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Midterm Exam in Conceptual Framework and Accounting Standards

Problems

Problem 1: The stockholders’ equity of the WPC as of December 31, 2013 was as follows:

Common stock, P10 par, authorized 300,000 shares; 250,000


shares issued and outstanding P2,500,000.00
Paid-in capital excess of par 3,750,000.00
Retained earnings 1,800,000.00

On June 1, 2014, WPC reacquired 40,000 shares of its common stock at P40 per share. The following
transactions occurred in 2014 with regard these shares:

July 1 Sold 15,000 treasury shares at P45.


July 15 2 for 1 share split.
Aug. 15 Sold 34,000 treasury shares at P15.
Sept. 1 Retired 2,000 shares.

Based on the information provided, determine the correct balances of the following:

A B C D
1. Treasury Stock 310,000 280,000 130,000 205,000
2. Common Stock 2,490,000 2,500,000 2,460,000 2,210,000
3. Paid-in capital in excess of par 3,750,000 3,720,000 3,735,000 3,810,000
4. Paid-in capital from treasury stock 150,000 60,000 75,000 0
5. Retained earnings 1,690,000 1,810,000 1,825,000 1,905,000

Problem 2: Effective April 23, 2014, the shareholders of Cold Corporation approved a 2 for 1 stock split
of Cold ordinary share and an increase in authorized ordinary share from 100,000 shares (par value P80
per share) to 200,000 shares (par value P40 per share). Cold’s Shareholders’ Equity accounts
immediately before issuance of the stock split shares were as follows:

Ordinary share (par value P80, 100,000 shares authorized, 50,000 shares
outstanding) P4,000,000
Share premium (P12 per share on the issuance) 600,000
Accumulated profit and losses 5,400,000

The stock split shares were issued on June 30, 2014.

6. In Cold’s June 30, 2014 statement of shareholders’ equity, balance of Ordinary share, Share
premium and Accumulated profits and losses are:
Ordinary share Share premium Accumulated
profits
a. 8,000,000 0 2,000,000
b. 8,000,000 600,000 1,400,000
c. 4,000,000 600,000 5,400,000
d. 4,000,000 4,600,000 1,400,000
Problem 3: The Batangas Corp. has requested you to examine its financial statements for the year
2014. During your examination, Batangas Corp. presented you its balance sheet as of December 31,
2013 which had the following shareholders’ equity section:

Preference shares, P10 par; 90,000 shares authorized and issued, of which
9,000 are in the treasury costing P135,000 and shown as an asset P900,000
Ordinary shares, P4 par value; 900,000 shares authorized, of which 675,000
shares are issued and outstanding 2,700,000
Share premium (P5 per share on preference shares issued in 2012) 450,000
Allowance for doubtful accounts receivable 18,000
Reserve for depreciation 1,260,000
Reserve for fire insurance 297,000
Accumulated profits 3,375,000
Total shareholders’ equity P9,000,000

Audit notes:

a. 4,500 treasury shares were sold for P18 per share on August 30, 2014. Batangas Corp. credited
the proceeds to the Preference share account. The treasury shares as of December 31, 2013
were acquired in one purchase in 2013.
b. The preference shares carry an annual dividend of P1 per share. The dividend is cumulative. As
of December 31, 2013, unpaid cumulative dividends amounted to P5 per share. The entire
accumulation was liquidated in June 2014, by issuing to the preference shareholders 81,000
ordinary shares.
c. A cash dividend of P1 per share was declared on December 1, 2014 to preference shareholders
of record December 15, 2014. The dividends are payable on January 15, 2015.
d. At December 31, 2014 the Allowance for Doubtful Accounts Receivable and Reserve for
Depreciation had balances of P37,500 and P1,575,000, respectively.
e. On March 1, 2014, the Reserve for fire insurance was increased by 90,000; Accumulated profits
was debited.
f. The December 31, 2014, the Reserve for fire insurance was decreased by P45,000 which
represents the carrying value of a machine destroyed by fire on that date. Fire cleanup costs of
P9,000 does not appear in the records.
g. The December 31, 2013 Accumulated profits consists of the following:
Donated land from a stockholder P675,000
Gains from treasury stock transactions 76,500
Earnings retained in the business 2,623,500
Total P3,375,000
h. Unadjusted net income for the year ended December 31, 2014 was P1,946,250 per company’s
books.

Based on the information above, answer the following:

7. What is the adjusted net income for the year ended December 31, 2014?
a. 1,946,250
b. 1,973,250
c. 1,937,250
d. 1,892,250
e. None of the above
8. What is the correct Additional paid in capital as of December 31, 2014?
a. 1,296,000
b. 1,215,000
c. 1,206,000
d. 621,000
e. None of the above
9. What is the correct Appropriated accumulated profits as of December 31, 2014?
a. 454,500
b. 387,000
c. 342,000
d. 0
e. None of the above
10. What is the correct Unappropriated accumulated profits as of December 31, 2014?
a. 4,016,250
b. 3,939,750
c. 3,935,250
d. 3,867,750
e. None of the above
11. What is the total shareholders’ equity as of December 31, 2014?
a. 5,550,750
b. 8,718,750
c. 9,474,750
d. 9,479,250
e. None of the above

Problem 4: You have been asked to examine the financial statements of HEAT INC. as of and for the
period ended December 31, 2014. During the course of your examination, you were asked to prepare a
comparative data from the company’s inception to the present. You ascertained the following
information:

 Heat Inc.’s charter became effective on January 2010, when 40,000 shares of P10 ordinary
shares and 20,000 of 14% cumulative, nonparticipating, preference shares were issued. The
ordinary shares were sold at P12 per share, and the preference shares were sold at its par value
of P100 per share.
 Heat was unable to pay preference dividends at the end of its first year. The preference
shareholders agreed to accept 2 shares of common shares for every 50 shares of preference
owned in lieu of the preference dividends due in the first operating year. The said ordinary
shares were issued on January 2, 2011 when the fair market value of the ordinary shares was at
P30.
 Heat acquired all the outstanding stock of Raptors Corporation on May 1, 2012 in exchange of
20,000 Heat ordinary shares.
 Heat effected a stock split on its ordinary shares 3 for 2 on January 1, 2013 and 2 for 1 on
January 1, 2014.
 Heat offered to convert 20% of preference shares to common shares on the basis of 2 shares of
common for every share of preference. The offer was accepted and the conversion was made on
July 1, 2014.
 No cash dividends were declared on ordinary shares until December 31, 2012. Cash dividends per
share of ordinary were declared and paid as follows:
December 31, 2012 P3.20
June 30, 2013 1.50
December 31, 2013 2.50
June 30, 2014 1.25
December 31, 2014 1.00
Based on the information above and as a result of your examination, answer the following:

12. The number ordinary and preference shares outstanding at the end of 2014, respectively?
_________________190,400______________; _______________16,000___________________
13. Balances of the Ordinary and Preference Shares accounts at the end of 2011, respectively?
________________408000_______________;
___________2000000_______________________
14. The amount of cash dividends declared and paid to ordinary shares in 2013?
___________364800____________________
15. The amount of cash dividends declared and paid to ordinary shares in 2014?
_____________________418400__________

Problem 5: On September 30, 2014, May Company issued 3,000 shares of its P10 par ordinary shares in
connection with a share dividend. No entry was made on the share dividend declaration date. The market
value per share immediately after the issuance was P15. May’s shareholders’ accounts immediately
before issuance of the share dividends were as follows:

Ordinary share, P10 par, 50,000 shares authorized; 25,000 issued P250,000
Paid in Capital in Excess of Par 300,000
Retained Earnings 350,000
Treasury share, 5,000 shares at cost (40,0000

16. What should be the retained earnings balance immediately after the share dividend declaration?
________________________305,000_______
17. Assuming that instead of declaring and issuing 3,000 shares, the company declared and issued
4,000 shares as share dividends, what should be the retained earnings balance immediately after
the share dividend declaration?
_____________________310,000__________

Theories

18. Which of the following features of preference would most likely be opposed by ordinary
shareholders?
a. Convertible
b. Callable
c. Cumulative
d. Participating
e. None of the above
19. The primary purpose of a quasi-reorganization is to give the entity the opportunity to
a. Obtain relief from creditors
b. Revalue understated assets at fair value
c. Eliminate a deficit
d. Distribute the shares of a newly-created subsidiary to the shareholders in exchange for part
of their shares in the corporation
e. None of the above
20. A retained earnings appropriation is used to
a. Absorb a fire loss when an entity is self-insured
b. Provide for a contingent loss that is probable and measurable
c. Smooth periodic income
d. Restrict earnings available for dividends
e. None of the above
21. If an entity wishes to capitalize retained earnings, it may issue
a. Unissued (or available) shares
b. Share dividend
c. Treasury shares
d. Shares from other corporation
e. None of the above
22. Shares that have a fixed per-share amount printed on the share certificate are called
a. Par or stated value shares
b. Fixed value shares
c. Uniform shares
d. Stated value shares
e. None of the above
23. The term residual owner means that shareholders
a. Are entitled to a dividend every year in which the entity earns an income
b. Have the rights to specific assets of the entity
c. Bear the ultimate risks and receive the benefits of ownership
d. Can negotiate individual contracts in behalf of the entity
e. None of the above
24. When collectability is reasonably assured, the excess of the subscription price over the stated
value of the no-par subscribed share capital shall be recorded as
a. No par share capital
b. Share premium when the subscription is issued
c. Share premium when the subscription is collected
d. Share premium when the subscription is recorded
e. None of the above
25. An entity shall classify a contract to deliver its own equity instruments under equity as a separate
account (e.g., Deposit for Stock Subscription) from Outstanding Capital Stock if and only if, all of
the following elements are present as of end if the reporting period: Which is not?
a. The unissued authorized capital stock of the entity is insufficient to cover the amount of
shares indicated in the contract
b. There is board of directors’ approval on the proposed increase in authorized capital stock (for
which a deposit was received by the corporation)
c. There is stockholders’ approval of said proposed increase
d. There is a subscription agreement which, among other things, states that the corporation is
not contractually obliged to return the consideration received and that the corporation is
obliged to deliver a fixed number of its own shares of stock for a fixed amount of cash or
property paid or to be paid by the contracting party
e. The account must be reported as addition to shareholders’ equity of the corporation’s
statement of financial position