AUDITING PROBLEMS IRENEO/ESPENILLA/JAMES STOCKHOLDERS’ EQUITY PROBLEM 1: A partial list of the accounts and ending account balances taken from the post- closing trial balance of Alpha Corporation on December 31, 2011 is shown below: ' Accumulated profits P410,000 2. Bonds payable 220,000 4. Ordinary shares subscribed 50,000 4Long-term investment in shares 210,000 & Share premium on ordinary shares 460,000 Premium on bonds payable 30,000 "Ordinary shares 400,000 Preference shares subscribed : 45,000 Share premium on preference shares 112,000 faPreference shares 300,000 4 Share premium from treasury stock transactions 4,000 12 Unrealized increase in the value of securities available for sale 3,000 la Ordinary share options outstanding 15,000 [Ordinary share warrants outstanding 5,000 15-Subscription receivable from ordinary shares - current 10,000 ¢gSubscription receivable from preference shares ~ current 5,000 Further investigation revealed the following Information: 2. Ordinary share is no-par, with a stated value of P10 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 a P50 par value, 8,000 shares are authorized, 6,000 shares are issued and outstanding, 900 shares have been subscribed at a price of P70 per share. Each share fs cumulative convertible into five ordinary shares, and pays a 7% annuai dividend. Dividends are not in arrears. ¢, Bonds payable mature on July 1, 2021. They carry 2 12% annual interest rate, payable semiannually. The premium is being amortized using the straight-line method. Requirements: 1. What |s the total additional paid-in capital? a 572,000 ¥ 596,000 b 576,000 @ 599,000 2, What is the total contributed capital? a 1,371,000 € 1,394,000 1,391,000 @ 1,424,000 3. What is the total legal capital from ordinary shares? a 400,000 ¥ 910,000 b 450,000 ‘914,000 4. What is the total legal capital from preference shares? 2 300,000 © 457,000 345,000 4 461,000 5. What is the total stockholders’ equity? @ 1,789,000 A 1,804,000 b 1,800,000 d 1,834,000 PROBLEM 2: The Now Co. Is authorized to issue 600,000 shares of P10 par value ordinary shares. The following transactions occurred in 2011, the company's first year of operations. @ Issued for cash 20,000 shares at P30 per share. b_ Issued 2,500 shares to lawyers for services rendered In securing the corporate Charter and for preliminary legal costs of organizing the corporation. The fair value of the services is P90, 000.© Issued 300 shares, valued objectively at P10,000 to the employees instead of paying them cash for their wages. Issued 125,000 shares in exchange for a building valued at P2,950,000 and land valued at P800,000. 1. The ordinary share balance on December 31, 2011 a 1,485,000 FX 1A78,000 b 3,978,000 1,543,000 ‘The amount of the share premium in excess of par at December 31, 2011: 2 2,965,000 © 2,907,000 A 2,972,000 6 2,722,000 PROBLEM 3: The following are Park Co,’s equity accounts at December 31, 2011: Ordinary share, par value, P10; authorized 200,000 shares; 1,200,000 issued and outstanding 120,000 shares Additional paid-in capital (Share premium) 140,000 Retained earnings (Accumulated profit) 720,000 The following transactions occurred in 2012: 1. Acquired 2,000 ordinary shares for 30,000 2. Sold 1,200 treasury shares at P18 per share 3. Retired the remaining treasury shares What is the totaladditional paid-in capital on December 31, 20127 2 136,000 © 143,600 b 140,400 ff 139,600 PROBLEM 4: The stockholders’ equity for the IT Co. on December 31 was: Preference share, P20 par, 60,000 shares Issued and outstanding 1,200,000 Share premium in excess of par - Preference share 300,000 Ordinary share, P10 par, 300,000 shares issued and outstanding 3,000,000 Share premium in excess of par ~ Ordinary share ‘600,000 Accumulated profit 2,500,000 Each share of preference is convertible into 1 ordinary share. In June, IT converted 4,000 of preference shares into ordinary shares, 1. The entry to take up the conversion includes a credit to: a Preference share for 80,000 £ Share premium for 60,000 Ordinary share for 80,000 ‘d_ Accumulated profit for 60,000 2. Assuming that each share of preference is convertible into 4 ordinary shares and IT converted 4,000 of preference shares into ordinary, the entry to take up the conversion includes a debit to ‘2 Preference share for 160,000 gf Accumulated profit for 60,000 b Ordinary share for 160,000 + Accumulated profit for 80,000 PROBLEMS: The XL Co. decides to issue 2,000 shares of P30 par preference shares with 1,000 detachable warrants. The package sells for P120. 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, the warrants are selling at P20 per warrant and the market value of the preference without the warrants is P90. 1. The amount to be assigned to the share warrants 4 24,000 240,000 © 216,000 4 20,000 >. The amount to be credited to share premium in excess of par if 60% of the warrants are exercised ; € 18,000 3 22/808 4 42,000 BM 32,4003. The expiration of the remaining warrants shall involve a credit to: Additional paid in capital 24,000 © Ordinary share warrants 24,000 B Additional paid in capital 9,600 d- Ordinary share warrants 9,600 > pen crtion} Greate PROBLEM Gi On January 1, 2011 M Co, fssued 200 share options to each of its 10 executive officers, The options vest at the end of a 6-year period. On the date of the grant, each share option had a fair value of P15, M expects that all 2,000 options will vest. 1, The compensation expense for 2011 Is: @ 30,000 © 25,000 1 5,000 ad -o f 2. The compensation expense in 2014 assuming one officer leaves the company in December 2011 and that the company expects that no other employee will leave by the end of the 6” year: 2 3,000 © 5,000 1 b 18,000 _ a VARUBRAS OFTEN LAH (NOW MARKET” BASED) PROBLEM 7: On January 1, 2011, MARS Company granted share options to 10 of Its key f employees entitling them to acquire P100 par value shares of the company at P110 per share. The share options will vest on December 31, 2013, provided that the employees remain in the j company’s employ and provided that revenues reach P100 million, the employees will receive 1,000 options each. If revenues reach P150 million, the employees will receive 2,000 options 1 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 is 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 numberof Actual revenue earned Employees who will leave ‘the company Dec. 31, 2011 2 80 million Dec. 31, 2012 2 120 million Dec. 31, 2013 3 200 million ‘Actual number of employees who left the company. A tein) tng Pen Pajitn REQUIRED: 1. What is the compensation expense to be recognized in 20117 80,000 © 180,000 > 100,000 4 300,000 2. What is the compensation expense to be recognized in 2012? i 2 80,000 240,000 | b 100,000 4 300,000 i 3. What Is the compensation expense to be recognized in 2013? q 2 1 630,000 © 320,000 b 500,000 # 310,000 4. If the actual employees receiving their options exercise all their options in 2014, how much Is ‘credited to share premium from the related issuance of shares? ‘@ 210,000 £840,000 b 630,000 . ‘4 900,000 : VARIABLE CPTION PLAN Fa. Be Santer 1! %o11, mars Company granted share options to 10 of ts key employees entitling them to acquire P100 par value shares of the company at P110 per share conditional upon the employees’ remaining In the company’s employ during the vesting period. The 10,009. share options shall vest at the end of 2011 if the company’s revenues reach P9OM; ‘or at the end of 2012 if the company’s revenues reach P100M; or at the end of 2013if the revenues reach P110M. ‘The market value of the option on the date of grant is 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. The company also expects that no employees shall leave the company during the vesting period.