ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514

CPA Review Batch 45  May 2023 CPA Licensure Examination

FINANCIAL ACCOUNTING & REPORTING / AUDITING PRACTICE S. IRENEO  G. MACARIOLA  C. ESPENILLA  J. BINALUYO

SHAREHOLDERS’ EQUITY
Elements of Shareholders’ Equity:
1. Share Capital or Capital Stock
a) Ordinary share capital or common stock
b) Preference share capital or preferred stock

2. Share Capital Not Yet Fully Paid or Subscribed Capital Stock

3. Share Premium Reserve or Additional Paid In Capital

a) Excess of par (issue price over par)
b) On re-issue of treasury shares
c) On share or stock dividend
d) Share options outstanding
e) Share warrants outstanding
f) Donated Capital
g) On retirement of share capital

4. Other Equity Reserves:

a) Appropriation reserves
b) Revaluation reserves
c) Translation reserves
d) Unrealized gain or loss on available for sale
e) Actuarial gains and losses

5. Accumulated Profits and Losses or Retained Earnings

Measure of Share Capital When Issued or Subscribed: With par – at par any excess to Share Premium
Without par but with a stated value:
1. At stated value any excess to Share Premium Reserve
2. At total amount or proceeds on the issue of the share

Measure of the Consideration Received in Exchange for Shares:

a) For cash or receivable–at face
b) For non-cash – at the FMV of the non-cash or FMV of the shares issued whichever is clearly determinable.
c) For services rendered – at the FMV of the services rendered or market value of the shares issued
whichever is clearly determinable.

Share capital transaction – any gain on the reissue (treasury share), retirement, conversion of share is credited
to the account Share Premium Reserve or any other appropriate account, any loss is charged against Share
Premium (for the reissue of treasury), if any, any remaining loss to Accumulated Profits and Losses, any loss
identified to other share capital transaction other than re-issue of treasury, is debited directly to the account
Accumulated Profits and Losses.

Issuance of Ordinary and Preference Shares for a Basket Price: Both Securities are treated as equity:
1. If the market values of both equity shares are known, the basket price is allocated using their market
value ratio.
2. When only one security has a known market value, the basket price or proceeds is allocated to the
securities by deducting the market value of the security with a known market value (the market value of
that security will be its assigned value) the excess will the assigned value of the security without a known
market value.

Preference Shares are treated as Debt:

The residual method is used to allocate the proceeds between the Ordinary Share Capital (equity) and the
Preference Share (debt). The fair value of the Preference Share (debt) is deducted from the total proceeds in
arriving at the fair value of the Ordinary Share Capital (equity).
Issuance of Preference Share with a Share Warrant: Preference Share is treated as Equity:
1. If the market value of the preference share and the market value of the warrants are known – the
proceeds is allocated to the securities using their market value ratio.
2. When only one security has a known market value, the proceeds is allocated to the securities by
deducting the market value of the security with a known market value (the market value of that security
will be its assigned value) the excess will the assigned value of the security without a known market
value.
Preference Share is treated as Debt:
The residual method is used to allocate the proceeds between the Share Warrants (equity) and the Preference
Share (debt). The fair value of the Preference Share (debt) is deducted from the total proceeds in arriving at the
fair value of the Share Warrants (equity).

Page 1 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

Measure of Treasury Share – at cost which is equal to the face value of cash or fair market value of non-cash
asset surrendered in reacquiring shares of the company.

Disposal of treasury share thru re-issuance - the re-issue price less the cost of treasury share. Any positive
excess is credited to Share Premium- from Treasury. Any negative excess is debited to Share Premium-Treasury
to the extent of an existing credit balance prior to re-issuance, any remaining negative excess is debited to
Retained Earnings or Accumulated Profits or Losses account.

Disposal of treasury share thru retirement - the carrying value of the share to which to the treasury share
belongs less cost of the treasury. Any positive excess is credited to Share Premium- from Retirement. Any
negative excess is debited to Accumulated Profits and Losses.
* The carrying value of the share includes the Par and the Share Premium at the time the shares were originally issued.

Conversion of a Class of Own Equity to another Class of Own Equity:

The carrying value of the converted class of equity is transferred to the newly issued class of equity. Gain or loss
on the conversion is not recognized.
Share Rights - is an issue of new shares with the terms of issue giving shareholders the right to an additional
number of shares in proportion to their current shareholdings. Rights issue may be renounceable or non-
renounceable. If renounceable, existing shareholders may sell their rights to the new shares to another party
during the offer period. If the rights issue is non-renounceable, a shareholder is not allowed to sell his or her
rights to the new shares and must either accept or reject the offer to acquire new shares in the company.

Accounting for Share Rights:

1. Upon issuance – no formal entry is necessary, only a memorandum entry is required
2. Upon exercise – formal entry is required to record the issue of new shares.
3. Upon redemption – formal entry is required to record the “as if” payment of cash dividends.
4. Upon expiration – no formal entry is necessary.

Bonus issue – is an issue of shares to existing shareholders in proportion to their current shareholdings at no
cost to the shareholders. The company uses its reserves balances or retained earnings to make the issue. The
bonus issue is a transfer from one equity account to another, so it does not increase or decrease the shareholders’
equity of the enterprise. Bonus issue is a transaction that will only affect the components of the equity or a
transaction inside the shareholders’ equity. The result of the bonus issue increases the share capital and decreases
another equity account of the entity.

Equity-Settled Share-Based Payment: (Share Options):

The entity shall measure the services received, and the corresponding increase in equity, directly, at the fair value
of the services received, unless the fair value cannot be estimated reliably. If the entity cannot estimate reliably
the fair value of the services received, the entity shall measure their fair value and the corresponding increase in
equity, indirectly, by reference to the fair value of the equity instruments granted. Because of the difficulty of
directly measuring the cost of the service directly, the entity shall measure the fair value of the employee services
received by reference to the fair value of the equity instruments granted. However, in rare cases, the entity may
be unable to estimate reliably the fair value of the equity instruments granted at the measurement date, the
entity shall instead measure the equity instruments at their intrinsic value.

Cash-Settled Share-Based Payments:

The entity shall 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 remeasure 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 loss for the period.
Share-Based Payment with Cash Alternatives:
For share-based payment transactions in which the terms of the arrangement provide either the entity or the
counter party with the choice of whether the entity settles the transaction in cash (or other asset) or by issuing
equity instruments, the entity shall account for that transaction, or the components of that transactions, as a
cash-settled share-based payment transactions if, and to the extent that, the entity has incurred a liability to
settle in cash or other assets, or as equity-settled share-based payment transaction if, and to the extent that, no
such liability has been incurred.

Share-Based Payment–The Counter Party with a Choice of Settlement:

If an entity granted the counterparty the right to choose whether a share-based payment transaction is settled
in cash or by issuing equity instruments, the entity has granted a compound financial instrument, which includes
a debt component and equity component. For transaction with parties other than employees, in which the fair
value of the goods or services received is measured directly, the entity shall measure the equity component of
the compound financial instrument as the difference between the fair value of the goods or services received and
the fair value of the debt component, at the date when the goods or services are received.

For transactions, including transactions with employees, the entity shall measure the fair value of the compound
financial instrument at the measurement date, taking into account the terms and conditions on which the rights
to cash or equity instruments were granted. The entity shall first measure the fair value of the debt component
and then measure the fair value of the equity component, taking into account that the counterparty must forfeit
the right to receive cash in order to receive the equity instruments.

Page 2 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

Share-Based Payment – The Entity with a Choice of Settlement:

If the terms of the arrangement provide an entity with the choice of whether to settle in cash or by issuing equity
instruments, the entity shall determine whether it has a present obligation to settle in cash and account for the
share-based payment transaction accordingly. The entity has a present obligation to settle in cash if the choice
of settlement in equity instrument has no commercial substance (e.g. because the entity is legally prohibited from
issuing shares), or the entity has a past practice or a stated policy of settling in cash, or generally settles in cash
whenever the counterparty asks for cash settlement. If the entity has a present obligation to settle cash, it shall
account for the transaction in accordance with the requirements applying cash- settled share-based payment
transactions. If no such obligation, the entity shall account for transaction in accordance with the requirements
applying equity-settled share-based payment transactions.

FINANCIAL ACCOUNTING & REPORTING-THEORIES

1. Total shareholders’ equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
2. A primary source of shareholders’ equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by shareholders.
d. both income retained by the corporation and contributions by holders.
3. Which of the following represents the total number of shares that a corporation may issue under the terms of
its charter?
a. authorized shares c. unissued shares
b. issued shares d. outstanding shares
4. When treasury shares are purchased for more than the par value of the shares and the cost method is used
to account for treasury shares, what account(s) should be debited?
a. Treasury shares for the par value and share premium for the excess of the purchase price over the
par value.
b. share premium for the purchase price.
c. Treasury shares for the purchase price.
d. Treasury shares for the par value and retained earnings for the excess of the purchase price over the
par value.
5. In January 2021, Foler Corporation, a newly formed company, issued 10,000 shares of its P10 par ordinary
shares for P15 per share. On July 1, 2021, Foler Corporation reacquired 1,000 shares of its outstanding shares
for P12 per share. The acquisition of these treasury shares
a. decreased total shareholders’ equity c. did not change total shareholders’ equity
b. increased total shareholders’ equity d. decreased the number of issued shares
6. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
7. When treasury shares are purchased for more than the par value of the shares and the cost method is used
to account for treasury shares, what account(s) should be debited?
a. Treasury shares for the par value and share premium for the excess of the purchase price over the
par value.
b. share premium for the purchase price.
c. Treasury shares for the purchase price.
d. Treasury shares for the par value and retained earnings for the excess of the purchase price over the
par value.
8. At its date of incorporation, Solid, Inc. issued 100,000 shares of its P10 par ordinary shares at P11 per share.
During the current year, Solid acquired 20,000 ordinary shares at a price of P16 per share and accounted for
them by the cost method. Subsequently, these shares were reissued at a price of P12 per share. There have
been no other issuances or acquisitions of its own ordinary shares. What effect does the reissuance of the
shares have on the following accounts?
Retained Earnings Share Premium
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
9. Contributed capital consists of the following major components?
a. legal and stated capital c. legal capital and additional paid-in capital
b. retained earnings and legal capital d. additional paid-in capital and retained earnings
10. How should the excess of subscription price over the value of ordinary shares subscribed be recorded?
a. as share premium when the share capital is issued
b. as share premium when the subscription is received
c. as share premium when the subscription is collected
d. as retained earnings when the subscription is received

Page 3 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

11. Treasury share was acquired for cash at a price in excess of its par value. The treasury share was
subsequently sold for cash at a price in excess of its acquisition price. Assuming that the cost method of
accounting for treasury share transactions is used, what is the effect on total shareholders’ equity?
Purchase of treasury share Sale of treasury share
a. Increase Decrease
b. Decrease No effect
c. Decrease Increase
d. No effect No effect
12. At the date of the financial statements, ordinary shares issued would exceed ordinary shares outstanding as
a result of the
a. declaration of a share split c. purchase of treasury shares
b. declaration of share dividend d. payment in full of subscribed shares
13. How would a share split affect each of the following?
Assets Total Shareholders’ Equity Share Premium
a. Increase Increase No effect
b. No effect No effect No effect
c. No effect No effect Increase
d. Decrease Decrease Decrease

FINANCIAL ACCOUNTING & REPORTING - PROBLEMS

Problem 1: Brown Corporation was organized on January 2, 2022, with authorized capital of 200,000 shares of
P10 par value ordinary share. During 2022, Brown had the following transactions:
Jan. 12 Issued 80,000 shares for P12 per share
Apr 23 Issued 4,000 shares for legal services when the market price was P14 per share
What should be the amount of share premium at December 31, 2022?
a. 16,000. b. 56,000. c. 160,000. d. 176,000

Problem 2: Orange Corporation issued 80,000, P10 par value, ordinary shares when it began operation in 2020
and issued an additional 40,000 shares in 2021. Orange also issued 20,000, P5 par value, preference share
convertible into 40,000 ordinary shares. In 2022, Orange purchased 30,000 ordinary shares and held it in the
treasury.
At December 31, 2022, what is the total par value of Orange ordinary shares outstanding?
a. 1,600,000. b. 1,300,000. c. 1,200,000 d. 900,000

Problem 3: On April 1, 2022, Indigo, a newly formed company, had the following shares issued and outstanding
• Ordinary share, no par, P1 stated value, 20,000 shares originally issued for P30 per share
• Preference share, P10 par value, 6,000 shares originally issued for P50 per share
Indigo’s April 1, 2022 statement of shareholders’ equity should report
Ordinary share Preference share Share premium
a. 20,000 60,000 820,000
b. 20,000 300,000 580,000
c. 600,000 300,000 -0–
d. 600,000 60,000 240,000

Problem 4: The Beige Company was incorporated on January 1, 2022, with the following authorized
capitalization:
• 80,000 ordinary shares, no par value, stated value, P40 per share
• 20,000 5% cumulative preference share, par value P10 per share
During 2022, Beige issued 48,000 ordinary shares for a total of P2,400,000 and 12,000 preference shares at P16
per share. In addition, on December 31, 2022, subscriptions for 4,000 shares of preference share were taken at
a purchase price of P17. These subscribed shares were paid for on January 2, 2023.
What should Beige report as total contributed capital on its December 31, 2022 statement of financial position?
a. 2,800,000. b. 2,524,000. c. 2,592,000. d. 2,660,000.

Problem 5: Gray Company was organized on January 1, 2022, with an authorization of 400,000 shares of
ordinary share with a par value of P6 per share

During 2022, the corporation had the following capital transactions:

January 5 Issued 300,000 shares at P10 per share
April 6 Issued 100,000 shares at P12 per share
June 8 Issued 100,000 shares at P14 per share
July 28 Purchased 40,000 shares at P11 per share
December 31 Sold the 40,000 shares held in treasury at P18 per share

Gray used the cost method to record the purchase and reissuance of the treasury shares. What is the total
amount of share premium as of December 31, 2022?
a. 0. b. 2,320,000. c. 2,600,000. d. 2,880,000.

Page 4 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

Problem 6: Red Corporation was organized on January 1, 2021, at which date it issued 200,000 shares of P10
par ordinary shares at P15 per share. During the period January 1, 2021, through December 31, 2021, Red
reported net income of P900,000 and paid cash dividends of P460,000. On January 10, 2022, Red purchased
12,000 shares of its ordinary share at P12 per share. On December 31, 2022, Red sold 8,000 treasury shares at
P8 per share. Red uses the cost method of accounting for treasury shares.
What is Red’s total shareholders’ equity on December 31, 2022?
a. 3,340,000. b. 3,408,000 c. 3,376,000. d. 3,360,000.

Problem 7: Polo Company, a public limited company, has granted share options to its employees with a fair
value of P12,000,000. The options vest in three years’ time. The company uses the Monte-Carlo model to estimate
the fair value of the options, the number of employees that will vest and the revision of estimates such as the
following:
1. Grant date – January 1, 2020, estimate of employees leaving the company during the vesting period – 5%.
2. Revision of estimate – January 1, 2021 – estimate of employees leaving the company during the vesting
period – 6%.
3. Actual number of employees leaving the company - December 31, 2022 – 5%.
What would be the amount of expense charged in the profit or loss for the year ended December 31, 2022?
a. 3,760,000. b. 3,800,000 c. 3,880,000 d. 4,000,000.

Problem 8: On January 1, 2020, Nikko, Inc. granted 80,000 cash shares appreciation rights to the executives
on condition that the executives remain in its employ for the next three years. The entity estimates that the fair
value of the share appreciation rights at the end of each year in which a liability exists are as follows:
2020 2021 2022
Fair value P15 P18 P20
Compensation expense relating to the plan is to be recorded over a three-year period beginning January 1, 2020.
1. What amount of compensation expense should Nikko recognize for the year ended December 31, 2021?
a. 400,000. b. 560,000, c. 640,000. d. 1,440,000

2. What amount of compensation expense should Nikko recognize for the year ended December 31, 2022?
a. 400,000 b. 560,000. c. 640,000. d. 1,440,000.

AUDITING PRACTICE
Significant Business Process: Other Business Processes – Financing Cycle

PROBLEM 1: (SFP PRESENTATION; SHARE ISSUE)

Determine the adjusted balance of the following based on the balances as of December 31, 2020 below:
1. Total additional paid-in capital
2. Total contributed capital
3. Total stockholders’ equity
Ordinary shares (see audit note a) ?
Preference shares (see audit note a) ?
Subscribed ordinary shares (see audit note b) ?
Subscribed preference shares (see audit note b) ?
Subscriptions receivable – Ordinary shares (see audit note b) ?
Subscriptions receivable – Preference shares (see audit note b) ?
Share premium – Ordinary shares ?
Share premium – Preference shares ?
Bonds payable, Due December 31, 2025 2,000,000
Premium on bonds payable 200,000
Share premium - Treasury share transactions 240,000
Additional paid-in capital - bond conversion option 120,000
Donated capital 150,000
Ordinary share options outstanding 180,000
Ordinary share warrants outstanding 25,000
Accumulated unrealized holding loss on financial asset at FVOCI 130,000
Accumulated revaluation surplus/reserves 600,000
Accumulated net remeasurement gain on accumulated benefits 90,000
obligation and plan assets
Accumulated foreign exchange translation reserves, credit 300,000
Accumulated hedging reserves, debit 265,000
Treasury shares (see audit note c) ?
Accumulated profits – appropriated for treasury shares ?
Ordinary share dividends payable (see audit note c) 290,000
Accumulated profits – appropriated for plant expansion 800,000
Accumulated profits - unappropriated 1,650,000
Accumulated profits – bonds payable repayment 500,000

Page 5 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

Audit notes:
A. India Corporation issued 100,000 ordinary shares (no par value but with a P10 stated value) and
40,000 preference shares (P20 par value) for a lump-sum amount P2.8M. The prevailing fair values of
ordinary shares and preference shares on the date of issuance was at P15 per share and P25 per share,
respectively.
B. Additional 50,000 ordinary shares and 20,000 preference shares were subscribed at P18 per share and
P30 per share, respectively. 25% of the subscriptions price for both ordinary and preference shares
remained outstanding as of December 31, 2020. The receivable balance from ordinary shares were
collectible within the next 12 months, while the receivable balance from preference shares are non-
current. None of the subscribed shares were fully paid by the end of the year.
C. There were no other transactions affecting the company’s issued and subscribed shares during the year
other than a reacquisition of 5,000 ordinary shares (as treasury shares) at P16 per share and the
declaration of 20% stock dividends on ordinary shares.

PROBLEM 2: (SHARE ISSUE; TREASURY SHARES; CONVERTIBLE PREFERENCE SHARES)

You were assigned to audit the shareholders’ equity of America Corp. for the year ended December 31, 2020.
America Corp. was incorporated in early 2019 when it was authorized by SEC to issue 1,000,000 ordinary
shares (P20 par) and 500,000 preference shares (P100 par). The following schedule reflects the company’s
capital balances as of December 31, 2019:

Ordinary shares, 120,000 shares issued at inception of operations in lieu of a P2,400,000

Land and Building with a total fair market value of P3M (40% attributed to the
Land.)
Preference shares, 40,000 shares issued in June 30, 2019 at P120 per share. 4,800,000
One preference share can be convertible to four ordinary shares
Retained earnings, which is the company’s net income in 2019 1,158,000
Total shareholders’ equity ?

Your inquiries and investigation revealed the following transactions which occurred in 2020:
a. On January 5, the company reacquired 20,000 ordinary shares at P600,000 and held them as treasury
share.
b. On March 1, the company issued 45,000 additional ordinary shares with P1M, 12% face value bonds for
a lump sum consideration amounting to P2,250,000. The bonds which pay interest every December 31
and shall mature on December 31, 2025, were currently quoted in the market at 110 (excluding
accrued interest) while each ordinary share is selling currently in the market at P30.
c. On April 5, the company reissued 6,000 of the treasury shares reacquired on January 5 at P35 per
share.

d. On July 20, the company reissued 9,000 of the treasury shares reacquired on January 5 in lieu of
professional services received from lawyers. The fair value of the services received was at P250,000
which is believed to be reflective of the prevailing fair value of the shares on that date.
e. On August 1, the company retired and reverted to unissued basis 3,000 of the treasury shares
reacquired on January 5.
f. On October 31, 8,000 of the preference shares were converted to ordinary shares.
g. The company registered an adjusted net income in 2020 at P2,798,000.
Based on the information above, determine the adjusted balance of the following as of Dec. 31, 2020:
1. Ordinary Shares
2. Preference Shares
3. Share premium – Ordinary shares
4. Share premium – Preference shares
5. Share premium – Treasury shares
6. Additional Paid-in Capital
7. Contributed Capital
8. Stockholders’ Equity

PROBLEM 3: (SHARE ISSUE; SHARE WARRANTS AND SHARE RIGHTS)

You were assigned to audit the shareholders’ equity of Indonesia Inc. for the year ended December 31, 2020.
Indonesia Inc. was incorporated in early 2019 when it was authorized by SEC to issue 500,000 ordinary shares
(P50 par) and 1,000,000 preference shares (P20 par). The following schedule reflects the company’s capital
balances as of December 31, 2019:
Ordinary shares, 100,000 shares issued 5,000,000
Preference shares, 300,000 shares issued 6,000,000
Share premium – Ordinary shares 500,000
Share premium – Preference shares 1,200,000
Retained earnings, which is the company’s net income in 2019 2,980,000
Total shareholders’ equity ?

Page 6 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

Your inquiries and investigation revealed the following transactions, which occurred in 2020:
a. On March 1, the company received subscriptions for 50,000 ordinary shares at P70 per share from five
subscribers (10,000 shares each). The subscribers were required to pay 25% of the subscriptions price
in cash as down payment with balance to be settled after 3 months.
b. June 1, the company received the balance from four subscribers on March 1. Shares were therefore
issued. The remaining subscriber defaulted on the balance. As per agreement, the company auctioned
out the defaulted shares and incurred P20,000 in auction expenses.
c. On September 1, the highest bidder on the defaulted shares was selected and the amount due was
collected. The amount due includes a 12% annual interest on the subscriptions’ receivable balance
defaulted.
d. On September 15, the company issued 20,000 preference shares for P840,000. Each preference share
was issued with five warrants. Two warrants can be exercised to purchase one ordinary share at P56
per share up to 2 years from date of issue. The preferences shares were currently selling in the market
at P34 per share while each warrant can be sold separately at P1.20 per warrant.
e. On October 12, 60% of the warrants issued with preference shares were exercised.
f. On October 31, the company issued at 12%, P2M bonds payable for a total lump sum of P2,380,000.
Attached to each P1,000 bonds are 20 warrants. The bonds, which pay interests annually every
December 31, are currently quoted at 104 (excluding accrued interest) without the warrant while the
warrant has a market value of P1.25 per warrant. One warrant can be exercised to purchase two
ordinary shares at P52 per share up to 2 years from date of issue.
g. On November 4, 75% of the warrants issued with bonds were exercised.
h. On December 5, a debt restructuring agreement was entered with a debtor for an overdue loans
payable outstanding amounting to P800,000 with unpaid interest of P96,000. The debtor agreed as a
concession to accept 10,000 ordinary shares in full settlement of the loan. This agreement is outside the
normal/original credit term. Ordinary shares are currently selling at this time at P78 per share.
i. On December 20, the company reacquired 30,000 ordinary shares for a lump sum of P1,560,000 and
placed them as treasury.
j. On December 30, the company issued stock rights to its ordinary shareholders. Ten share rights plus
P55 shall entitle the holder to acquire 1 ordinary share. Share rights are exercisable one year from date
of issuance.
k. The company registered an adjusted net income in 2020 at P1,390,000.
Requirements:
1. What is the credit to the share premium account as a result of the share subscription in transaction a?
2. How much is the total amount collected from the highest bidder in transaction c?
3. What is the amount allocated to the warrants issued with preference shares in transaction d?
4. What is the credit to the share premium account as a result of the share issuance in transaction e?
5. What is the amount allocated to the warrants issued with bonds in transaction f?
6. What is the net effect to total APIC as a result of the share issuance in transaction g?
7. What is the gain or loss to be reported in the profit or loss as a result of the transaction h?
8. Assuming that all but 20,000 share rights issued in transaction i were exercised the following year, what is
the credit to share premium as a result of the share issuance?

PROBLEM 4: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)

On January 1, 2020 Pakistan Co. issued 1,000 share options to each of its 24 executive officers. The options
vest at the end of a three-year period. On the date of the grant, each share option had a fair value of P13.
Pakistan Co. initially estimates that all employees will stay until the end of the vesting period, thus all share
options shall become exercisable.
Four options together with P102 per share shall entitle to holder to acquire an ordinary share (P100 par value).
Options shall expire by the end of 2024.

Requirements:
1. The salaries expense for 2020 assuming that no change in estimate occurs by the end of the year:
2. The salaries expense in 2021 assuming that 2 officers actually left 2021 and that one more officer is
expected to leave by the end of the vesting period:

3. The salaries expenses in 2022 assuming that 3 more employees actually left in 2022:
4. The credit to the share premium account as a result of the exercise of 80% of the options in 2023:

PROBLEM 5: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)

On January 1, 2020, Brazil Corporation granted 100 share options each to its employees that will vest once its
share price (fair market value of shares) reaches P90. The actual share price is currently P56 on this date. The
company has currently 120 employees.

Page 7 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

The employee is required to be employed with the company at the time the condition is met in order to receive
the options. Two options together with P75 per share entitles the holder to acquire 1 ordinary share (P50 par
value). The share options will expire in 5 years. On the date of grant, it is expected that the condition will be
satisfied in four years (estimated vesting period)

The company applies a binomial options pricing model, which takes into account the possibility that the share
price will equal/exceed P90 in four years (hence the share options become exercisable) and the possibility that
the share price will not equal/exceed P90 in four years (hence the option will be forfeited, that is reverted back
to equity). The company estimates that the market value of the stock option on the date of grant with this market
condition is P16 per option.
The following information are deemed relevant:
Estimated total number of Actual Share
employees who will leave the Price at the end
Date company by the end of 2023 of each year
Dec. 31, 2020 None 65
Dec. 31, 2021 8 78
Dec. 31, 2022 12 82
Dec. 31, 2023 15(Actual) 90
Requirements:
1. What is the compensation expense to be recognized in 2020?
2. What is the compensation expense to be recognized in 2021?
3. What is the compensation expense to be recognized in 2022?
4. What is the compensation expense to be recognized in 2023?
5. Assuming that the actual share price amounted to P89 at end of 2023, what is the compensation expense to
be recognized in 2023?
6. Assuming that the actual share price amounted to P90 at the end of 2022, what is the compensation expense
in 2022?

PROBLEM 6: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)

On January 1, 2020, Nigeria Company granted 20,000 share options to 80 employees entitling them to acquire
P100 par value shares of the company at an exercise rate of two options plus P115 per share conditional upon
the employees’ remaining in the company’s employ during the vesting period. The share options (250 options
per employee) shall vest at the end of 2020 if the company’s 2020 revenues reach P90M ; or at the end of 2021
if the company’s 2021 revenues reach P100M; or at the end of 2022 if the 2022 revenues reach P110M.
The market value of the option on the date of grant is P18. 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 following information are deemed relevant:

Estimated total number of employees Actual
Year who will stay by the end of the vesting period Revenue
2020 70 P80M
2021 74 90M
2022 76(Actual) 110M

Requirements:
1. What is the salaries expense to be recognized in 2020?
2. What is the salaries expense to be recognized in 2021?
3. What is the salaries expense to be recognized in 2022?
4. Assuming that the employees exercised all their options in 2023, what is the net increase in total
APIC as a result of the exercise?

PROBLEM 7: (STOCK APPRECIATION RIGHTS/CASH-SETTLED SHARE BASED PAYMENTS)

On January 1, 2020, Bangladesh Co. issued share appreciation rights (SARs) to its 50 employees. The SARs
will vest at the end of 3 years, provided the employees remain with the company and provided that production
on the third year (in 2022) increase by 100% (based on actual production in 2019 which was 100,000 units).
The number of share appreciation rights entitlement of each employee depending upon the actual increase in
production in 2022 is:
Increase in production in 2022 No. of SARs per
(based on 2019 production) Employee
100% - 120% 1,500
121% - 150% 2,000
>150% 2,500
The company is projecting a 30% increase in annual production over the next five years considering its current
and planned production capacity.

Page 8 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

The following information are deemed relevant:

Estimated total number of employees who Fair market
Year Actual Production will leave the company by the end of 2022 value of SAR
12/31/2020 130,000 units 0 P25
12/31/2021 180,000 units 5 P30
12/31/2022 255,000 units 15(Actual) P34

Requirements:
1. Salaries expense in 2020:
2. SAR payable balance as of December 31, 2021:
3. Salaries expense in 2022:
4. Entry to record the exercise of 60% of SARs in 2023 assuming that the fair value of SAR on the exercise date
is at P38:
5. Entry to record the remeasurement of the remaining SARS by the end of 2023 assuming that the fair value
of SARs at the end of 2023 is at P32 per SAR?

PROBLEM 8: (SHARE-BASED PAYMENTS WITH CASH ALTERNATIVE)

On January 1, 2020, Hotel Corp. grants its COO the right to choose either 10,000 ordinary shares or to receive
cash payment equal to 7,500 shares. These are to vest after rendition of two years of service. Par value of the
company’s share of stock is P100. The COO exercised his rights on September 30, 2022. The fair value
information follow:
FMV
Compound Instrument: 1/1/20 P120
Share of Stock: 1/1/20 130
12/31/20 136
12/31/21 144
9/30/22 150

Requirements:
1. What is the balance of SAR payable as of December 31, 2020 and 2021?
2. What is the balance of the ordinary share option outstanding as of December 31, 2020 and 2021?
3. What is the total salaries expense related to the share-based payments in 2020 and 2021?
4. Entry to record the exercise assuming the employee opted settlement in cash on September 30, 2022.
5. Entry to record the exercise assuming the employee opted to receive shares on September 30, 2022.

PROBLEM 9: (RAP, INTERNAL CONTROLS, SUBSTANTIVE TESTING)

1. Which of the following is generally correct regarding the rendering of other audit procedures in a typical
risk-based audit of general-purpose financial statements?
A. Where preliminary assessment of audit risk (combined risk of material misstatement in the financial
statements and planned detection risk) is placed at a high level, the auditor shall plan to render extensive
test of controls first to conclude on their effectiveness, before rendering less extensive substantive testing
which maybe done at an interim date.
B. Where preliminary audit risk assessment (based on risk assessment procedures) allows, account balances
resulting from non-routinary transaction cycles such as revenue and disbursement cycles, are usually
being audited through test of controls first before less extensive substantive testing which maybe done
at an interim date.
C. Notwithstanding the result of risk assessment procedures, account balances resulting from non-routinary
transaction cycles such as financing and investing cycles, are usually being audited through direct
substantive testing gathering less persuasive evidence (as to nature), using less extensive procedures
(as to extent) which may be rendered at an interim period (as to timing).
D. Notwithstanding the result of risk assessment procedures, account balances resulting from non-routinary
transaction cycles such as financing and investing cycles, are usually being audited through direct
substantive testing gathering more persuasive evidence (as to nature), using more extensive procedures
(as to extent) which should be rendered at year-end (as to timing).

2. Which of the following is incorrect when auditing account balances resulting from non-routinary transaction
cycle such as stockholders’ equity balances arising from financing cycle?
A. The auditor should render risk assessment procedure to understand the client’s internal control and
regardless of the design and operation, should place audit risk at a high level so as to render directly
extensive substantive testing.
B. The auditor should render risk assessment procedure to understand the client’s internal control after
which should test the control’s effectiveness where controls are potentially reliable as to design and
operation.
C. The auditor after rendering risk assessment procedure to understand the client’s internal control should
plan to gather more persuasive evidence using more extensive evidence gathering procedures.
D. The auditor after rendering risk assessment procedure to understand the client’s internal control should
plan to place the timing of his substantive test procedures at year-end.

Page 9 of 10 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY FARAP-4514
SHAREHOLDERS’ EQUITY

3. After understanding the financing cycle of China Corporation in relation to your audit of the client’s
stockholders’ equity account, you decided to place preliminary audit risk (inherent and control risk) at a high
level, which of the following is correct?
A. The auditor should next test controls’ effectiveness through further inquiry, inspection, observation and
reperformance.
B. The auditor should go directly to substantive test procedures which may be rendered to interim period
ended balances.
C. The auditor should go directly to substantive test procedures heavily relying on substantive test analytical
procedures.
D. The auditor should go directly to substantive test procedures heavily relying on substantive test of details.

4. Which of the following is correct regarding audit of stockholders’ equity transactions and related account
balances?
A. The auditor usually suspects higher risk of OVERSTATEMENT error, thus shall focus on gathering evidence
to support the managements’ COMPLETENESS and VALUATION assertions.
B. The auditor usually suspects higher risk of UNDERSTATEMENT error, thus shall focus on gathering
evidence to support managements’ COMPETENESS and VALUATION assertions.
C. The auditor usually suspects higher risk of OVERSTATEMENT error, thus shall focus on gathering evidence
to support the managements’ EXISTENCE and VALUATION assertions.
D. The auditor usually suspects higher risk of UNDERSTATEMENT error, thus shall focus on gathering
evidence to support managements’ EXISTENCE and VALUATION assertions.

5. Which of the following audit procedures is a test primarily to substantiate the occurrence/existence assertion
when auditing stockholders’ equity transactions and related account balance?
A. Vouching authorization by the board of directors of significant stockholders’ equity transactions such as
share issuance, treasury share transactions, share rights issuances, dividend declaration, among others
to the minutes of meetings of the BOD.
B. Examination of the transfer agent’s records for possible unrecorded share issuance, share
reacquisitions, or share retirements.
C. Reference to fair market value quotations for share options granted to employees.
D. Examination of stock certificate files.

6. In tests concerning the valuation of stock options, an auditor should:

A. Trace the authorization for the transaction to a vote of the board of directors.
B. Refer to market quotations
C. Verify existence of option holders in the entity’s payroll records or stock ledgers.
D. Determine that sufficient treasury stock is available to cover any new stock issued.

7. When the client-company does not maintain its own stock records, the auditor should obtain written
confirmation from the transfer agent and registrar concerning:
A. Restrictions on the payments of dividends.
B. The number of shares issued and outstanding.
C. Guarantees of preference shares liquidation value.
D. The number of shares subject to agreements to repurchase

- END -

Page 10 of 10 0915-2303213  www.resacpareview.com