CPA REVIEW SCHOOL OF THE PHILIPPINES AP-9101-1

Manila
AUDITING PROBLEMS CPA Review

AUDIT OF SHAREHOLDERS’ EQUITY

ISABEL COMPANY

ISABEL COMPANY is authorized to issue 100,000 of P10 par value ordinary shares, and 30,000 of
6% cumulative and nonparticipating preference shares, par value P100 per share. The company
engaged in the following share capital transactions through December 31, 2021:

a) 25,000 ordinary shares were issued for P325,000 and 10,000 preference shares for machinery
valued at P1,300,000.

b) Subscriptions for 4,500 ordinary shares have been taken, and 40% of the subscription price
of P18 per share has been collected. The shares will be issued upon collection of the
subscription price in full.

c) 1,000 treasury ordinary shares have been purchased for P12 and accounted for under the
cost method.

The post-closing retained earnings balance at December 31, 2021, is P210,000.

What is Isabel’s total shareholders’ equity at December 31, 2021?

A. P1,855,400 B. P1,857,400 C. P1,819,400 D. P1,555,400

SINIGANG CORPORATION

SINIGANG CORPORATION recently hired a new accountant with very limited experience in
corporation accounting. During the first month, he made the following entries for the
corporation’s share capital.

Jan. 2 Cash 600,000

Share capital 600,000
Issued 30,000 of P5 par value
ordinary shares at P20 per share.
10 Cash 1,800,000
Share capital 1,800,000
Issued 45,000 of P30 par value
preference shares at P40 per share.
15 Share capital 24,000
Cash 24,000
Purchased 3,000 ordinary shares for
the treasury at P8 per share.
31 Cash 3,000
Loss on sale of share capital 4,500
Share capital 7,500
Sold 1,500 treasury shares at P2 per share.

Required:
Prepare the necessary correcting entries.

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CPAR - MANILA AP-9101-1 – AUDIT OF SHAREHOLDERS’ EQUITY

LASO COMPANY

The LASO COMPANY wants to raise its working capital. After analysis of the available options,
the company decides to issue 12,000 shares of P30 par preference shares with detachable
warrants. The package of the shares and warrants sells for P120. The warrants enable the
holder to purchase 12,000 shares of P10 par ordinary shares at P40 per share. Immediately
following the issuance of the shares, the share warrants are selling at P10 per share. The market
value of the preference shares without the warrants is P90.

1. What amount should be assigned to the share warrants issued?

A. P120,000 B. P1,040,000 C. P4,062,000 D. P144,000

2. Assuming that only 80% of the warrants are exercised, what journal entry should be made
to take up the exercise of the warrants?

MALAY COMPANY

You have been assigned to the audit of MALAY CO., a manufacturing company. You have been
asked to summarize the transactions for the year ended December 31, 2021, affecting
shareholders’ equity and other related accounts. The shareholders’ equity section of Malay’s
December 31, 2020, statement of financial position follows:

Ordinary share capital, P2 par value, 1,000,000

shares authorized, 180,000 shares issued,
177,580 shares outstanding P 360,000
Share premium - issuance 3,640,000
Share premium – treasury shares 45,000
Retained earnings 649,378
Cost of 2,420 treasury shares (145,200)
Total shareholders’ equity P4,549,178

You have extracted the following information from the accounting records and audit working
papers.
2021
Jan. 15 Malay reissued 1,300 treasury shares for P40 per share. The 2,420 treasury shares on
hand at December 31, 2020, were purchased in one block in 2019.
Feb. 1 Sold 180, P1,000, 9% bonds due February 1, 2031, at 103 with one detachable share
warrant attached to each bond. Interest is payable annually on February 1. The fair
market value of the bonds without the share warrants is 95. The detachable warrants
have a fair value of P50 each and expire on February 1, 2022. Each warrant entitles
the holder to purchase 10 ordinary shares at P40 per share.
Mar. 6 2,800 ordinary shares were subscribed for at P44 per share. 40% of the subscription
was collected.
20 The balance due on 2,400 shares was received and those shares were issued.
Nov. 1 There were 110 share warrants detached from the bonds and exercised.
Malay’s net income for 2021 is P950,000.

Based on the preceding information, determine the correct December 31, 2021, balance of each
of the following:

1. Ordinary share capital

A. P364,800 B. P375,800 C. P372,600 D. P367,000

2. Share premium – issuance

A. P3,827,200 B. P3,808,200 C. P3,805,065 D. P3,791,400

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CPAR - MANILA AP-9101-1 – AUDIT OF SHAREHOLDERS’ EQUITY

3. Share premium – treasury shares

A. P19,000 B. P45,000 C. P187,200 D. P192,800

4. Unappropriated retained earnings

A. P1,532,178 B. P1,599,378 C. P1,573,378 D. P1,454,178

5. Total shareholders’ equity

A. P5,722,218 B. P5,716,618 C. P5,720,223 D. P5,717,088

BAHRAIN CORPORATION

The shareholders’ equity section of BAHRAIN CORPORATION’s statement of financial position as

of December 31, 2020, is as follows:
Share capital—Ordinary (P10 par, 750,000 shares
authorized, 412,500 issued and outstanding) P4,125,000
Share premium 825,000
Total paid-in capital P4,950,000
Unappropriated retained earnings P2,002,500
Appropriated retained earnings 750,000
Total retained earnings 2,752,500
Total shareholders’ equity P7,702,500

Bahrain Corporation had the following shareholders’ equity transactions during

2021:

Jan. 15 Completed the building renovation for which P750,000 of retained earnings had been
restricted. Paid the contractor P727,500, all of which is capitalized.

Mar. 3 Issued 150,000 additional ordinary shares for P18 per share.

May 18 Declared a dividend of P1.50 per share to be paid on July 31, 2021, to shareholders of
record on June 30, 2021.

June 19 Approved additional building renovation to be funded internally. The estimated cost of
the project is P600,000, and retained earnings are to be restricted for that amount.

July 31 Paid the dividend.

Nov. 12 Declared a property dividend to be paid on January 5, 2022. The dividend is to consist
of equipment that has a carrying amount of P360,000 and a fair value of P472,500 on
November 12.

Dec. 31 Net income for 2021 (before recognition of impairment loss on the equipment declared
as property dividend) is P1,327,500. The equipment’s fair value less cost to distribute
on December 31 is P330,000.

1. Share capital—ordinary on December 31, 2021, is

A. P5,625,000 B. P4,125,000 C. P4,950,000 D. P7,650,000

2. Share premium on December 31, 2021, is

A. P2,625,000 B. P825,000 C. P2,025,000 D. P1,200,000

3. Unappropriated retained earnings on December 31, 2021, is

A. P2,163,750 B. P2,246,250 C. P2,133,750 D. P2,276,250

4. The total shareholders’ equity on December 31, 2021, is

A. P10,376,250 B. P10,526,250 C. P9,926,250 D. P7,650,000

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CPAR - MANILA AP-9101-1 – AUDIT OF SHAREHOLDERS’ EQUITY

UBE COMPANY

UBE COMPANY reported the following amounts in the shareholders’ equity section of its December
31, 2020, statement of financial position:

Preference shares, 10%, P10 par (100,000 shares

authorized, 20,000 shares issued) P200,000
Ordinary shares, P5 par (50,000 shares authorized
10,000 shares issued) 50,000
Share premium 96,000
Retained earnings 600,000
Total P946,000
The following transactions occurred during 2021:

1. Paid the annual 2020 P1 per share dividend on preference shares and P0.50 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2020.
2. Purchased 2,000 shares of its own outstanding ordinary shares for P20 per share.
3. Reissued 700 treasury shares for equipment valued at P25,000.
4. Issued 5,000 preference shares at P15 per share.
5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares were
selling for P12 per share.
6. Issued the stock dividend.
7. Declared the annual 2021 P1 per share dividend on preference shares and the P0.50 per share
dividend on ordinary shares. These dividends are payable in 2022.
8. Appropriated retained earnings for plant expansion, P300,000.
9. Appropriated retained earnings for treasury shares.
The net income for 2021 was P470,000.

Based on the above data, determine the correct December 31, 2021, balances of each of the
following accounts:

1. Preference shares
A. P200,000 B. P275,000 C. P250,000 D. P1,000,000

2. Ordinary shares
A. P54,000 B. P54,350 C. P53,500 D. P50,000

3. Share premium
A. P138,090 B. P137,600 C. P127,090 D. P132,000

4. Treasury shares
A. P40,000 B. P15,000 C. P26,000 D. P14,000

5. Unappropriated retained earnings

A. P714,775 B. P709,775 C. P703,775 D. P729,775

END OF 9101-1

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