Chapter 9 Caselette - Audit of SHE PDF

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CHAPTER 9 – Audit of Shareholders’ EquityProblem 1 You have been assigned to the audit of Aguillon Inc., a manufacturing company. You have been asked to summarize the transactions for the year ended December 31, 2004, affecting shareholders’ equity and other related accounts. The shareholders’ equit...

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CHAPTER 9 – Audit of Shareholders’ Equity Problem 1 You have been assigned to the audit of Aguillon Inc., a manufacturing company. You have been asked to summarize the transactions for the year ended December 31, 2004, affecting shareholders’ equity and other related accounts. The shareholders’ equity section of Aguillon’s December 31, 2003, balance sheet follows: Shareholders’ Equity Contributed capital: Ordinary share P2 par value, 500,000 shares authorized, 90,000 shares issued, 88,790 shares outstanding Paid-in capital in excess of par Paid-in capital from treasury share Total contributed capital Retained earnings Total contributed capital and retained earnings Less: Cost of 1,210 shares of treasury share Total shareholders’ equity

P

180,000 1,820,000 22,500 P2,022,500 324,689 P2,347,189 72,600 P2,274,589

You have extracted the following information from the accounting records and audit working papers. 2004 Jan. 15

Aguillon reissued 650 shares of treasury share for P40 per share. The 1,210 shares of treasury share on hand at December 31, 2001, were purchased in one block in 2001. Aguillon used the cost method for recording the treasury shares purchased.

Feb. 2

Sold 90, P1,000, 9% bonds due February 1, 2005, at 103 with one detachable share warrant attached to each bond. Interest is payable annually on February 1. The fair market value of the bonds without the share warrants is 97. The detachable warrants have a fair value of P60 each and expire on February 1, 2005. Each warrant entitles the holder to purchase 10 shares of Ordinary share at P40 per share.

Mar. 6

Subscriptions for 1,400 shares of Ordinary share were issued at P44 per share, payable 40% down and the balance by March 20.

20

Nov. 1

The balance due on 1,200 shares was received and those shares were issued. The subscriber who defaulted on the 200 remaining shares forfeited the down payment in accordance with the subscription agreement. There were 55 share warrants detached from the bonds and exercised.

Net income for the year is P600,000. Questions- Based on the information above, answer the following questions: 1. The Ordinary Share at December 31, 2004 is: a. P 215,000 b. P 204,000 c. P 191,000

d. P 183,500

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2. The Additional paid capital in excess of par at December 31, 2004 is: b. P 1,894,600 a. P 1,903,000 c. P 1,870,400 d. P 1,835,800 3. The APIC – treasury share at December 31, 2004 is: c. P 9,500 a. P 22,500 b. P 13,000

d. P 0

4. The Ordinary Share Warrants Outstanding at December 31, 2004 is: c. P 2,100 a. P 5,400 b. P 3,300 d. P 0 5. The Subscribed Ordinary Share at December 31, 2004 is: a. P 2,800 b. P 2,400 c. P 400

d. P 0

6. The APIC – forfeited share at December 31, 2004 is: a. P 0 b. P 3,520 c. P 3,920

d. P 5,280

7. The Treasury Share at December 31, 2004 is: a. P 0 b. P 72,600 c. P 39,000

d. P 33,600

8. The Total Shareholders’ Equity at December 31, 2004 is: b. P 2,659,620 c. P 2,384,309 a. P 2,984,309

d. P 2,059,620

Solution Jan 15 Cash (650 shares x P40) 28,000 Paid-in capital from treasury share 13,000 Treasury Share 39,000 Cost of treasury share: P72,000/1,210 shares = P60 per share Cost of shares sold: 650 shares x P60 = P 39,000 Feb 2 Cash (P90,000 x 103) 92,700 Discount on bonds payable 2,700 Bonds payable 90,000 Ordinary share warrants 5,400 Price of bonds without warrants attached: 97 x P90,000 = P87,300 Value of detached warrants: 90 x P60 = P 5,400 Because value of bonds plus value of detachable warrants is equal to the total issuance price (P87,300 + P5,400 = P92,700), the value assigned to the bonds and warrants is the fair value of each. Mar 6 Cash 24,640 Ordinary share subscription receivable 36,960 Ordinary share subscribed 2,800 Paid-in capital in excess of par 58,800 Mar 20 Cash 31,680 Ordinary share subscription receivable 31,680 Mar 20 Ordinary share subscribed 2,400 Ordinary share 2,400 Mar 20 Ordinary share subscribed 400 Paid-in capital in excess of par 8,400 Ordinary share subscription receivable 5,280 Paid in capital from forfeited share subscription 3,520 Nov 1 Cash (550 s P40) 22,000 Ordinary share warrants (55 x P60) 3,300 Ordinary share 1,100 Paid-in capital in excess of par 24,200 Answer: 1. D 2. B 3. C 4. C 5. D 6. B 7. D 8. D

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Problem 2 The shareholder’s equity of the Amongan Lumber Co. on June 30, 2004, was as follows: Contributed capital: 5% preference share, P50 par, cumulative, 30,000 shares issued, dividends 5 years in arrears P1,500,000 Ordinary share, P30 par, 100,000 shares issued 3,000,000 P4,500,000 Deficit from operations (600,000) Total shareholder’s equity P3,900,000 On July 1, the following actions were taken: a. Ordinary shareholders turned in their old Ordinary share and received in exchange new ordinary share, 1 share of the new share being exchanged for every 4 shares of the old. New ordinary share was given a stated value of P60 per share. b. One-half share of the new ordinary share was issued on each share of preference share outstanding in liquidation of dividends in arrears on preference share. c. The deficit from operations was applied against the paid-in capital arising from the ordinary share restatement. Transactions for the remainder of 2004 affecting the shareholders’ equity were as follows: Oct. 1 Nov. 10 Dec. 31

10,000 shares of preference share were called at P55 plus dividends for 3 months at 5%. Share was formally retired. 60,000 shares of new ordinary share were sold at P65. Net income for the 6 months ended on this date was P400,000. (Assume that revenues and expenses were closed to a temporary account, Income summary. Use this account to complete the closing process.) The semiannual dividend was declared on preference shares, and a P0.75 dividend on ordinary shares, dividends being payable January 20, 2003.

Questions Based on the information above, answer the following questions: 1. The balance of 5% Preference Share at December 31, 2004 is: a. P 1,500,000 b. P 1,000,000 c. P 500,000

d. P 0

2. The balance of Ordinary Share at December 31, 2004 is: a. P 3,000,000 b. P 4,000,000 c. P 4,500,000

d. P 6,000,000

3. The balance of Additional paid in capital at December 31, 2004 is: a. P 0 b. P 300,000 c. P 1,500,000 d. P 1,800,000 4. The balance of Retained Earnings at December 31, 2004 is: a. P 0 b. P (600,000) c. P 243,750

d. P 293,750

Solution July 1 Ordinary share, P30 par 3,000,000 Ordinary share, P60 stated value 1,500,000 Exchanged 100,000 shares of old ordinary share with a par value of P30 for 25,000 shares of new ordinary share with a stated value of P60.

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July 1

Retained earnings 900,000 Ordinary share, P60 stated value 900,000 Eliminate dividends in arrears on preference share through issuance of 15,000 shares of new ordinary share. July 1 Paid-in capital in excess of stated value 1,500,000 Retained earnings 1,500,000 Applied deficit against paid-in capital created through recapitalization Oct 1 5% Preference share 600,000 Retained earnings 56,250 Cash 556,250 Retired 10,000 shares of preference share 10,000 shares preference share retired: Amount paid (10,000 shares x P55) P550,000 Dividends for 3 months (P500,000 x .05 x 3/12) 6,250 P 556,250 Nov 10 Cash 3,900,000 Ordinary share, P60 stated value 3,600,000 Paid-in capital in excess of stated value 300,000 Sold 60,000 shares of ordinary share P65. Dec 31 Income summary 400,000 Retained earnings 400,000 Recorded earnings for the 6-month period ended December 31. Dec 31 Dividends (Retained earnings) 100,000 Dividend payable – preference 25,000 (20,000 x P50 x .05 x ½) Dividend payable – ordinary 75,000 (100,000 shares x P.75) SHAREHOLDERS’ EQUITY Contributed Capital 5% preference share Ordinary share Paid-in capital in excess of stated value – ordinary Total Retained earnings (accumulated since July 1, 2002) Total Shareholders’ Equity

1,000,000 6,000,000 300,000 7,300,000 243,750 7,543,750

On July 1, 2004, 100,000 shares of ordinary share, P30 par, were exchanged for 25,000 shares of ordinary share with a P60 stated value, thus creating additional paid-in capital. Such paid-in capital was applied to the elimination of a P600,00 deficit on this date and also the liquidation of dividends in arrears on preference share of P900,000 through the issue of 15,000 shares of new ordinary. Earnings since July 1, 2004, were P400,000. Charges for dividends since this date were P106,250, and the call premium on 10,000 shares of preference share redeemed was P50,000, resulting in a retained earnings balance of P243,750. Answer: 1. B 2. D

3. B

4. C

Problem 3 Alcain COMPANY’s shareholders’ equity account balance at December 31, 2003, were as follows: Ordinary share 800,000 Additional paid-in capital 1,600,000 Retained earnings 1,845,000 The following 2004 transactions and other information relate to the shareholders’ equity accounts: a. Alcain had 400,000 authorized shares of P5 par ordinary share, of which 160,000 shares were issued and outstanding.

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b. On March 5, 2004, Alcain acquired 5,000 shares of its ordinary share for P10 per share to hold as treasury share. The shares were originally issued at P15 per share. ALCAIN uses the cost method to account for treasury share. Treasury share is permitted in Alcain’s state of incorporation. c. On July 15, 2004, Alcain declared and distributed a property dividend of inventory. The inventory had a P75,000 carrying value and a P60,000 fair market value. d. On January 2, 2002, Alcain granted share options to employees to purchase 20,000 share of Alcain’s ordinary share at P18 per share, which was the market on that date. The option may be exercised within a three year period beginning January 2, 2004. The measurement date is the same as the grant date. On October 1, 2004, employees exercised all 20,000 options when the market value of the share was P25 per share. ALCAIN issued new shares to settle the transaction. e. Alcain’s net income for 2004 was P240,000. Questions Based on the information above and other analysis as necessary, answer the following question: 1. Alcain’s Ordinary share balance at December 31, 2004 is: a. P 1,300,000 b. P 1,160,000 c. P 900,000

d. P 800,000

2. Alcain’s Additional paid-in capital balance at December 31, 2004 is: a. P 1,860,000 b. P 1,960,000 c. P 2,000,000 d. P 2,100,000 3. Alcain’s Retained Earnings balance at December 31, 2004 is: c. P 2,010,000 a. P 2,085,000 b. P 2,025,000

d. P 1,770,000

4. Alcain’s Treasury Share balance at December 31, 2004 is: c. P 75,000 a. P 0 b. P 50,000

d. P 125,000

5. Alcain’s Shareholders’ Equity balance at December 31, 2004 is: a. P 4,910,000 b. P 4,820,000 c. P 4,735,000

d. P 4,720,000

Solution a. Memo entry b. Treasury share 50,000 Cash c. Retained earnings 75,000 Property dividends payable d. Cash 360,000 Ordinary share APIC e. Income summary 240,000 Retained earnings Answer: 1. C 2. A 3. C 4. B 5. D

50,000 75,000 100,000 260,000 240,000

Problem 4 Ashary COMPANY is a publicly held company whose shares are traded in the over the counter market. The shareholders’ equity account at December 31, 2003, had the following balances: Preference share, P100 par value. 6% cumulative;

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5,000 shares authorized; 2,000 shares issued and outstanding Ordinary share, P1 par value; 150,000 shares authorized; 100,000 issued and outstanding Additional paid-in capital Retained earnings

P 200,000 100,000 800,000 1,586,000

Transactions during 2004 and other information relating to the shareholders’ equity account were as follows: 

February 1, 2004 – Issued 13,000 shares of ordinary share to Keith Company in exchange for land. On the date issued, the share had a market price of P11 per share. The land had a carrying value on Keith’s books of P135,000, and the assessed value for property taxes of P90,000.



March 1, 2004 – Purchased 5,000 shares of its own ordinary share to be held as treasury for P14 per share. Ashary uses the cost method to account for treasury share. Transactions in treasury share are legal in Ashary’s state of incorporation.



May 10, 2004 – Declared a property dividend of marketable securities held by Ashary to ordinary shareholders. The securities had a carrying value of P600,000, fair value on relevant dates were: Date of declaration (May 10, 2004) P 720,000 Date of record (May 25, 2004) 758,000 Date of distribution (June 1, 2004) 736,000



October 1, 2004 – Reissued 2,000 shares of treasury share for P16 per share.



November 4, 2004 – Declared a cash dividend of P1.50 per share to all ordinary shareholders of record November 15, 2004. The dividend was paid on November 25, 2004.



December 20, 2004 – Declared the required annual cash dividend on preference share for 2004. The dividend was paid on January 5, 2005.



January 16, 2005 – Before closing the accounting records for 2004, Ashary became aware that no amortization had been recorded for 2004 for a patent purchased on July 1, 2003. The patent was properly capitalized at P320,000 and had an estimated useful life of eight years when purchased. Ashary’s income tax rate is 30%.



Net income after tax for 2004 was P838,000.

Questions 1. The total additional paid-in capital at year-end is: a. P 881,000 b. P 877,000 c. P 922,000

d. P 934,000

2. The total fundamental errors is a. P 14,000 b. P 20,000

d. P 40,000

c. P 27,200

3. The total cash dividends – ordinary at year-end is: c. P 165,000 a. P 172,500 b. P 169,500

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d. P 162,000

4. The total property dividends – ordinary at year-end is: b. P 720,000 c. P 736,000 a. P 600,000

d. P 758,000

5. The number of ordinary share issued and outstanding at year-end is: a. 102,000 b. 110,000 c. 111,000 d. 113,000 Solution Feb 1 -

Mar 1

-

May 10 Oct 1

Nov 4

-

-

Dec 20 Dec 31 -

Dec 31 Answer: 1. D 2. A

Land

143,000 Ordinary share APIC – CS Treasury share 70,000 Cash Retained earnings 600,000 Property dividend payable Cash 32,000 Treasury share APIC – TS Retained earnings 165,000 Cash Retained earnings 12,000 Dividends payable Retained earnings 14,000 Income tax payable 6,000 Patents Income summary 838,000 Retained earnings 3. C

4. A

13,000 130,000 70,000 600,000 28,000 4,000 165,000 12,000

20,000 838,000

5. B

Problem 5 During your audit of Asumbra Company for the year 2004, its initial year of operations, you find the following entries in its “Shareholders’ Equity” account: ____________________SHAREHOLDERS’ EQUITY___________________ Jan. 01Issuance of 150,000 shares of capital share, P10 par; authorized 500,000 shares in exchange for real estate property with a market value of P2 million 1,500,000 Jan. 15Sale of 200,000 shares of capital share at P12 per share

2,400,000

Mar. 01Purchase 20,000 shares of its own share at P15 per Share

300,000

May 15Loss on sale of motor equipment

100,000

Jun 10 Proceeds from sale of 10,000 treasury shares

170,000

Dec 31Declared cash dividends payable quarterly beginning April 1, 1998

200,000

Dec 31Net profit for the year

790,000

Questions

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1. The adjusted balance of the “Shareholders’ Equity” account of the company’s balance sheet as of December 31, 2004 is: c. P 4.76 million d. P 4.91 million a. P 4.36 million b. P 4.46 million 2. The book value per share of the company’s share as of December 31, 2004 is a. P 14.44 b. P 14.00 c. P 13.12 d. P 12.82 Solution Land Ordinary share APIC Cash Ordinary share APIC Treasury share Cash Retained earnings Loss on sale Cash Treasury share APIC – TS Retained earnings Cash Answer: 1. C 2. B

2,000,000 1,500,000 500,000 2,400,000 2,000,000 400,000 300,000 300,000 100,000 100,000 170,000 150,000 20,000 200,000 200,000

Problem 6 You are auditing the balance sheet of the Ballares Company on December 31, 2004, which has the following items on the equity side of the balance sheet: Current Liabilities Bonds Payable Reserve for Bonds Retirement 6% Cumulative Preference Share, P100 par value (entitled to P110 and accumulated dividends per share in voluntary liquidation). Authorized, 30,000 shares; issued, 20,000 shares; in treasury, 1,500 shares Ordinary share, P100 par value, authorized, 100,000 shares; issued and outstanding, 40,000 shares Premium on preference share Premium on ordinary share Retained earnings

2,858,000 3,000,000 1,600,000

1,850,000

4,000,000 100,000 673,000 1,312,600

The company proposes to finance a plant expansion program by issuing an additional 20,000 shares of ordinary share. Ordinary shareholders of record October 1, 2004 were notified that they will be permitted to subscribe to the new issue at P150 per share up to 50% of their holdings. The market value of the share on October 1, 2004, was P172.50. The share goes ex-rights in the market on October 3, 2004. Questions 1. Total shareholders’ equity as of December 31, 2004 is: d. P 9,535,600 a. P 2,035,000 b. P 5,535,000 c. P 7,500,000 2. Total book value of the 40,000 shares of ordinary share is:

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a. P 9,535,000

b. P 7,500,600

c. P 2,035,000

d. P 1,875,150

3. The book value per share of ordinary share as of December 31, 2004 is: a. P 203.55 b. P 187.52 c. P 172.50 d. P 165.00 Solution 1 D.

Reserve for bond retirement 6% cumulative Preference share Ordinary share Premium on preference share Premium on ordinary share Retained earnings Total shareholders’ equity Less equity identified to preference share Liquidation value (18,500 shares x P110)

P1,600,000 1,850,000 4,000,000 100,000 673,000 1,312,600 P9,535,600

P7,500,600

2

B

Total BV of the 40,000 shares of ordinary share

3

B

BV per share of ordinary share P7,500,600/ 40,000

2,035,000

P187.52

Problem 7 On January 1, 2003, the shareholders’ equity of Bantaya Company’s balance sheet revealed the following information: P5 Convertible Preference Share (P40 par value; 50,000 shares authorized, 20,000 shares issued and outstanding) Ordinary share (P5 stated value; 200,000 shares authorized, 120,000 shares issued and outstanding) Paid-in capital in excess of par Retained earnings Total shareholders’ equity

800,000 600,000 3,000,000 4,500,000 8,900,000

In addition, the following information is known: a.

On February 2, 2003, 15,000 ordinary shares were acquired by the company for P33 per share.

b.

On September 30, 2003, 5,000 preference shares were converted to ordinary shares. One share of preference share is convertible into one share of ordinary share. At the time of conversion, the ordinary share had a market value of P42 per share.

c.

On December 21, 2003, the company received a share subscription of 10,000 ordinary shares at a subscription price of P33 per share. The subscription contract required a cash down payment equal to 60% of the subscription price, with the balance due on February 1, 2004.

d.

On February 1, 2004, 8,500 ordinary shar...