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AP.2808 - Audit of Equity MAY 2020: Auditing Problems Ocampo/Cabarles/Soliman/Ocampo
AP.2808 - Audit of Equity MAY 2020: Auditing Problems Ocampo/Cabarles/Soliman/Ocampo
Existence: Recorded equity accounts exist Valuation and allocation: Shareholders’ equity balances
are shown at appropriate amounts.
1. Obtain schedules of shareholders’ equity accounts and
reconcile to the general ledger balances. 9. Vouch share capital entries, dividend entries and
entries to retained earnings.
2. Review authorization and terms of share issues.
3. Confirm shares outstanding with registrar on share and Presentation and disclosure: Shareholders’ equity
transfer agent. accounts are properly presented and adequately disclosed
in the financial statements.
4. Inspect share certificate book.
10. Review financial statements and perform analytical
procedures to determine whether accounts are
5. Inspect certificates of shares held in treasury.
classified and disclosed in the financial statements in
accordance with GAAP.
Completeness: All equity accounts are recorded
11. Review minutes of board of directors’ and
6. In addition to the above mentioned procedures, shareholders’ meetings for share options and dividend
perform analytical review procedures. restrictions.
1. Internal control measures regarding the issuance of share certificates and proper accounting for transfers and
registration of shares should be established. One of these measures is the appointment of a share and transfer agent
or an independent registrar.
2. Share certificates should be serially prenumbered by the printer and that the authority for signing and issuing the
certificates be designated by the board of directors.
3. As individual certificates are issued, corresponding records of the certificates should be prepared containing the name
and address of the shareholders and the number of shares issued to each.
4. Cancelled certificates should be mutilated and any necessary documentary stamps should be attached to the
cancelled certificates.
5. Entries for the share issuances and transfers should be made by a person who does not have authority to sign and
issue certificates.
- end -
PROBLEM NO. 2
The Retained Earnings account of Endurance Company shows the following debits and credits for the current year:
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
Jan. 1 Balance 726,400
(a) Loss from fire 5,250 721,150
(b) Write-off of goodwill 52,500 668,650
(c) Share dividends distributed 140,000 528,650
(d) Loss on sale of equipment 48,300 480,350
(e) Officers’ compensation related to income of prior
periods – accrual overlooked 325,500 154,850
(f) Loss on retirement of preference shares at more
than issue price 70,000 84,850
(g) Paid in capital in excess of par 129,500 214,350
(h) Share issuance expenses (related to letter g) 10,000 204,350
(i) Share subscription defaults 8,470 212,820
(j) Gain on retirement of preference shares at less than
issue price 25,900 238,720
(k) Gain on early retirement of bonds 15,050 253,770
(l) Gain on life insurance policy settlement 10,500 264,270
RETAINED EARNINGS
Balance
Date Debit Credit Debit Credit
(m) Correction of a fundamental error 50,050 314,320
(n) Effect of change in accounting principle from FIFO to
weighted average 100,000 414,320
(o) Dividends payable 25,000 389,320
(p) Loss on sale of treasury shares 20,000 369,320
(q) Proceeds from sale of donated shares 40,000 409,320
(r) Appraisal increase in land 250,000 659,320
(s) Appropriated for property acquisition 100,000 559,320
REQUIRED:
1. Prepare adjusting journal entries to correct the 4. The auditor is concerned with establishing that
Retained Earnings account. dividends are paid to client corporation shareholders
owning shares as of the
2. Determine the correct amount of Retained Earnings a. Issue date c. Declaration date
account before closing profit or loss for the period. b. Record date d. Payment date
3. An audit program for the retained earnings account 5. During an audit of an entity’s shareholders’ equity
should include a step that requires verification of the accounts, the auditor determines whether there are
a. Fair value used to charge retained earnings to restrictions on retained earnings resulting from loans,
account for a two-for-one-share split. agreements, or law. This audit procedure most likely
b. Approval of the adjustment to the beginning is intended to verify management’s assertion of
balance as a result of a write-down of an account a. Existence
receivable. b. Valuation
c. Authorization for both cash and share dividends. c. Completeness
d. Gain or loss resulting from disposition of treasury d. Presentation and disclosure
shares.
PROBLEM NO. 3
Resilience Corporation was organized on January 1, 2018, and began operations immediately. Unfortunately, the
company hired an incompetent bookkeeper. For the years 2018 through 2020, the bookkeeper presented an annual
balance sheet that reported only one amount for shareholders' equity: 2018, P1,377,000; 2019, P1,566,000 and 2020,
P1,850,000. Also, the condensed income statement reported as follows: 2018, net loss, P175,000; 2019, net profit,
P220,000; and 2020, net profit, P409,300 (cumulative earnings of P454,300). Based on the P454,300, the president has
recommended to the board of directors that a cash dividend of P450,000 be declared and paid during January 2021. The
outside director on the board has objected on the basis that the company's financial statements contain major errors
(there has never been an audit). You have been engaged to clarify the situation. The single shareholders' equity
account, provided by the bookkeeper, appeared as follows:
Shareholders' Equity
2018 Share issue costs P 13,000 2018 Ordinary shares, par P5
2018 Net loss 175,000 200,000 shares issued P1,600,000
2019 Bought 1,000 shares from an unhappy 2019 Net profit (including P100,000
shareholder Ekis 7,000 land write-up based on
president’s estimate) 220,000
Depreciation expense* 2019 Ordinary shares, 2,000
(2018, P15,000; 2019, P17,000; 2020, shares issued 18,000
P23,000) 55,000
Miscellaneous expenses* 2020 Sold 300 of the Ekis shares 2,700
(2018, P20,000; 2019, P25,000; 2020,
P5,000) 50,000
2020 Cash loan to the company president 100,000 2020 Net profit 409,300
P400,000 P2,250,000
* Recorded as expense but not shown on the income statement.
QUESTIONS:
Based on the concerns of the outside director, you must address the following questions:
1. What is the adjusted balance of retained earnings as of December 31, 2020?
2. What entry is necessary (a) to close the above single shareholders' equity account and (b) to record the various
components of shareholders' equity in separate accounts?
3. What is the adjusted total equity as of December 31, 2020?
PROBLEM NO. 4
Hawks Corporation was incorporated in 2019. During During 2020 Hawks Corporation had a profit of P380,000.
2019, the company issued 100,000 shares of P1 par value
ordinary shares for P27 per share. During 2019, Hawks QUESTIONS:
Corporation had a profit of P250,000 and paid dividends of
Based on the above and the result of your audit, determine
P28,000.
the following:
During 2020, the company had the following transactions. 1. Total share premium as of December 31, 2020
a. P4,333,000 c. P4,337,000
1/2 Issued 10,000 shares of P100 par value b. P1,733,000 d. P4,348,000
cumulative preference shares at par. The
preference shares are convertible into five 2. Total retained earnings as of December 31, 2020
ordinary shares and had a dividend rate of 6%. a. P516,000 c. P602,000
b. P501,000 d. P279,000
3/1 Issued 3,000 ordinary shares for legal service 3. Total equity as of December 31, 2020
performed. The value of the legal services was a. P5,621,000 c. P5,535,000
P100,000. The shares are actively traded on a b. P5,539,000 d. P5,550,000
stock exchange and valued on 3/1 at P32 per
share. 4. Basic earnings per share for the year 2020
a. P2.11 c. P3.20
7/1 Issued 40,000 ordinary shares for P42 per b. P1.60 d. P2.69
share. 5. Diluted earnings per share for the year 2020
a. P1.90 c. P2.11
10/1 Repurchased 16,000 treasury shares for P34 per b. P1.48 d. P2.25
share.
12/30 Declared and paid a dividend of P0.20 per share - now do the DIY drill -
on ordinary shares and a 6% dividend on the
preference shares.