Iac-stockholders-students (1).docx

Audit of Shareholders’ Equity Problem 1 You were assigned to audit the shareholders’ equity of AB Corp. for the year ended December 31, 2018. AB was incorporated in 2017 when it was authorized to issue P100 par, 100,000 ordinary shares and P50 par, 50,000 preference shares. The following schedule reflects the company’s capital balances as of December 31, 2017: Ordinary Shares, 50,000 shares issued at P170 per share Preference Shares, 20,000 shares issued in exchange for a building with a fair value of P1,600,000 Retained Earnings

8,500,000 1,600,000 6,350,000

Your inquiries revealed the following transactions in 2018 in chronological order: a. The company issued 15,000 ordinary shares and 12,000 preference shares for a total amount of P 3,100,000. On this date, ordinary shares are quoted in the market at P125 per share. b. The company reacquired 18,000 from its previously issued ordinary shares at P 130 per share with the intent of reissuing them subsequently. c. 3,000 ordinary shares were subscribed for P160 per share. 20% was received as down payment. d. The company issued 7,000 ordinary shares at P180 per share. The company incurred P 30,000 of brokers’ fees and commissions. e. The company issued 13,000 ordinary shares together with a 4-year, 12% P2,000,000 face value bonds for a total consideration of P4,800,000. The bonds which pay semi-annual interest every January 1 and July 1 are currently quoted at 105 while the ordinary shares are quoted in the market at P180 per share. f. The company charged to repairs expense a major repair incurred on May 1, 2017 amounting to P 45,000. This is pertinent to an Equipment acquired on February 1, 2017. Total life of asset at date of acquisition is 5 years. g. The company reissued 9,000 treasury shares at P185 per share. h. The company retired 4,000 treasury shares. i. The subscriptions receivable pertinent to 60% of the total subscribed shares were fully collected. j. The adjusted net income is P3,890,000 for the year. Compute for the balances of the following for the year 2018, or as at December 31, 2018: 1. 2. 3. 4. 5. 6.

Legal Capital Share Premium Contributed capital Total Shareholders’ Equity Retained Earnings, January 1, 2018 as adjusted Adjusted 2018 profit Problem 2

Blend Co. had the following selected information in its December 31, 2017 Shareholders’ Equity: 12% Preference, P80 par, 50,000 shares authorized, 10,000 shares issued and outstanding Ordinary shares, P40 par value, 100,000 shares authorized, 50,000 shares issued, 5,000 shares reacquired at P75 per share Share Premium on Preference Shares Share Premium on Ordinary Shares Accumulated Profits Treasury Shares

P800,000 1,625,000 200,000 300,000 1,800,000 -0-

Transactions in 2018 are as follows in chronological order: a. On January 2, the company issued 8,000, P 1,000, 12% bonds payable with detachable warrants. One warrant is attached to each P 1,000 bond. The bonds which pay semi-annual interest every June 30 and December 31 were issued at a total amount of P 8,900,000. On the date of issuance, the bonds were quoted at 106 without the warrants while each warrant can be sold in the market

Audit of Shareholders’ Equity

Page . . . . 2

at P30. Five warrants surrendered together with P75 exercise price entitle the holder to acquire one ordinary share. Warrants can be exercised two years from the date of issuance. b. c. d. e.

70% of the treasury shares were reissued at P72 per share. 10% Ordinary Share Bonus issue was declared; FMV of an ordinary share on this date is P83 80% of the warrants were exercised Share rights were issued to Ordinary Shares. Upon exercise shareholders can acquire one share for every five share rights exercised at a subscription price of P60 per share. f. 75% rights were exercised; 10 rights to a share with P92 per share g. Remaining treasury shares were retired. h. Issued 90% full shares on the 10% bonus issue previously declared. i. 80% of the fractional shares issued were exercised j. Adjusted net income for the year totalled P1,560,000. Required: Compute for the components of your 2018 Shareholders’ Equity Problem 3 On January 1, 2019, the Board of Directors of Part Inc. authorized the grant of options to supplement the salaries of its 100 employees. Each stock option permits the purchase of a share of Part Inc. P50 par ordinary share at a price of P75. The market price of an option at the date of grant is P30. The option becomes exercisable beginning January 1, 2022, if the employee remains with the company for the entire three-year vesting period. The number of options an employee receives depends on the sales at the end of the vesting period, December 31, 2021 as follows: Peso Sales P100M to P150M P150M+ to P200M P200M+

No. Options Per Employee 1,000 1,500 2,000

The options expire on December 31, 2022. The following information were likewise gathered:

Date December 31, 2019 December 31, 2020 December 31, 2021

Actual Number of Employees Who Left the Company 27 13 19

Estimated Number of Employees Who Will Leave The Company 28 24

Actual Sales P 110M 90M 210M

Based on historical performance, the company estimates that the average 20% annual sales increase in the past years is expected to remain during the vesting period. Requirements: 1. Compute for the compensation expense at the end of each vesting period. 2. Amount credited to Share Premium if 85% of the options were exercised. Problem 4 Mars issued stock appreciation rights to its 20 executives on January 1, 2019. The stock appreciation rights may be exercised beginning January 1, 2022 provided the executive is still in the employ of the company at the date of the exercise. Each right provides for a cash payment equal to the prevailing market value of the stock appreciation rights. The equivalent number of shares of stock appreciation rights will be based on the level of sales of the company at the end of 2021, as follows: Sales Level in Millions P250 to P400 P400+ to P750 Higher than P750

Number of SARs to be Granted Each 1,200 1,800 2,000

Sales generated by the Company and the stock price at the end of each year are:

Audit of Shareholders’ Equity

Year 2019 2020 2021

Page . . . . 3

Sales level in Millions P210 410 760

FMV of a SAR, end of year P70 90 110

There has been an average increase in annual sales of 25% in the past years and the company expects the same pattern over the vesting period. Some executives left and some may probably leave the company for better opportunities:

Date December 31, 2019 December 31, 2020 December 31, 2021

Actual Number of Employees Who Left the Company 2 -03

Estimated Number of Employees Who Will Leave The Company 5 4

Compute for the Compensation Expense for each of the vesting period. Problem 5 In your audit of Sun Inc. for the calendar year ended December 31, 2019, you discovered the following charges to the company’s Retained Earnings account: Beginning Balance Accumulated Unrealized holding loss on financial assets held at fair value through OCI Inventory fire loss Impairment loss on PPE 15% stock dividend declared based on 100,000 shares outstanding, Par 100; FMV P120 at date of declaration Loss on sale of equipment Correction of a prior period error Loss on retirement of treasury shares Gain on sale of ordinary share Gain on early extinguishment of bonds Unrealized holding gain on financial asset held at fair value through profit or loss Proceeds from sale of donated assets Net income for the year Reserve for plant expansion

A B C D E F G H I J K L M

3,420,000 (360,000) (745,000) (422,000) (1,500,000) (185,000) 98,000 (63,000) 133,000 277,000 181,000 89,000 1,264,000 300,000

Compute for the adjusted balance of Accumulated Profit, beginning balance, adjusted net income and the balance of the unappropriated Accumulated Profit at the end of the year. Problem 6 Right Company decided on January 2, 2018 to review its accounting practices. This is due to changing economic conditions and to make its financial statements more comparable to those of other companies in its industry. The following changes will be effective as of January 1, 2018: 1.

Right decided to change its allowance for bad debts from 2% to 4% of its outstanding receivable balance. Right’s receivable balance at December 31, 2018 was P690,000. Allowance for bad debts had a debit balance of P2,000 before adjustment.

2. Right decided to use the straight-line method of depreciation on its equipment instead of the sum-of-the-years’ digits method. It was also decided that this asset has 10 years of useful life as of January 2, 2018. The equipment was purchased on January 1, 2008 at a cost of P 1,100,000. On the acquisition date, it was estimated that the equipment would have a 15-year useful life with no residual value.

Required: Amount taken to profit or loss as a result of the change in estimate. Problem 7 In the past Pert Company has depreciated its computer hardware using the straight-line method. The computer hardware has a 10% salvage value and an estimated useful life of 5 years. As a result of the rapid advancement in information technology, management of Pert has determined that it receives most of the benefits from its computer facilities in the first few years of ownership. Hence, as of January 1, 2018, Pert proposes changing to SYD for depreciating its computer hardware. The following computer purchases were made by Pert at the beginning of each year. 2015 2016 2017

P90,000 50,000 60,000

Required: Depreciation expense in 2017 and 2018 Problem 8 The following information pertains to Bill Company’s depreciable assets: 1.

Machine X was purchased for P150,000 on January 1, 2013. The entire cost was expensed in the year of acquisition. The estimated useful life of this machine is 15 years with no residual value. 2. Machine Y cost P525,000 and was acquired on January 1, 2014. On the acquisition date, the expected useful life was 12 years with no residual value. The straight-line depreciation method was used. On January 1, 2018, it was estimated that the remaining life of the asset would be 4 years and that there would be a P25,000 residual value. Depreciation recorded in 2018 was still the same depreciation recorded in 2017. 3. A building was purchased on January 3, 2015 for P3,000,000. The building was expected to have a useful life of 20 years with no residual value. The straight-line depreciation method was used. On January 1, 2018, a change was made to the SYD method of depreciation. No change was made to the estimated useful life and residual value of the building. Depreciation expense recorded in 2018 was still the same depreciation recorded in 2017. Required: Net understatement(overstatement in 2018 profit or loss. Problem 9 Tri, Inc. has been using the FIFO method of inventory costing since it began operations in 2017. In 2018, the company decided to change to the weighted average method. The following are the December 31 inventory balances under each method.

2017 2018

FIFO P450,000 895,000

Weighted Average P560,000 999,000

Required: Prepare the entry to record the change in inventory costing method. Problem 10 The first audit of the financial statements of Alessa Co. was made for the year ended December 31, 2018. In reviewing the books, the auditor found out that certain adjustments had been overlooked at the end of 2017 and 2018. He also discovered that other items had been improperly recorded. These omissions and other failures for each year are summarized as follows:

Salaries Payable Interest receivable Prepaid Insurance Advances from Customers (Note 1) Equipment (Note 2)

December 2017 2018 145,600 130,000 43,200 35,500 64,000 51,300 78,400 93,500 94,000 87,000

Note 1 – Collections from customers had been recorded as sales but should have been recognized as advances from customers because goods were not shipped until the following year. Note 2 – capital expenditures had been recorded as repairs but should have been charged to equipment; the depreciation rate is 10% per year, but depreciation in the year of expenditure is to be recognized at 5%. Required: Adjusting journal entries Problem 11 You have been engaged to audit the financial statements of Phil Corp. for the year ended December 31, 2018. Your audit reveals the following situations: 1. Depreciation of P16,000 for 2018 on equipment was not recorded. 2. The physical inventory cunt on December 31, 2017, improperly excluded merchandise costing P95,000 that had been temporarily stored in a public warehouse. Phil uses a periodic inventory system. 3. The physical inventory count on December 31, 2018, improperly included merchandise with a cost of P42,500 that had been recorded as a sale on December 29, 2018 and held for the customer to pick up on January 2, 2019. 4. A collection of P28,000 on account from a customer received on December 31, 2018 was not recorded until January 3, 2019. 5. In 2018, Phil sold for P18,500 fully depreciated equipment that originally cost P110,000. The proceeds from the sale were credited to the equipment account. 6. During December 2018, a competitor company filed a patent infringement suit against Phil claiming damages of P1,000,000. The company’s legal counsel has indicated that an unfavourable outcome is probable and a reasonable estimate of the court’s award to the competitor is P600,000. The company has not reflected or disclosed this situation in the financial statements. 7. Phil has a portfolio of current marketable equity securities acquired in 2017 for trading purposes. No valuation entry has been made. Information on cost and market value is as follows:

December 31, 2017 December 31, 2018

Cost 475,000 475,000

Market 475,000 500,000

8. At December 31, 2018, an analysis of payroll information shows accrued salaries of p61,000. The accrued salaries payable account had a balance of P80,000 at December 31, 2018, which was unchanged from its balance at December 31, 2017. 9. A piece of equipment was acquired on January 2, 2018 for P160,000 and was charged to repairs expense. The equipment is expected to have a useful life of 8 years and no residual value. Phil normally uses the straight-line method to depreciate this type of equipment. 10. A P75,000 insurance premium paid on July 1, 2017 for a policy that expires on June 30, 2020 was charged to Insurance Expense 11. A patent was acquired at the beginning of 2017 for P250,000. No amortization has been recorded since its acquisition. The patent had a 10-year useful life on the date of acquisition. Adjusting journal entries.