Professional Documents
Culture Documents
Chapter15 - Answer PDF
Chapter15 - Answer PDF
SUBSTANTIVE TESTS OF
15 OWNERS EQUITY ACCOUNTS
(b) Procedures applicable to rights and obligations are (1) make inquiries of legal
counsel, and (2) review articles of incorporation and by-laws.
15-2. In vouching dividend entries, the auditor should (a) establish that preferential or
other rights of shareholders and any restrictions on dividend distributions have
been recognized, (b) establish the number of shares outstanding on the date of
record and verify the accuracy of the total dividend declaration by recalculation,
(c) ascertain the propriety of the entry to record the declaration, and (d) trace
dividend payments to canceled checks and other documentation.
15-3. The procedures consist of: (a) review minutes of board of directors meetings and
(b) compare statement presentation with GAAP.
a. (1) Certificates may have been surrendered in exchange for others without
attaching the surrendered certificates to the stub book.
(2) The excess certificates may have been issued under proper authority for
services or for property and not recorded in the financial books.
(3) They may have been issued improperly in exchange for cash, services or
property, or without consideration. The impropriety might result from
oversight or from fraudulent design.
(4) The error may have occurred because an item which should have been
posted to the share capital account was not in fact so posted.
(5) An error may have occurred in entering the number of shares issued on
the certificate stub.
(6) Additional shares may have been issued near the end of 2006 but the cash
received was not recorded until 2007.
15-2 Solutions Manual to Accompany Applied Auditing, 2006 Edition
b. (1) Make a quick inspection of open stubs to determine whether they provide
a ready clue to the reason for difference, e.g., one certificate issued for
10,000 shares. If so, investigate the facts regarding its issue.
(2) If a quick inspection fails to provide a clue, refer to a list of shareholders
supporting the entries in the cash receipts book for the 72,000 shares
originally sold. Check this list item by item against stubs for shares
originally issued and mark the stubs so checked. Then check returned
certificates attached to stubs against new stubs issued in exchange for
those certificates, marking the new stubs. Prepare a list of unmarked
stubs. This should total 10,000 shares and serve to identify the
outstanding certificates with respect to which shares are not recorded in
the general ledger.
(3) If errors are found in the number of shares issued, as shown by stubs in
the share certificate book after comparison with the cash receipts entries,
it may be necessary to circularize the original shareholders to determine
how many shares were actually issued.
The cash receipts book and general journal for the first few days of
2007 should be examined for entries which may be for shares issued late
in 2006.
(4) If it is found that excess shares have been issued, inquiry should be made
of responsible officers with respect to the circumstances in which they
were issued. The answers obtained should be substantiated by
appropriate evidence, e.g., resolutions of the board, etc.
15-5. The proposal for the limitation of procedure is not justified by the stated facts.
Although the transfer agent and the registrar know the number of shares issued,
they do not necessarily know the number of shares outstanding. Furthermore, the
audit of share capital includes more than determining the number of shares
outstanding. For example, the auditor must determine what authorizations exist
for the issuance of shares, what assets were received in payment of shares, how
the transactions were recorded, and what subscription contracts have been entered
into. Confirmation from the registrar could not help in determining these things.
In addition to confirmation from the registrar, the audit of share capital might
include the following procedures for which the purposes are briefly indicated:
(1) Examine the corporation charter to determine the number of shares authorized
and the special provisions relating to each class of shares if more than one
class is authorized.
(2) Examine minutes of shareholders and directors meetings to determine
authorization for appointments of the registrar and the transfer agent, and to
determine authorization for the issuance or reacquisition of shares.
(3) Examine provisions relating to share capital in the corporation law of the state
of incorporation to determine any special provisions such as, for example,
those relating to the issuance of no-par shares.
Substantive Tests of Owners Equity Accounts 15-3
(4) Analyze the share capital accounts to obtain an orderly picture of share
transactions for use as a guide to other auditing procedures and as a
permanent record.
(5) Trace the consideration received for share capital into the records to
determine what consideration has been received and how it has been
recorded.
(6) Examine and schedule treasury shares and review entries for treasury shares
to determine the existence of treasury shares, as authorized, and to determine
that a proper record has been made.
(7) Review registrars invoices and cash disbursements to determine that original
issue taxes have been paid.
(8) Compare dividends with shares outstanding at dividend dates to determine
that dividends have been properly paid and also to substantiate the shares
outstanding.
(9) Review subscription and option contracts, etc., to determine the facts in
regard to subscriptions and options and to determine that these facts have
been properly recorded and that they are adequately disclosed.
Based on the limited data made available in the problem, the Balance Sheet is
presented as follows:
Talisay Corporation
Balance Sheet
December 31, 2006
Assets
Current assets (including share subscriptions receivable) P 34,000
Noncurrent assets
Land 9,000
Other fixed assets (net of accumulated depreciation of
P16,000) 40,000
Total assets P 83,000
Hope, Inc.
Shareholders Equity
As of September 30, 2007
(a)
Preference Shares Schedule
# of Shares Amount
Balance 9/30/06 4,000 P 60,000
Shares issued to purchase land 8,000 120,000
Shares redeemed (4,000) (60,000)
Balance 9/30/07 8,000 P120,000
Substantive Tests of Owners Equity Accounts 15-5
(b)
Ordinary Shares Schedule
# of Shares Amount
Balance 9/30/06 110,000 P1,100,000
T. Santos 4,500 45,000
Balance 9/30/07 114,500 P1,145,000
(c)
Paid-in Capital Schedule
Amount
Balance 9/30/06 -0-
Sale to T. Santos [4,500 x (P25 - P10)] P 67,500
Subscription by K. Reyes [10,000 x (25 - P10)] 150,000
P217,500
(d)
Retained Earnings Schedule
Amount
Balance 9/30/06 P622,000
Net income 250,000
Preference shares redemption [4,000 x (P18 - ( 12,000)
P15)]
Cash dividend ordinary (110,000 x P1.50) (165,000)
Cash dividend preference (12,000 x P2) ( 24,000)
P671,000
Baguio Company
Shareholders Equity
December 31, 2007
Ordinary shares (15 par value; 100,000 shares authorized,
and outstanding) P1,500,000
Paid-in capital in excess of par 2,425,000 *
Retained earnings (from Dec. 31, 2007) -0-
Total Shareholders Equity P3,925,000
______________________
* Original balance P1,750,000
Reduction of par value of ordinary shares (P10 x 100,000) 1,000,000
Additional contribution 600,000
Elimination of deficit (925,000) **
Paid-in capital in excess of par P2,425,000
** Original deficit P750,000
Loss on revaluation of plant assets 175,000
Deficit to be eliminated P925,000
15-6 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Answer: a
15-10. 1) c 3) c 5) d 7) c 9) b
2) b 4) a 6) a 8) b 10) d
15-11. A4 Corporation
A4 Corporation
Contributed Capital Section of the Balance Sheet
December 31, 2006
Contributed Capital
8% Preference shares, P100 par (6,000 shares authorized,
2,550 shares issued and outstanding) P255,000
Ordinary shares, no par 24,000 shares authorized, 10,800
shares issued and outstanding) 266,050 *
Premium on preference shares 27,850
Additional paid-in capital from share subscription default 100
Additional paid-in capital from treasury shares 1,000
Total contributed capital P550,000
Substantive Tests of Owners Equity Accounts 15-7
* P207,000 + P29,700 + P13,600 + P15,750 = P266,050
The above schedule is supported by the following entries for the transactions that
occurred in 2006:
2006
Mar. 2 Cash (P10 x 400) 4,000
Subscriptions Receivable (P112 x 400) 44,800
Preference Shares Subscribed (P100 x 400) 40,000
Premium on Preference Shares 8,800
500 x P35
* Ordinary shares: P27,000 x (500 x P35) + (100 x P125) = P15,750
100 x P125
Preference shares: P27,000 x = P11,250
(500 x P35) + (100 x P125)
P27,000
15-8 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Partner Corporation
Shareholders Equity
December 31, 2006
Share capital
Preference shares, P4 cumulative, par value P50 per share;
authorized 50,000 shares, issued and outstanding 10,000
shares P 500,000
Ordinary shares, par value P1 per share; authorized 500,000
shares, issued 150,000 shares, and outstanding 140,000
shares 150,000
Total share capital P 650,000
Additional paid-in capital ordinary
In excess of par value 1,560,000
From sale of treasury shares 250,000
Total paid-in capital P2,460,000
Retained earnings 231,000
Accumulated other comprehensive income (loss)
Unrealized decrease in value of available for sale securities (25,000)
Total paid-in capital, retained earnings, and accumulated other
comprehensive income (loss) P2,666,000
Less: Treasury shares, 10,000 shares at cost (180,000)
Total shareholders equity P2,486,000
Substantive Tests of Owners Equity Accounts 15-9
15-13. Del-V Company
Requirement (1)
Del-V Company
Statement of Retained Earnings
For Year Ended December 31, 2006
Requirement (2)
Note A: Retained earnings are restricted in the amount of P14,000, the cost of the
ordinary shares being held as treasury shares.
Requirement (1)
b. Write-down of inventories
Retained Earnings 6,000
Current Assets (inventories) 6,000
Requirement (2)
RICY Corporation
Balance Sheet
December 31, 2006
Liabilities P 30,000
Ordinary shares, P1 par 10,000
Additional paid-in capital on ordinary shares 16,000
Retained earnings (see Note A) 0
Total liabilities and shareholders equity P 56,000
Note A: Retained earnings as of December 31, 2006 has a zero balance due to a
quasi-reorganization on that date. At that time, net assets were revalued, the par
value of ordinary share was reduced from P10 to P1 per share, and a P114,000
deficit was charged against additional paid-in capital.
Requirement (1)
Preference Ordinary
a. Preferred dividend (2,000 x 0.10 x P100) P20,000
Remainder to ordinary (P80,000 P20,000) P60,000
Total P20,000 P60,000
Substantive Tests of Owners Equity Accounts 15-11
b. Dividends in arrears (2 x 2,000 x 0.10 x P100) P40,000
Current preferred dividend (2,000 x 0.10 x P100) 20,000
Remainder to ordinary (P80,000 P60,000) 20,000
Total P60,000 P20,000
2,000 x P100
* Preference: P10,000 extra dividend x = P4,000
(2,000 x P100) + (30,000 x P10)
P300,000
* Ordinary: P10,000 extra dividend x = P6,000
P500,000
Requirement (2)
Dividends per share
Dividend yield =
Market price per share
P60,000 / 30,000 P2
Ordinary share: = = 10%
P20 P20
P213,718 P213,718
= = 17.1%
P875,000 + P375,000 P1,250,000
P135,000
Rate of interest paid on bonds payable: = 13.5%
P1,000,000
15-12 Solutions Manual to Accompany Applied Auditing, 2006 Edition
Emporia Plastics, Inc. is trading on the equity successfully, since its return on
ordinary share equity is greater than interest paid on bonds.
MLA Corporation
SHAREHOLDERS EQUITY
December 31, 2007
Paid-in Capital:
Preference shares, P100 par value
10,000 shares authorized, 4,000 shares P400,000
issued & outstanding
P136,000
P136,000 + P24,000 X P152,000 = P129,200 Value assigned to bonds
Cash...................................................................... 152,000
Discount on Bonds Payable.................................. 40,800
(P170,000 P129,200)
Bonds Payable........................................ 170,000
Paid-in CapitalShare Warrants ........... 22,800
(b) When the warrants are non-detachable, separate recognition is not given to
the warrants. The accounting treatment parallels that given convertible debt
because the debt and equity element cannot be separated.
Cash...................................................................... 152,000
Discount on Bonds Payable.................................. 18,000
Bonds Payable............................................... 170,000
Requirement (a)
Requirement (b)
If the convertible security were preference shares, basic EPS would be the same
assuming there were no preference dividends declared or the preference was
noncumulative. For diluted EPS, the numerator would be the net income amount
and the denominator would be 2,090,000.