AUDITING PROBLEMS

Audi of Shareholders’ Equity

Prof. Francis O. Mateos, CPA

PROBLEM 1
The shareholders’ equity section of Danny Company revealed the following information on December 31, 2021:

 Share premium on ordinary shares P 150,000

 Long-term investments in equity securities 200,000
 Subscribed ordinary shares 100,000
 Bonds payable 500,000
 Accumulated profits – unappropriated 250,000
 Ordinary shares options outstanding 12,500
 Subscription receivable – ordinary shares 10,000
 Subscription receivable – preference shares 7,500
 Revaluation surplus 65,000
 Reserve for depreciation 50,000
 Reserve for bond sinking fund 160,000
 Donated capital 20,000
 Cash dividends payable – preferences 40,000
 Unissued preference shares 75,000
 Unissued ordinary shares 325,000
 Ordinary share warrants outstanding 17,500
 Unrealized increase in FVTOCI securities 5,000
 Gain on sale of treasury shares 30,000
 Authorized preference shares at P50 par value 400,000
 Subscribed preference shares 30,000
 Authorized ordinary shares at P10 stated value 600,000
 Share premium – conversion option (bonds) 20,000
 Premium on bonds payable 50,000
 Share premium on preference shares 75,000

Questions: Compute the following based on the above data:

1. Ordinary shares issued
a.
2. Preference shares issued
a.
3. Share premium
a.
4. Contributed capital
a.
5. Total legal capital
a.
6. Total shareholders’ equity
a.

PROBLEM 2
The adjusted balances of the shareholders’ equity of Cubao Company on December 31, 2020 show the following:

8% Preference shares, P100 par P 600,000

Ordinary shares, P10 par 900,000
Share premium – Preference shares 108,000
Share premium – Ordinary shares 450,000
Retained earnings 1,150,000
Unrealized increase in value of FVTOCI – equity 30,870
Treasury shares (10,000 shares acquired on March 10, 2019) (210,000)
Total Shareholders’ Equity P 3,028,870

The following transactions occurred during 2021:

Jan. 5 Issued 15,000 shares of ordinary at P25 per share.

Jan. 31 Paid the annual 2017 per share dividend on preference share and the P2 per share dividend on ordinary
shares.
Mar. 3 Issued 2,000 shares of preference at P125 per share.
May 8 Reissued 3,000 shares of treasury at P24 per share.
June 16 2 for 1 split of ordinary shares.
July 3 Declared a 5% share dividend on the outstanding ordinary shares to be issued on August 4. The share is
selling for P14 per share.
Aug. 4 Issued the share dividend.
Oct. 2 Declared a property dividend payable to ordinary shareholders on November 1. The dividend consists of
10,290 shares of an Investment in Lagro Company fair value through other comprehensive income

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 securities, which had been acquired at a cost of P12 per share and which have a carrying amount of P15
per share. The share is currently selling for P16 per share.
Oct. 16 The company issued for P400,000 cash, 2,000 Preference shares and 500 ordinary shares. The
preference share has a fair value of P150 on the date of sale. No fair value is available for the ordinary
share.
Nov. 2 Issued the property dividend to ordinary shareholders. The share is currently selling for P20 per share.
Dec. 31 Declared the annual per share dividend on the outstanding preference share and a P2 per share dividend
on the outstanding ordinary share, to be paid on January 31, 2022.
Dec. 31 The adjusted net income for the year was P1,125,000.

Questions: Compute for the adjusted balance of the following on December 31, 2021 based on the above data:
1. Preference shares
a.
2. Ordinary shares
a.
3. Total contributed capital
a.
4. Retained earnings – unappropriated
a.
5. Total shareholders’ equity
a.

PROBLEM 3
The shareholders’ equity of Brenda Company Corporation at January 1, 2021 appears below:

 12% Preference shares, P200 par, 10,000 shares authorized, 3,500 shares
issued and outstanding P 700,000
 Ordinary shares, P100 par, 90,000 shares authorized, 17,500 shares issued
and outstanding 1,750,000
 Share premium – Preference 87,500
 Share premium – Ordinary 875,000
 Retained earnings 2,250,000

During 2021, the following transactions occurred:

Jan. 4 Issued 10,000 ordinary shares for P180 per share.

Jan. 27 Purchases 3,000 ordinary shares for the treasury at P200 per share.
Feb. 1 Shareholders donated 2,500 entity’s own ordinary shares to the corporation.
Feb. 13 Sold half of the treasury shares acquired last January 27 for P220 per share.
Feb. 14 Sold the donated shares at P220 per share.
July 14 Issued 2,000 preference shares to acquire special equipment with a fair value of P720,000.
Oct. 14 Received subscriptions to 9,000 ordinary shares at P250 per share.
Nov. 14 Received cash payment from each subscriber for 40% of the ordinary shares subscription price.
Nov. 26 Received full payment of the 5,000 shares on Oct. 14 and Nov. 14.
Dec. 31 Closed net income of P500,000 from the income summary account to retained earnings.

Questions: Answer the following based on the above data:

1. How much is the Preference share on December 31, 2021 statement of financial position?
a.
2. How much is the Ordinary share on December 31, 2021 statement of financial position?
a.
3. How much is the Total share premium on December 31, 2021 statement of financial position?
a.
4. How much is the Retained earnings – unappropriated on December 31, 2021 statement of financial position?
a.
5. How much is the total shareholders’ equity on December 31, 2021 statement of financial position?
a.

PROBLEM 4
On January 1, 2021, an entity grants 100 share options to each of its 500 employees. Each grant is conditional upon
the employee working for the entity over the next three years. The entity estimates that the fair value of each share
option is P15. On the basis of a weighted average probability, the entity estimates that 20% of employees will leave
during the three-year period and therefore forfeit their rights to the share options.

During 2021, 20 employees leave. The entity revises its estimate of total employee departures over the three-year
period from 20% to 15%. During 2022, a further 22 employees leave. The entity revises its estimates of total
employee departures over the three-year period from 15% to 12%. During 2023, a further 15 employees leave.

Questions:
1. How much is the compensation expense for 2021?
a.
2. How much is the compensation expense for 2022?
a.

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 3. How much is the compensation expense for 2023?
a.

PROBLEM 5
On January 1, 2021, Korea Company grants to a senior executive 5,000 share options, conditional upon the executive
remaining in the entity’s employ until the end of 2023. However, the share options cannot be exercised unless the
share price has increased from P50 at the beginning of 2021 to above P65 at the end of year 2023. If the share price
is above P65 at the end of 2023, the share options can be exercised at any time during the next seven years, i.e. by
the end of year 10.

The entity applies a binomial option pricing model, which takes into account the possibility that the share price will
exceed P65 at the end of 2023 (and hence the share options become exercisable) and the possibility that the share
price will not exceed P65 at the end of year 3 (and hence the options will be forfeited). It estimates the fair value of
the share options with this market condition to be P24 per option.

Questions:
1. How much is the compensation expense for 2021?
a.
2. How much is the compensation expense for 2022?
a.
3. How much is the compensation expense for 2023?
a.

PROBLEM 6
On January 1, 2021, Davao Company grants 100 cash share appreciation rights (SARs) to each of its 500 employees,
on condition that the employees remain in its employ for the next three years. During 2021, 36 employees leave. The
entity estimates that a further 60 will leave during 2022 and 2023. During 2022, 42 employees leave and the entity
estimates that a further 27 will leave during 2023. During 2023, 21 employees leave. At the end of 2023, 150
employees exercise their SARs, another 130 employees exercise their SARs at the end of 2024 and the remaining
employees exercise their SARs at the end of 2025.

The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At
the end of 2023, all SARs held by the remaining employees vest. The intrinsic value of the SARs at the date of
exercise (which equal the cash paid out) at the end of years 2023, 2024 and 2025 are also shown below.
Year Fair Value Intrinsic Value
2021 P30
2022 33
2023 36 P30
2024 40 35
2025 42

Questions: Determine the following based on the above data:

1. How much is the compensation expense in 2021?
a.
2. How much is the compensation expense in 2022?
a.
3. How much is the compensation expense in 2023?
a.
4. How much is the compensation expense in 2024?
a.
5. How much is the compensation expense in 2025?
a.

PROBLEM 7
Data relating to the shareholders’ equity of Jasmine Company during December 31 are as follows:

Ordinary share, P40 par, 37,500 shares issued P 1,500,000

8% Preference share, P400 par, 6,250 shares issued 2,500,000
Retained earnings 3,500,000
Total shareholders’ equity P 7,500,000

 Dividends are in arrears for 4 years.

Questions: Answer the following independent cases:

Case 1: Assume that the preference shares are cumulative.

1. How much is the book value per preference share?
a.
2. How much is the book value per ordinary share?
a.

Case 2: Assume that the preference shares are cumulative with liquidation value of P210 per share.
3. How much is the book value per preference share?
a.
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 4. How much is the book value per ordinary share?
a.

Case 3: Assume that the preference shares are noncumulative.

5. How much is the book value per preference share?
b.
6. How much is the book value per ordinary share?
a.

Case 4: Assume that the preference shares are cumulative and participating.
7. How much is the book value per preference share?
a.
8. How much is the book value per ordinary share?
a.

PROBLEM 8
On January 1, 2021, Albert Company has 120,000 outstanding ordinary shares. During the year, Albert Company
reported net income of P3,000,000. Income tax rate is 30%. In addition, Albert Company has 1,800, 10% convertible
bonds P1,000 face amount. Each bond is convertible into 5 ordinary shares.

Questions: Answer the following based on the above data:

1. How much is the basic EPS for the year?
a.
2. How much is the diluted EPS for the year assuming bonds were issued on January 1 and no conversions were
made during the year?
a.
3. How much is the diluted EPS for the year assuming bonds were issued on May 1 and no conversions were
made during the year?
a.
4. How much is the basic EPS for the year assuming bonds were issued in the previous year and were converted
on August 1?
a.
5. How much is the diluted EPS for the year assuming bonds were issued in the previous year and were
converted on August 1?
a.

PROBLEM 9
On January 1, 2021, Ronald Company has 200,000 outstanding ordinary shares. During the year, Ronald Company
reported a net income of P4,000,000. Income tax rate is 30%. In addition, Ronald Company has 5,000 issued and
outstanding P100 par, cumulative preference shares. The preference shares have a 10% fixed rate and each share is
convertible into 5 ordinary shares.
Questions: Answer the following based on the above data:
1. How much is the basic EPS for the year?
a.
2. How much is the diluted EPS for the year assuming preference shares were issued on January 1 and no
conversions were made during the year?
a.
3. How much is the diluted EPS for the year assuming preference shares were issued on April 1 and no
conversions were made during the year?
a.
4. How much is the basic EPS for the year assuming preference shares were issued in the previous year and
were converted on October 1?
a.
5. How much is the diluted EPS for the year assuming preference shares were issued in the previous year and
were converted on October 1?
a.

****END****
***GODBLESS***

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