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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:
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. Legal Capital
2. Share Premium
3. Contributed capital
4. Total Shareholders’ Equity
5. Retained Earnings, January 1, 2018 as adjusted
6. 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 P800,000
Ordinary shares, P40 par value, 100,000 shares authorized, 50,000 shares issued,
5,000 shares reacquired at P75 per share 1,625,000
Share Premium on Preference Shares 200,000
Share Premium on Ordinary Shares 300,000
Accumulated Profits 1,800,000
Treasury Shares -0-
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.
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:
The options expire on December 31, 2022. The following information were likewise gathered:
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 generated by the Company and the stock price at the end of each year are:
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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:
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:
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.