(CPAREMEW SCHOOL OF THE PHILIPPINES AP-8601 Monne ‘AUDITING PROBLEMS CPAReviow ‘AUDIT OF SHAREHOLDERS’ EQUITY PROBLEM NO. 1 KAYA CO. began operations on January 1. Authoriand were 120,000 shares of PIO par value ‘rcinry shares an 240,000 shares of 10%, F100 par value preference shares, The following transactions invlving shareholders’ equity ocaurred during the fist year of operations. Jan. 1 Issued 30,000 oxinary shares tothe corporation promt in exchange for fand valued at P1,020,000 and services valued at P420,000. ‘The property had cost the oromoters 'P540,000 3 years before and was carried cn the promoters books at P300,000- Feb, 23. Issued 60,000 preference shares with 2 per value of PLOO per share, The shares were Issued et a price of PISO per share, and the company paid P450,000 to an agent Fer ‘sellng the shares, Mar. 10, Sold 18,000 ordinary shares for P390 per share, Issue costs were P150,000. ‘Apr. 10. 24,000 ordinary shares were sold under share subscriptions at P450 per share. NO Shares are ‘sued unt a Subscription contract i pain full. No cash was received. July 14. Exchanged 4,200 ordinary shares and 8,400 preference shares for a building witha flr value of P3,000,000, “The bukding was originally purchased for P2,280,000 by the Investors and nas a book value OF P1,320,000. In addon, 3,600 ordinary shores were sald for P2,440,000 in cash, ‘Aug, 3. Received payments In ful for half of the share subscriptions and payments on account onthe rest ofthe subscrgtions. Total cash recelved was P8400,000. Share certificates ‘were issued forthe subsoriptions pad in ful. Nov. 2. Issued 5,000 oruinary shares for an ounstancing bank Ioan of P2,100,000, inducing ‘2cerved interest of P100,000, KAVA CO.‘ onary shares are quoted at P410 por share ‘on this dete 10 Issued 10,000 preference shares for P1,250,000, with 10,000 warrants to acquire 5,000 ‘orthnary shares at PAOD per share. On this date, the warrants have a market value of P10, but the preference share has no iniown market value ex warrant. ‘Dee. 10. 9,000 warrants issued on Nov. 10 were exercised ard the remainder lapsed. 34 Netincome forthe Fist yer of operations wes P3,600,000. 31. Declared a cash dvdend of PID per share on preference shares and F20 per sharon ‘ortinary shares, payable on February 10 ta sharehoiders of record on January 15, * [easedl on the preceding information, calculate the halances of each of the following: reference shore contd ‘Share premium ~ preference shores ‘Grdinary share capeal ‘Share premium ~ ordinary shaves Retained earings "Total shareholders equity ‘90000000000000000 Page Loft PagesPROBLEM NO. 2 ‘You were engaged by CITY CORPORATION, a publicly held company’ whose shares are traded 09 the Philpine Stock Exchange, to conduct an aut of ts 2019 financil statements. You were tid by the company’s controler that there were numerous equity transactions that took place in 2019. The shareholders’ equity eccounts at December 31, 2018, had the folowing balances: ‘Share capltal-Preference, P100 par valve, 6% cumulative; '9,000 shares authorizd; 5,400 shares issued and outstanding 540,000 ‘Share captal-Ordinary, P1 par value, 540,000 shares authorized; "3€0,000 shares issued and outssanding 360,000 Share premium 720,000 Retained earnings 294,000 “Total shareholders’ equity eiis.00 You summarized the following transactions during 2019 and other information relating to the shareholders’ equity in your working papers 2s fllons: “+ January 6, 2019 — Issued 13,500 ordinary shares in exchange for land. On he date issued, the shares had a market price of P16.50 per share. The land had a carving value of P126,000. + January 20, 2019 - Issued 10,000 ordinary shares to Atty. A. Santiago as compensation or 500 Rous of legal services performed. Alty. Sartiago usualy bis P400 per hour for legal serves. On the date of issuance, the share was trading at P17. ‘+ January 31, 2019 ~ Sold 720, P1,000, 12% bonds due Jonuary 31, 2029, at 96 with one ‘etochable share warrant attached to each bond. Interest is payable annually on January 32 ‘The fair value ofthe bonds without the share warrants is 95. The detachable warrants have 2 fair value of PSO each and expire on January 31, 2020. Each werrant entitles the holder to purchase 10 ordinary shares at P10 per share. = February 22, 2019 - Purchased 4,500 of its own ordinary shares to be held as treasury shares for P24 per share. ‘© February 28, 2019 - Subscriptions for 12,600 ordinary shares were received at P26 Per share, payable 50% down and the balance by March 15. «March 15, 2019 - The balance due on 10,800 ordinary shares was received and these Shares were issued. The subscriber who defaulted on the 1,600 remaining shares forfeited ‘the down payment in accordance with the subscription agreement ‘+ August 30, 2019 - Reissued 1,800 treasury shares for P20 per share. ‘= September 14, 2019 - There were 567 warrants detached from the bonds and exercised. + November 30, 2019 - Declared a cash dividend of PO.50 per share to all ordinary shareholders of record December 15, 2019. The dividend was paid on December 30, 2019. + December 15, 2019 - Dedared the required annual cash dividends on preference shares for 2019, The dividend was paid on January 15, 2020. «© January 8, 2020 — Before dosing the accounting records for 2019, CITY became aware that ino depreciation had been recordad for 2018 for a machine purchased on July 1, 2018. The machine was propesty capitalized at P288,000 and had an estimated useful life of eight years ‘when purchased, ‘The appropriate correcting entry was recorded on the same date, ‘+ Adjusted net income for 2019 was P252,000. Page 208 Pages(CoA MANILA Arsen, Aun oF SHARENOWDERS ETL ‘Based on the foregoing and the result of your audit, answer the following: (Ignore {income tax implications.) 1. Share capital—ordinary at December 31, 2018, i A P394,200 8, 397,270 . F399,870 ©. 401,770 2. How much ste total share premium as of December 31, 20197 APL379530. — B PI,43i,880 —C. PLASS,280 ©, PL A68,960 3. The unapproprited retained earrings on December 34,2019, is ‘A. PIB 765 B. P224,965 232,165 D. 726,765 4. How much is the total shareholders’ equty on December 31, 20197 APES AIS ——-B. P2615,625 —C. P2,620,415 —_D. F2,622,015 ‘00000000000000000, PROBLEM NO.3 BEBE CO. was formed on July 1, 2016. Tt was authorized to Issue 600,000 shares of P10 par velue ordinary shares and 200,000 stares of 8 percent P25 par value, cumulative and ‘nonperticipating preference shares. BEBE CO, has @ July 1-June 30 fiscal year. The following information relates tothe shareholders‘ equity accounts of BEBE CO. Ordinary Shares Prior to the 2018-2019 fiscal year, BEBE CO. had 220,000 ordinary shares issued 2s follows: 41. 170,000 shares were issued for cash on July 1, 2016, at P35 per share. 2. On Duly 24, 2016, 10,000 shares were exchanged for a plot of land which cost the seller 'P140,000 in 2010 and had a fair value of P2,200,000 on July 24, 2016, 3. 40,000 shares were issued on March 2017, for P35 per share. During the 2018-2019 fiscal year, the folowtng transactions regarding ondiary shares took rece: November 30, 2018 BEBE.CO. purchased 4,000 of its own shares on the open market at P39 per share. December 15, 2018 BEBE CO. decared a S% share dividend for shareholders of record on January 15, 2019, to be Issued on January 31, 2019. BEBE CO. was inaving a iquidty problem and could not afford a cash dividend at the ‘time. BEBE 00/5 ordinary shares were selng at P55 per share on December 15, 2018, June 20, 2019 BEBE CO. sold 1,000 of ts own ordinary shares that it had purchased on [November 30, 2038, for P42,000. Preference Shares BEBE CO, issued 80,000 preference shares at P44 per share on July 1, 2017. Cash Dividends BEBE CO. has followed 2 schesiule of deciaring cash dividends in December and June, payment being made to shareholders of record inthe folowing month. The cash dividends hhave been declared since inception of the companty through June 30, 2019, ere shown bel Page 30 Pages '(PAR A ‘Share Canta-Ordinary Hl 12/45/17 0-30 per share PL.00 per share 06/35/18 0.30 per share 1.00 per share 33/15/38 - 1.00 per share ‘No cash dvidends were declared during June 2019 due tothe company’s liquidity problems. Retained Earnings ‘As of June 30, 2018, BEBE CO's retained earings account had a balance of Pt, 380,000. For the fiscal year ending June 30, 2019, BEBE CO. reported net income of PB0,000. Required: Compute the adjusted balances ofthe following as of June 30, 2019: Preference share capital (Ordinary share capital “Toll share premium Retained earnings (before appropriation for treasury shares) "Total shareholders equty ‘00000000000000000 PROBLEM NO. 4 ‘ACPA was engaged by BIRDIE Company in 2019 to examine its books and records and to make: whatever corrections are necessary. An examination of the accounts discoses the folowing: a) Dividends had been deciared on December 15 in 2017 and 2016 but hed not been entered Inthe books unt paid 'b)_ Improvements in bulcings and equipment of P37,200 had been debited to expense at the fend of April 2016. Improvements are estimated to have 12-year life, The company Uses the straight-line method in recording depreciation and computes depreciation to the nearest month. ©) The physica inventory of merchandise had been overstated by P28,800 atthe end of 2017 ‘and by P42,750 atthe end of 2018. 4) The merchandise inventories atthe end of 2018 and 2019 did not include merchandise that was then in transit and to which the company had tite. These shipments of P18,900 ‘and P26,100 were recorded as purchases in January of 2019 and 2020, respectively, ©) The company had fale to record sales commissions payable of P32,400 and 9,900 at the end of 2018 and 2019, respectively 4) The company had fale to recognize suppiles on hand of P7,650 and P15,460 at the end (0F 2018 and 2019, respectively. ‘The retained earings account appeared as shown below on the date the CPA began the eamination. Retained Earnings Date Ten Debit Creit_— Balance] 2017, Jan, [Balance P58 000 [[Dec. 31 I Net income for year 252,000_| 837,000 2018 an. 10 | Dividends paid 139,500 C750 Page of 8 Pages(CPA ANA _____________#?scon= avortor ssanmownens eouiTy Mar. 6 | Stock sold — excess over par 735,000 | 686,500 | [E31 Net oss for year 16,200 726,300 019 Debit | ~redt |“ Balance [Gan, 10" | Biadends paid 138,500 586,600 ‘Dec. 34_| Net ss for year 173,700 413,100 What isthe corrected 2017 net income? A, P215,100 B. 272,700 c. 364,500 . 372,600 22. What isthe corrected 2018 net loss? ‘AL 160,200 B. P179,100, c 198,000 . P207,000 3. Whats the corrected 2019 net loss? A. P108,720 B P168,120 cc. P194,220 , P213,120 4. What is the corrected retained earnings on December 31, 20167 A. 405,900 B. a91,400 C. P548,180 678,600 5S. What isthe corrected retained earings on December 31, 20197 A. 108,180 B P1g9,000 C. 278,280 . 297,180 ‘00000000000000000 PROBLEM NO. 5 ‘At the bepinning of year 1, Entity A grants share options to each of ts 100 emnpioyees working In the sales department. The share options will vest 2t the end of year 3, provided that the ‘employees remain in the entity's employ, and provided that the volume of sales of a particular ‘product increases by at least an average of 5 peruent per year. TF the volume of sales of the Product increases by an average of between 5 percent and 10 percent per year, each employee will receive 100 share options. Ifthe volume of sales increases by an average of between 11 Dercent and 15 percent each year, each employee will receive 200 share options. Tf the volume Of sales increases by an average of 16 percent or more, each employee wil receive 300 share options. (On grant date, Entity A estimates that the share options have a felr value of P20 per option. Entty A also estimates that the volume of sales of the product will increase by an averege of between 11 percent and 15 percent per year, and therefore expects that, for each employee: who remains in service unt the end of year 3, 200 share options will vest. The entity also estimates, onthe ass of 8 weed average probaly, tet 20 perc of employees wil Ieee etre fend of year 3. By the end of year 1, seven employees have left and the entity stil expects that a total of 20, employees wil leave by the end of year 3. Hence, the entity expects that 80 employees wil remain in service forthe three-year period. Product sales have increased by 12 percent and the entity expects this rate of increase to continue over the next 2 years. By the end of year 2, 2 further five employees have left, bringing the total to 12 to date. The entity now expects ony three more employees wil leave during year 3, and therefore expects @ total of 85 employees will remain at the end of year 3, Product sales have increased by 20 ‘percent, resulting in an average of 16 percent over the two years to date. The entity now expects that sales will average 16 percent or more over the three-year period, and hence expects each ‘sales employee to receive 300 share options a the end of year 3. By the end of year 3,2 further two employees have left. Hence, 14 employees have left duping the three-year period, and 86 employees remain. The entity's sales have increased by an. of 16 percent over the three years. ages of 8 PagesSeaways gomeoy-auror seanenoipens enum Based on the preceding information, answer the following: 1. What s the compensation expense for year 1? AL 53,333 B, P106,667 c. 160,000 . 172,000 2. ‘Whats the compensation expense for year 2? A. 168,000 B P1g0,000 c 233,333 . 286,667 3. What is the compensation expense for year 3? A P14 667 B. 176,000 c. 188,000 . 282,667 4. What is the cumulative compensation expense for years 1, 2, and 3? ‘8. 172,000 8. 320,000 C. P344,000 , 516,000 5. Atthe end of year 2, the entty should report share options outstanding of AL 226,667 B. P286,667 C. 326,000 340,000 '20000000000000000 (On January 1, Year 3, Entity B grants share options to each ofits 100 employees working inthe ‘sales department. Each of these employees receives 10 share options. The share options wal vest on December 31, Year 3, provided that the employees remain in the entity's employ. On January 1, Year 1, fal value per option is P30. (On December 31, Year 1 tis expected that during the whole vesting period of three years, 10% (of the employees wil leave entty 8. On December 31, Year 2, this expectation is revised to 30%, Finaly, by December 31, Year 3, 20% ofthe employées left entity 8. ‘There is also a performance condition in addition to the service condition. According to the performance condition, the options only vest if entity B's share price on December 31, Year 3 exceeds its share price on January 1, Year 1 by at least 20%, On December 31, Year 1 and on December 31, Year 2, itis expected that this target wil be met. However, the target is not met by December 31, Year 3. ‘Based on the preceding information, answer the following: 1. What amount of compensation expense should be recognized in Year 1? AL 9,000, B. P16,000, c. P10,000 D. PO 2. What amount of compensation expense should be recognized in Year 27 APO B. Pe,000 C P5,000, D. Pi0,000 ‘3. What amount of compensation expense should be recognized In Year 32 ‘A. 14,000 B. P10,000, C. 9,000, D. PO ‘00000000000000000 PROBLEM NO.7 ‘An entity grants 300 cash share appreciation rights (SAR) to each ofits 500 employees, on condition that the empoyees remain init employ forte next tree yeas During year 1, 35 employees have lft. The entity estates that a further 60 wil leave during years 2 and 3. During year 2, 40 employees have left and the entty estimates that a further 25 will leave during year 3. During year 3, 22 employees have left. At the end of year 3, 150, “employees exerosed their SARS, ancther 140 employees exercised thelr SARs atthe end of year ‘4 and the remaining 113 employees exercised thelr SARS atthe end of year 5, Page 6 of 8 PagesCoaRewaA i — a SHARON EQUITY “The entity estimates the fir value ofthe SARS atthe end of each year in which a lability exits a ‘town below. A the end of yea" 3, al SARS held by the remaining employees vested. The in ssi values ofthe SARs atthe date of exercise (which equal the cash paid out) at the end of years 3, 4, and 5 are also shown below. Year FoicValue Intrinsic Value Pia.40 1550 18.20 P15.00 21.40 20.00 25.00 REQUIRED: ‘Compute the amounts of compensation expense and libilty thatthe entity should report In years ites, ‘90000000000000000 PROBLEM NO. 8 1. An audit program for the audit ofthe retained earings account should indude a step that requires verficaton of |. Market value used to charge retained earings to account for a 2for-1 stock sol Approval of the adjustment to the beginning balance as @ result of a write-down of an. ‘account recelvate. CC. Authorization for both cash and stock dividends. . Gain or loss resulting from disposition of treasury shares. 2. Inn examination of shareholders’ equity, an auditor is most concerned that ‘A. Capita stock transactions are property authorized. B, ‘Stock spits are capitalized at par or stated valve on the dividend declaration date. CC. Dividends during the year under audit were approved by the shareholders. 'D. Changes in the accounts are verified by a bank serving as @ registrar and stock transfer ‘agent. 3. Inan audit of a medium-sized manufacturing concem, which one ofthe fellowing areas can ‘be expected to require the least amount of auc time? AL Owners equity B Assets © Revenue Dy Uabaites. 4. When a corporat lent maintains tts own stock records, the auctor primary wil rely upon ‘A. Confirmation with the company secretary of shares outstanding at year-end, BL Review of the corporate minutes for data as to shares outstanding, CC. Confirmation of the numberof shares outstanding at year-end with the appropriate state offical. Inspection ofthe stock book at year-end and accounting forall certificate numbers. 5, When a client company does nat maintain ts own stock records, the auditor should obtain ‘written confirmation from the transfer agent and registrar concerning ‘A. Restrictions on the payment of dividends. The numberof shares issued and outstanding. C. Guarantees of preferred stock liquidation value. 1D. The numberof shares subject to agreement to repurchase, 6. With respect to treasury shares, the auditor should not object to which ofthe folowing? ‘A, Restrictions on retained earnings have not been met. B. Dividends have been paid on treasury shares. C. The treasury share certificates have been destroyed. D. Treasury shares are recorded at cost rather than par value. Page 7 of PagesSPAR-MANIA rah — DIT OF SHAREWONDERS EQUITY 7. A dient company declared and paid a stock dividend. Its independent external audio should determine that ‘A. Shareholders receved their addtional shares by confirming year-end holdings with them. ‘The stock dividend was propery recorded by means of a memorandum entry onty. ‘The officers authorized the issuance ofthe stock dividend. ‘Appropriate amounts were transfer from retained eamings to shere capital and shere remium, gee ‘8 During an audit of an entity’ shareholders’ equity accounts, the auditor determines whether there are restictions on retained earings resulting from loans, agreements, or law. ‘This ‘uct procedure most likly is intendes to verify management's assertion of A. Existence 8. Completeness © Valuation D. Presentation and disclosure If the aucitee has @ material amount of treasury stock on hand at year-end, the auctor should |A. Count the certificates atthe same time other securities are counted. 8 Count the certificates only iF the company hed treasury stock transactions during the ‘yor. . Not count the certificates if treasury stock isa deduction from shareholders’ equity. 1. Count the certificates only if the company classifies treasury stock with other assets. 10._In performing tests concerning the granting of stock options, an auditor should ‘A. ‘Confirm the trensection with the Secures and Exchange Commission. . Verify the exstence of option holders inthe entity's payroll records or stock ledgers. ‘Determine that suficent treasury stock is avalable to Cover any new stock issued. D. “Trace the authorization for the transaction to a vete ofthe board of directors. 11, ‘The auditor does not expect the cient to debit retained eamings for which ofthe folowing transactions? AL 810% stock dividend, An appropriation of retained earnings for treasury shares. . Alarge stock dividend. 1. A fourfor-one stock spit. 112, Where no independent stack transfer agents are employed and the corporation issues Its ‘wn stocks and maintains stack records, cancelled stock certificates should ‘A. Not be defaced, but segregated from other stock certificates and retained in a cancelled certificates fle 8. Be destroyed to prevent fraudulent relssuanice. CC. Be defaced and sent to the Secretary of te Department of Finance. ©. Be defaced to prevent resssuance and attached to their corresponding stubs. Page’ of Pages