lOMoARcPSD|29102258

AUDIT OF SHAREHOLDERS EQUITY – ACTIVITY

(THEORIES)

(20 secs)
1. Which of the following procedure is least likely in the audit of capital stock?
a. Evaluate compliance with stock option plans.
b. Examine all outstanding stock certificates for completeness.
c. Reconcile shares outstanding with the general ledger.
d. Account for the proceeds from stock issues.

(2 mins)
2. On December 31, 2020, the equity section of Jesichoia Company revealed the following information:

Preference share capital, P300 par P7,000,000

Share premium - preference shares 3,000,000
Ordinary share capital, P150 4,335,000
Share premium - ordinary shares 650,000
Subscribed ordinary share capital 950,000
Retained earnings - appropriated 550,000
Unrealized loss on available for sale securities 800,000
Subscription receivable - ordinary shares 700,000
Retained earnings - unappropriated 3,500,000
Treasury shares - ordinary 1,000,000

How much is the contributed capital of Jesichoia Company as of December 31, 2020?

Solution:
Preference share capital, P300 par P7,000,000
Share premium-preference shares 3,000,000
Ordinary share capital, P150 4,335,000
Share premium-ordinary shares 650,000
Subscribed ordinary share capital 950,000
Subscription receivable-ordinary shares (700,000)
Contributed Capital P15,235,000

(30 secs)
3. Statement I: In retained earnings, the auditor should ensure whether it has
been properly declared in accordance with the requirements of the Revised
Corporation Code of the Philippines.

Statement II: Shareholders’ Equity is the residual interest of owners in the net
assets of a corporation measured by the excess of liabilities over asset.

a. Statement I and II are true

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b. Statement I and II are false (In dividends, asset over liabilities)

c. Statement I is true, Statement II is false
d. Statement I is false, Statement II is true

(2 mins)
4. The following are Lyca Company’s equity accounts at December 31, 2020:

 Ordinary share capital, par value P10; authorized 200,000 shares; issued and
outstanding 120,000 shares................................................ P1,200,000
 Share premium...................................................................... 180,000
 Retained earnings.................................................................. 720,000

Lyca Company uses the cost method of accounting for treasury shares.

The following transactions occurred in 2021:

a. Acquired 8,000 ordinary shares for P144,000.
b. Sold 6,500 treasury shares at P20 per share
c. Retired the remaining treasury shares

What is the share premium balance on December 31, 2021?

A. P117,000 C. P181,000
B. P168,000 D. P193,000

Solution:
Balance, January 1, 2021 P180,000
From reissue of treasury shares (20-18* = P2×6,500) 13,000
From retirement of treasury shares (12,000)
Balance, December 21, 2021 P181,000
*P144,000/8,000 = P18 cost per share

(20 secs)
5. During an audit of an entity’s shareholders’ equity accounts, the auditor is verifying
the amount disbursed with the amount authorized by the Board of Directors. This audit
procedure most likely is intended to verify management’s assertion of
A. Existence and Completeness
B. Existence and Valuation
C. Completeness and Valuation
D. Presentation and Disclosure

(3 mins and 2 mins)

6. and 7. Marites Company has been paying regular quarterly dividends of P1.50 and wants to pay
the same amount in the third quarter of 2021.

The following information relates to the company’s equity:

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Jan. 1 Shares outstanding, 400,000; P2 par (760,000 shares authorized).

Feb. 15 Issued 25,500 new shares at 10.50
Mar. 31 Paid quarterly dividends of 1.50 per share
May 12 Converted P1,000,000 of 1,000 bonds to ordinary shares at the rate of
50 shares per P1,000 bond.
June 15 Issued an 12% stock dividend
June 30 Paid quarterly dividends of P1.50 per share.

6. What is the total amount that Marites will have to pay in dividends in the third quarter in order
to pay P1.50 per share?

7. What is the total amount of dividends to be distributed during the year assuming no equity
transactions occur after June 30?

SOLUTION: (ROQUE, Problem 8-1)

Jan. 1 Shares outstanding 400,000

Feb. 15 Issuance 25,500
May 12 Bond Conversion 50,000
June 11 Stock Dividend (475,500 x 12%) 57,060
June 30 Shares outstanding 532,560
Dividend rate x 1.50
Dividends to be paid 798,840

1st quarter (400,000 + 25,500 = 425,500 x 1.50) 638,250

2nd – 4th quarter (798,840 x 3) 2,396,520
Total dividends to be distributed 3,034,770

(10 secs)
8. A guy walks to a store and steal s a $100 bill from the register without the owner's knowledge.
He then buys $70 worth of goods using the $100 bill and the owner gives $30 in change.
How much money did the owner lose?

A. $30
B. $70
C. $100
D. $130

(3 mins and 3 mins)

9. and 10. Cheerup Corp. granted 100 cash share appreciation rights (SARs) to each of its 200
employees in January 2020, on the condition that they stay with the company for the next three
years.

2020
 Fourteen employees leave. The entity estimates that a further twenty-eight will leave during
2021 and 2022.
2021
 Fifteen employees leave, and the entity estimates that a further eight will leave during 2022.

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2022
 Seven employees leave.

At the end of 2022, sixty employees exercised their SARs. Another forty employees exercised
their SARs at the end of 2023, and the remaining employees exercised their SARs at the end of 2024.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists, as
shown below. At the end of 2022, all SARs held by the remaining employee’s vest. The intrinsic
values of the SARs at the date of exercise (which equal the cash paid out) at the end of 2022, 2023,
and 2024 are also shown below.

Year Fair Value Intrinsic Value

2020 P30
2021 32
2022 36 P35
2023 42 40
2024 46

9. Determine the compensation expense in 2020

Compensation Expense in 2020 = (158 employees × 100 SARs × P30 × 1/3) = P158,000

10. Determine the compensation expense in 2024

Liability on SARs, 12/31/2024 P0

Less: Liability on SARs, 12/31/2023 (64 268,800
employees × 100 SARs × P42)
Decrease in Liability (268,800)
SARs exercised (64 employees × 100 294,400
SARs × P46)
Compensation Expense in 2024 P25,600

(30 seconds)
11. Statement I: Review appropriateness of accounting for share-based
compensation is one of the primary audit procedures of existence

Statement II: A common example of instruments with simple feature is

redeemable preference shares.

a. Statement I and II are true

b. Statement I and II are false
c. Statement I is true, Statement II is false (complex feature)
d. Statement I is false, Statement II is true

(3 mins , 2 mins, and 2 mins)

12. to 14. You are auditing the balance sheet of the Hallelujah Company on December 31, 2020,
which has the following items on the equity side of the balance sheet:

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Current Liabilities 2,858,000

Bonds Payable 3,000,000

Reserve for Bonds Retirement 2,660,000

6% Cumulative Preference Share, P100 par value (entitled to P110 and 1,850,000
accumulated dividends per share in voluntary liquidation). Authorized,
30,000 shares; issued, 20,000 shares; in treasury, 1,500 shares

Ordinary share, P100 par value, authorized,100,000 shares; issued and 6,600,000
outstanding, 66,000 share

Premium on preference share 100,000

Premium on ordinary share 675,000

Retained Earnings 1,312,600

The company proposes to finance a plant expansion program by issuing an additional

20,000 shares of ordinary share. Ordinary shareholders of record October 1, 2020 were notified
that they will be permitted to subscribe to the new issue at P150 per share up to 50% of their
holdings. The market value of the share on October 1, 2020, was P172.50. The share goes
ex-rights in the market on October 3, 2020.

12. Compute for the total shareholders’ equity as of December 31, 2020
13. Compute for the book value of the 66,000 shares of ordinary share
14. Compute for the book value per share of ordinary share as of December 31, 2020

Solutions:

Revenue for bond retirement P2,660,000

6% Cumulative Preference Share 1,850,000

Ordinary share 6,600,000

Premium on preference share 100,000

Premium on ordinary share 675,000

Retained Earnings 1,312,600

Total Shareholders’ Equity P13,197,600

Total Shareholders’ Equity P13,197,600

Less: Equity identified to preference share 2,035,000

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Liquidity Value (18,500 shares × P110)

Total Book Value of the 66,000 shares of ordinary share P11,162,600

Total Book Value of the 66,000 shares of ordinary share P11,162,600

Divide by: Issued and Outstanding (Ordinary Share) 66,000

Book Value per share of ordinary share P169.13

(20 secs)
15. Which of the following information is most important when auditing shareholders’
equity?
A. Share dividends are capitalized at par or stated value on the dividend declaration
B. Entries in the share capital account can be traced to a resolution in the minutes of
the board of directors’ meetings
C. Share dividends and/or share splits during the year were approved by the shareholders
D. Changes in the share capital account are verified by an independent stock transfer agent

( 2mins, 2 mins, and 1 min)

16. to 18. The company issued 2,500, P125 par ordinary shares for an outstanding bank loan of
P350,000. On this date, shares are quoted at P150 per share.

16. Compute for the loss on extinguishment of liability.

17. Compute for the increase in share premium
18. What would be the entry for loans payable – bank to record issuance of share for liability?

SOLUTION: (ASUNCION)

Fair value of equity instruments issued (2,500 x P150) 375,000

Less: Carrying amount of liability 350,000
Loss on extinguishment of liability 25,000

Fair value of equity instruments issued (2,500 x P150) 375,000

Less: Total par value of equity issued (2,500 x P125) 312,500
Share premium 62,500

Loans payable – bank 350,000

Loss on extinguishment of liability 25,000
Share capital 312,500
Share premium 62,500
To record issuance of share for liability

(10 secs)
19. A birthday girl once said "22 _________ around the sun and cheers to more"

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A. Revolution
B. Rotation
C. Years of Existence
D. Birthday

(3 mins and 2 mins)

20. and 21. The accounts below appear in the December 31 trial balance of Cassy Company:

Authorized ordinary share P 3,800,000

Unissued ordinary share 900,000
Subscribed ordinary share 550,000
Subscription receivable 650,000
Premium on ordinary share 200,000
Retained earnings – unappropriated 400,000
Retained earnings – appropriated 220,000
Revaluation surplus 350,000
Treasury shares, at cost 200,000

20. Compute for the Total Contributed Capital.

21. Compute the amount of total shareholder’s equity that Cassy should report in its
December 31 statement of financial position.

SOLUTION: (ASUNCION)

Authorized ordinary share P 3,800,000

Unissued ordinary share ( 900,000 )
Issued ordinary share 2,900,000
Subscribed ordinary share 550,000
Subscription receivable ( 650,000 ) (100,000)
Premium on ordinary share 200,000
Total contributed capital 3,000,000
Retained earnings – unappropriated 400,000
Retained earnings – appropriated 220,000
Revaluation surplus 350,000
Total 3,970,000
Treasury shares, at cost ( 200,000 )
Total shareholders’ equity P 3,770,000

(20 secs)
22. Footing the shares outstanding in the stock register and comparing the total shares
outstanding in the general ledger stock account addresses the audit objective of
A. Existence
B. Completeness
C. Valuation
D. Presentation and Disclosure

(3 mins)
23. The accounts below appear in the December 31,2020 trial balance of Masipagaku Company

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Subscribed share capital P 1,750,000

Treasury shares, 600 at cost 90,000
Unissued share capital 6,000,000
Share premium 190,000
Appropriation for plant expansion 550,000
Retained earnings 1,220,000
Authorized share capital – 100,000 shares 10,000,000
Subscription’s receivable 340,000

The minutes of meetings of BOD reveal that on December 5, 2020, the company’s board
declared a 12% cash dividend payable to shareholders and subscribers of record on December
20,2020. The dividend checks are to be distributed on January 20, 2021. Company’s accountant
has not recorded this dividend declaration.

 What is the amount of unrecorded dividend payable?

SOLUTION: (ROQUE, Problem 8-25)

Authorized share capital 10,000,000

Less: Unissued share capital 6,000,000
Issued share capital 4,000,000
Less: Treasury share at par (100 x 600) 60,000
Issued and outstanding 3,940,000
Add: Subscribed share capital 1,750,000
Basis for dividend 5,690,000
Multiply by dividend rate x 12%
Unrecorded dividend payable 682,800

(10 secs)
24. Kung ang suka ay vinegar, ano naman ang toyo?
a. Ikaw
b. Jowa mo
c. Soy sauce
d. Saucer

(3 mins and 3 mins)

25. to 26. The following was Summer Corporation’s post-closing trial balance as of December 31,
2020:
Summer Corporation
Post-Closing Trial Balance
December 31, 2020
Debit Credit
Accounts Payable P 495,000
Accounts Receivable P 963,000
Reserve for depreciation 360,000
Reserve for doubtful accounts 54,000
Premium on common stock 1,800,000
Gain on sale of treasury stock 450,000

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Bonds payable 720,000

Building and equipment 1,980,000
Cash 396,000
Cash dividends payable on preferred stock 7,200
Common stock (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
Available-for-sale securities at fair value 513,000
Trading securities at fair value 387,000
Net unrealized loss on available-for-sale 45,000
securities
Preferred stock (P50 par value) 900,000
Preferred expenses 72,000
Donated Capital 800,000
Stock warrants outstanding 208,000
Retained Earnings 455,800
Treasury stock – common, at cost 324,000
Totals P6,480,000 P6,480,000

At December 31, 2006, Alcoy had the following number of common and preferred shares:

Common Preferred
Authorized 900,000 90,000
Issued 270,000 18,000
Outstanding 252,000 18,000

The dividends on preferred stocks are PO.40 cumulative. In addition, the preferred
stock has a preference in liquidation of P50 per share.

25. Compute for the unappropriated retained earnings

26. Compute for the total Shareholder’s Equity
25)
Total Retained Earnings 455,800
Less: Appropriation for treasury stock 324,000
Unappropriated Retained Earnings P 131,800

26)
Total additional paid-in capital
Premium on common stock P1,800,000
Gain on sale of treasury stock 450,000
Donated Capital 800,000
Stock warrants outstanding 208,000 P3,258,000
Preferred stock (P50 par value) 900,000
Common stock (P1 par value) 270,000
Total Contributed Capital 4,428,000
Retained Earnings 455,800

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Total 4,883,800
Less: Treasury stock 324,000
Net Unrealized Loss on AFS 45,000 369,000
Total Shareholders Equity P4,514,800

(3 mins)
27. On June 30, 2020, the Happy Lumber Co.'s shareholder equity was as follows:

Contributed capital:

5% preference share, P50 par, cumulative, 45,000 P2,250,000

shares issued, dividends 5 years in arrears
Ordinary share, P30 par, 100,000 shares issued 3,000,000
4,500,000
Deficit from operations (600,000)
Total shareholder’s equity P3,900,000

On July 1, the following actions were taken:

a. Ordinary shareholders exchanged their old Ordinary share for a new Ordinary share, with
1 share of the new share being exchanged for every 4 shares of the old. The stated value
of the new ordinary share was set at P60 per share.
b. In liquidation of preference share dividend arrears, one-half share of the new ordinary
share was issued for each share of preference share outstanding.
c. The operating deficit was applied against the paid-in capital resulting from the ordinary
share restatement.

The following transactions affecting shareholders' equity occurred during the remainder of 2020:

October 1
 10,000 shares of preference share were called at P55 plus dividends for 3 months at 5%.
Share was formally retired.
November 10
 60,000 shares of new ordinary share were sold at P65.
December 31
 Net income for the 6 months ended on this date was P400,000. (Assume that revenues and
expenses were closed to a temporary account, Income summary. Use this account to
complete the closing process.) The semi-annual dividend was declared on preference shares,
and a PO.75 dividend on ordinary shares, dividends being payable January 20, 2019.

How much is the balance of 5% Preference Share at December 31, 2020?

Solution:

5% Preference Share after the retirement of 10,000 shares 35,000

(45,000-10,000)
× Par value P50
Balance of 5% Preference Share at December 31, 2020 P1,750,000

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MGA TANONG NA WALA PA SA QUIZIZZ

Usually, an auditor obtains evidence of shareholder’s equity transactions by reviewing
the entity’s
a. Numbered stock certificates
b. Cash receipt journal
c. Transfer agent’s records
d. Minutes of BOD meetings

Which of the following assertions is least likely considered by the auditor in an audit
of shareholders equity?
a. Existence
b. Completeness
c. Rights and Obligations
d. Presentation and Disclosure

All share capital transactions should ultimately be traced to the

A. Numbered stock certificates
B. Minutes of the Board of Directors
C. By-Laws
D. Equity Reconciliation Schedule

Because of the limited number of transactions involved in shareholders' equity

items, the auditor normally assess control risk at the maximum level and performs
A. Detailed test balances
B. Detailed analytical procedures
C. Detailed test of transactions
D. Detailed test of controls

According to GAAP, the declaration of a property dividend may necessitate the recognition of a
gain or loss if the property's fair value differs from its carrying value on the declaration date.
- TRUE

Subscription Receivable can either be treated as current asset or capitalized to subscribed share
capital.
- FALSE (capitalized - deduction)

Because equity transactions are typically few but large in size, control risk should be assessed at
the highest level for shareholder equity and tested for all transactions.
- TRUE

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