EMILIO AGUINALDO COLLEGE – CAVITE

CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

HANDOUT 9
AUDIT OF SHAREHOLDERS EQUITY

PROBLEM NO. 1

Resolve Corporation began operations on January 1, 20x5. 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.

In connection with your audit of the company’s financial statements, you noted the
following transactions involving stockholders’ equity during 20x5:

Jan. 1 Issued 1,500 shares of common stock to the corporation promoters in

exchange for property 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.

Jan. 31 Issued 30,000 shares of convertible preferred stock at P150 per share.
Each share can be converted to five shares of common stock. The
corporation paid P225,000 to an agent for selling the shares.

Feb. 15 Sold 9,000 shares of common stock at P390 per share. The
corporation paid issue costs of P75,000.

May 30 Received subscriptions for 12,000 shares of common stock at P450 per
share.

Aug. 30 Issued 2,100 shares of common stock and 4,200 shares of preferred
stock in exchanged for a building with a fair market value of P1,530,000.
The building was originally purchased for P1,140,000 by the investors
and has a book value of P660,000. In addition, 1,800 shares of
common stock were sold for P720,000 cash.

Nov. 15 Payments in full for half of the subscriptions and partial payments for
the rest of the subscriptions were received. Total cash received was
P4,200,000. Shares of stock were issued for the fully paid
subscriptions.

Dec. 1 Declared a cash dividend of P10 per share on preferred stock, payable
on December 31 to stockholders of record on December 15, and P20
per share cash dividend on common stock, payable on January 15,
20x6 to stockholders of record on December 15.

Dec. 31 Paid the preferred stock dividend.

Net income for the first year of operations was P1,800,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 20x5:

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 EMILIO AGUINALDO COLLEGE – CAVITE
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SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

1. Common stock
a. P264,000 b. P144,000 c. P204,000 d. P186,000

2. Paid-in capital in excess of par value of preferred stock

a. P1,500,000 b. P1,275,000 c. P1,545,000 d. P1,860,000

3. Paid-in capital in excess of par value of common stock

a. P8,211,000 b. P11,121,000 c. P10,851,000 d. P10,032,000

4. Retained earnings
a. P1,050,000 b. P1,170,000 c. P1,458,000 d. P930,000

5. Total stockholders’ equity

a. P17,295,000 b. P15,810,000 c. P16,950,000 d. P17,010,000

SUGGESTED ANSWERS: C, C, C, D, B

PROBLEM NO. 2

The Perseverance Corporation has requested you to audit its financial statements for
the year 20x5. During your audit, Perseverance presented to you its balance sheet as
of December 31, 20x4 containing the following capital section:

Preferred stock P10 par; 60,000 shares authorized

and issued, of which 6,000 are treasury shares
costing P90,000 and shown as an asset P600,000
Common stock, par value P4; 600,000 shares
authorized, of which 450,000 are issued and outstanding 1,800,000
Additional paid in capital (P5 per share on preferred stock
issued in 20x0) 300,000
Allowance for doubtful accounts receivable 12,000
Reserve for depreciation 840,000
Reserve for fire insurance 198,000
Retained earnings 2,250,000
P6,000,000

Additional information:

1) Of the preferred stock, 3,000 shares were sold for P18 per share on August 30,
20x5. Perseverance credited the proceeds to the Preferred Stock account. The
treasury shares as of December 31, 20x4 were acquired in one purchase in 20x4.

2) The preferred stock carries an annual dividend of P1 per share. The dividend is
cumulative. As of December 31, 20x4, unpaid cumulative dividends amounted to
P5 per share. The entire accumulation was liquidated in June, 20x5, by issuing to
the preferred stockholders 54,000 shares of common stock.

3) A cash dividend of P1 per share was declared on December 1, 20x5 to preferred

stockholders of record December 15, 20x5. The dividend is payable on January
15, 20x6.

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

4) At December 31, 20x5, the Allowance for Doubtful Accounts Receivable and
Reserve for Depreciation had balances of P25,000 and P1,050,000, respectively.

5) On March 1, 20x5, the Reserve for Fire Insurance was increased by P60,000;
Retained Earnings was debited.

6) On December 31, 20x5, 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.

7) The December 31, 20x4 Retained Earnings consists of the following:

Donated land from a stockholder (Market value on

date of donation) P450,000
Gains from treasury stock transactions 51,000
Earnings retained in business 1,749,000
P2,250,000

8) Net income for the year ended December 31, 20x5 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, 20x5. (Disregard tax implications)

A B C D
1. Preferred stock 555,000 630,000 570,000 600,000
2. Common stock 2,070,000 2,016,000 1,800,000 1,854,000
3. Additional paid in capital 810,000 864,000 414,000 804,000
4. Appropriated retained earnings 0 303,000 258,000 228,000
5. Unappropriated retained earnings 2,623,500 2,677,500 2,578,500 2,626,500
6. Treasury stock 0 36,000 45,000 90,000
7. Total stockholders’ equity 6,316,500 3,700,500 6,319,500 5,812,500

SUGGESTED ANSWERS: D, B, B, B, C, C, A

PROBLEM NO. 3

The stockholders equity of Willpower Corporation showed the following data on

December 31, 20x4:

12% preferred stock, P30 par, 135,000 shares issued and P4,050,000
outstanding
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

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

The 20x5 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.
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, 20x5:

1. Preferred stock
a. P4,617,000 b. P4,968,000 c. P4,698,000 d. P4,860,000

2. Common stock
a. P15,615,000 b. P13,968,000 c. P13,500,000 d. P13,725,000

3. Additional paid-in capital

a. P6,777,000 b. P6,679,800 c. P6,858,000 d. P6,814,800

4. Unappropriated retained earnings

a. P1,749,240 b. P1,711,440 c. P2,251,440 d. P1,684,440

5. Total stockholders’ equity

a. P26,949,240 b. P26,958,960 c. P26,922,240 d. P26,940,240

SUGGESTED ANSWERS: C, D, D, B, A

PROBLEM NO. 4

Grit Corp., organized on June 1, 20x4, was authorized to issue stock as follows:

 800,000 shares of 9% preferred stock, convertible, P100 par

 2,500,000 shares of common stock, P2.50 stated value

During the remainder of the fiscal year ended May 31, 20x5, the following transactions
were completed in the order given:

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SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares
of common stock were subscribed for at P26. Both subscriptions were payable 30%
upon subscription, the balance in one payment.

 The second subscription payment was received, except one subscriber for 60,000
shares of common stock defaulted on payment. The full amount paid by this
subscriber was returned, and all of the fully paid stock was issued.

 150,000 shares of common stock were reacquired by purchase at P28.

 Each share of preferred was converted into four shares of common stock.

 The treasury stock was exchanged for machinery with a fair market value of
P4,300,000.

 There was a 2-for-1 stock split, and the stated value of the new common stock is
P1.25.

 Net income was P830,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of
December 31, 20x5:

1. Common stock
a. P2,550,000 b. P2,100,000 c. P5,100,000 d. P4,200,000

2. Total additional paid-in capital

a. P50,890,000 b. P48,340,000 c. P48,808,000 d. P48,240,000

3. Total contributed capital

a. P53,908,000 b. P53,440,000 c. P55,990,000 d. P53,340,000

4. Total stockholders’ equity

a. P54,270,000 b. P54,738,000 c. P56,820,000 d. P54,170,000

SUGGESTED ANSWERS: C, B, B, A

PROBLEM NO. 5

The year-end audit of the records of Stamina Farms disclosed a shortage in cash
amounting to P600,000. The treasurer had concealed the fraud by increasing
inventories by P300,000, land by P100,000 and accounts receivable by P200,000.

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 EMILIO AGUINALDO COLLEGE – CAVITE
CAMPUS
SCHOOL OF BUSINESS ADMINISTRATION
INTEGRATED AUDITING THEORIES AND PROBLEMS

Faced with prosecution, the treasurer offered to surrender 6,000 Stamina Farms shares
owned by him. The board of directors accepted the offer, with the agreement that the
treasurer would pay any deficiency between the shortage and the book value of the
shares, after adjusting for the fraud. The corporation would in turn pay the excess, if
any, of the book value over the shortage.

As of December 31, 20x5, there were 40,000 common shares issued and outstanding
with a par value of P100; Retained earnings as of January 1, 20x5 was P1,600,000 and
net income from 20x5 operations was P1,400,000.

REQUIRED:

Considering the above information, answer the following:

1. What would be the book value per share for purposes of the agreement?
a. P175 b. P206 c. P150 d. None of these

2. How much would the company pay the treasurer, if any?

a. P450,000 b. P300,000 c. P636,000 d. None of these

3. Assuming further the company distributes the 6,000 shares as dividend to the
remaining stockholders, what would be the balance of the Retained earnings as of
December 31, 20x5?
a. P1,950,000 b. P2,100,000 c. P1,764,000 d. None of these

SUGGESTED ANSWERS: A, A, A

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