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AUDIT OF STOCKHOLDERS EQUITY PROBLEMS
PROBLEM 1
You are engaged in the audit of WOODHAVEN Co., a new
client, at the close of its first fiscal year, April 30, 2011. The
books had been closed prior to the time you began your
year-end field work.
Shown below are the shareholders equity accounts in the
general ledger.
Ordinary Share Capital
Sept
14,
2010
CD May 1, 2010
CR
110,000
1,200,000
April 28, 2011
J
109,000
April28,2011
109,000

April 30, 2011

J
5,200,000
April 30, 2011 J
800,000
A.

B.

Retained Earnings
February
2,2011
52,500
April30,2011
800,000
Income Summary
April 30, 2011
6,000,000

CR

Additional information is as follows:

From the articles of incorporation:
Authorized share capital
30,000 shares
Par value per share
P 100
Directors minutes include the following resolutions:
April 30, 2010
Authorized the issue of 10,000 shares
at P 120 per share.

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Sept 13, 2010
Authorized the acquisition of
1,000 shares at P 110.
Feb 01, 2011 Authorized the reissue of 500 treasury
shares at P 105.
April 28, 2011
Declared a 10% stock dividend,
payable May 31, 2011, to shareholders of
record as of April 30, 2011. The market
value of the WOODHAVEN Co. stock on
April 28, 2011, was P 130 per share.
Based on the above information, determine the correct
balances of the following accounts on April 30, 2011.
1. Ordinary Share Capital
a. P 1,199,000
b.
P 1,000,000
c.
P 1,100,000
d. P 900,000
2.
3.
4.
5.

Treasury Shares
a. P 110,000 b. P 100,000
P 55,000
Share Premium
a. P 226,000 b. P 231,000
P 200,000
Retained Earnings
a. P 619,000 b. P 800,000
P 797,500
Stock Dividends Payable
a. P 123,500 b. P 95,000
P0

c.

P 50,000

d.

c.

P 228,500

d.

c.

P 676,500

d.

c.

P 109,000

d.

PROBLEM 2
COLDSPRING Corp., organized on June 1, 2011, was
authorized to issue shares as follows:

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800,000 shares of 9% preference shares, convertible,
P100 par
2,500,000 ordinary shares, P2.50 stated value
During the remainder of the fiscal year ended May 31, 2010,
the following transactions were completed in the order
given:
300,000 shares of preference shares were subscribed
for at P105, and 900,000 ordinary shares were
subscribed for at P26.
Both subscriptions were
payable 30% upon subscription, the balance in one
payment.
The second subscription payment was received, except
one subscriber for 60,000 ordinary shares defaulted on
payment. The full amount paid by this subscriber was
returned, and all of the fully paid shares was issued.
150,000 ordinary shares were reacquired by purchase
at P28.
Each preference share was converted into four
ordinary shares.
The treasury share was exchanged for machinery with
a fair market value of P4,300,000.
There was a 2-for-1 share split, and the stated value of
the new ordinary share is P1.25.
Net income was P830,000.

1.

QUESTIONS:
Based on the above and the result of your audit, determine
the following as of December 31, 2010:
Ordinary Share Capital
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2.

3.

4.

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a. P2,550,000
b. P2,100,000 c.
P5,100,000 d. P4,200,000
Total Share Premium
a. P50,890,000
b. P48,340,000c.
P48,808,000 d. P48,240,000
Total Contributed Capital
a. P53,908,000
b. P53,440,000c.
P55,990,000 d. P53,340,000
Total Shareholders equity
a. P54,270,000
b. P54,738,000c.
P56,820,000 d. P54,170,000
PROBLEM 3
The following information about a share based compensation
of UNIONDALE Company:
Vesting condition
Continued employment for three years
Share options can be exercised if the share price
increases from P100 on Jan. 1, 2009 to P130 on
Dec. 31, 2011. The options can be exercised any
time during the next seven years
Assumptions:
10,000 share options granted to senior
executives on Jan. 1, 2009
All senior executives are still in service as of Dec.
31, 2011
The entity uses a pricing model that takes into
account the possibility that the share price will
exceed P130 on Dec. 31, 2011.
FV of option using this market condition is P48
per option.
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1. How much should be recognized as expense in 2011
assuming the share price increases by P 100?
a.
P0
b. P 160,000
c. P 320,000
d. P 480,000
2. How much should be recognized as expense in 2011
assuming the share price does not increase by P 100?
a. P 0
b. P 160,000
c. P 320,000
d. P 480,000
PROBLEM 4
On January 1, 2006, BRENTWOOD Ltd. granted stock
options to its chief executive officer (CEO). This is the only
stock option plan that BRENTWOOD offers. The details of
the stock options are set out below:
Option to purchase
5,000 no-par-value
common shares
Option price per share
P62.00
Market price per share at grant date
P57.00
Stock options expire
The earlier of 8 years
after issuance or the
employees
cessation
of
employment with the company
for any reason other than
retirement.
The options are first exercisable
The earlier of 4 years
after issuance or the date on
which an employee reaches the
retirement age of 65.
Fair value at grant date, as determined
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By using a binomial valuation model
P10.00
On January 1, 2011, 4,000 of the options were exercised
when the market price of the common shares was P 78.00.
The rest of the options were allowed to expire.
Compute the amount of compensation expense to be
recognized in 2006.
a.
P 50,000 b. P 40,000
c. P 10,000 d.
P
12,500
2. The journal entry to record the exercise of 400 options on
January 1, 2011 will require
a.
a debit to cash of P312,000
b.
a debit to Additional paid-in capital of P40,000
c.
a credit to Ordinary share capital of P40,000
d.
a credit to Additional paid-in capital of P248,000

PROBLEM 5
Retained Earnings account of ELLENVILLE Co., follows:
Date
Particulars
Debit
Credit
01/01/08
Balance
P80,600
06/30/08
Dividends Paid
P25,000
12/31/08
Net income for the year
42,500
02/07/10
Premium on capital stock
10,000
04/30/10
Loss on sale of land
5,000
09/30/10
Dividends paid
20,000
12/31/10
Net income for the year
5,800
12/31/10
Revaluation surplus
40,000
07/01/11
Gain on sale of Treasury Stock
1,600
12/31/11
Net income for the year
33,700
Unrealized loss on
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AFS securities
3,400

What is the correct balance of the Retained Earnings account o

December 31, 2011?
a. P 112,600
b. P117,600
c. P 123,200
d.
111,800
PROBLEM 6
The following information has been taken from the ledger
accounts of FRANKLIN SQUARE Corp.
Total income since incorporation
P317,000
Total cash dividends paid
60,000
Proceeds from sale of donated stock
40,000
Total value of stock dividends distributed
30,000
Gains on treasury stock transactions
18,000
Unamortized discount on bonds payable
32,000
Treasury stock
20,000
Appropriated for plant expansion
70,000
Unpaid cash dividends
24,000

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REQUIRED:
Determine
the
current
balance
of
unappropriated retained earnings.
a. P 203,000
b. P113,000
c. P 133,000
d. none of these

PROBLEM 7
RFM Company entered into a contract with a customer to
supply and install a machine on January 1, 2011 and to
service the machine on July 1, 2011 and January 1, 2012.
The cost of the machine to RFM is P80,000. It is possible for
a customer to purchase both the machine and the
maintenance services separately.
The customer is contractually obliged to pay RFM P200,000
on January 1, 2012.
The prevailing rate for one year credit granted to trade
customers in the industry is 5% per six-month period.
Experience has shown that the servicing of a machine of the
model sold to the customer is expected to cost RFM P15,000
to perform the first service and P25,000 to perform the
second service. When RFM provides machine services to
customers in a separate transaction, it earns a margin of
50% on cost.
On January 1, 2011, the cash selling price of a machine of
the model sold to the customer is 125,964.
Required:
1. The amount of income that should be recognized on the
sale of machine in 2011 is:
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2.

3.

4.

5.

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a. P125,964 b. P200,000
c. P185,000
d. P160,000
The amount of income that should be recognized on the
sale of services in 2011 is:
a. P25,000
b. P15,000
c. P22,500
d.
P37,500
The amount of income that should be recognized on the
sale of services in 2012 is:
a. P25,000
b. P15,000
c. P22,500
d.
P37,500
The amount of interest revenue that should be recognized
in 2011 is:
a. P6,298
b. P7,738
c. P14,036
d.
P0
The amount of interest revenue that should be recognized
in 2012 is:
a. P6,298
b. P7,738
c. P20,000
d.
P0

/jgs