National University- Manila

Audit of Shareholders’ Equity

Problem 1
You have been assigned to the audit of Aguillon Inc., a manufacturing company. You have
been asked to summarize the transactions for the year ended December 31, 2020, affecting
shareholders’ equity and other related accounts. The shareholders’ equity section of Aguillon’s
December 31, 2019, balance sheet follows:

Shareholders’ Equity

Contributed capital:
Ordinary share P2 par value, 500,000 shares authorized,
90,000 shares issued, 88,790 shares outstanding P 180,000
Paid-in capital in excess of par 1,820,000
Paid-in capital from treasury share 22,500
Total contributed capital P2,022,500
Retained earnings 324,689
Total contributed capital and retained earnings P2,347,189
Less: Cost of 1,210 shares of treasury share 72,600
Total shareholders’ equity P2,274,589

You have extracted the following information from the accounting records and audit working
papers.

2020
Jan. 15 Aguillon reissued 650 shares of treasury share for P40 per share. The 1,210
shares of treasury share on hand at December 31, 2001, were purchased in
one block in 2001. Aguillon used the cost method for recording the treasury
shares purchased.

Feb. 2 Sold 90, P1,000, 9% bonds due February 1, 2005, at 103 with one detachable
share warrant attached to each bond. Interest is payable annually on February
1. The fair market value of the bonds without the share warrants is
97. The detachable warrants have a fair value of P60 each and expire on
February 1, 2005. Each warrant entitles the holder to purchase 10 shares of
Ordinary share at P40 per share.

Mar. 6 Subscriptions for 1,400 shares of Ordinary share were issued at P44 per share,
payable 40% down and the balance by March 20.

20 The balance due on 1,200 shares was received and those shares were issued.
The subscriber who defaulted on the 200 remaining shares forfeited the down
payment in accordance with the subscription agreement.

Nov. 1 There were 55 share warrants detached from the bonds and exercised.

Net income for the year is P600,000.

Questions- Based on the information above, answer the following questions:

1. The Ordinary Share at December 31, 2020 is:

a. P 215,000 b. P 204,000 c. P 191,000 d. P 183,500
2. The Additional paid capital in excess of par at December 31, 2020 is:
a. P 1,903,000 b. P 1,894,600 c. P 1,870,400 d. P 1,835,800

3. The APIC – treasury share at December 31, 2020 is:

a. P 22,500 b. P 13,000 c. P 9,500 d. P 0

4. The Ordinary Share Warrants Outstanding at December 31, 2020 is:

a. P 5,400 b. P 3,300 c. P 2,100 d. P 0

5. The Subscribed Ordinary Share at December 31, 2020 is:

a. P 2,800 b. P 2,400 c. P 400 d. P 0

6. The APIC – forfeited share at December 31, 2020 is:

a. P 0 b. P 3,520 c. P 3,920 d. P 5,280

7. The Treasury Share at December 31, 2020 is:

a. P 0 b. P 72,600 c. P 39,000 d. P 33,600

8. The Total Shareholders’ Equity at December 31, 2020 is:

a. P 2,984,309 b. P 2,659,620 c. P 2,384,309 d. P 2,059,620

Problem 2
The shareholder’s equity of the Amongan Lumber Co. on June 30, 2020, was as follows:

Contributed capital:
5% preference share, P50 par, cumulative, 30,000 shares issued,
dividends 5 years in arrears P1,500,000
Ordinary share, P30 par, 100,000 shares issued 3,000,000
P4,500,000
Deficit from operations (600,000)
Total shareholder’s equity P3,900,000

On July 1, the following actions were taken:

a. Ordinary shareholders turned in their old Ordinary share and received in exchange new
ordinary share, 1 share of the new share being exchanged for every 4 shares of the old.
New ordinary share was given a stated value of P60 per share.
b. One-half share of the new ordinary share was issued on each share of preference share
outstanding in liquidation of dividends in arrears on preference share.
c. The deficit from operations was applied against the paid-in capital arising from the
ordinary share restatement.

Transactions for the remainder of 2020 affecting the shareholders’ equity were as follows:

Oct. 1 10,000 shares of preference share were called at P55 plus dividends for 3
months at 5%. Share was formally retired.
Nov. 10 60,000 shares of new ordinary share were sold at P65.

Dec. 31 Net income for the 6 months ended on this date was P400,000. (Assume that
revenues and expenses were closed to a temporary account, Income summary.
Use this account to complete the closing process.) The semiannual dividend
was declared on preference shares, and a P0.75 dividend on ordinary shares,
dividends being payable January 20, 2019.

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Questions
Based on the information above, answer the following questions:

1. The balance of 5% Preference Share at December 31, 2020 is:

a. P 1,500,000 b. P 1,000,000 c. P 500,000 d. P 0

2. The balance of Ordinary Share at December 31, 2020 is:

a. P 3,000,000 b. P 4,000,000 c. P 4,500,000 d. P 6,000,000

3. The balance of Additional paid in capital at December 31, 2020 is:

a. P 0 b. P 300,000 c. P 1,500,000 d. P 1,800,000

4. The balance of Retained Earnings at December 31, 2020 is:

a. P 0 b. P (600,000) c. P 243,750 d. P 293,750

Problem 3
Alcain COMPANY’s shareholders’ equity account balance at December 31, 2019, were as
follows:
Ordinary share 800,000
Additional paid-in capital 1,600,000
Retained earnings 1,845,000

The following 2020 transactions and other information relate to the shareholders’ equity
accounts:

a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares
were issued and outstanding.

b. On March 5, 2020, Alcain acquired 5,000 shares of its ordinary share for P10 per share
to hold as treasury share. The shares were originally issued at P15 per share. ALCAIN

uses the cost method to account for treasury share. Treasury share is permitted in
Alcain’s state of incorporation.

c. On July 15, 2020, Alcain declared and distributed a property dividend of inventory. The
inventory had a P75,000 carrying value and a P60,000 fair market value.

d. On January 2, 2018, Alcain granted share options to employees to purchase 20,000 share
of Alcain’s ordinary share at P18 per share, which was the market on that date. The option
may be exercised within a three year period beginning January 2, 2020. The measurement
date is the same as the grant date. On October 1, 2020, employees exercised all 20,000
options when the market value of the share was P25 per share. ALCAIN issued new shares
to settle the transaction.

e. Alcain’s net income for 2020 was P240,000.

Questions
Based on the information above and other analysis as necessary, answer the following
question:

1. Alcain’s Ordinary share balance at December 31, 2020 is:

a. P 1,300,000 b. P 1,160,000 c. P 900,000 d. P 800,000

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2. Alcain’s Additional paid-in capital balance at December 31, 2020 is:
a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000

3. Alcain’s Retained Earnings balance at December 31, 2020 is:

a. P 2,085,000 b. P 2,025,000 c. P 2,010,000 d. P 1,770,000

4. Alcain’s Treasury Share balance at December 31, 2020 is:

a. P 0 b. P 50,000 c. P 75,000 d. P 125,000

5. Alcain’s Shareholders’ Equity balance at December 31, 2020 is:

a. P 4,910,000 b. P 4,820,000 c. P 4,735,000 d. P 4,720,000

Problem 4
Ashary COMPANY is a publicly held company whose shares are traded in the over the counter
market. The shareholders’ equity account at December 31, 2019, had the following balances:
Preference share, P100 par value. 6% cumulative;
5,000 shares authorized; 2,000 shares issued
and outstanding P 200,000

Ordinary share, P1 par value; 150,000 shares

authorized; 100,000 issued and outstanding 100,000
Additional paid-in capital 800,000
Retained earnings 1,586,000

Transactions during 2020 and other information relating to the shareholders’ equity account
were as follows:

 February 1, 2020 – Issued 13,000 shares of ordinary share to Keith Company in exchange
for land. On the date issued, the share had a market price of P11 per share. The land had
a carrying value on Keith’s books of P135,000, and the assessed value for property taxes
of P90,000.

 March 1, 2020 – Purchased 5,000 shares of its own ordinary share to be held as treasury
for P14 per share. Ashary uses the cost method to account for treasury share. Transactions
in treasury share are legal in Ashary’s state of incorporation.

 May 10, 2020 – Declared a property dividend of marketable securities held by Ashary to
ordinary shareholders. The securities had a carrying value of P600,000, fair value on
relevant dates were:

Date of declaration (May 10, 2020) P 720,000

Date of record (May 25, 2020) 758,000
Date of distribution (June 1, 2020) 736,000

 October 1, 2020 – Reissued 2,000 shares of treasury share for P16 per share.

 November 4, 2020 – Declared a cash dividend of P1.50 per share to all ordinary
shareholders of record November 15, 2020. The dividend was paid on November 25, 2020.

 December 20, 2020 – Declared the required annual cash dividend on preference share for
2020. The dividend was paid on January 5, 2005.

 January 16, 2005 – Before closing the accounting records for 2020, Ashary became aware

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 that no amortization had been recorded for 2020 for a patent purchased on July 1, 2019.
The patent was properly capitalized at P320,000 and had an estimated useful life of eight
years when purchased. Ashary’s income tax rate is 30%.

 Net income after tax for 2020 was P838,000.

Questions
1. The total additional paid-in capital at year-end is:
a. P 881,000 b. P 877,000 c. P 922,000 d. P 934,000

2. The total fundamental errors is

a. P 14,000 b. P 20,000 c. P 27,200 d. P 40,000

3. The total cash dividends – ordinary at year-end is:

a. P 172,500 b. P 169,500 c. P 165,000 d. P 162,000

4. The total property dividends – ordinary at year-end is:

a. P 600,000 b. P 720,000 c. P 736,000 d. P 758,000
5. . The number of ordinary share issued and outstanding at year-end is:
a. 102,000 b. 110,000 c. 111,000 d. 113,000

Problem 5
During your audit of Asumbra Company for the year 2020, its initial year of operations, you
find the following entries in its “Shareholders’ Equity” account:

SHAREHOLDERS’ EQUITY
Jan. 01Issuance of 150,000 shares of capital share, P10 par;
authorized 500,000 shares in exchange for real
estate property with a market value of P2 million 1,500,000

Jan. 15Sale of 200,000 shares of capital share at P12 per

share 2,400,000

Mar. 01Purchase 20,000 shares of its own share at P15 per

Share 300,000

May 15Loss on sale of motor equipment 100,000

Jun 10 Proceeds from sale of 10,000 treasury shares 170,000

Dec 31 Declared cash dividends payable quarterly

beginning April 1, 2014 200,000

Dec 31 Net profit for the year 790,000

Questions

1. The adjusted balance of the “Shareholders’ Equity” account of the company’s balance
sheet as of December 31, 2020 is:
a. P 4.36 million b. P 4.46 million c. P 4.76 million d. P 4.91 million

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2. The book value per share of the company’s share as of December 31, 2020 is
a. P 14.44 b. P 14.00 c. P 13.12 d. P 12.82

Problem 6
You are auditing the balance sheet of the Ballares Company on December 31, 2020, which
has the following items on the equity side of the balance sheet:

Current Liabilities 2,858,000

Bonds Payable 3,000,000
Reserve for Bonds Retirement 1,600,000
6% Cumulative Preference Share, P100 par value
(entitled to P110 and accumulated dividends
per share in voluntary liquidation). Authorized,
30,000 shares; issued, 20,000 shares; in treasury,
1,500 shares 1,850,000
Ordinary share, P100 par value, authorized,
100,000 shares; issued and outstanding, 40,000
Shares 4,000,000
Premium on preference share 100,000
Premium on ordinary share 673,000
Retained earnings 1,312,600

The company proposes to finance a plant expansion program by issuing an additional 20,000
shares of ordinary share. Ordinary shareholders of record October 1, 2020 were notified that
they will be permitted to subscribe to the new issue at P150 per share up to 50% of their
holdings. The market value of the share on October 1, 2020, was P172.50. The share goes
ex-rights in the market on October 3, 2020.

Questions
1. Total shareholders’ equity as of December 31, 2020 is:
a. P 2,035,000 b. P 5,535,000 c. P 7,500,000 d. P 9,535,600

2. Total book value of the 40,000 shares of ordinary share is:

a. P 9,535,000 b. P 7,500,600 c. P 2,035,000 d. P 1,875,150

3. The book value per share of ordinary share as of December 31, 2020 is:
a. P 203.55 b. P 187.52 c. P 172.50 d. P 165.00

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Problem 7
On January 1, 2019, the shareholders’ equity of Bantaya Company’s balance sheet revealed
the following information:

P5 Convertible Preference Share (P40 par value; 50,000 shares

authorized, 20,000 shares issued and outstanding) 800,000
Ordinary share (P5 stated value; 200,000 shares
authorized, 120,000 shares issued and outstanding) 600,000
Paid-in capital in excess of par 3,000,000
Retained earnings 4,500,000
Total shareholders’ equity 8,900,000

In addition, the following information is known:

a. On February 2, 2019, 15,000 ordinary shares were acquired by the company for P33 per
share.

b. On September 30, 2019, 5,000 preference shares were converted to ordinary shares. One
share of preference share is convertible into one share of ordinary share. At the time of
conversion, the ordinary share had a market value of P42 per share.

c. On December 21, 2019, the company received a share subscription of 10,000 ordinary
shares at a subscription price of P33 per share. The subscription contract required a cash
down payment equal to 60% of the subscription price, with the balance due on February
1, 2020.

d. On February 1, 2020, 8,500 ordinary shares were issued according to the subscription
contract. Because of default by a subscriber, 1,500 shares were not issued. The
subscription contract requires the subscriber to forfeit all cash advance.

e. On April 15, 2020, 10,000 shares held in treasury were reissued at P50 per shares.

f. On May 16, 2020, a special dividend of preference share was distributed to ordinary
shareholders. One hundred shares of ordinary share entitled a shareholder to one share
of preference share. The market price of preference share was P40 per share at that time.

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g. Net income for 2019 was P660,000 and for 2020, P890,000.
Questions
1. The total preference share at December 31, 2019 is:
a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

2. The total ordinary share at December 31, 2019 is:

a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

3. The total additional-paid in capital at December 31, 2019 is:

a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

4. The total retained earnings at December 31, 2019 is:

a. P 4,706,887.50 b. P 5,160,000.00 c. P 5,491,925.00 d. P 5,596,887.50

5. The Treasury share at December 31, 2019 is:

a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

6. The total preference share at December 31, 2020 is:

a. P 548,600 b. P 600,000 c. P 625,000 d. P 651,400

7. The total ordinary share at December 31, 2020 is:

a. P 600,000 b. P 625,000 c. P 651,400 d. P 667,500

8. The total additional paid-in capital at December 31, 2020 is:

a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

9. The total retained earnings at December 31, 2020is:

a. P 5,998,900.00 b. P 5,491,925.00 c. P 4,965,000.00 d. P 4,706,887.50

10. The Treasury share at December 31, 2020 is:

a. P 495,000 b. P 330,000 c. P 165,000 d. P 0

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Problem 8
You are a senior accountant responsible for the annual audit of Calunsag Company for the
year ended December 31, 2019. The information available to you is presented below. You
may assume that any pertinent information not presented below has already been checked
found satisfactory.

Excerpts from trial balance, December 31, 2019:

Debit Credit
Retained earnings 93,000
Allowance for decline in value of inventory 36,500
Capital share (1,000 shares) 100,000

The books have not been closed, but all adjusting entries which the company expects to make
have been posted. Their trial balance shows a P60,000 net profit for the year.

Ledger details of Retained Earnings:

RETAINED EARNINGS
08/06/19 CD 2,000 12/31/18 Balance 134,500
10/10/19 J 10,000 04/29/19 CR 500
12/31/19 J 30,000

NOTE: The balance at 12/31/02 agrees with last year’s working papers.

Analysis of selected cash Receipts:

Date Account credited Amount Explanation

04/29/19 Capital Share P10,000 Sold P100 par share at 105
Retained Earnings 500
10/10/19 Building P530,000 See corollary entry dated
October 10, 2019.
Analysis of selected cash disbursement:

Date Account debited Amount Explanation

08/06/19 Retained Earnings P2,000 Freak accident to company
truck not covered by insurance;
repairs by JET & Co.
Selected entries in the general journal:

Date Entry and explanation Debit Credit

10/10/19 Allowance for depreciation 370,000
Retained Earnings 10,000
Building 380,000
Sale of main office Building.

12/31/19 Retained Earnings 30,000

Allowance for Decline in Market
Value of Inventory 30,000

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 Provision to value materials Inventory at lower of cost or NRV, in accordance
with Company pricing policy.
Questions
1. The Ordinary Share balance of Calunsag Company at December 31, 2019
is:
2. The Additional paid-in capital balance of Calunsag Company at December
31, 2019 is:
3. The Retained Earnings – January 1, 2019 balance of Calunsag Company is:
4. Net income of Calunsag Company at December 31, 2019 is:
5. The Retained Earnings – December 31, 2019 balance of Calunsag
Company is

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