MANTUHAC, ANTHONY BSA-3

SEATWORK 01: AUDIT OF STOCKHOLDERS’ EQUITY

PROBLEM NO. 1

Resolve Corporation began operations on January 1, 2015. The company was authorized to issue 60,000
shares of P10 par value ordinary share and 120,000 shares of 10%, P100 par value convertible preference
share capital.

In connection with your audit of the company’s financial statements, you noted the following transactions
involving stockholders’ equity during 2015:

Jan. 1 Issued 1,500 shares of ordinary shares to the corporation promoters in exchange for
property valued at P510,000 and services valued at P210,000. The property costs
P270,000 3 years ago and was carried on the promoters’ books at P150,000.

Jan. 31 Issued 30,000 shares of convertible preferred share at P150 per share. Each share
can be converted to five shares of ordinary shares. The corporation paid P225,000 to
an agent for selling the shares.

Feb. 15 Sold 9,000 shares of ordinary shares at P390 per share. The corporation paid issue
costs of P75,000.

May 30 Received subscriptions for 12,000 shares of ordinary shares at P450 per share.

Aug. 30 Issued 2,100 shares of ordinary shares and 4,200 shares of preferred share in
exchanged for a building with a fair market value of P1,530,000. The building was
originally purchased for P1,140,000 by the investors and has a book value of
P660,000. In addition, 1,800 shares of common stock were sold for P720,000 cash.

Nov. 15 Payments in full for half of the subscriptions and partial payments for the rest of the
subscriptions were received. Total cash received was P4,200,000. Shares of stock
were issued for the fully paid subscriptions.

Dec. 1 Declared a cash dividend of P10 per share on preferred share, payable on December
31 to stockholders of record on December 15, and P20 per share cash dividend on
ordinary shares, payable on January 15, 2016 to stockholders of record on December
15.

Dec. 31 Paid the preferred share dividend.

Net income for the first year of operations was P1,800,000.

REQUIRED: Based on the above and the result of your audit, determine the following as of December 31,
2015:
204,000
1. Ordinary share capital
2. Share premium- Preference share capital 1,545,000
3. Share premium- Ordinary share capital 10,851,000
4. Retained earnings 930,000
5. Total stockholders’ equity 17,010,000

Preferred stock 3,420,000

Ordinary share capital 204,000 (1)
Subscribed common 60,000
Share premium- Preference share capital 1,545,000 (2)
Share premium- Ordinary share capital 10,851,000 (3)
Retained earnings 930,000 (4)
Total stockholders’ equity, 12/31/15 17,010,000 (5)

Journal entries affecting the stockholder’s equity accounts during 2015:

1/1 Equipment 510,000

Organization expenses 210,000
Common stock (1,500 shares x P10) 15,000
APIC - excess over par of CS 705,000
#
1/31 Cash (30,000 shares x P150) 4,500,000
Preferred stock (30,000 shares x P100) 3,000,000
APIC - excess over par of PS 1,500,000
#

APIC - excess over par of PS 225,000

Cash 225,000
#

2/20 Cash (9,000 shares x P390) 3,510,000

Common stock (9,000 shares x P10) 90,000
APIC - excess over par of CS 3,420,000
#

APIC - excess over par of CS 75,000

Cash 75,000
#

5/30 Subscriptions rec. (12,000 sh. x P450) 5,400,000

Subscribed common stock (12,000 shares x P10) 120,000
APIC - excess over par of CS 5,280,000
#

8/30 Cash 720,000

Common stock (1,800 shares x P10) 18,000
APIC - excess over par of CS 702,000
#

Building 1,530,000
Common stock (2,100 shares x P10) 21,000
APIC - excess over par of CS
[(2,100 sh x P400*)-21,000] 819,000
Preferred stock (4,200 shares x P100) 420,000
APIC - excess over par of PS (balance) 270,000
* (P720,000/1,800 shares)
#

11/07 Cash 4,200,000

Subscriptions receivable 4,200,000
#

Subscribed common stock (120,000 x 1/2) 60,000

Common stock 60,000
#

12/01 Retained earnings 870,000

Dividends payable - Preferred 342,000
Dividends payable – Common 528,000
#

12/31 Income summary 1,800,000

Retained earnings 1,800,000
#
PROBLEM NO. 2

The Stockholders equity of Willpower Corporation showed the following data on December 31, 2014:

12% Preferred share, P30 par, 135,000 shares issued and outstanding P4,050,000
Ordinary share, P50 par, 180,000 shares issued and outstanding 9,000,000
Premium on preferred share 1,080,000
Premium on ordinary share 3,240,000
Retained earnings 1,395,000

The 2015 transactions of the company affecting its stockholders’ equity are summarized chronologically as
follows:
1. Issued 27,000 shares of preferred share at P40.
2. Issued 94,500 shares of ordinary share at P70.
3. Retired 5,400 shares of preferred stock at P45.
4. Purchased 13,500 shares of its ordinary shares at P80.
5. Split ordinary shares two for one (par value reduce to P25).
6. Reissued 13,500 shares of treasury stock – ordinary at P50.
7. Stockholders donated to the company 9,000 shares of ordinary shares when shares had a market price
of P52. One half of these shares were subsequently issued for P54.
8. Dividends were paid at the end of the calendar year on the ordinary share at P2 per share and on the
preferred share at the preferred rate.
9. Net income for the year was P2,520,000.

REQUIRED: Based on the above and the result of your audit, determine the following as of December 31,
2015:
4,698,000
1. Preferred share (PS) 13,725,000
2. Ordinary share (OS)
6,814,800
3. Share premium –OS and PS
4. Unappropriated retained earnings 1,711,440
5. Total stockholders’ equity 26,949,240

Preferred stock 4,698,000 (1)

Common stock 13,725,000 (2)
Additional paid in capital 6,814,800 (3)
Retained earnings - Appropriated 540,000
Retained earnings - Unappropriated 1,711,440 (4)
Treasury stock ( 540,000)
Total SHE, 12/31/15 26,949,240 (5)

Journal entries affecting the stockholder’s equity accounts during 2015:

1) Cash (27,000 shares x P40) 1,080,000

Preferred stock (27,000 shares x P30) 810,000
APIC - premium on preferred stock 270,000
#

2) Cash (94,500 shares x P70) P6,615,000

Common stock (94,500 shares x P50) P4,725,000
APIC - premium on common stock 1,890,000
#

3) Preferred stock (5,400 shares x P30) 162,000

APIC - premium on PS (P1,080,000x5.4/135) 43,200
Retained earnings 37,800
Cash (5,400 shares x P45) 243,000
#

4) Treasury stock-CS (13,500 shares x P80) 1,080,000

Cash 1,080,000
#

5) Memo entry.

6) Cash (13,500 shares x P50) 675,000

Treasury stock (P1,080,000 x 1/2) 540,000
APIC - from treasury stock transactions 135,000
#
7) Memo entry.
Cash (9,000 shares x 1/2 x P54) 243,000
APIC - Donated capital 243,000
#

8) Retained earnings 1,625,760

Cash 1,625,760
#

Common shares issued and outstanding, 1/1/15 180,000

2) Shares issued 94,500
4) Purchase of treasury shares (13,500)
261,000
5) Stock split 261,000
6) Reissuance of treasury shares 13,500
7) Donated shares ( 9,000)
Reissuance of donated shares 4,500
Common shares issued and outstanding,12/31/06 531,000
x Dividend per share 2
Dividends to common 1,062,000
Dividends to preferred (P4,698,000 x 12%) 563,760
Total 1,625,760

9) Income summary 2,520,000

Retained earnings 2,520,000
#
10) Retained earnings 540,000
Retained earnings - appropriated (cost of TS) 540,000
#
PROBLEM NO. 3

Grit Corp., organized on June 1, 2014, was authorized to issue stock as follows:
• 800,000 shares of 9% preferred share, convertible, P100 par
• 2,500,000 shares of ordinary share, P2.50 stated value

During the remainder of the fiscal year ended May 31, 2015, the following transactions were completed in the
order given:

• 300,000 shares of preferred share were subscribed for at P105, and 900,000 shares of ordinary were
subscribed for at P26. Both subscriptions were payable 30% upon subscription, the balance in one
payment.

• The second subscription payment was received, except one subscriber for 60,000 shares of ordinary
share defaulted on payment. The full amount paid by this subscriber was returned, and all of the fully
paid share was issued.

• 150,000 shares o fordinary shares were reacquired by purchase at P28.

• Each share of preferred was converted into four shares of ordinary shares.

• The treasury stock was exchanged for machinery with a fair market value of P4,300,000.

• There was a 2-for-1 share split, and the stated value of the new ordinary share is P1.25.

• Net income was P830,000.

REQUIRED: Based on the above and the result of your audit, determine the following as of December 31,
2015:
1. Ordinary share capital 5,100,000
2. Total Share Premium 48,340,000
3. Total Contributed Capital 53,440,000
4. Total stockholders’ equity
54,270,000
SEATWORK 02 : AUDIT OF SHAREHOLDER’S EQUITY

Select the best answer for each of the following: Shade your answers YELLOW:
1. In an examination of shareholder’s equity, an auditor is most concerned that
a. Capital stock transactions are properly authorized.
b. Stock splits are capitalized at par or stated value on the dividend declaration date.
c. Dividends during the year under audit were approved by the shareholders.
d. Changes in the accounts are verified by a bank serving as a registrar and stock transfer agent.

2. In audit of a medium-sized manufacturing concern, which one of the following areas can be expected to
require the least amount of audit time?
a. Owner’s equity b. Assets c. Revenue d. Liabilities

3. When a corporate client maintains its own stock records, the auditor primarily will rely upon
a. Confirmation with the company secretary of shares outstanding at year-end.
b. Review of the corporate minutes for data as to shares outstanding.
c. Confirmation of the number of shares outstanding at year-end with the appropriate state official.
d. Inspection of the stock book at year-end and accounting for all certificate numbers.

4. When a client company 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 agreement to repurchase

5. The auditor is concerned with establishing that dividends are paid to client corporation shareholders
owning stock as of the
a. Issue date c. Record date
b. Declaration date d. Payment date

6. An audit program for the retained earnings account should include a step that requires verification of the
a. Fair 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.

7. During an audit of an entity’s shareholders’ equity accounts, the auditor determines whether there are
restrictions on retained earnings resulting from loans, agreements, or law. This audit procedure most likely is
intended to verify management’s assertion of
a. Existence c. Valuation
b. Completeness d. Presentation and disclosure

8. If the auditee has a material amount of treasury stock on hand at year-end, the auditor should
a. Count the certificates at the same time other securities are counted.
b. Count the certificates only if the company had treasury stock transactions during the year.
c. No count the certificates if treasury stock is a deduction from shareholders’ equity.
d. Count the certificates only if the company classifies treasury stock with other assets.

9. In performing tests concerning the granting of stock options, an auditor should

a. Confirm the transaction with the Securities and Exchange Commission.
b. Verify the 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.

10. The auditor would not expect the client to debit retained earnings for which of the following transactions?
a. A 4-for 1 stock split.
b. "Loss" resulting from disposition of treasury shares.
c. A 1-for 10 stock dividend.
d. Correction of error affecting prior year's earnings.