VIII – AUDIT OF STOCKHOLDERS’ EQUITY

PROBLEM NO. 1
Alcoy Corporation’s post-closing trial balance at December 31, 2006 was as
follows:
Alcoy Corporation
Post-Closing Trial Balance
December 31, 2006
Debit Credit
Accounts payable P 495,000
Accounts receivable P 963,000
Reserve for depreciation 360,000
Reserve for doubtful accounts 54,000
Premium on common stock 1,800,000
Gain on sale of treasury stock 450,000
Bonds payable 720,000
Building and equipment 1,980,000
Cash 396,000
Cash dividends payable on preferred stock 7,200
Common stock (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
Available-for-sale securities at fair value 513,000
Trading securities at fair value 387,000
Net unrealized loss on available-for-sale
securities 45,000
Preferred stock (P50 par value) 900,000
Prepaid expenses 72,000
Donated capital 800,000
Stock warrants outstanding 208,000
Retained earnings 415,800
Treasury stock – common, at cost 324,000
Totals P6,480,000 P6,480,000

At December 31, 2006, Alcoy had the following number of common and
preferred shares:
Common Preferred
Authorized 900,000 90,000
Issued 270,000 18,000
Outstanding 252,000 18,000

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The dividends on preferred stocks are P0.40 cumulative. In addition, the
preferred stock has a preference in liquidation of P50 per share.

QUESTIONS:

Based on the above and the result of your audit, determine the following as
of December 31, 2006:

1. Additional paid-in capital

a. P3,213,000 c. P3,050,000
b. P3,258,000 d. P2,600,000

2. Total contributed capital

a. P4,428,000 c. P3,770,000
b. P4,220,000 d. P1,170,000

3. Unappropriated retained earnings

a. P415,800 c. P91,800
b. P739,800 d. P37,800

4. Total stockholders’ equity

a. P4,266,800 c. P4,888,800
b. P4,519,800 d. P4,474,800

Suggested Solution:

Question No. 1
Premium on common stock P1,800,000
Gain on sale of treasury stock 450,000
Donated capital 800,000
Stock warrants outstanding 208,000
Total additional paid-in capital P3,258,000

Question No. 2
Preferred stock (P50 par value) P 900,000
Common stock (P1 par value) 270,000
Additional paid-in capital (see no. 1) 3,258,000
Total contributed capital P4,428,000

Question No. 3
Total retained earnings P415,800
Less appropriation for treasury stock 324,000
Unappropriated retained earnings P 91,800

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Question No. 4
Total contributed capital (see no. 2) P4,428,000
Retained earnings:
Unappropriated (see no. 3) P 91,800
Appropriated for treasury stock 324,000 415,800
Total 4,843,800
Less : Treasury stock 324,000
Net unrealized loss on AFS 45,000 369,000
Total stockholders equity P4,474,800

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

PROBLEM NO. 2
Your audit client, Argao, Inc., is a public enterprise whose shares are
traded in the over-the-counter market. At December 31, 2005, Argao had
3,000,000 authorized shares of P10 par value common stock, of which
1,000,000 shares were issued and outstanding. The stockholders’ equity
accounts at December 31, 2005 had a following balances.
Common stock P10,000,000
Additional paid-in capital 3,750,000
Retained earnings 3,250,000

Transactions during 2006 and other information relating to the

stockholders’ equity accounts were as follows:

• On January 2, 2006, Argao issued at P54 per share, 50,000 shares of

P50 par value, 9% cumulative convertible preferred stock. Each share
of preferred stock is convertible into two shares of common stock.
Argao had 300,000 authorized shares of preferred stock. The preferred
stock has a liquidation value equal to its par value.

• On February 1, 2006, Argao reacquired 10,000 shares of its common

stock for P16 per share.

• On April 30, 2006, Argao sold 250,000 shares (previously unissued) of

P10 par value common stock to the public at P17 per share.

• On June 15, 2006, Argao declared a cash dividend of P1 per share of

common stock, payable on July 15, 2006, to stockholders of record on
July 1, 2006.

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• On November 10, 2006, Argao sold 5,000 shares of treasury stock for
P21 per share.

• On December 15, 2006, Argao declared the yearly cash dividend on

preferred stock, payable on January 15, 2007, to stockholders of record
on December 31, 2006.

• On January 20, 2007, before the books were closed for 2006, Argao
became aware that the ending inventories at December 31, 2005 were
understated by P150,000 (after tax effect on 2005 net income was
P90,000). The appropriate correction entry was recorded the same day.

• After correcting the beginning inventory, net income for 2006 was
P2,250,00.

QUESTIONS:

Based on the above and the result of your audit, determine the following as
of December 31, 2006:

1. Additional paid-in capital

a. P5,700,000 c. P5,500,000
b. P5,525,000 d. P5,725,000

2. Unappropriated retained earnings

a. P4,125,000 c. P4,045,000
b. P4,035,000 d. P3,955,000

3. Treasury stock
a. P160,000 c. P55,000
b. P 80,000 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 common stock

a. P17.89 c. P17.71
b. P17.82 d. P15.41

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Suggested Solution:

Questions No. 1 to 4
Preferred stock P 2,500,000
Common stock 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, 12/31/06 P24,770,000 (4)
Prepare T-accounts for each component of the stockholders’ equity. Place
the balances as of January 1, 2006, 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 2006:
1/2 Cash (50,000 shares x P54) P2,700,000
Preferred stock (50,000 shares x P50) P2,500,000
APIC - excess over par of preferred stock 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

Common stock (250,000 shares x P10) P2,500,000
APIC - excess over par of common stock 1,750,000

6/15 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

12/15 Retained earnings (2,500,000 x 9%) P 225,000

Dividends payable - preferred P225,000

12/31 Inventory, 1/1/06 P 150,000

Retained earnings P 90,000
Income tax payable 60,000

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 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 preferred stock 2,500,000
Common stockholders' equity 22,270,000
Divide by common shares outstanding 1,245,000
Book value per share of common stock P 17.89

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

PROBLEM NO. 3
The stockholders’ equity section of the Asturias Inc. showed the following
data on December 31, 2005: Common stock, P3 par, 300,000 shares
authorized, 250,000 shares issued and outstanding, P750,000; Paid-in
capital in excess of par, P7,050,000; Additional paid-in capital 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 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 2006:

Feb. 1 Key executives exercised 4,500 options outstanding at
December 31, 2005. 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.

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 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 2006 was P250,500.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:

1. Common stock
a. P777,300 c. P833,850
b. P848,700 d. P850,050

2. Total additional paid-in capital

a. P7,522,200 c. P8,219,650
b. P8,402,800 d. P8,419,450

3. Total contributed capital

a. P8,299,500 c. P9,269,500
b. P9,053,500 d. P9,251,500

4. Retained earnings
a. P580,500 c. P730,500
b. P858,000 d. P654,150

5. Total stockholders’ equity

a. P10,000,000 c. P9,030,000
b. P 9,784,000 d. P9,982,000

Suggested Solution:

Questions No. 1 to 5
Common stock 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, 12/31/06 P10,000,000 (5)
Note: Follow the same approach in Problem no. 2.

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 Journal entries affecting the stockholders equity accounts during 2006:
2/1 Cash (4,500 options x P35) P 157,500
APIC-stock options (4,500 x P5) 22,500
Common stock (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

Common stock (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
Common stock (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) C; 4) C, 5) A

PROBLEM NO. 4
Balamban Corporation was authorized at the beginning of 2004 with
540,000 authorized shares of P100, par value common stock. At December
31, 2004, the stockholders’ equity section of Balamban was as follows:
Common stock, par value P100 per share; authorized
540,000 shares; issued 54,000 shares P5,400,000
Additional paid-in capital 540,000
Retained earnings 810,000
Total stockholders’ equity P6,750,000

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On May 10, 2005, Balamban issued 90,000 shares of its common stock for
P10,800,000. A 5% stock dividend was declared on September 30, 2005
and issued on November 10, 2005 to stockholders of record on October 31,
2005. Market value of common stock was P110 per share on declaration
date. The net income of Balamban for the year ended December 31, 2005
was P855,000.

During 2006, Balamban had the following transactions;

Feb. 15 Balamban reacquired 5,400 shares of its common stock for

P95 per share.

May 15 Balamban sold 2,700 shares of its treasury stock for P120
per share.

Jun 30 Issued to stockholders one stock right for each share held to
purchase two additional shares of common stock for P125 per
share. The rights expire on December 31, 2006.

Aug. 15 45,000 stock rights were exercised when the market value of
common stock was P130 per share.

Sep. 30 72,000 stock rights were exercised when the market value of
the common stock was P140 per share.

Dec. 01 Balamban declared a cash dividend of P2 per share payable

on January 15, 2007 to stockholders of record on December
31, 2006.

Dec. 15 Balamban retired 1,800 shares of its treasury stock and

reverted them to an unused basis. On this date, the market
value of the common stock was P150 per share.

Dec. 31 Net income for 2006 was P900,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as
of December 31, 2006:

1. Common stock
a. P38,520,000 c. P38,340,000
b. P26,640,000 d. P38,250,000

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2. Additional paid-in capital
a. P8,329,500 c. P5,413,500
b. P8,338,500 d. P8,266,500

3. Retained earnings
a. P1,080,000 c. P1,017,000
b. P1,002,600 d. P1,008,000

4. Treasury stock
a. P18,000 c. P85,500
b. P90,000 d. P 0

Suggested Solution:

Questions No. 1 to 4

Common Retained Treasury

Stock APIC Earnings stock
Balances, 1/1/05 P 5,400,000 P 540,000 P 810,000 P 0
May 10, 2005 9,000,000 1,800,000
Sept. 30, 2005 720,000 72,000 (792,000)
Net income-2005 855,000
Balances, 12/31/05 15,120,000 2,412,000 873,000 0
Feb. 15 513,000
May 15 67,500 (256,500)
Aug. 15 9,000,000 2,250,000
Sep. 30 14,400,000 3,600,000
Dec. 01 (765,000)
Dec. 15 (180,000) 9,000 (171,000)
Net income-2006 900,000
Balances, 12/31/06 P38,340,000 P8,338,500 P1,008,000 P 85,500

Answers: 1) C; 2) B; 3) D; 4) C

PROBLEM NO. 5
Bogo Corporation began operations on January 1, 2006. 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 2006:

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 Jan. 1 Issued 1,500 shares of common stock 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 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. The balance is
collectible next year.

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, 2007 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, 2006:

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1. Common stock
a. P204,000 c. P264,000
b. P144,000 d. P186,000

2. Paid-in capital in excess of par value of preferred stock

a. P1,500,000 c. P1,275,000
b. P1,545,000 d. P1,860,000

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

a. P 8,211,000 c. P11,121,000
b. P10,851,000 d. P10,032,000

4. Retained earnings
a. P1,050,000 c. P 930,000
b. 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
Preferred stock P3,420,000
Common stock 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, 12/31/06 P17,010,000 (5)
Journal entries affecting the stockholders equity accounts during 2006:
1/1 Equipment P 510,000
Organization expenses 210,000
Common stock (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

Preferred stock (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

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2/20 Cash (9,000 shares x P390) P3,510,000
Common stock (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 common stock (12,000 shares x P10) P 120,000
APIC - excess over par of CS 5,280,000

8/30 Cash P 720,000

Common stock (1,800 shares x P10) P 18,000
APIC - excess over par of CS 702,000

Building P1,530,000
Common stock (2,100 shares x P10) P 21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000] P 819,000
Preferred stock (4,200 shares x P100) P 420,000
APIC - excess over par of PS (balance) P 270,000
* (P720,000/1,800 shares)

Note: The fair value of the building should be allocated to the

preferred stock and common stock based on fair values. The
problem did not specifically mention the fair value of the common
stock. However, on the same date the company issued 1,800
common shares for P720,000 cash. Therefore, common shares
were selling at P400/share (P720,000/1,800). Since the fair value
of the preferred stock is not determinable, it will be assigned the
residual amount after deducting the fair value of common stock
from the fair value of the building.

11/07 Cash P4,200,000

Subscriptions receivable P4,200,000

Subscribed common stock (120,000 x 1/2) P60,000

Common stock P 60,000

Note: Since the subscriptions receivable is collectible next year, it

will be presented under current assets. Incidentally, if the
subscriptions receivable is not collectible currently, it will be
presented under stockholders’ equity.

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 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}

Note: Shares issued plus subscribed less treasury shares are entitled
to dividends.

12/31 Income summary P1,800,000

Retained earnings P1,800,000

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

PROBLEM NO. 6
The Borbon Corporation has requested you to audit its financial statements
for the year 2006. During your audit, Borbon presented to you its balance
sheet as of December 31, 2005 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 P 600,000
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
Total stockholders’ equity P6,000,000

Additional information:

1) Of the preferred stock, 3,000 shares were sold for P18 per share on
August 30, 2006. Borbon credited the proceeds to the Preferred Stock
account. The treasury shares as of December 31, 2005 were acquired
in one purchase in 2005.

2) The preferred stock carries an annual dividend of P1 per share. The

dividend is cumulative. As of December 31, 2005, unpaid cumulative
dividends amounted to P5 per share. The entire accumulation was

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 liquidated in June, 2006, 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, 2006 to

preferred stockholders of record December 15, 2006. The dividend is
payable on January 15, 2007.

4) At December 31, 2006, the Allowance for Doubtful Accounts Receivable

and Reserve for Depreciation had balances of P25,000 and P1,050,000,
respectively.

5) On March 1, 2006, the Reserve for Fire Insurance was increased by

P60,000; Retained Earnings was debited.

6) On December 31, 2006, 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, 2005 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, 2006 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, 2006. (Disregard tax
implications)

1. Total Additional paid-in capital

a. P414,000 c. P810,000
b. P804,000 d. P864,000

2. Retained earnings - Appropriated

a. P258,000 c. P228,000
b. P303,000 d. P 0

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3. Retained earnings - Unappropriated
a. P2,677,500 c. P2,578,500
b. P2,626,500 d. P2,623,500

4. Treasury stock
a. P45,000 c. P36,000
b. P90,000 d. P 0

5. Total stockholders’ equity

a. P3,700,500 c. P6,316,500
b. P5,812,500 d. P6,319,500

Suggested Solution:

Questions No. 1 to 5
Preferred stock P 600,000
Common stock 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, 12/31/06 P6,316,500 (5)

Journal entries affecting the stockholders equity accounts during 2006:

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*

Common stock (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.

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 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) B; 3) C; 4) A, 5) C

PROBLEM NO. 7
The stockholders equity of Cordova Corporation showed the following data
on December 31, 2005:
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 2006 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.

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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, 2006:

1. Preferred stock
a. P4,617,000 c. P4,968,000
b. P4,698,000 d. P4,860,000

2. Common stock
a. P15,615,000 c. P13,968,000
b. P13,500,000 d. P13,725,000

3. Additional paid-in capital

a. P6,777,000 c. P6,679,800
b. P6,858,000 d. P6,814,800

4. Unappropriated retained earnings

a. P1,749,240 c. P1,711,440
b. 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
Preferred stock P 4,698,000 (1)
Common stock 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, 12/31/06 P26,949,240 (5)

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Journal entries affecting the stockholders equity accounts during 2006:
1) Cash (27,000 shares x P40) P1,080,000
Preferred stock (27,000 shares x P30) P 810,000
APIC - premium on preferred stock 270,000

2) Cash (94,500 shares x P70) P6,615,000

Common stock (94,500 shares x P50) P4,725,000
APIC - premium on common stock 1,890,000

3) Preferred stock (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, 1/1/06 180,000
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,12/31/06 531,000
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) B; 2) D; 3) D; 4) C, 5) A

PROBLEM NO. 8
You were able to gather the following information in connection with your
audit of the stockholders’ equity section of the balance sheet of Liloan, Inc.
The company is a manufacturer of school and office equipment. As of
December 31, 2005, the stockholder’s equity of the company is presented
below:
Cumulative preferred stock (P15 par value; 100,000
shares authorized, 12,000 shares issued and
outstanding) P 180,000
Common stock (P10 par value; 1,000,000 shares
authorized, 330,000 shares issued and outstanding 3,300,000
Retained earnings 1,866,000
P5,346,000

Liloan’s capital stock transactions during 2006 were as follows:

a. On January 31, 24,000 preferred shares were issued in exchange for

land with a fair value of P300,000. Six months ago, 2,000 shares of
Liloan’s preferred stock were exchanged “over the counter” for P14
per share.

b. On February 14, 13,500 shares of common stock were sold to Ms. P.

Saway at P25 per share.

c. On December 14, Liloan purchased dissident stockholder Saway’s

13,500 shares at P27 per share. The shares are to be held as
treasury shares. (Saway violently opposed Liloan’ business strategy
and Liloan’s management decided to eliminate her interest.)

d. On December 20, Liloan contracted with Ms. Buti for the sale of
30,000 previously unissued shares at P25 per share to be issued
when the purchase price is fully paid. At December 31, only
P585,000 had been paid. Buti agreed to pay the balance on or before
January 31, 2007.

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e. On December 31, Liloan retired 12,000 preferred shares at P18 per
share.

f. A cash dividend of P2 per share was declared on the preferred shares

on October 15, and paid on November 15.

g. A cash dividend of P1.50 per share was declared on December 15,

and payable on January 15, 2007.

h. Liloan’s net income for the year 2006 was P750,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as
of December 31, 2006:

1. Preferred stock
a. P360,000 c. P264,000
b. P300,000 d. P324,000

2. Common stock
a. P3,435,000 c. P3,735,000
b. P4,020,000 d. P3,637,500

3. Additional paid-in capital

a. P592,500 c. P625,500
b. P202,500 d. P142,500

4. Total retained earnings

a. P1,977,000 c. P2,013,000
b. P1,648,500 d. P2,037,000

5. Total stockholders’ equity

a. P6,171,000 c. P6,396,000
b. P6,036,000 d. P6,336,000

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Suggested Solution:

Questions No. 1 to 5
Preferred stock P 360,000 (1)
Common stock 3,435,000 (2)
Subscribed common stock 300,000
Additional paid in capital 652,500 (3)
Total retained earnings 2,013,000 (4)
Treasury stock (364,500)
Discount on preferred stock (60,000)
Total SHE, 12/31/06 P6,336,000 (5)

Journal entries affecting the stockholders equity accounts during 2006:

a) Land (at fair value) P 300,000
Discount on preferred stock 60,000
Preferred stock (24,000 shares x P15) P 360,000

b) Cash (13,500 shares x P25) P 337,500

Common stock (13,500 shares x P10) P 135,000
APIC - excess over par of common stock 202,500

c) Treasury stock - common P 364,500

Cash (13,500 shares x P27) P 364,500

d) Cash P 585,000
Subscriptions receivable 165,000*
Subscribed common stock (30,000 shares x P10) P 300,000
APIC - excess over par of common stock 450,000
* [(30,000 shares x P25)- P585,000]

e) Preferred stock (12,000 shares x P15) P 180,000

Retained earnings 36,000
Cash (12,000 shares x P18) P 216,000

f) Retained earnings P 72,000

Cash [(12,000 + 24,000 x P2)] P 72,000

g) Retained earnings P 495,000**

Dividends payable [(12,000 + 24,000 x P2)] P 495,000
** [(330,000 + 13,500 – 13,500) x P1.5]

h) Income summary P 750,000

Retained earnings P 750,000

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

PROBLEM NO. 9
You gathered the following information pertaining to the stockholders’
equity section of the Oslob Corporation in connection with your audit of the
company’s financial statements for 2006:

Common stock, P1 par value; authorized 1,500,000

shares; issued 750,000 shares; outstanding
700,000 shares P 700,000
Additional paid-in capital:
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 common stock and treasury stock were originally
issued in 2003 for P11 per share. The treasury stock is common stock
reacquired on March 31, 2005. Oslob uses the par value method of
accounting for treasury stock.

During 2006, the following events or transactions occurred relating to

Oslob’s stockholders equity:

Feb. 10 Issued 200,000 shares of unissued common stock for P12.50

per share.

Mar. 15 Declared cash dividend of P0.20 per share to stockholders of

record on April 1, 2006 and payable on April 15, 2006. This
was the first dividend ever declared by Oslob.

Aug. 30 Oslob’s president retired, Oslob purchased from the retiring

president 50,000 shares of Oslob’s common stock 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, 2007 and payable on January 15, 2007.

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Oslob is being used by two separate parties for patent infringements.
Oslob 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 common stock on February 10, 2006

caused Oslob’s additional paid-in capital in excess of par to increase by
a. P 200,000 c. P2,300,000
b. P2,500,000 d. P 0

2. The retirement of 50,000 shares of common stock on August 30, 2006

caused Oslob’s additional paid-in capital in excess of par to decrease by
a. P 50,000 c. P500,000
b. P600,000 d. P 0

3. Oslob wants to appropriate retained earnings for all loss contingencies

that are not properly accruable by a charged to expense. How much of
Oslob loss contingencies should be appropriated by charged to
unappropriated retained earnings?
a. P300,000 c. P500,000
b. P200,000 d. P 0

4. How much cash dividends should Oslob charge against unappropriated

retained earnings in 2006?
a. P350,000 c. P370,000
b. P180,000 d. P170,000

5. How much should Oslob show in note to financial statement as a

restriction on retained earnings because of the acquisition of treasury
stock?
a. P100,000 c. P600,000
b. 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 common stock (200,000 shares x P1) 200,000
Increase in APIC P2,300,000

Question No. 2
Journal entry to record the retirement:
Common stock (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, 3/15/06
[(700,000 + 200,000) x P0.20] P180,000
Dividends declared, 12/15/06
[(700,000 + 200,000 - 50,000) x P0.20] 170,000
Total cash dividends P350,000

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) C; 2) C; 3) A; 4) A, 5) B

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PROBLEM NO. 10
In connection with your audit of the Poro Company, you were asked to
prepare comparative data from the company’s inception to the present.
The following were gathered during your audit:

a. Poro Company’s charter became effective on January 2, 2002, when

80,000 shares of P10 common and 40,000 shares of 5% cumulative,
nonparticipating, preferred stock were issued. The common stock was
sold at P12 per share and the preferred stock was sold at its par value
of P100 per share.

b. Poro was unable to pay preferred dividends at the end of its first year.
The owners of the preferred stock agreed to accept 2 shares of common
stock for every 50 shares of preferred stock owned in discharge of the
preferred dividends due on December 31, 2002. The shares were
issued on January 2, 2003. The fair market value was P30 per share
for common on the date of issue.

c. Poro Company acquired all outstanding stock of Pos Corporation on

May 1, 2004, in exchange for 40,000 shares of Poro common stock.

d. Poro split its common stock 3 for 2 on January 1, 2005, and 2 for 1 on
January 1, 2006.

e. Poro offered to convert 20% of the preferred stock to common stock on

the basis of 2 shares of common for 1 share of preferred. The offer was
accepted, and the conversion was made on July 1, 2006.

f. No cash dividends were declared on common stock until December 31,

2004. Cash dividends per share on common stock were declared and
paid as follows:
July 1 December 31
2004 - P4.00
2005 P3.00 P5.00
2006 P2.50 P2.00

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Outstanding number of common shares as of December 31, 2006

a. 364,800 c. 372,800
b. 684,800 d. 380,800

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2. Outstanding number of preferred shares as of December 31, 2006
a. 40,000 c. 32,000
b. 24,000 d. 96,000

3. Amount of cash dividends declared and paid to common stockholders

for the year 2005
a. P972,800 c. P1,459,200
b. P608,000 d. P1,981,440

4. Amount of cash dividends declared and paid to common stockholders

for the year 2006
a. P3,911,040 c. P1,713,600
b. P3,041,600 d. P1,673,600

Suggested Solution:

Question Nos. 1 and 2

Common Preferred
Jan. 02, 2002 80,000 40,000
Jan. 02, 2003 Common issued to preferred
shareholders (40,000/50 x 2) 1,600
Dec. 31, 2003 81,600 40,000
May 01, 2004 Acquisition of Pos Corp. 40,000
Dec. 31, 2004 121,600 40,000
Jan. 01, 2005 3:2 Common stock split
[(121,600 x 3/2) - 121,600] 60,800
Dec. 31, 2005 182,400 40,000
Jan. 01, 2006 2:1 Common stock split 182,400
Jul. 01, 2006 Conversion of preferred
(40,000 x 20% x 2) 16,000 (8,000)
Dec. 31, 2006 380,800 32,000

Question No. 3
Dividends declared, 7/1/05 (182,400 x P3.00) P 547,200
Dividends declared, 12/31/05 (182,400 x P5.00) 912,000
Cash dividends to common in 2005 P1,459,200

Question No. 4
Dividends declared, 7/1/06 (364,800 x P2.50) P 912,000
Dividends declared, 12/31/06 (380,800 x P2.00) 761,600
Cash dividends to common in 2006 P1,673,600

Answers: 1) D; 2) C; 3) C; 4) D

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PROBLEM NO. 11
You were able to gather the following information in connection with your
audit of Sogod Corporation:

• On January 1, 2004, Sogod Corporation granted stock options to

officers and key employees for the purchase of 30,000 shares of the
company’s P10 par value common stock at P25 per share. The options
are exercisable within a 5-year period beginning January 1, 2006, by
grantees still in the employ of the company, and expiring December 31,
2010. The service period for this award is 2 years. The fair value
option pricing model determined total compensation expense to be
P525,000. The stock was selling at P35 at the time the options were
granted.

• On April 1, 2005, 3,000 options were terminated when the employees

resigned from the company. The market value of common stock was
P35 per share on this date.

• On March 31, 2006, 18,000 option shares were exercised when the
market value of common stock was P40 per share.

QUESTIONS:

Based on the above and the result of your audit, determine the following:

1. Compensation expense for 2004

a. P525,000 c. P236,250
b. P262,500 d. P150,000

2. Net compensation expense for 2005

a. P262,500 c. P120,000
b. P210,000 d. P150,000

3. The exercise of the 18,000 options will result in a credit to APIC-excess

over par of
a. P585,000 c. P270,000
b. P620,000 d. P450,000

4. APIC from stock options as of December 31, 2006

a. P 0 c. P472,500
b. P90,000 d. P157,500

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Suggested Solution:

Question No. 1
Compensation expense for 2004 (P525,000 x 1/2) P262,500

PFRS 2 par. 10 states that for equity-settled share-based payment

transactions, the entity shall measure the goods or services received, and
the corresponding increase in equity, directly, at the fair value of the
goods or services rendered, unless the fair value cannot be estimated
reliably. If the entity cannot estimate reliably the fair value of the goods
or services received, the entity shall measure their fair value, and the
corresponding increase in equity, indirectly, by reference to the fair value
of the equity instruments granted.

In cases, that the entity is unable to estimate reliably the fair value of the
equity instruments granted at measurement date, the entity may
measure the equity instruments at their intrinsic value.

If the equity instruments granted do not vest until the counterparty

completes a specified period of service, the entity shall presume that the
services to be rendered by the counterparty as consideration for those
equity instruments will be received in the future, during the vesting
period. On the other hand, if the equity instruments granted vest
immediately, the entity shall recognize the services received in full, with
a corresponding increase in equity.

Question No. 2
Compensation expense for 2005 (P525,000 x 1/2) P262,500
Less stock options of terminated employees
(P525,000 x 3/30) 52,500
Net compensation expense for 2005 P210,000

Question No. 3
Journal entry to record the exercise of the options:
Cash (18,000 x P25) P 450,000
APIC-stock options (P472,500 x 18/27) 315,000
Common stock (18,000 x P10) P180,000
APIC-excess over par 585,000

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Question No. 4
Compensation expense, 2004 P262,500
Compensation expense, 2005 210,000
Stock options exercised (see no. 3) (315,000)
APIC from stock options P157,500

Answers: 1) B; 2) B; 3) A; 4) D

PROBLEM NO. 12
Select the best answer for each of the following:
1. When no independent stock transfer agents are employed and the
corporation issues its own stocks and maintains stock records,
canceled stock certificates should
a. Be destroyed to prevent fraudulent reissuance.
b. Be defaced and sent to the SEC.
c. Not be defaced but segregated from other stock certificates and
retained in a canceled certificates file.
d. Be defaced to prevent reissuance and attached to their
corresponding stubs.

2. All corporate capital stock transactions should ultimately be traced to

the
a. Numbered stock certificates.
b. Minutes of the Board of Directors.
c. Cash receipts journal.
d. Cash disbursements journal.

3. Which of the following information is most important when auditing

shareholders’ equity?
a. Entries in the capital stock account can be traced to a resolution in
the minutes of the board of directors' meetings.
b. Stock dividends and/or stock splits during the year were approved
by the shareholders.
c. Stock dividends are capitalized at par or stated value on the
dividend declaration date.
d. Changes in the capital stock account are verified by an independent
stock transfer agent.

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4. The primary responsibility of a bank acting as registrar of capital stock
is to
a. Verify that stock is issued in accordance with the authorization of
the board of directors and the articles of incorporation.
b. Act as an independent third party between the board of directors
and outside investors concerning mergers, acquisitions, and the
sale of treasury stock.
c. Ascertain that dividends declared do not exceed the statutory
amount allowable in the state of incorporation.
d. Account for stock certificates by comparing the total shares
outstanding to the total in the shareholders’ subsidiary ledger.

5. The CPA's examination normally need not include

a. Determining that dividend declaration is in compliance with debt
agreements.
b. Tracing the authorization for the dividends from the directors'
meetings.
c. Testing the propriety of the payment to the individual stockholders.
d. Detailed checking from the dividend payment list to the capital stock
records.

6. The board of directors of Mega Supermarkets declared a 20% cash

dividend at its meeting on March 12, 2005 payable on May 15, 2005 to
stockholders on record as of April 15, 2005. The dividend declaration
should be taken up in the company's financial statements of
a. March 12, 2005. c. December 31, 2005.
b. May 15, 2005. d. April 15, 2005.

7. When a client company does not maintain its own stock records, the
auditor most likely will
a. Obtain written confirmation from the transfer agent and registrar
concerning the number of shares issued and outstanding.
b. Inspect the stock book at year-end and accounting for all certificate
numbers.
c. Review of the corporate minutes for information as to shares
outstanding.
d. Confirm the number of shares outstanding at year-end with the
appropriate state official.

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8. An auditor usually obtains evidence of shareholders’ equity
transactions by reviewing the entity’s
a. Canceled stock certificates.
b. Transfer agent’s records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.

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

10. 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. Completeness c. Presentation and disclosure
b. Existence d. Valuation

Answers: 1) D; 2) B; 3) A; 4) A, 5) D; 6) A; 7) A; 8) D; 9) B; 10) C

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