PROBLEM NO.

3
PABEBE CO. was formed on July 1, 2016. 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. PABEBE CO. has a July 1-June
30 fiscal year.

The following information relates to the shareholders' equity accounts of PABEBE

CO.:

Ordinary Shares
Prior to the 2018-2019 fiscal year, PABEBE CO. had 220,000 ordinary shares issued
as follows:

1. 170,000 shares were issued for cash on July 1, 2016, at P35 per share.

2. On July 24, 2016, 10,000 shares were exchanged for a plot of land which cost the
seller P140,000 in 2010 and had a fair value of P1,200,000 on July 24, 2016.

3. 40,000 shares were issued on March 1, 2017, for P35 per share.

During the 2018-2019 fiscal year, the following transactions regarding ordinary
shares took place:

November 30, 2018 PABEBE CO. purchased 4,000 of its own shares on the
open market at P39 per share.

December 15, 2018 PABEBE CO. declared a 5% share dividend for shareholders of
record on January 15, 2019, to be issued on January 31, 2019. PABEBE CO. was
having a liquidity problem and could not afford a cash dividend at the time. PA BEBE
CO.'s ordinary shares were selling at P55 per share on December 15, 2018.

June 20, 2019 PABEBE CO. sold 1,000 of its own ordinary shares that it had
purchased on November 30, 2018, for P42,000.

Preference Shares
PABEBE CO. issued 80,000 preference shares at P44 per share on July 1, 2017.

Cash Dividends
PABEBE CO. has followed a schedule of declaring cash dividends in December and
June, with payment being made to shareholders of record in the following month.
The cash dividends which have been declared since inception of the company
through June 30, 2019, are shown below:
Declaration Date Share Capital-Ordinary Share Capital-
Preference
12/15/17 PO.30 per share P1.00 per share
06/15/18 PO.30 per share P1.00 per share
12/15/18 - P1.00 per share

No cash dividends were declared during June 2019 due to the company's liquidity
problems.

Retained Earnings
As of June 30, 2018, PABEBE CO's retained earnings account had a balance of
P1,380,000. For the
fiscal year ending June 30, 2019, PABEBE CO. reported net income of P80,000.

Required:
Compute the adjusted balances of the following as of June 30, 2019:
1. Preference share capital
2. Ordinary share capital
3. Total share premium
4. Retained earnings (before appropriation for treasury shares)
5. Total shareholders' equity

PROBLEM NO. 4
A CPA was engaged by BIRD Company in 2019 to examine its books and records
and to make whatever corrections are necessary. An examination of the accounts
discloses the following:

a) Dividends had been declared on December 15 in 2017 and 2018 but had not
been entered in the books until paid.

b) Improvements in buildings and equipment of P97,200 had been debited to

expense at the end of April 2016. Improvements are estimated to have 12-year life.
The company uses the straight-line method in recording depreciation and computes
depreciation to the nearest month.

c) The physical inventory of merchandise had been overstated by P28,800 at the

end of 2017 and by P42,750 at the end of 2018.

d) The merchandise inventories at the end of 2018 and 2019 did not include
merchandise that was then in transit and to which the company had title. These
shipments of P18,900 and P26,100 were recorded as purchases in January of 2019
and 2020, respectively.
e) The company had failed to record sales commissions payable of P32,400 and
P9,900 at the end of 2018 and 2019, respectively.

f) The company had failed to recognize supplies on hand of P7,650 and P15,480 at
the end of 2018 and 2019, respectively.

The retained earnings account appeared as shown below on the date the CPA began
the examination.

Retained Earnings

DATE ITEM DEBIT CREDIT BALANCE

2017
Jan. 1 Balance P585,000
Dec. 31 Net Income for the year P252,000 837,000
2018
Jan. 10 Dividends paid P139,500 697,500
Mar. 6 Stock Sold – excess 189,000 886,500
over par
Dec. 31 Net Loss for the year 160,200 726,300
2019
Jan. 10 Dividends Paid 139,500 586,800
Dec. 31 Net loss for the year 173,700 413,100

1. What is the corrected 2017 net income?

A. P215,100 B. P272,700 C. P364,500 D. P372,600

2. What is the corrected 2018 net loss?

A. P160,200 B. P179,100 C. P198,000 D. P207,000

3. What is the corrected 2019 net loss?

A. P108,720 B. P168,120 C. P194,220 D. P213,120

4. What is the corrected retained earnings on December 31, 2018?

A. P405,900 B. 491,400 C. P549,180 D. P678,600

5. What is the corrected retained earnings on December 31, 2019?

A. P108,180 B. P189,000 C. P278,280 D. P297,180

PROBLEM NO.5
At the beginning of year 1, Entity A 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 A estimates that the share options have a fair value of P20 per
option. Entity A 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 2 years.

By the end of year 2, a further five 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 employees 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 sales
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:

1. What is the compensation expense for year 1?

A. P53,333 B. P106,667 C. P160,000 D. P172,000

2. What is the compensation expense for year 2?

A. P168,000 B. P180,000 C. P233,333 D. P286,667

3. What is the compensation expense for year 3?

A. P114,667 B. P176,000 C. P188,000 D. P282,667

4. What is the cumulative compensation expense for years 1, 2, and 3?

 A. P172,000 B. P320,000 C. P344,000 D. P516,000

5. At the end of year 2, the entity should report share options outstanding of
A. P226,667 B. P286,667 C. P328,000 D. P340,000

PROBLEM NO. 6
On January 1, Year 1, Entity B grants share options to each of its 100 employees
working in the sales department. Each of these employees receives 10 share
options. The share options will vest on December 31, Year 3, provided that the
employees remain in the entity's employ. On January 1, Year 1, fair value per option
is P30.

On December 31, Year 1, it is expected that during the whole vesting period of
three years, 10% of the employees will leave entity B. On December 31, Year 2, this
expectation is revised to 30%. Finally, by December 31, Year 3, 20% of the
employees left entity B.

There is also a performance condition in addition to the service condition. According

to the performance condition, the options only vest if entity B's share price on
December 31, Year 3 exceeds its share price on January 1, Year 1 by at least 20%.
On December 31, Year 1 and on December 31, Year 2, it is expected that this target
will be met. However, the target is not met by December 31, Year 3.

Based on the preceding information, answer the following:

1. What amount of compensation expense should be recognized in Year 1?

A. P9,000 B. P14,000 C. P10,000 D. PO

2. What amount of compensation expense should be recognized in Year 2?

A. PO B. P9,000 C. P5,000 D. P10,000

3. What amount of compensation expense should be recognized in Year 3?

A. P14,000 B. P10,000 C. P9,000 D. PO

PROBLEM NO. 7
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 the remaining 113
employees exercised their 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 are 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 equal the cash paid out) at the end of years 3, 4, and 5 are also
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.