The Review School of Accountancy ®Tel. No. 735-9807 & 734-3989 AUDITING PROBLEMS IRENEO/ESPENILLA/JAMES (QUIZZER? - SHE PROBLEM 1: A partial list of the accounts and ending account balances takén from the post- Closing trial balance of ALPHA CORPORATION on December 31, 2014 is shown as follows: Account ‘Amount. Accumulated profits - unappropriated 410,000 Bonds payable 220,000 Ordinary shares subscribed ‘ 50,000 Long term investments in equity securities 210,000 Additional paid-in capital on ordinary shares 460,000 Premium on bonds payable 30,000 Authorized ordinary shares at P10 par value 900,000 Preference shares subscribed 45,000 Additional paid-in capital on preference shares 112,000 ‘Authorized preference shares at P50 par value 400,000 Gain on sale of treasury shares 4,000 Unrealized increase in value of securities available for sale 3,000 Ordinary share warrants outstanding 20,000 Unissued ordinary shares 500,000 Unissued preference shares 100,000 Cash dividends payable ~ preference 50,000 Donated capital 25,000 Reserve for bond sinking fund 220,000 Reserve for depreciation 150,000 Revaluation increment in properties 100,000 Subscription receivable ~ preference (Jong term) 15,000 Subscription receivable ~ common (long term) 20,000 REQUIRED Compute the following: A B O° > 1. Ordinary shares issued 950,000 900,000 450,000 400,000 2. Preference shares issued 445,000 400,000 345,000, 300/000 3. Additional paid-in capital 592,000 596,000 621,000 651,000 3. Total contributed capital 1,332,000 1,352,000 1,377,000 1,381,000 5. Total legal capital - 1,395,000 1,300,000 795,000 700,000 6. Total stockholders’ equity 2,744,000 2,244,000 2,114,000 2,144,000 PROBLEM 2: 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 2,500,000 Paid-in capital in excess of par 3,750,000 Retained earnings 1,800,000 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: uly 4, Sold 15,000 treasury shares at P45. duly 15, 2 for 4 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 8 c D 7, Treasury stock 310,000 280,000 130,000 _ 205,000 8. Common stock 2,490,000 2,500,000 2,460,000 2,210,000 9. Paid-in capital in excess of par 3,750,00 3,720,000 3,735,000 3,810,000 10. Paid-in capital from treasury stock 150,000 ' 60,000" 75,000 0 11. Retained earnings 1,690,000 1,810,000 1,825,000 1,905,000 PROBLEM 3:in the course of your first time audit of MISAMIS INC.’s stockholder’s equity accotints for the audit year 2014, the following schedule of the company's stockholder’s equity accounts as of December 31, 2013 were presented by the client ‘Ordinary share capital, P100 par; 200,000 shares authorized, $0,000 shares issued and outstanding; options to purchase 10,000 shares at P100 per share are held by employees, no value having been assigned to these options. 5,000,000 Mei ch 0 es ME CS REY Tackce ee ere ee Te ReSA: The Review School of Accountancy Page 2 of 14 Share premium from ordinary shares 3,000,000 Accumulated profits 3,000,000 Further investigation and inquiry revealed the following information: a. The options referred to above were granted to each of its 100 employees on January 1, 2012 which shall vest three years thereafter provided employees remain in the company’s nploy and provided further that sales increase at least by an average of 5% per year. If the sales increase by an average of at least 5% per year, each year, employees shall Feceive 100 share options. If the sales increase by an average of at least 10% per year, each employee shall receive 200 share options. If the sales increase by an average of at least 15% per year, each employee shall receive 300 options. The fair value of each share option on the grant date was P30 per share. No employee left the company during the said vesting period. Records show that average sales increase aver the inclusive vesting period are: 2012, 8%; 2013, 10%, and,2014, 13%, b. On Nay 1, 2034, the company issued bonds of P5,000,000 at 120 giving each P1,000 bond @ warrant enabling the holder to purchase 4 shares at P120 per share for a one year period. Shares were selling for P140 at this time. The market value of bond ex-warrant is 105. Qh June 1, 2014, half of the warrants issued with bonds were exercised. G. On,August 1, the company issued rights to shareholders, permitting holders to acquire for a 60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for P150 at this time. All but 5,000 of these rights were exercised and additiohal shares were issued. @, The company declared a P5 per stare cash dividends on December 15, 2014 payable to stockholders as of December 31, 2014 on January 31, 2015. f, Net income before any adjustm nts amounted to PZ,500,000 in 2014. Required! 12. What is the retroactive adjustment to the beginning accun the options granted in 2012? ulated profits account related to ‘2. P600,000 . P200,00¢ b. P400,000 d, No adjustment necessary 13, What is the correct credit to the share premium account as a result of the exercise of rights referred to in item d? ‘a. 250,000 285,000 b. 270,000 é. 330,000 14, What is the total Additional Paid in Capital to be presented in the stockholders’ equity portion of the balance sheet as of December 31, 20147 ‘a. 3,130,000 2,530,000 b. 3,505,000 2,155,900 15. What is the correct Accumulated Profits as of December 31, 20147 a. 5,145,000 4,745,000 b. 4,900,000 d. 4,545,000 PROBEM 4; Effective April 23, 2014, the shareholders of Cold Corporation approved @ 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 stares authorized, 50,000 shares outstanding) 4,000,000 Share premium (PL2 per share on the issuance) 600,000 Accumulated profits and losses 5,400,000 The stock split shares were issued on June 20, 2014, 16. In Cold's June 30, 2014 statement of shareholders’ equity, balance af Ordinary share, Share premium and Accumulated profits and Losses are Ordinary share Share premium Accumulated profits 8,000,000 0 2,000,000 8,000,000 600,000 1,400,000 4,000,000 600,000 5,400,009 4,000,000 4,600,000 1,400,000 STOCKHOLDERS’ EQUITY. ReSA: The Review School of Accountancy Page 3 of 14 PROBLEM 5:0n December 31, 2013, Santiago Inc.'s ordinary shares were selling for P95 per share. On this date, the company creates a compensatory share option pian for its 70 employees. The plan document states that each employee may purchase 500 shares of its P20 par ordinary shares for P3S per share after one year if revenues reach PLSM, after 2 years if revenues reach P18M, or after three years if revenues reach P20M. On this date, based on a reliable option pricing model, Santiago Inc. estimates that each option which can be exercised up to 2018 under the condition that the employee is still within the employ of the company, has a . fair value of P18. The company has experience a stable 25% Increase in revenues for the past 5 years and reasonably expects the same trend for the upcoming years. The following information are available from the company’s records: Year ‘Actual Remaining Expected Revenues employees additional Earned at year end employee resignation 2014 PIa.sM 68. 8 2015 175M 65 5 2 20.5M 63 - Forty-five employees exercised their vested options on June 15, 2017 while three employees resigned on the same year without exercising their options, thus were forfeited. Required: 17. What is the compensation expense related to the share option plan to be recognized in the 2014 financial statements? ‘a. 315,000 ©. 207,000 b. 270,000 d, 90,000 18, What is the compensation expense related to the share option plan to be recognized in the 2015 financial statements? ‘a. 315,000 ¢. 207,000 b. 270,000 d. 90,000 19. What is the balance of the additional paid-in-capital account related to the share options as of December 31, 20167 ‘a. 207,000 ¢. 567,000 b. 540,000 d. 630,000 20, What is the balance of the ordinary share options outstanding account as of December 31, 2017. a. 135,000 ¢. 270,000 b. 162,000 d. 405,000 21, What is the resulting Share premium from the issuance of shares from the exercise of the . ‘employee options, . ‘a. 405,000 c. 742,500 b. 432,000 * d. 87,500 PROBLEM 6: On January, 2014, Pandora Corp. granted to 600 employees, 100 share options each exercisable after 3 years, subject to the employees staying with the company until the end of 2016. Options can be exercised if share price increases from P40 at the beginning of 2014 to ‘above P60 at the end 2016. The share options can be exercised at any time during the next five years, that js by the end of 2021. The company estimates the fair value of the share options on the grant date at PS per option. This estimate takes into account the possibility that the share price will exceed P6O per share at the end of 2016, thus options are exercisable and the possibility that the share price will not exceed P60 at the end of 2016, thus the share options will be forfeited. ‘The following information are deemed relevant: Fair value Fair ‘Actual. number of Estimated number of of Shares value of employees actually additional employees Options leaving the company _expected to leave the during the year company by the end of 2016 Dec. 31. 2014 pas 4. 5 45 Dec. 31, 2015 44, 3 20 35 Dec. 31, 2016 56 0 30 z AUDITING PROBLEMS - STOCKHOLDERS’ EQUITY APQ 2