DE LA SALLE ARANETA UNIVERSITY

AUIDT OF SHAREHOLDERS EQUITY

Account Balance Audit Objectives

 All the equity accounts on the balance sheet either (a) represent shares or other units of ownership that are appropriately
authorized, issued, and outstanding; or (b) reflect other properly authorized transactions that are appropriately recorded in
the equity accounts.

 All the shares or other units of ownership that are appropriately authorized, issued, and outstanding, and all other properly
authorized transactions that affect the equity accounts at the balance sheet date are included in the equity accounts.

 The equity accounts are stated on the balance sheet at the appropriate amounts.

 Share options, share purchase plans, share purchase warrants, conversion privileges, or other contingent share issuances
that exist have been appropriately recognized.

 The equity accounts are properly classified, described and disclosed in the financial statements, including notes, in
conformity with prescribed accounting principles.

Primary Substantive Procedures

1. Obtain an equity reconciliation schedule, including retained earnings, agree to general ledger accounts and test
movements from prior year end to current year end to ensure proper accounting for changes in equity, (e.g., profit
distributions, other equity reductions or increases) and determine completeness and compliance with laws and
regulations including taxation issues.

2. Review the minutes and other supporting documents for the authorization for, and the details of, the transactions that
affected the equity accounts and disclosures during the period, including equity restrictions.

3. Review board or authorized committee minutes and inquire of management for any share option agreements. Determine
that options have been appropriately accounted for and disclosed.

4. Ensure that all dividend payments are appropriately approved and declared, and that tax regulations have been followed.
5. Confirm the capital share authorized and issued and, when applicable, the treasury shares held with the transfer agent
and registrar; confirm the partners’ or the proprietor’s account balances. If the client acts as its own transfer agent,
examine the share certificate book or the detailed records to determine that numbers of authorized shares and outstanding
shares; inspect unused certificates on hand; test the issuance and cancellation of shares during the period.

CASE 1

The following data were compiled prior to preparing the balance sheet of the Consider Corporation as of December 31,
2018:

Authorized ordinary shares, P100 par value P4,000,000

Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury shares 80,000
Net unrealized loss on equity securities at other
comprehensive income 96,000
Premium on capital shares 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital shares 480,000
Shares subscriptions receivables 120,000
Shares warrants outstanding 200,000
Treasury shares, at cost 144,000
Unissued ordinary shares 800,000

Compute for the following:

1|Page
 1. Ordinary shares issued
2. Total share premium
3. Retained earnings – appropriated
4. Total shareholders’ equity
5. Total legal capital

CASE 2

On January 2018, the board of directors of Avengers Inc. authorized the grant of share options per employee to supplement
the salaries of 200 of its key employees. Each share option permits the purchase of one share of Avengers ordinary share
at a price of P25 per share (par value P20). The market price of the share on January 1, 2018 is P40 per share.

The share option plan was divided into two categories depending on the level of position of the employees in the company.
The two share option plan was presented below:

Share Option Plan A: (For 100 employees)

The board of directors of Avengers Inc. authorized the grant of 100 share options per employee The option which has a
market value of P25 vests, or become exercisable, beginning on January 1, 2021, if the employees stay with the company
for the entire three-year vesting period and provided further that market price of shares reaches P60 at the end of the vesting
period. The options shall expire on December 31, 2022.

The following information were deemed relevant for the computation of the compensation expense for each year:
Date Estimated number of Share market price
Employees who will leave the
company (Option A only)
Dec. 31, 2018 20 P50
Dec. 31, 2019 25 P55
Dec. 31, 2020 30* P61
*Actual number of employees who left the company.

Share Option Plan B: (For the remaining 100 employees)

The board of directors of Avengers Inc. authorized the grant of share options per employee The option which has a market
value of P25 vests, or become exercisable, beginning on January 1, 2021, if the employees stay with the company for the
entire three-year vesting period and provided further that sales at the end of the vesting period reaches P100,000,000 mark,
option to vest is at 100 option per employee; if sales reach P125,000,000 mark, options to vest is at 150 options per
employee; if sales reach P150,000,000 mark, options to vest is at 200 options per employee. The options expire on
December 31, 2022.

The following information were deemed relevant for the computation of the compensation expense for each year:
Date Estimated number of Actual Sales as
Employees who will leave the reported per year
company (Option B only)
Dec. 31, 2018 25 P75M
Dec. 31, 2019 20 110M
Dec. 31, 2020 16* 150M
*Actual number of employees who left the company.

Based on historical performance, the company estimates that the average annual sales increase in the past years of 20% is
expected to remain during the vesting period.

1. How much is the total compensation expense recognized for both share option plan in 2018?
2. How much is the total compensation expense recognized for both share option plan in 2019?
3. How much is the total compensation expense recognized for both share option plan in 2020?
4. Assuming that the fair market value of shares on December 31, 2020 was at P58 (Plan A), how much is the total
compensation expense recognized for both share option plan in 2020?
5. Assuming that the fair market value of shares on December 31, 2019 was at P60 (Plan A), how much is the total
compensation expense recognized for both share option plan in 2019?
6. What is the credit to share premium account assuming that all employees receiving options by the end of 2020
exercises all options in 2021?

CASE 3
You were assigned to audit the shareholders’ equity of Justice League Corp. for the year ended December 31, 2018. Justice
League Corp. was incorporated in early 2017 when it was authorized by SEC to issue 100,000 ordinary shares (P100 par)

2|Page
and 50,000 preference shares (P50 par). The following schedule reflects the company’s capital balances as of December 31,
2017:

Ordinary shares, 50,000 shares issued during the company’s incorporation at P150 P7,500,000
per share.
Preference shares, 20,000 shares issued in June 30, 2017 in exchange of a building 1,200,000
with a fair market value of P1,200,000
Retained earnings, which is the company’s net income in 2017 5,540,000
Total shareholders’ equity P14,240,000

Your inquiries and investigation revealed the following transactions which occurred in 2018:
a. In early 2018, the company reacquired 20,000 from its previously issued ordinary shares at P160 per share and reverted
them to treasury since it has an intent of reissuing the same.
b. On March 10, the company issued 10,000 ordinary shares (from previously unissued shares) and 10,000 preference
shares for a total lump sum of P2,800,000. On this date, ordinary shares are quoted in the market at P175 per share
while preference shares are quoted at P75 per share.
c. On June 19, the company issued, through a broker, additional 5,000 preference shares at P85 per share. The company
incurred P25,000 in broker’s fees and commission.
d. On July 1, the company issued 15,000 ordinary shares with a 3 year- P2,000,000, 12% face value bonds for a total
consideration of P5,000,000. The bonds which pay semi-annual interest every January 1 and July 1, are currently quoted
at 110 while the ordinary shares are quoted in the market at P180 per share.
e. On October 11, the company reissued 8,000 treasury shares at P185 per share.
f. On December 1, the company retired 7,000 treasury shares and reverted them to unissued basis.
g. The company registered an adjusted net income in 2018 at P4,530,000.

Based on the information above, answer the following:

1. What is the balance of ordinary shares account as of December 31, 2018?
2. What is the balance of the preference shares account as of December 31, 2018?
3. What is the balance of the share premium in excess of par from ordinary shares as of December 31, 2018?
4. What is the balance of the share premium in excess of par from preference shares as of December 31, 2018?
5. What is the total additional paid-in capital as of December 31, 2018?
6. What is the total contributed capital as of December 31, 2018?
7. What is the correct balance of the retained earnings – unappropriated account as of December 31, 2018?
8. What is the total shareholders’ equity as of December 31, 2018?

CASE 4
You were engaged by Riking Ball Company to audit the company’s financial statement for the year ended December 31,
2017. The company’s records were destroyed by fire and you ask the accountant to prepare the equity section as of December
31, 2017. The shareholders equity section of Riking Ball Company as of December 31, 2017 which was prepared by the
client is composed of the following:

Ordinary share capital, par P200 P5,000,000

Share premium – ordinary 1,500,000
8% Preference share capital, par P250 3,500,000
Share premium – preference 800,000
Share dividends distributable – ordinary 600,000
Share premium from treasury share 25,000
Retained earnings – Appropriated P1,500,000
Retained earnings – Free 2,500,000 4,000,000
Less: Treasury share (at cost P250 ordinary) 120,000
Unrealized loss on Equity investments @FVTOCI 150,000 (270,000)
Total shareholder’s equity P15,695,000

** The company reported net income during the period under audit (2018) of P12,800,000.

The following transactions occurred in 2018 related to equity in chronological order:

a. Issued 12,000 ordinary shares and 10,000 preference shares at P221 and P255 each, respectively.
b. Issued 2,500 shares of ordinary shares and 3,000 shares of preference shares with to total proceeds of P1,500,000.
Also, a land was received from a shareholder in exchanged of 1,400 shares of preference shares. There is available
market value for the land, P350,000.
c. Acquired 12,000 shares of ordinary shares and 15,000 shares of preference shares at P215 and P275, respectively.
d. Distribute the share dividends due today.

3|Page
e. Declared and issued a 25% share dividends to all shareholders when market value of shares is P205 for ordinary and
P259 for preference.
f. Declared 50% of ordinary treasury shares as dividends to ordinary shareholders. Market value of each share on the
date of declaration is P208.
g. Issued the ordinary treasury shares declared as dividends.
h. Issued a 3 for 1 share split.
i. Equity investments at other comprehensive income securities increase its market value by P30,000.
j. P300,000 of retained earnings were appropriated for future purchase of equipment.

Determine the following at the end of 2018:

1. Preference share capital
2. Ordinary share capital
3. Share premium – preference
4. Share premium – ordinary
5. Total contributed capital
6. How much is the total amount charge to retained earnings during the period as a result of declaration of
dividends?
7. How much is the net effect of share split in total shareholder’s equity?
8. Treasury shares
9. Unappropriated retained earnings
10. Total shareholder’s equity

CASE 5
Badyang Company had the following transaction related to declaration dividends in the current period (2018) under your
audit, You determined that no entries were made by the accountant to reflect the transaction related to dividend to ensure
that the balance of retained earnings is at optimum level in the financial statement. You gather evidences and based on the
minutes of the board meetings, you summarized it below:

Share dividend
Badyang Company has 500,000 shares of P10 par value ordinary shares outstanding. In declaring and distributing 10%
share dividend, Badyang Company issued only 46,000 new shares, the other share dividend were not issued because some
investors did not own Badyang Company’s shares in even multiples of ten. To these shareholders, Badyang Company
issued fractional warrants. Badyang Company’s ordinary shares were selling at P25 per share when the share dividends
were declared. Ultimately, only 90% of the fractional share warrants were finally turned-in in exchange of full shares.

At the end of the year Badyang Company declared a P2 per share cash dividend.

Property Dividend
On October 31, Badyang Company declared a building held as owner-occupied property with an original life of 10 years as
dividend distributable to stockholders on January 31 of the following year. This was acquired at P800,000 on October 31,
2017. The property had fair market value P900,000 on October 31, 2018. On December 31, 2018 the value of the property
declined to P700,000.

The property was transferred to shareholders on January 31, 2019 when the prevailing fair value was at P800,000.

Determine the following:

1. How much is the total amount charge to retained earnings in 2018 related to dividend transactions?
2. What is the entry to record the distribution of share dividends and the fractional warrants?
3. What is the entry to record the surrender and exercise of the 90% fractional warrants?
4. Assuming that the remaining fractional warrants expire, what is the entry to record their expiration?
5. What is the gain or loss to be recognized in the profit or losses as a result of the distribution of the property
dividends on January 31?

CASE 6
Trust Big Word Corporation has suffered operating losses for some time, but is now operating profitably and expects to
continue to do so. Current and projected income, however, will not be sufficient to eliminate the deficit in the near term. It
also appears that plant assets are overstated considering current prices and economic conditions. After receiving permission
from government authorities and approval from the shareholders, the board of directors of Trust Corporation decides to
restate the company assets and paid-in capital balances in order to remove the deficit and make possible the declaration of
dividends from profitable operations. A balance sheet for the company just prior to this action is presented on the next
page:
Trust Big Word Corporation
Statement of Financial Position
December 31, 2018

Current assets P250,000 Liabilities P300,000

Property, plant and equipment 1,500,000 Ordinary Shares, 10 par 1,000,000
4|Page
 Accumulated Depreciation (600,000) Share premium 100,000
Deficit (250,000)
Total assets P1,150,000 Total P1,150,000

Case 1:
Assuming that the quasi reorganization shall be accomplished as follows:
a) Property, plant and equipment are to be reduced to their present fair market value of P800,000.
b) Inventories are to be written down by P50,000.
c) Un-accrued obligation shall be recognized at P150,000.
d) Ordinary Shares are to reduce to a par value of P5.

Requirements:
1. What is the total asset after the quasi-reorganization?
2. What is the total shareholders’ equity after the quasi-reorganization?
3. What is the balance of share premium (additional paid in capital) after the quasi-reorganization?
4. What is the correct balance of the retained earnings account as of December 31, 2018?

Case 2:
Assuming that the quasi reorganization shall be accomplished as follows:
a) Property, plant and equipment are appraised at a replacement cost of P2,500,000.
b) Inventories are to be written down by P75,000.
c) Un-accrued obligation shall be recognized at P175,000.

Requirements:
1. What is the total asset after the quasi-reorganization?
2. What is the total shareholders’ equity after the quasi-reorganization?
3. What is the balance of share premium (additional paid in capital) after the quasi-reorganization?
4. What is the balance of any revaluation surplus after the quasi-reorganization?
5. What is the correct balance of the retained earnings account as of December 31, 2018?

5|Page