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Chapter 8 Audit of Stockholders' Equity
Chapter 8 Audit of Stockholders' Equity
CHAPTER 8
AUDIT OF STOCKHOLDERS’ EQUITY
Objective
1. Solving Audit of Stockholders’ Equity Problems
2. Theory of Audit of Stockholders’ Equity
PROBLEM NO. 1
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 7,200
stock
Common stock (P1 par value) 270,000
Inventories 1,116,000
Land 684,000
APPLIED AUDITING
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
QUESTIONS:
Based on the above and the result of your audit, determine the following as of
December 31, 2006:
Suggested Solution:
Question No. 1
APPLIED AUDITING
Question No. 2
Question No. 3
Question No. 4
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.
On January 2, 2006, Argao issued at P54 per share, 50,000 shares of P50
par value, 9% cumulative convertible preferred stock. Each share of
preferred stock is convertible into two shares of common stock. Argao had
300,000 authorized shares of preferred stock. The preferred stock has a
liquidation value equal to its par value.
On April 30, 2006, Argao sold 250,000 shares (previously unissued) of P10
par value common stock to the public at P17 per share.
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
APPLIED AUDITING
b. P 80,000 d. P50,000
Suggested Solution:
Questions No. 1 to 4
Question No. 5
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.
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
Answers: 1) D; 2) D; 3) C; 4) C, 5) A
PROBLEM NO. 4
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.
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
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
In connection with your audit of the company’s financial statements, you noted
the following transactions involving stockholders’ equity during 2006:
APPLIED AUDITING
QUESTIONS:
Based on the above and the result of your audit, determine the following as of
December 31, 2006:
APPLIED AUDITING
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
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) P420,000
APIC - excess over par of PS (balance) P 270,000
* (P720,000/1,800 shares)
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.
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)
4. Treasury stock
a. P45,000 c. P36,000
b. P90,000 d. P 0
5. Total stockholders’ equity
a. P3,700,500 c. P6,316,500
b. P5,812,500 d. P6,319,500
Suggested Solution:
Questions No. 1 to 5
4) Ignore
5) Retained earnings P 60,000
Retained earnings - appropriated P 60,000
6) See no. 8.
Answers: 1) D; 2) B; 3) C; 4) A, 5) C
APPLIED AUDITING
PROBLEM NO. 7
To have an idea about Audit of Stockholders’ Equity kindly watch this video
https://youtu.be/2ua85v3yNwM
Reference:
Compilation of lecture notes by
Dean Rene Boy R. Bacay , CPA, CrFA, CMC, MBA, FRIAcc
APPLIED AUDITING