I - REVIEW QUESTIONS – THEORETICAL

1. In the audit of a medium sized manufacturing concern, which one of the following
areas would be expected to require the least amount of the audit time?
a. Owner’s equity. c. Assets.
b. Revenue. d. Liabilities.
2. Which of the following assertions is least likely considered by the auditor in an audit
of shareholder’s equity?
a. Completeness. c. Presentation and disclosure.
b. Existence. d. Rights and obligations.
3. Because of the limited number of transactions involved in shareholder’s equity
items, the auditor normally assess control risk at the maximum level and performs
a. Detailed test of balances. c. Detailed analytical procedure.
b. Detailed test of transactions. d. Detailed test of controls.
4. A registrar/transfer agent system relating to capital stock is most likely used by:
a. A small, nonpublic company.
b. A large, publicly traded company.
c. All companies.
d. Not even one company.
5. An auditor obtains evidence of stockholders’ equity transactions for a publicly
traded company by reviewing the entity’s:
a. Minutes of board of directors’ meetings.
b. Registrar’s record of interbank transfers.
c. Canceled stock certificates.
d. Treasury stock certificate book.
6. Changes in capital stock accounts should normally be approved by:
a. The board of directors. c. The stockholders.
b. The audit committee. d. The president.
7. Which of the following is the most important consideration of an auditor when
examining the stockholders’ equity section of a clients’ statement of financial
position?
a. Changes in the capital stock account are verified by an independent stock
transfer agent.
b. Stock dividends and/or stock splits during the year under audit were approved
by the stockholders.
c. Stock dividends are capitalized at par or stated value on the dividend declaration
date.
 d. Entries in the capital stock account can be traced to resolution in the minutes of
the board of directors’ meeting.
8. Which of the following procedures is least likely in the audit of capital stock?
a. Examine all outstanding stock certificates for completeness.
b. Account for the proceeds from stock issues.
c. Reconcile shares outstanding with the general ledger.
d. Evaluate compliance with stock option plans.
9. For a large publicly traded client the auditor’s examination of capital stock accounts
will not normally include:
a. Analysis of capital stock accounts.
b. Confirmation of shares issued with the independent registrar.
c. Accounting for the proceeds of major stock issues.
d. Reconciliation of a stock certificate book with the general ledger.
10. Which of the following is correct in confirming shareholder’s equity items to
independent registrar and stock transfer agent?
a. The confirmation request should be written under the client’s letterhead and
mailed by the Board of Directors.
b. Replies to confirmation request should be sent to the Board of Directors.
c. The confirmation request should be written under the client’s letterhead and
mailed by the auditor.
d. The control of the dispatch and receipt of confirmation request should be under
the control of the appropriate client personnel.
11. When the client of a CPA firm does not maintain its own shareholder records, the
auditor should obtain written confirmation from the transfer agent and registrar
concerning
a. Guarantees of preferred stock liquidation value
b. The number of shares subject to repurchase agreements (treasury)
c. Any restrictions on dividend payments
d. The type and number of shares issued and outstanding
12. Company A does not employ an independent stock transfer agent, but rather issues
its own stock and maintains its stock records. When outstanding shares are
transferred from one holder to another the certificate of the selling shareholder
should be:
a. Cancelled (generally by perforation) and attached to the certificate book.
b. Destroyed to prevent fraudulent reissuance.
c. Retained by the selling shareholder.
d. Sent to the state’s registrar of investment securities.
13. An audit program for the examination of the retained earnings account should
include a step that requires verification of the
a. Market value used to charge retained earnings to account for two-for-one stock
split.
 b. Approval of the adjustment to the beginning balance as a result of a write-down
of an account receivable.
c. Authorization for both cash and stock dividends.
d. Gain or loss resulting from disposition of treasury shares.
14. In auditing retained earnings, the following item does not concern the auditor even
if it was not approved by the BOD?
a. Issuance of convertible debt securities.
b. Declaration of 20% share dividends.
c. Issuance of redeemable preferred shares.
d. Changes in retained earnings due to closing of net income.
15. During an audit of an entity’s stockholders’ equity accounts, the auditor determines
whether there are restrictions on retained earnings resulting from loans,
agreements, or state law. This audit procedure most likely is intended to verify
management’s assertion of
a. Existence or occurrence. c. Valuation or allocation.
b. Completeness. d. Presentation and disclosure.
16. Which of the following transactions is an auditor most likely to examine when
auditing the retained earnings account?
a. Changing from one method of depreciation to another.
b. Correcting an error in depreciation in depreciation in a prior year.
c. Adjusting the percentage used to estimate the allowance for doubtful accounts.
d. Changing from the FIFO to LIFO method of inventory valuation.
17. The audit approach for acquired treasury stock will normally include:
a. Confirmation with shareholders.
b. Inspection of certificates.
c. Inspection of cash receipts entries.
d. Recomputation of all gains and losses.
18. An auditor should trace corporate stock issuances and treasury stock transactions
to the:
a. Numbered stock certificates. d. Minutes of the board of
b. Articles of incorporation. directors.
c. Transfer agent’s records.
19. When auditing treasury shares, one objective of the auditor includes checking
whether
a. Gain on reissuance of treasury shares is included in retained earnings.
b. Loss on reissuance of treasury shares is included in profit or loss.
c. Cash received from reacquisition of shares is received by the Board of Directors.
d. Retained earnings were restricted for the amount of issue price of the treasury
shares.
 20. Footing the shares outstanding in the stock register and comparing the total to
shares outstanding in the general ledger stock account addresses the audit objective
of
a. Completeness. c. Ownership.
b. Validity. d. Valuation.

PROBLEM 32–25 Comprehensive Problem

You have been asked to audit the Tanya Company. During the course of your audit, you are
asked to prepare comparative data from company’s inception to the present. You have
determined the following:
A. Tanya charter became effective on January 2, 2017 when 20,000 shares of ₱10
ordinary shares and 10,000 shares of 7% cumulative, nonparticipating, preference
shares were issued. The ordinary shares were sold at ₱12 per share, and the
preference shares were sold at par value of ₱100 per share.
B. Tanya was unable to pay preference dividends at the end of first year. The owners of
preference share agreed to accept 2 ordinary shares for every 50 preference shares
owned in discharge of the preference dividends due on December 31, 2017. The
shares were issued on January 2, 2018. The fair market value was ₱30 for ordinary
shares at the date of issue.
C. Tanya acquired all the outstanding shares of Akinka Corporation on May 1, 2019 in
exchange for 10,000 ordinary shares of Tanya.
D. Tanya split its ordinary shares 3 for 2 on January 1, 2020, and 2 for 1 on January 1,
2021.
E. Tanya offered to convert 20% of the preference shares to ordinary shares on the
basis of 2 ordinary shares for 1 preference share. The offer was accepted, and the
conversion was made on July 1, 2021.
F. No cash dividends were declared on ordinary until December 31, 2019. Cash
dividends per share of ordinary share shares were declared and paid as follows:
JUNE 30 DEC. 31
2019 - ₱3.20
2020 ₱1.50 ₱2.50
2021 ₱1.25 ₱1.00

Questions:
Based on the preceding information, determine the following:
 1. The number of shares outstanding on December 31, 2019
ORDINARY PREFERENCE
a. 30,000 10,000
b. 30,200 9,800
c. 35,000 10,000
d. 30,400 10,000

2. The number of shares outstanding on December 31, 2020

ORDINARY PREFERENCE
a. 45,300 10,000
b. 45,600 10,000
c. 76,000 10,000
d. 52,500 9,800

3. The number of shares outstanding on December 31, 2021

ORDINARY PREFERENCE
a. 95,200 8,000
b. 49,600 10,000
c. 93,200 7,840
d. 93,200 8,000

4. The amount of cash dividend declared and paid to shareholders in 2020

a. ₱182,400 c. ₱159,600
b. ₱83,600 d. ₱121,600
5. The amount of cash dividend declared and paid to shareholders in 2021
a. ₱214,200 c. ₱153,200
b. ₱217,200 d. ₱209,200

(PhilCPA adapted)

PROBLEM 32–26 Comprehensive Problem

The shareholders’ equity of Brenalyn Corporation at January 1, 2021 appears below:
12% Preference shares, ₱200 par, 20,000 shares authorized, 7,000
shares issued and outstanding ₱1,400,000
Share premium – Preference shares 175,000
Ordinary shares, ₱100 par, 180,000 shares authorized, 35,000 shares
issued and outstanding 3,500,000
Share premium – Ordinary shares 1,750,000
Retained earnings 4,500,000

During 2021, the following transactions occurred:

Jan 5: Issuance of 6,000 shares at ₱110 per share for cash. Stock issue costs that
were paid by the corporation amounted to ₱80,000.
Jan 28: Purchased 5,000 ordinary shares for the treasury at ₱200 per share
Feb 2: Shareholders donated 4,000 entity’s own ordinary shares to the corporation
Feb 14: Sold half of the treasury shares acquired last January 28 for ₱220 per share
Feb 14: Sold the donated shares at ₱220 per share
Jul 15: The company issued for ₱1,100,000 cash, 4,000 preference shares and 1,000
ordinary shares. The preference and ordinary shares have fair values of ₱220
and ₱120 per share, respectively on the date of sale.
Oct 15: Received subscriptions to 15,000 ordinary shares at ₱250 per share
Nov 15: Received cash payment from each subscriber for 40% of the ordinary shares
subscription price.
Nov 27: Received full payment of the 10,000 shares on Oct. 15 and Nov. 15
Dec 31: Closed net income of ₱1,000,000 from the income summary account to
retained earnings.

Questions:
Based on the above data, answer the following:
1. How much is the Preference share on December 31, 2021 statement of financial
position?
a. ₱1,400,000 c. ₱2,800,000
b. ₱2,200,000 d. ₱3,015,000
2. How much is the Ordinary share on December 31, 2021 statement of financial
position?
a. ₱3,895,000 c. ₱5,200,000
b. ₱6,500,000 d. ₱6,300,000
3. How much is the Total share Premium on December 31, 2021 statement of financial
position?
 a. ₱5,200,000 c. ₱5,305,000
b. ₱4,555,000 d. ₱8,025,000
4. How much is the Retained earnings – unappropriated on December 31, 2021
statement of financial position?
a. ₱5,030,000 c. ₱4,980,000
b. ₱4,900,000 d. ₱5,480,000
5. How much is the total shareholders’ equity on December 31, 2021 statement of
financial position?
a. ₱16,275,000 c. ₱18,185,000
b. ₱17,435,000 d. ₱17,685,000

PROBLEM 32–27 Comprehensive Problem

Joy Ashliy Company reported the following amounts in the shareholders’ equity section of
its December 31, 2020, statement of financial position:
10% Preference share, ₱100 par (10,000 shares authorized, 4,000 shares
issued ₱400,000
Ordinary share, ₱5 par (100,000 shares authorized 40,000 shares issued) 200,000
Share premium 250,000
Retained earnings 900,000
Total ₱1,750,000

During 2021, the following transactions transpired concerning shareholders’ equity:

1.) Paid the annual ₱10 per share dividend on preference share and a ₱2 per share
dividend on ordinary share. These dividends had been declared on December 31,
2020.
2.) Purchased 5,000 shares of its own outstanding ordinary share for ₱40 per share.
3.) Reissued 2,000 treasury shares for land valued at ₱100,000.
4.) Issued 4,000 preference shares with detachable warrants. The package sells for
₱120. The warrants enable the holder to purchase 2,000 ordinary shares at ₱30 per
share. Immediately after the issuance of the share, the warrants are selling at ₱10
per share and the market value of the preference without the warrants is ₱90.
5.) On October 1, 60% of the warrants are exercised. The remaining warrants were not
exercised.
6.) Declared a 20% share dividend on the outstanding ordinary share when the stock is
selling for ₱45 per share.
7.) Issued the share dividend.
 8.) Net income for the year is ₱2,400,000.
9.) Declared the annual 2021 ₱10 per share dividend on preference share and the ₱2
per share dividend on the ordinary share. These dividends are payable in 2022.
Questions:
Based from the above data, answer the following:
1. How much is the balance of the Preference share on December 31, 2021 statement
of financial position?
a. ₱400,000 c. ₱800,000
b. ₱600,000 d. ₱425,500
2. How much is the balance of the Ordinary share on December 31, 2021 statement of
financial position?
a. ₱206,700 c. ₱247,200
b. ₱219,000 d. ₱244,200
3. How much is the balance of the Retained earnings unappropriated on December 31,
2021 statement of financial position?
a. ₱3,128,320 c. ₱3,008,320
b. ₱3,090,120 d. ₱2,970,120
4. How much is the balance of the Treasury share on December 31, 2021 statement of
financial position?
a. ₱200,000 c. ₱76,000
b. ₱80,000 d. ₱120,000
5. How much is the total stockholder’s equity as of December 31, 2021?
a. ₱4,394,320 c. ₱4,514,320
b. ₱4,432,520 d. ₱4,552,520

PROBLEM 32–28 Comprehensive Problem

Marianne Corporation had the following shareholders’ equity account balances at
December 31, 2020:
10% Convertible preference shares (₱100 par value; 100,000 shares
authorized, 40,000 shares issued and outstanding) ₱4,000,000
Ordinary shares (₱10 par value; 200,000 shares authorized, 84,000
shares issued) 840,000
Subscribed ordinary shares 100,000
Subscriptions receivable 52,000
Share premium 968,000
Retained earnings 15,000,000
Total ₱20,948,000
Less: Treasury ordinary shares (4,000 shares) 44,000
Total Shareholders’ Equity ₱20,904,000

The subscribed ordinary shares account is composed of 10,000 shares subscribed at ₱13
per share. The subscription contract required a cash down payment equal to 60% of the
subscription price, with the balance due on February 1, 2021.
Transactions in 2021:
1) On February 1, 2021, the 8,000 ordinary shares were issued according to
subscription contract. Because of default by a subscriber, 2,000 shares were not
issued. All payments made by the subscriber were forfeited in favor of the Company.
2) On March 1, 2021, 2,000 preference shares were converted to ordinary shares. One
preference share is convertible into two ordinary shares. At the time of conversion,
the preference shares had a market value of ₱125 while the ordinary shares had a
market value of ₱25 per share.
3) On April 1, 2021, 92,000 share rights were issued to the ordinary shareholders
permitting the purchase of two new shares of ordinary share in exchange for one
right and ₱15 cash. On April 25, 2021, 67,500 stock rights were exercised when the
market price of Marianne’s ordinary shares was ₱20 per share. Marianne issued
new shares to settle the transaction. The remaining 24,500 rights were not
exercised and thus expired.
4) On September 30, 2021, 3,000 treasury shares were reissued at ₱20 per share.
5) On January 15, 2022, before the accounting records were closed for 2021, Marianne
became aware that the rent income for the year ended December 31, 2020 was
understated by ₱400,000. The after tax-effect on the 2020 net income was
₱280,000. The appropriate correcting entry was recorded the same day.
6) After correcting the rent income, net income for 2021 was ₱2,500,000.
7) Cash dividends are declared for preference and ordinary shares on April 30 and
October 31. Semi-annual cash dividends for ordinary shares are ₱1 per share.
Questions:
Based on the above data, determine the following as of December 31, 2021:
1. Preference shares
a. ₱4,000,000 c. ₱3,500,000
b. ₱3,860,000 d. ₱3,800,000
2. Ordinary shares
a. ₱2,530,000 b. ₱2,270,000
 c. ₱2,310,000 d. ₱2,520,000
3. Total share premium
a. ₱1,845,600 c. ₱1,839,600
b. ₱1,908,600 d. ₱1,925,100
4. Retained earnings – unappropriated
a. ₱16,932,000 c. ₱16,652,000
b. ₱16,552,000 d. ₱16,355,000
5. Total shareholders’ equity
a. ₱24,881,600 c. ₱24,601,600
b. ₱24,501,600 d. ₱24,300,100

PROBLEM 32–29 Comprehensive Problem

Luke Corporation had the following shareholders’ equity account balances at December 31,
2020:
Ordinary shares (₱10 par value; 200,000 shares authorized, 84,000
shares issued ₱840,000
Share premium 420,000
Retained earnings 15,000,000
Total ₱16,260,000
Less: Treasury ordinary shares (4,000 shares) 44,000
Total Shareholders’ Equity ₱16,216,000

Transaction in 2021:
a) On January 15, the company reissued its 1,500 treasury shares at ₱20 per share.
b) On March 1, the company split the ordinary shares 2 for 1 share.
c) On April 1, Luke Company declared several equipment as property dividends
payable on August 15, 2021. The carrying amount of the equipment is ₱648,000.
Data relating to the fair values of the equipment are as follows:
Date Fair values (assume that the costs
to distribute are immaterial)
April 1, 2021 ₱700,000
August 15, 2021 ₱650,000
d) On September 1, the company issued 4,000 shares of ₱50 par preference shares
with detachable warrants. The package sells for ₱150. The warrants enable the
 holder to purchase 2,000 ordinary shares at ₱15 per share. Immediately after the
issuance of the share, the warrants are selling at ₱10 per share and the market value
of the preference without the warrants is ₱90.
e) On October 1, 80% of the warrants are exercised. The remaining warrants were not
exercised.
f) On November 2, 2,000 ordinary shares were retired at ₱20 per share. These
ordinary shares were originally issued previous year at ₱15 per share.
g) On December 15, the company declared a ₱4 per share cash dividends on the
ordinary shares.
h) Adjusted net income for 2021 was ₱2,400,000.
Questions:
Based on the above data, determine the following as of December 31, 2021:
1. Preference shares
a. ₱260,000 c. ₱200,000
b. ₱540,000 d. Zero
2. Ordinary shares
a. ₱836,000 c. ₱846,000
b. ₱847,000 d. ₱838,000
3. Total share premium
a. ₱876,000 c. ₱844,500
b. ₱839,500 d. ₱831,500
4. Retained earnings – unappropriated
a. ₱16,047,100 c. ₱16.074,600
b. ₱16,062,100 d. ₱16,152,500
5. Total shareholders’ equity
a. ₱17,929,600 c. ₱18,010,000
b. ₱17,929,200 d. ₱16,181,000

PROBLEM 32–30 Comprehensive Problem

The adjusted balances of the Shareholders’ Equity of Capital Company on December 31,
2020 show the following:
8%, Preference shares, ₱100 par ₱1,200,000
Ordinary shares, ₱10 par 1,800,000
Share premium on preference shares 216,000
Share premium on ordinary shares 900,000
Total contributed capital ₱4,116,000
Retained earnings 2,300,000
Accumulated other comprehensive income:
Unrealized increase in value of FVTOCI equity securities 61,740
Total ₱6,476,000
Less: Treasury shares (20,000 shares acquired on March 9, 2020) 420,000
Total Shareholders’ Equity ₱6,057,740

The following transactions occurred during 2021:

Jan. 4 Issued 30,000 shares of ordinary at ₱25 per share.
Jan. 30 Paid the annual 2020 per share dividend on preference share and the ₱2 per
share dividend on ordinary shares.
Mar. 2 Issued 4,000 shares of preference at ₱125 per share.
May 7 Reissued 6,000 shares of treasury at ₱24 per share.
June 15 Split the ordinary shares two for one.
July 2 Declared a 5% share dividend on the outstanding ordinary shares to be issued
on August 3. The share is selling for ₱14 per share.
Aug. 3 Issued the share dividend.
Oct. 1 Declared a property dividend payable to ordinary shareholders on November
1. The dividend consists of 20, 580 shares of an Investment in Lamb Company
fair value through other comprehensive income securities, which had been
acquired at a cost ₱12 per share and which have a carrying value of ₱15 per
share. The share is currently selling for ₱16 per share.
Oct. 15 The company issued for ₱800,000 cash, 4,000 Preference shares and 1,000
ordinary shares. The preference share has a fair value of ₱150 on the date of
sale. No fair value is available for the ordinary share.
Nov. 1 Issued the property dividend to ordinary shareholders. The share is currently
selling for ₱20 per share.
Dec. 31 Declared the annual per share dividend on the outstanding preference share
and a ₱2 per share dividend on the outstanding ordinary share, to be paid on
January 30, 2022
The adjusted net income for the year was ₱2,250,000.
Questions:
Based on the above data, compute for the adjusted balance of the following on December
31, 2021:
1. Preference shares
a. ₱900,000 c. ₱1,600,000
b. ₱800,000 d. ₱2,000,000
2. Ordinary shares
 a. ₱2,296,000 c. ₱2,203,000
b. ₱2,100,000 d. ₱2,320,000
e.
3. Total paid-in capital/contributed capital
a. ₱5,658,400 c. ₱4,114,000
b. ₱6,458,400 d. ₱6,478,000

4. Retained earnings – unappropriated

a. ₱2,920,940 c. ₱2,506,400
b. ₱2,878,800 d. ₱2,646,540
5. Total shareholders’ equity
a. ₱9,379,340 c. ₱9,043,200
b. ₱9,422,460 d. ₱9,104,940