*# Debt x Keaning CS College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Session 1 \udit of Shareholders’ Equity, Part 1 (Shareholders’ Equity and Share-based Compensation) FINANCING CYCLE Business corporations obtain substantial amounts of their financial resources by incurring debt and isuing capita stock, The acquiton end zepaymentof capital is sometimes referred to asthe financing cycle. This transaction cycle includes thé sequence of procedures for authorizing, executing, and recording transactions that involve bank loans, mortgages, bonds payable, and capital stock as well as the payment of interest and dividends. The accounts in a company’s capital acquisition and repayment cycle depend on the type of business the company operates and how its operations are financed. All corporations have capital stock and retained earnings, but some may also have preferred stock, additional paid-in capital, and treasury stock. As with other cycles, cash is an important account in the cycle because both the acquisition and repayment of capital affect the cash account. The unique characteristics of the capital acquisition and repayment cycle affect how auditors verify the accounts in the cydle. This cycle often includes these accounts: ‘+ Notes payable '* Cash in the bank * Contracts payable + Capital stock—common '* Mortgages payable '* Capital stock—preferred + Bonds payable + Paid-n capital in excess of par * Interest expense * Donated capital 1 Accrued interest + Retained earings * Appropriations of retained earnings _* Dividends payable '* Treasury stock * Proprietorship—capital account ++ Dividends declared ‘+ Partnership—capital account AUDIT OF SHAREHOLDERS’ EQUITY Owners’ equity for corporate clients consists of capital stock accounts (preferred and common) and retained earnings. Balances in the capital stock accounts change when the corporation issues of repurchases stock. Transfer of ownership of shares from one shareholder to another does not affect the account balances. Retained earnings are normally increased by earnings and decreased by dividend payments. Additionally, afew journal entries (e.g, prior period adjustments) may directly affect retained earnings. Transactions in the owners’ equity accounts are generally few, but material in amount. No change may occur during the year in the capital stock accounts, and perhaps only one or two entries will be made to the retained earnings account. The Auditors’ Objectives in Auditing Owners’ Equity The auditors’ objectives in the audit of owners’ equity are to: 1. Use the understanding of the client and its environment to consider inherent risks, including fraud risks, related to owners’ equity. 2. Obtain an understanding of internal control over owners’ equity. 3. Assess the risks of material misstatement and design tests of controls and substantive procedures that: ‘2, Substantiate the existence of owners’ equity and the occurrence of the related transactions. b. Establish the completeness of recorded owners’ equity Verify the cutoff of transactions affecting owners’ equity. dd. Establish the proper valuation of owners’ equity and the accuracy of transactions affecting owners’ equity. e. Determine that the presentation and disclosure of information about owners’ equity are appropriate, 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 In conjunction with the audit of owners’ equity accounts, the auditors will aso obtain evidence about the related accounts of dividends payable and capital stock discounts and premiums. Internal Control over Owners’ Equity There are three principal elements of strong internal control over capital stock and dividends: (1) the proper authorization of transactions by the board of directors and corporate officers, (2) the segregation of duties in handling these transactions (preferably the use of independent agents for stock registration and transfer and for dividend payments), and (3) the maintenance of adequate records. Control of Capital Stock Transactions by the Board of Directors ‘© All changes in capital stock accounts should receive formal advance approval by the board of directors. The board of directors must determine the number of shares to be issued and the price per share; if an installment plan of payment is to be used, the board must prescribe the terms. ‘© IF plant and equipment, services, or any consideration other than cash is to be accepted in payment for shares, the board of directors must establish the valuation on the noncash assets received. ‘+ Transfers from retained earnings to the Capital Stock and Paid-in Capital accounts, as in the case of stock dividends, are initiated by action of the board. ‘+ Stock splits and changes in par or stated value of shares require formal authorization by the board. ‘+ Authority for all dividend actions rests with the directors. The declaration of a dividend must specify not only the amount per share but also the date of record and the date of payment. Independent Registrar and Stock Transfer Agent ‘+ In appraising internal control over capital stock, the first question that the auditors consider is whether the corporation employs the services of an independent stock registrar and a stock transfer agent or handles its own capital stock transactions, ‘+ Any company with stock listed on a securities exchange is required to engage an independent registrar as a control to prevent the improper issue of stock certificates. The responsibility of an independent registrar is to make sure that stock is issued by a corporation in accordance with the capital stock provisions in the corporate charter and the authorization of the board of directors. This is to avoid any overissuance of stock. ‘+ Most large corporations also employ the services of a stock transfer agent to maintain the stockholder records, including those documenting transfers of stock ownership. The Stock Certificates Book and Stockholders Ledger ‘= If the corporation does not utilize the services of an independent registrar and stock transfer agent, the board of directors usually assigns these functions to the secretary of the company. ‘+The stock certificates should be serially numbered by the printer, and from the time of delivery to the company until issuance, they should be in the exclusive custody of the designated officer. The signatures of two officers are generally required on stock certificates. ‘+The certificates often are prepared in and torn from bound books called stock certificates books, with attached stubs similar to those in a checkbook. Certificates should be issued in ‘numerical sequence and not signed or countersigned until the time of issuance. ‘= When outstanding shares are transferred from one holder to another, the old certificates are surrendered to the company. The designated officer cancels the old certificates by perforating and attaching it to the corresponding stub in the certificates book, ‘+ Atransfer journal may be used to record transfers of shares between shareholders. A stockholder’s ledger provides a separate record for each stockholder, thus making it possible. to determine at a glance the total number of shares owned by any one person. This record may be used in compiling the list of dividend checks or for any other communication with shareholders. 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Internal Control over Dividends ‘« The nature of internal control over the payment of dividends, as in the case of stock Issuance, depends primarily upon whether the company performs the function of dividend payment itself or utilizes the services of an independent dividend-paying agent. ‘+ TFan independent dividend-paying agent is used, the corporation will provide the agent with a certified copy of the dividend declaration and a check for the full amount of the dividend. ‘The bank or trust company serving as stock transfer agent is usually appointed to distribute the dividend, since it maintains the detailed records of stockholders. + Ina small corporation that does not use the services of a dividend-paying agent, the responsibility for payment of dividends is usually lodged with the treasurer and the secretary. ‘After declaration of a dividend by the board of directors, the secretary prepares a list of stockholders as of the date of record, the number of shares held by each, and the amount of the dividend each is to receive. Audit Plan—Capital Stock The following procedures are typical of the procedures required in many engagements for the verification of capital stock: 1. Obtain an understanding of internal control over capital stock transactions, Examine articles of incorporation, bylaws, and minutes for provisions relating to capital stock, Obtain or prepare analyses of the capital stock accounts. ‘Account for all proceeds from stock issues. Confirm shares outstanding with the independent registrar and stock transfer agent. For a corporation acting as its own stock registrar and transfer agent, reconcile the stockholder records with the general ledger. Determine that appropriate accounting is applied to employee stock compensation plans. Determine that compliance with restrictions and preferences pertaining to capital stock and disclosures are appropriate. Capital stock transactions are usually few; consequently, the auditors usually substantiate all transactions in audits of nonpublic companies. In public company integrated audits, the auditors will rely on controls because they must be tested to attest to internal control. In addition to the preceding steps, the auditors should determine the appropriate financial statement presentation of capital stock. This topic is discussed later in this chapter, along with the financial statement presentation of other elements of owners’ equity. Retained Earnings and Dividends ‘Audit work on retained earnings and dividends includes two major steps: (1) the analysis of retained earnings and any appropriations of retained earnings and (2) the review of dividend procedures for both cash and stock dividends. Ona first-year audit, the analysis of retained earnings and any appropriations of retained earnings should cover the entire history of these accounts. Such an analysis is prepared for the permanent file and is updated during each annual audit. Appropriations of retained earnings require specific ‘authorization by the board of directors. The only verification necessary for these entries is to ascertain that the dates and amounts correspond to the actions of the board. In the verification of cash dividends, the auditors usually will perform the following steps: 1. Determine the dates and amounts of dividends authorized. 2. Verify the amounts paid. 3. Determine the amount of any preferred dividends in arrears. 4. Review the treatment of unclaimed dividend checks. The auditors’ analysis of dividend declarations may reveal the existence of cash dividends declared but not paid. These dividends must be shown as liabilities in the balance sheet. The auditors also may review the procedures for handling unclaimed dividends and ascertain that these items are recognized as liabilities. In the verification of stock dividends, there is an additional responsibility of 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 determining that the proper amounts have been transferred from retained earnings to capital stock and paid-in capital accounts for both large and small stock dividends. SHARE-BASED COMPENSATION ‘A compensation arrangement established by the entity whereby the entity’s employees shall receive share capital in exchange for their services (equity settled compensation) or entity incurs liabilities to the employees in amounts based on the price of its shares (cash settled compensation). When is compensation recognized? = If the share-based compensation vest immediately, the entity shall recognize the ‘compensation as expense in full of corresponding increase on equity on the grant date. - If the share-based compensation does not vest immediately until the employee completes a specified condition, the compensation is recognized as expense over the vesting period. STOCK OPTION. Granted to officers and key employees to enable them to acquire shares of the entity during specified period upon fulfillment of certain conditions at a specified price. ‘SHARE APPRECIATION RIGHTS. The share appreciation rights entitle an employee to receive ‘cash which is equal to the excess of the market value of the entity's shares over a predetermined price for a stated number of shares. REDIENOBERE arene for option issuance Determine if options vested immediately or not vested immediately. a, If options vest immediately, charge compensation or salaries expense for the entire valuation/value of the options ‘The value of option should be at fair value of the option, otherwise at intrinsic value If fair value method is used, value of the option shall be fixed at whatever isthe fair value of the options on the grant date. If intrinsic value (fair market value of stocks less exercise price) is used, the intrinsic value is updated at each balance sheet date before and after the vesting period until the options are exercised. Any changes in intrinsic value shall be treated as a mere change in estimate, charged to profit or loss. 2. If options are not vested immediately, determine if option plan is fixed or variable. a. If options are under fixed option plan (the only resting condition is the vesting.), charge compensation expense to the vesting period by allocating the value of the options to the said vesting period. b. In estimating the compensation expense for each period, always consider in the analysis the estimated number options which will become exercisable based on number of employees who shall remain within the company's employees until the end of the vesting period. Any changes in the number of employees remaining with the company until the option vest shall be accounted for as a change in estimate. 3. If options are under variable option plan (if apart from the vesting period, there is an additional vesting condition), determine what is the nature of the additional vesting condition (market based or non-market based) 4. If additional vesting condition is market based (for example, share price), account for the option as ifs fixed, That is, compensation expense shall be recognized over the vesting period regardless of whether the additional market condition is achieved or not. This is because the determination of the fair Valuation of the options considers the probabilty that market-based condition will be achieved or not achieved. In addition, market-based condition cannot be directly influenced by key holders or employees, that is, services of employees are not related to the achievabilty of the condition, thus whether the market-based condition is achieved or not, in 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 principle, the company received the services of the employees thus compensation expense shall be recognized. 5. If additional vesting condition is nonmarket based (for example, target sales, earings, increase in sales etc.), consider whether the additional market-based condition is achieved or not in resting the options. This means that compensation expense shall only be recognized if additional vesting condition (apart from the vesting period) Is achievable or achieved. In addition, a certain which among the following items are valuable or varies in response to the non-market-based condition: a. Number of options b. Vesting period Fair value of options If nonmarket based vesting condition is not achieved, the option shall revert to the company. Accounting for share appreciation rights Share appreciation rights are accounted for similar with options (Follow the same steps above) with the following exceptions: = Share appreciation rights payable is a financial liability to pay in cash. ~ Measurement: The value of the share appreciation right payable (at fair value or intrinsic value) shall be updated at the end of each reporting year during and after the vesting period Until the liability is settled. ~The liability is settled at the prevailing fair or intrinsic value of the share appreciation right on the settiement date. = Any changes in fair valuation at each balance sheet date and on the settlement date shall be treated as mere change in estimate, charged to profit or loss. 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Let's Try Theories 1. When a client company does written confirmation from t a ts on stock register, the auditor should obtain register concerning Restriction on the payment of seckehony, - c. Guarantees the preference share liquidation value d. The number of shares subject to agreements to repurchase ~/ 2. The primary responsibilty of bank updating as registrar of capital share i to a. A certain that dividends declared do not exhibit the statutory amount allowance under state of incorporation b. Recount fr stock certificates by comparing the total shares outstanding tothe total inthe shareholder subsidiary Ledger c. Up as an independent third party between the board of directors and outside investors concerning mergers, acqustons, andthe sale of Treasury shares d._ Verify that stock is issued in accordance with the authorization of the board of directors and the articles of incorporation. 3. All corporate capital share transactions should be ultimately be traced to— omit rakin a. Minutes of the board of directors meeting b. Cash disbursement Journal €. Cash receipts Journal d. Numbered stock certificate 4. During the audit entities shareholders equity accounts, the autor determines whether there are restrictions on retained earnings resulting from loans agreements or state laws. This audit procedure most likely is intended to verify what management assertion? 2. Existence or occurrence b. Valuation or allocation c. Completeness isclosure 5. An auditor should trace corporate stock issuances and Treasury stock transactions to a. Numbered stock certificates b. Transfer agent records c. Articles of incorporation 4. Minutes of the board of directors meeting coninut 6. An aut program forthe examination ofthe reading earrings account shoul include a step that requires verification of the a, Market value used to charge retained earnings to account for a two-for-one spit b. Approval off the adjustment to the beginning balance as a result of a writedown of accounts receivable _¢. Authorization for both cash and stock dividends d. Gain or loss resulting from disposition of Treasury shares 7, The amount of time spent verifying equity is frequently minimal for closely held corporations because: a. These companies are so small that itis not necessary to audit capital section b. The few owners all have access to the books so the auditor spends more time on accounts like liabilities which affect outsiders ¢. There are transactions during the year for the capital stock accounts, except for earnings and dividends. d. There is no public interest in these companies 8. When a company has Treasury stock certificates on hand, a year end count of the certificates by the auditor is: a. Always required ._ Not required if Treasury stock is @ deduction from shareholders’ equity 2° semester 2023-20229. Ty of Mindanas College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines Phone No. (082) 305-0645 Required when the company classifies Treasury stock with other assets d. Required when the company had Treasury stock transactions during the year Itis normal practice to verify all capital stock transactions: a. Only when the client is small b. That are in exist of a material amount c. If there are not very many during the year Saige because of their materiality and permanence in the recor 10. When a dividend Is declared by the board of directors, the source for determining who should receive dividends checks is the '@ Shareholders capital stock master file Schedule of stock owners Capital stock certificate record Corporate directory Problems. Problem 1 A partial list of the accounts and ending account balances taken from the post-closing trial balance of ‘Alpha Corporation on December 31, 2014 is shown as follows: ‘Accounts ‘Accumulated profits- unappropriated Bonds payable Ordinary shares subscribed Long term investments in equity securities, ‘Additional paid-in capital on ordinary shares Premium on bonds payable ‘Authorized ordinary shares at p10 par value Preference shares subscribed ‘Additional paid-in capital on preference shares ‘Authorized preference shares at p50 par value Gain on sale of treasury shares Unrealized increase in value of secutities available for sale Ordinary share warrants outstanding Unissued ordinary shares Unissued preference shares Cash dividends payable-preference Donated capital Reserve for bond sinking fund Reserve for depreciation Revaluation increment in properties Subscription receivable- preference (long-term) Subscription receivable- common (long-term) REQUIRED: Compute the following: A B Ordinary shares issued 950,000 900,000 Preference shares issued 445,000 400,000 ‘Additional paid-in capital 592,000 596,000 Total contributed capital 1,332,000 1,352,000 1 2 3 4. Py semester 2021-2022 Amount 410,000 220,000 50,000 210,000 460,000 30,000 900,000 45,000 112,000 400,000 4,000 3,000 20,000 500,000 100,000 50,000 25,000 220,000 150,000 100,000 15,000 20,000College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 5. Total legal capital 1,395,000 1,300,000 6. Total shareholders’ equity 2,744,000 2,244,000 Problem 2 In the course of your first-time audit of MISAMIS INC.’s stockholders’ equity accounts for the audit year 2014, the following schedule of the company's stockholder’s equity accounts as of December 31, 2013 were presented by the client: Ordinary share capital, P100 par, 200,000 shares authorized, 50,000 | P5,000,000 [eV an ca eptton shares issues and outstanding; options to purchase 10,000 shares at ee P100 per share are held by employees, no value having been, neat end As Hs fe ere assigned to these options swat, (ovo) ‘Share premium from ordinary shares 1,000,000 haat sar ‘Accumulated profits 3,000,000 i Further investigation revealed the following information: @ wxu eur ‘a. The options referred to above were granted to each of its 100 employees on January 1, 2012 pr which shall vest three years thereafter provided employees remain in the company’s employ or and provided further that sales increase by an average of at east 5% per year. IF the sales Pe, ywf 2? increase by an average of at least by an average of 5% per year, each year, employees shall“? “7 receive 100 share options. If the sales increase by an average of at least 10% per year, each“) 211407 employee shall receive 200 share options. If the sales increase by an average of at least 15% per year, each employee shall receive 300 options. a | if gymewnsyps_ On May 1, 2014, the company issued bonds of P5,000,000 at 120 giving each P1000 bond @ fe Mm sires warrant enabling the holder to purchase 4 shares at P120 per share for a one-year period, a ‘Shares were selling for P140 at this time. The market value of the bond ex-warrant is P105, oe On June 1, 2014, half of the warrants issued with bonds were exercised. 20 sag er d. On August 1, the company issued rights to shareholders, permitting holders to acquire for a ‘yg UT OTe bot cums st “ap 60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for P150 at ompp 28> «jr ___ this time, Al but §,000 of these rights were exercised and addtional shares were issued. “Atsee. The company declared a PS per share cash dividends on December 15, 2014 payable to ie 6 20h stockholder as of December 31, 2014 on January 31, 2015. seo f. Net income before any adjustments amounted to P2,5000,000 in 2014. Wm nu etn ge las 2 REQUIRED: no 1. What isthe retroactive adjustment to the beginning accumulated profits account related to the 7 options granted in 2012? 2 Om) 600,000, a0 eT 400,000 ‘corm © 200,000 25 rvs) IF 4. No adjustment 8 Be 2. What is the correct crecit to the share premium account as a result ofthe exercise of rights) oxg, ry) not referred to in item d? oscariw) Wnt a. 250,000 b. 270,000 oe c. 285,000 330,000 3, What is the total additional paid in capital to be presented in the stockholders’ equity portion of the balance sheet as of December 31, 2014? 1. 3,130,000 b 3505000 SP WT 2,930,000 oe One A [ 1gS0T a or 5 rameter =f) art) 4 wTCollege of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao ‘ne No. (082) 306-0648 d. 2,155,000 4. What is the correct accumulated profits as of December 31, 20147 2. 51145000 RE hg, Sena b. 4,900,000 4,745,000 (eo OEE alee Go Ww 9.5m stew al) se See (WT) ee Problem 3 You were assigned to audit the Love Corporation’s Shareholders’ Equity accounts and the related capital transactions for its first year of operation ended December 31, 2018. In studying the transactions, you came across the following entries made by the client: (ond So Date Particulars Debit Credit — gy 24 Jan. 15 Land 500,000 owt Ordinary shares 500,000 a To record the issuance of 50,000 shares of ordinary in exchange of a real property; ‘2 a wer Mar. 1 ‘Subscription receivable 420,000 Gaspivek 18T Ordinary shares 420,000 % st ‘To record the subscription of 20,000 shares of ordinary at P21 per share subscription price. Jun. 1 Ordinary shares 125,000 re oe Cash 125,000 Cae To record the acquisition of 5,000 shares of company’s own ordinary shares. Cash yar Aug. 15 Cash 252,000 Eubceription Rusivable ‘Subscription receivable 252,000 Swbtorw ob Or To record the collection for the full payment of 60% ofthe subscribed shafés on Mar!" Sept. 2 Cash 40,000 Ordinary shares 40,000 To record the reissuance of half of the shares reacquired on June 1. Dec. 29 ‘Accumulated profits 750,000 ‘Share premium 750,000 To record the grant of 10 employee share appreciation rights on the grant date ‘computed as: (10 x 5,000 x P15). Audit Notes: 1. The company was authorized to issued 100,000 shares of ordinary shares at P10 par value. 2. The real property received on January 15 were fairly valued at P1,800,000. 30% of which is ated to he land wih the balan to the bulking which te company intends to suas a factory site. 3. The company declared a 4-for-1 share split up on August 31. 4, The share appreciation rights were granted to 10 of the key employees provided that the employees stays with the company for 5 years from date of grant and provided further that the 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 average revenue growth rate over the five-year period is at 10%, each employee will receive 3,000 share appreciation rights; ifthe average revenue growth rate is 20%, each employee will receive 4,000 share appreciation rights; If the average revenue growth rate is 30%, each employee will received 5,000 share a the end of the year, it was ascertained by the management tha ill leave the corripany before the fifth year and projected that the average revenue ate shall be walt lover the five- ase The prevailing fair value of the share appreciation rights by the 8nd'6f the year is 5. On December 30, the board of directors approved a P1 per share cash dividend to shareholders of record as of December 20, payable on Januaty 10 of the subsequent year. 6. After all the necessary adjusting entries, you ascertained that the correct net income for the year is at P1,500,000. oS os oP one ba Questions: eres 1. Whats the correct creit to share premium asa result ofthe transaction on January 15? ux gunna) a. None b. P-40,000 . P 760,000 (&P tes00,000% PF OP ur om a OT eran 2. What is the correct credit to share premium as a result of the subscription on March 1? xy, ah“ 3. What is the number of sharg ssued after the share split on August 31? mes RESO came yoo 4. The correct entry to record the reissuance of treasury shares on September 2, involves: nM Debit to retained earnings at P40,000. Re Debit to retained earnings at P22,500, TH ore c. Credit to share premium at P40,000. &._Graitto share premium at P2,500 10 tis the correct balance of share appreciation rights payable as of December 31? > P 84,000 . P-90,000 , P 105,000 .P 420,000 > 7 employers Problem 4 ‘The Perseverance Corporation has requested you to audit its financial statements for the year 2020. During your audit, Perseverance presented to you its balance sheet as of December 31, 2019 containing the following capital section: Preferred stock P10 par; 60,000 shares authorized and issued, of ‘hich 6,000 are treasury shares costing P90,000 and shown as an 600,000 asset ‘Common stock, par value P4; 600,000 shares authorized, of which 1,800,000 450,000 are issued and outstanding ‘Additional paid in capital (PS per share on preferred stock issued in 300,000, 2015) Allowance for doubtful accounts receivable 12,000 Reserve for depreciation 840,000 Reserve for fire insurance 198,000 Retained earnings 2,250,000 Total 6,000,000 10 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Additional information: 1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30, 2020. Perseverance credited the proceeds to the Preferred Stock account. The treasury shares as of December 31, 2019 were acquired in one purchase in 2019. 2) The preferred stock carries an annual dividend of P1 per share. The dividend is cumulative. ‘As of December 31, 2019, unpaid cumulative dividends amounted to PS per share. The entire accumulation was liquidated in June, 2020, by issuing to the preferred stockholders 54,000 shares of common stock. 3) A cash dividend of P1 per share was declared on December 1, 2020 to preferred stockholders of record December 15, 2020. The dividend is payable on January 15, 2021. 4) At December 31, 2020, the Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had balances of P25,000 and P1,050,000, respectively. 5) On March 1, 2020, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings was debited, 6) On December 31, 2020, the Reserve for Fire Insurance was decreased by P30,000, which represents the carrying value of a machine destroyed by fire on that date. Estimated fire cleanup costs of P6,000 does not appear on the records. 7). The December 31, 2019 Retained Earnings consists of the following: Donated land from a stockholder (Market value on date of donation) 450,000 Gains from treasury stock transactions 51,000 Earnings retained in business 1,749,000, Total 2,250,000 8) Net income for the year ended December 31, 2020 was P1,297,500 per company's records. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2020. (Disregard tax implications) ‘Accounts A c 1. Preferred stock 555,000 570,000 (600,000 2. Common stock 2,070,000 1,800,000 54 3. Additional paid in capital 810,000, 414,000 804,000 4, Appropriated retained earnings 0 258,000 228,000 5. Unappropriated retained pea ere —. earnings 623, 67, 626, 6. Treasury stock 36,000 90,000 7. Total stockholders’ equity (©316,500) 3,700,500 5,812,500 PROBLEM 5 Nestle company was organized at the beginning of the current year. The following shareholders accounts are included in the entities here and trial balance. Preference share capital, P100 par, authorized 100,000 shares, issued and outstanding, 66,000 shares. 6,600,000 Preference share capital subscribed, 6000 shares 600,000 Share premium preference 240,000 Subscription receivable preference 360,000 Ordinary share capital, P10 par value, authorized 200,000 shares, issued and outstanding, 72,000 shares 720,000 u 2° semester 2023-20224,290.00 70@an Po Town 0s 3,000 College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Ordinary share capital subscribed, 72,000 shares 720,000 Share premium ordinary 2, 850,000 ‘Subscriptions receivable ordinary 1,080,000 The following current year transactions related to Nestle corporation's shareholders equity: ‘+ Immediately after Nestle Corporation was organized, it received subscriptions of 60,000 per shares. ‘© During the year, subscriptions were received for an additional 12,000 preference share with price of 120 pesos per share ‘+ Cash payments were received from subscribers at frequent intervals for several months after subscription. The company's policy is to issue share certificates only upon full payment of the share subscription. ‘+ Also during the current year, Nestle Corporation issued 24,000 ordinary shares in exchange for a track of land with the value of P690,000. Question: 1. What is the total subscription price of the ordinary shares originally subscribed? 2. How much was collected from the subscribers of preference shares? 3. The company's statement of financial position at the end of the current year showed report total contributed capital for preference share and ordinary share of? Problem 6 Overkill Company presented the following “Surplus” account in relation to its financial statement audit for the year December 31, 2015. The company never undertook audit ofits financial records since its incorporation on January 1, 2011. SURPLUS 2011-2014 Cash Dividends 1,560,000 | (Nate) | et incomelioss 2,400,000 12/31/12 To reserve for bond 2011 Goodwill recognition (Note sinking fun (Note 3) 60,000 | 2) caaes 12/31/13 Reserve for sinking 60,000 | 12/31/12 Contributed capital in 18,000 fund 7000 | excess of par value : 1/1/13 Donation to company by Pepe a) 60,000 | a stock holder, operational asset 15,000 ne at fair value 3/31/13 Refund of prior years’ a 750,000 | income taxes due to carryback of 27,000 2 2012 net loss to 2013, 7/1/14 Reduction in share capital one, 41,500,000 12/31/15 Net income 510,000 Additional information: Note 1: On June 30, 2012 the company recognized as an outright expense an equipment with a cost of P160,000. As per audit, you have ascertained that the equipment has a useful life of 5 years and is supposed to be depreciated using straight-line method to zero residual value. Note 2: Goodwill has been recognized by the company upon approval of the board of directors R 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 Note 3: The company issued a P200,000, 12% bonds payable on January 2012. The bond indenture requires the company to appropriate retained earnings at P60,000 annually starting December 31, 2012 until the bonds’ maturity on December 31, 2016. Note 4: This pertains to a board of directors approved recapitalization reducing the par value of the company’s shares from P25 to P10 without change in the number of outstanding shares (100,000 shares). Note 5: The company declared and distributed 50% stock dividends on its 100,000, P10 par value ordinary shares outstanding. The fair market value of the shares was at P15, REQUIRED: 1. What is the retroactive adjustment to the retained earnings beginning 2015 as a result of the error identified in Note 17 a. 64,000 c. 48,000 d. 96,000 2. What is the adjusted net income in 2015? a. 478,000 b. 494,000 . 500,000 d. 510,000 3. What is the correct debit to retained earnings as a result ofthe stock dividend declaration on ‘September 1, 2015? a, 750,000 b. 700,000 c. 550,000 d. 510;008 £00 009 4, What is the adjusting entry in relation to your aut in note 42 a. Debit: Share premium- 1,500,000; Credit Retained earnings- 1,500,000 b. Debit: Ordinary shares- 1,500,000; Credit Share premium- 1,500,000 ‘ics Debit: Retained earnings- 1,500,000; Credit Share premium 1,500,000 d. Debit: Retained earnings- 1,500,000; Credit: Ordinary shares- 1,500,000 5. What is the correct balance of retained earnings, unappropriated, as of December 31, 2015? a. 925,000 b. 745,000 c. 685,000, d. 658,000 Problem 7 On January 2014, Pandora Corp granted 600 empk a re each exercisable after 3 years, subject to the employees staying with the company until the end of 2016,,Qptions can be exercised if share prices increase rom the beginning of 2014 to. ioe the end of 2016. The share options can be exercised at arly time during the next five years, thatis by 2021. The company estimates the fair valuue-of the share options on the end of 2016, thus options are exercisable-and the possibilty that the share price will not exceed PEO at the end of 2016, thus the share options will be forfeited. The following information are deemed relevant: Fair value of Fair value of Actual number of Estimated shares ‘options employees number of actually leaving additional employees B 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 abi 00 the company expected toleave 5, during the year the company by the end of 20) Os) Dec. 31, 2014 Pas % @ tas) ae Dec, 31, 2015 44 20 35 Dec. 31, 2016 6 30 - Few -S-to-Aee ye ae 2 ewe 6 ae 1. What is the compensation expense in 2014? — a. 100,000 4) -S-10- 9 = SNE oem thy ate, . 88,333 27008 None — 2. What is the compensation expense in 2015? if S00 in US *5 rr a. 100,000 Cumulative ar B. 91667 ie ny ma hae MO 99.08 88,333 = igo m) — d. None acne 3. What is the compensation expense in 2016? a. § 92,500 Salaries WP agen b. 91,667 90 c 88,333 d. None 4, What is the ordinary share options outstanding as of December 31, 2015? $00 y mm b. 191,667 ‘Shave fren dev ©. 188,333 stuns of 90 4, None Problem 8 (On January 2014, Jubee Corp. grants each of its 100 employees in the sales department share options. The share options will vest at the end of 2016, provided that the employees remain in the entity's employ and provided that the volume of sales increases by at least an average of 5% per year. If the sales volume increase by an average of 5% to 10% per year, each employee will receive 100 options each. If sales volume increase by 11% to 15%, each employee will receive 200 options teach. If sales volume increase by more than 15% each employee will receive 300 options each. Each option can be exercised to acquire ordinary shares (P100 par) at P120 per share at any time up to December 31, 2017. On the grant date, the company estimates that the share options have a fair value of P40 per option. The company also estimates that the volume of sales for the product will increase by an average of 11% to 15% per year. The entity also estimates, based on weighted probability that 20% of the employees will leave before the end of 2016. By the end of 2014, seven employees have left the company and the entity stil estimates that a total of 20 employees will eave at the end of 2016. Product sales have increased by 12% and the entity expects that this rate will continue over the next 2 years. By the end of 2015, further five employees left the company. The entity now expects due to low tumover that 15% of employees will leave by the end of 2016. Product sales increased by 20% and expects that same increase in 2016. By the end of 2016, additional two employees left. The entity sales have increased by 16% in 2016, “ 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 REQUIRED: 1. What is the compensation expense in 20142 a. 640,000 c. 466,667 d. 352,000 2. What is the compensation expense in 2015? a. 640,000 d. 352,000 3. What is the compensation expense in 2016? a. 640,000 4, Assuming that 60% of the options granted to employees were exercised, the entry to record the exercise shall require a credit share premium at a, 928,800 _ b. 925,200 309,600 d. 306,000 5. Assuming that 40% of the options granted to employees expires by the end of 2017, the entry to record that expiration shall require a credit share premium at a. None c. 408,000 d. 400,000 Problem 9 MYX Co. issued stock appreciation rights to its COO on January 1, 2012. The stock appreciation rights may be exercised beginning January 1, 2015 provided that the officer is still in the employ of the ‘company at the date of exercise. Each right provides for a cash payment equal to the amount the share price of MYX Co. exceed P50. The equivalent number of shares for stock appreciation rights will be based on the level of sales of the company ta the date of exercise, as follows: Sales level (in millions) ‘Number of SAR to be granted P250 to P400 10,000 400 plus to P750 15,000 ‘Above P750 20,000 Sales actually achieved by the company and the stock price at the end of each year are! Year Sales level Share price at end of year 2012 350 milion. P74 2013, 410 million 85 2014 760 million 95 REQUIRED: 1. “What is the compensation expense to be recognized in 2013? a. 80,000 b. 270,000 c. 525,000 d. 550,000 15 2° semester 2023-2022College of Accounting Education ‘SPF Facundo Hal B& E Bldg, ‘Matin, Davao City Phiippines ‘The Universigy of Mindanao Phone No. (082) 305-0645 2. The entry to record the payment to employees in 2015 assuming all of the rights are exercised? 2." 80,000, b, 5255,000 €._550,000 ‘$00,000, 3. Assuming SARs are not yet exercised as at December 31, 2015 and that the fair value of the stock appreciation rights is at P1,000,000, what is the liability for the SAR to be recognized as of December 31, 2015? ‘a. 500,000 SAR ave centinunadly, revaluad at efch . 525,000 als date vies Soe) aie é. 900,000 d. 1,000,000 STRIVE FOR PROGRESS, NOT PERFECTION. 16 2° semester 2023-2022