ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 43  May 2022 CPA Licensure Examination  Quiz 2

AUDITING (Auditing Problems) S. IRENEO  C. ESPENILLA

AP-200Q: FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY

PROBLEM 1:
1. You were assigned to audit one of your audit firm’s continuing client, Manifest Corp., a manufacturing
company of medium size, which of the following areas would you expect to require the least amount
of audit time?
a. Owner’s equity.
b. Revenue.
c. Assets.
d. Liabilities.

PROBLEM 1: A partial list of the accounts and ending account balances taken from the post-closing trial
balance of Manifest Corp. on December 31, 2021 is shown below:
Accumulated profits - unappropriated P450,000
Bonds payable 220,000
Ordinary shares subscribed 50,000
Long-term investment in shares 210,000
Share premium on ordinary shares 460,000
Premium on bonds payable 30,000
Ordinary shares 400,000
Preference shares subscribed 45,000
Share premium on preference shares 112,000
Preference shares 300,000
Share premium from treasury stock transactions 24,000
Additional paid-in capital - bond conversion option 15,000
Accumulated unrealized holding gain on financial asset at fair value
through other comprehensive income/losses 90,000
Accumulated Revaluation surplus/reserves 120,000
Accumulated remeasurement loss on accumulated benefits obligation and 35,000
plan assets
Accumulated foreign exchange translation gain 56,000
Accumulated hedging losses through other comprehensive 22,000
income/losses
Ordinary share options outstanding 15,000
Ordinary share warrants outstanding 5,000
Subscription receivable from ordinary shares 10,000
Subscription receivable from preference shares 5,000
Treasury shares, 2,000 ordinary shares at cost 40,000
Accumulated profits – appropriated for treasury shares 40,000
Accumulated profits – appropriated for plant expansion 100,000

Further investigation revealed the following information:

a. Ordinary share has no par value but with P10 stated value per share. 90,000 shares are authorized,
40,000 shares are issued, 5,000 shares have been subscribed at price of P28 per share. The outstanding
subscriptions receivable balance is due on March 31, 2022.

b. Preference share has P50 par value, 8,000 shares are authorized, 6,000 shares are issued and
outstanding, 900 shares have been subscribed at a price of P70 per share. Each share is cumulative
convertible into five ordinary shares and pays a 7% annual dividend. Dividends are not in arrears.
Subscriptions receivable balance on preference shares is due January of 2023.

Required: Determine the adjusted balance of the following as of December 31, 2021:
2. Total additional paid-in capital?
a. 611,000 c. 616,000
b. 631,000 d. 636,000
3. Total contributed capital?
a. 1,411,000 c. 1,421,000
b. 1,426,000 d. 1,416,000
4. Total stockholders’ equity?
a. 2,185,000 c. 2,180,000
b. 2,220,000 d. 2,225,000
5. Total legal capital from ordinary shares?
a. 400,000 c. 910,000
b. 890,000 d. 450,000
6. Total legal capital from preference shares?
a. 300,000 c. 345,000

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b. 412,000 d. 457,000

7. In your audit Manifest Corp.’s stockholders’ equity transactions, all corporate share capital transactions
should ultimately be traced to the:
a. Minutes of the board of
directors. b. Cash receipts journal.
c. Cash disbursements journal.
d. Numbered stock certificates.

PROBLEM 2: You were assigned to audit the shareholders’ equity of California Corp. for the year ended
December 31, 2021. California Corp. was incorporated in early 2020 when it was authorized by SEC to issue
100,000 ordinary shares (P100 par) and 50,000 preference shares (P50 par). The following schedule reflects
the company’s capital balances as of December 31, 2020:

Ordinary shares, 50,000 shares issued during the company’s P7,500,000

incorporation at P150 per share.
Preference shares, 20,000 shares issued in June 30, 2020 in exchange of 2,100,000
a building with a fair market value of P2,100,000.
Accumulated profits, which is the company’s net income in 2020 5,540,000
Total shareholders’ equity P15,140,000

Your inquiries and investigation revealed the following transactions which occurred in 2020:
a. On January 5, the company issued 10,000 ordinary shares to employees as compensation. The shares
are currently selling on this date at P165 per share.
b. On March 10, the company issued 10,000 ordinary shares and 12,000 preference shares for a total
lump sum of P2,800,000. On this date, ordinary shares are quoted in the market at P210 per share
while preference shares are quoted at P75 per share.
c. On April 1, the company issued 15,000 ordinary shares with a 3 year- P2,000,000, 12% face value
bonds for a total consideration of P5,000,000. The bonds which pay semi-annual interest every
January 1 and July 1, are currently quoted at 110 (excluding accrued interest) while the ordinary
shares are quoted in the market at P210 per share.
d. On August 1, 20,000 preference shares were subscribed by several subscribers at P80 per share. 25%
of the subscriptions were collected up front with the balance to be paid after 6 months.
e. On October 31, receivables for the 15,000 shares subscribed on August 1 were fully collected, thus the
corresponding shares were issued.

f. On December 1, the company reacquired 5,000 ordinary shares at P1M and placed them in the
treasury.

g. The company registered an adjusted net income in 2021 at P4,530,000.

h. On December 30, the company declared P10 cash dividends to ordinary shares and P5 per share
dividends to preference shares payable on January 31, 2022.
Based on the information above, determine the adjusted balance of the following as of Dec. 31, 2021:
8. Ordinary Shares
a. 8,500,000 c. 8,000,000
b. 9,000,000 d. 8,200,000
9. Preference Shares
a. 2,600,000 c. 2,250,000
b. 2,350,000 d. 2,500,000
10. Additional Paid-in Capital
a. 5,350,000 c. 7,350,000
b. 6,900,000 d. 7,290,000
11. Accumulated profits - unappropriated
a. 8,010,000 c. 9,010,000
b. 8,050,000 d. 9,050,000
12. California Corp. does not maintain its own stock records, the auditor should obtain written confirmation
from the transfer agent and registrar concerning.
a. restrictions on the payment of dividends.
b. the number of shares issued and outstanding.
c. guarantees of preferred stock liquidation value.
d. the number of shares subject to agreements to repurchase.

PROBLEM 3: You were assigned to audit the shareholders’ equity of Potent Inc. for the year ended December
31, 2021. Potent Corp. was incorporated in early 2020 when it was authorized by SEC to issue 500,000
ordinary shares (P10 par) and 100,000 convertible preference shares (P20 par). The following schedule
reflects the company’s capital balances as of December 31, 2020:

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Ordinary shares, 100,000 shares issued during the company’s P1,400,000

incorporation in exchange of a land with a fair value of P1.4M.
Preference shares, 50,000 share issued during the company’s 2,500,000
incorporation at P50 per share. Each preference share is convertible to
four ordinary shares.
Retained earnings, which is the company’s net income in 2020 540,000
Total shareholders’ equity P4,440,000

Your inquiries and investigation revealed the following transactions, which occurred in 2020:
a. On August 15, the company reacquired 20,000 ordinary shares at P25 per share and reverted them to
treasury since it intends to reissue the same.
b. On October 11, the company reissued 4,000 treasury shares for a piece of equipment with fair market
value of P150,000.
c. On November 5, the company reissued 6,000 treasury shares at P19 per share.
d. On December 1, the company retired 5,000 treasury shares and reverted them to unissued basis.
e. On December 12, 20,000 preference shares were converted to ordinary shares.
f. The company registered an adjusted net income in 2021 at P830,000.

Based on the information above, determine the adjusted balance of the following as of Dec. 31, 2021:
13. The entry to record the retirement of treasury shares on December 1, shall involve:
a. A debit to retained earnings at P55,000.
b. A debit to APIC from Treasury at P55,000.
c. A debit to retained earnings at P41,000.
d. A debit to APIC from Treasury at P41,000.
14. The entry to record the conversion of preference shares to ordinary shares on December 12 shall involve:
a. A debit to APIC at P200,000.
b. A debit to Retained earnings at P200,000.
c. A credit to Retained earnings at P600,000.
d. A credit to APIC at P200,000.
15. What is the total additional paid-in capital as of December 31, 2021?
a. 1,400,000 c. 1,520,000
b. 1,480,000 d. 1,550,000
16. An audit program for the examination of the retained earnings account of your client Potent Inc. should
include a step that requires verification of the:
a. market value used to charge retained earnings to account for a 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.

PROBLEM 4: Lockdown Co. had the following selected information in its December 31, 2020
Stockholders’ Equity portion of its balance sheet:
10% Preference shares, P100 par value, 50,000 shares authorized,
10,000 shares issued and outstanding P1,000,000
Ordinary shares, P50 par value, 100,000 shares authorized,
50,000 shares issued 2,500,000
Share premium on preference shares 400,000
Share premium on ordinary shares 250,000
Accumulated profits 2,350,000
Treasury shares (Ordinary shares) 10,000 shares (750,000)

Transactions in 2021 are as follows:

a. On March 2, the company issued 5,000, P1,000 12% bonds payable with detachable warrants. Two
warrants are attached to each P1,000 bond. The bonds which pay semi-annual interest every June 30
and December 31 were issued at total lump sum of P5,700,000. On the date of issuance, the bonds
were quoted at 105 without the warrants and excluding accrued interest while each warrant can be
sold in the market at P25. Four warrants surrendered together with P60 exercise price entitle the
holder to acquire one ordinary share. Warrants can be exercised 2 years from the date of the
issuance.
b. On April 15, stock rights were issued to ordinary shareholders. Five stock rights plus P65 per share
entitle the holder to acquire one additional ordinary share.
c. On June 1, 60% of the warrants issued with the bonds were exercised.
d. On August 15, 50% of the stock rights were exercised by the ordinary shareholders.

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e. On December 20, 20% stock dividends were declared on ordinary shares. The fair market value of
ordinary shares on this date wat at P75 per share. The stock dividends are distributable on January
31, 2022.

f. Adjusted net income for the year amounted to P1,250,000.

Based on the information above, answer the following:

17. What is the correct amount to be allocated to the ordinary share warrants as a result of the transaction on
March 2?
a. 450,000 c. 250,000
b. 350,000 d. 50,000
18. What is the credit to the share premium account because of the exercise of the stock warrants on June 1?
a. 15,000 c. 250,000
b. 210,000 d. 225,000
19. What is the credit to the share premium account because of the exercise of the stock rights on August 15?
a. 60,000 c. 50,000
b. 80,000 d. 100,000
20. What is the debit to retained earnings as a result of the stock dividends declaration on December 20?
a. 682,500 c. 455,000
b. 450,000 d. 675,000

PROBLEM 5: On January 1, 2021, Advise Company granted share options to 10 of its key employees entitling
them to acquire P100 par value shares of the company for two options plus P110 per share. The share options
will vest on December 31, 2023, provided that the employees remain in the company’s employ and provided
that revenues reach P100 million, the employees will receive 1,000 options each. If revenues reach P150
million, the employees will receive 2,000 options each. If revenues reach P200 million, the employees will
receive 3,000 options each.
The market value of the option on the date of grant is P30. The company has a steady pattern of 25% increase
in revenues every year over the last 5 years and expects the same pattern during the vesting period.
In addition, the following information were deemed relevant for the computation of the compensation expense
for each year:
Estimated number of
Date Employees who will leave Actual revenue earned
the company
Dec. 31, 2021 2 P80 million
Dec. 31, 2022 1 120 million
Dec. 31, 2023 3* 200 million
*Actual number of employees who left the company.
REQUIRED:
21. What is the compensation expense to be recognized in 2022?
a. 80,000 c. 280,000
b. 100,000 d. 320,000
22. What is the compensation expense to be recognized in 2023?
a. 210,000 c. 270,000
b. 280,000 d. 320,000
23. If the five employees exercised their options in 2024, how much is credited to share premium from the
related issuance of shares?
a. 525,000 c. 450,000
b. 280,000 d. 320,000

PROBLEM 6: On January, 2021, Promise Corp. granted to 600 employees, 100 share options each exercisable
after 4 years, subject to the employees staying with the company until the end of 2024. Options can be
exercised if share price increases from P40 at the beginning of 20 21 to above P80 at the end 2024. The share
options can be exercised at any time during the next five years, that is by the end of 2029. The company
estimates the fair value of the share options on the grant date at P5 per option. This estimate considers the
possibility that the share price will exceed P80 per share at the end of 2024, thus options are exercisable and
the possibility that the share price will not exceed P80 at the end of 2024, thus the share options will be
forfeited.

The following information are deemed relevant:

Fair Actual number of Estimated number of
value of employees actually leaving additional employees
Shares the company during the expected to leave the
year company by the end of 2024
Dec. 31. 2021 P52 5 45
Dec. 31, 2022 68 10 40

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Dec. 31, 2023 75 20 35

Dec. 31, 2024 86 25 -

Requirements:
24. What is the compensation expense to be recognized in 2022?
a. 67,500 c. 68,750
b 71,250 d. 62,500
25. What is the compensation expense to be recognized in 2024?
a. 67,500 c. 68,750
b. 71,250 d. 62,500
26. Assuming that actual share price is at P79 per share on December 31, 2024, what is the compensation
expense to be recognized in 2024?
a. 67,500 c. 68,750
b. 71,250 d. 62,500
27. Which of the following audit procedures would an auditor render regarding Promise Corp.’s granting of stock
options?
a. Confirm the transaction with the Secretary.
b. Verify existence of option holders in the entity’s payroll records or stock ledgers.
c. Determine that sufficient treasury stock is available to cover any new stock issued.
d. Trace the authorization for the transaction to a vote of the board of directors.

PROBLEM 7: On January 1, 2021, Disappearance Corp. grants its 20 of its officers the right to choose either
1,000 ordinary shares each or to receive cash payment equal to 500 shares each. These are to vest after
rendering three years services. Par value of the company’s share of stock is P100. The company expects that
all officers will stay during the vesting period.
FMV
Compound Instrument: 1/1/21 P120
Share of Stock: 1/1/21 130
12/31/21 136
12/31/22 144
12/31/23 150
Requirements:
28. What is the salaries expense from the grant in 2021?
a. 900,000 c. 850,000
b. 880,000 d. 820,000
29. What is the salaries expense from the grant in 2022 assuming that 2 officers actually left in 2022 and that
the company estimates that 1 more will leave by the end of the vesting period?
a. 619,333 c. 629,667
b. 620,000 d. 680,000
30. What is the salaries expense from the grant in 2023 assuming that 2 officers actually left in 2023?
a. 640,667 c. 629,667
b. 620,000 d. 619,333

PROBLEM 8: Processing Co. has been paying regular semi-annual dividends to its shareholders. The
following are the company’s equity transactions:
1.1 The company has 1,800,000 shares issued and outstanding; total shares authorized
is 3,000,000 shares; the par is P20 per share.
4.15 Issued 100,000 new shares at P50 per share.

5.20 Reacquired 400,000 shares at P60 per share.

6.30 Paid dividend of P2,550,000.

10.13 P2M of P1,000 bonds were converted into ordinary share at the rate of 50 shares of
stock per P1,000 bond.

10.30 Declared a 1:2 share split up on its ordinary shares.

11.11 Reissued 300,000 shares from the treasury at P24 per share.

12.16 Issued an 11% share dividend on its ordinary shares. The fair value of shares on this
date was at P25 per share.

12.31 Paid 0.90 per share semi-annual dividends.

Requirements:
31. The dividend per share paid on June 30
a. 1.50 c. 1.59
b. 2.00 d. 1.70

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32. The entry to record reissue of treasury shares on 11.11 shall involve:
a. A debit to APIC at 1.8M
b. A debit to Retained earnings at 1.8M
c. A credit to APIC at 1.8M
d. A credit to Treasury shares at P18M
33. The entry to record the 11% share dividends on 12.16 shall involve:
a. A debit to Retained earnings at 3.85M
b. A debit to Retained earnings at 7.7M
c. A credit to Share premium at P5,775M
d. A credit to Share premium at P1.925M
34. The amount debited to retained earnings for the 12.31 cash dividends shall be:
a. 2,850,000 c. 3,163,500
b. 2,997,000 d. 3,496,500

PROBLEM 9: On October 31, 2021 Radio Inc. declared a building as property dividend distributable to
stockholders on January 31 of the following year. The building had an original cost of P2M acquired on January
of 2018 and is being depreciated over a 20-year useful life. The building had a fair market value of P1.8M on
October 31, 2021. On December 31 the value of the building decreased to P1.5M. Cost to sell the building was
consistent at 10% of the fair market value.

The building was transferred to shareholders on January 31 when the prevailing fair value of the building was
at P1.2M.
35. The entry to record the declaration of the property dividends would include a debit to retained earnings of:
a. 2,000,000 c. 1,800,000
b. 1,620,000 d. 1,625,000
36. What is the correct balance of the Noncurrent asset held for disposal that should be reported in the
statement of financial; position as of December 31?
a. 1,500,000 c. 1,350,000
b. 1,625,000 d. 1,620,000
37. How much total loss should be recognized in the income statement on the Noncurrent asset held for
disposal for the year 2021?
a. None c. 650,000
b. 5,000 d. 275,000
38. What is the gain or loss to be recognized in the profit or losses as a result of the distribution of the
property dividends on January 31?
a. None c. 150,000
b. 425,000 d. 275,000

PROBLEM 10: Right Corporation presented the following balance sheet for Dec. 31, 2021:

ASSETS
Current assets P300,000
Treasury shares (at fair value, cost is P150,000) 140,000
Depreciable fixed assets 560,000
Total Assets P1,000,000

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities P200,000
Ordinary shares subscribed (500 shares) 100,000
Long-term debt 80,000
Total Liabilities P380,000
Ordinary shares (4,000 shares issued) P180,000
10% Preference shares (10,000 shares issued) 120,000
Subscriptions receivable (40,000)
Reserve for depreciation 160,000
Accumulated profits 200,000
Total shareholders’ equity 620,000
Total Liabilities and Shareholders’ Equity P1,000,000

Additional information:
1. Your investigation of Right Corporation’s financial records indicates that all authorized shares
have been either issued or subscribed. The par values for the ordinary and preference shares
are P20 and P10, respectively.
2. The treasury shares were originally purchased when the market price was P200 per share.
During 2021, 250 treasury shares were resold for P250 per share. A gain on treasury share
transactions was credited for the difference between the original cost and the selling price.
The amount was included in the determination of the net income for the year. Furthermore,

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the excess of cost over market of the treasury shares at the end of the period was recognized
as an unrealized loss on the 2021 income statement.
3. You also discovered that a majority stockholder donated during 2021, a land which originally
costed the stockholder P200,000 but with a market value of P300,000 during the date of
donation.
4. Subscriptions receivables are due six months from December 31, 2021.

Determine the adjusted balances of the following:

A B C D
39. Total assets 1,000,000 1,040,000 1,200,000 1,240,000
40. Total Additional paid-in capital 105,000 222,500 510,000 522,500
41. Total contributed capital 702,500 712,500 672,500 682,500
42. Total stockholders’ equity 760,000 750,000 720,000 700,000

PROBLEM 11: The Accumulated profits account of Felix Corp. shows the following debits and credits for the
year 2021:
UNAPPROPRIATED ACCUMULATED PROFIT
Date Debit Credit Balance
Jan.1 Balance P565,500
(a) Gain on life insurance policy settlement P50,000 615,500
(b) Write-off of intangibles (goodwill) 30,000 585,500
(c) Effect of a change in accounting principle (from
FIFO to weighted average) 100,000 685,500
(d) Loss on sale of treasury stock (APIC from treasury 20,000 665,500
stock transaction balance is at P15,000)
(e) 10% stock dividends on 100,000, P10 par value
shares issued and outstanding (FMV at the same
date at P12.50) 100,000 565,500
(f) 2020 unaccrued employee compensation 160,000 405,500
(g) Premium on ordinary shares issued 65,000 470,500
(h) Stock issuance expenses related to ordinary share
issued above 5,000 465,500
(i) Defaults on ordinary shares subscription. Amount 15,000 480,500
collected was forfeited in favor of the company.
(j) Loss on sale of an equipment 25,000 455,500
(k) Gain on retirement of preference shares at less
than issue price 35,000 490,500
(l) Gain on early retirement of bonds 12,500 503,000
(m) Correction of a prior period error 45,000 548,000
(n) Cash dividends declaration 75,000 473,000
(o) Inventory loss from flood 10,500 462,500
(p) Proceeds from sale of donated stocks 37,500 500,000
(q) Revaluation increase in land 150,000 650,000
(r) Appropriations for plant expansion 100,000 550,000
(s) Unadjusted net income for the period 175,000 725,000

43. How much is the adjusted net income for the year?
a. 207,000 c. 172,000
b. 187,000 d. 159,500
44. How much is the correct unappropriated accumulated profits restated beginning balance?
a. 710,500 c. 550,500
b. 680,500 d. 520,500
45. How much is the correct unappropriated accumulated profits ending balance?
a. 477,500 c. 422,500
b. 417,500 d. 377,500

PROBLEM 12: Fan Inc. has sustained heavy losses over a period of time and conditions warrant that Fan Inc.
undergo a quasi-reorganization on December 31, 2021.

The balance sheet of Fan Inc. on December 31, prior to the reorganization is:

Current assets P1,500,000

Property, plant and equipment P5,000,000
Less: Accumulated depreciation 2,000,000 3,000,000
Goodwill 500,000
Total assets P5,000,000

Current liabilities P600,000

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Ordinary shares, P100 par value 5,000,000

Share premium on ordinary shares 500,000
Deficit (1,100,000)
Total assets P5,000,000

The Securities and Exchange Commission approved the quasi-reorganization on the basis of the unrealistic
valuation of the property, plant and equipment. Accordingly, the SEC recommended that the PPE be appraised
by an independent expert.
a. The PPE are determined to have replacement cost of P9,000,000.
b. The inventory is to be written down by P250,000.
c. The goodwill should be written-off.
d. Unrecorded accounts payable amounted to P150,000.
e. Any resulting deficit is charged against the revaluation surplus.

Requirements:
46. Fan Inc.’s balance sheet after the quasi-reorganization should show total assets of:
a. 5,000,000 c. 6,500,000
b. 6,650,000 d. 6,600,000
47. The balance in the Revaluation surplus after the quasi-reorganization is:
a. None c. 400,000
b. 100,000 d. 500,000

PROBLEM 13: Tiles Co. issued share appreciation rights (SARs) to 40 of its employees on January 2, 2021.
The SARs will vest at the end of 3 years, provided the employees remain with the company and provided the
average revenue growth over the vesting period exceeds 5%. The share appreciation rights entitlement of
each employee depending upon the average growth rate is:
Average Revenue Growth Percentage No. of SARs per Employee
More than 5 to 10 1,000
More than 10 to 15 2,000
More than 15% 3,000

On the grant date, each SAR has a fair value of P60. Tiles Co. estimates an average revenue growth rate of
11% during the 3-year vesting period, and that 10 of its employees will eventually leave before the vesting
period ends.
48. Assuming that estimates did not change by the end of 2021 and that the fair value of SAR as of December
31, 2021 is at P65, what is the salaries expense in 2021?
a. 1,300,000 c. 1,200,000
b. 1,250,000 d. 1,400,000
49. Assuming that as of December 31, 2022, the average revenue growth projection over the three-year
vesting period was reduced to 10% and 34 employees are expected to remain in the entity’s employ.
Assuming further that the fair value of each SAR is P72, what is the stock appreciation rights payable
balance as of the end of 2022?
a 332,000 c 1,632,000
b 816,000 d 1,300,000
50. Assuming that at the end of 2023, actual average revenue growth rate during the vesting period is at 16%
and only 25 employees remain. Assuming further that the fair market value of SAR is at P80, what is the
salaries expense in 2023?
a 2,773,333 c 4,684,000
b 4,368,000 d 6,000,000

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Suggested Answers and Solutions

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Quiz 2: FINANCING CYCLE – AUDIT OF STOCKHOLDERS’ EQUITY

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200Q
Quiz 2: FINANCING CYCLE – AUDIT OF STOCKHOLDERS’ EQUITY

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200Q
Quiz 2: FINANCING CYCLE – AUDIT OF STOCKHOLDERS’ EQUITY

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AP-200Q
Quiz 2: FINANCING CYCLE – AUDIT OF STOCKHOLDERS’ EQUITY

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