Name: ________________________________________Date: ________________________

Year, Section and Class Time: _____________________ Instructor: _____________________

ANSWER SUMMARY TABLE

1 11 21 31
2 12 22 32
3 13 23 33
4 14 24 34
5 15 25 35
6 16 26
7 17 27
8 18 28
9 19 29
10 20 30

REMINDERS:
1. Do not talk to your seatmates during examination. If you have any question or problem,
ask the teacher/proctor.
2. Use ball pens for your final answers and write legibly.
3. When you are finished, pass the test papers and leave the room quietly. Do not stay inside
the room.

PROBLEM NO. 1
Your audit client, Cruz, Inc., is a public enterprise whose shares are traded in the over-the-counter
market. At December 31, 2018, Cruz had 3,000,000 authorized shares of P10 par value Ordinary
share capital, of which 1,000,000 shares were issued and outstanding. The stockholders’ equity
accounts at December 31, 2018 had a following balances.
Ordinary share capital P10,000,000
Share premium 3,750,000
Retained earnings 3,250,000

Transactions during 2019 and other information relating to the stockholders’ equity accounts were
as follows:
 On January 5, 2019, Cruz issued at P54 per share, 50,000 shares of P50 par value, 9% cumulative
convertible Preference share capital. Each share of Preference share capital is convertible into
two shares of Ordinary share capital. Cruz had 300,000 authorized shares of Preference share
capital. The Preference share capital has a liquidation value equal to its par value.
 On February 1, 2019, Cruz reacquired 10,000 shares of its Ordinary share capital for P16 per
share.
 On April 30, 2019, Cruz sold 250,000 shares (previously unissued) of P10 par value Ordinary
share capital to the public at P17 per share.
 On June 18, 2019, Cruz declared a cash dividend of P1 per share of Ordinary share capital,
payable on July 12, 2019, to stockholders of record on July 1, 2019.
 On November 10, 2019, Cruz sold 5,000 shares of treasury stock for P21 per share.
 On December 14, 2019, Cruz declared the yearly cash dividend on Preference share capital,
payable on January 14, 2006, to stockholders of record on December 31, 2019.
 On January 20, 2006, before the books were closed for 2019, Cruz became aware that the ending
inventories at December 31, 2018 were understated by P150,000 (after tax effect on 2018 net
income was P90,000). The appropriate correction entry was recorded the same day.
 After correcting the beginning inventory, net income for 2019 was P2,250,00.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Share premium

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 a. P5,700,000 b. P5,500,000 c. P5,525,000 d. P5,725,000
2. Unappropriated retained earnings
a. P4,125,000 b. P4,045,000 c. P4,035,000 d. P3,955,000
3. Treasury stock
a. P160,000 b. P55,000 c. P80,000 d. P50,000
4. Total stockholders’ equity
a. P22,190,000 c. P24,690,000
b. P24,770,000 d. P24,840,000
5. Book value per share of Ordinary share capital
a. P17.89 b. P17.71 c. P17.82 d. P15.41

Suggested Solution:

Questions No. 1 to 4
Preference share capital P 2,500,000
Ordinary share capital 12,500,000
Additional paid in capital 5,725,000 (1)
Retained earnings:
Appropriated P 80,000
Unappropriated 4,045,000 4,125,000 (2)
Treasury stock ( 80,000) (3)
Total SHE, 12/31/05 P24,770,000 (4)
Prepare T-accounts for each component of the stockholders’ equity. Place the balances as of January
1, 2019, journalize the transactions affecting the SHE accounts, post the entries to the affected
accounts, then extract the balances.
Journal entries affecting the stockholders equity accounts during 2019:
1/15 Cash (50,000 shares x P54) P2,700,000
Preference share capital (50,000 shares x P50) P2,500,000
APIC - excess over par of Preference share capital 200,000
2/1 Treasury stock (10,000 x P16) P 160,000
Cash P 160,000
4/30 Cash (250,000 shares x P17) P4,250,000
Ordinary share capital (250,000 shares x P10) P2,500,000
APIC - excess over par of Ordinary share capital 1,750,000
6/18 Retained earnings P1,240,000*
Dividends payable - common P1,240,000
* [(1,000,000 + 250,000 – 10,000) x P1]
11/10 Cash (5,000 shares x P21) P 105,000
Treasury stock (5,000 shares x P16) P 80,000
APIC - from treasury stock transactions 25,000
12/14 Retained earnings (2,500,000 x 9%) P 225,000
Dividends payable - preferred P225,000
12/31 Inventory, 1/1/05 P 150,000
Retained earnings P 90,000
Income tax payable 60,000
12/31 Income summary P2,250,000
Retained earnings P2,250,000
12/31 Retained earnings P 80,000
Retained earnings - appropriated (cost of TS) P 80,000

Question No. 5
Total stockholders' equity (see no. 4) P24,770,000
Less liquidation value of Preference share capital 2,500,000
Ordinary share capitalholders' equity 22,270,000
Divide by common shares outstanding 1,245,000
Book value per share of Ordinary share capital P 17.89

Answers: 1) D; 2) B; 3) C; 4) B, 5) A

PROBLEM NO. 2

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The stockholders’ equity section of the Liwanag Inc. showed the following data on December 31, 2018:
Ordinary share capital, P3 par, 300,000 shares authorized, 250,000 shares issued and outstanding,
P750,000; Paid-in capital in excess of par, P7,050,000; Share premium from stock options, P150,000;
Retained earnings, P480,000. The stock options were granted to key executives and provided them
the right to acquire 30,000 shares of Ordinary share capital at P35 per share. The stock was selling
at P40 at the time the options were granted.

The following transactions occurred during 2019:

Feb. 1 Key executives exercised 4,500 options outstanding at
December 31, 2018. 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 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 6,000 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.
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 2019 was P250,500.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Ordinary share capital
a. P777,300 b. P833,850 c. P848,700 d. P850,050
2. Total Share premium
a. P7,522,200 b. P8,219,650 c. P8,402,800 d. P8,419,450
3. Total contributed capital
a. P8,299,500 b. P9,269,500 c. P9,053,500 d. P9,251,500
4. Retained earnings
a. P580,500 b. P730,500 c. P858,000 d. P654,150
5. Total stockholders’ equity
a. P10,000,000 b. P9,030,000 c. P9,784,000 d. P9,982,000

Suggested Solution:
Questions No. 1 to 5
Ordinary share capital P 850,050 (1)
Additional paid in capital 8,419,450 (2)
Contributed capital 9,269,500 (3)
Retained earnings 730,500 (4)
Total SHE, 12/31/05 P10,000,000 (5)
Note: Follow the same approach in Problem no. 1.
Journal entries affecting the stockholders equity accounts during 2019:
2/1 Cash (4,500 options x P35) P 157,500
APIC-stock options (4,500 x P5) 22,500
Ordinary share capital (4,500 shares x P3) P 13,500
APIC - excess over par 166,500
4/1 Cash P2,000,000
Bond discount [P2,000,000-(2,000xP996)] 8,000
Bonds payable P2,000,000
APIC-stock 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

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 Ordinary share capital (24,850 shares x P3) P 74,550
APIC - excess over par 919,450
10/1 Cash (2,000 x 2 x P40) P 160,000
APIC-stock warrants 8,000
Ordinary share capital (2,000 shares x 2 x P3) P 12,000
APIC - excess over par 156,000
12/1 APIC-stock options [P150,000-(4,500xP5)] P 127,500
APIC - expired stock options P 127,500
12/31 Income summary P 250,500
Retained earnings P250,500
Answers: 1) D; 2) D; 3) B; 4) B, 5) A

PROBLEM NO. 3
Tabtab Corporation began operations on January 1, 2019. The company was authorized to issue
60,000 shares of P10 par value Ordinary share capital and 120,000 shares of 10%, P100 par value
convertible Preference share capital.

In connection with your audit of the company’s financial statements, you noted the following
transactions involving stockholders’ equity during 2019:
Jan. 1 Issued 1,500 shares of Ordinary share capital 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 shares of convertible Preference share capital at
P150 per share. Each share can be converted to five shares of
Ordinary share capital. The corporation paid P225,000 to an
agent for selling the shares.
Feb. 15 Sold 9,000 shares of Ordinary share capital at P390 per share.
The corporation paid issue costs of P75,000.
May 30 Received subscriptions for 12,000 shares of Ordinary share
capital at P450 per share.
Aug. 30 Issued 2,100 shares of Ordinary share capital and 4,200
shares of Preference share capital 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 Ordinary
share capital 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. The balance is collectible next
year.
Dec. 1 Declared a cash dividend of P10 per share on Preference share
capital, payable on December 31 to stockholders of record on
December 15, and P20 per share cash dividend on Ordinary
share capital, payable on January 15, 2006 to stockholders of
record on December 15.
Dec. 31 Paid the Preference share capital 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, 2019:
1. Ordinary share capital
a. P204,000 b. P264,000 c. P144,000 d. P186,000
2. Paid-in capital in excess of par value of Preference share capital
a. P1,500,000 b. P1,275,000 c. P1,545,000 d. P1,860,000
3. Paid-in capital in excess of par value of Ordinary share capital
a. P8,211,000 c. P11,121,000

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 b. P10,851,000 d. P10,032,000
4. Retained earnings
a. P1,050,000 b. P930,000 c. P1,170,000 d. P1,458,000
5. Total stockholders’ equity
a. P17,295,000 c. P15,810,000
b. P16,950,000 d. P17,010,000

Suggested Solution:

Questions No. 1 to 5
Preference share capital P3,420,000
Ordinary share capital 204,000 (1)
Subscribed common 60,000
Additional paid in capital - preferred 1,545,000 (2)
Additional paid in capital - common 10,851,000 (3)
Retained earnings 930,000 (4)
Total SHE, 12/31/05 P17,010,000 (5)
Journal entries affecting the stockholders equity accounts during 2019:
1/1 Equipment P 510,000
Organization expenses 210,000
Ordinary share capital (1,500 shares x P10) P 15,000
APIC - excess over par of CS 705,000
1/31 Cash (30,000 shares x P150) P4,500,000
Preference share capital (30,000 shares x P100) P3,000,000
APIC - excess over par of PS 1,500,000
APIC - excess over par of PS P 225,000
Cash P 225,000

2/20 Cash (9,000 shares x P390) P3,510,000

Ordinary share capital (9,000 shares x P10) P 90,000
APIC - excess over par of CS 3,420,000
APIC - excess over par of CS P 75,000
Cash P 75,000
5/30 Subscriptions rec. (12,000 sh. x P450) P5,400,000
Subscribed Ordinary share capital (12,000 shares x P10) P 120,000
APIC - excess over par of CS 5,280,000
8/30 Cash P 720,000
Ordinary share capital (1,800 shares x P10) P 18,000
APIC - excess over par of CS 702,000
Building P1,530,000
Ordinary share capital (2,100 shares x P10) P 21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000] P 819,000
Preference share capital (4,200 shares x P100) P 420,000
APIC - excess over par of PS (balance) P 270,000
* (P720,000/1,800 shares)
11/07 Cash P4,200,000
Subscriptions receivable P4,200,000
Subscribed Ordinary share capital (120,000 x 1/2) P60,000
Ordinary share capital P 60,000
12/01 Retained earnings P 870,000
Dividends payable - Preferred P 342,000
Dividends payable – Common 528,000
Preferred - (P3,420,000/P100 x P10)
Common - {[(P204,000 + P60,000)/P10] x P20}
12/31 Income summary P1,800,000
Retained earnings P1,800,000

Answers: 1) A; 2) C; 3) B; 4) B, 5) D

PROBLEM NO. 4

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The Sim Corporation has requested you to audit its financial statements for the year 2019. During
your audit, Sim presented to you its balance sheet as of December 31, 2018 containing the following
capital 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 P 600,000
Ordinary share capital, par value P4; 600,000 shares
authorized, of which 450,000 are issued and 1,800,000
outstanding
Additional paid in capital (P5 per share on Preference share
capital issued in 2014) 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
Total stockholders’ equity P6,000,000

Additional information:
1) Of the Preference share capital, 3,000 shares were sold for P18 per share on August 30, 2019.
Sim credited the proceeds to the Preference share capital account. The treasury shares as of
December 31, 2018 were acquired in one purchase in 2018.
2) The Preference share capital carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 2018, unpaid cumulative dividends amounted to P5 per share.
The entire accumulation was liquidated in June, 2019, by issuing to the Preference share
capitalholders 54,000 shares of Ordinary share capital.
3) A cash dividend of P1 per share was declared on December 1, 2019 to Preference share
capitalholders of record December 15, 2019. The dividend is payable on January 15, 2006.
4) At December 31, 2019, the Allowance for Doubtful Accounts Receivable and Reserve for
Depreciation had balances of P25,000 and P1,050,000, respectively.
5) On March 1, 2019, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings
was debited.
6) On December 31, 2019, 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, 2018 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
8) Net income for the year ended December 31, 2019 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, 2019. (Disregard tax implications)
1. Total Share premium
a. P414,000 b. P810,000 c. P804,000 d. P864,000

2. Retained earnings - Appropriated

a. P258,000 b. P228,000 c. P303,000 d. P0
3. Retained earnings - Unappropriated
a. P2,677,500 b. P2,578,500 c. P2,626,500 d. P2,623,500
4. Treasury stock
a. P45,000 b. P36,000 c. P90,000 d. P0
5. Total stockholders’ equity
a. P3,700,500 b. P6,316,500 c. P5,812,500 d. P6,319,500

Suggested Solution:

Questions No. 1 to 5
Preference share capital P 600,000

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 Ordinary share capital 2,106,000
Additional paid in capital 864,000 (1)
Retained earnings - Appropriated 303,000 (2)
Retained earnings - Unappropriated 2,578,500 (3)
Treasury stock ( 45,000) (4)
Total SHE, 12/31/05 P6,316,500 (5)
Journal entries affecting the stockholders equity accounts during 2019:
1) Cash (3,000 shares x P18) P 54,000
Treasury stock-preferred
[(90,000/ 6,000 shares) x 3,000] P 45,000
APIC - from treasury stock transactions 9,000
2) Retained earnings P 270,000*
Ordinary share capital (54,000 shares x P4) P 216,000
APIC - excess over par 54,000
* [(60,000 – 6,000) x P5]
3) Retained earnings P 57,000**
Dividends payable P 57,000
** [(60,000 – 3,000) x P1]
4) Ignor.
5) Retained earnings P 60,000
Retained earnings - appropriated P 60,000
6) See no. 8.
7) Retained earnings P 501,000
APIC - donated capital P 450,000
APIC - from treasury stock transactions 51,000
8) Income summary P1,261,500***
Retained earnings P1,261,500
Net income per company's records P1,297,500
Fire loss erroneously charged to reserve for fire insurance ( 30,000)
Estimated fire clean up cost ( 6,000)
Adjusted net income P1,261,500
9) Retained earnings P 45,000
Retained earnings - appropriated (cost of TS) P 45,000

Answers: 1) D; 2) C; 3) B; 4) A, 5) B

PROBLEM NO. 5
The stockholders equity of Suarez Corporation showed the following data on December 31, 2018:
12% Preference share capital, P30 par, 135,000
shares P4,050,000
issued and outstanding
Ordinary share capital, P50 par, 180,000 shares
issued 9,000,000
and outstanding
Premium on Preference share capital 1,080,000
Premium on Ordinary share capital 3,240,000
Retained earnings 1,395,000

The 2019 transactions of the company affecting its stockholders’ equity are summarized
chronologically as follows:
1. Issued 27,000 shares of Preference share capital at P40.
2. Issued 94,500 shares of Ordinary share capital at P70.
3. Retired 5,400 shares of Preference share capital at P45.
4. Purchased 13,500 shares of its Ordinary share capital at P80.
5. Split Ordinary share capital 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 Ordinary share capital 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 share capital at P2 per share
and on the Preference share capital at the preferred rate.
9. Net income for the year was P2,520,000.

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QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Preference share capital
a. P4,617,000 b. P4,968,000 c. P4,698,000 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. P6,679,800 c. P6,858,000 d. P6,814,800
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 c. P26,958,960
b. P26,922,240 d. P26,940,240

Suggested Solution:

Questions No. 1 to 5
Preference share capital P 4,698,000 (1)
Ordinary share capital 13,725,000 (2)
Additional paid in capital 6,814,800 (3)
Retained earnings - Appropriated 540,000
Retained earnings - Unappropriated 1,711,440 (4)
Treasury stock ( 540,000)
Total SHE, 12/31/05 P26,949,240 (5)
Journal entries affecting the stockholders equity accounts during 2019:
1) Cash (27,000 shares x P40) P1,080,000
Preference share capital (27,000 shares x P30) P 810,000
APIC - premium on Preference share capital 270,000
2) Cash (94,500 shares x P70) P6,615,000
Ordinary share capital (94,500 shares x P50) P4,725,000
APIC - premium on Ordinary share capital 1,890,000
3) Preference share capital (5,400 shares x P30) P 162,000
APIC - premium on PS (P1,080,000x5.4/135) 43,200
Retained earnings 37,800
Cash (5,400 shares x P45) P 243,000
4) Treasury stock-CS (13,500 shares x P80) P1,080,000
Cash P1,080,000
5) Memo entry.

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

Treasury stock (P1,080,000 x 1/2) P 540,000
APIC - from treasury stock transactions 135,000
7) Memo entry.
Cash (9,000 shares x 1/2 x P54) P 243,000
APIC - Donated capital P 243,000
8) Retained earnings P1,625,760
Cash P1,625,760
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 shares 4,500
Common shares issued and outstanding,12/31/05 531,000
x Dividend per share P 2
Dividends to common P1,062,000
Dividends to preferred (P4,698,000 x 12%) 563,760
Total P1,625,760

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 9) Income summary P2,520,000
Retained earnings P2,520,000
10) Retained earnings P 540,000
Retained earnings - appropriated (cost of TS) P 540,000

Answers: 1) C; 2) D; 3) D; 4) B, 5) A

PROBLEM NO. 6
You gathered the following information pertaining to the stockholders’ equity section of the Maranan
Corporation in connection with your audit of the company’s financial statements for 2019:

Ordinary share capital, P1 par value; authorized

1,500,000 shares; issued 750,000 shares;
outstanding 700,000 shares P 700,000
Share premium:
Excess of par 7,000,000
From treasury stock 100,000
Total paid-in capital P7,800,000
Unappropriated retained earnings 4,050,000
Total stockholders’ equity P11,850,000

All of the outstanding Ordinary share capital and treasury stock were originally issued in 2016 for
P11 per share. The treasury stock is Ordinary share capital reacquired on March 31, 2018. Maranan
uses the par value method of accounting for treasury stock.

During 2019, the following events or transactions occurred relating to Maranan’s stockholders equity:
Feb. 12 Issued 200,000 shares of unissued Ordinary share capital for
P12.50 per share.
June 15 Declared cash dividend of P0.20 per share to stockholders of
record on April 1, 2019 and payable on April 15, 2019. This
was the first dividend ever declared by Maranan.
Sept. 20 Maranan’s president retired, Maranan purchased from the
retiring president 50,000 shares of Maranan’s Ordinary share
capital for P13 per share, which was equal to market value on
this date. This stock was cancelled.
Dec. 15 Declared a cash dividend of P0.20 per share to stockholders of
record on January 2, 2006 and payable on January 15, 2006.

Maranan is being used by two separate parties for patent infringements. Maranan management and
outside legal counsel share the following opinions regarding to these suits:
Suit Likelihood of losing the suit Estimated loss
#1 Reasonably possible P300,000
#2 Probable 200,000

QUESTIONS:
Based on the above and the result of your audit, answer the following:
1. The issuance of 200,000 shares of Ordinary share capital on February 12, 2019 caused Maranan’s
in Share premium in excess of par increase by
a. P200,000 b. P2,300,000 c. P2,500,000 d. P0
2. The retirement of 50,000 shares of Ordinary share capital on September 20, 2019 caused
Maranan’s Share premium in excess of par to decrease by
a. P50,000 b. P500,000 c. P600,000 d. P0
3. Maranan wants to appropriate retained earnings for all loss contingencies that are not properly
accruable by a charged to expense. How much of Maranan loss contingencies should be
appropriated by charged to unappropriated retained earnings?
a. P300,000 b. P500,000 c. P200,000 d. P0
4. How much cash dividends should Maranan charge against unappropriated retained earnings in
2019?
a. P350,000 b. P370,000 c. P180,000 d. P170,000
5. How much should Maranan show in note to financial statement as a restriction on retained
earnings because of the acquisition of treasury stock?
a. P100,000 b. P600,000 c. P450,000 d. P650,000

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Suggested Solution:

Question No. 1
Proceeds from issuance (200,000 x P12.50) P2,500,000
Less par value of Ordinary share capital (200,000 200,000
shares x P1)
Increase in APIC P2,300,000

Question No. 2
Journal entry to record the retirement:
Ordinary share capital (50,000 shares x P1) P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
Unappropriated retained earnings 100,000
Cash (50,000 shares x P13) P 650,000

Question No. 3
Loss contingency that is not properly accruable by a charged to expense:
Suit # 1 – Reasonably possible P300,000

Question No. 4
Dividends declared, 6/15/05 P2,500,000
[(700,000 + 200,000) x P0.20]
Dividends declared, 12/15/05
[(700,000 + 200,000 - 50,000) x P0.20] 200,000
Total cash dividends P2,300,000

Question No. 5
Reconstruction of the entry made to record the acquisition of treasury stock:
Treasury stock (50,000 shares x P1) P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
APIC - from TS transactions P 100,000
Cash (balancing figure) 450,000

Answers: 1) B; 2) B; 3) A; 4) A, 5) C

PROBLEM NO. 7
The MEJIA Company engaged you in 2019 to examine its books and records and to make whatever
adjustments are necessary.

Your examination disclosed following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:
RETAINED EARNINGS

Date Particulars Debit Credit Balance

2017
Jan. 1 Balance 580,000
Dec. 31 Net income for the year 310,000 890,000
2018
Jan. 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of 90,000 840,000
par
Aug. 30 Gain on retirement of
Preference share capital
at less than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500
2019
Jan. 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 434,000

b. The company failed to properly recognize accruals and prepayments. Selected accounts revealed
the following information:

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 2016 2017 2018 2019
1. Prepaid expenses P8,500 P6,200 P7,400 P9,500
2. Accrued expenses 5,400 7,300 8,700 9,000
3. Unearned income 6,900 7,800 8,900 9,600
4. Accrued income 4,700 5,600 6,200 7,800

c. Dividends had been declared on December 31 in 2017 and 2018 but had not been entered in the
books until paid.

d. The company purchased a machine worth P270,000 on April 30, 2016. The company charged the
purchase to expense. The machine has an estimated useful life of 3 years. The company uses
the straight line method and residual values are deemed immaterial.

e. The company received a transportation equipment as donation from one of its stockholders on
September 30, 2018. The equipment was used to deliver goods to customers. The equipment
costs P750,000 and has a remaining life of 3 years on the date of donation. The equipment has a
fair value of P240,000 and P30,000 was incurred for registering the transfer of ownership. The
company did not record the donation on its books. The expenses paid related to the donated
equipment were charged to expense.

f. The physical inventory of merchandise had been understated by P64,000 and by P44,500 at the
end of 2017 and 2019, respectively.

g. The merchandise inventories at the end of 2018 and 2019 did not include merchandise that was
then in transit shipped FOB shipping point. These shipments of P43,400 and P32,600 were
recorded as purchases in January 2019 and 2006, respectively.

QUESTIONS:
Based on the above audit findings, the adjusted balances of the following are: (Disregard tax
implications)
1. Retained earnings, 12/31/02
a. P580,900 b. P790,900 c. P850,900 d. P760,900
2. Net income for 2017
a. P369,800 b. P279,800 c. P215,800 d. P373,100
3. Retained earnings, 12/31/03
a. P976,700 b. P930,700 c. P860,700 d. P720,700

4. Net loss for 2018

a. P269,700 b. P349,700 c. P379,700 d. P359,700
5. Retained earnings, 12/31/04
a. P481,000 b. P341,000 c. P411,000 d. P241,000
6. Net loss for 2019
a. P118,300 b. P148,300 c. P228,300 d. P178,300
7. Retained earnings, 12/31/05
a. P302,700 b. P252,700 c. P362,700 d. P332,700

Suggested Solution:

Questions No. 1 to 7
RE NI NL NL
2016 2017 2018 2019
Unadjusted balances P580,000 P310,000 (P205,000) (P165,500)
(b.1) Prepaid expense
2016 8,500 (8,500)
2017 6,200 (6,200)
2018 7,400 (7,400)
2019 9,500
(b.2) Accrued expense
2016 (5,400) 5,400
2017 (7,300) 7,300
2018 (8,700) 8,700
2019 (9,000)
(b.3) Unearned income
2016 (6,900) 6,900
2017 (7,800) 7,800

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 RE NI NL NL
2016 2017 2018 2019
2018 (8,900) 8,900
2019 (9,600)
(b.4) Accrued income
2016 4,700 (4,700)
2017 5,600 (5,600)
2018 6,200 (6,200)
2019 7,800
(d) Purchase of
machinery, expensed
on April 30, 2016 270,000
Unrecorded depr. (60,000) (90,000) (90,000) (30,000)
(e) Unrecorded transpo
equipm't. received as
donation on 9/30/04
Expenses paid 30,000
Unrecorded depr. (20,000) (80,000)
(f) Understatement of
inventory
2017 64,000 (64,000)
2019 44,500
Understatement of
inventory and
purchases
2018 43,400 (43,400)
(43,400) 43,400
2019 32,600
. . . (32,600)
Unadjusted balances P790,900 P279,800 (P349,700) (P228,300)

Retained earnings, 1/1/03, as adjusted P 790,900

Net income for 2017 279,800
Dividends declared ( 140,000)
Retained earnings, 12/31/03 930,700
Net loss for 2018 ( 349,700)
Dividends declared ( 100,000)
Retained earnings, 12/31/04 481,000
Net loss for 2019 ( 228,300)
Retained earnings, 12/31/05 P 252,700

Answers: 1) B; 2) B; 3) B; 4) B, 5) A; 6) C; 7) B

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