8Audit of SHE-1 - Notes PDF

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BCSVillaluzBRIAN CHRISTIAN S. VILLALUZ, CPALEarning ADvancement Review Center (LEAD)CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)CPA Reviewer in Financial Accounting & Reporting (FAR)CPA Reviewer in Auditing (Theory & Problems) Page 1 of 3AUDITING PROBLEMSH...

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BCSVillaluz AUDITING PROBLEMS Handout #9: Audit of Shareholders’ Equity Problem 1: The shareholders’ equity section of PARAISO Corporation’s statement of financial position as of December 31, 2018, is as follows Ordinary shares, P10, par value; authorized, 2,000,000 shares; issued 400,000 shares Share premium Retained earnings Total

P4,000,000 1,700,000 6,000,000 P11,700,000

The following transactions occurred during 2019: Jan. 5

10,000 shares of authorized and unissued ordinary shares were sold for P17 per share. The company incurred share issue cost at P1 per share.

Jan. 16 Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of record February 5. Feb. 20 Reacquired 50,000 shares as treasury shares at P20 per share. Feb. 25 20,000 shares of authorized and unissued ordinary shares were issued in exchange of equipment having a fair market value of P500,000. The company incurred share issue cost at P20,000. Mar. 1

A 30% stock dividend was declared and issued. Market value of shares on this date was at P30.

Apr. 1

A two-for-one split was carried out. Market value of shares on this date was at P18 per share.

May 30 Reissued half of the treasury shares at P14 per share. July 1

A 15% stock dividend was declared and issued. Market value is currently at P20 per share.

Aug. 1

A cash dividend of P0.20 per share was declared payable September 1 to shareholders of record on August 21.

Dec. 31 Adjusted net income for the year is at P2,150,000.

Required: Determine the balance of the following stockholders’ equity accounts 1. Ordinary shares A. 6,218,500 C. 6,250,000 B. 6,000,000 D. 6,313,500 2.

3.

4.

Total share premium A. 4,575,500 B. 4,375,500

C. D.

4,605,500 4,405,500

Retained earnings-unappropriated A. 2,865,500 C. B. 2,993,260 D.

3,232,260 3,732,000

Total stockholders’ equity A. 14,287,260 B. 14,152,260

13,787,260 13,557,260

C. D.

Problem 2: On May 2018, Jenjen Inc. was organized with 3,000,000 authorized shares of P10 per value ordinary shares, and 300,000 of its ordinary shares were issued for P3,300,000. Net income through December 31, 2018 was P125,000. On July 23, 2019 when the shares were selling at P13 per share, Jenjen Inc. issued 500,000 of its ordinary shares in exchange of real estate properties which were fairly valued at P6,250,000. A 5% share dividend was declared on October 2, 2019, to shareholders of record on October 23, 2019. The market value of the ordinary shares was P11 per share on the declaration date. Jenjen Inc.’s net income for the year ended December 31, 2019 was P350,000. During 2020, Jenjen Inc. had the following transactions: a. In February, Jenjen Inc. reacquired 30,000 of its treasury shares for P9 per share. b.

In June, Jenjen Inc. sold 15,000 of its treasury shares for P12 per share.

c.

In September, each shareholder was issued (for each share held) one right to purchase two additional ordinary shares for P13 per share. The rights shall expire on December 31, 2020.

d.

In October, 250,000 rights issued were exercised when the market value of the ordinary shares was P14 per share.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR)

CPA Reviewer in Financial Accounting & Reporting (FAR) CPA Reviewer in Auditing (Theory & Problems)

Page 1 of 3

BCSVillaluz e.

In November, 400,000 rights issued were exercised when the market value of the ordinary shares was P15 per share.

f.

On December 15, Jenjen Inc. declared its first cash dividend to shareholders of P0.30 per shares payable on January 10, 2021, to shareholders of record on December 31, 2020.

g.

On December 31, in accordance with the applicable law, Jenjen Inc. formally retired 10,000 of its treasury shares and had them revert to an unissued basis.

h.

Net income for 2020 was P800,000.

Based on the information presented above, determine the following: 1.

The cash dividends declaration on December 15 includes a debit to retained earnings at A. 349,500 C. 637,500 B. 351,000 D. 639,000

2.

What is the adjusted additional-paid in capital? A. 5,545,000 C. 3,585,000 B. 5,505,000 D. 3,595,000

3.

What is the adjusted retained earnings-total (appropriated and unappropriated) balance? A. 485,500 C. 197,500 B. 484,000 D. 196,000

4.

What is the total stockholders’ equity? A. 26,997,500 C. 14,422,500 B. 27,042,500 D. 14,467,500

Problem 3: The shareholders’ equity accounts of Splitter Corporation at December 31, 2018, had the following balances: Share capital – preference shares, P100 par value, 6% cumulative; 15,000 shares authorized; 9,000 shares issued and outstanding Share capital – ordinary shares, P1 par value, 900,000 shares authorized; 600,000 shares issued and outstanding Share premium Retained earnings Total shareholders’ equity

P900,000 600,000 1,200,000 3,300,000 6,000,000

The following transactions occurred during 2019: •

January 6 – Issued 22,500 ordinary shares to Weakness Co. in exchange for land. On the date issued, the share had a market price of P16.50 per share. The land had a carrying amount of P210,000, and an assessed value for property taxes of P245,000.

•

January 31 – Sold 1,200, P1,000, 12% bonds, at 98 with one detachable share warrant attached to each bond. Interest is payable annually on January 31. The fair value of the bonds without the share warrants is 95. The detachable warrants have a fair value of P50 each and expire one year from issuance. Each warrant entitles the holder to purchase 10 ordinary shares at P10 per share.

•

February 22 – Purchased 7,500 of its own ordinary shares to be held as treasury shares for P24 per share.

•

February 28 – Subscriptions for 21,000 ordinary shares were received at P26 per share, payable 50% down and the balance by March 15.

•

March 15 – The balance due on 18,000 shares was received and those shares were issued. The subscriber who defaulted on the 3,000 remaining shares forfeited the down payment in accordance with the subscription agreement.

•

April 30 – Distributed property dividend to ordinary shareholders. The property had a carrying amount of P910,000 and fair value of P950,000.

•

August 30 – Reissued 3,000 treasury shares for P20 per share.

•

September 14 – There were 945 warrants detached from the bonds and exercised.

•

November 30 – Declared a cash dividend of P2 per share to all ordinary shareholders of record December 15, 2019. The dividend was paid on December 30, 2019.

•

December 15 – Declared the required annual cash dividends on preference shares for 2019. The dividends was paid on January 15, 2020.

•

Adjusted net income after tax for 2019 was P2,585,650.

BRIAN CHRISTIAN S. VILLALUZ, CPA LEarning ADvancement Review Center (LEAD) CPA Reviewer in Advanced Financial Accounting & Reporting (AFAR) CPA Reviewer in Financial Accounting & Reporting (FAR)...