ReSA The Review School of Accountancy ‘Tel. No. 735-9807 & 734-3989 AUDITINGPROBLEMS IRENEO/ESPENILLA FINANCING CYCLE: AUDIT OF STOCKHOLDERS’ EQUITY {OBLEM 1: A partial list of the accounts and ending account balances taken from the post-closing trial balance of Alpha Corporation on December 31, 2016 is shown below: 1. Accumulated profits - unappropriated 450,000 2. Bonds payable 220,000 3. Ordinary shares subscribed 50,000 4. Long-term investment in shares 210,000 5. Share premium on ordinary shares 460,000 6. Premium on bonds payable 30,000 7. Ordinary shares 400,000 B. Preference shares subscribed ’ 45,000 9. Share premium on preference shares 412,000 10. Preference shares 300,000 LL. Share premium from treacury stock transactions 24,000 12. Share dividends distributable - Preference Share 410,000 13. Additional paid-in capital - bond conversion option 15,000 14. Accumulated unrealized holding gain on financial asset at fair value through other comprehensive income/losses. 90,000 15, Accumulated revaluation surplus/reserves 120,000 16. Accumulated remeasurement loss on accumulated profits obligation and plan assets 35,000 17. Accumulated foreign exchange translation gain 56,000 18, Share dividends distributable - Ordinary Share 25,000 19. Accumulated hedging losses through other comprehensive income/losses, 22,000 20. Ordinary share options outstanding 15,000 21. Ordinary share warrants outstanding 5,000 22: Subscription receivable from ordinary shares ~ current 10,000 23. Subscription receivable from preference shares ~ noncurrent 5,000 24, Treasury shares, 2,000 ordinary shares at cost 40,000 25. Accumulated profits - appropriated for treasury shares 140,000 26. Accumulated profits ~ appropriated for plant expansion 100,000 27. Accumulated profits - appropriated for payment of loans 50,000 28. Share Premium from bond conversion privilege 30/000, Further investigation revealed the following information. '2. Ordinary share has P10 par value per share. 90,000 shares are authorized, 40,000 shares are Issued and outstanding, 5,000 shares have been subscribed at price of P28 per share, b. Preference share has no par value but with a stated value of PSO par value, 8,000 shares are ‘authorized, 6,000 shares are issued and outstanding, 900 shares have been subscribed at price of P70 per share. Each share is cumulative convertible into five ordinary shares, and pays 2.7% annual dividend. Dividends are not in arrears. Required: Determine the adjusted balance of the following as of December 31, 2016: ‘Total additional paid-in capital Total contributed capital Total stockholders’ equity Total legal capital from ordinary shares Total legal capital from preference shares PROBLEM 2: You were assigned to aucit the shareholders’ equity of Walker Corp. for the year ended December 31, 2016. Walker Corp. was incorporated in early 2015 when it was authorized by SEC to ‘ssve 500,000 ordinary shares (P100 par) and 250,000 preference shares (P50 par). The following schedule reflects the company’s capital balances af of December 31, 2015: ‘Ordinary shares, 50,000 shares issued during the company's 7,500,000 incorporation at P150 per share. Preference shares, 20,000 shares issued on June 30, 2015 in exchange of 41,200,000 + a building with a fair market value of P1,200,000.ReSA: The Review School of Accountancy Page 2 of 10 Retained earnings, which is the company’s net income in 2015 5,540,000_ Total shareholders’ equity Pi4/240,000 Your inquiries and investigation revealed the following transactions which occurred in 2016: ‘3. On January 5, the company issued 10,090 ordinary shares to employees as compensation. The shares are currently selling on this date at P165 per share, b. On March 10, the company issued 10,000 ordinary shares and 10,000 preference shares for @ 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. On uly 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 semi-annual 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. 4. On August 1, 20,000 preference shares were subscribed by several subscribers at P80 per share. 25% of the subscriptions were collected up front with the balance to be paid after 3 months. &. On October 31, receivables for the 15,000 shares subscribed on August 1 were fully collected, thus the corresponding shares were issued. The subscribers of the remaining shares defaulted, 28 a result, the company offered the remaining shares in an auction. The company paid P15,000 in auction related expenses. ‘On November 25, the company selected the highest bidder for 4,000 shares, thus the amount ‘due was collected. The remaining shares were issued. 9. The company registered an adjusted net income in 2016 at P4,$30,000, lowing transactions transpired in 2017: Fh. On January 15, the company issued 5,000 ordinary shares to the company’s outside legal Counsel. The shares are currentiy’selling on this date at P180 per share. The fair market value of the legal services received on this date is P8S0,000. 1. On February 5, the company issued 10,000 ordinary shares to its creditors as a payment of its ‘outstanding loan of P2,250,000; inclusive of interest of P50,000. The shares ate currently selling ‘on this date at P200 per share. This payment was a resuit of a debt restructuring agreement entered by the company with the creditor. 3, On March 5, the company issued 3,000 ordinary shares to its creditors as a settlement of the company’s outstanding liabilities of 525,000, which is inclusive of interest payable of P15,000 in compliance with the original terms of the debt. ‘The shares are currently selling on this date ‘at P175 per share, Based on the information above, determine the adjusted balances of the following Ordinary Shares, December 31, 2016 and 2017 Preference Shares, December 31, 2016 ‘Share premium in excess of par ~ Ordinary Shares December 31, 2016 and 2017 ‘Share premium in excess of par — Preference Shares, Cecember 31, 2016 ‘Additional Paid-in Capital, December 31, 2016 Contributed Capital, December 31, 2016 Stockholders’ Equity, December 31, 2015 ogaune PROBLEM 3:You were assigned to audit the shareholders’ equity of Glory Inc. for the year ended December 31, 2016. Glory Corp. was incorporated in early 2015 when it was authorized by SEC to sue 500,000 ordinary shares (P10 par) and 100,000 convertible preference shares (P20 par), The folawing schedule reflects the company's capital balances as of December 31, 2015: Ordinary shares, 100,000 shares Issued during the company’s 1,400,000 incorporation in exchange of a land with a fair value of P1.4M. Preference shares, 50,000 share issued duning the company's 2,500,000 incorporation at PSO per share. Each preference share Is convertible to four ordinary shares. Retained earnings, which és the company’s net income in 2015 $340,000 Total sh seholders’ equity TB5840,000- Your inqu’ .es and Investigation revealed the following transactions, which occurred in 2016: ‘On January 15, the company reacquired 20,000 ordinary shares (from the 2015 issue) at P22 per share and reverted them ta treasury since it intends to reissue the same. b. On February 11, the company reissued 4,000 treasury shares at P28 per share. c. On March 5, the company reissued 6,000 treasury shares at P19 per share. On April 1, the company retired 5,000 treesury shares, ———z00 &ReSA: The Review Schoo! of Accountancy Page 3 of 10 ce €. On May 12, 20,000 preference shares were converted to ordinary shares. f. On dune 9, 15,000 shares were sudscribed for a total amount of P175,000. 9. On July 4, a 2 for 1 share split was effected for the ordinary share, h. On August 8, the company reissued 3,000 treasury shares at PB per share, 1. The company issued 4,000 ordinary shares for P11 per share, ‘The company registered an adjustee! net come in 2016 at PB30,000. smpute for the adyusted balances of the following as of December 31, 2016: Ordinary Shares Preference Shares ‘Share premium - Ordinary shares Share premium ~ Preference shares ‘Share premium ~ Treasury shares Total additional paid-in capital ‘Total contributed capital Total stockholders’ equity PROBLEM .4: XL.Co. issued 2,000 shares uf P20 par preference shares with 1,000 detachable warrants for a total price of 240,000, The warrants enable the holder to purchase 1,000 ordinary shares of P10 par at P40 per share. Immediately after the issuance of the share, th warrants are selling at P20 per Warrant and the market value of the preference without the warrants 1s P90. Required: Determine the following: 1 2 i The amount to be assigned to the share warrants “The amount fo be credited to share premium in excess of par if 60% of the warrants are exercised ‘The effect of the expiration of the remaining warrants to the total Share Premium PROBLEMS: Global Co. had the following selected information in its December 31, 2015 Stockholders’ Equity: 10% Preference shares, P100 par value, $0,000 shares authorized, 10,000 shares issued and outstanding 1,000,000 Ordinary shares, P50 par value, 100,000 shares authorized, '50,000 shares issued, 5,000 shares reacquired at P75 per share 2,500,000 ‘Share premium on preference shares 250,000 Share premium on ordinary shares 250,000 ‘Accumulated profits 2,350,000 ‘Transactions in 2016 are as follows: ‘a. On January 2, the company issued 4,000, F1,000 10% bonds payable with detachable warrants, ‘One warrant is attached to each P1,000 bord. The bonds which pay semi-annual interest every Sune 30 and December 31 were issued at total lump-sum price of P4,200,000. On the date of issuance, the bonds were quoted at 101 without the warrants while each warrant can be sold in the market at P25. Five warrants surrendered together with P7S exercise price entitle the holder to acquire one ordinary share. Warrants can be exercised 2 years from the date of the issuance, b. On April 15, stock rights were issued to ordinary shareholders. Ten stock rights plus P6O per share entitle the holder to acquire one additional ordinary share, On June 1, 80% of the warrants issued with the bonds were exercised, d. On August 15, all but 6,000 stock rights were exercised by the ordinary shareholders. fe. Adjusted net income for the year amounted to 1,350,000. ‘Based on the information above, answer the following: i ‘AUDITING PROBLEMS - BATCH 36> ‘What is the correct amount to be allocated to the ordinary share warrants as a result of the transaction on January 2? What ste cred tothe share premium account asa result ofthe exercise ofthe stock warrants fon June 17 ‘What is the credit to the share premiuin account as a result of the exercise of the stock rights on we te 1e stock rights ‘What is the correct balance of the ordinary shares accounts as of Occember 31, 20167 ‘What isthe total Additional paid in capita’ as of December 31, 2016? ‘What is the total stockholders’ equity as of December 31, 2016?ReSA: The Review School of Accountancy Page 4 of 10 PROBLEM G:Lucky Company granted 100 share options to each of its S00 employees on January 1, 2017. The option plan allows the employees fo purchase a share of the entity’s P100 par value ordinary Snare capital at P10. On January 1, 2017, tive fair value of each option was P24. The option plan requires the employees receiving the opt ons to be in the employ of the company at least until December 31, 2019. Options are exercisable in 2020. ‘Actual ang revised estimates of employees leaving the company during 2017, 2018 and 2019 are as (2OIT—"T 25 empioyecs left; 30 more [2018 [20 employees left; 15 mo 2019 10 employees left miployees are expected to leave before December 31, 2019, ‘employees leave before December 31, 2019 ‘80% of the options were exercised in 2020, and the remaining options expired by end of 2020. Required: Compute for the following: 1. Compensation expense for 2017, 2018 and 2019 2. Share premium credited as a resvlt of the exercise of the options. PROBLEM 2: On January 1, 2016, MARS Company granted share options to 10 of its key employees entitiing them to acquire P100 par value snares of the company at P11O per share. The share options will vest on December 31, 2018, provided that the employees remain in the company’s employ and provided that revenues reach P1GO million, the empicyees will receive 1,000 options each. If revenues Teach P1S0 million, the emplayees wil! receive 2,000 options each. IF revenues reach P200 million, the ‘employees will receive 3,000 options each. ‘The market value of the option on the date of grant és P30. The company has a steady pattern of 25% increase in revenues every year over the last 5 years and expects the same pattern during the vesting period. In addition, the following information were deemed relevant for the computation of the compensation ‘expense for each year: Date Estimated number of ‘Actual revenue earned Emplovees who wil leave ‘the company Dec. 31, 2016 2 . P80 milion Dec. 31, 2017 2 120 million Dec. 31, 2018 3* 200 milion ‘Actual number of employees who left the company. REQUIRED: 1. What is the compensation expense to be recognized in 20167 2 80,000 © 180,000 b 100,000 6 300,000 . 2. What is the compensation expense to be recognized in 2017? a 80,000 240,000 b 100,000 6 300,000 3. What is the compensation expense to be recognized in 2018? ‘a 630,000 © 320,000 b 500,000 4 310,000 4, If the actual employees receiving their options exercise all their options in 2019, how much 1s credited to share premium from the related issuance of shares? a 210,000 © 840,000 b 630,000 3 900,000 : On January 1, 2016, MARS Company granted share options to 10 of its key employees TAting them to acquire P100 par value shares of the company at Pi10 per share conditional upon the employees’ remaining in the company’s employ during the vesting penod. The 10,000 share options Shall vest at the end of 201Gif the company’s revenues reach PIOM; or at the end of 2017 if the company’s revenues reach P1OOM; or at the end of 2018if the revenues reach P110M. “The market value ofthe option on the dete of grontis P20, The company has a steady pattern of 25% The market va ower yoor over tne ast 9 years and expects the same pattern during the vestig increas i rer als expects that no employees shal leave the company arin the vesting pei. Revenues actually earned and recorded by the company during 2016 through 2018 follow: 2016 P80 million 2017-90 million 2018 110 million What isthe compensation expense to be recognted in 20167 | ‘a 50,000 5 © 150, | SBTRNG RGRERE TESS ———200 &ReSA: The Review School of Accountancy Page 5 of 10 b 100,000 4 300,000 2. What is the compensation expense to be recognized in 2017? a 50,000 © 150,000 b 100,000 4 300,000 3. What is the’ compensation expense to be recognized in 2018? a $0,000 ¢ 150,000 b 100,000 4 300,000 4. If the employees exercised all their options in 2019, how much 1s credited to share premium from the related issuance of shares? 2 100,000 ¢ 400,000 b 300,000 6 500,000 PROBLEM 9: On January 1, 2016, FGH Corporation issued 300 share options to 10 of its key employees that will vest once its share price equals P90. The employee #s required to be employed with the company at the time the condition 1s met in order to receive the options. The share options will expire in S years. On the date of grant, itis expected that the condition will be satisfied in 3 years. The company applies a binomial options pricing model, which takes into account the possibility that the share price will equai/exceed P90 in 3 years (hence the share options become exercisable) and the possibilty that the share price will not equal/exzeed P90 in 3 years (hence the option will be forfeited). The company estimates that the market value of the stock option on the date of grant with this market condition 1s P25 per option. The corresponding share pnce at the end of each year and the corresponding estimated number of employees expected to leave the cornpany at the end of each year are as follows: Date Estimated number of ‘Actual Share Price Employees who will leave ‘the company Dec. 31, 2016 1 80 Dec. 31, 2017 2 85 Dec. 31, 2018 3 on ‘Actual number of employees who left the company. 1. What is the compensation expense to be recognized in 20167 a. 75,000 b. 67,500 ©. 25,000 4. 22,500 2. What is the compensation expense to be recegnized in 20177 ‘2. 40,000 b. 25,000 20,000 4. 17,500 3. What is the compensation expense to be recognized in 20187 2. $2,500 b. 17,500 12,500, 4. 10,500 ‘Assuming that the actual share price amourited to PBS at end of 2018, what is the compensation ‘expense to be recognized in 20187 a. 52,500 b. 17,500 © 12,500 4.0 PROBLEM 10: C Co. issued share appreciation rights (SARs) to 40 or its employees. The SARS will vest at the end of 3 years, provided the employees remain with the company and provided the average revenue growth over the period will exceed 5%. The share option entitlement of each ‘employee depending upon the average growth rate is: ‘Average Revenue Growth Percentage No. of SARs per Employee Sto 10 1,000 11 to 15 2000 More than 15% 3,000 ‘On the grant date, each SAR has a fair value of uring the 3-year vesting period, and that 16 ot ends. 1. Assuming the estimates da not change during Year 1, the compensation expense in Year 1 is 2 800,000 960,000 b 320,000 4 480,000 2. At the end of Year 2, the average revenue growth projection over the three-year vesting period is 14% and 32 employees are expected to remain in the entity's employ. The fair value of each SAR '570. The compensation expense in Year 21s 3 2,506,667 © 1,449,000 b 2,186,667 6 1,986,667 [At the end of Year 3, the average revenue growth over the three-year vesting period is 13% and 36 ‘employees did not leave the company. Tlic fair value of each SAR 1s P80. The compensation expense in Year 3 Is, a 2,773,333 5,760,000 C expects an average revenue growth rate of 8% sr3 employees will leave before the vesting period AUDITING PROBLEMS - BATCH 37.ReSA: The Review School of Accountancy Page 6 of 10 MOGLEM.LL: ETC Co. nas been paying regular semi-onnusldvdends tots shareholders. The felling re the company's equty wansasto 11° The company hes 1,300,000 shores isued and outstanding; total shares authorized Is 3,000,090 shares; tre par is P2 per share, 2 4.15 Issued 100,000 new shares at PS per share, 5.20 Reacquired 200,000 shares at PS per share. 6.30 Paid dividend of P2,550,000. 10.13 P2M of P1,000 bonds were converted into ordinary share at the rate of 50 shares of stock per P1,000 bond: 11.11 Reissued 100,000 shares froin the treasury at P6 per share. 12.46 Issued an 11% share dividend 12.31 Paid semi-annual dividends. ‘The alvidend per share isthe same as that paid in the first semi-annual period. : ® 41. The dividend per share paid on June 30 a 1.50 © 159 b 0.85. d 170 2. The amount of dividend to be paid in the December 31, in order to pay the same dividend rate as ‘that paid in the previous semi-annual period: 2 2,850,000 © 3,163,500 > 8 3,585,300 PROBLEM 12; The SHE account of Big Co. on June 30, 2011 are as follows: Ordinary share, P10 par, 50,000 shares issued and outstanding 500,000 ‘Share premium in excess of par 250,000 Accumulated profit 3,138,000, ‘Shares of the company are selhing at this time at P20. Prepare the entries in each of the following independent cases: A. 10% stock dividend is issued B 30% stock dividend is issued ‘4 PROBLEM 13: BC Co. has 50,000 ordinary shares that are issued and outstanding at a par value of P10. In declaring and distributing 2 50% stock uividend, BC initially issued only 20,000 new shares; the other shares were not issued because some investors did not own BC shares in even multiples of 10. ‘To these shareholders, BC issued fractional warrants. Prepare the journal entries for the following: ‘A. Declaration of share dividend B. Issuance of full shares and fractional warrants C._ Issuance of full shares through the surrender of 80% fractional share warrants D. Expiration of the remaining fractional warrants. PROBLEM 14: On October 31, Coy Inc. declared building as property dividend distributable to stockholders on January 31 of the following year. The building nad a carrying value of P1,SH on October 531. The building had 2 fair market value of P1.4M on the same date. On Dec. 31 the value of the building further deteriorated and latest estimates placed the fair value of the building at P1.2M, “The Building was transferred to shareholders on January 31 when the prevailing fair value ofthe building was at P1.3M. “A. ‘The entry to record the declaration of the property dividends would include a debit to retained es nings of: Aare bh. SM c. 1.4M 4. 1.2M Nees 2 et ic prt Seas parable shoul bs reported oe siatment of trancat postion es December 317: a ean Lam 4. 1.2m |3. How much loss should recognized inthe inceme statement on the reclassification of the bulding to : for disposal on the deciaration date? Saat ee aon min © 4. What is the gain oF l05s to be recognized in the profit or losses as a result of the distribution of the 2 property dividends on Jenwary 31? Be Oe eres . 300,000 4. 200,000 © be: 100,000ReSA: TI je 'eSA: The Review School of Accountancy Page 7 of 10 ROBLEM 15:3KL Corp. reported th MH ne following amounts in the shareholders’ equity section of ts December 31,2015, statement of nancial positon, Ne areolders ey section of ts Preference shares, P10 par (100,000 shares autho 40,000 shares issuea) 1 on” ares ouorved, oe Qfsinary shares, PS par (50,000 shares authorized, 20,000 shares iseued) 100,000 are premium = Ordinary shares 192,600 Accumulated profits 3,200,000 b i following transactions eccurred dunng 2016: At the beginning of 2014, the company paid the annuat 2015 PI per share dividend on preference shares and P0.50 per share dividend on Ordinary shares. These dividends had been declared on December 1, 2015. Further investigations revealed that no entry has been ‘made to account for the declaration of the said dividends, On February 13, the company purchased 4,000 shares of its own outstanding ordinary shares for P80,000. On March 30, the company declared and issued ordinary shares split-up (1 1s to 2) ‘On June 19, the company reissued 2,00 treasury shares for an equipment with a fair value at 50,000. (On August 2, the company issued 10,000 shares of preference shares at P15 per share. On September 30, the company declared 8 10% stock dividend on the outstanding ordinary ‘shares when the stock is selling for PB per share, The share dividends were subsequently 'ssued on October 11 December 1, the company declared the annual 2016 Pi dividend on preference sheres and the 0.25 per share dividend on ordinary shares. These dividends are payable at the beginning of 2017. ‘The company registered a net income for 2016 at P940,000. Requirements: 1 2 Bi What is the effect to stockholders’ equity as a result ofthe share split in item c? What is the amount credited to accumulated profits as a result of the declaration of the 10% stock dividend in item What is the amount credited to accumulated profits as @ result of the 2016 cash dividend declaration? ‘What is the correct balance of the accumulated profits-unapproprieted account as of December 31, 20167 ‘Assuming that the share dividends deciared in item f was 20%, what is the amount credited to retained carnings as a result of the declaration of stock dividends? PROBLEM 16:Talisay Corporation presented the following batance sheet for Dec. 31, 2086: Assets Current Assets P 30,000 ‘Treasury shares (at market, cost is P15,000) 14,000 Depreciable Fixed Assets 56,000 Total assets, 100,000 Liabilities and Shareholders’ Equity Current liabilities P 20,000 Ordinary shares subscribed (S00 shsres) 10,000 Long-term debt 8.000 “otal liabilities 2 ‘38,000 Ordinary shares (4,000 shares issued) P 48,000 10% Preference shares (1,000 shares issued) 12,000 Subscriptions receivable ( 4,000) Reserve for depreciation 16,000 Accumulated profit 20,009 ‘Total shareholders’ equity — 62,000 Total liabilities and sharcholders' equity Pi100,000, ‘Additional information: AUDITING PROBLEMS - BATCH 37 3. Your investigation of Talisay Corporation's financial records indicates that all ‘authorized shares have been either issued or subscribed. The par values for the ordinary and preference shares are P2 and P10, respectively. 4. The treasury shares were originally purchased when the market price was P20 per ‘share. During 2016, 250 treasury shares were resold for P2S per share. gain on treasury share transactions’ was credited for the difference between the original cost ‘and the selling price. The amount was included in the determination of the nt incomeReSA: The Review School of Accountancy Page 8 of 10 for the year. Furthermore, the excess of cost over market of the treasury shares at the end of the period was recognized as an unrealized loss on the 2016 meomne statement ‘You ciso discovered that majority stockholder donated during 2026, 3 land which Criginally costed the stockholger P5000 but with @ market valve of P9,000 during the date of donation. 6. Subscriptions receivable are due six months from December 31, 2016. Determine the a usted balances of the following A B c > 1. Totat assets 79,000 83,000 $7,000 $8,000 2. Total liabilities * 20,000 28,000» 38,000 48,000 3. Additional paid-in capital 30,000 31,250 39,000 21,000 4. Total contributed capital 40,250 41,250 50,250 88,000 5. Treasury stocks 34,000 18,750 20,000 «15,000 6. Total stockholders’ equity 83,000 69,000 62,000» S5,000 PROBLEM.17: The Accumulated profits sccount of ily Jean Corp. shows the following debuts and credits for the year 2016: UNAPPROPRIATED ACCUMULATED PROFIT Date Debt Credit Balance Jan1 Balance 585,500 (2) Gain on life insurance policy setitement 50,000 (b) Write off of intangibles (goodwill 30,000 (©) Effect of @ change in accounting principle (from FIFO to weighted average) 300,000 (2) Loss on sale of treasury stock (APIC from treasury 20,000 ‘tock transaction is enough to cover the loss) (2) 10% stock dividends on 109,000, P10 par valve shares issued and outstanding (FIV at the same. date at P12.50) 100,000 ()—_2015unaccrued employee compensation 160,000 (9) Premium on ordinary shares issued 65,000 (h) Stock issuance expenses related to oruinary share issued above s,000 () Loss on sale of an equiament 25,000 G) Gain on retirement of preference shares at less than issue price (K) Gain on early retirement of bonds () Correction of a prior period error (m) Cash dividends payable 75,000 (7) Iaventory loss from flood 30,500 (0) Proceeds from sale of donated stacks (p) Revaluation increase in land (2) Appropriations for plant expansion 100,000 (s)__Net income for the period 1. How much is the adjusted net income for the year? a. 207,000 . 187,600 © 172,000 4. 188,500 2. How much is the correct unappropriated accumulated profits restated beginn ‘a. 710,500 b. 680,500 1. $$0,500 d. $20,500 3. How much is the correct unappropriated accumutated profits ending balance? a. 447,500 b. 460,000 © 422,508 ¢. 377,500 PROBLEM 18:Logan Corp. has incurred losses trom operations for many years. At the necammen of the newly hired president, the bourd of directors noted to implement 2 quasi-reorge~sation, sassen to the stockholders’ and creditors’ approval. Immediately, prior to the quasi-resrganceton 30, 2016, Logan's balance sheet was 2% follows: assets Current assets P1,375,000 Property, plant and equipment 375,000 Other noncurrent assets 500.000 Total assets 75,250,000 Labilties and Stockholders’ Equity Total Habiities 1,00,000 Ordinary shares, P1O par valve AUDITING PROBLEMS - BATCH 37ReSA: 'eSA: The Review School of Accountancy fege9 40. Additional paid-in capi Dect eal 750,000 (4,000,000) Total liablties and stockholders’ equity 5,250,000 The 0) decommethalders and creditors approved the quas/-reorganization effective July 1, 2016, to be accomplished by a reduction in property, plant, and equipment (net) P875,000, a reduction in other assets of P375,000, and a reduction in par value from PLO to PS, 1. Logan's July 1 balance sheet after the quas'-reorganization should show totl assets of: 3, 4,000,000 ‘b. 2,500,000 e. 4,375,000. 3,875,000 2. The balance in the Additionsl paid-in capital after the quasi-reorganizetion on July 2, is: 2. 750,000 2,000,000. $00,000 6.0 3. Logan's deat after the quas!-reorgenization on July 1, 2016, should be: 2. 750,000 8 250,000 500,000. PROBLEM 19: Scott Inc. has sustained heavy losses over a period of time and conditions warrant that Scott Inc. undergo a quasi-reorganization on December 31, 2016. The balance sheet of Scatt Inc. on December 31, prior to the reorganization is: Current assets 1,000,000 Property, plant and equipment 5,000,000 Less: Accumulated depreciation 41,500,000 3,500,000 Goodwill 500,000 Total assets 5,000,000 Current liabilities 1,100,000 Ordinary shares, P100 par value '5,000,000, Share premium on ordinary shares 500,000 Deficit (4,600,000) 85,000,000 Total assets ‘The Securities and Exchange Commission approved the quasi-reorganization on the basis of the Unrealistic valuation of the property, plant and equipment. Accordingly, the SEC recommended that the PPE be appraised by an independent expert. 1. The PPE are determined to have replacement cost of P9,000,000. 2) The inventory is to be written dawn by 400,000. 3. The goodwill should be wnitten-off 4. Unrecorded accounts payable amounted to 200,000. 5. Any resulting deficit is charged against the revaluation surplus. 1. Scott’s balance sheet after the quasi-reorganization should show total assets of: ‘2. 6,900,000 _b. 7,400,000 ‘©. 7,800,000 d. 8,000,000 2. The balance’in the Revaluation surplus afte, the quasi-reorganization is: ’2. 2,800,000. 1,200,000. 300,000 'd. 100,000 3, Scott's deficit after the quasi-reerganization, should be: 2. 1,600,000 b. 600,000 ‘c. 200,000 2.0 PROBLEM 20: T.An auditor usually obtains evidence of stockholders equity transactions by reviewing the entity's 12. Minutes of board of directors meetings. (x) b. Transfer agents’ records: €. Canceled stock certificates d._ Treasury stock certificates. 2. In performing tests concerning the granting of stock options, an auditor should: Confirm the transaction with the Secretary. Verify existence of option holders in the entity's payroll records or stock ledgers. Determine that sufficient treasury stock 1s available to cover any new stock 'ssued. Trace the authorization for the transaction to a vote of the board of directors. (x) 3. During an audit of an entity's stockholders’ equity accounts, the auditor determines whether there ‘are restrictions on retained earnings resulting from loans, agreements or laws. This audit procedure ‘most likely is intended to verify managemer:t assertion of a. Existence b.- Completeness ©. Valuation J. Presentation and disclosure (x) AUST PROSENSE BOAT ———z00 &)ReSA: The Review Schooi of accountancy Page 10 0f 10 eremaeclent-comPary does not maintain ts wn stock records, the auditor should obtain wrtter ‘confirmation from the transfer agent a a registrar concerning: a. Restrictions on the payments of dividends. b. The number of shares tesuen endl outstanding. (x) € Guoramees of preference stares liquidation value. 3. The number of share tte ayreemients to repurchase audit program for the examinetion af the ret squires verification of the Rashet value used t0 charge resained earnings to account for a two-for-one split. Approval of the adjustment to the beginning balance 3s a result of a write-down of an accounts receivable. © Authonzation for both cash and stock dividends. (x) Gain 0° toss resuiting form «spauition of treasury shares tained earnings account should include a step that 2 S panei ODITING PROBLEMS - BATCH 3 : a