Audit of Equity [PDF]

Citation preview

TARIPE, Jennifer A. TABO, Janelle



IV- BS Accountancy



X- Audit of Equity PROBLEM NO. 1 – Components of equity Alcoy Corporation’s post-closing trial balance at December 31, 2010 was as follows: Alcoy Corporation Post-Closing Trial Balance December 31, 2010 Debit Accounts payable Accounts Receivable Reserve for depreciation Reserve for doubtful accounts Premium on ordinary shares Gain on sale treasury shares Bonds Payable Building and equipment Cash Dividends payable on preference shares Ordinary share capital (P1 par value) Inventories Land Available-for-sale securities at fair value Trading securities at fair value Net unrealized loss on available-for-sale Securities Preference share capital (P50 par value) Prepaid expenses Donated Capital Share warrants outstanding Retained earnings Treasury shares – ordinary, at cost Totals



Credit P 495,000



P 963,000 360,000 54,000 1,800,000 450,000 720,000 1,980,000 396,000 7,200 270,000 1,116,000 684,000 513,000 387,000 45,000 900,000 72,000 800,000 208,000 415,800 324,000 P 6,480,000



P 6,480,000



At December 31, 2010, Alcoy had the following number of ordinary and preference shares: Ordinary 900,000 270,000 252,000



Authorized Issued Outstanding



Preference 90,000 18,000 18,000



The dividends on preference shares are P 0.40 cumulative. In addition, the preference share has a preference in liquidation of P50 per share. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Share premium/ Additional paid-in capital a. P3,213,000 c. P3,050,000 b. P3,258,000 d. P2,600,000 2. Total contributed capital a. P4,428,000 b. P4,220,000



c. P3,770,000 d. P1,170,000



3. Unappropriated retained earnings a. P415,800 c. P91,800 b. 739,800 d. P37,800 4. Total equity a. P4,266,800 b. P4,519,800



c. P4,888,800 d. P4,474,800



Answers: 1) B; 2) A; 3) C; 4) D Suggested Solution: Question No. 1 Premium on ordinary shares Gain on sale of treasury shares Donated capital Share warrants outstanding



P1,800,000 450,000 800,000 208,000



Total share premium/additional paid-in-capital



P3,258,000



Question No. 2 Preference share capital (P50 par value) Ordinary share capital (P1 par value) Share Premium (see no. 1) Total contributed capital



P900,000 270,000 3,258,000 P 4, 428, 000



Question No. 3 Total retained earnings Less appropriate for treasury shares Unappropriated retained earnings



P415,800 324,000 P 91,800



Question No. 4 Total contributed capital (see no.2) Retained earnings: Unappropriated (see no. 3) Appropriated for treasury shares Total Less : Treasury shares Net unrealized loss on AFS



P4,428,000 P 91,800 324,000



415,800 4,843,800



324,000 45,000



369,000



Total equity



P 4,474,800



PROBLEM NO.2 – Adjusted components of equity The “shareholders equity” account of Alegria Corporation, after its initial year of operation in 2010 shows the following: Date Jan. 01



Jan. 15 Mar. 10 May 15 June 10 Dec. 31 Dec. 31



Particulars Issued 6,000 shares at par of P100 in exchange for real property with a market value of P800,000; authorized 20,000 shares Sold 8,000 shares at P120 Purchased 800 shares at P150 Loss on sale of machinery Sold 400 treasury shares Cash dividends declared payable January 15, 2011 Profit for the year



Debit



Credit P600,000 960,000



P120,000 40,000 68,000 80,000 316,000



Questions: Based on the information presented above and the result of your audit, answer the following:



1. The adjusted share capital as of December 31, 2010 is a. P1,360,000 c. P1,400,000 b. P1,560,000 d. P1,340,000 2. The total share premium as of December 31, 2010 is a. P360,000 c. P368,000 b. P160,000 d. P168,000 3. The unappropriate retained earnings as of December 31, 2010 is a. P196,000 c. P136,000 b. P156,000 d. P144,000 4. The adjusted total equity on December 31, 2010 is a. P1,944,000 c. P1,744,000 b. P1,704,000 d. P1,904,000 5. The book value per share of Alegria Corporation on December 31, 2010 was a. P140.00 c. P128.20 b. P132.22 d. P125.29 Answers: 1) C; 2) C; 3) C; 4) D; 5) A Suggested Solution: Share Date Capital Jan. 1 P600,000 Jan. 15 800,000 Mar. 10 May 15 June 10 Dec. 31 Profit(P316,000P40,000) Bal., (12/31/10)



P1,400,000



Share premium P200,000 160,000



Retained Earnings



Treasury shares



P120,000 (60,000)



8,000 (P80,000)



276,000 P368,000



P196,000



P60,000



PROBLEM NO. 3 – Various equity transactions Your audit client, Argao, Inc., is a public entity whose shares are traded in the over- the- counter market. At December 31, 2009, Argao had 3,000,000 authorized, P10 par value, ordinary shares,



of which 1,000,000 shares were issued and outstanding. The equity accounts at December 31, 2009 had a following balances. Ordinary share capital Share Premium Retained earnings



P10,000,000 3,750,000 3,250,000



Transactions during 2010 and other information relating to the equity accounts were as follows: • On January 2. 2010. Argao issued at P54 per share, 50,000 shares of P50 par value, 9% cumulative convertible preference shares. Each preference share is convertible into two ordinary shares. Argao had 300,000 authorized shares of preference shares. The preference share has a liquidation value equal to its par value. • On February 1, 2010, Argao reacquired 10,000 ordinary shares for P16 per share. • On April 30, 2010, Argao sold 250,000, P10 par value, ordinary shares (previously unissued) to the public at P17 per share. • On June 15, 2010, Argao declared a cash dividend of P1 per share on ordinary shares, payable on July 15, 2010, to shareholders of record on July 1, 2010. • On November 10, 2010, Argao sold 5,000 treasury shares for P21 per share. • On December 15, 2010, Argao declared the yearly cash dividend on preference share, payable on January 15, 2011, to shareholders of record on December 31, 2010. • On January 20, 2011, before the books were closed for 2010, Argao became aware that the ending inventories at December 31, 2009 were understated by P150,000 (after tax effect on 2009 profit was P90,000). The appropriate correction entry was recorded the same day. • After correcting the beginning inventory, profit for 2010 was P2, 250,000. Questions: Based on the above and the result of your audit, determine the following as of December 31, 2010. 1. Share premium a. P5700,000 b. P5,525,000



c. P5,500,000 d. P5,725,000



2. Unappropriated retained earnings a. P4,125,000 c. P4,045,000 b. P4,035,000 d. P3,955,000 3. Treasury shares



a. P160,000 b. P80,000



c. P55,000 d. 50,000



4. Total equity a. P22,190,000 b. P24,770,000



c. P24,690,000 d. P24,840,000



5. Book value per share of ordinary a. P17.89 c. P17.71 b. P17.82 d. P15.41 Answers: 1) D; 2) C; 3) B; 4) B; 5) A Suggested Solution: Questions No. 1 to 4 Preference share capital Ordinary share capital Share premium Retained earnings: Appropriated Unappropriated Treasury shares Total equity, 12/31/10



P 2,500,000 12,500,000 5,725 (1) P 80,000 4,045,000



4,125,000 (2) (80,000) (3) P 24,770,000 (4)



Question No. 5 Total equity (see no. 4) Less liquidation value of preference shares Ordinary shareholders’ equity Divide by ordinary shares outstanding Book value per share of ordinary



P24,770,000 2,500,000 22,270,000 1,245,000 P 17.89



Prepare T accounts for each component of equity. Place the balances as of January I, 2010, journalize the transactions affecting the equity accounts post the entries to the accounts, then extract the balances. Journal entries affecting the equity accounts during 2010: 1/2



Cash (50,000 shares x P54)



P2,700,000



Preference share capital (50,000 shares x P50) Share Premium excess over par PS 2/1



Treasury shares (10,000 x P16) Cash



P2,500,000 200,000 P 160,000 P 160,000



4/30 Cash (250,000shares x P17) Ordinary share capital (250,000 shares x P10) Share premium -excess over par OS



P4,250,000



6/ 15 Retained earnings Dividends payable - ordinary * ((1,000, 000 + 250,000 10, 000) xP1]



P1,240,000* P1,240,000



11/ 10 Cash (5,000 shares x P21) Treasury shares (5,000 shares x P16) Share premium - treasury shares transactions



P 105,000



P2,500,000 1,750,000



P 80,000 25,000



12/ 15 Retained earnings (2,500,000 x 9%) Dividends payable – preference



P 225,000 P225,000



12/31



P 150,000



Inventory, 1/1/ 10 Retained earnings Income tax payable



12/31



Profit or loss summary Retained earnings



12/31



Retained earnings Retained earnings - appropriated (cost of TS)



P 90,000 60,000 P2,250,000 P2,250,000 P 80,000 P 80,000



PROBLEM NO. 4 – Various equity transactions The equity section of the Asturias Inc. showed the following data on December 31, 2009: Share capital, P3 par, 300,000 shares authorized, 250,000 shares issued and outstanding, P750,000; Share premium – excess over par, P7,050,000. The share options were granted to key executives and provided them the right to acquire 30,000 ordinary shares at P35 per share. Each option has a fair value of P5 at the time the options were granted. The following transactions occurred during 2010:



Feb. 1 Key executives exercised 4,500 options outstanding at December 31, 2009. The market price per share was P44 at this time. Apr. 1 The company issued bonds of P2,000,000 at par, giving each P1,000 bond a detachable warrant enabling the holder to purchase two ordinary shares at P40 each for a 1- year period. The bonds would sell at P996 per 1000 bond without the warrant. July 1 The company issued rights to shareholders (one right on each share, exercisable within a 30- day period) permitting holders to acquire one share at P40 with every 10 rights submitted. All but 6,000 rights were exercised on July 31, and the additional shares were issued. Oct. 1 All warrants issued in connection with the bonds on April were exercised. Dec. 1 The market price per share dropped to P33 and options came due. Because the market price was below the option price, no remaining options were exercised. Dec.31 Profit for 2010 was P250,500. Questions: Based on the above and the result of your audit, determine the following as of Dec. 31, 2010: 1. Share capital a. P777,300 b. P848,700



c. P833,850 d. P850,050



2. Total share premium a. P7,522,200 b. P8, 402,800



c. P8,219,650 d. P8,419,450



3. Total contributed capital a. P8,299,500 b. P9,053,500



c. P9,269,500 d. P9,251,500



4. Retained Earnings a. P580,000 b. P858,000



c. P730,500 d. P654,150



5. Total equity a. P10,000,000 b. P9,784,000



c. P9,030,000 d. P9,982,000



Answers: 1) D; 2) D; 3) C; 4) C; 5) A Suggested Solution:



Questions No. 1 to 5 Share capital Share premium Contributed capital Retained earnings Total equity, 12/31/10



P 850,050 8,419,450 9,269,500 730,500 P10,000,000 (5)



(1) (2) (3)



Note: Follow the same approach in Problem no. 3. Journal entries affecting the equity accounts during 2010: 2/1



4/1



Cash (4,500 options x P35) P157,500 Share premium-share options (4,500 x P5) 22,500 Share capital (4,500 shares x P3) Share premium excess over par



P 13,500 166,500



Cash P2,000,000 Bond discount [P2,000,000-(2,000xP996)] 8,000 Bonds payable 2,000,000 Share premium-share warrants 8,000



7/1 Memorandum: Issued rights to shareholders permitting holder to acquire for a 30-day period one share at P40 With every 10 rights submitted- a maximum of 25,450 shares (254,500 shares + 10). 7/ 31 Cash {(25,450 - (6,000/ 10)] x P40} P 994,000 Share capital (24,850 shares x P3) P Share premium excess over par 10/1



12/ 1



12/31



Cash (2,000 x 2 x P40) Share premium-share warrants Share capital (2,000 shares x 2 x P3) Share premium excess over par



P 160,000 8,000



Share premium-share options [P150,000-(4,500xP5)] Share premium - expired share options Profit or loss summary



74,550 919,450



P 12,000 156,000



P127,500 P127,500 P250,500



Retained earnings



P250,500



PROBLEM NO. 5 – Various equity transactions Balamban Corporation was authorized at the beginning of 2008 with 540,000, P100 par value, ordinary shares. At December 31, 2008, the equity section of Balamban was as follows: Share capital, par value P100 per share; authorized 540,000 shares; issued 54,000 shares Share premium Retained earnings Total equity



P 5,400,000 540,000 810 000 P6,750,000



On May 10,2009, Balamban issued 90,000 ordinary shares for P10,800,000. A 5% share dividend was declared on September 30, 2009 and issued on November 10, 2009 to shareholders of record on October 31, 2009. Market value of ordinary share was P110 per share on declaration date. The profit of Balamban for the year ended December 31, 2009 was P855,000. During 2010, Balamban had the following transactions; Feb. 15



Balamban reacquired 5,400 ordinary shares for P95 per share.



May 15



Balamban sold 2,700 treasury shares for P120 per share.



Jun. 30 Issued to shareholders one right for each share held to purchase two additional ordinary shares for P125 per share. The rights expire on December 31, 2010. Aug. 15 share.



45,000 rights were exercised when the market value of ordinary share was P130 per



Sep. 30 72,000 rights were exercised when the market value of the ordinary share was P140 per share. Dec. 01 Balamban declared a cash dividend of P2 per share payable on January 15, 2011 to shareholders of record on December 31, 2010. . Dec. 15 Balamban retired 1,800 treasury shares. On this date, the market value of the ordinary share was P150 per share. Dec. 31 Profit for 2010 was P900,000.



QUESTIONS: Based on the above and the result of our audit, determme the following as of December 31, 2010: 1. Share capital a. P38.520,000 b. P26,640,000



c. P38.340,000 d.P38,250,000



2. Share premium a. P8,329,500 b. P8,338,500



c. P5,413,500 d. P8,266,500



3.Retained earnings a. P1,080,000 b. P1,002,600



c. P1,017,000 d. P1,008,000



4.Treasury shares a. P18,000 b. P90,000



c. P85,500 d. P 0



Answers: 1) C; 2) B; 3) D; 4) C Suggested Solution: Questions No. 1 to 4



Balances, 1/1/09 May 10, 2009 Sept. 30, 2009 Profit- 2009 Balances, 12/31/09 Feb. 15, 2010 May 15, 2010 Aug. 15, 2010 Sept. 30, 2010 Dec. 01, 2010



Share Capital P5,400,000 9,000,000 720,000



Share premium P540,000 1,800,000 72,000



15,120,000



2,412,000



9,000,000 14,400,000



Retained Earnings P810,000 (792,000) 855,000 873,000



67,500 2,250,000 3,600,000 (765,000)



Treasury shares P0



0 513,000 (256,500)



Dec. 15, 2010 Profit 2010 Balances, 12/31/10



(180,000) P38,340,000



9,000 P8,338,500



(171,000) 900,000 P1,008,000



P85,000



PROBLEM NO. 6 – Various equity transactions Bogo Corporation began operations on January 1, 2010. The company was authorized to issue 60,000, P10 par value, ordinary shares and 120,000 shares of 10%, P100 par value convertible preference shares. In connection with your audit of the company’s financial statements, you noted the following transactions involving shareholders’ equity during 2010: Jan. 1 Issued 1,500 ordinary shares to the corporation promoters in exchange for equipment valued at P510,000 and services valued at P210,000. The property costs P270,000 3 years ago and was carried on the promoters’ books at P150,000. Jan. 31 Issued 30,000 convertible preference shares at P150 per share. Each share can be converted to five ordinary shares. The corporation paid P225,000 to an agent for selling the shares. Feb. 15 Sold 9,000 ordinary shares at P390 per share. The corporation paid issue costs of P75,000. May 30



Received subscriptions for 12,000 ordinary shares at P450 per share.



Aug. 30 Issued 2,100 ordinary shares and. 4,200 preference shares in exchanged for a building with a fair value of P1,530,000. The building was originally purchased for P1,140,000 by the investors and has a carrying amount of P660,000. In addition, 1,800 ordinary shares were sold for P720,000 cash. Nov. 15 Payments in full for half of the subscriptions and partial payments for the rest of the subscriptions were received. Total cash received was P4,200,000. Shares stock were issued for the fully paid subscriptions. The balance is collectible next year. Dec. 1 Declared a cash dividend of P10 per share on preference shares, payable on December 31 to shareholders of record on December 15, and P20 per share cash dividend on ordinary shares, payable on January 15, 2011 to shareholders of record on December 15. Dec. 31



Paid the preference share dividend.



Profit for the year of operations was P1,800,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Ordinary share capital a. P204,000 b. P144,000



c. P264,000 d. P186,000



2. Share premium- preference a. P1,500,000 b. P1, 545,000



c. P1,275,000 d. P1,860,000



3. Share premium – ordinary a. P8,211,000 b. P10,851,000



c. P11,121,000 d. P10,032,000



4. Retained earnings a. P1,050,000 b. P1,170,000



c. P930,000 d. P1,458,000



5. Total equity a. P17,295,000 b. P16,950,000



c. P15,810,000 d. P17,010,000



Answers: 1) A; 2) B; 3) B; 4) C; 5) D Suggested Solution: Questions No. 1 to 5 Preference share capital Ordinary share capital Subscribed ordinary share capital Share premium – preference Share premium – ordinary Retained earnings Total equity, 12/31/10



P3,420,000 204,000 60,000 1,545,000 10,851,000 930,000 P17,010,000 (5)



Journal entries affecting equity during 2010:



(1) (2) (3) (4)



1/ 1 Equipment P510,000 Organization expenses 210,000 Ordinary share capital (1,500 shares 1: P10) Share premium - ordinary



P 15,000 705,000



1/31 Cash (30,000 shares x P150) P4,500,000 Preference share capital (30,000 shares x P100) P3,000,000 Share premium preference 1 ,500,000 Share premium -preference Cash



P225,000 P225,000 '



2/20 Cash (9,000 shares x P390) P3,510,000 Ordinary share capital (9,000 shares x P10) Share premium - ordinary



Share premium – ordinary Cash 5/30 Subscriptions rec. (12,000 sh. X P450) Subscribed ordinary share capital (12,000 shares x P10) Share premium - ordinary 8/30



P 90,000 3,420,000



P75 000 P75,000 P5,400,000 P120,000 5,280,000



Cash P720,000 Ordinary share capital (1,800 shares x P10) P18,000 Share Premium – ordinary 702,000



Building P1,530,000 Ordinary share capital (2100 shares x P10) Share premium- ordinary [(2,100 sh x P400*)-21,000] Preference share capital (4,200 shares x P100) Share premium -preference (balance)



P21,000 819,000 420,000 270,000



* (P720, 000/ 1,800 shares) Note: The fair value of the building should be allocated to the preference and ordinary shares



based on fair values. The problem did not specifically mention the fair value of the ordinary shares. However, on the same date the company issued 1,800 ordinary shares for P720, 000 cash. Therefore, ordinary shares were selling at P400/ share (P720,000/ 1,800). Since the fair value of the preference share is not determinable, it will be assigned the residual amount after deducting the fair value of ordinary shares from the fair value of the building. 1 1/07



Cash Subscriptions receivable



P4,200,000 P4,200,000



Subscribed ordinary share capital (120,000 x 1/2) Ordinary share capital



P60,000 P60,000



Note: Since the subscriptions receivable is collectible next year, it will be presented under current assets. Incidentally, if the subscriptions receivable is not collectible currently, it will be presented as a deduction within the equity section. 12/01



Retained earnings Dividends payable - Preference Dividends payable - Ordinary



P870,000 P342,900 528,000



Preference - (P3,420,000/P100 x P10) Ordinary - {[P204,000+P60,000)/P10] x P20} Note: Shares issued plus subscribed less treasury shares are entitled to dividends. 12/ 31



Profit or loss summary Retained earnings



P1,800,000 P 1,800,000



PROBLEM NO. 7 - Various equity transactions The Borbon Corporation has requested you to audit its financial statements for the year 2010. During your audit, Borbon presented to you its statement of financial position as of December 31, 2009 containing the following equity section:



Preference share capital P10 par; 60,000 shares authorized and issued, of which 6,000 are treasury shares costing P90,000 and shown as an asset Ordinary share capital, par value P4; 600,000 shares authorized, of which 450,000 are issued and outstanding Share premium (P5 per share on preference shares issued in 2001) Allowance for doubtful accounts receivable Reserve for depreciation Reserve for fire insurance Retained earnings Total equity



P 600,000



1,800,000 300,000 12,000 840,000 198,000 2,250,000 P 6,000,000



Additional information: 1) Of the preference share capital, 3,000 shares were sold for P18 per share on August 30, 2010. Borbon credited the proceeds to the Preference share capital account. The treasury shares as of December 31, 2009 were acquired in one purchase in 2009. 2) The preference share carries an annual dividend of P1 per share. The dividend is cumulative. As of December 31, 2009, unpaid cumulative dividends amounted to P5 per share. The entire accumulation was liquidated in June, 2010, by issuing to the preference shareholders 54,000 ordinary shares. 3) A cash dividend of P1 per share was declared on December 1, 2010 to preference shareholders of record December 15, 2010. The dividend is payable on January 15, 2011. 4) At December 31, 2010, the Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had balances of P25,000 and P1,050,respectively. 5) On March 1 2010, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings was debited. 6) On December 31, 2010, the Reserve for Fire Insurance was decreased by P30,000, which represents the carrying amount of a machine destroyed by fire on that date. Estimated the fire cleanup costs of P6,000 does not appear on the records. 7) The December 31, 2009 Retained Earnings consists of the following;



Donated land from a shareholder (Fair value on date of donation) P450,000 Gains from treasury share transactions 51,000 Earnings retained in business 1,749,000 P2,250,000 8) Profit for the year ended December 31, 2010 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, 2010. (Disregard tax implications) 1. Total share premium a. P414,000 b. P804,000



c. P810,000 d. 864,000



2. Retained earnings- Appropriated a. P258,000 b. P303,000



c. P228,000 d. P 0



3. Retained earnings- Unappropriated a. P2,677,500 b. P2,626,500



c. P2,578,500 d. P2,623,500



4. Treasury shares a. P45,000 b. P90,000 5.Total equity a. P3,700,500 b. P5,812,500



c. P36,000 d. P 0



c. P6,316,500 d. P6,319,500



Answers: 1) D; 2) B; 3) C; 4) A; 5) C Suggested Solution:



Questions No. 1 to 5 Preference share capital Ordinary share capital Share Premium Retained eanrings – Appropriated Retained earnings – Unappropriated Treasury shares Total equity, 12/31/10



P600,000 2,106,000 864,000 (1) 303,000 (2) 2,578,000 (3) (45,000) (4) P6,316,600 (5)



Journal entries affecting the equity accounts during 2010: 1. Cash (3,000 shares x P18) P54,000 Treasury shares [(90,000/6,000 shares) x 3,000 shares] P45,000 Share Premium 9,000 2. Retained earnings P270,000 * Ordinary share capital (54,000 shares xP4) P216,000 Share premium 54,000 *[(60,000 – 6,000) x P5] 3. Retained earnings Dividends payable **[(60,000 – 3,000) x P1] 4. Ignore 5. Retained earnings Retained earnings – appropriated



P57,000** P57,000



P60,000 P60,000



6. See no. 8 7. Retained earnings Share premium



P501,000



8. Profit or loss summary Retained earnings



P1,261,500



Profit per company’s records Fire loss erroneously charged to reserve For fire insurance Estimated fire clean up cost Adjusted profit



P501,000



P1,261,500 P1,297,000 (30,000) (6,000) P 1,261,500



9. Retained earnings P45,000 Retained earnings – appropriated (cost of TS) P45,000



PROBLEM NO. 8 - Various Equity Transaction The shareholders equity of Cordova Corporation shared the following data on December 31, 2009: 12% Preference Share capital, P30 par, 135,000 share issued and outstanding Ordinary share capital, P50 par, 180,000 shares issued and outstanding Share premium – preference Share premium – ordinary Retained earnings



P4,050,000 P9,000,000 P1,080,000 P3,240,000 1,395,000



The 2010 transactions of the company affecting its equity summarized chronologically as follows: 1. 2. 3. 4. 5. 6. 7.



Issued 27,000 preference shares at P40. Issued 94,500 ordinary shares at P70. Retired 5,400 preference shares at P45. Purchased 13,500 ordinary shares at P80. Split ordinary shares two for one (par value reduce toP25) Reissued 13,500 treasury shares at P50. Shareholders donated to the company 9,000 ordinary shares when shares had a market price of P52. One half of these shares were subsequently issued for P54. 8. Dividends were paid at the end of the calendar year on the ordinary shares at P2 per share and on the preference shares at the preference rate. 9. Profit for the year was 2,520,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Preference share capital a. P4,617,000 b. P4,698,000



c. P4,968,000 d. P4,860,000



2. Ordinary share capital a. P15,615,000



c. P13,968,000



b. P13,500,000



d. P13,725,000



3.



Share premium a. P6,777,000 b. P6,858,000



c. P6,679,800 d. P 6,814,800



4. Unappropriated retained earnings a. P1,749,240 c. P1,711,440 b. 2,251,240 d. P1,684,440 5. Total equity a. P26,949,240 b. P26,922,240



c. P26,958,960 d. P26,940,240



Answers: 1) B; 2) D; 3) D; 4) C; 5) A Suggested Solution: Questions No. 1 to 5 Preference share capital Ordinary share capital Share premium Retained earnings – Appropriate Retained earnings – Unappropriate Treasury shares Total equity, 12/31/10



P 4,698,000 (1) 13,725,000 (2) 6,814,800 (3) 540,000 1,711,440 (4) ( 540,000) P 26,949,240 (5)



Journal entries affecting the equity accounts during 2010: 1. Cash (27,000 shares x P40) P1,080,000 Preference share capital (27,000 shares x P30) Share premium - preference



2.



3.



P 810,000 270,000



Cash (94,500 shares x P70) P 6,615,000 Ordinary share capital ( 94,500 shares x P50) Share premium – ordinary



P 4,725,000 1,890,000



Preference share capital (5,400 shares x P30) P 162,000 Share premium - preference (1,080,000 x 5.4 /135) 43,200 Retained earnings 37,800 Cash (5,400 shares x P45) P243,000



4. Treasury shares (13,500 shares x P80)



P 1,080,000



Cash P



P1,080,000



5.



Memo entry.



6.



Cash (13,500 shares x P50). P 675,000 Treasury shares (1,080,000 x 1/2) P 540,000 Share premium - treasury shares transaction 135,000



7.



Memo entry Cash (9,000 shares x 1/2 x P54) Share premium - donated capital



8.



Retained earnings Cash



P 243,000 P 243,000 � P 1,625,760 P 1,625,760



Ordinary shares issued and outstanding, 1/1/10 2) Shares issued 4) Purchase of treasury shares 5) Share split 6) Re-issuance of treasury shares 7) Donated shares Re-issuance of donated shares Ordinary shares issued and outstanding, 12/31/10 x Dividend per share. Dividends to ordinary Dividends to preference (P4,698,000 x 12%) Total 9) Profit or loss summary Retained earnings



180,000 94,500 (13,500) 261,000 261,000 13,500 (9,000) 4,500 531,000 P 2 P1,062,000 563,760 1,625,760



P 2,520,000



10) Retained earnings P 540,000 Retained earnings - appropriated (cost of TS) P



P 2,520,000



540,000



PROBLEM NO. 9 - Various equity transactions In connection with your audit of the Colon Corporation, you were able to obtain the following information pertaining to the corporation's equity accounts.



Colon Corporation has 32,000, P2 par value, ordinary shares authorized. Only 75% of these shares have been issued, and of the shared issued, only 22,000 are outstanding. On December 31, 2009, the equity section revealed that the balance in Share premium - ordinary was P832,000, and the Retained Earnings balance was P220,000. The Treasury shares were purchased at an average price of P37.50 per share. During 2010, Colon had the following transactions: Jan. 15 Colon issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative preference shares, 4,000 shares are authorized. Feb. 01



Colon sold 3,000 newly issued ordinary shares at P42 per share.



Mar. 15 Colon declared a cash dividend on ordinary shares of P0.15 per share, payable on April 30 to all shareholders of record on April 1. Apr. 15



Colon reacquired 400 ordinary shares for P43 per share.



Employees exercised 2,000 share options granted in 2004. When the options were granted, each option entitled the employees to purchase 1 ordinary share for P50 per share. The share price on the date of grant was also P50 per share. Colon issued new shares to the employees. May 01 Colon declared a 10% share dividend to be distributed on June 1 to shareholders of record on May 7. The market price of the ordinary share was P50 per share on May 1. 31 Colon sold 300 treasury shares reacquired on April 15 and an additional 400 shares costing P15,000 taht had been on hand since the beginning of the year. The selling price was P57 per share. Sept. 15 The semiannual cash dividend on ordinary shares was declared, amounting to P0.15 per share. Colon also declared the the yearly dividend on preference shares. Both are payable on October 15 to shareholders of record on October 1. Profit for 2010 was P100,000. QUESTIONS: Based on the above and the result of your audit, determine the balances of the following as of December 31, 2010: 1.



Preference share capital a. P86,000 b. P90,000



c. P80,000



d. P84,000



2. Ordinary share capital a. P63,320 b. P23,320



c. P183,320



3. Share premium a. P1,175,680 b. P1,068,000



d. P58,000



c. P1,195,680



4. Treasury shares a. P64,300 b. P77,200



c. P92,200



5. Total retained earnings a. P74,756 b. P99,756



c. P183,250



d. P1,099,680



d. P75,000



d. P174,756



Suggested Solution: Questions No. 1 to 5 Preference share capital Ordinary share capital Share premium Retained earnings Treasury shares Total Equity, 12/31/10



P 80,000 (1) 63,320 (2) 1,195,680 (3) 174,756 (5) (64,300) (4) P1,449,456



Journal entries affecting the equity accounts during 2010: 1/15 Cash (1,600 shares x P55) P 88,000 Preference share capital (1,600 shares x P50) P 80,000 Share premium - preference 8,000 2/1



Cash (3,000 shares x P42) P 126,000 Ordinary share capital (3,000 shares x P2) P 6,000 Share premium - ordinary 120,000



3/15 Retained earnings [(22,000+3000)xP0.15)] Dividends payable - ordinary



P 3,750



4/15



P 17,200



4/15



Treasury shares Cash (400 shares x P43)



P 3,750



P 17,200



Cash (2,000 shares x P50) P 100,000 Ordinary share capital (2,000 shares x P2) P 4,000



Share premium - ordinary 5/1



96,000



Retained earnings (26,600 x 10% x P50) Share dividends payable - ordinary (26,600 x 10% x P2) Share premium - ordinary



P 133,000 P 5,320 127,680



5/31



Cash (700 shares x P57) P 39,900 Treasury shares [(300 shares x P43) + P15,000)] P 27,900 Share premium - treasury shares transactions 12,000



6/1



Share dividends payable -ordinary Ordinary share capital



9/15



P 5,320 P 5,320



Retained earnings Dividends payable - preference (80,000 x 5%) Dividends payable - ordinary (29,960 x P15)



12/31 Profit or loss summary Retained earnings



P 8,494 P 4,000 4,494



P 100,000 P 100,000



PROBLEM NO. 10 – Various equity transactions Following is the equity section of Carcar Corporation’s statement of financial position at December 31, 2009: Share capital, P10 par value; authorized 1,500,000 shares; issued and outstanding 900,000 shares Share premium Retained earnings Total equity



P9,000,000 750,000 2,700,000 P12,450,000



Transactions during 2010 and other information relating to the equity accounts were as follows:  



On January 26, Carcar reacquired 75,000 ordinary shares for P11 per share. On April 4, Carcar sold 45,000 treasury shares for P14 per share.



   











On June 1, Carcar declared a cash dividend of P1 per share, payable on July 15, 2010 to shareholders of record on July 1, 2010. On August 15, each shareholder was issued one right for each share held to purchase two additional shares for P12 per share. The rights expire on October 31, 2010 On September 30, 150,000 rights were exercised when the market value of the share was P12.50 per share. On November 2, Carcar declared a two for one share split up and changed the par value of the share from P10 to P15 per share. On November 20, shares were issued for the share split On December 5, 60,000 shares were issued in exchanged for a secondhand equipment. It originally cost P600,000 was carried by the previous owner at a carrying amount of P300,000, and was recently appraised at P390,000. Profit for 2010 was P720,000.



Questions: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Share Capital a. P12,600,000 b. P10,050,000 2. Share Premium a. P1,485,000 b. P3,825,000 3. Unappropriated Retained Earnings a. P2,550,000 b. P2,220,000 4. Total Equity a. P16,425,000 b. P16,095,000



c. P10,800,000 d. P12,300,000 c. P1,575.000 d. P1,275,000 c. P2,422,500 d. P2,190,000 c. P14,295,000 d. P16,065,000



Answers: 1) D; 2) C; 3) B; 4) B Suggested Solution: Questions No. 1-4 Share Capital Share Premium Appropriated Retained Earnings Retained Earnings Treasure shares Total Equity 12/31/10 Journal entries affecting the equity accounts during 2010:



P112,300,000 (1) 1,575,000 (2) 330,000 2,220,000 (3) (330,000) P16,095,000 (4)



1/26 4/4



6/1



Treasury shares (75,000 x P11) Cash



P 825,000



Cash (45,000 x P14) Treasury shares (45,000 x P11) Share Premium



P 630,000



Retained Earnings [(900,000-30,000) x P1] Dividends Payable



P 870,000



P 825,000 P 495,000 P 135,000 P870,000



8/15



Memo entry



9/30



Cash (150,000 x 2x P12) Share Capital (150,000 x 2 x P10) Share Premium



P 3, 600,000



Equipment Share Capital



P 390,000



P 3,000 000 600,000 P



300,000



Share Premium P90,000 12/31 Profit or loss summary Retained Earnings



P 720,000



12/31 Retained Earnings Appropriated Retained Earnings



P 330,000



P 720,000 P 330,000



PROBLEM NO.11 –Various equity Transactions You were able to gather the following information in connection with your audit of the equity section of the statement of financial position of Liloan, Inc. The company is a manufacturer of school and office equipment. As of December 31, 2009, the equity of the company is presented below: Cumulative preference share capital (P15 par value; 100,000 shares authorized, 12,000 shares issued and outstanding) Ordinary share capital (P10 par value: 1,000,000 shares authorized, 330,000 shares issued and outstanding) Retained Earnings



Liloan’s equity transaction during 2010 were as follows:



P 180,000 3,300,000 1,866,000 P 5,346,000



a. On January 31, 24 000 Preference shares were issued in exchange for land with a fair value of P300,000, Six months ago, 2,000 shares of Liloan’s preference shares were exchanged “over the counter “ for P14 per share. b. On February 14, 13,500 ordinary shares were sold to Ms. P. Saway at P25 per share. c. On Decemer 14, Liloan purchased dissident shareholder Saway’s 13,500 shares at P27 per share. The shares are to be held as treasury shares. (Saway violently opposed Liloan’ business strategy and Liloan’s management decided to eliminate her interest.) d. On December 20, Liloan contracted with Ms. Buti for the sale of 30,000 previously unissued ordinary shares at P25 per share to be issued when the purchase price is fully paid. At December 31, only P585,000 had been paid. Buti agreed to pay the balance on or before January 31, 2011. e. On December 31, Liloan retired 12,000 preference shares at P18 per share. f. A cash dividend of P2 per share was declared on the preference shares on October 15, and paid on November 15. g. A cash dividend of P1.50 per ordinary shares was declared on December 15 and payable on January 15, 2011. h. Liloan’s profit for the year 2010 was P750,000. Questions: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Preference share capital a. P360,000 b. P300,000



c. P264,000 d.P324,000



2. Ordinary share capital a. P3,435,000 b. P4,020,000



c.P3,735,000 d.P3,637,500



3. Share Premium a. P592,500 b. P202,500



c.P652,500 d. P142,500



4. Total Retained Earnings a. P1,977,000 b. P1,648,500



c. P2,013,000 d. P2,037,000



5. Total equity a. P6,171,000 b. P6,036,000



c. P6,396,000 d. P6,336,000



Answers: 1) A; 2) A; 3) C; 4) C; 5) D



Suggested solutions: Questions No. 1 to 5 Preference share capital Ordinary share capital Subscribed ordinary share capital Share premium Total retained earnings Treasury shares Discount on preference share capital Total Equity, 12/31/10 P6,336,000 Journal entries affecting the equity accounts during 2010:



P 360,000 (1) 3,435,000 (2) 300,000 652,500 (3) 2,013,000 (4) (364,500) (60,000) (5)



a. Land (at fair value) P300,000 Discount on Preference share capital 60,000 Preference share capital (24,000 shares x P15) P360,000 b. Cash (13,500 shares x P25) P337,500 Ordinary share capital (13,500 shares x P10) Share Premium 202,500 c. Treasury shares Cash(13,500 shares x P27)



P135,000



P364,500 P364,500



d. Cash P585,000 Subscriptions Receivables 165,000* Subscribed ordinary share capital (30,000 shares x P10) Share Premium



P300,000 450,000



*[(30,000 shares x P25) – P585,000] e. Preference share capital (12,000 shares x P15) Retained earnings Cash (12,000 shares x P18)



P180,000 36,000



f. Retained earnings Cash [(12,000+24,000 x P2)]



P72,,000



P216,000 P 72,000



g. Retained earnings P495,000 Dividends payable [(12,000 + 24,000 x P2) **[(330,000 + 13,500) x P1.5] h. Profit or loss summary



P750,000



P495,000



Retained Earnings



P750,000



PROBLEM NO. 12-Various equity transactions You gather the following information pertaining to the equity section of the Oslob Corporation in connection with your audit of the company’s financial statements for 2010: Ordinary share capital, P1 par value; authorized 1,500,000 shares; issued 750,000 shares; outstanding 700, 000 shares Share Premium: Excess over par From Treasury shares Total paid-in capital Unappropriated retained earnings Total equity



P700,000 P7,000,000 100,000 P7,800,000 4,050,000 P11,850,000



All of the outstanding ordinary and treasury shares were originally issued in 2007 for P11 per share. The treasury shares were acquired on March 31, 2009. Oslob uses the par value method of accounting for treasury shares. During 2010, the following events or transactions occurred relating to Oslob’s equity: Feb. 10 March 15 Aug. 30 Dec. 15



Issued 200,000 of unissued ordinary shares for P12.50 per share. Declared cash dividend of P0.20 per share to shareholders of record. April 1, 2010 and payable April 15, 2010. This was the first dividend ever declared by Oslob. Oslob’s president retired, Oslob purchased from the retiring president 50,000 ordinary shares of Oslob for P13 per share, which was equal to market value on this date Declared a cash dividend of P0.20 per share to shareholders of record on January 2, 2011 and payable on January 15, 2011.



Oslob is being used by two separate parties for patent infringements. Oslob management and outside legal counsel share the following opinions regarding to these suits: Suit #1 #2



Likelihood of losing the suit Reasonably possible Probable



Estimated loss P300,000 200,000



Questions: Based on the above and the result of your audit answer the following: 1. The issuance of 200,000 ordinary shares on February 10, 2010 caused Oslob’s share premium to increase by a. P 200,000 c. P 2,300,000 b. P2,500,000 d. P 0



2. The retirement of 50,000 ordinary shares on August 30, 2010 caused Oslob’s share premium to decrease by a. P 50,000 c. P 500,000 b. P 600,000 d. P 0 3. Oslob wants to appropriate retained earnings for all loss contingencies that are not properly accruable by a charged to expense. How much of Oslob loss contingencies should be appropriated by charged to unappropriated retained earnings? a. P 230,000 c. P 500,000 b. P 200,000 d. P 0 4. How much cash dividends should Oslob charge against unappropriated retained earnings in 2010? a. P 350,000 c. P 370,000 b. P 180,000 d. P 170,000 5. How much should Oslob show in note to financial statements as a restrictions on retained earnings because of the acquisitions of treasury shares? a. P 100,000 c. P 600,000 b. P 450,000 d. P 650,000 Answers: 1) C; 2) C; 3) A; 4) A; 5) B Suggested solutions: Question No. 1 Proceeds from issuance (200,000 x P12.50) Less par value of shares issued (200,000 shares x P1) Increase in share premium Question No. 2 Journal entry to record the retirement: Ordinary share capital (50,000 shares x P1) Share Premium (50,000 shares x (P11-1) Unappropriated retained earnings Cash



P 2,500,000 200,000 P 2,300,000



P 50,000 500,000 100,000 P 550,000



Question No. 3 Loss contingency that is not properly accruable by a charged to expense: Suit # 1 – Reasonably possible



P 300,000



Question No. 4 Dividends declared, 3/15/10 [(700,000+200,000) x P0.20] Dividends declared, 12/15/10 [(700,000+200,000-50,000)x P0.20] Total cash dividends



P180,000 170,000 P350,000



Question No. 5 Reconstruction of the entry made to record the acquisition of treasury shares: Treasury shares (50,000 shares x P1) P 50,000 Share Premium – excess over par (50,000 shares x (P11-1) 500,000 Share premium – TS transactions Cash (balancing figure)



P100,000 450,000



PROBLEM NO. 13 – Analysis of share and dividend transactions In connection with your audit of the Poro Company, you were asked to prepare comparative data from the Company’s inception to the present. The following gathered during your audit: a. Poro Company’s charter became effective on January 2, 2006, when 80,000, P10 par value, ordinary shares and 400,000, 5% cumulative, nonparticipating, preference shares were issued. The ordinary shares was sold at P12 per share and preference shares was sold at its par value of P100 per share. b. Poro was unable to pay preference dividends at the end of its first year, The owners of the preference shares agreed to accept 2 ordinary shares for every 50 shares of preference shares owned in discharge of the preference share dividends due on December 31, 2006. The shares were issued on January 2 , 2007. The fair value was P30 per share for ordinary on the date of issue. c. Poro Company acquired all outstanding shares of Pos Corporation on May 1, 2008, in exchange for 40,000 ordinary shares of Poro. d. Poro split its ordinary shares 3 for 2 on January 1, 2009, and 2 for 1 on January 1, 2010. e. Poro offered to convert 20% of the preference shares to ordinary on the basis of 2 ordinary shares for 1 preference share. The offer was accepted, and the conversion was made on July 1, 2010. f. No cash dividends were declared on ordinary shares until December 31, 2008. Cash dividends per ordinary share were declared and paid as follows: December 31 June 30 2008 P 4.00 2009 P 5.00 P 3.00 2010 P 2.00 P 2.50 Questions: Based on the above and the result of your audit, determine the following: 1. Outstanding number of ordinary shares as of December 31, 2010 a. 364,800 c. 372,800 b. 684,800 d. 380,800 2. Outstanding number of preference shares as of December 31, 2010 a. 40,000 c. 32,000



b. 24,000



d. 96,000



3. Amount of cash dividends declared and paid to ordinary shareholders for the year 2009 a. P 972,800 c. P 1,459,200 b. P 608,000 d. P 1,981,440 4. Amount of cash dividends declared and paid to ordinary shareholders for the year 2010 a. P 3,911,040 c. P 1,713,600 b. P 3,041,600 d. P 1,673,600 Answers: 1) D; 2) C; 3) C; 4) D Suggested solutions: Questions 1 and 2 Jan. 02, 2006 Jan. 02, 2007



Ordinary issued to preference Shareholders (40,000/50 x 2)



Dec. 31, 2007 May 01, 2008Acquisition of Pos Corp. Dec. 31, 2008 Jan. 01, 2009 3:2 Ordinary share split [(121,600 x 3/2) – 121,600] Dec. 31, 2009 Jan. 01, 2010 2:1 Ordinary share split Jan. 01, 2010 Conversion of preference (40,000 x 20% x 2) Dec, 31, 2010



Ordinary 80,000



Preference 40,000



1,600 81,600 40,000 121,600



40,000 40,000



60,800 182,400 182,400



40,000



16,000 380,000



(8,000) 32,000



Questions No. 3 Dividends declared, 7/1/09 (182,400 x P3.00) Dividends declared, 12/31/09 (182,400 x P5.00) Cash dividends to ordinary shareholders in 2009



P 547,200 912,000 P 1,459,200



Question No. 4 Dividends declared, 7/1/10 (364,800 x P2.50) Dividends declared, 12/31/10 (380,800 x P2.00) Cash dividends to ordinary shareholders in 2010



P 912,000 761,600 P 1,673,600



PROBLEM NO. 14 – Analysis of equity transactions The equity section of Ronda Corporation’s statement of financial position as of December 31, 2009 is as follows:



Shareholders’ Equity Share Capital, P5 par value; authorized, 2,000,000 shares; issued, 400,000 shares Share Premium Retained earnings



P 2,000,000 850,000 3,000,000 5,850,000



The following events occurred during 2010: Jan. 5 Jan 16 Feb 10 Mar. 1 Apr. 1 July 1 Aug 1 Dec. 31



10,000 shares were sold for P9 per share. Declareda cash dividend of P0.40 per share, payable February 15 to shareholders of record on February 5. 40,000 shares were sold for P11 per share. A 40% share dividend was declared and issued. Market value is currently P15. A two-for-one split was carried out. The par value of the share was to be reduced to 2.50 per share. Market value on March 31 was P18 per share. A 10% share dividend was declared and issued. Market value is currently P10 per share. A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of record on August 21. Profit for 2010 was P 1,880,0000.



Questions: Based on the above and the result of your audit, answer the following: 1. The number of shares issued and outstanding as of December 31, 2010 is a. 2,079,000 c. 1,188,000 b. 1,386,000 d. 346,500 2. The balance of share capital as of December 31, 2010 is a. P 3,465,000 b. P 3,780,000



c. d.



P 3,228,750 P 3,622,500



3. The balance of share premium as of December 31,2010 is a. P 2,075,000 c. b. P 2,547,500 d.



P 1,760,000 P 3,695,000



4. The balance of retained earnings as of December 31, 2010 is a. P 381,600 c. b. P 3,362,400 d.



P 1,094,400 P 2,001,600



Answers: 1) B; 2) A; 3) A; 4) D Suggested solution:



Date



Shares issued and outstanding Bal. 12/31/09 400,000 January 5 10,000 410,000 January 16 February 10 40,000 450,000 March 1 180,000 630,000 April 1 630,000 1,260,000 July 1 126,000 1,386,000 August 1 December 31 Bal. 12/31/10 1,386,000



Share Capital



Share Premium



Retained earnings



P 2,000,000 50,000 2,050,000



P 850,000 40,000 890,000



200,000 2,250,000 900,000 3,150,000 3,150,000 315,000 3,465,000 P3,465,000



240,000 1,130,000



P 3,000,000 3,000,000 (164,000) 2,836,000 (900,000) 1,936,000 1,936,000 (1.260,000) 676,000 (554,400) 1,880,000 P2,001,600



1,130,000 1,130,000 945,000 2,075,000 P2,075,000



PROBLEM NO.15-Share Options You were able to gather the following information in connection with your audit of Sagod Corporation: 



 



On January 1, 2008, Sogod Corporation granted share options to officers and key employees for the purchase of 30,000, P10 par value, ordinary shares of the company at P25 per share. The options are exercisable within a 5-year period beginning January 1, 2010 by grantees still in the employ of the company, and expiring December 31, 2014. The service period for this award is 2 years. The fair value option pricing model determined total compensation expense to be P525,000 . The share was selling at P35 at the time the options were granted. On April 1, 2009, 3,000 option were terminated when the employees resigned from the company. The market value of ordinary share was P35 per share on this date. On March 31,2010, 18,000 option shares were exercised when the market value of ordinary shares was P40 per share.



QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Compensation expenses in 2008 a. P 525,000 c. P 236,250 b. P 262,500 d. P 150,000 2. Net compensation expense in 2009 a. P262,500 b. P210,000



c. P120,000 d. P150,000



3. The exercise of the 18,000 options will result in a credit to Share premium-excess over par of a. P585,000 c. P270,000 b. P620,000 d. P450,000 4. Share Premium-share options as of December 31,2010 a. P 0 b. P 90,000



c. P472,500 d. P157,500



Answers: 1) B; 2) B; 3) A; 4) D Suggested solutions: Question No. 1 Compensation expense in 2008 (P525,000 x 1/2)



P262,500



PFRS 2 par. 10 states that for equity-settled share-based payment transactions, the entity shall measure the goods or services received, and corresponding increase in equity, directly, at the fair value of the goods or services rendered, unless the fair value cannot be estimated reliably. If the entity cannot estimate reliably the fair value of the goods of services received, the entity shall measure their fair value, and the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. In cases, that the entity is unable to estimate reliably the fair value of the equity instruments granted at measurement date, the entity may measure the equity instruments at their intrinsic value. If the equity instruments granted do not vest until the counterparty completes a specified period of service, the entity shall presume that the services to be rendered by the counterparty as consideration for those equity instruments will be received in the future, during –the vesting period. On the other hand, if the equity instruments granted vest immediately, the entity shall recognize the services received in full, with a corresponding increase in equity. Question No. 2 Compensation expense in 2009 (P525,000 x 1/2 ) Less: Share options of terminated employees (P525,000 x 3/30) Net compensation expense in 2009



P262,500 52,500 P210,000



Question No. 3 Journal entry to record the exercise of the options: Cash (18,000 x P26) Share Premium-options (P472,500 x 18/27) Share Capital ( P18,000 x P10 )



P450,000 315,000 P180,000



Share premium-excess over par Question No. 4 Compensation expense, 2008 Compensation expense, 2009 Share options exercised (see no. 3)



585,000 P262,500 210,000 (315,000)



Share premium- share options, 12/31/10



P157,500



PROBLEM NO. 16 Share options At the beginning of 2010, Sibonga Company grants 100 share options to each of its 200 employees. Each grant is conditional upon the employee working for the entity over the next three years. The entity estimates that the fair value of each share option is P45. On the basis of a weighted average probability, the entity estimates that 25 per cent of employees will leave during the three-year period and therefore forfeit their rights to the share options. During 2010, 10 employees leave. The entity revises it estimates of total employee departures over the three-year period from 25 per cent to 20 per cen. During 2011, a further 8 employees leave. The entity revises its estimate of total employee departures over the three-year period from 20 per cent to 15 per cent. During 2012, a further 6 employees leave. Questions: Based on the above and the result of the audit, determine the following: 1. Compensation expense in 2010 a. P240,000 b. P225,000



c. P720,000 d. P 0



2. Compensation expense in 2011 a. P240,000 b. P270,000



c. P510,000 d. P 0



3. Compensation expense in 2012 a. P240,000 b. P720,000



c. P282,000 d. P792,000



Answers: 1) A; 2) B; 3) C Suggested solutions: Question No. 1 Compensation expense in 2010 (200 employees x 100 options x 80% x P45 x 1/3) Question No. 2



P240,000



Cumulative compensation expense, 12/31/11 (200 employees x 100 options x 85% x P45 x 2/3) Less: compensation expense for 2010 Compensation expense in 2011



P510,000 240,000 P270,000



Question No. 3 Cumulative compensation expense, 12/31/12 (176 employees x 100 options x P45) Less: Cumulative compensation expense, 12/31/11 Compensation expense in 2012



P792,000 510,000 P282,000



PROBLEM NO. 17- Share options At the beginning of 2010, Santander grants share options to each of its 100 employees working in the sales department. The share options will vest at the end of 2012, provided that the employees remain in the entity’s employ, and provided that the volume of sales of a particular product increases by at least an average of 5 percent per year. If the volume of sales of the product increases by an average of between 5 per cent and 10 per cent of the year, each employee will receive 100 share options. If the volume of sales increases by an average of between 10 per cent and 15 per cent each year, each employee will receive 200 share options. If the volume of sales increases by an average of 15 per cent or more, each employee will receive 300 share options. On grant date, Santander estimates that the share options have a fair value of P20 per option. Santander also estimates that the volume of sales of the product will increase by an average of between 10 per cent and 15 per cent per year. The entity also estimates, on the basis of a weighted average probability, that 19 per cent of employees will leave before the end of 2012. By the end of 2010, seven employees have left and the entity still expects that aa total of 19 employees will leave by the end of 2012. Product sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2 years. By the end of 2011, further six employees have left. The entity now expects only three more employees will leave during 2012. Product sales have increased by 18 percent. The entity now expects that sales will average 15 percent or more over three-year period. By the end of 2012, a further two employees have left. The entity’s sales have increased by an average of 16 percent over the three years Questions: Based on the above and the result, determine the following: 1.Compensation expense in 2010 a. P162,000



c.



P108,000



b.



P124,000



d.



P



0



2. Share premium-share options at the end of 2011 a. P348,000 b. P336,000



c. P340,000 d. P 0



3.Compensation expense in 2011 a. P228,000 b. P224,000



c. P232,000 d. P 0



4.Compensation expense in 2012 a. P510,000 b. P162,000



c. P174,000 d. P 0



Answers: 1) C; 2) B; 3) A; 4) C Suggested solutions: Question No. 1 Compensation expense in 2010 (8 employees x 200 options x P20 x 1/3)



P108,000



Question No. 2 Share premium-share options,12/31/11 (84 employees x 300 options x P20 x 2/3)



P336,000



Question No. 3 Cumulative compensation expense, 12/31/11 Less: compensation expense in 2010 Compensation expense in 2011



P336,000 108,000 P228,000



Question No. 4 Cumulative compensation expense, 12/31/12 (85 employees x 300 options x P20) Less: cumulative compensation expense, 12/31/12 Compensation expense in 2012



P510,000 336,000 P174,000



PROBLEM NO. 18 –Share appreciation rights On January 1, 2010, Tabogan Corp. grants 100 cash share appreciation rights (SARs) to each of to 200 employees, on condition that the employees remain in its employ for the next three years. During 2010, 14 employees leave. The entity estimates that a further 24 will leave during 2011 and 2012. During 2011, 10 employees leave and the entity estimates that a further 8 will leave during 2012. During 2012, 6 employees leave. At the end of 2012, 60 employees exercise their



SARs, another 40 employees exercise their SARs at the end of 2013 and the remaining employees exercise their SARs at the end of 2014. The entity estimates the fair value of the SARs at the end of each year in which a liability exist as shown below. At the end of 2012, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of 2012, 2013 and 2014 are also shown below. YEAR Fair value Intrinsic value 2010 P30 2011 32 2012 36 P35 2013 42 40 2014 46 Questions: Based on the above and the result of the audit, determine the following: 1. Compensation expense in 2011 a. P189,467 c. P196,400 b. P117,840 d. P 0 2. Compensation expense in 2012 a. P247,600 b. P232,560



c. P230,533 d. P 0



3. Compensation expense in 2013 a. P 58,000 b. P160,000



c. P157,600 d. P 0



4. Compensation expense in 2014 a. P322,000 b. P 86,800



c. P 28,000 d. P 0



Answers: 1) B; 2) C; 3) A; 4) A; 5) C Suggested solutions: Question No. 1 Compensation expense in 2010 (162 employees x 100 SARs x P30 x 1/3)



P162,000



For cash settled share based-payment transactions, the entity shall measure the goods or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall remeasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognized in profit or loss for the period. (PFRS 2 par. 30)



Question No. 2 Liability on SARs, 12/31/11 (168 employees x 100 SARs x 32x 2/3) Less: compensation expense in 2010 Compensation expense in 2011 Question No. 3 Liability on SARs, 12/31/12 (110 employees x 100 SARs x 36) Less liability on SARs, 12/31/11 Increase in liability SARs exercised (60 employees x 100 SARs X P35) Compensation expense in 2012 Question No. 4 Liability on SARs, 12/31/13 (7 employees x 100 SARs x 42) Less liability on SARs, 12/31/12 Decrease in liability SARs exercised (100 employees x 100 SARs X P40) Compensation expense in 2013 Question No. 5 Liability on SARs, 12/31/14 Less liability on SARs, 12/31/13 Decrease in liability SARs exercised (70 employees x 100 SARs X P46) Compensation expense in 2014



P358,400 162,000 P196,400 P396,000 358,400 37,600 210,000 247,600 P294,000 396,000 (102,000) 160,000 58,000 P 0 294,000 (294,000) 322,000 28,000



PROBLEM NO. 19-Share options with cash alternatives An entity grants to an employee the right to choose either 5,000 phantom shares, ie a right to a cash payment equal to the value of 5,000 shares or 6,000 shares. The grant is conditional upon the completion of three years’ service. If the employee chooses the share alternative, the shares must be held for three years after vesting date. A grant date, the entity’s share price is P81 per share. At the end of years 1, 2 and 3, the share price is P82, P85 and P90 respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date fair value of the share alternative is P78 per share. Questions:



Based on the above and the result of the audit, determine the following: 1. Compensation expense in year 1 a. P156,000 c. P157,667 b. P136,667 d. P 0 2. Compensation expense in year 2 a. P156,000 b. P167,666



c. P146,666 d. P 0



2. Compensation expense in year 3 a. P156,000 b. P167,666



c. P187,667 d. P 0



Answers: 1) C; 2) B; 3) C; Suggested solutions: Question No. 1 Liability component (P5,000 x P82 x 1/3) Equity component (63,000/3) Compensation expense in year 1



P136,667 21,000 P157,667



Computation of equity component: Fair value of equity alternative (6,000 shares x P78) Fair value of cashalternative (5,000 shares x P81) Fair value of equity component



P468,000 405,000 P 63,000



For share-based payment transactions in which the terms of arrangement provide either the entity or the counterparty with the choice of whether the entity settles the transactions in cash (or other assets) by issuing equity instruments, the entity shall account for the share-based payment transaction of, and to the extent that, the entity has incurred a liability to settle in cash or other assets, or as an equity settle share-based payment transaction if, and to the extent that, such a liability has been incurred. If an entity has granted the counterparty the right to choose whether a share-based payment transaction is settled in cash or by issuing equity instruments, the entity has granted a compound financial instrument, which includes a debt component (ie the counterparty’s right to demand payment in cash) and an equity component (ie the counterparty’s right to demand settlement in equity instruments rather than in cash).( PFRS 2 par. 35) The entity shall account separately for the goods or services received or acquired in respect of each component of the compound financial instrument. For the debt component, the entity shall recognize the goods or services acquired, and a liability to pay for those goods or services, as the counterparty supplies goods or renders service, in accordance with the requirements applying to cash-settled share-based payment transactions. For the equity component, the entity shall recognize the goods or services received, and an increase in equity, as the counterparty supplies



goods or render service, in accordance with the requirements applying to equity-settled sharebased payment transactions. (PFRS 2 par. 38)



Question No. 2 Cumulative liability component end of year 2 (P5,000 x P85 x 2/3) Less: Cumulative liability component end of year 1 Expense liability Equity component (63,000/3) Compensation expense in year 2 Question No. 3 Cumulative liability component end of year 3 (P5,000 x P90) Less cumulative liability component end of year 2 Expense-liability Equity component (P63,000/3) Compensation expense in year 3



P283,333 136,667 146,666 21,000 P167,666 P450,000 283,333 P166,667 21,000 P187,667



PROBLEM NO. 20 –Substantive audit procedures for equity Select the best answer for each of the following: 1. All share capital transaction should ultimately be traced to the a. Numbered stock certificates b. Minutes of the Board of Directors. c. Cash receipts journal d. Cash disbursement journal 2. Which of the following information is most important when auditing shareholders’ equity? a. Entries in the share capital account can be traced to a resolution in the minutes of the board of directors’ meetings. b. Share dividends and/or share splits during the year were approved by the shareholders. c. Share dividends are capitalized at par or stated value on the dividend declaration date. d. Changes in the share capital account are verified by an independent stock transfer agent. 3. When a corporate client maintains its own stock records, the auditor primarily will rely upon a. Confirmation with the company secretary of shares outstanding at year end. b. Review of the corporate minutes for data as to shares outstanding,



c. Confirmation of the number of shares outstanding at year end with the appropriate state official. d. Inspection of the stock book at year end and accounting for all certificate numbers. 4. When a client company does not maintain its own stock records, the auditor most likely will a. Obtain written confirmation from the transfer agent and registrar concerning the number of shares issued and outstanding. b. Inspect the stock book at year end and accounting for all certificate numbers. c. Review of the corporate minutes for information as to shares outstanding. d. Confirmation the number of shares outstanding at year end with the appropriate state official. 5. The primary responsibility of a bank acting as registrar of capital stock is to a. Verify that stock issued in accordance with the authorization of the board of directors and the articles of incorporation. b. Act as an independent third party between the board of directors and outside investors concerning mergers, acquisitions and the sale of treasury stock. c. Ascertain that dividends declared do not exceed the statutory amount allowable in the state of incorporation. d. Account for stock certificates by comparing the total shares outstanding to the total in shareholders’ subsidiary ledger. 6. a. b. c.



The CPA’s examination normally need not include Determining that dividend declaration is in compliance with debt agreements Tracing the authorization for the dividends from the directors’ meetings Testing the propriety of the payment list to the capital stock records.



7. The board of directors of Mega Supermarkets declared a 20% cash dividend at its meeting on March 12, 2010 payable on May 15, 2010 to shareholders on record as of April 15, 2010. The dividend declaration should be taken up in the company’s financial statements on a. March 12, 2010 c. December 31, 2010 b. May 15, 2010 d. April 15, 2010 8. An auditor usually obtains evidence of shareholders equity transactions by reviewing the entity’s a. Cancelled stock certificates b. Transfers agent’s records c. Treasury stock certificate book d. Minutes of board of directors meetings 9. In audit of a medium sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time? a. Revenue c. Liabilities b. Owner’s equity d. Assets



10. During an audit of an entity’s shareholder’s equity accounts, the auditor determines whether there are restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is intended to verify management’s assertion of, a. Completeness c. Presentation and disclosure b. Existence d. Valuation Answers: 1. A 2. A 3. D 4. A 5. A



6. D 7. A 8. D 9. B 10. C