Audit of Stockholders' Equity
Audit of Stockholders' Equity
PROBLEM NO. 1
Alcoy Corporation’s post-closing trial balance at December 31, 2006 was as
follows:
Alcoy Corporation
Post-Closing Trial Balance
December 31, 2006
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
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
securities 45,000
Preferred stock (P50 par value) 900,000
Prepaid expenses 72,000
Donated capital 800,000
Stock warrants outstanding 208,000
Retained earnings 415,800
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
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The dividends on preferred stocks are P0.40 cumulative. In addition, the
preferred stock has a preference in liquidation of P50 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
Suggested Solution:
Question No. 1
Premium on common stock P1,800,000
Gain on sale of treasury stock 450,000
Donated capital 800,000
Stock warrants outstanding 208,000
Total additional paid-in capital P3,258,000
Question No. 2
Preferred stock (P50 par value) P 900,000
Common stock (P1 par value) 270,000
Additional paid-in capital (see no. 1) 3,258,000
Total contributed capital P4,428,000
Question No. 3
Total retained earnings P415,800
Less appropriation for treasury stock 324,000
Unappropriated retained earnings P 91,800
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Question No. 4
Total contributed capital (see no. 2) P4,428,000
Retained earnings:
Unappropriated (see no. 3) P 91,800
Appropriated for treasury stock 324,000 415,800
Total 4,843,800
Less : Treasury stock 324,000
Net unrealized loss on AFS 45,000 369,000
Total stockholders equity P4,474,800
Answers: 1) B; 2) A; 3) C; 4) D
PROBLEM NO. 2
Your audit client, Argao, Inc., is a public enterprise whose shares are
traded in the over-the-counter market. At December 31, 2005, Argao had
3,000,000 authorized shares of P10 par value common stock, of which
1,000,000 shares were issued and outstanding. The stockholders’ equity
accounts at December 31, 2005 had a following balances.
Common stock P10,000,000
Additional paid-in capital 3,750,000
Retained earnings 3,250,000
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• On November 10, 2006, Argao sold 5,000 shares of treasury stock for
P21 per share.
• On January 20, 2007, before the books were closed for 2006, Argao
became aware that the ending inventories at December 31, 2005 were
understated by P150,000 (after tax effect on 2005 net income was
P90,000). The appropriate correction entry was recorded the same day.
• After correcting the beginning inventory, net income for 2006 was
P2,250,00.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
3. Treasury stock
a. P160,000 c. P55,000
b. P 80,000 d. P50,000
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Suggested Solution:
Questions No. 1 to 4
Preferred stock P 2,500,000
Common stock 12,500,000
Additional paid in capital 5,725,000 (1)
Retained earnings:
Appropriated P 80,000
Unappropriated 4,045,000 4,125,000 (2)
Treasury stock ( 80,000) (3)
Total SHE, 12/31/06 P24,770,000 (4)
Prepare T-accounts for each component of the stockholders’ equity. Place
the balances as of January 1, 2006, journalize the transactions affecting
the SHE accounts, post the entries to the affected accounts, then extract
the balances.
Journal entries affecting the stockholders equity accounts during 2006:
1/2 Cash (50,000 shares x P54) P2,700,000
Preferred stock (50,000 shares x P50) P2,500,000
APIC - excess over par of preferred stock 200,000
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12/31 Income summary P2,250,000
Retained earnings P2,250,000
Question No. 5
Total stockholders' equity (see no. 4) P24,770,000
Less liquidation value of preferred stock 2,500,000
Common stockholders' equity 22,270,000
Divide by common shares outstanding 1,245,000
Book value per share of common stock P 17.89
Answers: 1) D; 2) C; 3) B; 4) B, 5) A
PROBLEM NO. 3
The stockholders’ equity section of the Asturias Inc. showed the following
data on December 31, 2005: Common stock, P3 par, 300,000 shares
authorized, 250,000 shares issued and outstanding, P750,000; Paid-in
capital in excess of par, P7,050,000; Additional paid-in capital from stock
options, P150,000; Retained earnings, P480,000. The stock options were
granted to key executives and provided them the right to acquire 30,000
shares of common stock at P35 per share. Each option has a fair value of
P5 at the time the options were granted.
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Oct. 1 All warrants issued in connection with the bonds on April 1
were exercised.
Dec. 1 The market price per share dropped to P33 and options came
due. Because the market price was below the option price, no
remaining options were exercised.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P777,300 c. P833,850
b. P848,700 d. P850,050
4. Retained earnings
a. P580,500 c. P730,500
b. P858,000 d. P654,150
Suggested Solution:
Questions No. 1 to 5
Common stock P 850,050 (1)
Additional paid in capital 8,419,450 (2)
Contributed capital 9,269,500 (3)
Retained earnings 730,500 (4)
Total SHE, 12/31/06 P10,000,000 (5)
Note: Follow the same approach in Problem no. 2.
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Journal entries affecting the stockholders equity accounts during 2006:
2/1 Cash (4,500 options x P35) P 157,500
APIC-stock options (4,500 x P5) 22,500
Common stock (4,500 shares x P3) P 13,500
APIC - excess over par 166,500
Answers: 1) D; 2) D; 3) C; 4) C, 5) A
PROBLEM NO. 4
Balamban Corporation was authorized at the beginning of 2004 with
540,000 authorized shares of P100, par value common stock. At December
31, 2004, the stockholders’ equity section of Balamban was as follows:
Common stock, par value P100 per share; authorized
540,000 shares; issued 54,000 shares P5,400,000
Additional paid-in capital 540,000
Retained earnings 810,000
Total stockholders’ equity P6,750,000
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On May 10, 2005, Balamban issued 90,000 shares of its common stock for
P10,800,000. A 5% stock dividend was declared on September 30, 2005
and issued on November 10, 2005 to stockholders of record on October 31,
2005. Market value of common stock was P110 per share on declaration
date. The net income of Balamban for the year ended December 31, 2005
was P855,000.
May 15 Balamban sold 2,700 shares of its treasury stock for P120
per share.
Jun 30 Issued to stockholders one stock right for each share held to
purchase two additional shares of common stock for P125 per
share. The rights expire on December 31, 2006.
Aug. 15 45,000 stock rights were exercised when the market value of
common stock was P130 per share.
Sep. 30 72,000 stock rights were exercised when the market value of
the common stock was P140 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P38,520,000 c. P38,340,000
b. P26,640,000 d. P38,250,000
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2. Additional paid-in capital
a. P8,329,500 c. P5,413,500
b. P8,338,500 d. P8,266,500
3. Retained earnings
a. P1,080,000 c. P1,017,000
b. P1,002,600 d. P1,008,000
4. Treasury stock
a. P18,000 c. P85,500
b. P90,000 d. P 0
Suggested Solution:
Questions No. 1 to 4
Answers: 1) C; 2) B; 3) D; 4) C
PROBLEM NO. 5
Bogo Corporation began operations on January 1, 2006. The company was
authorized to issue 60,000 shares of P10 par value common stock and
120,000 shares of 10%, P100 par value convertible preferred stock.
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Jan. 1 Issued 1,500 shares of common stock to the corporation
promoters in exchange for equipment valued at P510,000 and
services valued at P210,000. The property costs P270,000 3
years ago and was carried on the promoters’ books at
P150,000.
Feb. 15 Sold 9,000 shares of common stock at P390 per share. The
corporation paid issue costs of P75,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
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1. Common stock
a. P204,000 c. P264,000
b. P144,000 d. P186,000
4. Retained earnings
a. P1,050,000 c. P 930,000
b. P1,170,000 d. P1,458,000
Suggested Solution:
Questions No. 1 to 5
Preferred stock P3,420,000
Common stock 204,000 (1)
Subscribed common 60,000
Additional paid in capital - preferred 1,545,000 (2)
Additional paid in capital - common 10,851,000 (3)
Retained earnings 930,000 (4)
Total SHE, 12/31/06 P17,010,000 (5)
Journal entries affecting the stockholders equity accounts during 2006:
1/1 Equipment P 510,000
Organization expenses 210,000
Common stock (1,500 shares x P10) P 15,000
APIC - excess over par of CS 705,000
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2/20 Cash (9,000 shares x P390) P3,510,000
Common stock (9,000 shares x P10) P 90,000
APIC - excess over par of CS 3,420,000
Building P1,530,000
Common stock (2,100 shares x P10) P 21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000] P 819,000
Preferred stock (4,200 shares x P100) P 420,000
APIC - excess over par of PS (balance) P 270,000
* (P720,000/1,800 shares)
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12/01 Retained earnings P 870,000
Dividends payable - Preferred P 342,000
Dividends payable – Common 528,000
Preferred - (P3,420,000/P100 x P10)
Common - {[(P204,000 + P60,000)/P10] x P20}
Note: Shares issued plus subscribed less treasury shares are entitled
to dividends.
Answers: 1) A; 2) B; 3) B; 4) C, 5) D
PROBLEM NO. 6
The Borbon Corporation has requested you to audit its financial statements
for the year 2006. During your audit, Borbon presented to you its balance
sheet as of December 31, 2005 containing the following capital section:
Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on
August 30, 2006. Borbon credited the proceeds to the Preferred Stock
account. The treasury shares as of December 31, 2005 were acquired
in one purchase in 2005.
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liquidated in June, 2006, by issuing to the preferred stockholders
54,000 shares of common stock.
6) On December 31, 2006, the Reserve for Fire Insurance was decreased
by P30,000, which represents the carrying value of a machine
destroyed by fire on that date. Estimated fire cleanup costs of P6,000
does not appear on the records.
8) Net income for the year ended December 31, 2006 was P1,297,500 per
company’s records.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balances of the following as of December 31, 2006. (Disregard tax
implications)
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3. Retained earnings - Unappropriated
a. P2,677,500 c. P2,578,500
b. P2,626,500 d. P2,623,500
4. Treasury stock
a. P45,000 c. P36,000
b. P90,000 d. P 0
Suggested Solution:
Questions No. 1 to 5
Preferred stock P 600,000
Common stock 2,106,000
Additional paid in capital 864,000 (1)
Retained earnings - Appropriated 303,000 (2)
Retained earnings - Unappropriated 2,578,500 (3)
Treasury stock ( 45,000) (4)
Total SHE, 12/31/06 P6,316,500 (5)
4) Ignor.
6) See no. 8.
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7) Retained earnings P 501,000
APIC - donated capital P 450,000
APIC - from treasury stock transactions 51,000
Answers: 1) D; 2) B; 3) C; 4) A, 5) C
PROBLEM NO. 7
The stockholders equity of Cordova Corporation showed the following data
on December 31, 2005:
12% preferred stock, P30 par, 135,000 shares
issued and outstanding P4,050,000
Common stock, P50 par, 180,000 shares issued
and outstanding 9,000,000
Premium on preferred stock 1,080,000
Premium on common stock 3,240,000
Retained earnings 1,395,000
The 2006 transactions of the company affecting its stockholders’ equity are
summarized chronologically as follows:
1. Issued 27,000 shares of preferred stock at P40.
2. Issued 94,500 shares of common stock at P70.
3. Retired 5,400 shares of preferred stock at P45.
4. Purchased 13,500 shares of its common stock at P80.
5. Split common stock two for one (par value reduce to P25).
6. Reissued 13,500 shares of treasury stock – common at P50.
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7. Stockholders donated to the company 9,000 shares of common stock
when shares had a market price of P52. One half of these shares were
subsequently issued for P54.
8. Dividends were paid at the end of the calendar year on the common
stock at P2 per share and on the preferred stock at the preferred rate.
9. Net income for the year was P2,520,000.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P4,617,000 c. P4,968,000
b. P4,698,000 d. P4,860,000
2. Common stock
a. P15,615,000 c. P13,968,000
b. P13,500,000 d. P13,725,000
Suggested Solution:
Questions No. 1 to 5
Preferred stock P 4,698,000 (1)
Common stock 13,725,000 (2)
Additional paid in capital 6,814,800 (3)
Retained earnings - Appropriated 540,000
Retained earnings - Unappropriated 1,711,440 (4)
Treasury stock ( 540,000)
Total SHE, 12/31/06 P26,949,240 (5)
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Journal entries affecting the stockholders equity accounts during 2006:
1) Cash (27,000 shares x P40) P1,080,000
Preferred stock (27,000 shares x P30) P 810,000
APIC - premium on preferred stock 270,000
5) Memo entry.
7) Memo entry.
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9) Income summary P2,520,000
Retained earnings P2,520,000
Answers: 1) B; 2) D; 3) D; 4) C, 5) A
PROBLEM NO. 8
You were able to gather the following information in connection with your
audit of the stockholders’ equity section of the balance sheet of Liloan, Inc.
The company is a manufacturer of school and office equipment. As of
December 31, 2005, the stockholder’s equity of the company is presented
below:
Cumulative preferred stock (P15 par value; 100,000
shares authorized, 12,000 shares issued and
outstanding) P 180,000
Common stock (P10 par value; 1,000,000 shares
authorized, 330,000 shares issued and outstanding 3,300,000
Retained earnings 1,866,000
P5,346,000
d. On December 20, Liloan contracted with Ms. Buti for the sale of
30,000 previously unissued shares at P25 per share to be issued
when the purchase price is fully paid. At December 31, only
P585,000 had been paid. Buti agreed to pay the balance on or before
January 31, 2007.
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e. On December 31, Liloan retired 12,000 preferred shares at P18 per
share.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P360,000 c. P264,000
b. P300,000 d. P324,000
2. Common stock
a. P3,435,000 c. P3,735,000
b. P4,020,000 d. P3,637,500
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Suggested Solution:
Questions No. 1 to 5
Preferred stock P 360,000 (1)
Common stock 3,435,000 (2)
Subscribed common stock 300,000
Additional paid in capital 652,500 (3)
Total retained earnings 2,013,000 (4)
Treasury stock (364,500)
Discount on preferred stock (60,000)
Total SHE, 12/31/06 P6,336,000 (5)
d) Cash P 585,000
Subscriptions receivable 165,000*
Subscribed common stock (30,000 shares x P10) P 300,000
APIC - excess over par of common stock 450,000
* [(30,000 shares x P25)- P585,000]
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Answers: 1) A; 2) A; 3) C; 4) C, 5) D
PROBLEM NO. 9
You gathered the following information pertaining to the stockholders’
equity section of the Oslob Corporation in connection with your audit of the
company’s financial statements for 2006:
All of the outstanding common stock and treasury stock were originally
issued in 2003 for P11 per share. The treasury stock is common stock
reacquired on March 31, 2005. Oslob uses the par value method of
accounting for treasury stock.
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Oslob is being used by two separate parties for patent infringements.
Oslob management and outside legal counsel share the following opinions
regarding to these suits:
Suit Likelihood of losing the suit Estimated loss
#1 Reasonably possible P300,000
#2 Probable 200,000
QUESTIONS:
Based on the above and the result of your audit, answer the following:
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Suggested Solution:
Question No. 1
Proceeds from issuance (200,000 x P12.50) P2,500,000
Less par value of common stock (200,000 shares x P1) 200,000
Increase in APIC P2,300,000
Question No. 2
Journal entry to record the retirement:
Common stock (50,000 shares x P1) P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
Unappropriated retained earnings 100,000
Cash (50,000 shares x P13) P 650,000
Question No. 3
Loss contingency that is not properly accruable by a charged to expense:
Suit # 1 – Reasonably possible P300,000
Question No. 4
Dividends declared, 3/15/06
[(700,000 + 200,000) x P0.20] P180,000
Dividends declared, 12/15/06
[(700,000 + 200,000 - 50,000) x P0.20] 170,000
Total cash dividends P350,000
Question No. 5
Reconstruction of the entry made to record the acquisition of treasury
stock:
Treasury stock (50,000 shares x P1) P 50,000
APIC - excess over par [50,000 shares x (P11 - P1)] 500,000
APIC - from TS transactions P 100,000
Cash (balancing figure) 450,000
Answers: 1) C; 2) C; 3) A; 4) A, 5) B
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PROBLEM NO. 10
In connection with your audit of the Poro Company, you were asked to
prepare comparative data from the company’s inception to the present.
The following were gathered during your audit:
b. Poro was unable to pay preferred dividends at the end of its first year.
The owners of the preferred stock agreed to accept 2 shares of common
stock for every 50 shares of preferred stock owned in discharge of the
preferred dividends due on December 31, 2002. The shares were
issued on January 2, 2003. The fair market value was P30 per share
for common on the date of issue.
d. Poro split its common stock 3 for 2 on January 1, 2005, and 2 for 1 on
January 1, 2006.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
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2. Outstanding number of preferred shares as of December 31, 2006
a. 40,000 c. 32,000
b. 24,000 d. 96,000
Suggested Solution:
Question No. 3
Dividends declared, 7/1/05 (182,400 x P3.00) P 547,200
Dividends declared, 12/31/05 (182,400 x P5.00) 912,000
Cash dividends to common in 2005 P1,459,200
Question No. 4
Dividends declared, 7/1/06 (364,800 x P2.50) P 912,000
Dividends declared, 12/31/06 (380,800 x P2.00) 761,600
Cash dividends to common in 2006 P1,673,600
Answers: 1) D; 2) C; 3) C; 4) D
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PROBLEM NO. 11
You were able to gather the following information in connection with your
audit of Sogod Corporation:
• On March 31, 2006, 18,000 option shares were exercised when the
market value of common stock was P40 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following:
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Suggested Solution:
Question No. 1
Compensation expense for 2004 (P525,000 x 1/2) P262,500
In cases, that the entity is unable to estimate reliably the fair value of the
equity instruments granted at measurement date, the entity may
measure the equity instruments at their intrinsic value.
Question No. 2
Compensation expense for 2005 (P525,000 x 1/2) P262,500
Less stock options of terminated employees
(P525,000 x 3/30) 52,500
Net compensation expense for 2005 P210,000
Question No. 3
Journal entry to record the exercise of the options:
Cash (18,000 x P25) P 450,000
APIC-stock options (P472,500 x 18/27) 315,000
Common stock (18,000 x P10) P180,000
APIC-excess over par 585,000
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Question No. 4
Compensation expense, 2004 P262,500
Compensation expense, 2005 210,000
Stock options exercised (see no. 3) (315,000)
APIC from stock options P157,500
Answers: 1) B; 2) B; 3) A; 4) D
PROBLEM NO. 12
Select the best answer for each of the following:
1. When no independent stock transfer agents are employed and the
corporation issues its own stocks and maintains stock records,
canceled stock certificates should
a. Be destroyed to prevent fraudulent reissuance.
b. Be defaced and sent to the SEC.
c. Not be defaced but segregated from other stock certificates and
retained in a canceled certificates file.
d. Be defaced to prevent reissuance and attached to their
corresponding stubs.
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4. The primary responsibility of a bank acting as registrar of capital stock
is to
a. Verify that stock is issued in accordance with the authorization of
the board of directors and the articles of incorporation.
b. Act as an independent third party between the board of directors
and outside investors concerning mergers, acquisitions, and the
sale of treasury stock.
c. Ascertain that dividends declared do not exceed the statutory
amount allowable in the state of incorporation.
d. Account for stock certificates by comparing the total shares
outstanding to the total in the shareholders’ subsidiary ledger.
7. When a client company does not maintain its own stock records, the
auditor most likely will
a. Obtain written confirmation from the transfer agent and registrar
concerning the number of shares issued and outstanding.
b. Inspect the stock book at year-end and accounting for all certificate
numbers.
c. Review of the corporate minutes for information as to shares
outstanding.
d. Confirm the number of shares outstanding at year-end with the
appropriate state official.
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8. An auditor usually obtains evidence of shareholders’ equity
transactions by reviewing the entity’s
a. Canceled stock certificates.
b. Transfer agent’s records.
c. Treasury stock certificate book.
d. Minutes of board of directors meetings.
Answers: 1) D; 2) B; 3) A; 4) A, 5) D; 6) A; 7) A; 8) D; 9) B; 10) C
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