferred dividend and a P0.80 common dividend.
28 Dividends declared on December 16 were paid.
31 The income summary account showed a credit balance of P425,000.

Based on the above and the result of your audit, determine the balances of the following as of December 31, 2018:
11. Preferred stock
a. P777,600 b. P600,000 c. P720,000 d. P729,600

12. Common stock

a. P615,000 b. P966,500 c. P735,500 d. P696,100

13. Additional paid in capital

a. P38,000 b. P93,600 c. P57,600 d. P95,600

14. Total stockholders’ equity

a. P2,498,150 b. P2,388,150 c. P1,892,100 d. P2,376,630

PROBLEM 5

You were able to gather the following information in connection with your audit of the stockholders’ equity section of the balance sheet of Jang Duk,
Inc. The company is a manufacturer of school and office equipment. As of December 31, 2017, the stockholder’s equity of the company is presented
below:

Cumulative preferred stock (P15 par value; 50,000

shares authorized, 6,000 shares issued and outstanding) P 90,000
Common stock (P10 par value; 500,000 shares authorized,
165,000 shares issued and outstanding 1,650,000
Retained earnings 933,000
P2,673,000

Jang Duk’s capital stock transactions during 2018 were as follows:

a. On January 31, 12,000 preferred shares were issued in exchange for land with an appraised value of P150,000. Six months ago, 1,000 shares
of Jang Duk’s preferred stock were exchanged “over the counter” for P14 per share.

b. On February 14, 6,750 shares of common stock were sold to Ms. Acti Vista at P25 per share.

c. On December 14, Jang Duk purchased dissident stockholder Vista’s 6,750 shares at
P27 per share. The shares are to be held as treasury shares. (Vista violently opposed Jang Duk’ business strategy and Jang Duk’s management
decided to eliminate her interest.)

d. On December 20, Jang Duk contracted with Ma Ria for the sale of 15,000 previously unissued shares at P25 per share to be issued when the
purchase price is fully paid. At December 31, only 292,500 had been paid. Ria agreed to pay the balance on or before January 31, 2019.

e. On December 31, Jang Duk retired 6,000 preferred shares at P18 per share.

f. A cash dividend of P2 per share was declared on the preferred shares on October 15, and paid on November 15.

g. A cash dividend of P1.50 per share was declared on December 15, and payable on January 15, 2019.

h. Jang Duk’s net income for the year 2018 was P375,000.

Based on the above and the result of your audit, determine the following as of December 31, 2018:

15. Preferred stock

a. P180,000 b. P132,000 c. P150,000 d. P162,000

16. Common stock

a. P1,717,500 b. P1,867,500 c. P2,010,000 d. P1,818,750

17. Additional paid-in capital

a. P296,250 b. P326,250 c. P101,250 d. P71,250

18. Total retained earnings

a. P988,500 b. P1,006,500 c. P824,250 d. P1,018,500

19. Total stockholders’ equity

a. P3,085,500 b. P3,198,000 c. P3,018,000 d. P3,168,000
PROBLEM 6

Geum Young Corporation was authorized at the beginning of 2016 with 300,000 authorized shares of P100, par value common stock. At December
31, 2016, the stockholders’ equity section of Geum Young was as follows:

Common stock, par value P100 per share; authorized

300,000 shares; issued 30,000 shares P3,000,000
Additional paid-in capital 300,000
Retained earnings 450,000
Total stockholders’ equity P3,750,000

On June 15, 2017, Geum Young issued 50,000 shares of its common stock for P6,000,000. A 5% stock dividend was declared on September 30, 2017
and issued on November 10, 2017 to stockholders of record on October 31, 2017. Market value of common stock was P110 per share on declaration
date. The net income of Geum Young for the year ended December 31, 2017 was P475,000.

During 2018, Geum Young had the following transactions;

March 1 Geum Young reacquired 3,000 shares of its common stock for P95 per share.
May 31 Geum Young sold 1,500 shares of its treasury stock for P120 per share.
August 10 Issued to stockholders one stock right for each share held to purchase two additional shares of common stock for P125 per
share. The rights expire on December 31, 2018.
September 15 25,000 stock rights were exercised when the market value of common stock was P130 per share.
October 31 40,000 stock rights were exercised when the market value of the common stock was P140 per share.
December 10 Geum Young declared a cash dividend of P2 per share payable on January 5, 2019 to stockholders of record on December 31,
2018.
December 20 Geum Young retired 1,000 shares of its treasury stock and reverted them to an unused basis. On this date, the market value of
the common stock was P150 per share.
December 31 Net income for 2018 was P500,000.

Based on the above and the result of your audit, determine the following as of December 31, 2018:

20. Common stock

a. P21,400,000 b. P21,300,000 c. P14,800,000 d. P21,250,000

21. Additional paid-in capital

a. P4,627,500 b. P3,007,500 c. P4,632,500 d. P4,592,500

22. Retained earnings

a. P600,000 b. P565,000 c. P557,000 d. P560,000

23. Treasury stock

a. P10,000 b. P47,500 c. P50,000 d. P0