Auditing Problems ACTG 11

JDTA AP-03 Stockholders’ Equity

Auditing Problems ACTG 112

JDTA AP-03 Stockholders’ Equity
AUDITING PROBLEMS ADAYO/TADIAR
STOCKHOLDERS’ EQUITY

PROBLEM 6: On January 1, 2011 M Co. issued 200 share options to each of its 10 executive officers. The option
vest at the end of a 6-year period. On the date of the grant, each share option had a fair value of P15. M
expects that all 2,000 options will vest.
1. The compensation expense for 2011 is:
a. 30,000 b. 5,000 c. 25,000 d. -0-
2. The compensation expense in 2014 assuming one officer leaves the Company in December 2014 and
that the company expects that no other employee will leave by the end of the 6 th year
a. 3,000 b. 18,000 c. 5,000 d. -0-

PROBLEM 8: On January 1, 2011, MARS Company granted share options to 10 of its key employees entitling
them to acquire P100 par value shares of the company at P110 per share conditional upon the employees’
remaining in the company’s employ during the vesting period. The 10,000 share options shall vest at the end
of 2012 if the company’s revenues reach P100M; or at the end of 2013 if the revenues reach P110M.
The market value of the option on the date of grant is P30. The company has a steady pattern of 25% increase
in revenues every year over the last 5 years and expects the same pattern during the vesting period. The
company also expects that no employees shall leave the company during the vesting period.
1.

Revenues actually earned and recorded by the company during 2011 through 2013 follow:
2011 P80 million
2012 90 million
2013 110 million
1. The entry to record the corresponding compensation expense to be recognized in 2011?
a. 50,000 c. 150,000
b. 100,000 d. 300,000
2. What is the compensation expense to be recognized on 2012?
a. 50,000 c. 150,000
b. 100,000 d. 300,000
3. What is the compensation expense to be recognized in 2013?
a. 50,000 c. 150,000
b. 100,000 d. 300,000
4. If the employees exercised all their options in 2014, how much is credited to share premium
from the related issuance of shares?
a. 100,000 c. 400,000
b. 300,000 d. 500,000
PROBLEM 9: On January 1, 2011, FGH Corporation issued 300 share options to 10 of its key employees that
will vest one its share price equals P90. The employee is required to be employed with the Company at the
time the condition is met in order to receive the options. The share options will expire in 5 years. On the date
of grant, it is expected that the condition will be satisfied in 3 years.
The company applies a binomial options pricing model, which takes into account the possibility
that the share price will equal/ exceed in P90 in 3 years (hence the share options become exercisable) and
the possibility that the share price will not equal/exceed P90 in 3 years (hence the option will be forfeited).
The Company estimates that the market value of the stock option on the date of grant with this market
condition is P25 per option.
The corresponding share price at the end of each year and the corresponding estimated number
of employees expected to leave the Company at the end of each year are as follows:
Date Estimated Number of Actual share price
Employees who will
Leave the Company

Dec. 31, 2011 1 P 80

Dec. 31, 2012 2 85
Dec. 31, 2013 3* 91
*Actual number of employees who left the Company

1. The entry to record the corresponding compensation expense in 2011 involves a debit to
compensation expense amounting to:
a. 75,000 c. 25,000
b. 67,500 d. 22,500
2. The entry to record the corresponding compensation expense in 2012 involves a debit to
compensation expense amounting to:
a. 40,000 b. 25,000

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c. 20,000 d. 17,500
3. The entry to record the corresponding compensation expense in 2013 involves a debit to
compensation expense amounting to:
a. 52,500 c. 12,500
b. 17,500 d. 10,500
4. Assuming that the actual share price amounted to P85 at the end of 2013, the entry to record the
corresponding compensation expense in 2013 involves a debit to compensation expense amounting
to:
a. 52,500 c. 12,500
b. 17,500 d. -0-

PROBLEM 10: C Co. issued share appreciation rights (SARs) to 40 or its employees. The SARs will vest at the
end of 3 years, provided that employees remain with the company and provided the average revenue growth
over the period will exceed 5%. The share option entitlement of each employee depending upon the average
growth rate is:
Average Revenue growth percentage No. of SARs per employee
5 to10% 1,000
11 to 15 % 2,000
More than 15% 3,000
On the grant date, each SAR has a fair value of P60. C expects an average revenue growth rate of 8%
during the 3 year vesting period, and that 16 of its employees will leave before the vesting periods ends.
1. Assuming that estimates do not change during year 1, the Compensation expense in year 1 is
a. 800,000 c. 960,000
b. 320,000 d. 480,000
2. At the end of the year 2, the average revenue growth projection over the three-year vesting period is
11% and 32 employees are expected to remain in the entity’s employ. The fair value of each SAR is
P70. The compensation expense in year 3 is:
a. 2,505,667 c. 1,440,000
b. 2,186,667 d. 1,986,667
3. At the end of the year 3, the average revenue growth over the three- year vesting period is 13% and
36 employees did not leave the company. The fair value of each SAR is P80. The compensation
expense in Year 3 is.
a. 2,773,333 c. 3,413,333
b. 5,760,000 d. 2,986,667
PROBLEM 11: The Shareholders’ equity section of Light Co. showed the following date on December 31, 2010:
Ordinary shares, P3 par, P150,000 shares authorized,
125,000 shares issued and outstanding P 375,000
Share premium 3,525,000
Ordinary share options outstanding 75,000
Accumulated profit 240,000
The Share options were granted to key executives and provided them the right to acquire 15,000 shares of
ordinary share at P35 per share. The options had a fair value of P5 on the grant date. The following
transactions occurred during 2011:
3/30 Key executives exercised 2,250 options. The market price per share was P44 at this time.
4/1 The Company issued bonds of P1,000,000 at P105, giving each P1,000,000 bond a
detachable warrant enabling the holder to purchase 2 shares of share at P40 for 1-year period.
Market values immediately following the issuance of the bonds were: P4 per warrant and P998
per P1,000 bond without the warrant.
6/30 The Company issues rights to shareholders (1 right on each share, exercisable within a 30-
day period) permitting holders to acquire 1 share at P40 with every 10 rights submitted. Shares were selling
for P43 at this time. All, but 3,000 rights were exercised on July 31 and the additional shares were issued.
9/30 All warrants issued with the bonds on April1 were exercised
11/30 The market price per share dropped to P33 and options came due.
Since the market price was below the option price, no remaining options were exercised.
1. What is the credit to Share premium account related to the issuance of ordinary shares through the
exercise of option on 3/30?
a. 83,250 c. 4,500
b. 72,000 d. No adjustment is necessary
2. What amount should have been allocated to the Share warrants outstanding account as a result of
the issuance of the bonds with the detachable warrants?
a. 52,000 c. 4,000
b. 4,192 d. -0-

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3. What amount should be credited to the Share premium account as a result of the issuance of shares
through the rights exercised by the shareholders?
a. 534,275 c. 462,500
b. 497,000 d. 459,275
4. What is the credit to the Share premium account from the exercise of warrants which were
originally attached to the bonds?
a. 126,000 c. 22,000
b. 52,000 d. 12,000
5. What is the adusted balance of the Ordinary share options outstanding?
a. 75,000 c. 11,250
b. 63,750 d. -0-
6. What is the balance of the Ordinary share warrants outstanding?
a. 52,000 c. 10,000
b. 22,000 d. -0-
PROBLEM 12: Calvin Corp. has been paying regular semi-annual dividends to its shareholders. The following
are the Company ‘s equity transactions:
1.1 The Company has 1,600,000 shares issued and outstanding: total shares authorized is
3,000,000 shares; the par is P2
4.15 Issued 100,000 new shares at P5
6.30 Paid dividends of P 2,550,000
10.13 P 2M of P1,000 bonds were converted into ordinary share at the rate of P100 shares of
stock per P1,000 bond
12.16 Issued an 11% share dividend
12.31 Paid semi-annual dividends. The dividend per share is the same as that paid in the first
semi-annual dividend period.
1. The dividend per share paid on June 30 is?
a. 1.5 b. 0.85 c. 1.59 d. 1.70
2. What is the amount of dividend to be paid in the December 31, in order to pay the same dividend
rate as that paid in the previous semi-annual period:
a. 2,850,000 c. 3,163,500
b. 2,997,000 d. 3,585,300
PROBLEM 13: The SHE account of Big Co., on June 30, 2011 are as follows:
Ordinary share, P10 par, 50,000 shares issued and outstanding 500,000
Share premium 250,000
Accumulated profit 3,135,000
Shares of the company are selling at this time at P20
Prepare the entries in each of the following independent cases
a. 10% stock dividend is issued

b. 30% stock dividend is issued

c. 4 for 1 share split is issued

d. Decrease in par value by P5

e. Increase in par value to P20

PROBLEM 14: BC Co. has 50,000 ordinary shares that are issued and outstanding at a par value of P10. In
declaring and distributing a 50% stock dividend, BC initially issued only 20,000 new shares; the other shares
were not issued because some investors did not own BC shares in even multiples of 10. To these
shareholders, BC issued fractional shares.
Prepare journal entries for the following:
A. Declaration of share dividend

B. Issuance of full and fractional shares

C. Issuance of full shares through the surrender of 80% fractional share warrants

PROBLEM 15: On October 31, Coy Inc. declared a building as property dividend distributable to stockholders
on January 31 of the following year. The building had a carrying value of P1.5 Million on October 31. The
building had a fair market value of P1.4 M on the same date. On December 31 the value of the building further
deteriorated and latest estimates placed the fair value of the building at P1.2 M.
The building was transferred to shareholders on January 31 when the prevailing fair value of the
building was P1.3 M.

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1. The entry to record of the declaration of the property dividends would include a debit to retained
earnings of:
a. P -0- b. 1.5 M c. 1.4 M d. 1.2 M
2. How much property dividends payable should be reported in the statement of financial position as of
December 31?
a. P-0- b. 1.5 M c. 1.4 M d. 1.2 M
3. How much loss should be recognized in the income statement on the reclassification of the building
to asset held for disposal on the declaration date?
a. P-0- b. 100,000 c. 300,000 d. 200,000
4. What is the gain or loss to be recognized in the profit or losses as a result of the distribution of the
property dividends on January 31?
a. P -0- c. 300,000
b. 100,000 d. 200,000
PROBLEM 16: Cyprus Co. began operations on January 1. Authorized were 20,000 shares of P10 par, ordinary
share and 40,000 shares of 10%, P100 par convertible preference share. The following transactions occurred
during the first year of operations:
1.1 Issued 500 shares of ordinary share to the corporation promoters in exchange for
property valued at P170,000
2.28 Issued 10,000 shares of convertible preference shares with a par value of P100. Each share
can be converted to 5 ordinary shares. The share was issued at a price of P150 per share
and the company paid P75,000 to an agent for selling the shares.
3.31 Sold 3,000 ordinary shares for P390 per share. Issue costs were P25,000
4.30 4,000 ordinary shares and 1,4000 Preference share subscriptions at P450 per share.
7.30 Exchanged 700 ordinary shares and 1,400 preference shares for a building with a fair
value of P510,000. In addition, 600 ordinary shares were sold for P240,000 cash.
8.30 Received in payments in full for half of the share subscriptions and payments on account
on the rest of the subscriptions. Total cash received was P1,400,000.
12.1 Declared a cash dividend of P10 per share on preference share payable on December 31 to
shareholders of record on December 15 and a P20 per share cash dividend on ordinary
share, payable on January 5 of the following year to shareholders of record on December
15.
12.31 Paid the dividend to preference share
12.31 Net income was P600,000
Compute the balances of each of the following accounts:
1. Preference share
a. 1,140,000 c. 1,655,000
b. 1,000,000 d. 1,795,000
2. Share premium-Preference share
a. 425,000 c. 515,000
b. 90,000 d. 545,000
3. Ordinary share
a. 88,000 c. 61,000
b. 68,000 d. 62,000
4. Share premium-Ordinary share
a. 3,707,000 c. 1,920,000
b. 3,110,000 d. 3,617,000
5. Accumulated profit
a. 310,000 c. 350,000
b. 600,000 d. 290,000
PROBLEM 17: Talisay Corporation presented the following balance sheet for December 31, 2011:
Assets
Current Assets P 30,000
Treasury shares (at market, cost is P15,000) 14,000
Depreciable Fixed Assets 56,000
Total assets P 100,000
Liabilities and Shareholders’ Equity
Current liabilities P 20,000
Ordinary shares subscribed (500 shares) 10,000
Long-term debt 8,000
Total Liabilities P 38,000
Ordinary shares (4,000 shares issued) P 18,000
10% Preference shares (1,000 shares issued) 12,000
Subscription receivable ( 4,000)
Reserve for depreciation 16,000
Accumulated profit 20,000

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Total shareholders’ equity 62,000

Total liabilities and shareholders’ equity P 100,000
Your investigation of Talisay Corporation’s financial records indicates that all authorized shares have been
either issued or subscribed.
The par values for the ordinary and preference shares are P2 and P10, respectively. The treasury shares were
originally purchased when the market price was P20 per share.
During 2011, 250 treasury shares were resold for P25 per share. A gain on treasury share transactions’ was
credited for the difference between the original cost and the selling price. Furthermore, the excess cost over
the market of the treasury shares at the end of the period was recognized as an unrealized loss on the 2008
income statement.
You also discovered that a majority stockholder donated during 2011, a land which originally costed the
stockholder P5,000 but with a market value of P9,000 during the date of donation.
Subscription receivables are due six months from December 31, 2011.
Determine the adjusted balances of the following:
A B C D
1. Total Assets 79,000 83,000 97,000 99,000
2. Total Liabilities 20,000 28,000 38,000 48,000
3. Additional paid-in capital 30,000 31,250 19,000 21,000
4. Total contributed capital 40,250 41,250 50,250 98,000
5. Retained earnings, end 20,000 21,000 19,750 18,750
6. Treasury stocks 14,000 18,750 20,000 15,000
7. Total stockholders’ equity 83,000 69,000 62,000 55,000

PROBLEM 18: The Accumulated Profits account of Billy Jean Corp. shows the following debits and credits for
the year 2011:
UNAPPROPRIATED ACCUMULATED PROFIT
Date Debit Credit Balance
Jan. 1 Balance P565,600
(a) Gain on life insurance policy settlement P 50,000 615,500
(b) Write off of intangibles 30,000 585,500
(c) Effect of a change in accounting principle (from
FIFO to weighted average) 100,000 685,500
(d) Loss on sale of treasury stock (APIC from treasury stock
Transaction is enough to cover the loss) 20,000 665,500
(e) 10% stock dividends on 100,000, P10 par value shares
Issued and outstanding (FMV at the same date at P12.50) 100,000 565,500
(f) 2010 unaccrued employee compensation 160,000 405,500
(g) Premium on ordinary shares issued 65,000 470,500
(h) Stock issuance expenses related to ordinary shares issued above 5,000 465,500
(i) Defaults on ordinary shares subscription 15,000 480,500
(j) Loss on sale of equipment 25,000 455,500
(k) Gain on retirement of preference shares at less than issue price 35,000 490,500
(l) Gain on early retirement of bonds 12,500 503,000
(m) Correction of a prior period error 45,000 548,000
(n) Cash dividends payable 75,000 473,000
(o) Inventory loss from flood 10,500 462,500
(p) Proceeds from sale of donated stock 37,500 500,000
(q) Revaluation increase in land 150,000 650,000
(r) Appropriation for plant expansion 100,000 550,000
(s) Net income for the period 175,000 725,000
1. How much is the adjusted net income for the year?
a. 207,000 c. 172,000
b. 187,000 d. 159,500
2. How much is the correct unappropriated accumulated profits restated beginning balance?
a. 710,500 c. 550,500
b. 680,500 d. 520,500
3. How much is the correct unappropriated accumulated profits restated beginning balance?
a. 710,500 c. 550,500
b. 680,500 d. 520,500

PROBLEM 19: Logan Corp. has incurred losses from operations for many years. At the recommendation of the
newly hired president, the board of directors noted to implement a quasi-reorganization, subject to the
stockholders’s and creditors approval. Immediately, prior to the quasi-reorganization, on June 30, 2011,
Logan’s balance sheet was as follows:
Assets

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Current Assets P 1,375,000

Property, plant and equipment 3,375,000
Other non-current assets 500,000
Total Assets P 5,250,000

Liabilities and Shareholders’ equity

Total liabilities P 1,500,000
Ordinary shares, P10 par value 4,000,000
Additional paid in capital 750,000
Deficit (1,000,000)
Total liabilities and equity P 5,250,000

The stockholders and creditors approved the quasi reorganization effective July 1,2011, to be accomplished
by a reduction in property, plant and equipment (net) P 875,000, a reduction in other non-current assets of
P375,000, and a reduction in par value from P10 to P5
1. Logan’s July 1 balance sheet after the quasi-reorganization should show total assets of
a. P 4,000,000 c. P 4,375,000
b. P 2,500,000 d. P 3,875,000

2. The balance in additional paid in capital after the quasi-reorganization on July 1 is:
a. P 750,000 c. P 500,000
b. P 2,000,000 d. P-0-
3. Logan’s deficit after the quasi-reorganization on July 1,2011 should be:
a. P 750,000 c. P 500,000
b. P 250,000 d. P -0-
PROBLEM 20: Scott Inc., has sustained heavy losses over a period of time and conditions warrant that Scott
Inc., undergo a quasi-reorganization on December 31, 2011.
The balance sheet of Scott Inc. on December 31, prior to reorganization is:
Current Assets P 1,000,000
Property, plant and equipment P 5,000,000
Less: Accum. Depreciation 1,500,000 3,500,000
Goodwill 500,000
Total Assets P 5,00,000
Current Liabilities P 1,100,000
Ordinary shares, P100 par value 5,000,000
Share premium on ordinary shares 500,000
Deficit (1,600,000)
Total assets P 5,000,000
The Securities and Exchange Commission approved the quasi-reorganization on the basis of the unrealistic
valuation of the property, plant and equipment. Accordingly, the SEC recommended that the PPE be appraised
by an independent expert.
1) The PPE are determined to have replacement cost of P 9,000,000
2) The inventory is to be written down by P400,000
3) The goodwill should be written off
4) Unrecorded accounts payable amounted to P200,000
5) Any resulting deficit is charged against the revaluation surplus
1. Scott’s balance sheet after the quasi reorganization should show total assets of:
a. P 6,900,000 c. P 7,800,000
b. P 7,400,000 d. P 8,000,000
2. The balance in the revaluation surplus after the quasi-reorganization is:
a. P 2,800,000 c. P 300,000
b. P 1,200,000 d. P 100,000
3.Scott’s deficit after the quasi-reorganization, should be
a. P 1,600,000 c. P 200,000
b. P 600,000 d. P -0-
PROBLEM21:
1. An auditor usually obtains evidence of stockholders’ equity transactions by reviewing the entity’s
a. Minutes of board of director’s meetings.
b. Transfer agents’ records
c. Canceled stock certificates
d. Treasury stock certificates
2. In performing tests concerning the granting of stock options, an auditor should:
a. Confirm the transaction with the Secretary
b. Verify existence of option holders in the entity’s payroll
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

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3. During an audit of an entity’s stockholders’ equity accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans, agreements or laws. This audit procedure most
likely is intended to verify management assertion of:
a. Existence
b. Completeness
c. Presentation and Disclosure
d. Valuation

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