Audit of Shareholders’ Equity Answer the following:

a. Balance of preference shares at December 31, 2020 balance

Problem 1: You have been assigned to audit of B Company, a sheet
manufacturing company. You have been asked to summarize the b. Balance of ordinary share at December 31, 2020 statement
transaction for the year ended December 31, 2020 affecting of financial position
shareholder’s equity and other related accounts. The shareholders’ c. Total additional paid in capital
equity section of B’s December 31, 2019 statement of financial d. The number of ordinary shares outstanding at December 31,
position follows: 2020
Contributed capital: e. Retained earnings at December 31, 2020
Ordinary share, 2 par, 200,000 shares authorized, 180,000
90,000 shares issued; 88,790 shares outstanding Problem 3: The shareholders’ equity section of W showed the
Share premium 1,820,000 following data on December 31, 2019:
Paid in capital from treasury stock 22,500
Total contributed capital 2,022,500 Ordinary share, 3 par, 300,000 shares authorized, 250,000 shares
Retained earnings 324,689 issued and outstanding, 750,000;
Total contributed capital 2,347,189
Cost of treasury stock, 1,210 stocks 72,600 share premium 7,050,000;
Total shareholders’ equity 2,274,589 share options outstanding, 150,000;
retained earnings, 480,000.
You have extracted the following information from the accounting
records and audit working papers: The share options were granted to key executives and provided them
2020 the right to acquire 30,000 ordinary shares at 35 per share. The
company assigned fair value to the options at the date of grant based
1/15 B issued 650 shares of treasury shares for 40 per share. The on IFRS 2. The following transactions occurred during 2020:
1,210 shares of treasury stock on hand at December 31, 2019 were
purchased in one block in 2019. 3/31 Key executives exercised 4,500 options outstanding at
December 31, 2019. The market price per share was 44 at this date.
2/2 Sold 90, P1,000 bonds due February 1, 2030 at 103 with one
detachable warrant attached to each bond. Interest is payable 4/1 The Company issued 10%, ten-year bonds of 2,00,000 at
annually on February 1. The fair value of the bonds without warrant face, giving each 1,000 bond a detachable warrant, enabling the
is 97. The company follows the policy of allocating the issue price to holder to purchase two shares of ordinary shares at 40 each for one
the bonds at market value, and the remaining to the share warrants. year period. The bonds would have sold to yield 12%. Interest is
The detachable warrants have a fair value of 60 and expire on payable annually at March 31. PV of OA = 5.6502 PV of 1 = 0.3220
February 1, 2021. Each warrant enables the holder to purchase 10 1,130,040+644,000= 1,774,040 x 12% x 9/12 =
ordinary shares at 40 per share.

3/6 Subscriptions for 1,400 shares were received at 44 per

share, payable 40% down and the balance by March 20. 6/30 The Company issued rights to shareholders (one right on
each share, exercisable within 30 days period) permitting holders to
3/20 The remaining number of shares was declared delinquent. acquire one share at 40 for every 10 rights submitted. Shares were
Cost of advertising the delinquent shares was 800. The amount due selling for 43 at this time. All but 6,000 rights were exercised on July
from the highest bidder was collected and the shares were 31, and the additional shares were issued.
accordingly issued.
9/30 All warrants issued with the bonds on April 1 were exercised.
11/3 55 share warrants were exercised.
11/30 The market price per share dropped 33 and the options
Compute for the adjusted balance of the following at December 31, came due. Because the market price was below the option price, no
2020: remaining options were exercised.
a. Ordinary share capital
b. Share premium 12/31 Profit for the period is 600,000.
c. Paid in capital from treasury shares
d. Ordinary share warrants outstanding a. What should be the balance of ordinary share on December
e. Treasury shares 31, 2020?
b. What is the amount of retained earnings at December 31,
Problem 2: The capital structure of B Company on December 31, 2020?
2019 follows: c. What is the amount credited to equity on April 1 upon
Preference, 12% share, 200 par, 30,000 shares 6,000,000 issuance of ten-year bonds?
issued and outstanding d. How much interest expense should be recognized for the
Ordinary share, 50 par, 100,000 shares issued and 5,000,000 year 2020 relating to the bonds?
outstanding e. What is the carrying amount of the bonds on December 31,
Share premium- preference 1,800,000 2020?
Share premium-ordinary 1,200,000
During 2020, the following selected transactions occurred:
a. Purchased and retired 4,000 preference shares at 280 per
share.
b. Purchased 8,000 shares of its own ordinary share at 75 per
share when each share is selling in the market at 78 each.
c. A two-for-one share split on the ordinary share was
approved by the shareholders, thereby reducing the par
value to 25.
d. Reissued 6,000 treasury shares at 45 each.
e. Shareholders donated 4,000 ordinary shares when the
market price was 46 per share. The company recorded the
donated share as memorandum in treasury stock.
f. 2,000 of the donated shares were issued for 48 per share.
g. The profit for 2020 was 1,850,000. No dividends were
declared.