A.
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ACCOUNTING 502
QUIZ 2 – FINAL
SET A
(for exclusive use by the School of Accountancy, Saint Louis
University, 2600 Baguio City, Philippines)
GENERAL INSTRUCTIONS:
You are allowed to have three (3) 10-column or 12-column
worksheets ONLY. Write on the upper leftmost portion of each
worksheet “Page 1”, “Page 2”, and “Page 3” for pagination.
Erasures, superimpositions, or any form of alterations on the
pagination will INVALIDATE your quiz. Use blue or black ink
only.
Multiple Choice
INSTRUCTIONS: Write your answers on the DATE COLUMN
of Page 1 ONLY. Use the numbering on the left most portion
of the column. Answers for multiple choice written on either
Page 2 or Page 3 will not be considered. Erasures,
superimpositions, or any form of alterations will invalidate
your answers. Solutions for the multiple-choice problems are
not required. (2 points each)
1. Which of the following is not a shareholders’ equity
transaction?
A. Declaration of dividends
B. Issuance of share capital
C. Payment of dividends
D. Purchase of treasury shares
2. Which of the following sets of duties does not violate the
principle of segregation of duties for internal control
purposes?
A. Issuing share capital and recording issue of share
capital
B. Shareholder ledger maintenance and cash
disbursements recording
C. Shareholder ledger maintenance and general ledger
recording
D. Shareholders ledger maintenance and preparation
of certificates of stock
3. Recalculation of dividends, share issuances and share
repurchases made by the treasury department is a test
of:
A. Cut-off
B. Occurrence
C. Ownership
D. Valuation
4. How many of the following statement(s) is/are correct?
Statement 1 – Charging expenses directly to retained
earnings instead to expense account is a potential fraud
risk associated with shareholders’ equity.
Statement 2 – When responding to identified risks of
material misstatements associated with shareholders’
equity accounts, the auditor often decides to rely heavily
on tests of controls.
Statement 3 – recording the purchases of treasury
stocks does not pose any inherent risk of material
misstatements.
B. One
C. Two
D. Three
5. Footing the shares outstanding in the share register and
comparing the total to the shares outstanding in the
general ledger addresses the audit objective of:
A. Classification
B. Completeness
C. Ownership
D. Valuation
6. Which of the following is not part of cumulative other
comprehensive income?
A. Actuarial gains and losses on defined benefit plans
pertaining to employees retirement benefits
B. Revaluation surplus
C. Unrealized gains and losses on available for sale
securities
D. Unrealized gains and losses on trading securities
7. Which of the following is not a typical procedure for
auditing dividends?
A. Confirming the amount disbursed for dividends
with the stock certificate registrar
B. Recomputing the amount of the dividends
C. Review of the client’s compliance with contracts
restricting the distribution of dividends
D. Testing payee names and amounts on canceled
checks with the share capital register or share
certificate
8. When a client maintains the services of an independent
stock registrar, the auditor should obtain written
confirmation from this registrar concerning which type
of information?
A. Covenants on preference shares issued
B. Number of shares issued and outstanding
C. Restrictions on dividends
D. Share options granted
9. An audit program for the audit of the retained earnings
account should include a step that requires verification
of:
A. Approval of the adjustment to the beginning
balance as a result of a write-down of an account
receivable.
B. Authorization for both cash and stock dividends.
C. Gain or loss resulting from disposition of treasury
shares.
D. Market Value used to charge retained earnings to
account for a 2-for-1 stock split.
10. Where no independent stock transfer agents are
employed and the corporation issues its own stocks and
maintains stock records, cancelled stock certificates
should:
A. Be defaced and sent to the secretary of finance.
B. Be defaced to prevent issuance and attached to
their corresponding stubs.
C. Be destroyed to prevent fraudulent reissuance.
D. Not be defaced but segregated from other stock
certificates and retained in a cancelled certificates
file.
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ACCOUNTING 502 – QUIZ # 2 (FINAL)
May 15, 2019
11. Statement 1 – When an entity does not maintain its own
stock records, the auditor should obtain written
confirmation from the transfer agent and registrar
concerning the number of shares issued and
outstanding.
Statement 2 – When an entity does not maintain its own
stock records, the auditor should obtain written
confirmation from the transfer agent and registrar
concerning restrictions on the payment of dividends.
A. Both of the statements are correct
B. None of the statements are correct
C. Only statement 1 is correct
D. Only statement 2 is correct
12. Which of the following statements is correct?
A. When a company has treasury share certificates on
hand, a year-end count of the certificates by the
auditor is required when the company classifies
treasury shares with other assets.
B. When a company has treasury share certificates on
hand, a year-end count of the certificates by the
auditor is not required if the treasury share is a
deduction from shareholder’s equity.
C. When a company has treasury share certificates on
hand, a year-end count of the certificates by the
auditor is required when the company had treasury
share transactions during the year.
D. When a company has treasury share certificates on
hand, a year-end count of the certificates by the
auditor is always required.
13. Which of the following statements is correct?
A. An independent auditor should determine that the
company officers authorized the issuance of the
stock dividend.
B. An independent auditor should determine that the
stock dividend was recorded by transferring
appropriate amounts from retained earnings to
share capital and share premium.
C. An independent auditor should determine that the
stock dividend was properly recorded by a
memorandum entry only.
D. When a company declared and paid stock dividend,
an independent auditor should determine that
shareholders received their additional shares by
confirming year-end holdings with them.
14. The unappropriated retained earnings account would
be debited for the following transactions, except:
A. A 5% stock dividend
B. A 70% stock dividend
C. A two-for-one stock split
D. An appropriation of retained earnings for planned
plant expansion
15. Which of the following is would not result to an increase
in share premium?
A. Declaration of 30% stock dividends
B. Issuance of share options
C. Receipt of donated capital
D. Selling of treasury shares at above cost
2
16. Black Company is authorized to issue 200,000 of P10
par value ordinary shares, and 60,000 of 6% cumulative
and nonparticipating preference shares, par value of
P100 per share. The company engaged in the following
share capital transactions through December 31, 2016:
a. 50,000 ordinary shares were issued for P650,000
and 20,000 preference shares for machinery valued
at P2,600,000.
b. Subscriptions for 9,000 ordinary shares have been
taken, and 40% of the subscription price of P18 per
share has been collected. The shares will be issued
upon collection of the subscription price in full.
c. 2,000 treasury ordinary shares have been
purchased for P12 and accounted for under the cost
method.
d. The post-closing retained earnings balance at
December 31, 2016, is P420,000.
What is Black Company’s total shareholder’s equity at
December 31, 2016?
A. 3,110,800
B. 3,638,800
C. 3,710,800
D. 3,714,800
Use the following information to answer 17 – 18:
On January 1, 2018, Yellow Corporation issued 3-year,
4,000 convertible bonds at face value of P1,000 per bond.
Interest is to be paid annually in arrears at the stated
coupon rate of 6%. Each bond is convertible, at the holder’s
option, into 200 P2 par value ordinary shares at any time
up to maturity. On the date of issuance, the prevailing
market interest rate for similar debt without the conversion
privilege was 9%. On the same date, the market price of one
ordinary share was P3. The bonds were converted on
December 31, 2019. The following present value factors are
obtained from the present value tables:
6% 9%
PV – 1 for 3 periods 0.83962 0.77218
PV – ordinary annuity of 1 for 3 periods 2.67301 2.53130
PV – annuity due of 1 for 3 periods 2.83339 2.75911
17. The equity component of the convertible debt is:
A. 303,768
B. 1,600,000
C. 1,973,621
D. 2,400,000
18. The entry to record the bond conversion on December
31, 2019 should include a credit to share premium –
issuance of:
A. Zero
B. 2,289,893
C. 2,400,000
D. 2,593,661
Use the following information to answer 19 – 20:
At the beginning of 2016, an entity grants 100 share options
each to 1,000 employees. The grant is conditional upon the
employees remaining in the entity’s employ during a vesting
period of three years.
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ACCOUNTING 502 – QUIZ # 2 (FINAL) 3
May 15, 2019

The exercise price at grant date is estimated at P30. Also, condensed income statement reported net income
However, the exercise price drops to P20 if the entity’s (loss) as follows:
earnings increase by at least an average of 10% per year
over the three-year period. For the year 2013 (P175,000)
For the year 2014 120,000
On grant date, the entity estimates that the fair value of the For the year 2015 409,300
share options, with an exercise price of P20, is P10 per Cumulative earnings P354,300
option. If the exercise price is P30, the entity estimates that
the share options have a fair value of P9 per option. The Based on the P354,300, the President has recommended to
following actual events occurred: the board of directors that a cash dividend of P350,000 be
declared and paid during January 2016. The outside
Year 2016 director on the board has objected on the basis that the
60 employees have left. The entity expects, on the basis of company’s financial statements contain major errors (there
weighted average probability, that a further 60 employees has never been an audit). You have been engaged to clarify
will leave during 2017 and 2018, respectively. The entity’s the situation. The single shareholders’ equity account,
earnings increased by 12%, and the entity expects that provided by the bookkeeper, appeared as follows:
earnings will continue to increase at this rate over the next
two years. The entity therefore expects that the earnings Shareholders’ Equity
target will be achieved, and hence, the share options will Debits
have an exercise price of P20. 2013 Share issue costs P 13,000
2013 Net loss 175,000
Year 2017 2014 Bought 1,000 shares from an
At year end, a further 70 employees have resigned. The unhappy shareholder named Red 7,000
entity expects that a further 60 employees will leave during
Depreciation expense*
2018. The entity’s earnings increased by 13%, and it
(2013 – P15,000)
continues to expect that the earnings target will be
(2014 – P17,000)
achieved.
(2015 – P23,000) 55,000
Miscellaneous expense*
Year 2018
(2013 – P20,000)
A further 56 employees have left by the end of the year. Due
(2014 – P25,000)
to a general decrease in market demand, the entity’s
(2015 – P5,000) 50,000
earnings increased by only 3%. Because the earnings target
2015 Cash loan to the company
was not achieved, the 100 vested share options for each
President 100,000
employee have exercised price of P30.
Total Debits P 400,000
Based on the above and the result of your audit, determine
the following: *Recorded as expense but not shown on the income
statement.
19. Compensation expense for 2018:
A. 192,600 Credits
B. 266,667 2013 Ordinary shares, par P5, 200,000
C. 270,000 shares issued P1,600,000
D. 273,333 2014 Net income (including P100,000
land write-up based on president’s
20. Share options outstanding at the end of 2018: estimate) 220,000
A. Zero 2014 Ordinary shares, 2,000 shares
B. 732,600 issued 18,000
C. 810,000 2015 Sold 300 shares of Red shares 2,700
D. 820,000 2015 Net income 409,300
Total Credits P2,250,000
Use the following information to answer 21 – 22:
Pink Corporation was organized on January 1, 2013 and Based on the concerns of the outside director, answer the
began operations immediately. Unfortunately, the company following:
hired an incompetent bookkeeper. For the years 2013
through 2015, the bookkeeper presented an annual balance 21. What is the adjusted balance of retained earnings as of
sheet that reported only one amount of shareholders’ equity: December 31, 2015?
A. 249,300
As of December 31, 2013 P 1,377,000 B. 349,300
As of December 31, 2014 1,566,000 C. 354,300
As of December 31, 2015 1,850,000 D. 454,300

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ACCOUNTING 502 – QUIZ # 2 (FINAL) 4
May 15, 2019

22. What is the adjusted total equity as of December 31, 24. Retained earnings (before appropriation for treasury
2015? shares):
A. 1,500,000 A. 649,378
B. 1,750,000 B. 1,454,178
C. 1,850,000 C. 1,573,378
D. 1,950,000 D. 1,599,378

Use the following information to answer 23 – 25:
You have been assigned to the audit of Blue Company, a
manufacturing company. You have been asked to
summarize the transactions for the year ended December
31, 2016, affecting shareholder’s equity and other related
accounts. The shareholders' equity section of Blue
Company’s December 31, 2015, statement of financial
position follows:
Ordinary share capital, P2 par value,
1,000,000 shares authorized, 180,000
shares issued, 177,580 shares
outstanding P 360,000
Share Premium – Issuance 3,640,000
Share Premium – Treasury shares 45,000
Retained Earnings 649,378
Treasury shares (cost of 2,420 shares) (145,200)
Total shareholders’ equity P 4,549,178
You have extracted the following information from the
accounting records and audit working papers.
2016
Jan. 15 Blue Company reissued 1,300 treasury shares
for P40 per share. The 2,420 treasury shares
on hand at December 31, 2015, were
purchased in one block in 2014.
Feb.1 Sold 180, P1,000, 9% bonds due February 1,
2026, 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 95. The detachable warrants have
a fair value of P50 each and expire on February
1, 2017. Each warrant entitles the holder to
purchase 10 ordinary shares at P40 per share.
Mar. 6 2,800 ordinary shares were subscribed for at
P44 per share. 40% of the subscription was
collected.
Mar. 20 The balance due on 2,400 shares was received
and those shares were issued.
Nov. 1 There were 110 share warrants detached from
the bonds and exercised.
Blue Company’s net income for 2016 is P950,000. Based on
the preceding information, determine the correct December
31, 2016 balance for of each of the following:
25. Total Shareholder’s Equity:
A. 5,716,618
B. 5,717,088
C. 5,720,223
D. 5,722,218
Use the following information to answer 26 – 30:
Purple Corporation was incorporated in 2014. During 2014,
the company issued 100,000 shares of P1 par value
ordinary shares for P27 per share. During 2015, the
company had the following transactions:
Jan. 2 Issued 10,000 shares of P100 par value
cumulative preference shares at par. The
preference shares are convertible into five
ordinary shares and had a dividend rate of 6%.
Mar. 1 Issued 3,000 ordinary shares for legal services
performed. The fair value of the legal services
amounts to P100,000. The shares are actively
traded on a stock exchange and valued on
March 1, 2015 at P32 per share.
Jul. 1 Issued 40,000 ordinary shares for P42 per
share.
Oct. 1 Repurchased 16,000 treasury ordinary shares
for P34 per share.
Dec. 1 Sold 3,000 treasury ordinary shares for P29
per share.
Dec. 30 Declared and paid a dividend of P0.20 per
share on ordinary shares and a 6% dividend
on the preference shares.
During 2014, Purple Corporation had a profit of P250,000
and paid dividends of P28,000. During 2015, Purple
Corporation had a profit of P380,000. Based on the above
and the result of your audit, determine the following:
26. Total share premium as of December 31, 2015:
A. 1,733,000
B. 1,737,000
C. 4,333,000
D. 4,337,000
27. Total retained earnings as of December 31, 2015:
A. 279,000
B. 501,000
C. 516,000
D. 561,000

23. Share premium – treasury shares: 28. Total equity as of December 31, 2015:
A. 19,000 A. 2,713,000
B. 45,000 B. 2,717,000
C. 187,200 C. 5,535,000
D. 192,800 D. 5,539,000

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ACCOUNTING 502 – QUIZ # 2 (FINAL) 5
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29. Basic earnings per share for the year 2015:
A. 2.46
B. 2.69
C. 2.92
D. 3.20
30. Diluted earnings per share for the year 2015:
A. 1.90
B. 2.11
C. 2.25
D. 3.20
Problem Solving
INSTRUCTIONS: Write a SUMMARY OF ANSWERS on the
long problems on the first few rows of Page 1 ONLY. Erasures
on the Summary of Answers will INVALIDATE ALL OF YOUR
ANSWERS on the long problems. In case you do not have any
answer on any item, write “NO ANSWER”. Leaving any item
on the Summary of Answers blank will INVALIDATE ALL OF
YOUR ANSWERS on the long problems. Answers in the
Summary of Answers should have a corresponding solution
in good accounting form to be given credit. Also, any answers
in the Summary of Answers without any corresponding
solutions, or with a solution that does not match with the said
answer, will not be given credit. Double-rule and encircle your
final answers on your solutions. Answers that are not double-
ruled or encircled, or both, will be considered as no solution.
Erasures are allowed, as long as they are done correctly and
neatly. (5 points each)
Use the following information to answer 1 – 2:
Orange Inc. is a public enterprise whose shares are traded
in the over the counter market. At December 31, 2016,
Orange Inc. had 6,000,000 authorized shares of P10 par
value ordinary stock, of which 2,000,000 shares were
issued and outstanding. The stockholder’s equity accounts
at December 31, 2016, had the following balances:
e. On November 10, 2017, Orange Inc. sold 10,000 shares
of treasury stock for P21 per share.
f. On December 14, 2017, Orange Inc. declared the yearly
cash dividend on preferred stock, payable on January
14, 2018, to stockholders of record on December 31,
2017.
g. On January 20, 2018, before the books were closed for
2017, Orange Inc. became aware that the ending
inventories at December 31, 2016 were understated by
P300,000 (after tax effect on 2016 net income was
P180,000). The appropriate correction entry was
recorded the same day.
h. After correcting the beginning inventory, net income for
2017 was P4,500,000.
Based on the above and the result of your audit, determine
the following:
1. Determine the balance of Retained Earnings -
Unappropriated of Orange Inc. as of December 31,
2017.
2. Determine the total stockholders’ equity of Orange Inc.
as of December 31, 2017.
Use the following information to answer 3 – 5:
The shareholder’s equity of Indigo Corporation as of
December 31, 2016 was as follows:
Ordinary shares; P10 par; authorized
300,000 shares; 250,000 shares issued
and outstanding 2,500,000
Share premium - ordinary shares 3,500,000
Retained earnings 1,740,000
On June 1, 2017, Indigo Corporation reacquired 40,000
ordinary shares at P40/share. The following transactions
occurred in 2017 regarding these shares:

Ordinary Stock P 20,000,000 July 1 – Sold 15,000 shares at P48 per share
Additional Paid-in Capital 7,500,000 August 1 – Sold 19,000 shares at P27 per share
Retained Earnings 5,535,000 September 1 – Retired 1,000 shares
The following entries were made by the company’s
Transactions during 2017 and other information relating to accountant to record the preceding transactions in 2017:
the stockholders’ equity accounts were as follows:
a. On January 5, 2017, Orange Inc. issued at P54 per June 1 Treasury shares 1,600,000
share, 100,000 shares of P50 par value, 9% cumulative Cash 1,600,000
preferred stock. Each share of preferred stock is
convertible, at the option of the holder, into two shares July 1 Cash 720,000
of ordinary stock. Orange Inc. had 600,000 authorized Treasury shares 720,000
shares of preferred stock. The preferred stock has a Aug. 1 Cash 513,000
liquidation value equal to its par value. Treasury shares 513,000
b. On February 1, 2017, Orange Inc. reacquired 20,000 Sept. 1 Ordinary shares 10,000
shares of its ordinary stock for P16 per share; Orange Treasury shares 10,000
Inc. uses the cost method to account for treasury stock.
c. On April 30, 2017, Orange Inc. sold 500,000 shares The net income of Indigo Corporation for 2017 was
(previously unissued) of P10 par value ordinary stock to P135,000.
the public at P17 per share
d. On June 18, 2017, Orange Inc. declared a cash dividend Based on the above and the result of your audit, determine
of P1 per share of ordinary stock, payable on July 12, the following:
2017 to stockholders of record on July 1, 2017. 3. What is the correct balance of treasury shares as of
December 31, 2017?
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ACCOUNTING 502 – QUIZ # 2 (FINAL) 6
May 15, 2019

4. What is the correct balance of share premium – ordinary

shares as of December 31, 2017?
5. What is the correct balance of retained earnings (before
appropriation for treasury shares) as of December 31,
2017?

Use the following information to answer 6 – 8:

The shareholders’ equity section of the Green Corporation’s
balance sheet as of December 31, 2018 is presented below:

12% Preference share capital, P100 par P 270,000

Ordinary share capital, P21 par 1,709,400
Share premium – preference 36,800
Share premium – ordinary 235,200
Share premium – treasury shares 3,200
Accumulated profits 1,585,840
Total shareholders’ equity P 3,840,440

Green Corporation had 65,000 ordinary shares as of

December 31, 2017. The following shareholders’ equity
transactions were recorded in 2018 and 2019:

2018
May 1 Sold 9,000 ordinary shares for P24, par value
P21.
Jul. 1 Sold 700 preference shares for P124, par value
P100.
Jul. 31 Issued an 10% share dividend on ordinary
shares. The market value of ordinary share was
P30 per share.
Aug. 30 Declared cash dividends of 12% on preference
shares and P3 per share on ordinary shares.
Dec. 31 Profit for the year amounted to P1,345,040.

2019
Feb. 1 Sold 2,200 ordinary shares for P30.
May 1 Sold 600 preference shares for P128.
May 31 Issued a 3-for-1 split of ordinary shares. The par
value of the ordinary share was reduced to P7 per
share.
Sep. 1 Purchased 1,000 ordinary shares for P18 to be
held as treasury shares.
Oct. 1 Declared cash dividends of 12% on preference
shares and P4 per share on ordinary shares.
Nov. 1 Sold 1,000 shares of treasury shares for P22.
Dec. 31 Profit for the year amounted to P991,520.

Determine the amounts, as required, in Green Corporation’s

comparative financial statements as of and for the years
ended December 31, 2018 and 2019:

6. Basic earnings per share for 2018

7. Basic earnings per share for 2019
8. Total equity as of December 31, 2019

~~~End of Quiz 2~~~

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