Name

Year and Section

Date

:______________________________________________
:______________________________________________
:______________________________________________

Problem No.1
A CPA was engaged by BOOMPANES COMPANY in 2014 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 2012 and 2013 but had not been
entered in the books until paid.
b) Improvements in buildings and equipment of P324,000had been debited to
expense at the end of April 2011. Improvements are estimated to have 12 year
life. The company uses straight line method in recording depreciation and
computes depreciation to the nearest month.
c) The physical inventory of merchandise had been overstated by P 96,000 at the end
of 2012 and by P42,500 at the end of 2013.
d) The merchandise inventories at the end of 2013 and 2014 did not include
merchandise that was then in transit and to which the company had title. These
shipments of P63,000 and P 87,000 were recorded as purchases in January of
2014 and 2015, respectively.
e) The company had failed to record sales commission payable of P98,000 and
P33,000 at the end of 2013 and 2014 ,respectively.
f) The company had failed to recognize supplies on hand of P25,500 and P51,700 at
the end of 2013 and 2014, respectively.
g) A delivery vehicle was sold for P100,000 on July 1,2014 and the proceeds were
credited to the Sales Account. The vehicle was acquired on January 1,2011, for
P600,000. At that time, it had an estimated life of 6 years with no residual value.
No depreciation was recorded on this vehicle in 2014.
The retained earnings account appeared as shown below on the date the CPA began the
examination.
Retained Earnings
Date
2012
Jan.1
Dec. 31
2013
Jan.10
Mar. 6
Dec. 31
2014
Jan.10
Dec. 31

Item

Debit

Balance
Net income for the year
Dividends paid
Stock sold excess over par
Net income for the year

297,500
9,200

1.What is the corrected 2012 net income?

a.P413,000
b. P230,000 c. P221,000

d. P178,500

2.What is the corrected 2013 net income?

a.P 116,000 b. P223,000 c. P419,000

d. P386,000

3.What is the corrected 2014 net loss?

a. P297,500 b.P 254,900 c. P287,500

d. P 202,500

4. What is the corrected retained earnings on December 31,2013?

a. P 261,000 b. P 279,000 c. P252,000 d. P 270,000
5. What is the corrected retained earnings on December 31,2014?
a. P 6,100
b. P 58,500 c. P76,500
d. P67,500

Balance

P344,000

P195,000
539,000

123,000
269,000

152,500
275,500
544,500

P386,500

Dividends paid
Net loss for year

Problem No. 2

Credit

247,000
237,800

BERNADETTE CO. began operatios on January 1,2014. Authorized were 100,000

ordinary shares of P50 par value and 50,000 convertible preference shares of 10% P50
parvalue. The following transactions involving shareholders equity occurred during the
first year of operations.
Jan. 1
Issued 10,000 ordianry shares to the corporation promoters in exchange
for property valued at P 1,250,000 and services valued at P250,000. The property had
cost the promoters P900,000 three years before and was carried on the promoters books
at P750,000.
Feb. 22
Issued 15,000 preference shares at a price of P60 per share. Each share
can be converted to five ordinary shares. The entity paid P25,000 to an agent for selling
the shares.
Mar 10

Sold 25,000 ordinary shares for P130 per share. Issue cost were P100,000.

Apr 10

20,000 ordinary shares were sold under share subscriptions at P175 per
share. No share certificates are issued until a subscription contract is paid in full.
No cash was received.
July 15
Exchange 12,000 ordinary sharesand 20,000 preferences shares for a
building with a fairvalue of P3,500,000. The building was originally purchased
for P3,250,000 by the owner and has a book value of P2,400,000. In addition,
10,000 ordinary shares were sold for P 1,500,000 cash.
Aug 1
Received payments in full for half of the share subscriptions and partial
payments on the rest of the subscriptions. Total cash received was P2,250,00.
Share certificates were issued for the subscriptions paid in full.

Aug 31

Received notice from holders of share subscriptions for 5,000 shares that
they would not pay further on the subscriptions because the price of the share had
fallen to P95 per share. The amount still due on those contracts was P750,000.
Amount previously paid on the contracts areforfeited according to the agreement.
Dec31
Net income for the first year of operations was P 1,500,000.
Based on the preceeding information, determine the correct balances of the following at
December31,2014:
1. Ordinary Share capital
a. P 2,850,000
b. P3,350,000

c. P 4,550,000

d. P 2,750,000

2.Share premium ordinary

a. P 5,775,000
b. P 7,675,000

c. P6,975,000

d. P 6,850,000

3. Share premium preference

a. P825,000
b. P950,000

c. P875,000

d. P850,000

4. Subscription receivable
a. P2,250,000
b. P 750,000

c. P1,250,000

d. P500,000

5. Total shareholders equity

a. P14,275,000
b. P12,775,000

c. P13,775,000

d. P15,275,000

Problem no. 3

Presented below are three (3) independent cases relating to the audit of shareholders
equity. Answer the question/s at the end of each case.
CHINITO COMPANY began operation on January 1,2013 by issuing at P15 per share
one half of the 500,000 ordinary shares (P1 par value) that had been authorized for
issue. In addition , CHINITO has 250,000 6% preference shares (P5 par value)
authorized. During 2013, Chinito reported net income of P620,000 and declared
dividends of P130,000.
During 2014, Chinito completed the following transactions:
Jan 10
Apr 2
July 21
Oct 25
Dec 31

Issued an additional 40,000 ordinary shares for P18 per share.

Issued 115,000 preference shares for P7 per share.
Authorized the acquisition of a custom made machine to be delivered in
January 2015. Chinito appropriated of P147,500 of reta ned earnings for
the purchase of the machine.
Issued an additional 55,000 preferences shares for P9 pershare.
Reported P610,000 of net income and declared a dividend of P317,500 to
shareholders of record on January 31,2015, to be paid on February 4,2015.

1. What is the total shareholders equity on December31,2014?

a. P 6,552,500
b. P 4,240,000
c. P6,405,000 d. P6,870,000
2. What is the unappropriated retained earnings balance on December 31,2014?
a. P 490,000
b. P952,500
c. P 635,000 d. P 782,500
BURITO CO> is authorized to issue 300,000 of P2 par value ordinary shares. The
company has the following transactions:
a) Issued 60,000 shares at P8 per share; received cash.
b) Issued 750 shares, selling at P35 per share, to lawyers for services in connection
with the organization of the corporation. The value of the legal services was
P27,000.
c) Issued 900 shares, valued objectively at P30,000 to the employees instead of
paying them cash wages.
d) Issued 70,000 shares in exchange for a building valued at P885,000 and land
valued at P240,000. (The building was originally acquired by the investor for
P750,000 and has P300,000 of accumulated depreciation; the land was originally
acquired for P90,000.)
e) Received cash for P19,500 shares issued at P38 per share.
f) Issued 12,000 shares at P45 per share;received cash.
3. The statement of financial position will report share premium of
a. P2,591,200
b. P2,616,700
c. P2,588,500
d. P2,563,000
CHIQUITO COMPANY has been paying regularly quarterly dividends of P1.50 and
wants to pay the same amount in the third quarter of 2014. The following information
relates to the companys equity:
Jan 1
Feb 15
Mar 31
May 12

Share outstanding, 350,000; P2 par(750,000 shares authorized).

Issued 30,000 new shares at P10.50.
Paid quarterly dividends of P1.50 per share.
Converted P1,000,000 of P1,000bonds to ordinary shares at the rate of 40
shares per P1,000 bond.
June 15 Issued a 10% stock dividend.
30
Paid quarterly dividends of P1.50 per share.
4. What is the total amount that chiquito will have to pay in dividends in the third
quarter in order to pay P1.50 per share?
a. P 525,000
b. P627,000 c. P570,000 d. P693,000

5. What is the total amount of dividends to be distributed during the year assuming
no equity transaction occur after June 30?
a. P2,280,000
b. P2,649,000
c. P2,772,000
d. P2,202,000
Problem No.4
BEBE CO. was formed on July 1,2011. It was authorized to issue 1,800,000 shares of
P10 par value ordinary shares and 600,000 shares of 8 percent P25 par value, cumulative
and non participating preference shares. BEBE CO. has a July 1 June 30 fiscal year.
The following information relates to the shareholders equity accounts of BEBE CO.:
Ordinary Shares
Prior to the 2013 2014 fiscal year, BEBE CO. had 660,000 ordinary shares issued as
follows:
1. 510,000 shares were issued for cash on July 1,2011, at P31 per share.
2. On July 24,2011, 30,000 shares were exchange for a plot of land which cost the
seller P 420,000 in 2005 and had an estimated market value of P1,320,000 on July
24,2011.
3. 120,000 shares were issued on March 1,2012, for P42 per share.
During the 2013 2014 fiscal year, the following transactions regarding ordinary shares
took place:
November 30,2013 BEBE CO. purchased 12,000 of its own shares on the open market
at P39 per share.
December 15,2013 BEBE CO. declared a 5% stock dividends for shareholders of
record on January 15,2014, to be issued on January 31,2014. BEBE CO. was having a
liquidity problem and could not afford a cash dividend at the time. BEBE CO.s
ordinary shares were selling at P52 per share on December 15,2013
June 20,2014
BEBE CO. sold of its own ordinary shares that it had purchased on
November30,2013 for P126,000.
Preference Shares
BEBE Co. issued 240,000 preference shares at P44 per share on July 1,2012.
Cash Dividends
BEBE 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 sinceinception of the company through June
30,2014, are shown below:
Declaration Date
12/15/2012
6/15/2013
12/15/2013

Share Capital Ordinary

P0.30 per share
P0.30 per share
-

Share Capital Preference

P1.00 per share
P1.00 per share
P1.00 per share

No cash dividends were declared during June 2014 due to the companys liquidity
problems.

Retained Earnings
As of June 30,2013, BEBE Cos retained earnings account had a balance of P4,140,000.
For the fiscal year ending June 30,2014, BEBE CO. reported net income of P240,000.
Required:
Compute the adjusted balances of the following as of June 30,2014:
a.
b.
c.
d.
e.
f.
g.
h.

Share capital - preference

Share capital - ordinary
Share premium - preference
Share premium - ordinary
Share premium - treasury
Retained earnings (before appropriation for treasury
shares)
Treasury shares
Total shareholders' equity

Problem No. 5
The shareholders equity section of BAHRAIN CORPORATIONs statement position as
of December 31,2013, is as follows:
Share capital Ordinary (P10 par,750,000 shares
Authorized, 412,500 issued and outstanding
Share premium
Total paid in capital
Unappropriated retained earnings
Appropriated retained earnings
Total retained earnings
Total sharesholders equity

P4,125,000
825,000
P4,950,000
P2,002,500
750,000
2,752,500
P7,702,500

Bahrain Corporation had the following shareholders equity transaction during 2014:
Jan 15
Completed the building renovation for which P750,000 of retained
earnings had been restricted. Paid the contractor P727,500, all of which is capitalized.
Mar 3
Issued 150,000additional ordinary shares for P18 per share.
May 18
Declared a dividend of P1.50 per share to be paid on July 31,2014, to
shareholders of record on June 30,2014.
June 19
Approved additional building renovation to be funded enternally. The
estimated cost of the project is P600,000, and retained earnings are to be restricted for
that amount.
July 31
Paid the dividend.
Nov 12
Declared a property dividend to be paid on January 5,2015. The dividend
is to consist of equipment that has a carrying amount of P360,000 and a fair value of
P472,500 on November 12.
Dec 31
Net income for 2014 ( before recognition of impairment loss on the
equipment declared as property dividend) is P1,327,500. The equipments fair value
less cost to distribute on December 31 is P330,000.
1.Share capital ordinary on December 31,2014 is
a. P5,625,000
b. P4,125,000
c. P4,950,000

d. P7,650,000

2.
Share premium on December 31,2014 is
a. P2,625,000
b. P825,000
c. P2,025,000

d. P1,200,000

3.Unappropriated retained earnings on December 31,2014 is

a. P2,163,750
b. P2,246,250
c. P 2,133,750

d.P 2,276,250

4.The total shareholders equity on December 31,2014 is

a. P10,376,250
b. P10,526,250
c. P9,926,250

d. P7,650,000

PROBLEM NO.6

You were engaged by CITY CORPORATION, a publicly held company whose shares
are traded on the Philippines Stock Exchange, to conduct an audit of its 2014
financial statements. You were told by the companys controller that there were
numerous equity transactions that took place in 2014. The shareholders equity
accounts at December 31,2013, had the following balances:
Share capital Preference, P100 par value,6% cumulative;
30,000 shares authorized; 18,000 shares issued
And outstanding
Share capital Ordinary, P1 par value , 1,800,000 shares
Authorized; 1,200,000 shares issued and outstanding
Share premium
Retained Earnings
Total shareholders equity

P1,800,000
1,200,000
2,400,000
980,000
P 6,380,000

You summarized the following transaction during 2014 and other information relating to
the shareholders equity in your working papers as follows:

January 6,204 Issued 45,000 ordinary shares 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 P420,000, and an assessed value for property taxes of
P490,0000.
January 31,2014Sold 2,400, 1,000,12% bonds due January 31,2024, at 98
with one detachable share warrant attached to each bond . Interest is payable
annually on January 31. The fair value of the bonds without the share warrants is
95. The detachable warrants have a fair value of P50 each and expire on January
31,2015. Each warrant entitles the holder to purchase 10 ordinary shares at P10
per share.
February 22,2014Purchased 15,000 of its own ordinary shares to be held as
treasury shares for P24 per share.
February 28,2014Subscription for 42,000 ordinary shares were received at
P26 per share , payable 50% down and the balance by March 15.
March 15,2014The balance due on 36,000 ordinary shares was received
and those shares were issued. The subscriber who defaulted on the 6,000
remaining shares forfeited the down payment in accordance with the subscription
agreement.
August 30,2014Reiisued 6,000 treasury shares for P20 per share.
September 14,2014- There were 1,890 warrants detached from the bonds and
exercised.
November 30,2014- Declared the required annual cash dividends on preferences
shares for 2014. The dividends was paid on January 15,2015.
January 8,2015Before closing the accounting records for 2014, CITY
became awarethat no depreciation had been for 2013 for a machine purchased on
July 1,2013. The machine was properly capitalized at P960,000 and had an
estimated usefull life of eight years when purchased. The appropriate correcting
entry was recorded on the same date.

Adjusted net income for 2014 was P840,000.

Based on the foregoing and the result of your audit , answer the following: (Ignore
income tax implications.)
1. Share capital ordinary at December 31,2014 is
a. P1,290,900
b. P1,305,900
c. P1,281,000 d.P1,299,900
2. How much is the total share premium as of Decemeber 31,2014?
a. P4,239,600
b. P4,317,600
c. P4,363,200 d. P4,065,100
3. The unappropriated retained earnings on December 31,2014 is
a. P982,550
b. P622,550
c. P766,550 d. P790,550
4. How much is the total shareholders equity on December31,2014?

a. P8,184,050

b. P7,968,050

c. P8,168,750 d. P8,190,050

Problem No.7
At the beginning of 2014, an entity grants 300 share options each to 1,000 employees.
The grant is conditional upon the employees remaining in the entitys employ during
a vesting period of three years.
The exercise price at grant date is estimated at P30. However, the exercise price drops
to P20 if the entitys earnings increase by at least an average of 10% per year over the
three year period.
On grant date, the entity estimates that the fair value of the share options , with an
exercise price of P20, is P10 per option. If the exercise price is P30, the entity
estimates that the share options have a fair value of P9 per option.
The following actual events occurred:
2014

60 employees have left. The entity expects, on the basis of a weighted average
probability, that a further 60 employees will leave during 2016 and 2016,
respectively.
The entitys earnings increased by 12% , and the entity expects that earnings will
continue to increase at this rate over the next two years. The entity therefore
expects that the earnings target will be achieved, and hence , the share options
will have an exercise price of P20.

2015

2016

At year end, a further 70 employees have resigned. The entity expects that
further 60 employees will leave during 2016.
The entitys earnings increased by 13%, and it continues to expext that the
earnings target will be achieved.
A futher56 employees have left by the end of the year
Due to a general decrease in market demand, the entitys earning increased by
only 3% Because the earnings target was not achieved, the 100 vestedshare
options for each employee have exercise price of P30.

Based on the preceding information, determine the following:

1. Compensation expense for 2014
a. P 810,000
b,. P820,000

c. P577,800

d. P732,600

2. Compensation expense for 2015

a. P577,800
b. P820,000

c. P800,000

d. P810,000

3. Compensation expense for 2016

a. P577,800
b. P820,000

c. P810,000

d. P800,000

4. Share options outstanding at the end of 2015

a. P2,430,000 b. P1,377,800
c. P800,000

d. P1,620,000

5. Share options outstanding at the end of 2016

a. 2,430,000
b. P0
c. P2,460,000 d. P2,197,800

Problem no. 8

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 years2 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 year3,150 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 existas 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 year3,4 and 5 are also shown below.
Year

Fair Value
1
2
3
4
5

IntrinsicValue

P14.40
15.50
18.20
21.40

P15.00
20.00
25.00

REQUIRED:
Compute the amounts of compensation expense and liability that the entity should
report in years 1 to 5.
Problem No. 9
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 entitys share price is P50 per share. At the end of years1,2 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 antity estimates that the grant datefair value of the
shares alternative is P48 per share.
At the and of year 3, the employee chooses:
Scenario 1: The cash alternative
Scenario 2: The equity alternative
Based on the preceeding information , answer the following:
1. What is the total fair value of the equity components 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. 17,333
c. P21,867

d. P19,333

4.What is the compensation expense in 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
Problem no. 10
1. In an examination of shareholders equity , an auditor is most concerned that
a. Capital stocks transactions are properly authorized.
b. Stocks splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders
d. Changes in the accounts are verified by a bark serving as a registrar and stock transfer
agent
2.In an audit of a medium sized manufacturing concern, which one of the following areas
can be expectedto require the least amount of audit time?
a. Owners equity
c. Revenue
b. Assets
d. Liabilities
3. When a corporate client maintains its own stock records , the auditor primarily will
rely upon.
a.Confirmation with the company secretary of shares outstanding at year end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of sharesoutstanding at yearend with the appropriate starte
official.
d. Inspection of the stock book at year end and accounting for all certificate numbers.
4. When a client company does not maintains its own stock records, the auditor should
obtain written confirmation from the transfer agent and registar concerning
a. Restrictions on the payment of dividends.
b. The number of shares issued and outstanding
c. Guarantees of preferred stock liquidation value
d. The number of shares subject to agreement to repurchase.
5.The auditor is concerned with establishing that dividends are paid to client corporation
shareholders owning stock as of the
a. Issue date
c. Record Date
b. Declaration date
d. Payment date
6. An audit program of the retained earnings account should include a step that requires
verifications of the
a. Fair value used to charge retained earnings to account for a two one stock split.
b. Approval of the adjustment to the beginning balance as a result of a write down of an
account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss arising from disposition of treasury shares.
7. During an audit of an entitys 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 managements assertion
of
a. Existence
c. Valuation
b. Completeness
d. Presentation and disclosure
8.If the auditee has a material amount of treasury stock on hand at year end, the auditor
should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transaction during the
year.
c. Not count the certificates if treasury stock is a deduction from shareholders equity
d. Count the certificates only if the company classifies treasury stock with otherassets.

9. In performing tests concerning the granting of stocks options, an auditor should

a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the existence of option holders in the entitys payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.
10 The auditor would not expect the client to debit retained earnings for which of the
following transactions?
A. A4 for 1 stock split
b. Loss arising from disposition of treasury shares.
c. A 1 for 10 stock dividend.
d. Correction of error affecting prior years earnings.