QUIZZER – AUDIT OF LIABILITIES (PART II)

AP-13
Use the following information to answer the next five (5) items
Following is the stockholders’ equity section of Car Corporation’s balance sheet at December 31, 2018:

Common stock, P10 par value; authorized 1,500,000 shares;

issued and outstanding 900,000 shares P9,000,000
Additional paid-in capital 750,000
Retained earnings 2,700,000
Total stockholders’ equity P12,450,000

In connection with your audit, you noted the following transactions involving equity during 2019:
 On January 26, Car reacquired 75,000 shares of its common stock for P11 per share
 On April 4, Car sold 45,000 shares of its treasury stock for P14 per share
 On June 1, Car declared a cash dividend of P1 per share, payable on July 15, 2019 to stockholders of
record on July 1, 2019
 On August 15, each stockholder was issued one stock right for each share held to purchase two additional
shares of stock for P12 per share. The rights expire on October 31, 2019
 On September 30, 150,000 stock rights were exercised when the market value of the stock was P12.50 per
share
 On November 2, Car declared a two for one stock split-up and charged the par value of the stock from
P10 to P5 per share. On November 20, shares were issued for the stock split
 On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It originally cost
P600,000, was carried by the previous owner at a book value of P300,000, and was recently appraised at
P390,000
 Net income for 2019 was P720,000

Based on the above and the result of your audit, determine the following as of December 31, 2019:
1. Common stock
A. P10,050,000
B. P10,800,000
C. P12,300,000
D. P12,600,000
2. Additional paid-in capital
A. P1,275,000
B. P1,485,000
C. P1,575,000
D. P3,825,000

3. Unappropriated retained earnings

A. P2,190,000
B. P2,220,000
C. P2,422,500
D. P2,550,000
4. Total stockholders’ equity
A. P16,065,000
B. P16,095,000
C. P14,295,000
D. P16,425,000
 5. Number of shares issued and outstanding
A. P1,050,000
B. P1,140,000
C. P1,170,000
D. P1,200,000
6. The equity section of Globe Corporation as of December 31, 2018, was as follows:
Share capital – ordinary, par value P2; authorized 20,000 shares;
issued and outstanding 10,000 shares P20,000
Share premium – ordinary 30,000
Retained earnings 75,000
Total P125,000

On March 1, 2019, the board of directors declared a 15% share dividend, and accordingly 1,500
additional shares were issued. On March 1, 2019, the fair value of the share was P6 per share. For the
two months ended February 28, 2019, Globe sustained a net loss of P10,000. What amount should Globe
report as retained earnings as of March 1, 2019?
A. P62,000
B. P65,000
C. P69,000
D. P72,000

7. On January 1, 2019, Culvert Corporation had 110,000 shares of its P5 par value ordinary shares
outstanding. On June 1, the corporation acquired 10,000 shares to be held in the treasury. On December
1, when the market price of the shares was P8, the corporation declared a 10% share dividend to be
issued to shareholders of record on December 16, 2019. What was the impact of the 10% share dividend
on the balance of the retained earnings account?
A. No effect
B. P50,000 decrease
C. P80,000 decrease
D. P88,000 decrease

8. Macy, Inc. had net income for 2019 of P2,120,000 and earnings per share on ordinary shares of P5.
Included in the net income was P300,000 of bond interest expense related to its long-term debt. The
income tax rate for 2019 was 30%. Dividends on preference shares were P400,000. The payout ratio on
ordinary shares was 25%. What were the dividends on ordinary shares in 2019?
A. P430,000
B. P482,500
C. P530,000
D. P645,000
9. Which one of the following is not a characteristic of the capital acquisition and repayment cycle?
A. The exclusion of a few transactions is rarely material by itself.
B. There is a legal relationship between the client and the holder of the equity securities.
C. There is a direct relationship between the interest and dividends accounts and debt and equity.
D. Relatively few transactions affect the balances, but each transaction is often highly material in amount.

10. In the audit of the transactions and amounts in the capital acquisitions and repayments cycle, the auditor
must take great care in making sure that the significant legal requirements affecting the financial statements
have been properly fulfilled and
A. Any violations are reported to the SEC
 B. Are adequately disclosed in the financial statements
C. Must issue a disclaimer if they haven’t been fulfilled
D. Any departures from the agreements are made with management’s knowledge and consent.

11. All corporate capital stock transactions should ultimately be traced to the
A. Cash receipts journal
B. Cash disbursements journal
C. Numbered stock certificates
D. Minutes of the board of directors

12. If a company employs a capital stock registrar and/or a transfer agent, the registrar or agent should be
requested to confirm directly to the auditor the number of shares of each class of stock
A. Authorized at the balance sheet date
B. Surrendered and canceled during the year
C. Issued and outstanding at the balance sheet date
D. Authorized, issued, and outstanding during the year

13. 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 state law. This audit procedure most
likely is intended to verify management's assertion of
A. Existence or occurrence
B. Completeness
C. Valuation or allocation
D. Presentation and disclosure
14. Which of the following owner’s equity transactions do corporations not record in their accounting systems?
A. Issuance of cash dividends
B. Issuance of preferred stock
C. Sale of common stock on the secondary market
D. All of the above are recorded

15. Which of the following audit objectives is least important in the audit of capital stock and paid-in capital in
excess of par?
A. Accuracy
B. Completeness
C. Rights and obligations
D. Presentation and disclosure
16. On July 1, 2019, Neil Co. issued 2,500 shares of its P10 par ordinary shares and 5,000 shares of its P10
par convertible preference shares for a lump sum of P125,000. At this date, Neil’s ordinary shares were
selling for P24 per share and the convertible preference shares for P18 per share. The amount of the
proceeds allocated to Neil’s preference shares should be
A. P62,500
B. P68,750
C. P75,000
D. P90,000

17. Ravine Company issues 6,000 shares of its P5 par value ordinary shares having a market value of P25
per share and 9,000 shares of its P15 par value preference shares having a fair value of P20 per share for
a lump sum of P288,000. The proceeds allocated to the ordinary shares is
A. P30,000
B. P130,909
 C. P150,000
D. P157,091

18. Which of the following information is most important when auditing shareholders’ equity?
A. Stock dividends are capitalized at par or stated value on the dividend declaration date.
B. Stock dividends and/or stock splits during the year were approved by the shareholders.
C. Changes in the capital stock account are verified by an independent stock transfer agent.
D. Entries in the capital stock account can be traced to a resolution in the minutes of the board of
directors’ meetings.

19. Dividends are not paid on

A. treasury shares
B. noncumulative preference shares
C. nonparticipating preference shares
D. dividends are paid on all of these

20. Noncumulative preferred dividends in arrears

A. are not paid or disclosed
B. are disclosed as a liability until paid
C. must be paid before any other cash dividends can be distributed
D. are paid to preference shareholders if sufficient funds remain after payment of the current preference
dividend