QUIZ 2 - Auditing Financing Cycle (SHE) PDF

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UNIVERSITY OF CALOOCAN CITY Auditing ProblemsQuiz 2 – Auditing Financing Cycle(Shareholder’s Equity)SITUATIONALSituation 1You were assigned to audit the shareholders’ equity of Bustenera Corporation for the year ended December 31, 2020. Bustenera Corp. was incorporated in early 2019 when it was auth...

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UNIVERSITY OF CALOOCAN CITY

Auditing Problems Quiz 2 – Auditing Financing Cycle (Shareholder’s Equity)

SITUATIONAL Situation 1 You were assigned to audit the shareholders’ equity of Bustenera Corporation for the year ended December 31, 2020. Bustenera Corp. was incorporated in early 2019 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, 2019: Ordinary Shares, 50,000 shares issued during the company’s incorporation at P150 per share

P 7,500,000

Preference shares, 20,000 shares issued in June 30, 2019 in exchange of a building with an assessed value of P1,000,000 The fair value of the shares during June 30 was P60 and and December 31, 2019 at P63.

1,260,000

Retained Earnings

5,540,000

Your inquiries and investigation revealed the following transactions which occurred in 2020: a. In early 2020, the company reacquired 20,000 from its previously issued ordinary shares at P160 per share and reverted them to treasury since it has intent of reissuing the same. You noted that the company’s accountant used par value method in recording this transaction but per its policies, the treasury stock transactions should be accounted at cost method. b. On March 10, the company issued 10,000 ordinary shares (from previously unissued shares) and 10,000 preference shares for a total lump sum of P2,800,000. On this date, ordinary shares are quoted in the market at P175 per share while preference shares are quoted at P75 per share. c. On June 19, the company issued, through a broker, additional 5,000 preference shares at P85 per share. The company incurred P25,000 in broker’s fees and commissions. d. On July 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 semiannual interest every January 1 and July 1, are currently quoted at 110 while the ordinary shares are quoted in the market at P180 per share. e. On October 11, the company reissued 8,000 treasury shares at P185 per share. f. On December 1, the company retired 7,000 treasury shares and reverted them to unissued basis. g. The company registered an adjusted net income in 2020 at P4,530,000. h. No dividends were declared in 2019, but on December 15, 2020 the company declared a 10% dividends on preference shares and P10 per share dividend on ordinary shares payable to shareholders on record as of December 31, 2020 to be settled in January 31, 2021. i. The board of directors approved on December 28, the appropriation of 20% of the company’s retained earnings (after other required appropriations) for its planned plant expansion in the following years.

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Based on the following information above, answer the following: 1. What is the balance of ordinary shares account as of December 31, 2020? a. P8,000,000 c. P6,800,000 b. P7,500,000 d. P6,300,000 2. What is the total cash dividends declared in 2020? a. P900,000 c. P855,000 b. P875,000 d. P805,000 3. What is the balance of the share premium in excess of par from preference shares as of December 31, 2020? a. P700,000 c. P540,000 b. P690,000 d. P340,000 4. What is the correct balance of the retained earnings unappropriated account as of December 31, 2020? a. P9,265,000 c. P7,416,000 b. P8,465,000 d. P6,772,000 5. What is the total additional paid-in capital as of December 31, 2020? a. P5,300,000 c. P5,100,000 b. P5,230,000 d. P4,410,000 6. What is the total contributed capital as of December 31, 2020? a. P13,780,000 c. P12,980,000 b. P13,580,000 d. P12,850,000 7. What is the total stockholder’s equity as of December 31, 2019? a. P23,365,000 c. P14,300,000 b. P22,245,000 d. P14,240,000

Situation 2 In the course of your first time audit of Batcho Inc.’s Stockholder’s equity accounts for the audit year 2020, the following schedule of the company’s stockholders’ equity accounts as of December 31, 2019 were presented by the client: Ordinary Shares capital, P100 par; 200,000 shares authorized; 50,000 shares issued and outstanding; options to purchase 10,000 shares at P100 per share are held by employees, no value having been assigned to these options

P 5,000,000

Share Premium from Ordinary Shares

2,000,000

Accumulated profits

3,000,000

Further investigation and inquiry revealed the following information: a. The options reffered to above were granted to each of its 100 employees on January 1, 2018 which shall vest three years thereafter provided employees remain in the company’s employ and provided further that sales increase at least by an average of 5% per year. If the sales increase by an average of at least 5% per year, each year, employees shall receive 100 Share Options. If the sales increase by an average of at least 10% per year, each employee shall receive 200 Share Options. If the sales increase by an average of at least 15% per year, each employee shall receive 300 options. The fair value of each share option on the grant date was P30 per share. No employee left the company during the said vesting period. Records show that the average sales increase over the inclusive vesting period are: 2018, 8%; 2019, 10%; and 2020, 13%. No entry was made on this transaction since 2018. b. On May 1, 2020, the company issued bonds of P5,000,000 at 120 giving each P1,000 a bond warrant enabling the holder to purchase 4 shares at P120 per share for one year period. Shares were selling for P140 at this time. The market value of bonds exwarrant is 105.

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c. On June 1, 2020, half of the warrants issued with bonds were exercised. d. On August 1, the company issued rights to shareholders, permitting holders to acquire for a 60-day period, 1 share at P130 with every 5 rights submitted. Shares were selling for P150 at this time. All but 5,000 of these rights were exercised and additional shares were issued. e. The company declared a P5 per share cash dividends on December 15, 2020 payable to stockholders as of December 31, 2020 on January 31, 2021. f. Net Income for 2020 amounted to P2,300,000. Required: 8. What is the retroactive adjustment to the beginning accumulated profits account related to the options granted in 2018? a. 200,000 c. 600,000 b. 400,000 d. No adjustment necessary 9. What is the correct credit to the share premium account as a result of exercise of rights referred to in item d? a. 250,000 c. 285,000 b. 270,000 d. 330,000 10. What is the total additional paid in capital to be presented in the stockholders’ equity portion of the balance sheet as of December 31, 2020? a. 3,880,000 c. 3,130,000 b. 3,505,000 d. 2,530,000 11. What is the correct Accumulated Profits as of December 31, 2020? a. 5,145,000 c. 4,745,000 b. 4,900,000 d. 4,545,000 Situation 3 JUDETH Company’s year-end shareholders’ equity consists of the following: 10% Preference share, cumulative, fully participating, P100 par, 20,000 shares 8% Preference share, noncumulative, fully participating, P80 par, 2,500 shares Ordinary share, P10 par, 100,000 shares issued Retained Earnings

2,000,000

200,000 1,000,000 820,000

Additional information: Dividends are in arrears for three years. 12. Compute for the book value per share of 10% preference shares: a. 141.00 c. 133.25 b. 133.88 d. 100.00 13. Compute for the book value per share of 8% preference shares: a. 408.00 c. 89.00 b. 89.50 d. 80.00 14. Compute for the book value per share of ordinary shares: a. 18.20 c. 11.19 b. 11.33 d. 10.00

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THEORIES 15. An auditor usually obtains evidence of stockholder’s equity transactions by reviewing the entity’s a. Minutes of Board of directors’ meetings b. Transfer agents’ records c. Canceled Stock certificates d. Treasury Stock Certificate book 16. Which of the following information is most important when auditing shareholder’s equity? a. Entries in the share capital account can be traced to a resolution in the minutes of the board of director’s meeting b. Share dividends and/or share splits during the year were approved by the shareholders c. Changes in the share capital account are verified by an independent stock transfer agent d. All of the above. 17. The auditor’s examination normally need not include a. Determining that dividend declaration is in compliance with debt agreements b. Tracing the authorization for the dividends from the directors’ meetings c. Testing the propriety of the payment to the individual stockholders d. All are included. 18. The following are considered by an audit firm in deciding whether to accept a new client, except: a. The client’s standing in the business community b. The client’s financial ability c. The client’s probability of achieving unmodified opinion d. The client’s relation with its previous auditor

=Nothing Follows=

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Answers: 1. C 2. D 3. B 4. D 5. B 6. A 7. D 8. B 9. D 10. A 11. D 12. B 13. B 14. C 15. A 16. A 17. D 18. C

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