X - AUDIT OF EQUITY PROBLEM NO. 1 ~ Components of equity Alcgy Corporation’s post-closing trial balance at December 31, 2010 was as follows: Alcoy Corporation : Post-Closing Trial Balance December 31, 2010 Accounts payable P 495,000 Accounts receivable P 963,000 Reserve for depreciation 360,000 Reserve for doubtful accounts 54,000 Premium on ordinary shares 1,800,000 Gain on sale of treasury shares 450,000 Bonds payable 720,000 Building and equipment 1,980,000 Cash 396,000 Dividends payable on preference shares 7,200 Ordinary share capital (P1 par value) 270,009 Inventories 1,116,000 Land 684,000 Available-for-sale securities at fair value 513,000 Trading securities at fair value 387,000 Net unrealized loss on available-for-sale securities 45,000 Preference share capital (P50 par value) 900,000 Prepaid expenses 72,000 Donated capital 800,000 Share warrants outstanding 208,000 Retained earnings 415,800 ‘Treasury shares ~ ordinary, at cost 324, Totals At December 31, 2010, Alcoy had the following number of ordinary and preference shares: Ordinary Preference Authorized - + 900,000 90,000 Issued ~ 270,000 18,000 Outstanding 252,000 18,000 523X- Audit of Equity ‘The dividends on preference shares are P0.40 cumulative. In addition, the preference share has a preference in liquidation of PSO per share. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Share premium /Additional paid-in capital a. P3,213,000 c. P3,050,000 b. 3,258,000 d. P2,600,000 2. Total contributed capital a. P4,428,000 c. P3,770,000 b. P4,220,000 d. P1,170,000 3. Unappropriated retained earnings a. P415,800 c. .P91,800 b. P739,800 d. P37,800 4. Total equity a. P4,266,800 c. P4,888,800 b. P4,519,800 d P4,474,800 Answers: 1) B; 2) A; 3)C; 4)D Suggested Solution: Question No. 1 Premium on ordinary shares P1,800,000 Gain on sale of treasury shares 450,000 Donated capitai 800,000 Share warrants outstanding 208,000 Total share premium/additional paid-in capital P3,258,000 Question No. 2 Preference share capital (P50 par value) P_ 900,000 B i 2 Share premium(see no. 1) 3.258.000 Total contributed capital 4,428,000 524X- Audit of Equity Question No. 3 Total retained earnings 415,800 Less appropriation for treasury shares 324,000 Unappropriated retained earnings P_91.800 Question No. 4 ‘Total contributed capital (see no. 2) P4,428,000 * Retained earnings: Unappropriated (see no. 3) P 91,800 Appropriated for treasury shares 324,000 __415,800 Total 4,843,800 Less: Treasury shares _ 324,000 Net unrealized loss on AFS 45,009 __ 369,000 Total equity P4,974,800 PROBLEM NO. 2 ~ Adjusted cor ponents of equity ‘The “shareholders’ equity” account of Alegria Corporation, after its initial year of operation in 2010 shows the following: Date Particulars Jan. 1 _ Issued 6,000 shares at par of P100 in exchange for real property with a market value of P800,000; 600,000 authorized 20,000 shares Jan. 15 Sold 8,600 shares at P120 960,000 Maz. 10 Purchased 800 Alegria shares at P1590 120,000 May 15 Loss on sale of machinery 40, June 10 Sold 400 treasury shares 68,000 Dec. 31 Cash dividends declared payable 80,000 January 15, 2011 Dec. 31 Profit for the year 316,000 bit Credit & QUESTIONS: Based on the information presented above and the result of your audit, 1. ‘The adjusted share capital as of December 31 2010 is a, P1,360,000 c. P1,400,000 b. Pi,560,000 d. P1,340,000 525X- Audit of Equity 2 ‘The total share prem tum as of December 31 2010 is a. P360,000 c. P368,000 b. P160,000 d. P168,000 %. The unappropriated retained earnings as of December 31 2010 is a. P196,000 c. P136,000 b. P156,000 d. P144,000 4. The adjusted total equity on December 31, 2010 is a. 1,944,000 ©. P1,744,000 b. P1,704,000 d. P1,904,000 a The book value per share of Alegria Corporation on December 31, 2010 was a. P140.00 ce. P128.20 }, = P1292 d. P125.29 Answers: 1) ©; 2) C; 3C 4D, 5A Suggested Solution: Share Share Retained Treasury Date capital premium Earnings __ share: Jan. 1 P 600,000 P200,000 Jan. 15 800,000 160,000 Mar. 10 P120,000 May 15, 8,000 ( 60,000) June i0 {P80,000) Dec. 31 Profit (P316,000- 40,000) 276.000 Bal. 12/31/10 1,400,000 £368,000 P196.000 P.60,000 526X - Audit of Equity PROBLEM NO. 3 - Various equity transactions Your audit client, Argao, Inc., is a public entity whose shares are traded in the over-the-counter market. At December 31, 2009, Argao had 3,000,000 authorized, P10. par value, ordinary shares, of which 1,000,000 shares were issued and outstanding. The equity accounts at December 31, 2009 had a following balances. Ordinary share capital P10,000,000 Share premium 2,750,000 Retained earnings 3,250,000 ‘Transactions during 2010 and other information relating to the equity accounts were as follows: * On January 2, 2010, Argao issued at P54 per share, 50,000 shares of P50 par value, 9% cumulative convertible preference shares. Each preference share is convertible into two ordinary shares. Argao had 300,000 authorized shares of preference shares, The preference share has a liquidation vahie equal to its par value. * On February 1, 2010, Argao reacquired 10,000 ordinary shares for P16 per share. * * On April 30, 2010, Argao sold 250,000, P10 par value, ordinary shares (previousiy unissued) to the public at P17 per share. + On June i5, 2010, Argao declared a cash dividend of P1 per share on ordinary shares, payable on July 15, 2010, to shareholders of record on July 1, 2010. * On November 10, 2010, Argao sold 5,000 treasury shares for P21 per share. * Oli December 15, 2010, Argao deciared the yearly cash dividend on preference share, payable on January 15, 2011, to shareholders of record on December 31, 2010. * On January 20, 2011, before the books were closed for 2010, Argao became aware that the ending inventories at December 31, 2009 were understated by P150,000 (after tax effect on 2009 profit was day. « Afte: PZ, correcting the beginning inventory, profit for 2010 was ,00. 527X- Audit of Equity QUESTIONS: Based on the above and the result of following as of December 31, 2010: 1, Share premium a. P5,700,000 b. P5,525,000 5,500,000 P5,725,000 em 2. Unappropriated retained earnings a. P4,125,000 c. P4,045,000 b. P4,035,000 d. 3,955,000 3. Treasury shares a. P160,000 c, P55,000 b. P 80,000 d. P50,000 4. Total equity a. P22,190,000 c. P24,690,000 b. P24,770,000 d. P24,840,000 5. Book value per share of ordinary a. P17.89 ©. P1771 b. P17.82 d. P15.41 Answers: ; 2) C; 3) B; 4) B, 5) A Suggested Solution: Questions No. 1 to 4 Preference share capital P 2,500,000 Ordinary share capital 12,500,000 Share premium 5,725,000 - (1) Retained earnings: Appropriated P 80,000 Unappropriated 4.045,000 4,125,000 (2) ‘Treasury shares 80,000) (3) Total equity, 12/31/10 224,770,000 (4) 528 your audit, determine theX- Audit of Equity Prepare T-accounts for each component of eqitity. lances as of January 1, 2010, journalize the transactions. affecting. the equity accounts, post the entries to the affected accounts, then extract the balances. Journal entries affecting the equity accounts during 2010: 1/2 Cash (50,000 shares x P54) P2,700,006 Preference share capital (50,000 shares x P50) 2,500,000 Share premium ~ excess over par PS 200,000 2/1 Treasury shares (10,000 x P16) P 160,000 Cash P 169,000 4/30 Cash (250,000 shares x P17) P4,250,000 Ordinary share capital (250,000 shares x P10) P2,500,000 Share premium — excess over par OS 1,750,000 6/15 Retained earnings P1,240,000* Dividends payable - ordinary P1,240,000 * (1,000,000 + 250,000 ~ 10,000) x P1] 11/10 Cash (5,000 shares x P21) P 105,000 Treasury shares (5,000 shares x Pi6) P 80,000 Share premium - treasury shares transactions 25,000 12/15 Retained earnings {2,500,000 x 9%) P 225,000 Dividends payable - preference 225,000 12/31 Inventory, 1/1/10 P 150,000 Retained earnings P 90,000 Income tax payable 60,000 12/31 Profit or loss summary P2,250,000 Retained earnings 0,000 12/31 Retained earnings Pp RA,NN0 Retained earnings - appropriated (cost of TS} P 80,000 529X- Audit of Equity Question No. 5 Total equity (see no. 4) 24,770,000 Less liquidation value of preference shares 2,500,000 Ordinary shareholders’ equity 22,270,000 Divide by ordinary shares outstanding 1,245,000 Book value per share of ordinary P__17.89 PROBLEM NO. 4 — Various equity transactions The equity section of the Asturias Inc. showed the following data on December 31, 2009: Share capital, P3 par, 300,000 shares authorized, 250,000 shares issued and outstanding, P750,000; Share premium - excess over par, P7,050,000; Share premium - share options, Pi50,000; Retained earnings, P480,000. The share options were granted to key executives and provided them the right to acquire 30,000 ordinary shares at P35 per share. Each option has a fair value of P5 at the time the options were granted. The following transacticns occurred during 2010: Feb. Apr. July 1 1 Key executives exercised 4,500 options outstanding at December 31, 2009. The market price per share was P44 at this time. The company issued bonds of P2,000,000 at par, giving each P1,000 bond a detachable warrant enabling the holder to purchase two ordinary shares at P40 each for a 1- year period. The bonds would sell at P996 per P1,000 bond without the warrant. The company issued rights to shareholders (one right on each share, exercisable within a 30-day period) permitting holders to acquire one share at P40 with every 10 rights submitted. All but 6,000 rights were exercised on July 31, and the additional shares were issued. All warrants issued in connection with the bonds on April 1 were exercised. - 530X - Audit of Equity Dec. 1 The market price per share dropped to P33 and options came due. Because the market price was below the option price, no remaining options were exercised. Dec. 31 Profit for 2010 was P250,500. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Share capital a. P777,300 c. P833,850 b. P848,700 d. P850,050 2. Total share premium a. P7,522,200 c. P8,219,650 b. P8,402,800 4. P8,419,450 3 Total contributed capital a. P8,299,500 ¢. P9,269,500 b. P9,053,500 d. P9,251,500 4. Retained earnings a. P580,500 c. P730,500 b. P858,000 a. P654,i50 S. Total equity a. P10,000,000 c. P9,030,000 b. P 9,784,000 d. P9,982,000 Answers: 1) D; 2)D; 3) C; 4) €, 5) A Suggested Solution: Questions No. 1 to 5 Share capita! P 950.050 #1} Share premium 8.419.450 (2) Contributed capital 4 9,269,500 (3) Retained earnings _____ 730.500 (4) Total equity, 12/31/10 B19,000,000 (5)X- Audit of Equity Note: Follow the same approach in Problem no. 3. Journal entries affecting the equity accounts during 2010: 2/1 Cash (4,500 options x P35) P157,500 Share premium-share options (4,500 x P5) 22,500 Share capital (4,500 shares x P3) P 13,500 Share premium - excess over par 5 166,500 4/1 Cash P2,000,000 Bond discount [P2,000,000-(2,000xP996)| 8,000 Bonds payable P2,000,000 Share premium-share warrants 8,000 7/1 Memorandum: Issued rights to shareholders permitting holder to acquire for a 30-day period one share at P40 with every 10 rights submitted - a maximum of 25,450 shares (254,500 shares + 10} 7/31 Cash {{25,450 - (6,000/ 10)] x P40} P 994,000 Share capital (24,850 shares x P3) P 74,550 Share premium - excess over par 919,450 10/1 Cash (2,000 x 2 x P40) P 160,000 Share premium-share warrants 8,000 Share capital (2,000 shares x 2 x P3) P 12,000 Share premium - excess over par 156,000 12/1 Share premium-share options {P150,000-(4,500xP5)] P127,500 Share premium - expired share options P127,500 12/31 Profit or loss summary 250,500 Retained earnings 250,500 PROBLEM NO. 5 — Various equity trunsuctions PalenRase roe th 540,000, P100 par value, ordinary shares, At December 31, 2008, the equity section of Balamban was as follows: 532X- Audit of Equity Share capital, par value P100 per share; authorized 540,000 shares; issued 54,000 shares 5,400,000 Share premium $40,000 Retained earnings 810,000 Total equity 6,750,009 On May 10, 2009, Balamban issued 90,000 ordinary shares for P10,800,000. A 5% share dividend was declared on September 30, 2009 and issued on November 10, 2009 to shareholders of record on October 31, 2009. Market value of ordinary share was Pi110 per share on declaration date. The profit of Balamban for the year ended December 31, 2009 was P855,000. During 2010, Balamban had the following transactions; Feb. 15 Balamban reacquired 5,400 ordinary shares for P95 per share. May 15 Balamban sold 2,70) treasury shares for P120 per share. Jun 30 Issued to shareholders one right for each share held to purchase two additional ordinary shares for P125 per share. The rights expire on December 31, 2010. Aug. 15 45,000 rights were exercised when the market value of ordinary share was P130 per share. Sep. 30 72,000 rights were exercised when the market value of the ordinary share was P140 per share. Dec. 01 Balamban declared a cash dividend of P2 per share payable on January 15, 2011 to shareholders of record on December 31, 2010. Dec. 15 Balamban retired 1,800 treasury shares. On this date, the market value of the ordinary share was P150 per share. Dec. 31 Profit for 2010 was P900,000. QUESTIONS: 533X- Audit of Equity Based on the above and the result of your audit, determine the ving as of December 31, 2010: 1. Share capital @. P38,520,000 ©. 38,340,000 b. P26,640,000 -d. P38,250,000 2. Share premium a. 8,329,500 ©. P5,413,500 b. 8,338,500 d. P8,266,500 3. Retained earnings a. P1,080,000 ©. P1,017,000 b. P1,002,600 4. P1,008,000 4. Treasury shares a. P18,000 c. P85;500 b. P90,000 ee Answers: 1) ©; 2) B; 3); 4)c ‘Suggested Solution: Questions No. 1 to 4 Shire Share Retained Treasury : carial premium _Eamings shares Balances, 1/1/09 P5,4. 0,000 P540,000 P 810,000 poo May 10, 2009 9,019,000 1,800,000 Sept. 30, 2009 720,000" 72,000 (792,000) Profit-2009 855,000 oe Balances, 12/31/09 T8775 2,412,000 873,000 0 Feb. 15,2010 513,000 May 15, 2010 67,500 (256,500) Aug. 15, 2010 9.930,000 2,250/000 Sep. 30, 2010 14 490,000 — 3,600,000 pa 01, 2010 (765,000) 2010 430,000) 9,000 (171,000) Balances, 12/31/10. 3 , 140,000 8.358500 P1,008.000 B a5.500 534X - Audit of Equity PROBLEM NO. 6 - Various equity transactions Bogo Corporation began operations on January 1, 2010. The company ‘was authorized to issue 60,000, P10 par value, ordinary shares and 120,000 shares of 10%, P100 par value convertible preference shares. In connection with your audit of the company’s financial statements, you rloted the following transactions involving shareholders’ equity during 2010: : Jan. Aug. 1 Issued 1,500 ordinary shares to the corporation promoters in exchange for equipment valued at P510,000 and services valued at P210,000. The property costs P270,000 3 years ago and was carried on the pro:noters’ books at P150,000. : Issued 30,000 convertible preference shares at P150 per share. Each share can be converted to five ordinary shares. The corporation paid P225,000 to an agent for selling the shares. Sold 9,000 ordinary shares at P390 per share. The corporation paid issue costs of P75,000. Received subscriptions for 12,000 ordinary shares at P450 per share. Issued 2,100 ordinary shares and 4,200 preference shares in exchanged for a building with a fair value of P1,530,000. ‘The building was originally purchased for P1,140,000 by the investors and has a carrying amount of P660,000. In addition, 1,800 ordinary shares were sold for P720,000 cash. Payments in full for half of the subscriptions and partial payments for the rest of the subscriptions were received. Total cash received was P4,200,000, Shares stock were issued for the fully paid subscriptions, The balance is collectible next year.X - Audit of Equity Dec. 1 Dec. 31 QUESTIONS: Declared a cash dividend of P10 per share on preference shares, payable on December 31 to shareholders of record on December 15, and P20 per share cash dividend on ordinary. shares, payable on January 15, 2011 to shareholders of record on December 15. Paid the preference share dividend. Profit for the first year of operations was P1 ,800,000. Based on the above and the result of your audit, determine the following as of December 31, 2010: 7 a Ordinary share capital a. P204,000 © P264,000 b. P144,000 d. P186,000 Share premium ~ preference a. P1,500,000 c. P1,275,000 b. P1,545,000 d. P1,860,000 Share premium - ordinary a. P 8,211,000 ©. P11,121,000 b. P10,851,000 4. P10,032,000 Retained earnings a. P1,050,000 ©. P 930,000 b. 1,170,000 4. P1,458,000 . Total equity a. P17,295,000 ©. P15,810,000 b. P16,950,000 d. P17,010,000 Answers: 1) A; 2) B; 3)B; 4) C, 5) D Suggested Solution:X- Audit of Equity Questions No. 1 to 5 Preference share capital 3,420,000 Ordinary share capital _ * 204,000 (1) Subscribed ordinary share capital 60,000 Share premium - preference 1,545,000 (2) Share premium - ordinary 10,851,000 (3) Retained earnings 930,000 (4) Total equity, 12/31/10 B1Z.010,000 (5) Journal entries affecting equity accounts during 2010: 1/1 Equipment 510,000 Organization expenses 210,900 Ordinary share capital (1,500 shares x P10} P_15,000 Share premium — ordinary 705,000 1/31 Cash (30,000 shares x P150) P4,500,000 Preference share capital (30,000 shares x P100) 3,000,000 Share premium — preference 1,500,000 Share premium — preference P 225,000 Cash 225,000 2/20 Cash (9,000 shares x P390) P3,510,000 Ordinary share capita! (9,000 shares x P10) P 90,000 Share premium — ordinary _ 3,420,000 Share premium — ordinary 75,000 Cash P75,000 5/30 Subscriptions rec. (12,000 sh. x P450) 5,400,000 Subscribed ordinary share capital {12,000 shares x P10) P 120,000 Share premium - ordinary 5,280,000 8/30 Cash 720,000 Ordinary share capital (1,800 shares x P10) P_ 18,000 Share premium - ordinary 702.000X - Audit of Equity Building P1,530,000 Ordinary share capital (2,100 shases'x Pid) P 21,000 Share premium ~ ordinary {2,100 sh x P400*)-2 1,000] 819,000 Preference share capital (4,200 shares x P100) 420/000 Share premium ~ preference (balance) 270,000 * (P720,000/ 1,800 shares) share is not determinable, it will be assigned the residual amount Gfter deducting the fair value of ordinary shares from the fair value of the building. 11/07 Cash 4,200,000 Subscriptions receivable P4,200,000 Subscribed ordinary share capital (120,000 x 1/2) P60,000 Ordinary share capital P60,000 pote: Since the subscriptions receivable is collectible next year, it will be presented under current assets. Incidentally, if the subscriptions receivable is not collectible currently, it will be presented as a deduction within the equity section. 12/01 Retained earnings 870,000 Dividends payable - Preference P.342,000 Dividends payable ~ Ordinary 528,000 ._ Preference - (P3,420,000/P100 x P10) Ordinary - {(P204,000 + P60,000)/ P10] x P20} Note: Shares issu plus subscribed less treasury shares are entitled to dividends. 12/31 Profitorloss summary P1,800,000 Retained earnings P1,800.000 538X - Audit of Equity PROBLEM NO. 7 - Various equity transactions The Borbon Corporation has requested: you to audit its financial statements for the year 2010. During your audit, Borbon presented to you its statement of financial position as of December 31, 2009 containing the following equity section: Preference share capital P10 par; 60,000 shares authorized and issued, of which 6,000 are treasury _ shares costing P90,000 and shown as an asset P 600,000 Ordinary share capital, par value P4; 600,000 shares authorized, of which 450,000 are issued and outstanding 1,800,000 Share premium (P5 per share on preference shares issued in 2001) 300,000 Allowance for doubtful accounts receivable 12,000 Reserve for depreciation 840,000 Reserve for fire insurance 198,000 Retained earnings 2,250,000 Total equity : P6,000,000 Additional information: 1) Of the preference share capital, 3,000 shares were sold for P18 per share on August 30, 2010. Borbon credited the proceeds to the Preference share capital account, The treasury shares as of December 31, 2009 were acquired in one purchase in 2009. 2) The preference share carries an annual dividend of P1 per share. The dividend is cumulative. As of December 31, 2009, unpaid cumulative dividends amounted to PS per share. ‘The entire accumulation was liquidated in June, 2010, by issuing to the preference. shareholders 54,000 ordinary shares. 3 A cash dividend of P1 per share was declared on December 1, 2010 to preference shareholders of record December 15, 2010. The dividend is payable on January 15, 2011. 4) At December 31; 2010, the, Allowance for Doubtful Accounts Receivable and Reserve for Depreciation had balances of P25,000 and P1,050,000, respect 539X- Audit of Equity 5) On March 1, 2010, the Reserve for Fire Insurance was increased by P60,000; Retained Earnings was debited. 6) On December’ 31, 2010, the Reserve for Fire Insurance was decreased by P30,000, which represents the carrying amount of a machine destroyed by fire on that date. Estimated fire cleanup costs of P6,000 does not appear on the records. 7) The December 31, 2009 Retained Earnings consists of the following: Donaied land from a shareholder (Fair value on date of donation) P450;000 Gains from treasury share transactions 51,000 Earnings retained in business 1,749,000 . 2,250,000 8) Profit for the year ended December 31, 2010 was P1,297,500 per company’s records. QUESTIONS: Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2010. (Disregard tax implications) 1, ‘Total share premium a. P414,000 cc. P810,000 | b. P804,000 d. 864,000 2. Retained earnings - Appropriated a. P258,000 c. 228,000 b. P303,000 a. P 0 3, Retained earnings - Unappropriated a. P2,677,500 c. P2,578,500 b, P2,626,500 d. 2,623,500 4, Treasury sharesX- Audit of Equity 5, Total equity a. P3,700,500 , & P6,316,508 b. P5,812,500 d. P6,319,500 Answers: 1) D; 2) B; 3) C; 4) A, 5)C Suggested Solution: Questions No. 1 to 5 Preference share capital P 600,000 Ordinary share capital 2,106,000 Share premium '864,000 (1) Retained earnings - Appropriated 303,000 (2) Retained earnings - Unappropriated . 2,578,500 (3) Treasury shares 145,000) (4) Total equity, 12/31/10 P6,316,500 (5) Journal entries affecting the equity accounts during 2010: i 1) Cash (8,000 shares x P18) 54,000 Treasury shares [(90,000/ 6,000 shares) x 3,000] P 45,000 Share premium ; 9,000 2) Retained earnings P270,000* Ordinary share capital (54,000 shares x P4) P 216,000 hare premium 54,000 * (60,000 ~ 6,000) x P5] 3) Retained earnings P57,000** Dividends payable P57,000 ** (60,000 ~ 3,000) x P1] 4) Ignore. 5) Retained earnings P 60,000 Retained earn 6) See no. 8. 541X- Audit of Equity 7) Retained earnin; 501,000 Share premium P501,000 8) Profit or loss summary P1,261,500 Retained earnings P1,261,500 Profit per company's records P1,297,500 Fire loss erroneously charged to reserve, for fire insurance (30,000) Estimated fire clean up cost ~ — Adjusted profit PL261,500 9) Retained earnings 45,000 Retained earnings - appropriated (cost of TS} 45,000 PROBLEM NO. 8 - Various equity transactions ‘The shareholders equity of Cordova Corporation showed the following data on December 31, 2009: 12% Preference share capital, P30 par, 135,000 shares issued and outstanding P4,050,000 Ordinary share cepital, P50 par, 180,000 shares issued and outstanding 9,000,000 Share premium - preference 1,080,000 Share premium - ordinary 3,240,000 Retained earnings 1,395,000 ‘The 2010 transactions of the company affecting its equity are summarized chronologically as follows: 1. Issued 27,000 preference shares at P40. 2. . Issued 94,500 ordinary shares at P70. 3. Retired 5,400 preference shares at P45. 5, Split ordinary share two for one (par value reduced to P25). 542X- Audit of Equity 6. Reissued 13,500 treasury shares at P50. 7. Shareholders donated to the company 9,000 ordinary shares when shares had a market price of P52. One half of these shares were subsequently issued for P54. 8 Dividends were paid at the eid of the calendar year on the ordinary shares at P2 per share and on the preference shares at the preference rate. 9. Profit for the year was P2,520,000. QUESTIONS: : Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Preference share capital a. P4,617,000 c. 4,968,000 b. 4,698,000 - d. P4,860,000 2. Ordinary share capital a. P15,615,000 ¢. P13,968,000 b. P13,500,000 d. 13,725,000 3. Share premium a. P6,777,000 c. P6,679,800 b. P6,858,000 d. P6,814,800 4., Unappropriated retained earnings a. P1,749,240 ce. P4,711,440 b. P2,251,440 d. P1,684,440 5. Total equity a. -P26,949,240 c. 226,958,960 b. P26,922,240 d. P26,940,240 Answers: 1) B; 2) B; 3)X- Audit of Equity Suggested Solution: Questions No. 1 to 5 Preference share capital P 4,698,000 (1) Ordinary share capital 13,725,000 (2) Share premium 6,814,800 (3) Retained earnings - Appropriated 540,000 Retained earnings - Unappropriated 1,711,440 (4) Treasury shares ~ 540,000) Total equity, 12/31/10 26,949,240 (5) Journal entries affecting the equity accounts during 2010: 1) Cash (27,000 shares x P40) 1,080,000 Preference share capital (27,000 shares x P30) P 810,000 Share premium - preference 270,000 2) Cash (94,500 shares x P70) 6,615,000 Ordinary share capital (94,500 shares x P50) 4,725,000 Share premium - ordinary 1,890,000 3) Preference share capital (5,400 shares x P30) P 162,000 Share premium - preference (P1,080,000x5.4/135) 43,200 . Retained earnings 37,800 Cash (5,400 shares x P45) P 243,000 4) Treasury shares (13,500 shares x P80} P1,080,000 Cash é 1,080,000 5) Memo entry. 6) Cash (13,500 shares x P50} P 675,000 Treasury shares (P1,080,000 x 1/2) P 540,000 Share premium - treasury shares transactions 135,000 7) Memo entry. Cash (9,000 shares x 1/2 x P54) Fee Share premium - Donated capital P 243,000 544X- Audit of Equity 8) Retained earnings P1,625,760 Cash P1,625,760 Ordinary shares issued and outstanding, 1/1/10 180,000 2) Shares issued 94,500 4) Purchase of treasury shares 13,500) 261,000 5) Share split : 261,000 6) Re-issuance of treasury shares 13,500 7) Donated shares ( 9,000) Re-issuance of donated shares 4,500 Ordinary shares issued and outstanding, 12/31/10 531,000 x Dividend per share Peed Dividends to ordinary 1,062,000 Dividends to preference (P4,698,000 x 12%) 563,760 Total Bi,625.760 9) Profit or loss summary P2,520,000 Retained earnings P2,520,000 10) Retained earnings P 540,000 Retained earnings - appropriated (cost of TS) P 540,000 PROBLEM NO. 9 ~ Various equity transactions In connection with your audit of the Colon Corporation, you were able to obtain the following information pertaining to the corporation's equity accounts. Colon Corparaiion has 2,000, F2 par value, ordinary shores thorized. Only 75% of these shares have been issued, and of the Shares issued, only 22,000 are outstanding. On December 31, 2009, the equity section revealed that the balance in Share premium — ordinary was P832,000, and the Retained Earnings balance was 220,000. ‘The Treasury shares were purchased at an average price of P37.50 per share. During 2010, Colon had the following transactions: Jan, 15 Colon issued, at PSS per share, 1,600 shares of P5Q par, 5% cumulative preference shares; 4,000 shures are ied S45,X- Audit of Equity Feb. O1 Mar. 15, Apr. 15 May 01 31 Sept.15 Colon sold 3,000 newly issued ordinary shares at P42 per share. Colon declared a cash dividend on ordinary shares of P0.15 - per share, payable on April 30 to all shareholders of record on April 1 Colon reacquired 400 ordinary shares for P43 per share. Employees exercised 2,000: share options granted in 2004. When the options were granted, each option entitled the employees to purchase 1 ordinary share for P50 per share. The share price on the date of grant was also P50 per share. Colon issued new shares to the employees. Colon declared a 10% share dividend to be distributed on June 1 to shareholders of record on May 7. The market price of the ordinary share was P50 per share on May 1. Colon sold 300 treasury shares reacquired on April 15 and an additional 400 shares costing P15,000 that had been on hand since the beginning of the year. The selling price was P97 per share. The semiannual cash dividend on ordinary shares was declared, amounting to P0.15 per share. Colon also declared the yearly dividend on preference shares. Both ere payable on October 15 to shareholders of record on October 1. Profit for 2010 was P100,000. = QUESTIONS: Based on the above and the result of your audit, determine the balances of ihe following as of December 31, 2010: a. P86,000 3 c. P80,000 b. P90,000 d. P84,000X- Audit of Equity 2. Ordinary share capital a. P63,320 c. P183,320 b. P23,320 d. P 58,000 3. Share premium a. P1,175,680 c. P1,195,680 b. P1,068,000 d. P1,099,680 4. Tredsury shares a. P64,300 - ¢, P92,200 b P77,200 d. P75,000 Total retained earnings a. P74,756 c. P183,250 b. P99,756 d. P174,756 Answers: 1) C; 2) A; 3); 4)A 5)D Suggested Solution: Questions No. 1 to 5 Preference share capital P 80,000 (1) Ordinary share capital 63,320 (2) Share premium 1,195,680 (3) Retained earnings 174,756 (5) Treasury shares 64,300) (4) Total equity, 12/31/10 P1,449,456, Journal entries affecting the equity accounts during 2010: 1/15 Cash (1,600 shares x P55) P 88,000 Preference share capital (1,600 shares x P50) P 80,000 Share premium - preference 8,000 2/1 Cash (3,000 shares x P42) P 126,000 Ordinary share capital (3,000 shares x P2) Share premium ordinary 3/15 Retained P 3,750 D Pe 547X- Audit of Equity 4/15 Treasury shares P 17,200 Cash (400 shares x P43) P 17,200 4/15 Cash (2,000 shares x P50) P 100,000 Ordinary share capital (2,000 shares x P2) P 4,000 Share premium — ordinary 96,000 5/1 Retained earnings (26,600 x 10% x P60) P. 133,000 Share dividends payable - ordinary (26,600 x 10% x P2) B-51320 Share premium — ordinary 127,680 5/31 Cash (700 shares x P57) P 39,900 ‘Treasury shares {(300 shares x P43) +P15,000] -P 27,900 Share premium ~ treasury shares transactions 12,000 6/1 Share dividends payable - ordinary 25,320 Ordinary share capital P ~5,320 9/15 Retained earnings P 8,494 Dividends payable - preference (80,000 x 5%) P 4,000 Dividends payable - ordinary (29.960 x P15) 4,494 12/31 Profit or loss sammary P100,000 Retained earnings P 100,000 PROBLEM NO. 10 - Various equity transactions Following is the equity section of Carcat Corporation’s statement of financial position at December 31, 2009: Share capital, P10 par value; authorized 1,500,000 shares; issued and outstanding 900,000 shares 9,000,000 Shere premium 750,000 Retained earnings 700,000 Transactions during 2010 and other information relating to the equity 548X- Audit of Equity * On January 26, Carcar reacquired 75,0U0 ordinary shares for PLL per share. * "On April 4, Carcar sold 45,000 treasury shares for P14 per share. * On June 1, Carcar declared a cash dividend of P1 per share, payable on July 15, 2010 to shareholders of record on July 1, 2010. * On August 15, each shareholder was issued one right for each share held to purchase two additional shares for P12 per share. The rights expire on October 31, 2010. *® On September 30, 150,000 rights were exercised when the market value of the share was P12.50 per share. ® On November 2, Carcar declared a two for one share split-up and changed the par value of the share from P10 to PS per share. On November 20, shares were icsued for the share 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 carrying amount of P300,000, and was ~ recently appraised at P390,000. * Profit for 2010 was P720,000. QUESTIONS: Based on the above and ‘the result of your audit, determine the following as of December 31, 2010: 1. Share capital a. P12,600,000 c. P10,800,000 b. P10,050,000 ~ d. P12,300,000 4. P1,275,000 549X- Audit of Equity 3. Unapproriated retained earnings a. P2,550,000 c, P2,422,500 b. P2,220,000 d. P2,190,000 4. Total equity a P16,425,000 c. P14,295,000 b. P16,095,000 d.. P16,065,000 Answers: 1)D; 2)C; 3)B; 4) B Suggested Solution: Questions No. 1 to 4 Share capital P12,300,000 (1) Share premium 1,575,000 (2) Appropriated retained earnings 330,000 Retained earnings 2,220,000 (3) Treasury shares (330,000, Total equity, 12/31/10 216,095,000 (4) Journal entries affecting the equity accounts during 2010 1/26 Treasury shares (75,000 x P11) P 825,000 Cash P_$25,000 4/4 Cash (45,006 x P14) P 630,000 Treasury shares (45,000 x P11) P 495,000 Share premium 135,000 6/1 Retained earnings {(900,000-30,000}xP1]_P_ 870,000 Dividends payable P 870,000 8/15 Memo entry 9/30 Cash (150,000 x 2 x P12} 3,600,000 Share capital (150,000 x 2 x P10) Shere p é 11/2 Memo entry 550X- Audit of Equity 9/30 Equipment P_ 390,000 Share capital {60,000 x P5} P 300,000 Share premium 90,000 12/31 Profit or loss summary P 720,000 Retained earnings P_ 720,000 12/31 Retained earnings P 330,000 Appropriated retained earnings P 330,000 PROBLEM NO. 11 ~ Various equity transactions You were able to gather the following information in connection with your audit of the equity section of the statement of fine:icial position of Liloan, Inc. The company is a manufacturer of school and office equipment. As of December 31, 2009, the equity of the company is presented below: Cumulative preference share capital (P15 par value; 100,000 shares authorized, 12,000 shares issued and outstanding) P_ 180,000 Ordinary share capital (P10 par value; 1,000,000 shares authorized, 330,000 shares issued and outstanding) 3,300,000 Retained earnings 1,866,000 P5,346,000 Liloan’s equity transactions during 2010 were as follows: a. On January 31, 24,000 preference shares were issued in exchange for land with a fair value of P300,000. Six months ago, 2,900 shares of Liloan’s preference shares were exchanged “over the counter” for P14 per share. b. On February 14, 13,500 ordiriary shares were sold to Ms. P. Saway at P25 per share. 3 500 shares ae p27 per share. The fe are to be hela as sey shares. Seay violently opposed ae business strategy +} SaiX- Audit of Equity d. On December 20, Liloan contracted with Ms. Buti for the sale of 30,000 previously unissued ordinary shares at P25 per share to be issued when the purchase price is fully paid. At December 31, only 585,000 had been paid. Buti agreed to pay the balance on or before January 31, 2011. e. On December 31, Liloan retired 12,000 preference shares at P18 per share. f. A cash dividend of P2 per share was declared on the preference shares on October 15, and paid on November 15. g. A cash dividend of P1.50 per ordinary share wes declared on December 15, and payable on January 15, 2011. h. -Liloan’s profit for the year 2010 was P750,000. QUESTIONS: Based on the above and the result of your audit, determine the following as of December 31, 2010: 1. Preference share capital a. P360,000 c. 264,000 b. P300,000 d. P324,000 2. Ordinany share capital a. P3,435,000 c. P3,735,000 b. 4,020,000 d. P3,637,500 3. Share premium a. P592,500 c. P652,500 b. 202,500 a. P142,500 4. Total retained earnings a. Pi,977,000 cc. P2,013,000 b. P1,648,500 d. P2,037,000 5. Total equity a. P6,171,000 b. . P6,036,000 552X- Audit of Equity Answers: A; 24; 3); 4c, PE Suggested Solution: Questions No. 1 to S Preference share capital P 360,000 (1) Ordinary share capital 3,435,060 (2) Subscribed ordinary share capital 300,000 Share premium 652,500 (3) Total retained earnings 2,013,000 (4) ‘Treasury shares (364,500) Discount on preference share capital 160,000) Total equity, 12/31/10 6,336,000 (5) Journal entries affecting the equity accounts during 2010: a) Land (at fair value) P 300,006 Discount on preference share capital 60,000 Preference share capital (24,000 shares x P15) P 360,000 b) Cash (13,500 shares x P25) P 337,500 Ordinary share capital (13,500 shares x P10) P 135,000 Share premium 202,500 ©) Treasury shares P 364,500 Cash (13,500 sHarcs x P27} Po g5K,e00 a) Cash P 585,000 Subscriptions receivable 165,000* Subscribed ordinary share capital (30,000 shares x P10) P300,000 Share premium 450,000 * [(80,000 shares x P25)- PS85,000] ) Preference share capital (12,000 shares x P15) P_ 180,000 Retained earnings 36,000 Cash (12,000 shares x P18) P 216,000 f) Retained earnings P 72,000 Cash [(12,000 + 24,000 x P2}] P 72,000 553- Audit of Equity &) Retained earnings P 495,000* Dividends payable {(12,000 + 24,000 x P2}} P 495,000 ** (830,000 + 13,500 - 13,500) x P1.5) h) Profit or loss summary P 750,000 Retained earnings P_ 750,000 PROBLEM NO. 12 - Various equity transactions You gathered the following information pertaining to the equity section of the Oslob Corporation in connection with your audit of the company’s financial statements for 2010: Ordinary share capital, P1 par value; authorized 1,500,000 shares; issued 750,000 shares; outstanding 700,000 shares P 700,000 Share premium: Excess over par 7,000,000 From treasury shares 100,000 Total paid-in capital 7,800,000 Unappropriated retained earnings 4,050,000 Total equity BL1.850,000 All of the outstanding ordinary and treasury shares were originally issued in 2007 for P11 per share. The treasury shares were acquired on March 31, 2009. Oslob uses the par value method of accounting for treasury shares, During 2010, the following events or transactions occurred relating to Oslob’s equity: Feb. 10 Issued 200,000 of unissued ordinary shares for P12.50 per share. Mar. 15 Declared cash dividend of P0.20 per share to shareholders of record on April 1, 2010 and payable on April 15, 2010. This was the first dividend ever declared by Oslob. Aug. 30 Oslob’s president ‘retired, Oslob purchased from the retiring president 50,000 ordinary shares of Oslob for P13 Per share, which was equai to market vaiue of this date. 554X- Audit of Equity These shares were cancelled. Dec. 15 Declared a cash dividend of PO.20 per share to shareholders of record on January 2, 2011 and payable on January 15, 2011, Osiob is being used by two separate parties for patent infringements. Oslob management and outside legal counsel share the following opinions regarding to these suits: Suit Likelihood of losing the suit Estim/ated loss #1 Reasonably possible 300,000 #2 Probabie 200,000 QUESTIONS: Based on the above and the result of your audit, enswer the following: 1. The issuance of 200,000 ordinary shares on February 10, 2010 caused Oslob’s share premium to increase by a. P 200,000 . c. P2,300,000 b. 2,500,000 a P 0 2. ‘The retirement of 50,000 ordinary shares on August 30, 2010 caused Oslob’s share premium to decrease by a. P 50,000 ¢. . P500,000 b. P600,000 dP 0 3. Oslob wants to appropriate retained earnings for all loss contingencies that are not properly accruable by a charged to expense. How much of Oslob loss contingencies should be appropriated by charged to unappropriated retained earnings? a. P300,000 c. P500,000 b. P200,000 a P 0 4. How much cash dividends should Oslob charge — against unappropriated retained earnings in 2010? a. P350,000 c. P370,000 b. P180,000 d. P170,000 555X- Audit of Equity 5. How much should Oslob show in-note to financial statement as a restriction on. retained earnings because of the acquisition of treasury shares? a. P100,000 c. P600,000 b. P450,000 d. P650,000 Answers: 1) €; 2)C; 3) A; 4) A, 5)B Suggested Solution: Question No. 1 Proceeds from issuance (200,000 x P12.50} 2,500,000 Less par value of shares issued (200,000 shares x P1) 260,000 Increase in share premium 2,300,000 Question No. 2 Journal entry to record the retirement: Ordinary share capital (50,000 shares x P1) P 50,000 Share premium [50,000 shares x (P11 - P1)] 500,000 Unappropriated retained earnings 100,000 Cash (50,000 shares x P13) P-650,000 Question No. 3 Loss contingency that is not properly accruable by a charged to expense: Suit # 1 - Reasonably possible P300,000 Question No. 4 Dividends declared, 3/15/10 {(700,000 + 200,000) x PO.20} 180,000 Dividends declared, 12/15/10 {(700,000 + 200,000 - 50,000) x PO.20) 556X- Audit of Equity Question No. 5 Reconstruction of the entry made to record the acquisition of treasury shares: 3 Treasury shares (50,000 shares x P1) P 50,000 Share premium - excess over par [50,000 shares x (P11 - P1)] 500,000 Share premium - TS transactions P 100,000 Cash (balancing figure) 450,000 PROBLEM NO. 13 - Analysis of share and dividend transactions In connection with your audit of the Poro Company, you were asked to prepare comparative data from the company’s inception to the present. ‘The following were gathered during your audit: a. Poro Company’s charter became effective on January 2, 2006, when 80,000, P10 par value, ordinary shares and 40,000, 5% cumulative, nonparticipating, preference Shares were issued. The ordinary share was sold at P12 per share and the preference share was sold at its par value of P100 per share. b. Poro was unable to pay preference dividends at the end of its first year. The owners of the preference shares agreed to accept 2 ordinary shares for every 50 shares of preference shares owned in discharge of the preference ‘share dividends due on December 31, 2006. The shares were issued on January 2, 2007. The fair value was P30 per share for ordinary on the date of issue. c. Poro Company acquired all outstanding shares of Pos Corporation on May 1, 2008, in exchange for 40,000 ordinary shares of Poro. d. Poro split its ordinary shares 3 for 2 on January 1, 2009, and 2 for 1 on January 1, 2010. e. Poro offered to convert 20% of the preference shares to ordinary on th ary shares for 1 preference share. The offer was accepted, and the conversion was made on July 1, 2010. 557X- Audit of Equity £ No cash dividends were declared on ordinary shares until December 31, 2008. Cash dividends per ordinary share were declared and paid as follows: December 31 June 30 2008 P4.00 2 2009 PS.00 P3.00 2010 P2.00 P2.50 QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Outstanding number of ordinary shares as of December 31, 2010 a. 364,800 c. 372,800 b. 684,800 d. 380,800 2. Outstanding number of preference shares as of December 31 » 2010 a. 40,000 c. 32,000 b. 24,000 d. 96,000 3. Amount of cash dividends declared and paid to ordinary shareholders for the year 2009 a. P972,800 c. P1,459,200 b. P608,000 d. P1,981,440 4. Amount of cash dividends declared and paid to ordinary shareholders for the year 2010 a. P3,911,040 c. P1,713,600 b. P3,041,600 d. P1,673,600 Answers: 1) D; 2); 3) C; 4)D Suggested Solution: Question Nos. 1 and 2 Ordinary Preference Jan, 02, 2006 80,000 40,000 Jan. 02,2007 Ordinary issued to preferen: shareholders (60,0: 22) 1,600 558X Audit of Equity Ordinary Preference Dec. 31, 2007 81,600 40,000 May 01, 2008 Acquisition of Pos Corp. 40,000 Dec. 31, 2008 121,600 40,000 Jan. 01,2009 3:2 Ordinary share split {121,600 x 3/2) - 121,600] —_60,800 Bec. 31, 2009 182,400 40,000 Jan. 01,2010 2:1 Ordinary share split 182,400 Jul. 01,2010 Conversion of preference (40,000 x 20% x 2) 16,000 (8.000) Dac. 31, 2020 380,800 32,000 Question Nu. 3 Dividends declared, 7/1/09 (182,400 x P3.00) P 547,200 Dividends declared, 12/31/09 (182,400 x P5.00) __912,000 Cash dividends to ordinary shareholders in 2009 B1,459,200 Question No 4 Dividends declared, 7/1/10 (364,800 x P2.50) P 912,000 Dividends declated, 12/31/10 (380,800 x P2.00) 761,600 ividends to ordinary shareholders in 2010 B1,673,01 PROBLEM NO. 14 - Analysis of equity transactions The equity section of Ronda Corporation's stat position as of December 31, 2009 is as follows: Shareholders’ Equity t of financial 5 ized, ued, 400,000 shares 2,000,000 Share premium 850,000 Retained earnings 3,000,000 25,850,000 The following events occurred during 2010: Jan. 5 10,000 shares were sold for P9 per share. Jan 16 Declared a cach nd of PN.40 per share, payable Febru: 15 to shareholders of record om February 5. ary 559X- Audit of Equity Feb.10 40,000 shares were sold for P11 per share. Mar. 1 A 40% share dividend was declared and issued. Market value per share is currently P15. April1 A two-for-one split was carried out. The par value of the share was to be reduced to P2.50 per share. Market value on March 31 was P18 per share. © July 1 A 10% share dividend was declared and issued. Market value is currently P10 per share. Aug. 1 A cash dividend of P0.40 per share was declared, payable September 1 to shareholders of record on August 21. Dec. 31 Profit for 2010 was P1,880,000. QUESTIONS: Based on the above and the result of your audit, answer the following: 1, The number of shares issued and outstanding as of December 31, 2010 is a. 2,079,000 ¢. 1,188,000 b. 1,386,000 d. 346,500 2. The balance of share capital as of December 31, 2010 is a. P3,465,000 c. P3,228,750 b. P3,780,000 d. P3,622,500 3. The balance of share premium as of December 31, 2010 is a. 2,075,000 c. P1,760,000 b. P2,547,500 d. 3,695,000 4. The balance of retained earnings as of December 31, 2010 is a. P- 381,600 ©. P1,094,400 b. P3,362,400 d. P2,001,600 Answers: 1) B; 2) A; 3) A; 4)D 560X- Audit of Equity Suggested Solution: Shares issuedand Share Share Retained Date outstanding capital premium _carnings Bal., 12/31/09 400,000 2,000,000 P 850,000 3,000,000 January 5 10,000 50,000. 40,000 ieee 10,000 2,050,000 890,000 3,000,000 January 16 (164,000) February 10 40,000. 200,000 __240,000__ 450,000 2,250,000 1,130,000 March 1 180,000 ___ 900,000 630,000 3,150,000 1,130,000 April 1 630,000 ____630,000 1,260,000 3,150,000 1,130,900 July 1 126,000 315,000 _945,000_{1.260,000} 7386000 3,465,000 2,075,000 676,000 August 1 ( 554,400) December 31 ___1,880,000_ Bal., 12/31/10 PROBLEM NO. 15 - Share options You were able to gather the following information in connection with your audit of Sogod Corporation: on January 1, 2008, Sogod Corporation granted share options to cmicers and Key employees for the purchase of 30,000, P10 par Value, ordinary shares of the company at P25 pet share. The options are exercisable within a 5-year period beginning January 1, 2010 by grantees still in the employ of the company) and expiring December 31, 2014 The service period for this award is 2 years. The fair value option pricing model determined total compensation expense to be P525,000. The share was selling at P35 at the time the options were granted. ed from the company. ordinary share was P35 per share on this date. 561X- Audit of Equity * On March 31, 2010, 18,000 option shares were exercised when the market value of ordinary share was P40 per share. QUESTIONS: Based on the above and the result of your audit, determine the following: 1. Contpensation expense in 2008 a. P525,000 ©. P236,250 b. P262,500 d. P150,000 2, Net compensation expense in 2009 a. P262,500 ©. P120,000 b. P210,000 d. 150,000 3. The exercise of the 18,000 options will result in a credit to Share premium - excess over par of a. P585,000 ¢. P270,000 b. P620,000 d. P450,000 4. Share premium - share options as of December 31, 2010 Base 0 ce. P472,500 b. P90,000 da. P157,500 Answers: 1) B; 2)B; 3) A; 4)D ‘Suggested Solution: Question No. 1 Compensation expense in 2008 (P525,000x 1/2) 262,500 PFRS 2 par. 10 states that for equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services rendered, unless the fair value cannot be estimated reliably. If the entity cannot estimate relia the fri or services received, the entity shall measure their fair value, the corresponding increase in equity, indirectly, by reference to the fair value of the equity instruments granted. 562X- Audit of Equity In cases, that the entity is unable to estimate reliably the fair value of the equity instruments granted at measurement date, the entity may measure the equity instruments at their intrinsic value. If the equity instruments granted do not vest until the counterparty completes a specified period of service, the entity shall presume that the services to be rendered by the counterparty as consideration for those equity instruments will be received’ in the future, during the vesting period. On the other hand, if the equity instruments granted vest immediately, the entity shall recognize the services received in full, with & corresponding increase in equity. Question No. 2 Compensation expense in 2009 (P525,000 x 1/2) P262,500 Less share options of terminated employees (P525,000 x 3/30) 52,500 Net compensation expense 11 2009 Question No. 3 Journal entry to record the exercise of the options: Cash (18,000 x P25} P450,000 Share premium - options (P472,500 x 18/27) 315,000 Share capital (18,000 x P10) P180,000 Share premium-excess over par 585,000 Question No. 4 Compensation expense, 2008 P262,500 Compensation expense, 2009 210,000 Share options exercised (see no, 3) (315,000) Share premium - share options, 12/31/10 P15Z.500 PROBLEM NO. 16 - Share options At the beginning of 2010, Sibonga Company te cach oF om Each gre employee working for the entity over the next three years. The enti! estimates that the fair value of each share option is P45. its 100 share optionsX- Audit of Equity On the basis of a weighted average probability, the entity estimates that therefore forfeit their rights to the share options. During 2010, 10 employees leave. The entity revises its estimate of total employee departures over the three-year period from 25 per cent to 20 per cent. During 2011, a further 8 employees leave. The entity revises its estimate of total employee departures-over the three-year period from 20 per cent to 15 per cent. During 2012, a further 6 employees leave. QUESTIONS: Based on the above and the result of the audit, determine the following: 1. Compensation expense in 2010 a. P240,000 ce. P720,000 b. P225,000 a. P 0 2. Compensation expense in 2011 a. P240,000 c, P510,000 b. P270,000 dP 0 3. Compensation expense in 2012 a. P240,000 c, P282,000 b. P720,000 d. P792,000 Answers: 1) A; 2) B; 3) C Suggested Solution: Question No. 1 Compensation expense in 2010 (200 employees = 100 options x 80% 5 x 1/3) P249,000 Question No. 2 Cumulative compensation expense, 12/3i/ii : {200 employees x 100 options x 85% * P45 x 2/3) P510,000 Less compensation expense for 2010 10X- Audit of Equity Question No. 3 Cumulative compensation expense, 12/31/12 (176 employees * 100 options P45) P792,000 Less cumulative compensation expense, 12/31/11 510,000 Compensation expense in 2012 282,000 PROBLEM NO. 17 - Share options ‘At the beginning of 2010, Santander grants share options to each of its 100 employees working in the sales department. The share options will vest at the end of 2012, provided that the employees remain in the entity's employ, and provided that the volume of sales of a particular product increases by at least an average of 5 per cont per year If the Polume of sales of the product increases by an average of between 5 per Cent and 10 per cent per year, each employee will receive 100 share options. If the volume of sales increases by an average of between 10 per cent and 15 per cent each year, each employee will receive 200 Phare options. If the volume of sales increases by an average of 15 per cent or more, each employee will receive 300 share options. On grant date, Santander estimates that the share options have a fair value of P20 per option. Santander also estimates that the volume of sales of the product will increase by an average of between 10 per cent snd 15 per cent per year. ‘The entity also estimates, on the basis of a weighted average probability, that 19 per cent of employees will leave before the end of 2012. By the end of 2010, seven employees have left and the entity still expects that a total of 19 employees will leave by the end of 2012. Product sales have increased by 12 per cent and the entity expects this rate of increase to continue over the next 2 years. By the end of 2011, a further six employees have left. The entity now expects only three more employees will leave during 2012. | Product alee have increased by 18 per cent. ‘The entity now expects that sales = ae will average i5 por cont or more ever the thres-y1 By the end of 2012, a further two employees have left. The entity’s sed by an average of 16 per cent over the three years 565X- Audit of Equity QUESTIONS: Based on the above and the result of the audit, determine the following: 1. Compensation expense in 2010 a. P162,000 . P108,000 b. P124,000 dP 0 2. Share premium - share options at the end of 2011 a. P348,000 ©. 340,000 b. P336,000 dP 0 3. Compensation expense in 2011 a. P228,000 c. P232,000 b. P224,000 a. P 0 4. Compensation expense in 2012 a. P510,000 ©. P174,000 b. P162,000 ap ° Answers: 1) C; 2) B; 3) A; 4c Suggested Solution: Question No. 1 Compensation expense in 2010 (81 employees * 200 options « P20 x 1/3) 108,000 Question No, 2 Share premium - share options, 12/31/11 (84 employees x 300 options x P20 x 2/3) 336,000 Question No. 3 Cumulative compensation expense, 12/31/11 336,000 Compensation expense in 2011X- Audit of Equity Question No. 4 Curnulative compensation expense, 12/31/12 (85 employees 300 options « P20) P510,000 Less cumulative compensation expense, 12/31/11 Compensation expense in 2012 PROBLEM NO. 18 - Share appreciation rights Qn January 1, 2010, Tabogan Corporation grants 100 cash share appreciation rights (SARs) to each of its 200 employees, on condition that the employees remain in its employ for the next three years. During 2010, 14 employees leave. The entity estimates that a further 24 will leave during 2011 and 2012. During 2011, 19 employees leave and the entity estimates that a further 8 will leave during 2012. During 2012, 6 employees leave. At the end of 2012, 60. employees exercise their SARs, another 40 employees exercise their SARs at the end of 2013 and the remaining employees exercise their SARs at the end of 2014, ‘The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below. At the end of 2012, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the end of 2012, 2013 and 2014 are also shown below. Year Fair value Intrinsic value 2010 P30 2011 32 2012 36° P35 2013 42 40 2014 46 QUESTIONS: Based on the above and the result of the audit, determine the following: 1. Compensation expense in 2010 a. P186,000 s cc. P97,200 b. P162,000 a. P °X- Audit of Equity » Compensation expen: a, P189,467 b. P117,840 P196,400 SB 0, ee Compensation expense in 2012 a. P247,600 230,533 b, 232,560 P 0 a9 Compensation expense in 2013 a. P 58,000 b. P160,000 P157,600 P 0 pe Compensation expense in 2014 a. P322,000 28,000 b. P 86,800 Po ao Answers: i) B; 2) C; 3) A; 4) A; 5) ‘Suggested Solution: Question No. 1 For cash-settled share-based payment transactions, the entity si measure the goods: or services acquired and the liability incurred at the fair value of the liability. Until the liability is settled, the entity shall renieasure the fair value of the liability at each reporting date and at the date of settlement, with any changes in fair value recognized in profit or Compensation expense in 2010 {162 employees x 100 SARs x P30 « 1/3) 162,000 loss for the period. (PFRS 2 par. 30) Question No. 2 Liability on SARs, 12/31/11 (168 employees * 100 SARs x P82 * 2/3) P358,400 Less compensation expense in 2010 162,000 ‘Compensation expense i 568 hellX- Audit of Equity Question No. 3 Liability on SARs, 12/31/12 (110 employees « 100 SARs * P36) P396,000 Less liability on SARs, 12/31/11 358.400 Increase in liability 37,600 SARs exercised (60 employees x 100 SARs = P35) 210,000 Compensation expense in 2012 P247,600 Question No. 4 Liability on SARs, 12/31/13 (70 employees x 100 SARs * P42) 294,000 Less liability on SARs, 12/31/12 396,000 Decrease in liability (102,000) SARs exercised (40 employees x 100 SARs « P40) __160.000 Compensation expense in 2013 B..58,000 Question No. 5 2 Liability on SARs, 12/31/14 P 0 Less liability on SARs, 12/31/13 294,000 Decrease in liability (294,000) SARs exercised (70 employees x 100 SARs x P46) _322,000 Compensation expense in 2013 P_28,000 PROBLEM NO. 19 - Share options with cash alternatives ‘An entity grants. to an employee the right to choose either 5,000 phantom shares, ie a right to a cash payment equal to the value of 5,000 shares, or 6,000 shares. The grant is conditional upon, the compietion of three years’ service. if thc employee chooses # ‘alternative, the shares must be held for three years after vesting date ‘At grant date, the entity’s share price is P81 per share. At the end of years 1, 2 and 3, the share price is P82, P85 and P90 respectively. The entity does not expect to pay dividends in the next three years. After taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grani daie fais value oi alternative is P78 per share.X- Audit of Equity QUESTIONS: Based on the above and the result of the audit, determine the following: 1. Compensation expense in year 1 a. P156,000 : P157,667 b. P136,667 P 0 po 2. Compensation expense in year 2 a. -P156,000 P146,666 b. P167,666 i 0 ao 3. Compensation expense in year 3 a. P156,000 P187,667 b. P166,667 P O Bo Answers: 1) ©; 2)B; 3)¢ Suggested Solution: Question No, 1 . Liability component (P5,000 x P82 x 1/3) P136,667 Equity component (P63,000/3) 21,000 Compensation expense in year 1 2157,667 Computation of equity component: Fair value of equity alternative (6,000 shares x78) P468,000 Fair value of cash alternative (5,000 shares x 81) 405,000 Fair value of equity component P_63.000 For share-based payment transactions in which the terms of the arrangement provide either the entity or thé counterparty with the choice of whether the entity settles the transaction in cash (or other assets) or by issuing equity instruments, the entity shall account for that transaction, or the components of that transaction, as a cash-settled share-based payment transaction if, and to the extent that, the entity has emied & inability to seitie in cash or other assets, or as ah equity. settled share-based payment transaction if, and to the extent that to Such liability has been incurred. (PFRS 2 par. 34) 570