APROREV

MEM07: AUDIT OF SHAREHOLDERS’

EQUITY
PROBLEM 1:The shareholders equity of Willpower Corporation showed the following data on
December 31, 2017:
12% Preference share, P30 par, 135,000 shares issued and outstanding P4,050,000
Ordinary shares, P50 par, 180,000 shares issued and outstanding 9,000,000
Premium on Preference share 1,080,000
Premium on Ordinary share 3,240,000
Retained earnings 1,395,000

The 2018 transactions of the company affecting its stockholders’ equity are summarized
chronologically as follows:
a) Issued 27,000 shares of preference share at P40.
b) Issued 94,500 shares of ordinary share at P70.
c) Retired 5,400 shares of preference share at P45.
d) Purchased 13,500 shares of its ordinary share at P80.
e) Split ordinary share two for one (par value reduce to P25).
f) Reissued 13,500 shares of treasury stock – ordinary at P50.
g) Stockholders donated to the company 9,000 shares of ordinary share when shares had a
market price of P52. One half of these shares were subsequently issued for P54.
h) Dividends were paid at the end of the calendar year on the ordinary share at P2 per
share and on the preference share at the preferred rate.
i) Net income for the year was P2,520,000.

Based on the above and the result of your audit, determine the following as of December 31,
2018:
1. Preference share
A. P4,617,000 C. P4,860,000
B. P4,698,000 D. P4,968,000
2. Ordinary share
A. P15,615,000 C. P13,725,000
B. P13,968,000 D. P13,500,000
3. Additional paid-in capital
A. P6,679,800 C. P6,814,800
B. P6,777,000 D. P6,858,000
4. Unappropriated retained earnings
A. P2,251,440 C. P1,711,440
B. P1,749,240 D. P1,684,440

Page 1 of 3
PROBLEM 2: Dell Corporation, organized on June 1, 2017, was authorized to issue 800,000 shares,
P100 par, 9% convertible preference shares and 2,500,000 shares, P2.50 par value, ordinary
shares.

During the remainder of the fiscal year ended May 31, 2018, the following transactions were
completed in the order given:
a) 300,000 preference shares were subscribed for at P105, and 900,000 ordinary shares
were subscribed for at P26. Both subscriptions were payable 30% upon subscription, the
balance in one payment.
b) The second subscription payment was received, except one subscriber for 60,000
ordinary shares defaulted on payment. The full amount paid by this subscriber was
returned and all of the fully paid shares was issued.
c) 150,000 ordinary shares stock were reacquired by purchase at P28.
d) Each preference share was converted into four ordinary shares.
e) The treasury shares were exchanged for machinery with a fair market value of P
4,300,000.
f) There was a 2-for-1 share split, and the par value of the new ordinary shares is P1.25.
g) Profit was P830,000.

Based on the result of your audit, determine the following as of May 31, 2018:
1. Ordinary share capital
A. P 2,550,000 C. P 2,100,000
B. P 5,100,000 D. P 4,200,000
2. Total additional paid-in capital
A. P 50,890,000 C. P 48,808,000
B. P 48,340,000 D. P 48,240,000
3. Total contributed capital
A. P 53,908,000 C. P 55,990,000
B. P 53,440,000 D. P 53,340,000
4. Total shareholder’s equity
A. P 54,270,000 C. P 54,738,000
B. P 56,820,000 D. P 54,170,000

PROBLEM 3: In the course of your first-time audit of MISAMIS INC.’s stockholder’s equity
accounts for the audit year 2017, the following schedule of the company’s stockholder’s
equity accounts as of December 31, 2016 were presented by the client:

Ordinary share capital, P100 par; 200,000 shares authorized; 50,000 shares
Issued and outstanding; options to purchase 10,000 shares at P100 per
Share are held by employees, no value having been assigned to these options
P5,000,000
Share premium from ordinary shares 1,000,000
Accumulated profits 3,000,000

Page 2 of 3
Further investigation and inquiry revealed the following information:

a) The options referred to above were granted to each of its 100 employees on January 1,
2015 which shall vest three year thereafter provided employees remain in the company’s
employ and provided further that sales increase at least by an average of 5% per year. If
the sales increase by an average of at least 5% per year each year, employees shall receive
100 share options. If the sales increased by an average of least 10% per year, each
employee shall receive 300 options

b) The fair market value of each share option on the grant date was P30 per share. No
employee left the company during the said vesting period. Records show that average
sales increase over the inclusive vesting period are: 2015, 8%; 2016, 10%, and 2017, 12%

c) On May 1, 2017, the company issued bonds of P5,000,000 at 120 giving each P1,000 bond
a warrant enabling the holder to purchase4 shares at P120 per share for a one year period.
Shares were selling for P140 at this time. The market value of bond ex-warrant is 105.

d) On June 1, 2017, half of the warrants issued with bonds were exercised.

e) On August 1, the company issued rights to shareholders, permitting holders to acquire for
a 60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for
P150 at this time. All but 5,000 of these rights were exercised and additional shares were
issued

f) The company declared a P5 per share cash dividends on December 15, 2017 payable to
stockholders as of December 31, 2017 on January 31, 2018

g) Net income before any adjustments amounted to P2,500,000 in 2017.

Based on the above transactions, answer the following items:

1. What is the retroactive adjustment to the beginning accumulated profits account related to
the options granted in 2015?
A. P600,000 C. P200,000
B. P400,000 D. No adjustment necessary
2. What is the correct credit to the share premium account as a result of the exercise of rights
referred to in item d?
A. P 250,000 C. P 285,000
B. P 270,000 D. P 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, 2017?
A. P 3,180,000 C. P 2,530,000
B. P 3,505,000 D. P 2,155,000
4. What is the correct Accumulated Profits as of December 31, 2017?
A. P 5,145,000 C. 4,745,000
B. P 4,900,000 D. 4,245,000

Page 3 of 3