Auditing Practice I I Third Term, AY 2013-2014

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UNIT8
AUDITOFEQUITYACCOUNTS
EstimatedTime:4.5HOURS

DiscussionQuestions8-1

1. Enumerate transactions that affecting the owners equity transaction of a typical

company(e.g.soleproprietorship,partnership,andcorporation).

2. Refer to Auditing & Assurance Services. 4

th
Edition, McGraw-Hill/Irwin by
Louwers,Ramsay,SinasonandStrawser.AnswerMultipleChoice10.22,28,32-
35and45(pages403to406).

Problem8-1:AnalysisofEquityAccounts

Apartiallistofaccountsandendingaccountbalancestakenfromthetrialbalanceof
AERONIncorporatedonDecember31,2013isshownasfollows:

Account Amount
Accumulatedprofitsunappropriated P410,000
BondsPayable 220,000
OrdinarySharesSubscribed 50,000
Longterminvestmentsinequitysecurities 210,000
Additionalpaidincapitalonordinaryshares 460,000
Premiumonbondspayable 30,000
AuthorizedOrdinarySharesatP10parvalue 900,000
PreferenceSharessubscribed 45,000
Additionalpaid-incapitalonpreferenceshares 112,000
AuthorizedpreferencesharesatP50parvalue 400,000
Gainonsaleoftreasuryshares 4,000
UnrealizedincreaseinvalueofAFS 3,000
OrdinaryShareWarrantsOutstanding 20,000
UnissuedOrdinaryShares 500,000
UnissuedPreferenceShares 100,000
CashDividendspayable-preference 50,000
DonatedCapital 25,000
Reserveforbondsinkingfund 220,000
Reservefordepreciation 150,000
RevaluationIncrement 100,000
Subscriptionreceivablepreference(noncurrent) 15,000
Subscriptionreceivablecommon(noncurrent) 20,000
Required:Computeforthefollowing:

1. Ordinarysharesissued
2. Preferencesharesissued
3. AdditionalPaidInCapital
4. TotalContributedCapital
5. TotalLegalCapital
6. TotalStockholdersEquity

Auditing Practice I I Third Term, AY 2013-2014

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Problem8-2TreasuryStockTransactions
The stockholders equity of RTW Corporation as of December 31, 2013 was as
follows:
ShareCapital,P10par,authorized300,000shares;
250,000sharesissuedandoutstanding 2,500,000
SharePremium 3,750,000
AccumulatedProfits 1,800,000

Duringtheyear,thefollowingtransactionstranspired:
a. On June 1, 20011, RTW reacquired 40,000 shares of its common stock at
P40pershare.
b. Of the 40,000 reacquired shares, 15,000 were sold at P45, 17,000 at P30,
and1,000wereretired.

Required:Computeforthefollowing:

a. Sharecapital
b. TreasuryShares
c. Sharepremium
d. Sharepremiumfromtreasuryshares
e. AccumulatedProfits

Problem8-3StockholdersEquityTransactions

The shareholders equity section of Kumander Diosa Corporations statement of

financialpositionasofDecember31,2013,isasfollows:

Ordinarysharecapital(P6par,250,000
sharesauthorized,147,500issuedand
outstanding) P885,000
Sharepremium 442,500
Totalpaid-incapital P1,327,500
Unappropriatedretainedearnings P963,500
Appropriatedretainedearnings 350,000
Totalretainedearnings 1,313,500
Totalshareholdersequity P2,641,000

TheCompanyhadthefollowingshareholdersequitytransactionsduring2010:

Jan.15 CompletedthebuildingrenovationforwhichP350,000ofretainedearnings
hadbeenrestricted.PaidthecontractorP328,300,allofwhichiscapitalized.

Mar.3 Issued50,000additionalordinarysharesforP1 1pershare.

May18 Declared a dividend of P1.50 per share to be paid on July 31, 2014, to
shareholdersofrecordonJune30,2014.

June19 Approved additional building renovation to be funded internationally. The

estimated cost of the project is P400,000, and retained earnings are to be
restrictedforthatamount.

July31 Paidthedividend.

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Nov.12 Declared a property dividend to be paid on December 31, 2014, to
shareholdersofrecordonNovember30,2014.Thedividendistoconsistof
18,300 shares of Chanel Corporation ordinary shares that are currently
recordedinArmanisbooksatP9pershare.

Dec.31 ReportedP673,500ofnetincomeonDecember31,2014incomestatement.
In addition, the shares were distributed in satisfaction of the property
dividend.

Required:

a. Preparethejournalentriestorecordthetransactionsin2014.
b. DeterminethebalanceofthefollowingasofDecember31,2014:
i. No.ofSharesIssuedandOutstanding
ii. Ordinarysharecapitalaccount
iii. Sharepremiumaccount
iv. Retainedearnings
v. Totalshareholdersequity

Problem8-4:ShareholdersEquityTransactions

BurberryCompanywasformedonJuly1,2011.Itwasauthorizedtoissue600,000
shares of P10 par value ordinary shares and 200,000 shares of 8 percent P25 par
value,cumulativeandnon-participatingpreferenceshares.BurberryCompanyhasa
July1June30fiscalyear.

The following information relates to the shareholders equity accounts of Burberry

Company:

OrdinaryShares

Prior to the 2013-2014 fiscal year, Burberry Company had 250,000 of outstanding
ordinarysharesissuedasfollows:

1. 210,000shareswereissuedforcashonJuly1,2011,atP33pershare.
2. OnJuly24,2011,10,000shareswereexchangedforaplotoflandwhichcost
thesellerP160,000in2001andhadanestimatedmarketvalueofP530,000
onJuly24,2011.
3. 30,000 shares were issued on March 1, 2013; the shares had been
subscribedforP46pershareonOctober31,2012.

During the 2013-2014 fiscal year, the following transactions regarding ordinary
sharestookplace:

2013
Oct.1 FourthousandshareswereissuedforcashatP48pershare.

Nov.30 Burberrypurchased4,600ofitsownordinarysharesontheopenmarketat
P39pershare.

Dec.15 Burberry declared a 5% stock dividend for shareholders of record on

January15,2014,tobeissuedonJanuary31,2014.Burberrywashavinga
liquidity problem and could not afford a cash dividend at that time.
Burberrys ordinary shareswere selling at P52per shareon December 15,
2013.

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2014
June20 Burberry sold 1,100 of its own ordinary shares that it had purchased on
November30,2013,forP47,000.

PreferenceShares
Burberryissued100,000preferencesharesatP47pershareonJuly1,2012.

CashDividends
BurberryhasfollowedascheduleofdeclaringcashdividendsinDecemberandJune
withpaymentbeingmadetoshareholdersofrecordinthefollowingmonth.Thecash
dividendswhichhavebeendeclaredsinceinceptionofthecompanythroughJune30,
2014,areshownbelow:

DeclarationDate OrdinaryShares PreferenceShares

12/15/12 P0.30pershare P1.50pershare
06/15/13 P0.30pershare P1.50pershare
12/15/13 --- P1.50pershare

No cash dividends were declared during June 2014 due to the companys liquidity
problems.

RetainedEarnings
As of June 30, 2013, Burberrys retained earnings account had a balance of
P1,830,000. For the fiscal year ending June 30, 2014, Burberry reported a net
incomeofP130,000.

In March 2013, Burberry received a term loan from Dior Cartier Bank. The bank
requires Burberry to establish a sinking fund and restrict retained earnings for an
amount equal to the sinking fund deposit. The annual sinking fund payment of
P150,000isdueon April30eachyear;thefirstpaymentwasmadeonscheduleon
April30,2014.

Required:
a. Journalentriestorecordthetransactionsfrom2011to2014.
b. ComputethebalancesofthefollowingaccountsasofJune30,2014:
i. Ordinarysharecapitalaccount
ii. Sharepremiumordinaryshares(includingtreasuryshares)
iii. Unappropriatedretainedearnings
iv. Numberofordinarysharesissuedandoutstanding
v. Totalshareholdersequity

Problem8-5:DividendsandEquityBalances

SirCle,Corp.(SCC)hasthefollowingamountsintheshareholdersequitysectionas
ofDecember31,2013:

Preferenceshares,10%,P10parvalue(100,000 250,000.00
sharesauthorized,25,000sharesissued)
Ordinaryshares,P5par(50,000shares 150,000.00
authorized30,000sharesissued)
Sharespremium 104,000.00
RetainedEarnings 750,000.00
Total 1,254,000.00
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Thefollowingtransactionsoccurredduringtheyear:

a. Issued6,500preferencesharesatP17pershare.
b. Purchased 4,500 shares of its own outstanding ordinary shares for P18 per
share.
c. Reissued1,200treasurysharesforequipmentvaluedatP30,000.
d. Declared a 5% stock dividend on the outstanding ordinary shares when the
sharesweresellingforP11pershare.
e. Paidtheannual2009P1persharecashdividendonpreferencesharesanda
P0.50persharecashdividendonordinaryshares.Thesedividendshadbeen
declaredonDecember31,2013.
f. Issuedstockdividend.
g. Declared the annual 2014 P1 per share cash dividend on preference shares
and the P0.50 per share cash dividend on ordinary shares. These dividends
arepayablein2015.
h. Appropriatedretainedearningsforplantexpansion,P200,000.
i. Appropriatedretainedearningsfortreasuryshares.

Thenetincomefor2014wasP620,000.

Required:

ComputeforthefollowingbalancesasofDecember31,2014:

1. Preferenceshares
2. Ordinaryshares
3. Sharepremium
4. Treasuryshares
5. UnappropriatedRetainedEarnings

Problem8-6:Quasi-Reorganization

Shown below are Davidoff Companys condensed statements of financial position

immediatelybeforeandoneyearafterithadcompletedaquasi-reorganization.

Dec.31,2013
(beforequasi-
reorganization)
Dec.31,2014
Currentassets P1,200,000 P1,670,000
Property,plant,andequipment
(net) 5,600,000 4,140,000
Totalassets
P6,800,000 P5,810,000

Ordinaryshares
P7,400,000 P5,890,000
Sharepremium
730,000 160,000
Retainedearnings (1,330,000) (240,000)
Totalshareholdersequity
P6,800,000 P5,810,000

In 2014, Davidoff reported net income of P650,000 and depreciation expense of

P470,000.Thequasi-reorganizationonDecember31,2013,includedthewritedown
ofthecompanysinventoriesbyP490,000.Nopurchasesorsalesofproperty,plant,
andequipmentitemsandnosharetransactionsoccurredin2014.

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Required:

Prepareallthejournalentriesmadeatthetimeofthequasi-reorganization.

Problem8-7:ShareOptions

At the beginning of year 1, the entity grants 130 shares each to 550 employees,
conditional upon the employees remaining in the entitys employ during the vesting
period.Theshareswill vestattheendofyear1iftheentitysearnings increaseby
more than 18 percent; at the end of year 2 if the entitys earning increase by more
than an average of 13 percent per year over the two-year period; and at the end of
year 3 if the entitys earnings increase by more than an average of 10 percent over
the three-year period. Theshareshaveafair value of P36 per shareat the start of
year1,whichequalsthesharepriceatgrantdate.Nodividendsareexpectedtobe
paidoverthethree-yearperiod.

By the end of year 1, the entitys earnings have increased by 14 percent, and 40
employeeshaveleft. The entity expects that earnings will continuetoincreaseat a
similar rate in year 2, and therefore expects that the shares will vest at the end of
year 2. The entity expects, on the basis of a weighted average probability, that a
further 34 employees will leave during year 2, and therefore expects that 476
employeeswillvestin130shareseachattheendofyear2.

By the end of year 2, the entitys earnings have increased by only 10 percent and
thereforethesharesdonotvestattheendofyear2.32employeeshaveleftduring
theyear.Theentityexpectsthatafurther28employeeswillleaveduringyear3,and
that the entitys earnings will increase by at least 6 percent, thereby achieving the
averageof10percentperyear.

Bytheendofyear3,24employeeshaveleftandtheentitysearningshadincreased
by8percent,resultinginanaverageincreaseof10.67percentperyear.Therefore,
454employeesreceived130sharesattheendofyear3.

Required:
Computefortheamountofremunerationexpenseattheendofyears1-3.

Problem8-8:ShareOptions

Atthebeginningof2013,LancomeCompanygrantsshareoptionstoeachofits125
employeesworkinginthesalesdepartment.Theshareoptionswillvestattheendof
2015, provided that the employees remain in the entitys employ, and provided that
the volume of sales of a particular product increases by at least an average of 5
percent per year. If the volume of sales of the product increases by an average of
between10percentand15percenteachyear,eachemployeewillreceive300share
options.Ifthevolumeofsalesincreasesbyanaverageof15percentormore,each
employeewillreceive400shareoptions.

Ongrantdate,LancomeCompanyestimatesthattheshareoptionshaveafairvalue
ofP34peroption.LancomeCompanyalsoestimatesthatthevolumeofsalesofthe
productwillincreasebyanaverageofbetween10percentand15percentperyear.
The company also estimates on the basis of weighted average probability that 19
percentofemployeeswillleavebeforetheendof2013.

Bytheendof2013,sevenemployeeshaveleftandthecompanystillexpectsthata
totalof19employeeswillleavebytheendof2015.Productsaleshaveincreasedby
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12 percent and the company expects this rate of increase to continue over the next
twoyears.

By the endof 2014, a further six employees haveleft. Theentity now expects only
four more employees will leave during 2015. Product sales have increased by 18
percent.Thecompanynowexpectsthatsaleswillaverage15percentormoreover
thethree-yearperiod.

By the end of 2015, a further three employees have left. The entitys sales have
increasedbyanaverageof16percentoverthethreeyears.

Required:

a. Compensationexpense,2013
b. Compensationexpense,2014
c. Compensationexpense,2015

Problem8-9:Shareoptionswithcashalternatives

Titus Company grants to an employee the right to choose either 5,500 phantom
shares
1
or7,000shares.Thegrantisconditionaluponthecompletionofthreeyears
of service. If the employee chooses the share alternative, the shares must be held
forthreeyearsafterthevestingdate.

Atgrantdate,theentityssharepriceisP83pershare.Attheendofyears1,2and3,
thesharepriceisP84,P87andP91respectively.Theentitydoesnotexpecttopay
dividends in the next three years. After taking into account the effects of the post-
vesting transfer restrictions, the entity estimates that the grant date fair value of the
sharealternativeisP81pershare.

Required:

a. Compensationexpense,year1
b. Compensationexpense,year2
c. Compensationexpense,year3

Problem8-10:ShareAppreciationRights

On January 1, 2013, Royce Corporation grants 120 cash share appreciation rights
(SAR) to each of its 200 employees on condition that the employee remain in its
employforthenextthreeyears.

During 2013, 14 employees left and the company estimates that a further 24 will
leave during 2014 and 2015. During 2014, 10 employees left and the company
estimatesthatafurther8willleaveduring2015.During2015,8employeesleft.At
theendof2015,60employeesexercisedtheirSAR.Attheendof2016,another42
employees exercised their SAR. At the end of 2017, the remaining employees
exercisedtheirSAR.

1
Phantom shares represent the right of an employee to receive cash payments equivalent to
5,500 shares as if the employee were given an actual share of stock in the company. The
employee never actually owns shares and thus obtains no shareholder rights under the plan.
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The entity estimates the fair value of the SAR at the end of each year in which a
liability exists as show below. At the end of 2015, all SAR held by the remaining
employeesvest.TheintrinsicvaluesoftheSARatthedateofexercise(whichequal
thecashpaidout)attheendof2015,2016,and2017arealsoshownbelow:

Year FairValue IntrinsicValue

2013 P28
2014 30
2015 33 P36
2016 41 39
2017 48

Required:

a. Compensationexpensein2014
b. Compensationexpensein2015
c. Compensationexpensein2016
d. Compensationexpensein2017

Problem8-11ComprehensiveProblem

InyourfirstyearauditofLABulldogsInc.,stockholdersequityaccountsfortheaudit
year 2014, the following schedule of the companys equity account as of December
31,2013waspresentedbyyourclient:

Ordinary Share Capital, P100 par, 200,000 shares authorized,

50,000 shares issued and outstanding, options to purchase
10,000 shares at P100 per share held by employees, no value
assignedtotheseoptions
P5,000,000
SharePremium 1,000,000
AccumulatedProfits 3,000,000

Yourexaminationdisclosedthefollowing:

a. Theoptionsreferredtoaboveweregrantedtoeachofits 100employeeson
January 1, 2012 which shall vest three years thereafter provided employees
do not leave the Company. It further provides that sales should increase at
leastbyanaverageof10%.Ifthesalesincreasebyaverageof10%peryear,
employeesreceive100shareoptions.Ifthesalesincreasebyanaverageof
15%, each employee will receive 200 share options. If sales increase by an
average of at least 20% per year, each employee shall receive 300 options.
The fair value of each share option was 30. No employees left the company
andsalesincreaseby13%in2012,13%in2013and19%in2015.

b. On May 1, 2014, the Company issued bonds of P5,000,000 at 120 giving

eachP1,000bondawarrantenablingtheholdertopurchase4sharesat120
per share for a one year period. The market value of the bond ex-warrant is
105.

c. On June 1, 2014, half of the warrants were exercised relating to the bonds
issuedlastMay2014.

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d. OnAugust1,thecompanyissuedrightstoshareholders,permittingholdersto
acquire for a 60-day period, 1 share at P130 with every 5 rights submitted.
SharesweresellingatP150.Allbut5000oftheserightswereexercised.

e. The company declared P5 cash dividends on December 15, 2011. These

remainedunpaidasofyear-end.

f. NetincomeamountedtoP2,500,000in2011.

Prepare and audit working paper showing the retrospective adjustment to retained
earnings (accumulated profits) and a rollforward analysis of the Companys
StockholdersEquity.