Unit 2 – 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, 2004, affecting
shareholders’ equity and other related accounts. The shareholders’ equity section of Aguillon’s
December 31, 2003, 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.

2004
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, 2004 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, 2004 is:
a. P 1,903,000 b. P 1,894,600 c. P 1,870,400 d. P 1,835,800

1
3. The APIC – treasury share at December 31, 2004 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, 2004 is:

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

5. The Subscribed Ordinary Share at December 31, 2004 is:

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

6. The APIC – forfeited share at December 31, 2004 is:

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

7. The Treasury Share at December 31, 2004 is:

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

8. The Total Shareholders’ Equity at December 31, 2004 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, 2004, 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 2004 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, 2003.

2
Questions
Based on the information above, answer the following questions:

1. The balance of 5% Preference Share at December 31, 2004 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, 2004 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, 2004 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, 2004 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, 2003, were as
follows:
Ordinary share 800,000
Additional paid-in capital 1,600,000
Retained earnings 1,845,000

The following 2004 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, 2004, 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, 2004, 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, 2002, 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, 2004. The
measurement date is the same as the grant date. On October 1, 2004, 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 2004 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, 2004 is:

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

3
2. Alcain’s Additional paid-in capital balance at December 31, 2004 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, 2004 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, 2004 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, 2004 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, 2003, 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 2004 and other information relating to the shareholders’ equity account
were as follows:

• February 1, 2004 – 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, 2004 – 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, 2004 – 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, 2004) P 720,000

Date of record (May 25, 2004) 758,000
Date of distribution (June 1, 2004) 736,000

• October 1, 2004 – Reissued 2,000 shares of treasury share for P16 per share.

• November 4, 2004 – Declared a cash dividend of P1.50 per share to all ordinary
shareholders of record November 15, 2004. The dividend was paid on November 25,
2004.

• December 20, 2004 – Declared the required annual cash dividend on preference share for
2004. The dividend was paid on January 5, 2005.

4
• January 16, 2005 – Before closing the accounting records for 2004, Ashary became aware
that no amortization had been recorded for 2004 for a patent purchased on July 1, 2003.
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 2004 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 2004, 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, 1998 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, 2004 is:
a. P 4.36 million b. P 4.46 million c. P 4.76 million d. P 4.91 million

5
2. The book value per share of the company’s share as of December 31, 2004 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, 2004, 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, 2004 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, 2004, was P172.50. The share goes
ex-rights in the market on October 3, 2004.

Questions
1. Total shareholders’ equity as of December 31, 2004 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, 2004 is:
a. P 203.55 b. P 187.52 c. P 172.50 d. P 165.00

Problem 7
On January 1, 2003, 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

6
 Total shareholders’ equity
8,900,000

In addition, the following information is known:

a. On February 2, 2003, 15,000 ordinary shares were acquired by the company for P33 per
share.

b. On September 30, 2003, 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, 2003, 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, 2004.

d. On February 1, 2004, 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, 2004, 10,000 shares held in treasury were reissued at P50 per shares.

f. On May 16, 2004, 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.

g. Net income for 2003 was P660,000 and for 2004, P890,000.
Questions
1. The total preference share at December 31, 2003 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, 2003 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, 2003 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, 2003 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, 2003 is:

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

6. The total preference share at December 31, 2004 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, 2004 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, 2004 is:

7
 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, 2004is:

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, 2004 is:

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

Problem 8
You are a senior accountant responsible for the annual audit of Calunsag Company for the
year ended December 31, 2003. 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, 2003:

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
08/06/03 CD 2,000 12/31/02 Balance 134,500
10/10/03 J 10,000 04/29/03 CR 500
12/31/03 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

04/29/03 Capital Share P10,000 Sold P100 par share at 105
Retained Earnings 500
10/10/03 Building P530,000 See corollary entry dated
October 10, 2003.
Analysis of selected cash disbursement:

Date Account debited Amount Explanation

08/06/03 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

10/10/03 Allowance for depreciation 370,000
Retained Earnings 10,000
Building 380,000
Sale of main office Building.

8
12/31/03 Retained Earnings 30,000
Allowance for Decline in Market
Value of Inventory 30,000
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, 2003 is:
a. P 100,500 b. P 100,000 c. P 99,500 d. P 89,500

2. The Additional paid-in capital balance of Calunsag Company at December 31, 2003 is:
a. P 1,000 b. P 500 c. P 0 d. cannot be

determined

3. The Retained Earnings – January 1, 2003 balance of Calunsag Company is:

a. P 155,000 b. P 154,500 c. P 135,000 d. P 134,500

4. Net income of Calunsag Company at December 31, 2003 is:

a. P 18,000 b. P 20,000 c. P 28,000 d. P 48,000

5. The Retained Earnings – December 31, 2003 balance of Calunsag Company is:
a. P 182,500 b. P 175,000 c. P 172,500 d. P 152,500

Problem 9
You were engaged by Catacutan Company, a publicity held company whose shares are traded
in the Philippines Share Exchange, to conduct an examination of its 2004 financial statements.
You were told by the company’s controller that there were numerous equity transactions that
took place in 2004. The shareholders’ equity accounts at December 31, 2003, had the
following balances:

Preference share, P100 par value, 6% cumulative; 15,000

shares authorized; 9,000 shares issued and outstanding P 900,000
Ordinary share, P1 par value, 900,000 shares authorized:
600,000 shares issued and outstanding 600,000
Additional paid-in capital 1,200,000
Retained earnings 3,198,000
Total shareholders’ equity P5,898,000

You summarized the following transactions during 2004 and other information relating to the
shareholders’ equity in your working papers as follows:

❖ January 6, 2004 – issued 22,500 shares of ordinary share to Difficult Company in

exchange or land. On the date issued, the share had a market price of P16.50 per share.
The land had a carrying value of P201,000, and an assessed value for property taxes of
P135,000.

❖ January 31, 2004 – Sold 1,350, P1,000, 12% bonds due January 31, 2006, at 98 with one
detachable share warrant to each bond. Interest is payable annually on January 31. The
fair value of the bonds without the share warrants is 95. The detachable warrant entitles
the holder to purchase 10 shares of ordinary share at P10 per share.

9
❖ February 22, 2004 – Purchased 7,500 shares of its own ordinary share to be held as
treasury share for P24 per share.

❖ February 28, 2004 – Subscriptions for 21,000 shares of ordinary share were received at
P26 per share, payable 50% down and the balance by March 15.

❖ March 15, 2004 – The balance due on 18,000 shares was received and those shares were
issued. The subscriber who defaulted on the 3,000 remaining shares forfeited the down
payment in accordance with the subscription agreement.

❖ April 30, 2004 – Declared a dividend of inventory to ordinary shareholders. The inventory
had a carrying value of P910,000:fair value on relevant dates were:

Date of declaration (April 30, 2004) P950,000

Date of record (May 15, 2004) 900,000
Date of distribution(May 31, 2004) 920,000

❖ August 30, 2004 – Reissued 3,000 shares of treasury share for P20 per share.

❖ September 14, 2004 – There were 945 warrants detached from the bonds and exercised.

❖ November 30, 2004 – Declared a cash dividend of P2 per share to all ordinary shareholders
of record December 15, 2004. The dividend was paid on December 30, 2004.

❖ December 15, 2004 – Declared the required annual cash dividends on preference share
for 2004. the dividend was paid on January 15, 2004.

❖ January 8, 2005 – Before closing the accounting records for 2004. Catacutan became
aware that no amortization had been recorded for 2003 for a patent purchased on July 2,
2003. The patent was properly capitalized at P480,000 and had an estimated useful life
of eight years when purchased. Catacutan is subject to 32% regular corporate income tax.
The appropriate correcting entry was recorded on the same day.

❖ Adjusted net income after tax for 2004 was P1,860,900.

Questions
Based on the foregoing and the result of your audit, answer the following :

1. By how much should the retained earnings be decreased as a result of the property
dividend declaration on April 30, 2004?
a. P 950,000 b. P 920,000 c. P 910,000 d. P 0
2. How much is the total dividends declared on preference and ordinary share in 2004?
a. P 2,294,900 b. P 2,263,900 c. P 2,254,900 d. P 2,200,900

3. Preference share at December 31, 2004 is

a. P 1,500,000 b. P 954,000 c. P 900,000 d. P 0

4. Ordinary share at December 31, 2004 is

a. P 640,500 b. P 645,450 c. P 649,950 d. P 652,950

5. How much is the total additional paid-in-capital as of December 31, 2004

a. P 2,163,300 b. P 2,178,220 c. P 2,765,600 d. P
2,774,000

10
6. The adjusted balance of retained earnings on December 31,2004 is
a. P 2,783,600 b. P 2,774,000 c. P 2,771,600 d. P 2,743,600

7. How much is the treasury share as of December 31, 2004?

a. P 180,000 b. P 120,000 c. P 108,000 d. P 0

8. How much is the total shareholders’ equity on December 31, 2004?

a. P 6,376,850 b. P 4,271,550 c. P 4,232,550 d. P 4,194,350

Problem 10
The Ceniza Company engaged Mr. Coliseo, a CPA, in 2003 to examine its books and records
and to make whatever adjustments are necessary.

The CPA’s examination disclosed the following:

a. Prior to any adjustments, the Retained Earnings account is reproduced below:

RETAINED EARNINGS
Balance
Date Particular Debit Credit Debit Credit
2001
Jan. 1 Balance 580,000
Dec. 31 Net income for the year 310,000 890,000
2002
Jan 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital in excess of par 90,000 840,000
Aug. 30 Gain on retirement of preference
Share at less than issue price 64,500 904,500
Dec. 31 Net loss for the year 205,000 699,500

2003
Jan 31 Dividends paid 100,000 599,500
Dec. 31 Net loss for the year 165,500 434,000

b. Dividends had been declared on December 31, 2001 and 2002 but had not been entered
in the books until paid.

c. The company purchased a machine worth P360,000 on April 30, 2000. The company
charged the purchase to expense. The machine has an estimated useful life of 3 years.
The company uses the straight line method and residual values are deemed immaterial.

d. The company received at transportation equipment as donation from one of its

shareholders on September 30, 2002. The equipment was used to deliver goods to
customers. The equipment costs P750,000 and has a remaining life of 3 years on the date
of donation. The equipment has a fair value of P240,000 and P30,000 was incurred for
registering the transfer of ownership. The company did not record the donation on its
books. The expenses paid related to the donated equipment were charged to expense.

e. The physical inventory of merchandise had been understates by P64,000 and by P44,500
at the end of 2001 and 2003, respectively.

11
f. The merchandise inventoried at the end of 2002 and 2003 did not include merchandise
that was then in transit shipped FOB shipping point. These equipments of P43,400 and
P32,600 were recorded a purchases in January 2003 and 2004, respectively.

Questions
Based on the above audit findings, the adjusted balances of the following are: (Disregard tax
implication)

1. Retained earnings, 12/31/00

a. P 860,000 b. P 850,900 c. P 790,900 d. P 760,900

2. Net income for 2001

a. P 373,100 b. P 369,800 c. P 254,000 d. P 215,800

3. Retained earnings, 12/31/01

a. P 976,700 b. P 974,000 c. P 860,700 d. P 720,700

4. Net loss for 2002

a. P 379,000 b. P 359,700 c. P 349,700 d. P 269,700

5. Retained earnings, 12/31/02

a. P 341,000 b. P 411,000 c. P 481,000 d. P 495,000

6. Net loss for 2003

a. P 241,000 b. P 228,300 c. P 178,300 d. P 148,300

7. Retained earnings, 12/31/03

a. P 362,700 b. P 332,700 c. P 302,700 d. P 254,000

Problem 11
The shareholders’ Equity of Cosare Corporation at December 31, 2003, showed

Capital share, Ordinary, P100 par value per share (Authorized

10,000 shares; issued and outstanding 6,000 shares) P600,000
Retained Earnings 300,000
Total P900,000

An audit disclosed that the treasurer was short in his cash to the extent of P50,000. He had
concealed his shortage by increasing inventory values by p15,000; land values by P20,000
and accounts receivables- trade by P15,000

Upon discovery of the shortage, the Treasure offered to surrender at book value 500 shares
of the Capital Share which he owns in the settlement of the shortage. The board of directors
accepted his offer and remitted cash to the Treasurer for any excess value over shortage. The
treasurer’s 500 shares, after being acquired by the company were distributed pro – rata to
the remaining shareholders.

Questions
1. What amount of money should the company pay the Treasurer?
a. P 50,000 b. P 25,000 c. P 15,000 d. P 0

12
2. What is the corporate retained earnings after distribution?
a. P 225,000 b. P 200,000 c. P 100,000 d. P 75,000

Problem 12
You have been engaged to audit the financial statements of Cuajotor Corporation for the
calendar year 2003. The company was organized on January 2, 2002 and has not been audited
before.

The following items relating to equity and income statement accounts appear in your Working
Balance Sheet (WBS) and Working Income Statement (WIS)

WBS- December 31, 2003: Balance Per Books

Long- term liabilities P240,800
Capital Share issued 560,000
Additional Paid in capital 100,000
Revaluation increment- Land 90,000
Retained Earnings 54,000

WIS- Year ended December 31, 2003

Income before tax 150,000
Provision for income tax 45,000
Income before extraordinary items 105,000
Extraordinary items(net of tax) 77,000
Net income 28,000

Following are your audit findings:

1. Long- term liabilities- This consist

Mortgage payable P180,000

Accrued interest on mortgage payable 10,800
Reserve for general contingencies 50,000
Total P240,800

The company mortgage its land to the Philippine National Bank for P180,000 on September
1, 2003. The mortgage liability is payable in 18 semi-annual installments of P10,000 plus
accrued interest of 18% to date. The first installments due March 1, 2004.

The reserve for general contingencies was set up by resolution of the Board of Directors on
December 27, 2003. its purpose is to provide for possible future losses due to the risk of an
impending business recession. A corresponding charge was made to general contingency
losses which is classified as an extraordinary item.

2. Capital Share issued- The company is authorized to issue 10,000 shares of P100 par value
ordinary share. Your analysis of the capital share issued account shows:

2003 DESCRIPTION AMOUNT

Jan. 1 Balance, 4,500 shares issued P450,000

Mar. 1 Sold 500 shares at P120 per share 60,000
Nov. 1 Assessment on shareholders P10 per share 50,000

13
Dec. 31 Balance P 560,000

3. Additional paid in capital - The account balance represents the fair value of property
donated to the company in 2002. There was no manager’s check account in 2002.

4. Revaluation increment (Land) – Land was written up to appraised value on December of

2003. The appraised value of P90,000 was determined by the company engineer. The
property was acquired in 2002 at a cost of P40,000.

5. Retained earnings, December 31, 2003 – Analysis of the retained earnings account for
2003 shows:

Balance, January 1, 2003 P18,000

Net income – 2003 28,000
Gain on sale of treasury share 8,000
Balance, December 31, 2003 P54,000

6. Over/Understatement – The following over/understatements were discovered in the

course of your audit:
2002 2003
Inventory, end 4,000 under 10,000 under
Depreciation expense 2,500 under 2,000 under
Accrued expenses payable end 1,000 under 1,600 over

7. Extraordinary items – Extraordinary items consists of:

General contingency losses P50,000

Write-off of obsolete inventory 20,000
Loss due to earthquake 40,000
Total 110,000
Less: Tax savings, 30% 33,000
Extraordinary items, net of tax 77,000

8. Provision for income tax - The income tax rate is 30%. There are no permanent differences
between financial and taxable income.

Required: For each item below, determine the amount per audit that should appear in your
working balance sheet and working income statement. Assume that client approves all
adjustments.

Questions
1. Capital share issued
a. P 580,000 b. P 550,000 c. P 510,000 d. P 500,000

2. Additional paid-in capital

a. P 168,000 b. P 150,000 c. P 110,000 d. P 100,000

3. Long-term liabilities
a. P 230,000 b. P 190,800 c. P 180,000 d. P 160,000

14
4. Current portion of long-term debt
a. P 80,000 b. P 20,000 c. P 10,000 d. P 0

5. Revaluation increment – Land

a. P 90,000 b. P 50,000 c. P 40,000 d. P 0

6. Retained earnings, 12/31/2002

a. P 21,850 b. P 20,800 c. P 18,350 d. P 18,000

7. Extraordinary items (net of tax)

a. P0 b. 42,000 c. 40,000 d. 28,000

8. Income before tax

a. P 96,600 b. 136,600 c. 134,600 d. 120,400

9. Provision for income tax

a. P 40,980 b. P 40,380 c. P 36,120 d. P 28,980

10. Net income

a. P 67,620 b. P 54,220 c. P 42,280 d. P 24,280

11. Retained earnings, 12/31/2003

a. P 85,970 b. 72,220 c. 63,080 d. 47,720

Problem 13
Listed below are the transactions that affected the shareholders’ equity of Christian Paul
Corporation during the period 2003-2005. At December 31, 2002, the corporation’s accounts
included:
(P in 000s)
Ordinary share, 315 million shares at P1 par P 315,000
Paid-in capital – excess of par 1,890,000
Retained earnings 2,910,000

a. November 2, 2003, the board of directors declared a cash dividend of P0.80 per share
on its ordinary shares, payable to shareholders of record November 16, to be paid December
2.

b. On March 3, 2004, the board of directors declared a property dividend consisting of

bonds of Maria Mikaela County that Christian Paul was holding as an investment. The bonds
had a fair market value of P4.8 million, but were purchased two years previously for P3.9
million. Because they were intended to be held-to-maturity, the bonds had not been
previously written up. The property dividend was payable to shareholders of record March
14, to be distributed April 6.

c. On July 13, 2004, the corporation declared and distributed a 5% ordinary share
dividend (when the market value of the ordinary share was P21 per share). Cash was paid
for fractional share rights representing 750,000 equivalent whole shares.

d. On November 2, 2004, the board of directors declared a cash dividend of P0.80 per
share on its ordinary shares, payable to shareholders of record November 16, to be paid
December 2.

15
e. On January 16, 2005, the board of directors declared and distributed a 3-for-2 share
split effected in the form of a 50% share dividend when the market value of the ordinary
share was P23 per share.

f. On November 2, 2005, the board of directors declared a cash dividend of P0.65 per
share on its ordinary shares, payable to shareholders of record November 16, to be paid
December 2.

g. The reported net income of Christian Paul was P990 million, P1,185 million, and P1,365
million for 2003, 2004, and 2005, respectively.

Questions
1. The Retained earnings of Christian Paul Corporation at the end of 2005 is: (P in 000s)
a. P 5,276,700 b. P 5,276,600 c. P 5,112,600 d. P 5,095,850

2. The Additional paid-in capital of Christian Paul Corporation at the end of 2005 is: (P in
000s)
a. P 5,860,000 b. P 5,655,000 c. P 2,190,000 d. P 2,025,000

3. The Ordinary share of Christian Paul Corporation at the end of 2005 is: (P in 000s)
a. P 495,750 b. P 495,000 c. P 330,750 d. P 330,000

4. The total Shareholders’ Equity of Christian Paul Corporation at the end of 2005 is: (P in
000s)
a. P 11,097,450 b. P 7,797,600 c. P 7,796,700 d. P 7,615,850

Problem 14
VELASCO COMPANY was formed on July 1, 2000. It was authorized to issue 300,000 shares
of P20 par value ordinary share and 100,000 shares of 8 percent P50 par value, cumulated
and nonparticipating preference share. VELASCO COMPANY has a July 1 – June 30 fiscal year.

The following information relates to the shareholders’ equity accounts of VELASCO COMPANY:

Ordinary share

Prior to the 2002-2003 fiscal year, Velasco Company had 110,000 shares of outstanding
ordinary share issued as follows:

1. 95,000 shares were issued for cash on July 1, 2000, at P62 per share.
2. On July 24, 2000, 5,000 shares were exchanged for a plot of land which cost the seller
P140,000 in 1994 and had an installment market value of P440,000 on July 24, 2000.
3. 10,000 shares were issued on March 1, 2001; the shares had been subscribed for P84
per share on October 31, 2001.

During the 2002-2003 fiscal year, the following transactions regarding ordinary share took
place:

October 1, 2002

Subscriptions were received for 10,000 shares at P92 per share. Cash of P184,000 was
received in full payment for 2,000 shares and share certificates were issued. The remaining

16
subscription for 8,000 shares were to be paid in full by September 30, 2004, at which time
the certificates were to be issued.

November 30, 2002

Velasco Company purchased 2,000 shares of its own share on the open market at P78 per
share. Velasco Company uses the cost method for treasury share.

December 15, 2002

Velasco declared a 5% share dividend for shareholders of record on January 15, 2003, to be
issued on January 31, 2003. Velasco Company was having a liquidity problem and could not
afford a cash dividend at that time. Velasco Company’s ordinary share was selling at P104
per share on December 15, 2002.

June 20, 2003

Velasco Company sold 500 shares of its own ordinary share that it had purchased on
November 30, 2002, for P42,000.
Preference share

Velasco Company issued 50,000 shares of preference share at P88 per share on July 1, 2001.

Cash Dividends

Velasco Company has followed a schedule of declaring cash dividends in December and June
with payment being made to shareholders of record in the following month. The cash
dividends which have been declared since inception of the company through June 30, 2003,
are shown below:

Declaration Date Ordinary share Preference Share

12/15/01 P0.60 per share P2.00 per share
6/15/02 P0.60 per share P2.00 per share
12/15/02 - P2.00 per share

No cash dividends were declared during June 2003, due to the company’s liquidity problem.

Retained Earnings

As of June 30, 2002, Velasco Company’s retained earnings account had a balance of
P1,380,000. For the fiscal year ending June 30, 2003, Velasco Company reported net income
of P80,000.

In March of 2002, Velasco Company received a loan from Davao Bank. The bank requires
Velasco Company to establish a sinking fund and restrict retained earnings for an amount
equal to the sinking fund and restrict retained earnings for an amount equal to the sinking
fund deposit. The annual sinking fund payment of P100,000 is due on April 30 each year, the
first payment was made on schedule on April 30, 2003.

Questions
1. What is the balance of the ordinary share account at June 30, 2003?
a. P 2,352,000 b. P 2,350,000 c. P 2,320,500 d. P
2,320,500

17
2. What is the balance of the Treasury Share account at June 30, 2003?
a. P 156,000 b. P 124,800 c. P 117,000 d. P 114,000

3. What is the entry to record the dividend in arrears on the preference share?
a. Retained earnings 100,000 c. Dividend payable 100,000
Dividend payable 100,000 Cash 100,000
b. Retained earnings 100,000 d. No journal entry
Cash 100,000

4. What is the total additional paid-in capital at June 30, 2003?

a. P 8,171,000 b. P 8,055,000 c. P 7,593,000 d. P
6,155,000

5. How much is the retained earnings at June 30, 2003?

a. P 1,250,000 b. P 1,150,000 c. P 788,000 d. P 688,000

6. What is the total shareholders’ equity at June 30, 2003?

a. P 13,736,000 b. P 13,116,000 c. P 13,000,000 d. P
12,900,000

Problem 15
On April 1,1994, the Jen-Jen, inc. issued P6,000,000 of 7% convertible bonds w/ interest
payment dates of April and Oct. 1. The bond were sold ion July 1,1994, and mature on April
1, 2014. The bond discount totaled P319,950. The bond contract entitles the bondholders to
received 10 shares of P20 par value ordinary share in exchange for each P1,000 bond. On
April 1, 2004, the holders of the bonds with total face value of P750,000 exercised their
conversion privilege. On July 1, 2004, the company reacquired at 125, bonds with a face value
of P375,000.

The balances in the capital accounts as of December 31, 2003 were

Ordinary share P20 par, authorized 3 million shares,

Issued and outstanding, 187,00 shares P 3,750,000
Premium on ordinary share 1,875,000

Market value of the ordinary share and bonds were as follows:

DATE BONDS ORDINARY SHARE

April 1, 2004 122 52
July 1, 2004 125 56
Questions:
Based on the above and the result of your audit, answer the following:

1. How much the total cash received from the sale of the P6,000,000 bonds on April 1, 1994?
a. P 6,000,000 b. P 5,680, 050 c. P 5,785,050 d. P 5,820, 050

2. How much is the interest expense for the year 1994?

a. P 323,100 b. P 315,000 c. P 218,100 d. P 201,900

3. How much is the carrying value of the bonds payable as of December 31, 1994?
a. P 6,311, 850 b. P 6,000,000 c. P 5,692,048 d. P 5,688,150

18
4. The entry to record the conversion on April 1, 2004 will include
a. A debit to bonds payable of P729,750.
b. A debit to discount on bonds payable of P20,250.
c. A credit to APIC of P579,750.
d. A credit to gain on bond conversion of P579,750.

5. How much is the gain (loss) on bond reacquisition on July 1, 2004?

a. P 103,622 b. P(103,622) c. P (83,878) d. 0

19