INTERNATIONAL SCHOOL OF ASIA AND THE PACIFIC

Alimannao Hills, Penablanca, Cagayan

College of Accountancy
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.

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

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

RmarPga,CPA
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.

10. 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

11. 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

12. 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

13. 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.

RmarPga,CPA
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.

14. 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

15. 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

16. 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

17. 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

18. 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
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 310,000 890,000
the year
2002
Jan 31 Dividends paid 140,000 750,000
Apr. 3 Paid in capital 90,000 840,000
in excess of par
Aug. 30 Gain on retirement 64,500 904,500
of Preference
Share at less
than issue price
Dec. 31 Net loss for 205,000 699,500
the year

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

RmarPga,CPA
 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 understating by P64,000

and by P44,500 at the end of 2001 and 2003, respectively.

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
equipment’s of P43,400 and P32,600 were recorded a purchase in January
2003 and 2004, respectively.

19. Retained earnings, 12/31/00

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

20. Net income for 2001

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

21. Retained earnings, 12/31/01

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

22. Net loss for 2002

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

23. Retained earnings, 12/31/02

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

24. Net loss for 2003

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

25. Retained earnings, 12/31/03

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

PROBLEM 5
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
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

RmarPga,CPA
 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.

26. 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

27. 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

28. 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

29. The total retained earnings at December 31, 2003 is:

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

30. The Treasury share at December 31, 2003 is:

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

31. 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

32. 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

33. The total additional paid-in capital at December 31, 2004 is:
a. P 3,637,300 b. P 3,625,000 c. P 3,612,700 d. P 3,455,000

34. The total retained earnings at December 31, 2004is:

a. P 5,998,900.00 b. P 5,491,925.0c. P 4,965,000.00 d. P 4,706,887.50

35. The Treasury share at December 31, 2004 is:

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

RmarPga,CPA