QUIZ – APPLIED AUDIT

Problem

1. While preparing its 2016 financial statements, Dek Company discovered computational errors in its 2015 and 2014
depreciation expense. These errors resulted in overstatement of each year’s income by P100,000, net of income tax.
The following amounts were reported in the previously issued financial statements:
2015 2014
Retained earnings, 1/1 2,800,000 2,000,000
Net income 600,000 800,000
Retained earnings, 12/31 3,400,000 2,800,000
Dek’s net income for 2016 is correctly reported at P700,000.
The statement of retained earnings for the year ended December 31, 2016 should report an ending balance at
a. 3,900,000
b. 4,100,000
c. 4,300,000
d. 4,000,000
2. The balance of retained earnings of Atlas Company at the beginning of the year was P650,000. During the year, Atlas earned revenue
of P4,500,000 and incurred expenses of P3,800,000, dividends of P500,000 were declared and paid, and the balance of the cash
account increased by P220,000.

The company's net income and the year-end balance in the retained earnings accounts, respectively, are

Net Income Retained earnings

a. 700,000 850,000
b. 200,000 850,000
c. 700,000 1,070,000
d. 200,000 1,070,000
3. Cyan Company issued 200,000 shares of P5 par common stock at P10 per share. On December 31, 2009, Cyan's retained earnings
were P3,000,000. In March 2010, Cyan reacquired 50,000 shares of its common stock at P20 per share. In June 2010, Cyan sold
10,000 of these shares to its corporate officers for P25 per share. Cyan uses the cost method to record treasury stock. Net income for
the year ended December 31, 2010 was P600,000.

At December 31, 2010 what amount should Cyan report as retained earnings?
a. 3,600,000
b. 3,650,000
c. 3,750,000
d. 3,800,000
4. Lind Company declared a cash dividend of P500,000 on March 1, to stockholders of record March 31, payable on April 30.

As a result of this cash dividend, working capital

a. Decreased on March 1 by P500,000
b. Decreased on March 31 by P500,000
c. Decreased on April 30 by P500,000
d. Did not change
5.
Long Company had 10,000 shares of common stock issued and outstanding at January 1, 2016. During 2016, Long took the following
actions:
March 15 Declared a 2-for-1 stock split, when the fair value of the stock was P80 per share.
December 15 Declared a P5 per share cash dividend.
In Long's statement of stockholders' equity for 2016, what amount should Long report as dividends?
a. 50,000
b. 100,000
c. 850,000
d. 950,000
6. In 2015, Elm Company bought 100,000 shares of Oil Company at a cost of P2,000,000. On January 15, 2016, Elm declared a
property dividend of the Oil stock to shareholders of record on February 1, payable on February 15. During 2016, the Oil stock had
the following market value:
January 15 2,500,000
February 1 2,600,000
February 15 2,400,000
The net effect of the foregoing transactions on retained earnings during 2016 should be reduction of
a. 2,000,000
b. 2,400,000
c. 2,500,000
d. 2,600,000
 7. On May 1, 2016, Sol Company's board of directors declared a 10% stock dividend. The market price of Sol's 30,000 outstanding
shares of P20 par value common stock was P90 per share on that date. The stock dividend was distributed on July 1, 2016, when the
stock's market price was P100 per share.
What amount should Sol credit to additional paid in capital for this stock dividend?
a. 210,000
b. 240,000
c. 270,000
d. 300,000
8. Galzburg Company's stockholders' equity comprised of 8,000 shares of P200 par common stock, P400,000 of additional paid in capital
and retained earnings of P900,000. Stock dividend of 6% was declared when the stock is selling for P500 per share.

What amount should be transferred from Galzburg's retained earnings account?

a. 1,920,000
b. 4,800,000
c. 240,000
d. 96,000
9. Monte Company's stockholders' equity is comprised of 100,000 shares of P20 par common stock, P4,000,000 of additional paid in
capital on common stock, and retained earnings of P6,000,000. If a 40% stock dividend is declared when the stock is selling for P50
per share.

What amount should be transferred from the retained earnings account to additional paid in capital account?
a. 2,000,000
b. 1,200,000
c. 800,000
d. 0
10. On September 30, 2016, Grey Company issued 4,000 shares of its P100 par common stock in connection with a stock dividend. The
market value per share on the date of declaration was P150. Grey's stockholders' equity accounts immediately before issuance of the
stock dividend shares were as follows:

Common stock P100, 50,000 shares authorized, 20,000 shares outstanding

2,000,000
Additional paid in capital 3,000,000
Retained earnings 1,500,000

What should be the retained earnings balance immediately after the stock dividend?
a. 1,100,000
b. 1,500,000
c. 2,100,000
d. 900,000
11. The following stock dividends were declared and distribution by Sol Company:
Percentage of common shares outstanding Fair value Par value
at declaration date
10 1,500,000 1,000,000
25 4,000,000 3,500,000

What aggregate amount should be debited to retained earnings for these stock dividends?
a. 4,500,000
b. 3,500,000
c. 5,000,000
d. 5,500,000
12. On December 31, 2016, Rhud Company declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000
shares of P1 par value common stock issued and outstanding. The fair value of the common stock was P30 per share on December 31,
2016.

As a result of this stock dividend, the total stockholders equity

a. Increased by P300,000
b. Decreased by P300,000
c. Decreased by P10,000
d. Did not change
13. On January 1, 2016, the board of directors of Blake Mining Company declared a cash dividend of P800,000 to stockholders of record
on January 15, and payable on February 15. Selected data from Blake's December 31, 2015 balance sheet are as follows:
Accumulated depletion 200,000
Capital stock 1,000,000
Additional paid-in capital 300,000
Retained earnings 600,000

The P800,000 dividends includes a liquidating dividends of

a. 600,000
b. 300,000
 c. 200,000
d. 50,000
14. The following information pertains to Meg Company.
Dividends on its 10,000 shares of 6%, P100 par value cumulative preferred stock have not been declared or paid for 3 years
Treasury stock was acquired at a cost of P1,500,000. The treasury stock had not been reissued as of year-end.
What amount of retained earnings should be appropriated as a result of these items?
a. 1,500,000
b. 1,680,000
c. 180,000
d. 0
15. At December 31, 2015, Eagle Company reported P1,750,000 of appropriated retained earnings for the construction of a new office
building, which was completed in 2016 at a total cost of P1,500,000. In 2016, Eagle appropriated P1,200,000 retained earnings for the
construction of a new plant. Also, P2,000,000 of cash was restricted for the retirement of bonds due in 2017.

In its December 31, 2016 balance sheet, Eagle should report what amount of appropriated retained earnings?
a. 1,200,000
b. 1,450,000
c. 2,950,000
d. 3,200,000
16. Ireland Company had an agreement with its bondholders that required the company to make payments to a sinking fund and to
maintain a related appropriation of retained earnings to retire the bonds. The company has been required to make sinking fund
contributions of P500,000 for each of the last five years. At the beginning of 2016, the bonds are repaid, the retained earnings
appropriation is canceled, and a 40% common stock dividend is declared and distributed. Immediately before the declaration of the
dividend, the company had 1,250,000 shares of P10 par value common stock outstanding with a per share market value of P12.
Immediately before repaying the bonds at their carrying amount, the company's unappropriated retained earnings balance was
P4,000,000.

21. The unappropriated retained earnings balance on December 31, 2016 should be
a. 1,500,000
b. 4,000,000
c. 6,500,000
d. 500,000
17. Nam Company reported the following amounts in the stockholders' equity section of its balance sheet dated December 31, 2015:
Preferred stock (P150 par value, 20,000 shares) 3,000,000
Common stock (P50 par value, 100,000 shares) 5,000,000
Additional paid in capital 6,000,000
Retained earnings 4,500,000
On January 1, 2016, Nam sold 20,000 additional shares of common stock for P90 per share. Late in 2016, it was learned that because
of mathematical error, an overstatement of depreciation expense by P500,000 had occurred in 2015. Nam reported net income of
P4,000,000 for 2016. Nam declared cash dividend of P1,000,000 on preferred stock and P2,000,000 on the common stock during
2016. The income tax rate is 35%.

What should be the retained earnings balance on December 31, 2016?

a. 5,825,000
b. 6,000,000
c. 5,175,000
d. 4,425,000
18. The directors of Ontario Company whose P50 par value common stock is currently selling at P60 per share have decided to issue a
stock dividend. The selling price is not expected to be affected by the stock dividend. Ontario, which has an authorization for
1,000,000 shares of common, had issued 500,000 shares, of which 100,000 shares are now held as treasury stock. In order to
capitalize P2,400,000 of the retained earnings balance,

What percentage should be declared as a stock dividend by the directors?

a. 10%
b. 8%
c. 6%
d. 4%
19. The stockholders’ equity section of Glenn Company revealed the following information on December 31, 2016.
Preferred stock, P100 par 2,300,000
Additional paid in capital – preferred 805,000
Common stock, P10 par 5,250,000
Additional paid in capital – common 2,750,000
Subscribed common stock 50,000
Retained earnings 1,900,000
Note payable 4,000,000
Subscription receivable – common 400,000
How much is the legal capital?
a. 7,550,000
b. 7,600,000
 c. 13,055,000
d. 11,150,000
20. Munn Corporation’s records included the following stockholders’ equity accounts:
Preferred stock, par value P15, authorized 200,000 shares 2,550,000
Additional paid capital, preferred stock 150,000
Common stock, no par, P50 stated value, 100,000 shares authorized
3,000,000
In Munn’s statement of stockholders’ equity, the number of issued and outstanding shares for each class of stock is
Common stock Preferred stock
a. 60,000 170,000
b. 60,000 180,000
c. 63,000 170,000
d. 63,000 180,000

21. On October 1, 2016, Ames Company issued 20,000 shares of its P100 par common stock to Clark for a tract of land. The
stock had a fair market value of P180 per share on this date. On Clark’s last property tax bill, the land was assessed at
P2,400,000.

Ames should record an increase in additional paid in capital of

a. 1,600,000
b. 1,000,000
c. 400,000
d. 0
22. East Company issued 1,000 shares of its P5 par common stock to Howe as compensation for 1,000 hours of legal
services performed. Howe usually bills P160 per hour for legal services. On the date of issuance, the stock was trading
on a public exchange at P140 per share.

By what amount should the additional paid in capital account increase as a result of this transaction?
a. 135,000
b. 140,000
c. 155,000
d. 160,000
23. Ashe Company was organized on January 1, 2016, with authorized capital of 100,00 shares of P200 par value common
stock. During 2016 Ashe had the following transactions affecting stockholders’ equity:
January 10 Issued 25,000 shares at P220 a share
March 25 Issued 1,000 shares for legal services when the fair value was P240 a share
September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a share
What amount should Ashe report for additional paid-in capital at December 31, 2016?
a. 840,000
b. 800,000
c. 540,000
d. 500,000
24. The December 31, 2016 condensed balances sheet of Wurzburg Services, an individual proprietorship, follows:
Current assets 280,000
Equipment (net) 260,000
540,000

Liabilities 140,000
Tony Wurzburg, Capital 400,000
540,000
Fair values at December 31, 2016 are as follows:
Current assets 320,000
Equipment 420,000
Liabilities 140,000
On January 2, 2016, Wurzburg Services was incorporated with 5,000 shares of P20 par value common stock issued.

How much should be credited to additional paid-in capital?

a. 460,000
b. 640,000
c. 500,000
d. 400,000
25. On July 1, 2016, Cove Company, a closely-held corporation, issued 6% bonds with a maturity value of P6,000,000,
together with 10,000 shares of its P50 par value common stock, for a combined cash amount of P11,000,000. If the
bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis.

What amount should Cove report for additional paid-in capital on the issuance of the stock?
a. 7,500,000
b. 6,500,000
c. 5,500,000
 d. 4,500,000
26. On December 1, 2016, Line Company received a donation of 2,000 shares of its P50 par value common stock from a
stockholder. On that date, the stock’s market value was P350 per share. The stock was originally issued for P250 per
share.
By what amount would this donation cause total stockholders’ equity to decrease?
a. 700,000
b. 500,000
c. 200,000
d. 0
27. Day Corporation holds 10,000 shares of its P10 par value common stock as treasury stock reacquired in 2014 for
P120,000. On December 31, 2016, Day issued all 10,000 shares for P190,000.

Under the cost method of accounting for treasury stock, the reissuance would result in a credit to
a. Capital stock of P100,000
b. Retained earnings of P70,000
c. Gain on sale of investments of P70,000
d. Additional paid-in capital of P70,000
28. Beck Company issued 200,000 shares of common stock when it began operations in 2014 and issued an additional
100,000 shares in 2016. Beck also issued preferred stock convertible to 100,000 shares of common stock. In 2016, Beck
purchased 75,000 shares of its common stock and held it in treasury.

At December 31, 2016, how many shares of Beck’s common stock were outstanding?
a. 400,000
b. 325,000
c. 300,000
d. 225,000
29. Seco Corporation was incorporated on January 1, 2016. The following information pertains to Seco’s common stock
transactions:
Jan. 2 Number of shares authorized 80,000
Feb. 1 Number of shares issued 60,000
July 1 Number of shares reacquired but not canceled 5,000
Dec. 1 Two-for-one stock split
At December 31, 2016, the number of shares of Seco’s common stock outstanding is
a. 150,000
b. 120,000
c. 115,000
d. 110,000
30. Of the 125,000 shares of common stock issued by Vey Company, 25,000 shares were held as treasury stock at
December 31, 2015. During 2016, transactions involving Vey’s common stock were as follows:
January 1 through October 31 – 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
November 1 – A 3 – for – 1 stock split took effect.
December 1 – Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not
retired.

At December 31, 2016, how many shares of Vey’s common stock were issued and outstanding?
Issued Outstanding
a 375,000 334,000
b 375,000 324,000
c 334,000 334,000
d 324,000 324,000
31. Nest Company issued 100,000 shares of common stock. Of these, 5,000 shares were held as treasury stock at
December 31, 2015. During 2016, transactions involving Nest’s common stock were as follows:
May 3 1,000 shares of treasury stock were sold.
Aug. 6 10,000 shares of previously unissued stock were sold.
Nov. 18 A 2-for-1 stock split took effect.
At December 31, 2016, how many shares of Nest’s common stock were issued and outstanding?

Issued Outstanding
a 220,000 212,000
b 220,000 216,000
c 222,000 214,000
d 222,000 218,000
32. In 2015, Rona Corporation issued 50,000 shares of P10 par value common stock for P100 per share. In 2016, Rona
acquired 2,000 of its shares at P150 per share and immediately canceled these 2,000 shares.

In connection with the retirement of these 2,000 shares, Rona should debit
Additional paid in capital Retained earnings
a 20,000 280,000
b 100,000 180,000
 c 180,000 100,000
d 280,000 0

33. On December 31, 2016, Pack Company’s board of directors canceled 5,000 shares of P25 par value common stock held
in treasury at an average cost of P130 per share. Before recording the cancellation of the treasury stock, Pack had the
following balances in its stockholders’ equity accounts:
Common stock 625,000
Additional paid-in capital 750,000
Retained earnings 900,000
Treasury stock, at cost 650,000
In its balance sheet at December 31, 2016, Pack should report common stock outstanding of
a. 0
b. 250,000
c. 500,000
d. 625,000
34. Vicar Company was organized on January 1, 2016 with 100,000 authorized shares of P100 par value common stock. On
January 5, Vicar issued 75,000 shares at P140 per share and on December 27, Vicar purchased 5,000 shares at P110
per share. Vicar used the par value method to record the purchase of the treasury shares.

What would the balance in the additional paid in capital from treasury stock account on December 31, 2016?
a. 200,000
b. 150,000
c. 50,000
d. 0
35. Rudd Corporation had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31,
2015. The following events occurred during 2016.
January 31 Declared 10% stock dividends
June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-1 stock split
At December 31, 2016, how many shares of common stock are outstanding?
a. 560,000
b. 600,000
c. 630,000
d. 660,000
QUIZ
Answer Section

PROBLEM

1. ANS:
A

Retained earnings – 1/17/2016 3,400,000

Prior period error:
Underdepreciation in 2014 and 2015 ( 200,000)
Corrected beginning balance 3,200,000
Net income for 2017 700,000
Retained earnings 3,900,000

PTS: 1
2. ANS:
A

Revenue 4,500,000
Expenses 3,800,000
Net income 700,000
=======
Retained earnings - beginning 650,000
Net income 700,000
Total 1,350,000
Dividends declares and paid (500,000)
Retained earnings 850,000
=======

PTS: 1
3. ANS:
A

Retained earnings - December 31, 2015 3,000,000

Net income of 2016 - December 31, 2016 600,000
Total retained earnings - December 31, 2016 3,600,000

The retained earnings must be appropriated to the extent of the remaining cost of the treasury shares of P800,000 (40,000 x P20).
Thus, the unappropriated balance should be P2,800,000

PTS: 1
4. ANS:
xx

PTS: 1
5. ANS:
B

Shares issued on January 1 10,000

Share split on March 15 2-for-1 2
Total shares issue and outstanding 20,000
=====

Dividends (20,000 x 5) 100,000

======

PTS: 1
6. ANS:
A

The standard provides that dividends payable in noncash assets should be charged to retained earnings at cost or net book value of the
noncash assets distributed.

PTS: 1
7. ANS:
A

Market value on date of declaration

(10% x 30,000 = 3,000 share x 90) 270,000
 Par value of shares issued as stock dividend(3,000 x 20) 60,000
Share premium 210,000
======
To record the declaration of the stock dividend on May 1:

Retained earning 270,000

Stock dividend payable 60,000
Share premium 210,000

To record the issuance of the stock dividend on July 1:

Stock dividend 60,000

Share capital 60,000

If the stock dividend is less than 20%, the market value of the share on the date of declaration is debited to retained earnings unless
such market value is lower than par or stated value in which case, the par or stated value is capitalized.

PTS: 1
8. ANS:
C

PTS: 1
9. ANS:
D

If the stock dividend is 20% or more, the par value or stated value is debited to retained earnings. Accordingly, the entry to record the
declaration of the 40% stock dividend is:

Retained earnings 800,000

Stock dividend payable
(40% x 100,000 x P20) 800,000

PTS: 1
10. ANS:
Answer is A

4,000 shares/20,000 = 20% stock dividend

Retained earnings before stock dividend 1,500,000

Less: Stock dividend (4,000 x 100) 400,000
Retained earnings after stock dividend 1,100,000

To record the declaration of the stock dividend:

Retained earnings 400,000

Stock dividend payable 400,000

To record the issuance of the stock dividend:

Stock dividend payable 400,000

Ordinary share capital 400,000

PTS: 1
11. ANS:
C

10% stock dividend at fair value 1,500,000

25% stock dividend at par value 3,500,000
total amount debited to retained earnings 5,000,000

PTS: 1
12. ANS:
D

PTS: 1
13. ANS:
C

Dividend declared 800,000

Retained earnings balance 600,000
Liquidating dividend 200,000
 Any amount paid in excess of the retained earnings balance is a liquidating dividend or return of capital. This is legally allowed under
the wasting asset doctrine as long as the excess does not exceed the accumulated depletion balance.

PTS: 1
14. ANS:
A

The preference dividends in arrears do not necessarily require appropriation of retained earnings.

Legally, retained earnings must be appropriated to the extent of the cost of treasury shares.

PTS: 1
15. ANS:
A

Only the retained earnings appropriated for the construction of new plant should be reported.

The retained earnings appropriated for the construction office building should be reverted to unappropriated retained earnings because
the building is already completed.

The cash restriction for the retirement of bonds payable does not necessarily require an appropriation of retained earnings.

PTS: 1
16. ANS:
A

Unappropraited retained earnings 4,000,000

Cancellation of appropriation for sinking fund (500,000 x 5) 2,500,000
Total 6,500,000
Stock dividend (1,250,000 x 40% x P10) (5,000,000)
Adjusted balance 1,500,000
========

PTS: 1
17. ANS:
A

Retained earnings - 1/1/2016 4,500,000

Prior period error - overdepreciation (500,000 x 65%) 325,000
Net income for 2016 4,000,000
Cash dividend - preference (1,000,000)
Cash dividend - ordinary (2,000,000)
Retained earnings - 12/31/2016 5,825,000
========

PTS: 1
18. ANS:
A

Shares to be issued as stock dividend(P2,400,000 / P60 market value)

40,000
Outstanding shares (500,000 - 100,000) 400,000
Percentage of stock dividend (40,000 / 400,000) 10%

PTS: 1
19. ANS:
B

Preference share capital 2,300,000

Ordinary share capital 5,250,000
Subscribed ordinary share capital 50,000
Total legal capital 7,600,000

In case of par value share capital, legal capital is the aggregate par value of all shares issued and subscribed. In the case
of no-par value share capital, legal capital is the aggregate stated value of shares issued and subscribed plus any excess
over stated value.

PTS: 1
20. ANS:
A
 Ordinary shares (3,000,000/50) 60,000
Preference shares (32,550,000/15) 170,000

PTS: 1
21. ANS:
XX

PTS: 1
22. ANS:
A

When shares are issued for services, the measure should be the fair value of such services. However, in this case, the
fair value of the services is not available. Thus, the measure is the fair value of the shares.

Legal expense (1,000 x 140) 140,000

Share capital (1,000 x 5) 5,000
Share premium 135,000

The normal billing rate is not necessarily the fair value of the service because this amount is likely to be negotiable.

PTS: 1
23. ANS:
A

January 10 (25,000 x 20) 500,000

March 25 (1,000 x 40) 40,000
September 30 (5,000 x 60) 300,000
Total share premium 840,000

PTS: 1
24. ANS:
C

PTS: 1
25. ANS:
B

Cash received 11,000,000

Less: Market value of bonds payable 4,000,000
Residual amount allocated to ordinary shares 7,000,000
Less: Par value of ordinary shares (10,000 x 50) 500,000
Share premium 6,500,000

PTS: 1
26. ANS:
D

Donated shares not retired are recorded by means of a memorandum only and therefore do not affect the total
shareholder’s equity. Donated share not retired are actually treasury shares without acquisition cost. However, the
reissuance of donated shares is credited to share premium

PTS: 1
27. ANS:
D

Cash 190,000
Treasury shares 120,000
Share premium 70,000

PTS: 1
28. ANS:
D

Total ordinary share issued (200,000 +100,000) 300,000

Less: Treasury shares 75,000
Ordinary share outstanding 225,000

PTS: 1
29. ANS:
 D

Issued share after split (60,000 x 2) 120,000

Treasury share after split (5,000 x 2) ( 10,000)
Outstanding shares 110,000

The treasury share are included in the share split.

PTS: 1
30. ANS:
A

Issued shares after split (125,000 x 3) 375,000

Less: Old treasury shares
(12,000 balance x 3) 36,000
New treasury shares 5,000 41,000
Outstanding shares 334,000

PTS: 1
31. ANS:
A

Original shares issued 100,000

New shares issued 10,000
Total share issued before split 110,000

Shares issued after split (110,00 x 2) 220,000

Less: Treasury share after split (4,000 x 2) 8,000
Outstanding ordinary shares 212,000

PTS: 1
32. ANS:
C

Share capital (2,000 x 10) 20,000

Share premium (2,000 x 90) 180,000
Retained earnings (balancing) 100,000
Cash 300,000

If an entity’s share capital is retired, the share capital reduced by its par
value. If the retirement in a loss (cost exceeds par value), such loss is
debited to the following in the order given:

1. Share premium from original issuance

2. Share premium from previous treasury share transaction
3. Retained earnings.

PTS: 1
33. ANS:
C

Share capital 625,000

Less: Par value of treasury shares retired (5,000 x 25) 125,000
Share capital outstanding 500,000

PTS: 1
34. ANS:
B

The par value method of recording treasury share is accounted for as retirement of share capital. Accordingly, the
treasury share account is debited at par and any share premium from original issuance is canceled.

Treasury shares (5,000 x 100) 500,000

Share premium – issuance (5,000 x 40) 200,000
Cash (5,000 x 110) 550,000
Share premium – treasury (balancing) 150,000

PTS: 1
35. ANS:
A
Original shares 300,000
Stock dividend (10% x 300,000) 30,000
Total shares issued before split 330,000
Less: Remaining treasury shares 50,000
Outstanding shares before split 280,000

Share issued after split (330,000 x 2) 660,000

Less: Treasury shares after split (50,000 x 2) 100,000
Outstanding shares after split 560,000

PTS: 1