Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

Accounting Review VI - Auditing Problem (ACCTG100G) AP - 02

AUDIT OF SHAREHOLDERS’ EQUITY
Problem I
The shareholders’ equity section of INA Computer Systems Corporation’s balance sheet as of December 31, 2016, is as follows:
Ordinary share capital (P5 par, 250,000 shares authorized
137,500 issued and outstanding) P687,500
Share premium 275,000
Total Paid in Capital 962,500
Unappropriated retained earnings P667,500
Appropriated retained earnings 250,000
Total retained earnings 917,500
Total shareholders’ equity P1,880,000
INA had the following shareholders’ equity transaction during 2017:
Jan. 15 Completed the building renovation for which P250,000 of retained earnings had been restricted. Paid
contractor P242,500, all of which is capitalized.

Mar. 3 Issued 50,000 additional shares of the ordinary share capital for P8 per share.

May 18 Declared a dividend of P1.50 per share to be paid on July 31, 2017, to stockholders of record on June
31, 2017.

June 19 Approved additional building renovation to be fund internally. The estimated cost of the project is
P200,000, and retained earnings are to be restricted for that amount.

Jul 31 Paid the dividend.

Nov 12 Declared a property dividend to be paid on January 5, 20188, to shareholders of record on November 30,
2017. The dividend is to consist of equipment which has a carrying amount of P120,000 and a fair value
of P157,500 on November 12.

Dec. 31 Reported of net income on December 31, 2017 (before recognition of impairment loss on the equipment
declared as property dividend) P442,500. The equipment’s fair value less cost to distribute on December
31 is P110,000.
Based on the foregoing, determine the following:
1. Ordinary share capital
A. P1,095,000 B. P1,087,500 C. P937,500 D. P687,500
2. Share premium
A. P425,000 B. P125,000 C. P275,000 D. P260,000
3. Unappropriated retained earnings
A. P758,750 B. P711,250 C. P748,750 D. P721,250
4. Total shareholders’ equity
A. P2,273,750 B. P2,311,250 C. P2,283,750 D. P2,321,250

Problem II
You were engaged by CAPSULE Corporation, a publicly held company whose shares are traded in the Philippine Stock
Exchange, to conduct an audit of its 2017 financial statements. You were told by the company’s controller that there were
numerous equity transactions that took place in 2017. The shareholders’ equity accounts at December 31, 2016, had the following
balances
Share Capital - Preference, P100 par value, 6% cumulative;
15,000 shares authorized; 9,000 shares issued
and outstanding P 900,000
Share Capital - Ordinary, P1 par value, 900,000 shares authorized;
600,000 shares issued and outstanding 600,000
Share premium 1,200,000
Retained earnings 3,300,000
Total shareholders’ equity P6,000,000
You were able to summarize the following transactions during 2017 and other information relating to the shareholders’ equity in
your working paper as follows:
• January 6, 2017 – Issued 22,500 shares of common stock in exchange for land. On the date issued, the shares had a
market price of P16.50 per share. The land had a carrying value of P210,000, and an assessed value for property taxes
of P245,000.
 • January 31, 2017 – Sold 1,200, P1,000, 12% bonds due January 31, 2027, at 98 with one detachable stock warrant
attached to each bond. Interest is payable annually on January 31. The fair value of the bonds without share warrants is
95. The detachable warrants have a fair value of P50 each and expire on January 31, 2018. Each warrant entitles the
holder to purchase 10 ordinary shares at P10 per share.
• February 22, 2017 – Purchased 7,500 shares of its own ordinary shares to be held as treasury shares for P24 per share.
• February 28, 2017 – Subscriptions for 21,000 ordinary shares received at P26 per share, payable, 50% down and the
balance on March 15.
• March 15, 2017 - The balance due on 18,000 ordinary shares was received and those shares were issued accordingly.
The subscriber who defaulted on the 3,000 remaining shares forfeited the down payment in accordance with the
subscription agreement.
• August 30, 2017 – Reissued 3,000 shares of treasury stock at P20 per share.
• September 14, 2017 – There were 945 warrants detached from the bonds and exercised.
• November 30, 2017 – Declared a cash dividend of P2 per share to all ordinary shareholders of record December 15,
2017. The dividend was paid on December 30, 2017.
• December 15, 2017 – Declared the required annual cash dividends on preferred stock for 2017. The dividend was paid
on January 15, 2018.
• January 8, 2018 – Before closing the accounting records for 2017, CAPSULE became aware that no depreciation had
been recorded for 2016 for a machine purchased on July 1, 2016. The machine was properly capitalized at P480,000
and had an estimated useful life of eight years when purchase. The appropriate correcting entry was recorded on the
same day.
• Adjusted net income for 2017 was P2,585,650.
Based on the foregoing and the result of your audit, answer the following:
1. Share capital – ordinary at December 31, 2012 is
A. P645,450 B. P649,950 C. P652,950 D. P640,500
2. How much is the total share premium as of December 31, 2012?
A. P2,119,800 B. P2,181,600 C. P2,032,550 D. P2,158,800
3. The unappropriated retained earnings on December 31, 2012 is
P4,390,750 B. P4,498,750 C. P4,402,750 D. P4,456,750
4. How much is the total shareholders’ equity on December 31, 2012?
A. P8,111,500 B. P8,099,500 C. P8,165,500 D. P8,195,500

Problem III
TRUNKS Company was formed on July 1, 2015. It was authorized to issue 600,000 shares of P10 par value ordinary shares and
200,000 shares of 8 percent P25 par value, cumulative and nonparticipating preference shares. TRUNKS have a July 1 – June 30
fiscal year.
The following information relates to the stockholders’ equity accounts of TRUNKS Company:
Ordinary Shares
Prior to the 2016 – 2017 fiscal year, TRUNKS had 220,000 ordinary shares issued as follows:
1. 170,000 shares were issued for cash on July 1, 2014, at P31 per share.
2. On July 24, 2014, 10,000 shares were exchange for a plot of land which cost the seller P140,000 in 2008 and had an
estimated market value of P440,000 on July 24, 2014.
3. 40,000 shares were issued on March 1, 2015, for P42 per share.
During the 2016-2017 fiscal year, the following transactions regarding ordinary shares took place:

2016
Nov. 30 TRUNKS purchased 4,000 shares of its own stock on the open market at P39 per share.

Dec. 15 TRUNKS declared a 5% stock dividends for stockholders of record on January 15, 2017, to be issued
on January 31, 2017. TRUNKS was having a liquidity problem and could not afford a cash dividend at
that time. TRUNKS ordinary share was selling at P52 per share on December 15, 2016.
2017
June 20 TRUNKS sold 1,000 of its own ordinary shares that it had purchased on November 30, 2016, for
P42,000.
Preference Shares
TRUNKS issued 80,000 shares of preference shares at P44 per share on July 1, 2015.
Cash Dividends
TRUNKS has followed a schedule of declaring cash dividends in December and June with payment being made to stockholders
of record in the following month. The cash dividends which had been declared since inception of the company through June 30,
2017, are shown below:
Declaration Date Share Capital-Ordinary Share Capital-Preference
12/15/15 P0.30 per share P1.00 per share
06/15/16 P0.30 per share P1.00 per share
12/05/16 -- P1.00 per share
No cash dividends were declared during June 2017 due to the company’s liquidity problems.
Retained Earnings
As of June 30, 2016, TRUNKS’ retained earnings account had a balance of P1,380,000. For the fiscal year ending June 30, 2017,
TRUNKS reported net income of P80,000.
Based on the foregoing information and your audit, compute the adjusted balances of the following as of June 30, 2017:
a. Share capital – Preference
b. Share capital – Ordinary
c. Share premium – Preference
d. Share premium – Ordinary
e. Share premium – Treasury
f. Retained earnings (before appropriation for treasury shares)
g. Treasury shares
h. Total shareholders’ equity

Problem IV
At the beginning of year 1, Entity AA grants share options to each of its 100 employees working in the sales department. The
share options will vest at the end of year 3, provided that the employees remain in the entity’s employ, and provided that the
volume of sales of a particular product, increases by at least an average of 5 percent per year. If the volume of sales of the
product increases by an average of between 5 percent and 10 percent per year, each employee will receive 100 share options. If
the volume of sales increases by an average of between 11 percent and 15 percent each year, each employee will receive 200
share options. If the volume of sales increases by an average of 16 percent or more, each employee will receive 300 share
options.
On grant date, Entity AA estimates that the share options have fair value of P20 per option. Entity AA also estimates that the
volume of sales of the product will increase by an average of between 11 percent and 15 percent per year, and therefore expects
that, for each employee who remains in service until the end of year 3, 200 share options will vest. The entity also estimates on
the basis of a weighted average probability, that 20 percent of employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will leave by the end of
year 3. Hence, the entity expects that 80 employees will remain in service for the three-year period. Product sales have increased
by 12 percent and the entity expects this rate of increase to continue over the next two years.
By the end of year 2, a further 5 employees have left, bringing the total to 12 to date. The entity now expects only three more
employees will leave during year 3, and therefore expects a total of 85 employee will remain at the end of year 3. Product sales
have increased by 20 percent, resulting in an average of 16 percent over the two years to date. The entity now expects that sales
will average 16 percent or more over the three-year period, and hence expects each employee to receive 300 share options at the
end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year period and 86
employees remain. The entity’s sales have increased by an average of 16 percent over the three years.
Based on the preceding information, answer the following questions:
1. What is the compensation expense for year 1?
A. P53,333 B. P160,000 C. P106,667 D. P172,000
2. What is the compensation expense for year 2?
A. P286,667 B. P180,000 C. P233,333 D. P168,000
3. What is the compensation expense for year 3?
A. P114,667 B. P176,000 C. P282,667 D. P188,000
4. What is cumulative compensation expense for years 1, 2, and 3?
A. P320,000 B. P516,000 C. P344,000 D. P172,000
5. At the end of year 2, the entity should report share options outstanding of
A. P328,000 B. P226,667 C. P286,667 D. P340,000
Problem V
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the employees remain
in its employ for the next three years.
During year 1, 35 employees have left. The entity estimates that a further 60 will leave during years 2 and 3. During year 2, 40
employees have left and the entity estimates that a further 25 will leave during year 3.During year 3, 22 employees have left. At
the end of year 3, 150 employees exercised their SARs, another 140 employees exercised their SARs at the end of year 4 and
remaining 113 employees exercised SARs at the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the end of
year 3, all SARs held by the remaining employees vested. The intrinsic values of the SARs at the date of exercise (which is equal
to the cash paid out) at the end of years 3, 4 and 5 are shown below.
Year Fair Value Intrinsic Value
1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25.00
REQUIRED: Compute the amounts of compensation expense and liability that the entity should report in years 1 to 5.
Problem VI
An entity grants to an employee the right to choose either 1,000 phantom shares (i.e., a right to a cash payment equal to the
value of 1,000 shares) or 1,200 shares with a par value of P10 per share. The grant is conditional upon the completion of three
years service. If the employee chooses the share alternative, the shares must be held for three years after vesting date.
At grant date, the entity’s share price is P50 per share. At the end of years 1, 2 and 3, the share price is P52, P55 and P60
respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-
vesting transfer restrictions, the entity estimates that the grant date fair value of the share alternative is P48 per share.
At the end of year 3, the employee chooses:
Scenario 1: The cash alternative.
Scenario 2: The equity alternative.
Based on the preceding information, answer the following:
1. What is the total fair value of the equity component as a result of the share-based payment transaction with settlement
alternatives?
A. P7,600 B. P10,000 C. P2,400 D. P0
2. What is the compensation expense in year 1?
A. P17,333 B. P19,866 C. P19,333 D. P23,334
3. What is the compensation expense in year 2?
A. P19,866 B. P17,333 C. P21,867 D. P19,333
4. What is the compensation expense for year 3?
A. P23,334 B. P25,867 C. P19,333 D. P19,866
5. If the employee has chosen the cash alternative, the amount to be paid at the end of year 3 should be?
A. P55,000 B. P67,600 C. P52,000 D. P60,000
6. If the employee has chosen the share alternative, the amount of share premium to be recognized is?
A. P7,600 B. P55,600 C. P60,000 D. P67,600
--END--
wep/ACCTG100G/shareholdersequity