Auditing Problems
Auditing Problems
Chichi’s preference and ordinary shares are traded on the over-the-counter market. At December
31, 2009, Chichi had 100,000 authorized shares and 3,000,000, no par, authorized ordinary
shares with a stated value of P5 per share
Transactions during 2010 and other information relating to the equity account were as follows:
a) On January 10, 2010, Chichi formally retired all the 30,000 treasury shares and had them
revert to unissued basis. The treasury shares had been acquired on January 20, 2009.
The shares were originally issued at P10 per share.
b) Chichi owned 10,000 ordinary shares of Benny Inc. purchased in 2009 for P 750,000.
The Benny shares were included in Chichi’s trading securities portfolio. On February 15,
2010, Chichi declared a dividend in kind of one share of Benny for every hundred
ordinary of Chichi held by shareholders of record on February 28, 2010. The dividend in
kind was distributed on March 12, 2010.
c) On April 1, 2010, 1,000,000 shares right were issued to the ordinary shareholders
permitting the purchase of new one ordinary share in exchange for four rights and P11
cash. On April price of Chichi’s ordinary share was P13 per share. Chichi’s issued new
shares to settle the transaction. The remaining 160,000 rights were not exercised and
thus expired.
d) On January 1, 2007, Chichi granted share options to employees for the purchase of
100,000 ordinary shares of the company at P8 per share which was also the market price.
The options are exercisable within a three-year period beginning January 1, 2009. On July
1, 2010, employees exercised 80,000 options for P8 per share. On July 1, 2010, the
market price of Chichi’s ordinary share was P8 per share. Chichi used new shares to settle
the transaction.
e) On December 12, 2010, Chichi declared the yearly cash dividend on preference shares,
payable on January 14 2011, to shareholders of record on December 31, 2010.
f) After year-end adjustment, the net unrealized loss on available for sale securities account
had a debit balance of P135,000 at December 31, 2010.
g) On January 15, 2011, before the accounting records were closed for 2010, Chichi became
aware that rent income for the year ended December 31, 2009 was overstated by
P500,000. The after tax-effect on the 2009 profit was P275,000. The appropriate
correcting entry was recorded the same day.
Questions:
Based on the above and the result of your audit, determine the following as of December 31,
2010:
4. Retained earnings
a. P5,275,000 c. P5,170,000
b. P5,445,000 d. P5,395,000
5. Total equity
a. P18,615,000 c. P18,480,000
b. P18,255,000 d. 18,530,000
Answers:
1. B
2. B
3. A
4. D
5. C
EXPLANATION:
a) The shares must have been issued originally. This requisite distinguished treasury shares from
unissued shares. Treasury shares can legally reissued at a discount without any discount liability
while unissued shares must be issued at least at par or stated value. In other respects, treasury
shares and issued shares are the same. Both are equity rather than asset. The retirement results
in a loss, meaning the cost of the treasury shares exceeds the par value, such loss is debited to
the following in the order given:
1. Additional paid in capital or share premium to the extent of the credit when the shares
were issued or additional paid in capital or share premium from original issuance.
2. Additional paid in capital or share premium from treasury shares.
3. Retained earnings.
c) For the issuance and expiration of the rights only a memorandum entry is prepared. The journal
entry is prepared when there is an exercise of the rights. No entry is required when the share
warrants are issued to shareholders because these warrants are issued usually without
consideration. The entity only needs to make a memorandum entry to indicate the number of
rights issued to shareholders and the number of shares that can be purchased through the
exercise of the rights. If the rights are exercised, a memorandum is made for the decreased in the
number of shares claimable through the exercise of rights.
840,000/4=210,000
to the next.
Contributed Capital:
Total Equity: