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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF STOCKHOLDERS’ EQUITY

PROBLEM NO. 1
The following data were compiled prior to preparing the balance sheet of the Conviction
Corporation as of December 31, 2005:
Authorized common stock, P100 par value P4,000,000
Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000
Stock warrants outstanding 200,000
Treasury stock, at cost 144,000
Unissued common stock 800,000
REQUIRED:
Compute for the following:
A B C D
1. Common stock issued 4,000,000 3,200,000 3,056,000 3,680,000
2. Additional paid-in capital (APIC) 320,000 1,400,000 1,320,000 1,200,000
3. Appropriated retained earnings 400,000 544,000 1,000,000 -
4. Total stockholders’ equity 6,760,000 6,640,000 6,480,000 6,240,000
5. Legal capital 3,200,000 3,680,000 3,560,000 4,000,000

PROBLEM NO. 2
Following is the stockholders’ equity section of Tenacity Corporation’s balance sheet at
December 31, 2004:
Common stock, P10 par value; authorized 1,500,000
shares; issued and outstanding 900,000 shares P9,000,000
Additional paid-in capital 750,000
Retained earnings 2,700,000
Total stockholders’ equity P12,450,000

Transactions during 2005 and other information relating to the stockholders’ equity
accounts were as follows:
• On January 26, Tenacity reacquired 75,000 shares of its common stock for P11 per
share.
• On April 4, Tenacity sold 45,000 shares of its treasury stock for P14 per share.
• On June 1, Tenacity declared a cash dividend of P1 per share, payable on July 15,
2005 to stockholders of record on July 1, 2005.

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• On August 15, each stockholder was issued one stock right for each share held to
purchase two additional shares of stock for P12 per share. The rights expire on
October 31, 2005.
• On September 30, 150,000 stock rights were exercised when the market value of the
stock was P12.50 per share.
• On November 2, Tenacity declared a two for one stock split-up and charged the par
value of the stock from P10 to P5 per share. On November 20, shares were issued for
the stock split.
• On December 5, 60,000 shares were issued in exchange for a secondhand equipment.
It originally cost P600,000, was carried by the previous owner at a book value of
P300,000, and was recently appraised at P390,000.
• Net income for 2005 was P720,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2005:
1. Common stock
a. P12,600,000 b. P10,800,000 c. P10,050,000 d. P12,300,000
2. Additional paid-in capital
a. P1,485,000 b. P1,575,000 c. P3,825,000 d. P1,275,000
3. Unapproriated retained earnings
a. P2,550,000 b. P2,422,500 c. P2,220,000 d. P2,190,000
4. Total stockholders’ equity
a. P16,425,000 b. P14,295,000 c. P16,095,000 d. P16,065,000

PROBLEM NO. 3
The stockholders’ equity section of the Determination Inc. showed the following data on
December 31, 2004: Common stock, P3 par, 450,000 shares authorized, 375,000 shares
issued and outstanding, P1,125,000; Paid-in capital in excess of par, P10,575,000;
Additional paid-in capital from stock options, P225,000; Retained earnings, P720,000. The
stock options were granted to key executives and provided them the right to acquire
45,000 shares of common stock at P35 per share. Each option has a fair value of P5 at
the time the options were granted.

The following transactions occurred during 2005:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31,
2004. The market price per share was P44 at this time.

Apr. 1 The company issued bonds of P3,000,000 at par, giving each P1,000
bond a detachable warrant enabling the holder to purchase two shares
of stock at P40 each for a 1-year period. The bonds would sell at P996
per P1,000 bond without the warrant.

July 1 The company issued rights to stockholders (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 9,000 rights were
exercised on July 31, and the additional stock was issued.
Oct. 1 All warrants issued in connection with the bonds on April 1 were
exercised.

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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 Net income for 2005 was P375,750.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2005:
1. Common stock
a. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,050
2. Total additional paid-in capital
a. P12,629,175 b. P11,283,300 c. P12,329,475 d. P12,604,200
3. Retained earnings
a. P870,750 b. P1,095,750 c. P1,287,000 d. P981,225
4. Total stockholders’ equity
a. P13,545,000 b. P15,000,000 c. P14,676,000 d. P14,973,000

PROBLEM NO. 4
With your representation, as Managing Partner of the Sy Pee Ey & Co., your firm was
engaged in the audit of the Fortitude Company at the close of the company’s first year of
operations on December 31, 2005. The company closed its books prior to the time you
began your year-end fieldwork.
Your audit and review showed the following stockholders’ equity accounts in the general
ledger:
Common Stock
08/30/05 CD P550,000 01/02/05 CR P6,000,000
12/29/05 J 545,000

Retained Earnings
12/29/05 J P545,000 12/01/05 CR P287,500
12/31/05 J 4,000,000

Income Summary
12/31/05 J P26,000,000 12/31/05 J P30,000,000
12/31/05 J 4,000,000

Based on the other working papers submitted by your audit staff, the following additional
information was forwarded:
From the Articles of Incorporation of Fortitude Company:
• Authorized capital stock – 150,000 shares
• Par value per share – P100
From the board of directors’ minutes of meetings, the following resolutions were extracted:
• 01/02/05 – authorized the issuance of 50,000 shares at P120 per share.
• 08/30/05 – authorized the acquisition of 5,000 shares at P110 per share.
• 12/01/05 – authorized the re-issuance of 2,500 treasury shares at P115 per share.

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• 12/29/05 – Declared a 10% stock dividend, payable January 31, 2006, to

stockholders on record as of January 15, 2006. The market value of the stock on
December 29, 2005 was P130 per share.
REQUIRED:
1. Prepare adjusting entries as of December 31, 2005.
2. Based on the above and the result of your audit, determine the adjusted balances of
the following as of December 31, 2005.
A B C D
1. Capital stock 5,995,000 5,545,000 5,000,000 5,475,000
2. APIC 1,012,500 1,000,000 1,155,000 965,000
3. Total retained earnings 3,525,000 3,572,500 3,382,500 3,512,500
4. Treasury stock 250,000 550,000 275,000 -
5. Total stockholders’ equity 10,012,500 9,215,000 9,737,500 9,262,500

PROBLEM NO. 5
The Retained Earnings account of Endurance Company shows the following debits and
credits for the year 2005:
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
Jan. 1 Balance 726,400
(a) Loss from fire 5,250 721,150
(b) Write-off of goodwill 52,500 668,650
(c) Stock dividends distributed 140,000 528,650
(d) Loss on sale of equipment 48,300 480,350
(e) Officers’ compensation related to income of
prior periods – accrual overlooked 325,500 154,850
(f) Loss on retirement of preferred shares
at more than issue price 70,000 84,850
(g) Paid in capital in excess of par 129,500 214,350
(h) Stock issuance expenses
(related to letter g) 10,000 204,350
(i) Stock subscription defaults 8,470 212,820
(j) Gain on retirement of preferred stock at
less than issue price 25,900 238,720
(k) Gain on early retirement of bonds 15,050 253,770
(l) Gain on life insurance policy settlement 10,500 264,270
(m) Correction of a fundamental error 50,050 314,320
(n) Effect of change in accounting principle
from FIFO to weighted average 100,000 414,320
(o) Dividends payable 25,000 389,320
(p) Loss on sale of treasury stock 20,000 369,320
(q) Proceeds from sale of donated stock 40,000 409,320
(r) Appraisal increase in land 250,000 659,320
(s) Appropriated for property acquisition 100,000 559,320
REQUIRED:
1. Prepare adjusting journal entries to correct the Retained Earnings account.
2. Determine the correct amount of Retained Earnings account.

PROBLEM NO. 6
In connection with your audit of the balance sheet of the Guts Company on December 31,
2005, the Liability side of the Balance Sheet shows following items:

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Current liabilities P571,000

Bonds payable 600,000
Reserve for bond retirement 320,000
6% Cumulative preferred stock, P100 par value (liquidation
value, P115 per share); Authorized, 6,000 shares; issued,
4,000 shares; in treasury, 600 shares 400,000
Common stock, P100 par value, authorized, 20,000 shares;
issued and outstanding, 8,000 shares 800,000
Premium on preferred stock 150,000
Premium on common stock 165,000
Retained earnings 458,600
Treasury preferred stock, at cost 84,000
REQUIRED:
1. Compute for the total stockholders’ equity as of December 31, 2005.
2. Compute for the book value per share of each class of stock as of December 31, 2005.
3. Assuming the preferred stock is participating, compute for the book value per share of
each class of stock as of December 31, 2005.

PROBLEM NO. 7
In connection with the audit of Courage Company’s financial statements for the year
ended December 31, 2005, your audit senior asked you to analyze the company’s
stockholders’ equity section and provide him with certain figures. The stockholders’ equity
sections of the company’s comparative balance sheets as of December 31, 2005 and 2004
are presented below:
12.31.05 12.31.04
12% Preferred stock, P100 par P 330,000 P 270,000
Common stock, P10* par 1,642,400 1,598,400
Paid-in capital in excess of par - preferred 53,600 36,800
Paid-in capital in excess of par - common 257,200 235,200
Paid-in capital from treasury stock 7,200 3,200
Retained earnings 1,884,800 1,585,840
Total stockholders’ equity P4,175,200 P3,729,440
*Par value after May 31, 2005 stock split.
Courage had 65,000 common stock outstanding as December 31, 2003.

The following stockholders’ equity transactions were recorded in 2004 and 2005:
2004
May 1 - Sold 9,000 common shares for P24, par value P20.
July 1 - Sold 700 preferred shares for P124, par value P100.
July 31 - Issued an 8% stock dividend on common stock. The market value of
common stock was P30 per share.
Aug. 30 - Declared cash dividends of 12% on preferred stock and P3 per share
on common stock.
Dec. 31 - Net income for the year amounted to P1,345,040
2005
Feb. 1 - Sold 2,200 common shares for P30.
May 1 - Sold 600 preferred shares for P128.
May 31 - Issued a 2-for-1 split of common stock. The par value of the common
stock was reduced to P10 per share.
Sep. 1 - Purchased 1,000 common shares for P18 to be held as treasury stock.
Oct. 1 - Declared cash dividends of 12% on preferred stock and P4 per share
on common stock.
Nov. 1 - Sold 1,000 shares of treasury stock for P22.

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REQUIRED:
Compute for the basic earnings per share for the year 2004 and 2005.

PROBLEM NO. 8
Select the best answer for each of the following:
1. In an examination of shareholder’s equity, an auditor is most concerned that
a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock
transfer agent.

2. 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. Owner’s equity b. Assets c. Revenue d. Liabilities

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 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

5. The auditor is concerned with establishing that dividends are paid to client
corporation shareholders owning stock as of the
a. Issue date c. Record date
b. Declaration date d. Payment date

6. An audit program for the retained earnings account should include a step that
requires verification of the
a. Fair value used to charge retained earnings to account for a two-for-one-stock
split.
b. Approval of the adjustment to the beginning balance as a result of a write-down of
an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.

7. During an audit of an entity’s shareholders’ 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. Existence c. Valuation
b. Completeness d. Presentation and disclosure

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8. If the auditee has a material amount of treasury stock on hand at year-end, the
auditor should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transactions during
the year.
c. No count the certificates if treasury stock is a deduction from shareholders’ equity.
d. Count the certificates only if the company classifies treasury stock with other
assets.

9. In performing tests concerning the granting of stock options, an auditor should

a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entity’s payroll records or stock
ledgers.
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.

10. The auditor would not expect the client to debit retained earnings for which of the
following transactions?
a. A 4-for 1 stock split.
b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
d. Correction of error affecting prior year's earnings.

– End of AP-5901 –

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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
AUDITING PROBLEMS
AUDIT OF STOCKHOLDERS’ EQUITY - QUIZZERS

PROBLEM NO. 1
Resolve Corporation began operations on January 1, 2005. The company was
authorized to issue 60,000 shares of P10 par value common stock and 120,000 shares of
10%, P100 par value convertible preferred stock.

In connection with your audit of the company’s financial statements, you noted the
following transactions involving stockholders’ equity during 2005:
Jan. 1 Issued 1,500 shares of common stock to the corporation promoters in
exchange for property 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 shares of convertible preferred stock at P150 per share.
Each share can be converted to five shares of common stock. The
corporation paid P225,000 to an agent for selling the shares.

Feb. 15 Sold 9,000 shares of common stock at P390 per share. The corporation
paid issue costs of P75,000.

May 30 Received subscriptions for 12,000 shares of common stock at P450 per
share.

Aug. 30 Issued 2,100 shares of common stock and 4,200 shares of preferred
stock in exchanged for a building with a fair market value of P1,530,000.
The building was originally purchased for P1,140,000 by the investors
and has a book value of P660,000. In addition, 1,800 shares of common
stock 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 of stock were issued for the fully paid subscriptions.

Dec. 1 Declared a cash dividend of P10 per share on preferred stock, payable
on December 31 to stockholders of record on December 15, and P20
per share cash dividend on common stock, payable on January 15, 2006
to stockholders of record on December 15.

Dec. 31 Paid the preferred stock dividend.

Net income for the first 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, 2005:
1. Common stock
a. P264,000 b. P144,000 c. P204,000 d. P186,000
2. Paid-in capital in excess of par value of preferred stock
a. P1,500,000 b. P1,275,000 c. P1,545,000 d. P1,860,000

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3. Paid-in capital in excess of par value of common stock

a. P8,211,000 b. P11,121,000 c. P10,851,000 d. P10,032,000
4. Retained earnings
a. P1,050,000 b. P1,170,000 c. P1,458,000 d. P930,000
5. Total stockholders’ equity
a. P17,295,000 b. P15,810,000 c. P16,950,000 d. P17,010,000
SUGGESTED ANSWERS: C, C, C, D, B

PROBLEM NO. 2
The Perseverance Corporation has requested you to audit its financial statements for the
year 2005. During your audit, Perseverance presented to you its balance sheet as of
December 31, 2004 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized
and issued, of which 6,000 are treasury shares
costing P90,000 and shown as an asset P600,000
Common stock, par value P4; 600,000 shares
authorized, of which 450,000 are issued and outstanding 1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 2000) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2005.
Perseverance credited the proceeds to the Preferred Stock account. The treasury
shares as of December 31, 2004 were acquired in one purchase in 2004.
2) The preferred stock carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 2004, unpaid cumulative dividends amounted to P5
per share. The entire accumulation was liquidated in June, 2005, by issuing to the
preferred stockholders 54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2005 to preferred
stockholders of record December 15, 2005. The dividend is payable on January 15,
2006.
4) At December 31, 2005, the Allowance for Doubtful Accounts Receivable and Reserve
for Depreciation had balances of P25,000 and P1,050,000, respectively.
5) On March 1, 2005, the Reserve for Fire Insurance was increased by P60,000;
Retained Earnings was debited.
6) On December 31, 2005, the Reserve for Fire Insurance was decreased by P30,000,
which represents the carrying value of a machine destroyed by fire on that date.
Estimated fire cleanup costs of P6,000 does not appear on the records.
7) The December 31, 2004 Retained Earnings consists of the following:
Donated land from a stockholder (Market value on
date of donation) P450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P2,250,000

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8) Net income for the year ended December 31, 2005 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, 2005. (Disregard tax implications)

A B C D
1. Preferred stock 555,000 630,000 570,000 600,000
2. Common stock 2,070,000 2,016,000 1,800,000 1,854,000
3. Additional paid in capital 810,000 864,000 414,000 804,000
4. Appropriated retained earnings 0 303,000 258,000 228,000
5. Unappropriated retained earnings 2,623,500 2,677,500 2,578,500 2,626,500
6. Treasury stock 0 36,000 45,000 90,000
7. Total stockholders’ equity 6,316,500 3,700,500 6,319,500 5,812,500
SUGGESTED ANSWERS: D, B, B, B, C, C, A

PROBLEM NO. 3
The stockholders equity of Willpower Corporation showed the following data on
December 31, 2004:

12% preferred stock, P30 par, 135,000 shares issued and outstanding P4,050,000
Common stock, P50 par, 180,000 shares issued and outstanding 9,000,000
Premium on preferred stock 1,080,000
Premium on common stock 3,240,000
Retained earnings 1,395,000

The 2005 transactions of the company affecting its stockholders’ equity are summarized
chronologically as follows:
1. Issued 27,000 shares of preferred stock at P40.
2. Issued 94,500 shares of common stock at P70.
3. Retired 5,400 shares of preferred stock at P45.
4. Purchased 13,500 shares of its common stock at P80.
5. Split common stock two for one (par value reduce to P25).
6. Reissued 13,500 shares of treasury stock – common at P50.
7. Stockholders donated to the company 9,000 shares of common stock 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 common stock at P2 per
share and on the preferred stock at the preferred rate.
9. Net income for the year was P2,520,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2005:
1. Preferred stock
a. P4,617,000 b. P4,968,000 c. P4,698,000 d. P4,860,000
2. Common stock
a. P15,615,000 b. P13,968,000 c. P13,500,000 d. P13,725,000
3. Additional paid-in capital
a. P6,777,000 b. P6,679,800 c. P6,858,000 d. P6,814,800

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4. Unappropriated retained earnings

a. P1,749,240 b. P1,711,440 c. P2,251,440 d. P1,684,440
5. Total stockholders’ equity
a. P26,949,240 b. P26,958,960 c. P26,922,240 d. P26,940,240
SUGGESTED ANSWERS: C, D, D, B, A

PROBLEM NO. 4
Grit Corp., organized on June 1, 2004, was authorized to issue stock as follows:
• 800,000 shares of 9% preferred stock, convertible, P100 par
• 2,500,000 shares of common stock, P2.50 stated value

During the remainder of the fiscal year ended May 31, 2005, the following transactions
were completed in the order given:
• 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares of
common stock were subscribed for at P26. Both subscriptions were payable 30% upon
subscription, the balance in one payment.
• The second subscription payment was received, except one subscriber for 60,000
shares of common stock defaulted on payment. The full amount paid by this subscriber
was returned, and all of the fully paid stock was issued.
• 150,000 shares of common stock were reacquired by purchase at P28.
• Each share of preferred was converted into four shares of common stock.
• The treasury stock was exchanged for machinery with a fair market value of
P4,300,000.
• There was a 2-for-1 stock split, and the stated value of the new common stock is
P1.25.
• Net income was P830,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December
31, 2005:
1. Common stock
a. P2,550,000 b. P2,100,000 c. P5,100,000 d. P4,200,000

2. Total additional paid-in capital

a. P50,890,000 b. P48,340,000 c. P48,808,000 d. P48,240,000

3. Total contributed capital

a. P53,908,000 b. P53,440,000 c. P55,990,000 d. P53,340,000

4. Total stockholders’ equity

a. P54,270,000 b. P54,738,000 c. P56,820,000 d. P54,170,000
SUGGESTED ANSWERS: C, B, B, A

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PROBLEM NO. 5
The year-end audit of the records of Stamina Farms disclosed a shortage in cash
amounting to P600,000. The treasurer had concealed the fraud by increasing inventories
by P300,000, land by P100,000 and accounts receivable by P200,000.

Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares
owned by him. The board of directors accepted the offer, with the agreement that the
treasurer would pay any deficiency between the shortage and the book value of the
shares, after adjusting for the fraud. The corporation would in turn pay the excess, if any,
of the book value over the shortage.

As of December 31, 2005, there were 40,000 common shares issued and outstanding with
a par value of P100; Retained earnings as of January 1, 2005 was P1,600,000 and net
income from 2005 operations was P1,400,000.
REQUIRED:
Considering the above information, answer the following:
1. What would be the book value per share for purposes of the agreement?
a. P175 b. P206 c. P150 d. None of these

2. How much would the company pay the treasurer, if any?

a. P450,000 b. P300,000 c. P636,000 d. None of these

3. Assuming further the company distributes the 6,000 shares as dividend to the
remaining stockholders, what would be the balance of the Retained earnings as of
December 31, 2005?
a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these
SUGGESTED ANSWERS: A, A, A

– End of AP-5901Q –

AP-5901Q
PROBLEM NO. 1 - Conviction Corporation

Question Nos. 1, 3 to 5 - B
Authorized common stock 4,000,000
Unissued common stock (800,000)
Common stock issued 3,200,000 1
Subscribed common stock 480,000
Subscriptions receivable (120,000) 360,000
Additional paid-in capital
Donated capital 800,000
Gain on sale of treasury stock 80,000
Premium on capital stock 320,000
Stock warrants outstanding 200,000 1,400,000
Retained earnings
Appropriated for sinking fund 400,000
Appropriated for treasury stock 144,000
Total appropriated retained earnings 544,000 3
Unappropriated (P720,000 - P144,000) 576,000 1,120,000
Revaluation surplus 800,000
Total 6,880,000
Less : Treasury stock (144,000)
Net unrealized loss on AFS (96,000) (240,000)
Total stockholders equity 6,640,000 5

Question No. 2 - B
Common stock issued 3,200,000
Subscribed common stock 480,000
Legal capital 3,680,000

AP-5801
PROBLEM NO. 2 - Determination, Inc.
2005
12.31.04 Transactions 12.31.05

Common stock 1,125,000 2/1 20,250 1,275,075 (1) C

7/31 111,825
10/1 18,000
Additional paid in capital 10,800,000 2/1 (33,750) 12,629,175 (2) A
2/1 249,750
4/1 12,000
7/31 1,379,175
10/1 (12,000)
10/1 234,000
12/1 (191,250)
12/1 191,250
Retained earnings 720,000 12/31 375,750 1,095,750 (3) B

Total stockholders' equity 12,645,000 15,000,000 (4) C

Journal entries for 2005

2/1 Cash (6,750 options x P35) 236,250
APIC-stock options (6,750 x P5) 33,750
Common stock (6,750 shares x P3) 20,250
APIC - excess over par 249,750
4/1 Cash 3,000,000
Bond discount [P3,000,000 - (3,000 x P996)] 12,000
Bonds payable 3,000,000
APIC-stock warrants 12,000
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 38,175 shares (381,750 shares ÷ 10).
7/31 Cash {[38,175 - (9,000/10)] x P40} 1,491,000
Common stock (37,275 shares x P3) 111,825
APIC - excess over par 1,379,175

10/1 Cash (3,000 x 2 x P40) 240,000

APIC-stock warrants 12,000
Common stock (3,000 shares x 2 x P3) 18,000
APIC - excess over par 234,000
12/1 APIC-stock options [P225,000 - (6,750 x P5)] 191,250
APIC - expired stock options 191,250
12/31 Income summary 375,750
Retained earnings 375,750
PROBLEM NO. 3 - Resilience Corporation
2005
12.31.04 Transactions 12.31.05

Preferred stock 1,800,000 1,800,000

Common stock 5,150,000 a (150,000) 6,450,000 (11) C
c 1,050,000
d 400,000
APIC - Preferred 90,000 90,000
APIC - Common 3,500,000 a (120,000) 4,880,000 (12) C
c 1,260,000
d 240,000
Retained earnings 4,000,000 b (750,000) 5,395,000 (14) D
e (180,000)
g (275,000)
h 2,600,000
Treasury stock (270,000) a 270,000 -
Net unrealized loss on AFS (245,000) f 110,000 (135,000)

Total stockholders' equity 14,025,000 18,480,000 (15) B

Journal entries for 2005

a Common stock (30,000 shares x P5) 150,000
APIC-common 120,000
Treasury stock 270,000
b Retained earnings 750,000
Trading securities 750,000
c Memorandum: Issued rights to shareholders permitting holder to acquire at P11
with every 4 rights submitted —a maximum of 250,000 shares (1,000,000 shares ÷ 10).
c Cash [(840,000/4) x P11] 2,310,000
Common stock ([(840,000/4) x P5) 1,050,000
APIC-common 1,260,000

d Cash (80,000 x P8) 640,000

Common stock (80,000 x P5) 400,000
APIC-common 240,000
e Retained earnings 180,000
Dividends payable-PS 180,000
f Net unrealized loss on AFS 110,000
Available for sale securities 110,000
g Retained earnings 275,000
Income tax payable 225,000
Rent income 500,000
h Income summary 2,600,000
Retained earnings 2,600,000
PROBLEM NO. 4 - Fortitude Company

Requirement no. 1
01/02/05 Capital stock [50,000 shares (P120-P100)] 1,000,000
Additional paid-in capital 1,000,000

08/30/05 Treasury stock 550,000

Capital stock 550,000

12/01/05 Retained earnings 287,500

Treasury stock (2,500 shares x P110) 275,000
APIC from reissuance of treasury stock 12,500

12/29/05 Retained earnings (P617,500 - P545,000) 72,500

Capital stock 545,000
Stock dividends distributable (4,750 x P100) 475,000
APIC - excess over par value 142,500
Shares issued 50,000
Treasury stock (5,000 -2, 500) (2,500)
Shares outstanding 47,500
Dividend rate (small stock dividend) 10%
Shares to be issued 4,750
Market value per share 130
Total amount to be charged to RE 617,500
Total par value of stock dividend payable 475,000
APIC - excess over par 142,500

12/31/05 Retained earnings (2,500 shares x P110) 275,000

Retained earnings appropriated for treasury stock 275,000

Requirement no. 2
Capital stock (P5,995,000-P1,000,000+P550,000-P545,000) 5,000,000 (1) C
Stock dividends distributable 475,000
APIC (P1,000,000+P12,500+P142,500) 1,155,000 (2) C
Retained earnings-appropriated 275,000
Retained earnings (P3,742,500-P287,500-P72,500-P275,000) 3,107,500 (3) C
Total 10,012,500
Treasury stock (P550,000-P275,000) (275,000) (4) C
Total stockholders' equity 9,737,500 (5) C
PROBLEM NO. 5 - Endurance Company
Requirement no. 1
a Fire loss 5,250
Retained earnings 5,250
b Goodwill write off 52,500
Retained earnings 52,500
d Loss on sale of equipment 48,300
Retained earnings 48,300
g Retained earnings 129,500
APIC-excess of par 129,500
h APIC-excess of par 10,000
Retained earnings 10,000
i Retained earnings 8,470
APIC from forfeited subscriptions 8,470
j Retained earnings 25,900
APIC from retirement of preferred stock 25,900
k Retained earnings 15,050
Gain on early retirement of bonds 15,050
l Retained earnings 10,500
Gain on life insurance settlement 10,500
q Retained earnings 40,000
Donated capital 40,000
r Retained earnings 250,000
Revaluation increment in property 250,000

Requirement no. 2
Unadjusted retained earnings balance 559,320
a 5,250
b 52,500
d 48,300
g (129,500)
h 10,000
i (8,470)
j (25,900)
k (15,050)
l (10,500)
q (40,000)
r (250,000)
Correct amount of RE before net income(loss) 195,950
OR
Jan. 1 Balance 726,400
c Stock dividend (140,000)
e Officers’ compensation related to income
of prior periods – accrual overlooked (325,500)
f Loss on retirement of preferred shares
at more than issue price (70,000)
m Correction of prior-period error 50,050
n Effect of change in accounting principle
from FIFO to weighted average 100,000
o Dividends payable (25,000)
p Loss on sale of treasury stock (20,000)
s Appropriated for property acquisition (100,000)
Correct amount of RE before net income(loss) 195,950
PROBLEM NO. 6 - Guts Company
Requirement No. 1
Capital stock
Preferred stock 400,000
Common stock 800,000 1,200,000
APIC
Premium on preferred stock 150,000
Premium on common stock 165,000 315,000
Retained earnings
Retained earnings, appropiated - bond retirement 320,000
Retained earnings, unappropiated 458,600 778,600
Total 2,293,600
Less treasury stock, at cost 84,000
Stockholders' equity 2,209,600

Requirement No. 2
Excess
over par Preferred Common
Balances 1,069,600 * 340,000 ** 800,000
Preferred dividend (P340,000 x 6%) (20,400) 20,400
Liquidation premium (3,400 x P15) (51,000) 51,000
Balance to common 998,200 998,200
Total 411,400 1,798,200
Divide by outstanding shares 3,400 8,000
Book value per share 121.00 224.78

* Premium on preferred stock 150,000

Premium on common stock 165,000
Retained earnings, appropiated - bond retirement 320,000
Retained earnings, unappropiated 458,600
Excess of cost of TS over par (P84,000 - P60,000) (24,000)
Excess over par 1,069,600
Note: For computation of BV/share purposes, TS is treated as a retired stock.
Shares Amount
** Preferred stock issued 4,000 400,000
Tresury stock, at par (600 x P100) (600) (60,000)
Outstanding preferred stock 3,400 340,000

Requirement No. 3
Excess
over par Preferred Common
Balances 1,069,600 * 340,000 ** 800,000
Preferred dividend (P340,000 x 6%) (20,400) 20,400
Liquidation premium (3,400 x P15) (51,000) 51,000
Common dividend (P800,000 x 6%) (48,000) 48,000
Balance for participation 950,200
Preferred (340/1,140 x P950,200) 283,393
Common (800/1,140 x P950,200) 666,807
Total 694,793 1,514,807
Divide by outstanding shares 3,400 8,000
Book value per share 204.35 189.35
 Page 1 of 1
PROBLEM NO. 7 - Courage Company

Basic earnings per share for 2004:

Net income for 2004 1,345,040
Less preferred stock dividend (270,000 x 12%) 32,400
Net income identified with common stock 1,312,640
Divide by weighted average number of common shares 153,360 *
Basic earnings per share 8.56

*Computation of weighted average

No. of shares Mos. o/s Total
Jan. 1 (65,000 x 1.08* x 2**) 140,400 12 1,684,800
May 1 (9,000 x 1.08* x 2**) 19,440 8 155,520
Total 1,840,320
Divide by 12
Weighted average number of shares for 2004 153,360
*Stock dividend issued on 7.31.04
**2-for-1 stock split issued on 5.31.05

Basic earnings per share for 2005

Net income for 2005 (see computation below) 991,520
Less preferred stock dividend (see computation below) 39,600
Net income identified with common stock 951,920
Divide by weighted average number of common shares 163,707
Basic earnings per share 5.81

Computation of net income for 2005

Retained earnings, 12/31/05 1,884,800
Retained earnings, 12/31/04 1,585,840
Increase in retained earnings 298,960
Add dividends declared in 2005:
Preferred (P330,000 x 12%) 39,600
Common (P1,642,400/P10 =
164,240 - 1,000 treasury shares =
163,240 shares x P4) 652,960 692,560
Net income for 2005 991,520

**Computation of weighted average

No. of shares Mos. o/s Total
Jan. 1 (79,920 x 2*) 159,840 12 1,918,080
Feb. 1 (2,200 x 2*) 4,400 11 48,400
Sept. 1 (1,000) 4 (4,000)
Nov. 1 1,000 2 2,000
Total 1,964,480
Divide by 12
Weighted average number of shares for 2005 163,707
*2-for-1 stock split issued on 5.31.05

PROBLEM NO. 8
1) A 6) C
2) A 7) D
3) D 8) A
4) B 9) D
5) C 10) A
PROBLEM NO. 1 - Resolve Corporation

Date Particulars 12.31.05

(Debit) Credit Balance
Preferred stock 1/31 3,000,000 3,420,000
8/30 420,000
Common stock 1/1 15,000 204,000 (1) C
2/20 90,000
8/30 18,000
8/30 21,000
11/07 60,000
Subscribed common stock 5/30 120,000 60,000
11/07 (60,000)
Subscription receivable 5/30 (5,400,000) (1,200,000)
11/07 4,200,000
Additional paid in capital - preferred 1/31 1,500,000 1,545,000 (2) C
1/31 (225,000)
8/30 270,000
Additional paid in capital - common 1/1 705,000 10,851,000 (3) C
2/20 3,420,000
2/20 (75,000)
5/30 5,280,000
8/30 702,000
8/30 819,000
Retained earnings 12/01 (870,000) 930,000 (4) D
12/31 1,800,000
15,810,000 (5) B

Journal entries for 2005

1/1 Property 510,000
Organization expenses 210,000
Common stock (1,500 shares x P10) 15,000
APIC - excess over par of common stock 705,000
1/31 Cash (30,000 shares x P150) 4,500,000
Preferred stock (30,000 shares x P100) 3,000,000
APIC - excess over par of preferred stock 1,500,000
APIC - excess over par of preferred stock 225,000
Cash 225,000
2/20 Cash (9,000 shares x P390) 3,510,000
Common stock (9,000 shares x P10) 90,000
APIC - excess over par of common stock 3,420,000

APIC - excess over par of common stock 75,000

Cash 75,000

5/30 Subscriptions receivable (12,000 shares x P450) 5,400,000

Subscribed common stock (12,000 shares x P10) 120,000
APIC - excess over par of common stock 5,280,000
8/30 Cash 720,000
Common stock (1,800 shares x P10) 18,000
APIC - excess over par of common stock 702,000
Building 1,530,000
Common stock (2,100 shares x P10) 21,000
APIC - excess over par of common [(2,100 sh x P400*)-21,000] 819,000
Preferred stock (4,200 shares x P100) 420,000
APIC - excess over par of preferred stock (balance) 270,000
'* (P720,000/1,800 shares)
11/07 Cash 4,200,000
Subscriptions receivable 4,200,000
Subscribed common stock (12,000 shares x P10 x 1/2) 60,000
Common stock 60,000
12/01 Retained earnings 870,000
Dividends payable - Preferred 342,000 *
Dividends payable - Common 528,000 **
* (P3,420,000/P100 x P10)
** {[(P204,000 + P60,000)/P10] x P20}
12/31 Income summary 1,800,000
Retained earnings 1,800,000
AP-5801Q
PROBLEM NO. 2 - Perseverance Corporation
2005
12.31.04 Transactions 12.31.05

Preferred stock 600,000 600,000 1 D

Common stock 1,800,000 (2) 216,000 2,016,000 2 B
Additional paid in capital 300,000 (1) 9,000 864,000 3 B
(2) 54,000
(7) 450,000
(7) 51,000
Retained earnings - appropriated 198,000 (5) 60,000 303,000 4 B
(9) 45,000
Retained earnings - unappropriated 2,250,000 (2) (270,000) 2,578,500 5 C
(3) (57,000)
(5) (60,000)
(7) (501,000)
(8) 1,261,500
(9) (45,000)
Treasury stock - preferred (90,000) (1) 45,000 (45,000) 6 C

5,058,000 6,316,500 7 A

Journal entries for 2005 affecting stockholders' equity accounts:

(1) Cash (3,000 shares x P18) 54,000
Treasury stock-preferred [(90,000/ 6,000 shares) x 3,000] 45,000
APIC - from treasury stock transactions 9,000
(2) Retained earnings - unappropriated 270,000
Common stock (54,000 shares x P4) 216,000
APIC - excess over par 54,000
Preferred stock issued, 12/31/05 60,000
Treasury shares 12/31/05 (6,000)
Number of shares issued and outstanding 54,000
Dividends per share 5.00
Total dividends 270,000
(3) Retained earnings - unappropriated 57,000
Dividends payable 57,000
Preferred stock issued 12/01/05 60,000
Treasury shares 12/01/05 (6,000 - 3,000) (3,000)
Number of shares issued and outstanding 57,000
Dividends per share 1.00
Total dividends 57,000
(4)
(5) Retained earnings - unappropriated 60,000
Retained earnings - appropriated 60,000
(6) See number 8
(7) Retained earnings - unappropriated 501,000
APIC - donated capital 450,000
APIC - from treasury stock transactions 51,000

(8) Income summary 1,261,500

Retained earnings - unappropriated 1,261,500
Net income per company's records 1,297,500
Fire loss charged to reserve for fire insurance (30,000)
Estimated fire clean up cost (6,000)
Adjusted net income 1,261,500

(9) Retained earnings - unappropriated 45,000

Retained earnings - appropriated for TS 45,000
PROBLEM NO. 3 - Willpower Corporation
2005
12.31.04 Transactions 12.31.05

Preferred stock 4,050,000 1 810,000 4,698,000 (1) C

3 (162,000)
Common stock 9,000,000 2 4,725,000 13,725,000 (2) D
Additional paid in capital 4,320,000 1 270,000 6,814,800 (3) D
2 1,890,000
3 (43,200)
6 135,000
7 243,000
Retained earnings - appropriated - 10 540,000 540,000
Retained earnings - unappropriated 1,395,000 3 (37,800) 1,711,440 (4) B
8 (1,625,760)
9 2,520,000
10 (540,000)
Treasury stock - 4 (1,080,000) (540,000)
6 540,000
18,765,000 26,949,240 (5) A

Journal entries for 2005

1) Cash (27,000 shares x P40) 1,080,000
Preferred stock (27,000 shares x P30) 810,000
APIC - premium on preferred stock 270,000
2) Cash (94,500 shares x P70) 6,615,000
Common stock (94,500 shares x P50) 4,725,000
APIC - premium on common stock 1,890,000
3) Preferred stock (5,400 shares x P30) 162,000
APIC - premium on PS (P1,080,000 x 5,400/135,000 43,200
Retained earnings 37,800
Cash (5,400 shares x P45) 243,000
4) Treasury stock-CS (13,500 shares x P80) 1,080,000
Cash 1,080,000
5) Memo entry

6) Cash (13,500 shares x P50) 675,000

Treasury stock (P1,080,000 x 1/2) 540,000
APIC - from treasury stock transactions 135,000

7) Memo entry

Cash (9,000 shares x 1/2 x P54) 243,000

APIC - Donated capital 243,000
8) Retained earnings 1,625,760
Cash 1,625,760
Common shares issued and outstanding, 1/1/05 180,000
2) Shares issued 94,500
4) Purchase of treasury shares (13,500)
261,000
5) Stock split 261,000
6) Reissuance of treasury shares 13,500
7) Donated shares (9,000)
Reissuance of donated sh 4,500
Common shares issued and outstanding 531,000
x Dividend per share 2
Dividends to common 1,062,000
Dividends to preferred (PS balance x 12%) 563,760
Total 1,625,760
9) Income summary 2,520,000
Retained earnings 2,520,000
10) Retained earnings 540,000
Retained earnings - appropriated (cost of TS) 540,000
PROBLEM NO. 4 - Grit Corporation
04-05
6.1.04 Transactions 5.31.05

Preferred stock - 2 30,000,000 -

4 (30,000,000)
Common stock - 2 2,100,000 5,100,000 1 C
4 3,000,000
Subscribed PS - 1 30,000,000 -
2 (30,000,000)
Subsriprions receivable-PS - 1 (31,500,000) -
1 9,450,000
2 22,050,000
Subscribed CS - 1 2,250,000 -
2 (2,100,000)
2 (150,000)
Subsriprions receivable-CS - 1 (23,400,000) (0)
1 7,020,000
2 15,288,000
2 1,092,000
Additional paid in capital - 1 22,650,000 48,340,000 2 B
2 (1,410,000)
4 (1,500,000)
4 28,500,000
5 100,000
Total contributed capital - 53,440,000 3 B

Retained earnings - 6 830,000 830,000

Treasury stock - common - 3 (4,200,000) -

5 4,200,000
- 54,270,000 4 A

Journal entries for 2004-2005 affecting stockholders' equity accounts:

1 Subscriptions receivable - PS (300,000 x P105) 31,500,000

Subscriptions receivable - CS (900,000 x P26) 23,400,000
Subscribed PS (300,000 x P100) 30,000,000
Subscribed CS (900,000 x P2.5) 2,250,000
APIC 22,650,000
Cash 16,470,000
Subscriptions receivable - PS (300,000 x P105 x 30%) 9,450,000
Subscriptions receivable - CS (900,000 x P26 x 30%) 7,020,000

2 Cash 37,338,000
Subscriptions receivable - PS (300,000 x P105 x 70%) 22,050,000
Subscriptions receivable - CS [(900,000-60,000) x P26 x 70%] 15,288,000
Subscribed PS (300,000 x P100) 30,000,000
Subscribed CS [(900,000-60,000) x P2.5] 2,100,000
Preferred stock 30,000,000
Common stock 2,100,000
Subscribed CS (60,000 x P2.5) 150,000
APIC [60,000 x (P26-P2.5)] 1,410,000
Subscriptions receivable - CS (60,000 x P26 x 70%) 1,092,000
Cash (60,000 x P26 x 30%) 468,000
3 Treasury stock 4,200,000
Cash (150,000 shares x P28) 4,200,000
4 Preferred stock 30,000,000
APIC [300,000 x (P105-P100)] 1,500,000
Common stock (300,000 x 4 x P2.5) 3,000,000
APIC 28,500,000
5 Machinery 4,300,000
Treasury stock 4,200,000
APIC 100,000
6 Memo entry.
7 Income summary 830,000
Retained earnings 830,000
PROBLEM NO. 5 - Stamina Farms
Requirement No. 1 - A
Capital stock (40,000 x P100) 4,000,000
Retained earnings: 1,600,000
Beginning 1,400,000
Net income for 2005 3,000,000
Total stockholders equity 7,000,000
Divide by number of shares outstanding 40,000
Book value per share 175

Requirement No. 2 - A
Value of the shares to be surrendered (6,000 x P175) 1,050,000
Amount of cash shortage 600,000
Amount to be paid to the treasurer 450,000
Requirement No. 3 - A
Retained earnings before dividends 3,000,000
Dividends to remaining stockholders (value of shares surrendered) (1,050,000)
Retained earnings after dividends 1,950,000