CRC-ACE The Professional CPA Review School

________________________________________________________

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 110,000 May 1, 2010 CR 1,200,000
April 28, 2011 J 109,000

Retained Earnings
April28,2011 109,000 February 2,2011 CR 52,500
April30,2011 800,000

Income Summary
April 30, 2011 J 5,200,000 April 30, 2011 J 6,000,000
April 30, 2011 J 800,000

Additional information is as follows:

A. From the articles of incorporation:
Authorized share capital 30,000 shares
Par value per share P 100

B. Director’s minutes include the following resolutions:

April 30, 2010 Authorized the issue of 10,000 shares at P 120 per share.
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
 CRC-ACE The Professional CPA Review School
________________________________________________________

2. Treasury Shares
a. P 110,000 b. P 100,000 c. P 50,000 d. P 55,000
3. Share Premium
a. P 226,000 b. P 231,000 c. P 228,500 d. P 200,000
4. Retained Earnings
a. P 619,000 b. P 800,000 c. P 676,500 d. P 797,500
5. Stock Dividends Payable
a. P 123,500 b. P 95,000 c. P 109,000 d. P0

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

 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.

2
 CRC-ACE The Professional CPA Review School
________________________________________________________

QUESTIONS:
Based on the above and the result of your audit, determine the following as of
December 31, 2010:
1. Ordinary Share Capital
a. P2,550,000 b. P2,100,000 c. P5,100,000 d. P4,200,000
2. Total Share Premium
a. P50,890,000 b. P48,340,000c. P48,808,000 d. P48,240,000
3. Total Contributed Capital
a. P53,908,000 b. P53,440,000c. P55,990,000 d. P53,340,000
4. 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.

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

3
 CRC-ACE The Professional CPA Review School
________________________________________________________
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
Market price per share at grant date
Stock options expire
P62.00
P57.00
The earlier of 8 years after issuance or the
employee’s 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

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.
1. 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

4
 CRC-ACE The Professional CPA Review School
________________________________________________________

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
AFS securities 3,400

What is the correct balance of the Retained Earnings account on December 31, 2011?
a. P 112,600 b. P117,600 c. P 123,200 d. P 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

REQUIRED: Determine the current balance of unappropriated retained

earnings.
a. P 203,000 b. P113,000 c. P 133,000 d. none of these

5
 CRC-ACE The Professional CPA Review School
________________________________________________________

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:
a. P125,964 b. P200,000 c. P185,000 d. P160,000
2. 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
3. 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
4. The amount of interest revenue that should be recognized in 2011 is:
a. P6,298 b. P7,738 c. P14,036 d. P0
5. The amount of interest revenue that should be recognized in 2012 is:
a. P6,298 b. P7,738 c. P20,000 d. P0

/jgs