PROBLEM 1:

Presented below are four independent cases relating to the audit of shareholders’ equity.
Answer the questions at the end of each case.

I.
The retained earnings account for CURDAPIA CO. shows the following (debits) and credits:
Jan. Balance P2,917,0
1 00
a) Loss from fire (3,175)

b) Goodwill impairment (322,000)

c) Stock dividend (500,000)

d) Loss on sale of equipment (175,500)

e) Officer’s compensation related to income of prior periods – (2,104,00

accrual overlooked 0)
f) Share premium – issuance 795,000

g) Stock subscription defaults 37,250

h) Gain on sale of treasury shares 147,000

i) Gain on early retirement of bonds at less than carrying value 81,000

j) Gain on life insurance policy settlement 78,000

k) Correction of prior-period error 30,500

1. What is the corrected amount of retained earnings?

A. P952,500 C. P157,500
B. P343,500 D. P903,500

II.
KANDONG COMPANY began operations on January 1, 2011, by issuing at P15 per share one-
half of the 475,000 ordinary shares (P1 par value) that had been authorized for issue. In
addition, Kandong has 250,000 6% preference shares (P5 par value) authorized. During 2011,
Kandong reported net income of P512,500 and declared dividends of P118,750.

During 2012, Kandong completed the following transactions:

Jan. 10 Issued an additional 50,000 ordinary shares for P17 per share
April 2 Issued 75,000 preference shares for P8 per share
July 21 Authorized the acquisition of a custom-made machine to be
delivered in January 2013. Kandong appropriated P147,500 of
retained earnings for the purchase of the machine.
Oct. 25 Issued an additional 25,000 preference shares for P9 per share
Dec. 31 Reported P607,500 of net income and declared a dividend of
P317,500 to shareholders of record on January 31, 2013, to be paid
on February 4, 2013.

2. What is the total shareholders’ equity on December 31, 2012?

A. P5,773,500 C. P3,956,250
B. P6,238,750 D. P5,921,250
3. What is the unappropriated retained earnings balance on December 31, 2012?
A. P683,750 C. P853,750
B. P536,250 D. P566,250

III.
BURADO CO. is authorized to issue 300,000 of P2 par value ordinary shares. The company has
the following transactions:
a) Issued 60,000 shares at P30 per share; received cash
b) Issued 750 shares, selling at P35 per share, to lawyers for services in connection with
the organization of the corporation. The value of the legal services was P27,000.
 c) Issued 900 shares, valued objectively at P30,000, to the employees instead of paying
them cash wages.
d) Issued 37,500 shares in exchange for a building valued at P885,000 and land valued at
P240,000. (the building was originally acquired by the investor for P750,000 and has
P300,000 of accumulated depreciation; the land was originally acquired for P90,000.)
e) Received cash for 19,500 shares issued at P38 per share.
f) Issued 12,000 shares at P45 per share; received cash

4. The statement of financial position will report share premium of

A. P4,000,950 C. P4,001,700
B. P3,973,500 D. P3,326,700

IV.
TALO COMPANY has been paying regular quarterly dividends of P1.50 and wants to pay the
same amount in the third quarter of 2012. The following information relates to the company’s
equity:

Jan. 1 Shares outstanding, 400,000; P2 par (750,000 shares authorized)

Feb. 15 Issued 25,000 new shares at P10.50
March 31 Paid quarterly dividends of P1.50 per share
May 12 Converted P1,000,000 of P1,000 bonds to ordinary shares at the
rate of 50 shares per P1,000 bond
June 15 Issued rate of 50 share dividend
30 Paid quarterly dividends of P1.50 per share

5. What is the total amount that Talo will have to pay in dividends in the third quarter in order
to pay P1.50 per share?
A. P790,875 C. P637,500
B. P712,500 D. P749,250
6. What is the total amount of dividends to be distributed during the year assuming no equity
transactions occur after June 30?
A. P3,163,500 C. P3,010,125
B. P3,085,125 D. P3,121,875

PROBLEM 2:
The NEPAL COMPANY is authorized to issue 600,000 shares of P10 par value ordinary share
capital. Nepal’s accounting year ends on December 31. The following transactions occurred in
2012, the company’s first year of operations.
a. Issued 20,000 shares at P20 per share; received cash
b. Issued 2,500 shares to attorneys for services in securing the corporate charter and for
preliminary legal costs of organizing the corporation. The value of the services was
P85,000.
c. Issued 300 shares, valued objectively at P15,000, to the employees instead of paying
them cash wages.
d. Issued 325,000 shares in exchange for a building valued at P3,000,000 and land valued at
P4,000,000. (The building was originally acquired by the investor for P2,500,000 and has
P1,000,000 of accumulated depreciation; the land was originally acquired for P1,500,000.)

1. What is the ordinary share capital balance on December 31, 2012?

A. P3,453,000 C. P3,490,000
B. P3,478,000 D. P4,278,000
2. The amount of share premium to be reported on Nepal’s statement of financial position at
December 31, 2012, is
A. P3,962,000 C. P3,022,000
B. P4,047,000 D. P4,022,000
3. The amount of organization expense to be charged against Nepals income for 2012 is
A. P85,000 C. P25,000
B. P0 D. P60,000

PROBLEM 3:
The following are PAKISTAN COMPANY’s equity accounts at December 31, 2011:

Ordinary share capital, par value P10; authorized 200,000

shares; issued P1,200,00
and outstanding 0
 Share premium 180,000
Retained earnings 720,000

Pakistan Company uses the cost method of accounting for treasury shares.

The following transactions occurred in 2012:

a. Acquired 8,000ordinary shares for P144,000
b. Sold 6,500 treasury shares at P20 per share
c. Retired the remaining treasury shares

What is the share premium balance on December 31, 2012?

A. P117,000 C. P181,000
B. P168,000 D. P193,000

PROBLEM 4:
As the newly appointed auditor in 2012 for JORDAN COMPANY, you have analyzed the
company’s “Share Premium” account. The following is a summary of the account since the
inception of Jordan Company.

Debits Credits
Cash dividends – preference shares P160,000
Cash dividends – ordinary shares 195,000
Excess of amount paid in over par value of ordinary P375,000
shares
Net income 500,000
Gain on early extinguishment of debt 42,000
Treasury preference shares; issued and reacquired 90,000
at par
Loss on litigation 75,000
Correction of a prior period error 23,0
00
P P
917,000 917,000

1. What is Jordan’s correct net income for 2012?

A. P500,000 C. P444,000
B. P467,000 D. P477,000
2. What is the correct retained earnings balance (before appropriation for treasury shares) as
at the end of the current year?
A. P444,000 C. P89,000
B. P135,000 D. P112,000
3. What is the correct share premium balance as at the end of the current year?
A. P554,000 C. P781,000
B. P600,000 D. P375,000

PROBLEM 5:
ISRAEL COMPANY is authorized to issue 200,000 of P10 par value ordinary shares, and 60,000
of 6% cumulative and nonparticipating preference shares, par value P100 per share. The
company engaged in the following share capital transactions through December 31, 2012:
a. 50,000 ordinary shares were issued for P650,000 and 20,000 preference shares for
machinery valued at P2,600,000.
b. Subscriptions for 9,000 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. 2,000 treasury ordinary shares have been purchased for P12 and accounted for under the
cost method.

The post-closing retained earnings balance at December 31, 2012, is P420,000.

What is Israel’s total shareholders’ equity at December 31, 2012?

A. P3,714,800 C. P3,638,800
B. P3,710,800 D. P3.110.800

PROBLEM 6:
SINGAPORE CORPORATION recently hired a new accountant with very limited experience in
corporation accounting. During the first month, he made the following entries for the
corporations share capital.

January 2 Cash 200,000

Share capital 200,000
Issued 10,000 of P5 par value ordinary
shares at P20 per share

10 Cash 600,000
Share capital 600,000
Issued 15,000 of P30 par value preference
shares at P40 per share

15 Share Capital 8,000

Cash 8,000
Purchased 1,000 ordinary shares for the
treasury at P8 per share

31 Cash 1,000
Loss on sale of share capital 1,500
Share capital 2,500
Sold 500 treasury shares at P2 per share

Required:
Prepare the necessary correcting entries.

PROBLEM 7:
The shareholders’ equity of the OMAN COMPANY as of December 31, 2011, was as follows:

Ordinary shares, P10 par, authorized 300,000 shares; 250,000

shares P2,500,00
issued and outstanding 0
Share premium – issuance 3,500,000
Retained Earnings 1,740,000

On June 1, 2012, Oman reacquired 40,000 ordinary shares at P40. The following transactions
occurred with regard to these shares.

July 1 Sold 15,000 shares at P48

August 1 Sold 19,000 shares at P27
September 1 Retired 1,000 shares

The following entries were made by the company’s accountant to record the preceding
transactions.

2012
June 1 Treasury 1,600,000
shares 1,600,00
Cash 0

July 1 Cash 720,000

Treasury shares 720,000

August 1 Cash 513,000

Treasury shares 513,000

September Ordinary 10,000

1 shares 10,000
Treasury shares

Oman’s net income for 2012 was P135,000.

Based on the preceding information, determine the correct balances of the following accounts:
1. Treasury shares
 A. P160,000 C. P210,000
B. P190,000 D. P200,000
2. Ordinary shares
A. P2,490,000 C. P2,460,000
B. P2,500,000 D. P2,210,000
3. Share premium – issuance
A. P3,486,000 C. P3,620,000
B. P3,500,000 D. P3,606,000
4. Share premium – treasury shares
A. P120,000 C. P240,000
B. P0 D. P710,000
5. Retained earnings (before appropriation for treasury shares)
A. P1,732,000 C. P1,597,000
B. P1,859,000 D. P1,718,000

PROBLEM 8:
The LAOS COMPANY wants to raise its working capital. After analysis of the available options,
the company decides to issue 6,000 shares of P30 per preference shares with detachable
warrants. The package of the shares and warrants sells for P120. The warrants enable the
holder to purchase 6,000 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. P60,000 C. P180,000
B. P72,000 D. P520,000
2. Assuming that only 80% of the warrants are exercised, the entry to record the exercise of
the warrants should include a
Debit to Credit to
A. Share warrants outstanding, Share premium, P201,600
P57,600
B. Cash, P192,000 Ordinary share capital,
P249,600
C. Share premium, P201,600 Ordinary share capital,
P48,000
D. Cash, P48,000 Warrants outstanding,
P57,600

PROBLEM 9:
The shareholders’ equity section of BAHRAIN CORPORATION’s statement of financial position as
of December 31, 2011, is as follows:

Ordinary share capital (P5 par, 250,000 shares

authorized, P
137,500 issued and outstanding) 687,500
Share premium 275,00
0
Total paid-in-capital P
962,500
Unappropriated retained earnings P
667,500
Appropriated retained earnings 250,0
00
Total retained earnings 917,50
0
Total shareholders’ equity P1,880,0
00

Bahrain Corporation had the following shareholders’ equity transactions during 2012:
Jan. 15 Completed the building renovation for which P250,000 of retained
earnings had been restricted. Paid the contractor P242,500, all of
which is capitalized.
 March Issued 50,000 additional ordinary shares for P8 per share
3
May Declared a dividend of P1.50 per share to be paid on July 31, 2012,
18 to shareholders of record on June 30, 2012.

June Approved additional building renovation to be funded internally.

19 The estimated cost of the project is P200,000, and retained
earnings are to be restricted for that amount.

July 31 Paid the dividend

Dec. Declared a property dividend to be paid on January 10, 2013, to

31 shareholders of record on January 5, 2013. The dividend is to
consist of equipment with a carrying value of P150,000. The
equipments fair value at December 31, 2012, is P157,500

Dec. Reported P442,500 of net income on December 31, 2012, income

31 statement.

1. The balance in the ordinary share capital account at December 31, 2012, should be
A. P1,095,000 C. P937,500
B. P1,087,500 D. P687,500
2. The balance in the share premium account at December 31, 2012, should be
A. P425,000 C. P275,000
B. P125,000 D. P260,000
3. The balance in the unappropriated retained earnings account at December 31, 2012,
should be
A. P921,250 C. P200,000
B. P713,750 D. P721,250
4. The total shareholders’ equity at December 31, 2012, should be
A. P2,233,750 C. P2,083,750
B. P2,283,750 D. P2,371,250

PROBLEM 10:
You have been assigned to the audit of MALAYSIA CO., a manufacturing company. You have
been asked to summarize the transactions for the year ended December 31, 2012, affecting
shareholders’ equity and other related accounts. The shareholders’ equity section of Malaysia’s
December 31, 2011, statement of financial position follows:

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

authorized, P
180,000 shares issued, 177,580 shares outstanding 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 P
4,549,178

You have extracted the following information from the accounting records and audit working
papers.

2012
Jan. 15 Malaysia reissued 1,300 treasury shares for P40 per share. The 2,420
treasury shares on hand at December 31, 2011, were purchased in
one block in 2010.

Feb. 1 Sold 180, P1,000, 9% bonds due February 1, 2022, 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, 2013. Each warrant entities
 the holder to purchase 10 ordinary shares at P40 per share.

March 2,800 ordinary shares were subscribed for at P44 per share 40% of
6 the subscription was collected

20 The balance due on 2,400 shares was received and those shares
were issued

Nov. 1 There were 110 shares warrants detached from the bonds and
exercised

Malaysia’s net income for 2012 is P950,000.

Based on the preceding information, determine the correct December 31, 2012, balance of
each of the following:
1. Ordinary share capital
A. P364,800 C. P372,600
B. P375,800 D. P367,000
2. Share premium – issuance
A. P3,827,200 C. P3,805,065
B. P3,808,200 D. P3,791,400
3. Share premium – treasury shares
A. P19,000 C. P187,200
B. P45,000 D. P192,800
4. Retained earnings (before appropriation for treasury shares)
A. P649,378 C. P1,599,378
B. P1,573,378 D. P1,454,178
5. Treasury shares
A. P67,200 C. P93,200
B. P145,200 D. P142,600
6. Total shareholders’ equity
A. P5,722,218 C. P5,720,223
B. P5,716,618 D. P5,717,088

PROBLEM 11:
During its first year of operations, LEBANON COMPANY entered into the following transactions
relating to shareholders’ equity. Lebanon’s articles of incorporation authorized the issue of
2,400,000 ordinary shares, P10 par per share, and 300,000 preference shares, P50 par per
share.

March 14 Sold 500,000 ordinary shares for P100 per share

15 Issued 20,000 ordinary shares to attorneys in exchange for legal

services.

15 Sold 35,000 of its ordinary shares and 10,000 preference shares

for P6,000,000.

Nov. 20 Issued 1,900 of its ordinary shares in exchange for equipment

for which the cash price was known to be P185,000.

Based on the preceding information, determine the correct balance of each of the following
accounts.
1. Ordinary share capital
A. P5,569,000 C. P5,550,000
B. P5,219,000 D. P6,069,000
2. Share premium – ordinary shares
A. P46,800,000 C. P52,116,000
B. P49,950,000 D. P50,116,000
3. Preference share capital
A. P2,000,000 C. P500,000
B. P0 D. P2,500,000
4. Share premium – preference shares
A. P2,500,000 C. P2,000,000
 B. P5,150,000 D. P0

PROBLEM 12:
SYRIA COMPANY was formed on July 1, 2009. It was authorized to issue 600,000 share of P10
par value ordinary shares and 200,000 shares of 8% P25 par value, cumulative and
nonparticipating preference shares. Syria Company has a July 1 – June 30 fiscal year.

The following information to the shareholders’ equity accounts of Syria Company :

Ordinary Shares
Prior to the 2011 – 2012 fiscal year, Syria Company had 220,000 of outstanding ordinary
shares issued as follows:
a. 190,000 shares were issued for cash on July 1, 2009, at P31 per share.
b. On July 24, 2009, 10,000 shares were exchanged for a plot of land which cost the seller
P140,000 in 2003 and had an estimated market value of P440,000 on July 24, 2009.
c. 20,000 shares were issued on March 1, 2011; the shares had been subscribed for P42 per
share on October 31, 2010.

During the 2011 – 2012 fiscal year, the following transactions regarding ordinary shares took
place:

2011
Oct. 1 4,000 shares were issued for cash at P46 per share.

Nov. 30 Syria purchased 4,000 of its own shares on the open market at
P39 per share.

Dec. 15 Syria declared a 5% share dividend for shareholders of record on

January 15, 2012, to be issued on January 31, 2012. Syria was
having a liquidity problem and could not afford a cash dividend
at the time. Syria’s ordinary shares were selling at P52 per share
on December 15, 2011.

2012
June 20 Syria sold 1,000 of its own ordinary shares that it had purchased
on November 30, 2011, for P42,000.

Preference Shares
Syria issued 100,000 preference shares at P44 per share on July 1, 2010.

Cash Dividends
Syria has followed a schedule of declaring cash dividends in December and June with payment
being made to shareholders of record in the following month. The cash dividends which have
been declared since inception of the company through June 30, 2012, are shown below.

Declaration Date Ordinary Shares Preference Shares

12/15/10 P0.30 per share P1.00 per share
06/15/11 P0.30 per share P1.00 per share
12/15/11 ---- P1.00 per share

No cash dividends were declared during June 2012 due to the company’s liquidity problems.

Retained Earnings
As of June 30, 2011, Syria’s retained earnings account had a balance of P1,380,000. For the
fiscal year ending June 30, 2012, Syria reported net income of P80,000

In March 2011, Syria received a term loan from JST National Bank. The bank requires Syria to
establish a sinking fund and restrict retained earnings for an amount equal to the sinking fund
deposit. The annual sinking fund payment of P100,000 is due on April 30 each year; the first
payment was made on schedule on April 30, 2012.

1. What is the ordinary share capital account balance at June 30, 2012?
A. P2,350,000 C. P2,510,000
 B. P2,320,000 D. P2,500,000
2. The total share premium – ordinary shares at June 30, 2012, is
A. P5,435,000 C. P4,970,000
B. P5,579,000 D. P5,693,000
3. The unappropriated retained earnings at June 30, 2012, should be
A. P788,000 C. P217,000
B. P571,000 D. P1,033,000
4. The total number of ordinary shares issued and outstanding at June 30, 2012, should be
A. P248,000 C. P232,000
B. P251,000 D. P235,000
5. The total shareholders’ equity at June 30, 2012, should be
A. P13,117,000 C. P12,783,000
B. P13,576,000 D. P13,000,000

PROBLEM 13:
At the beginning of year 1, an entity grants 200 shares each to 500 employees. The grant is
conditional upon the employees remaining in the entity’s employ until the performance
condition described below is satisfied.

Performance Condition
The shares will vest at the end of:
 Year 1 - If the entity’s earnings increase by 15%
 Year 2 - If the entity’s earnings increase by more than an average of 11% per year
over the two-
year period.
 Year 3 - If the entity’s earnings increase by more than an average of 8% per year
over the three –
year period.

The shares have a fair value of P15 at the beginning of year 1, which equals the share price at
grant date. The entity does not expect to pay dividends over the three-year period.

The following events occurred:

Year 1
 30 employees have left during year 1 and the entity expects, on the basis of a weighted
average probability, that a further 40 will leave during year 2.
 The entity’s earnings have increased by 14% by the end of year 1 and the entity expects
that the earnings will continue to increase at a similar rate in year 2. Therefore, the
entity expects that the shares will vest at the end of year 2.

Year 2
 35 employees have resigned by the end of year 2 and the entity expects that a further
30 will leave during year 3.
 Earnings have increased by only 7% during year 2. Hence, the shares do not vest at the
end of year 2 as expected by the end of year 1. The entity expects that by the end of
year 3, its earnings will increase by at least 5%, thereby achieving the average of 8%
per year.

Year 3
 28 employees have resigned by the end of year 3.
 The entity’s earnings have increased by 6% during year 3. This results in an average
increase of 9% per year over the three-year vesting period.

Based on the preceding information, determine the following:

1. Cumulative compensation expense at the end of year 1
A. P407,000 C. P430,000
B. P645,000 D. P82,500
2. Cumulative compensation expense at the end of year 2
A. P1,290,000 C. P810,000
B. P330,000 D. P822,000
3. Cumulative compensation expense at the end of year 3
A. P1,221,000 C. P1,215,000
B. P1,290,000 D. P1,500,000
4. The year in which the share options vested to the entity’s employees
A. Year 1 C. Year 3
B. Year 2 D. the options did not vest
5. Share options outstanding at the end of year 2
A. P822,000 C. P645,000
B. P810,000 D. P430,000

PROBLEM 14:
At the beginning of year 1, an entity grants to a senior executive 30,000 share options. The
grant is conditional upon the executive remaining in the entity’s employ until the end of year
3.

The share option can be exercised if the entity’s hare price increase from P20 at the beginning
of year 1 to above P30 at the end of year 2. If the share price is above P30 at the end of year
3, the share option can be exercised at any time during the next five years, i.e., by the end of
year 8.

The entity estimates the fair value of the share options on grant date to be P5 per option. The
estimate takes into account the following market conditions.
 The possibility that the share will exceed P30 at the end of year 3, i.e., share options
become exercisable; and
 The possibility that the share price will not exceed P30 at the end of year 3, i.e., the
share options will be forfeited.

The following actual events occurred in years 1 to 3:

Year 1
 The share price has increased to P24
 The entity’s estimate of the fair value of the options is P4 at the end of year 1. This
takes into account whether the market condition will be satisfied by the end of year 3.

Year 2
 The share price has decreased to P22. However, the entity remains optimistic that the
share price target will be met by the end of year 3.
 The estimated fair value of the share option is P3. Again, this estimate takes into
account the market condition noted above.

Year 3
 The share price only reaches P28 by the end of year 3.
 The estimated fair value of the share option is zero, as the market condition has not
been satisfied.

Based on the preceding information, determine the following:

1. Compensation expense for year 1
A. P50,000 C. P60,000
B. P40,000 D. P30,000
2. Compensation expense for year 2
A. P50,000 C. P60,000
B. P40,000 D. P30,000
3. Compensation expense for year 3
A. P50,000 C. P40,000
B. P0 D. P30,000
4. Share option outstanding at the end of year 2
A. P70,000 C. P90,000
B. P80,000 D. P100,000
5. Cumulative compensation expense for the three-year period
A. P0 C. P100,000
B. P150,000 D. P70,000

PROBLEM 15:
At the beginning of 2012, and entity grants 100 share options each to 1,000 employees. The
grant is conditional upon the employees remaining in the entity’s employ during a vesting
period of three years.

The exercise price at grant date is estimated at P30. However, the exercise price drops to P20
if the entity’s earnings increase by at least an average of 10% per year over the three-year
period.
On grant date, the entity estimates that the fair value of the share options, with an exercise
price of P20, is P10 per option. If the exercise price is P20, the entity estimates that the share
options have a fair value of P9 per options.

The following events occurred:

2012
 60 employees have left. The entity expects, on the basis of a weighted average
probability, that a further 60 employees will leave during 2013 and 2014, respectively.
 The entity’s earnings increased by 12%, and the entity expects that earnings will
continue to increase at this rate over the next two years. The entity therefore expects
that the earnings target will be achived, and hence, the share options will have an
exercise price of P20.

2013
 At year end, a further 70 employees have resigned. The entity expects that a further 60
employees will leave during 2014.
 The entity’s earnings increased by 13%, and it continues to expect that the earnings
target will be achieved.

2014
 A further 56 employees have left by the end of the year
 Due to a general decrease in market demand, the entity’s earnings increased by only
3%. Because the earnings target was not achieved, the 100 vested share option for each
employee have exercise price of P30.

Based on the preceding information, determine the following:

1. Compensation expense for 2012
A. P270,000 C. P273,333
B. P192,600 D. P244,200
2. Compensation expense for 2013
A. P192,600 C. P273,333
B. P266,667 D. P270,000
3. Compensation expense for 2014
A. P273,333 C. P266,667
B. P270,000 D. P192,600
4. Share options outstanding at the end of 2013
A. P540,000 C. P266,667
B. P810,000 D. P459,267
5. Share option outstanding at the end of 2014
A. P810,000 C. P820,000
B. P0 D. P732,600

PROBLEM 16:
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional
upon the employees remaining in the entity’s employ during the vesting period. The shares will
vest at the end of year if the entity’s earnings increase by more than 18%; at the end of year 2
if the entity’s earnings increase by more than an average of 13% per year over the two-year
period; and at the end of year 3 if the entity’s earnings increase by more than an average of
10% per year over the three-year period. The shares have a fair value of P20 per share at the
start of year 1, which equals the share price at grant date.

By the end of year 1, the entity’s earnings have increased by 14%, and 20 employees have
left. The entity expects that earning will continue to increase at 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 30 employees will leave during year 2.

By the end of year 2, the entity’s earnings have increased by only 10% and therefore the
shares do not vest at the end of year 2. 42 employees have left during the year. The entity
expects that a further 15 employees will leave during year 3, and that the entity’s earnings will
increase by at least 6%, thereby achieving the average 10% per year.

By the end of year 3, 10 employees have left and the entity’s earnings had increased by 8%,
resulting in an average of 10.67% per year.

Based on the foregoing, answer the following:

1. What amount of compensation expense should be recognized in year 1?
 A. P450,000 C. P300,000
B. P480,000 D. P320,000
2. What amount of compensation expense should be recognized in year 2?
A. P104,000 C. P114,000
B. P134,000 D. P244,000
3. What amount of compensation expense should be recognized in year 3?
A. P302,000 C. P292,000
B. P432,000 D. P312,000
4. What amount should the entity report as share options outstanding at the end of year 2?
A. P564,000 C. P544,000
B. P584,000 D. P614,000
5. What amount should the entity report as share options outstanding at the end of year 3?
A. P900,000 C. P1,000,000
B. P980,000 D. P856,000

PROBLEM 17:
At the beginning of year 1, Entity A grants share options to each of its 100 employees working
in the sales department. The share options will vest at the end of year 3, provided that the
employees remain in the entity’s employ, and provided that the volume of sales of a particular
product increases by at least an average of 5% per year. If the volume of sales of the product
increases by an average of between 5% and 10% per year, each employee will receive 100
share options. If the volume of sales increases by an average of between 11% and 15% each
year, each employee will receive 200 share options. If the volume of sales increases by an
average of 16% or more, each employee will receive 300 share options.

On grant date, Entity A estimates that the options have a fair value of P20 per option. Entity A
also estimates that the volume of sales of the product will increase by an average of between
11% and 15% per year, and therefore expects that, for each employee who remains in service
until the end of year 3, 200 share options will vest. The entity also estimates, on the basis of a
weighted average probability, that 20% of employees will leave before the end of year 3. By
the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will
remain in service for the three-year period. Product sales have increased by 12% and the
entity expects this rate of increase to continue over the next 2 years.

By the end of year 2, a further five employees have left, bringing the total to 12 to date. The
entity now expects only three more employees will leave during year 3, and therefore expects
a total of 85 employees will remain at the end of year 3. Product sales have increased by 20%,
resulting in an average of 16% over the two years to date. The entity now expects that sales
will average 16% or more over the three-year period, and hence expects each sales employee
to receive 300 share options at the end of year 3.

By the end of year 3, a further two employees have left. Hence, 14 employees have left during
the three-year period, and 86 employees remain. The entity’s sales have increased by an
average of 16% over the three years.

Based on the preceding information, answer the following:

1. What is the compensation expense for year 1?
A. P106,667 C. P160,000
B. P53,333 D. P172,000
2. What is the compensation expense for year 2?
A. P286,667 C. P233,333
B. P180,000 D. P168,000
3. What is the compensation expense for year 3?
A. P114,667 C. P282,667
B. P176,000 D. P188,000
4. What is the cumulative compensation expense for years 1, 2, and 3?
A. P320,000 C. P344,000
B. P516,000 D. P172,000
5. At the end of year 2, the entity should report share options outstanding of
A. P328,000 C. P286,667
B. P226,667 D. P340,000

PROBLEM 18:
At the beginning of year 1, an entity grants to a senior executive 3,000 share options,
conditional upon the executive remaining in the entity’s employ until the end of year 3. The
exercise price is P40. However, the exercise price drops to P30 if the entity’s earnings increase
by at least an average of 10% per year over the three-year period.

On grant date, the entity estimates that the fair value of the share options, with an exercise
price of P30, is P15 per option. If the exercise price is P40, the entity estimates that the share
options have a fair value of P12 per option.

During year 1, the entity’s earnings increased by 12%, and the entity expects that earnings
will continue to increase at this rate over the next two years. The entity therefore expects that
the earnings target will be achieved, and hence the share options will have an exercise price of
P30.

During year 2, the entity’s earnings increased by 13%, and the entity continues to expect that
the earnings target will be achieved.

During year 3, the entity’s earnings increased by only 3%, and therefore the earnings target
was not achieved. The executive completes three years’ service, and therefore satisfies the
service condition. Because the earnings target was not achieved, the 3,000 vested share
options have an exercise price of P40.

Based on the preceding information, answer the following:

1. What is the compensation expense in year 1?
A. P12,000 C. P30,000
B. P15,000 D. P40,000
2. What is the compensation expense in year 2?
A. P12,000 C. P30,000
B. P15,000 D. P40,000
3. What is the compensation expense in year 3?
A. P12,000 C. P60,000
B. P15,000 D. P6,000
4. At the end of year 2, the entity should report share options outstanding of
A. P60,000 C. P30,000
B. P80,000 D. P24,000
5. What is the cumulative compensation expense for years 1, 2, and 3?
A. P36,000 C. P114,000
B. P60,000 D. P40,000

PROBLEM 19:
At the beginning of year 1, an entity grants to a senior executive 3,000 share options,
conditional upon the executive remaining in the entity’s employ until the end of year 3.
However, the share options cannot be exercised unless share price has increased from P50 at
the beginning of year 1 to above P65 at the end of year 3. If the share price is above P65 at
the end of year 3, the share options can be exercised at any time during the next seven years,
i.e., by the end of year 10.

The entity applies a binomial option pricing model, which takes into account the possibility that
the share price will exceed P65 at the end of year 3 (and hence the share options become
exercisable) and the possibility that the share price will not exceed P65 at the end of year 3
(and hence the options will be forfeited). It estimates the fair value of the share options with
this market condition to be P20 per option.

Based on the preceding information, determine the compensation expense for years 1, 2, and
3.

PROBLEM 20:
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on
condition that the employees remain in its employ for the next three years.

During year 1, 35 employees have left. The entity estimates that a further 60 will leave during
years 2 and 3. During year 2, 40 employees have left and the entity estimates that a further
25 will leave during year 3. During year 3, 22 employees have left. At the end of year 3, 150
employees exercised their SARs, another 140 employees exercised their SARs at the end of
year 4 and the remaining 113 employees exercised their SARs at the end of year 5.

The entity estimates the fair value of the SARs at the end of each year in which a liability
exists as shown below. At the end of year 3, all SARs held by the remaining employees vested.
The intrinsic values of the SARs at the date of exercise (which equal the cash paid out) at the
end of years 3, 4, and 5 are also shown below.

Year Fair Value Intrinsic Value

1 P14.40
2 15.50
3 18.20 P15.00
4 21.40 20.00
5 25

Based on the preceding information, answer the following:

1. What amount of compensation expense should be recognized in year 1?
A. P223,200 C. P193,440
B. P211,200 D. P194,400
2. What amount of compensation expense should be recognized in year 2?
A. P190,333 C. P218,933
B. P222,993 D. P234,433
3. What amount of compensation expense should be recognized in year 3?
A. P272,127 C. P225,000
B. P460,460 D. P177,873
4. What amount of compensation expense should be recognized in year 4?
A. P280,000 C. P218,640
B. P61,360 D. P241,820
5. What amount of compensation expense should be recognized in year 5?
A. P241,820 C. P40,680
B. P460,460 D. P282,500
6. What amount of salaries payable should the entity report at the end of year 3?
A. P241,820 C. P413,333
B. P0 D. P460,460
7. What amount of salaries payable should the entity report at the end of year 4?
A. P241,820 C. P413,333
B. P0 D. P460,460

PROBLEM 21:
An entity grants to an employee the right to choose either 1,000 phantom shares (i.e., a right
to a cash payment equal to the value of 1,000 shares) or 1,200 shares with a par value of P10
per share. The grant is conditional upon the completion of three years’ service. If the employee
chooses the share alternative, the shares must be held for three years after vesting date.

At grant date, the entity’s share price is P50 per share. At the end of years 1, 2, and 3, the
share price is P52, P55 and P60, respectively. The entity does not expect to pay 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 share alternative is P48
per share.

At the end of year 3, the employee chooses:

Scenario 1: the cash alternative

Scenario 2: The equity alternative

Based on the preceding information, answer the following:

1. What is the total fair value of the equity component as a result of the share-based payment
transaction with settlement alternatives?
A. P7,600 C. P2,400
B. P10,000 D. P0
2. What is the compensation expense in year 1?
A. P17,333 C. P19,333
B. P19,866 D. P23,334
3. What is the compensation expense in year 1?
A. P19,866 C. P21,866
B. P17,333 D. P19,333
4. What is the compensation expense in year 1?
A. P23,334 C. P19,333
B. P25,868 D. P19,866
5. If the employee has chosen the cash alternative, the amount to be paid at the end of year 3
should be
 A. P55,000 C. P52,000
B. P67,600 D. P60,000
6. If the employee has chosen the share alternative, the amount of share premium to be
recognized is
A. P7,600 C. P60,000
B. P55,600 D. P67,600

PROBLEM 22:
The following information has been taken from the ledger accounts of CHINA CORPORATION:

Total net income since incorporation P3,200,000

Total cash dividends paid 150,000
Carrying value of the company’s investment in Yogi
Company declared 600,000
as property dividend
Proceeds from sale of donated shares 150,500
Total value of stock dividends distributed 420,000
Gains on treasury share transactions 375,000
Unamortized premium on bonds payable 413,200
Appropriated for contingencies 700,000

The current balance of unappropriated retained earnings is

A. P2,030,000 C. P1,330,000
B. P3,200,000 D. P1,930,000

PROBLEM 23:
BANGLADESH COMPANY’s December 31, 2012, audited statement of financial position reported
retained earnings of P150,000. Net income for 2012 was P85,000, and dividends of P60,000
were declared and paid in 2012. Bangladesh’s accountant discovered that net income for 2011
had been understated by P25,000 due to an error in recording depreciation expense for 2011.

The amount of retained earnings per books as of December 31, 2011 was
A. P150,000 C. P125,000
B. P200,000 D. P100,000

PROBLEM 24:
CHING CHING has been employed as an accountant by IRAN, INC. for a number of years. She
handles all accounting duties, including the preparation of financial statements. The following
is a statement of earned surplus prepared by Ching Ching for 2012:

Iran, Inc.
STATEMENT OF EARNED SURPLUS FOR 2012

BALANCE AT January 1, 2012 P365,000

Additions:
Change in estimate of 2011 amortization P 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Net income for 2012 150,000
Decreased depreciation due to change in 13,000 173,000
estimated life
Deductions: 538,000
Dividends declared and paid P 100,000
Loss on sale of equipment 2,500
Loss on earthquake 83,000 185,50
0
Balance at December 31, 2012 P352,50
0

1. What is the correct net income of Iran for 2012?

A. P87,500 C. P84,500
B. P173,000 D. P82,500
2. What is the correct retained earnings balance as of December 31, 2012?
A. P349,500 C. P438,000
B. P347,500 D. P352,500

PROBLEM 25:
The following selected accounts were taken from the December 31, 2012 trial balance of
INDONESIA CORPORATION:

Subscribed share capital P

1,250,000
Treasury shares, 600 shares, at cost 90,000
Unissued share capital 6,000,000
Share premium 180,000
Appropriation for plant expansion 500,000
Retained earnings 1,200,000
Authorized share capital – 100,000 shares 10,000,000
Subscription receivable 320,000

The minutes of meetings of the board of directors reveal that on December 5, 2012, the
company’s board declared a 10% cash dividend payable to shareholders and subscribers of
record on December 20, 2012. The dividend checks are to be distributed on January 10, 2013.
The company’s accountant has not recorded this dividend declaration.

What is the amount of unrecorded dividend payable?

A. P516,000 C. P487,000
B. P519,000 D. P394,000

PROBLEM 26:
The capital accounts of BHUTAN COMPANY on June 30, 2012, are as follows:

Ordinary shares, P10 par, 50,000 shares issued and P 500,000

outstanding
Share premium 250,000
Retained earnings 3,135,000

The company’s ordinary shares are selling at this time at P20.

What entries would you make in each of the following cases?

a) A 10% stock dividend is declared and issued
b) A 30% stock dividend is declared and issued
c) A 4-for-1 stock split is declared and issued

PROBLEM 27:
AFGHANISTAN COMPANY has been paying regular quarterly dividends to its shareholders. The
following equity transactions are shown in the company’s books:

Jan. P2 par value ordinary shares; (1,600,000 shares outstanding;

1 3,000,000 shares authorized).

Feb. Issued 100,000 new shares at P5

15
March Paid quarterly dividends of P2,550,000
31
May P2,000,000 of P1,000 bonds were converted to ordinary
13 shares at the rate of 100 shares per P1,000 bond.

June Issued an 11% stock dividend

16
Paid quarterly dividends. The dividend per share is the same
30 as that paid in the first quarter.

No other equity transactions occurred after June 30.

1. What is the amount of dividend per share that Afghanistan paid on March 31?
A. P1.50 C. P1.59
B. P0.85 D. P1.70
2. What is the amount of dividend that Afghanistan will have to pay in the third quarter in
order to pay the same dividend rate as that paid in previous quarters?
A. P2.850.000 C. P3,163,500
B. P2,997,000 D. P3,585,300
3. What is the total amount of dividends to be paid during the current year?
A. P10,305,900 C. P13,305,900
B. P12,040,500 D. P12,654,000

PROBLEM 28:
BRUNEI COMPANY has 50,000 shares of P10 par value share capital outstanding. In declaring
and distributing a 50% share dividend, Brunei initially issued only 20,000 new shares; the
other share dividend shares were not issued because some investors did not own Brunei
shares in even multiplies of 10. To these shareholders, Brunei issued fractional share warrants.

Prepare journal entries necessary to record the following:

a) Declaration of the share dividend
b) Issuance of the full and fractional share dividends
c) Issuance of full shares through the surrender of the required fractional warrants. (Assume
that 80% of the fractional share warrants were ultimately turned in for shares).

PROBLEM 29:
You have been asked to audit the TURKEY COMPANY. During the course of your audit, you are
asked to prepare comparative data from the company’s inception to the present. You have
determined the following:
a) Turkey Company's charter became effective on January 2, 2008, when 20,000 shares of
P10 ordinary shares and 10,000 shares of 7% cumulative, nonparticipating, preference
shares were issued. The ordinary shares were sold at P12 per share, and the preference
shares were sold at par value of P100 per share.
b) Turkey was unable to pay preference dividends at the end of its year. The owners of the
preference shares agreed to accept 2 ordinary shares for every 50 preference shares
owned in discharge of the preference dividends due on December 31, 2008. The shares
were issued on January 2, 2009/ the fair market value was P30 per share for ordinary
shares on the date of issue.
c) Turkey Company acquired all the outstanding shares of Akinka Corporation on May 1,
2010, in exchange for 10,000 ordinary shares of Turkey.
d) Turkey split its ordinary shares 3 for 2 on January 1, 2011, and 2 for 1 on January 1, 2012.
e) Turkey offered to convert 20% of the preference shares to ordinary shares on the basis of
2 ordinary shares for 1 preference share. The offer was accepted, and the conversion was
made on July 1, 2012.
f) No cash dividends were declared on ordinary shares until December 31, 2012. Cash
dividends per share of ordinary shares were declared and paid as follows:

June 30 Dec. 31
2010 -- P3.20
2011 P1.50 P2.50
2012 P1.25 P1.00

Based on the preceding information, determine the following:

I. The number of ordinary and preference shares outstanding on December 31 of each of
the following years:
1. 2009
Ordinary Preference
A. 20,000 10,000

B. 20,400 10,000

C. 25,000 10,000

D. 20,200 9,800

2. 2010
 Ordinary Preference
A. 30,000 10,000

B. 30,200 9,800

C. 35,000 10,000

D. 30,400 10,000

3. 2011
Ordinary Preference
A. 45,300 10,000

B. 45,600 10,000

C. 76,000 10,000

D. 52,500 9,800

4. 2012
Ordinary Preference
A. 95,200 8,000

B. 49,600 10,000

C. 93,200 7,840

D. 93,200 8,000

II. The amount of cash dividends declared and paid to shareholders for each of the
following years:
5. 2010
A. P112,000 C. P97,280
B. P96,640 D. 96,000
6. 2011
A. P182,400 C. P159,600
B. P83,600 D. P121,600
7. 2012
A. P214,200 C. P153,200
B. P217,200 D. P209,200

PROBLEM 30:
The following are the shareholders’ equity accounts of INDIA COMPANY at December 31, 2012.
Ordinary shares, P10 par; authorized 200,000 shares; issued P900,00
90,000 shares 0
Preference shares, 12% P25 par; authorized 100,000 shares;
issued 15,000 shares; cumulative 375,000
Share premium 2,500,0
00
Retained earnings 4,750,0
00
Treasury shares (7,500 ordinary shares) 371,250

The preference shares are participating in distribution in excess of a 15% dividend rate on the
ordinary shares. No dividends have been paid in 2010 or 2011. On December 31, 2012, India
wants to pay a cash dividend of P2 a share to ordinary shareholders.

1. What is the amount to be paid to preference shareholders?

A. P153,750 C. P108,750
B. P90,000 D. P135,000
2. What is the amount to be paid to ordinary shareholders?
A. P105,750 C. P99,000
B. P123,750 D. P165,000
PROBLEM 31:
UZBEKISTAN COMPANY reported the following amounts in the shareholders’ equity section of
its December 31, 2011, 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 50,000
shares issued)
Share premium 96,000
Retained earnings 600,00
0
TOTAL P
946,000

The following transactions occurred during 2012:

a. Paid the annual 2011 P1 per share dividend on preference shares and P0.50 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2011.
b. Purchased 2,000 shares of its own outstanding ordinary shares for P20 per share.
c. Reissued 700 treasury shares for equipment valued at P25,000
d. Issued 5,000 preference shares at P15 per share
e. Declared a 10% share dividend on the outstanding ordinary shares when the shares were
selling for P12 per share.
f. Issued the share dividend
g. Declared the annual 2012 P1 per share dividend on preference shares and the P0.50 per
share dividend on ordinary shares. These dividends are payable in 2013.
h. Appropriated retained earnings for plant expansion, P300,000.
i. Appropriated retained earnings for treasury shares.

The net income for 2012 was P470,000.

Based on the above date, determine the correct December 31, 2012, balances of each of the
following accounts:
1. Preference shares
A. P250,000 C. P275,000
B. P200,000 D. P1,000,000
2. Ordinary shares
A. P54,000 C. P53,500
B. P54,350 D. P50,000
3. Share premium
A. P137,600 C. P132,000
B. P127,090 D. P138,090
4. Treasury shares
A. P26,000 C. P15,000
B. P40,000 D. P14,000
5. Unappropriated retained earnings
A. P714,775 C. P703,775
B. P709,775 D. P729,775

PROBLEM 32:
CYPRUS COMPANY began operation on January 1. Authorized were 20,000 shares of P10 par
value ordinary shares and 40,000 shares of 10%, P100 par value preference shares. The
following transactions involving shareholders’ equity occurred during the first year of
operations.

January 1 Issued 500 ordinary shares to the corporation promoters in exchange for property
valued at P170,000 and services valued at P70,000. The property had cost the
promoters P90,000 3 years before and was carried on the promoters’ books at
P50,000.

February 23 Issued 10,000 preference shares with a par value of P100 per share. The shares
were issued at a price of P150 per share, and the company paid P75,000 to an
agent for selling the shares.

March 10 Sold 3,000 ordinary shares for P390 per share. Issue costs were P25,000
April 10 4,000 ordinary shares were sold under share subscription at P450 per share. No
shares are issued until a subscription contract is paid in full. No cash was
received.

July 14 Exchanged 700 ordinary shares and 1,400 preference shares for a building with a
fair market value of P510,000. The building was originally purchased for P380,000
by the investors and has a book value of P220,000. In addition, 600 ordinary
shares were sold for P240,000 in cash.

August 3 Received payments in full for half of the share subscriptions and payments on
account on the rest of the subscriptions. Total cash received was P1,400,000.
Shares were issued for the subscriptions paid in full.

December 1 Declared a cash dividend of P10 per share on preference shares, payable on
December 31 to shareholders of record on December 15, and a P20 per share
cash dividend on ordinary shares, payable on January 5 of the following year to
shareholders of record on December 15.

31 Paid the dividend to preference shareholders.

Net income for the first year of operations was P600,000

Based on the receding information, calculate the balances of each of the following accounts:
1. Preference shares
A. P1,140,000 C. P1,655,000
B. P1,000,000 D. P1,795,000
2. Share premium – preference shares
A. P425,000 C. P515,000
B. P90,000 D. P545,000
3. Ordinary shares
A. P88,000 C. P61,000
B. P68,000 D. P62,000
4. Share premium – ordinary shares
A. P3,707,000 C. P1,920,000
B. P3,110,000 D. P3,617,000
5. Retained earnings
A. P310,000 C. P350,000
B. P600,000 D. P290,000

PROBLEM 33:
ARMENIA CO. began operations on January 1, 2011, by issuing at P30 per share one-half of the
900,000 shares of P10 par value ordinary shares that had been authorized for sale. In addition,
Armenia has 500,000 shares of P50 par value, 6% preference shares authorized. During 2011,
Armenia had P3,200,000 of net income and declared P2,000,000 of dividends.

During 2012, Armenia had the following transactions:

January 9 Issued an additional 100,000 ordinary shares for P18 per share.

April 2 Issued 75,000 preference shares for P65 per share.

July 20 Authorized the purchase of a custom-made machine to be delivered in January

2013. Armenia restricted P800,000 of retained earnings for the purchase of the
machine

October 21 sold an additional 25,000 preference shares for P55 per share

December 31 Reported P2,400,000 of net income and declared a dividend of P700,000 to

shareholders of record on January 15, 2013, to be paid on February 4, 2013.

Based on the preceding data, determine the December 31, 2010, balances of the following:
1. Preference shares
A. P5,000,000 C. P6,250,000
B. P3,750,000 D. P4,875,000
2. Share premium – preference shares
A. P10,250,000 C. P1,250,000
 B. P2,050,000 D. P1,125,000
3. Ordinary shares
A. P1,000,000 C. P4,500,000
B. P6,300,000 D. P5,500,000
4. Share premium – ordinary shares
A. P9,800,000 C. P11,050,000
B. P9,000,000 D. P9,925,000
5. Retained earnings (unappropriated)
A. P2,900,000 C. P3,200,000
B. P2,100,000 D. P1,200,000

PROBLEM 34:
YEMEN CORPORATION has incurred losses from operations for many years. At the
recommendation of the newly hired president, the board of directors voted to implement a
quasi-reorganization, subject to shareholders’ and creditors’ approval. Immediately, prior to
the quasi-reorganization, on June 30 2012, Yemen’s statement of financial position was as
follows:

Assets
Current assets P1,375,000
Property, Plant and Equipment (net) 3,375,000
Other noncurrent assets 500,000
Total Assets P
5,250,000
Liabilities & Shareholders’ Equity
Total liabilities P1,500,000
Ordinary shares, P10 par 4,000,000
Share premium 750,000
Retained earnings (1,000,00
0)
Total Liabilities & shareholders’ equity P
5,250,000

The shareholders and creditors approved the quasi-reorganization effective July 1, 2012, to be
accomplished by a reduction in property, plant, and equipment (net) of P875,000, a reduction
in other noncurrent assets of P375,000, and a reduction in par value from P10 to P5.

1. Yemen’s July 1, 2012, statement of financial position after the quasi-reorganization should
show total assets of
A. P4,000,000 C. P4,375,000
B. P2,500,000 D. P3,875,000
2. The balance in the share premium account after the quasi-reorganization on July 1, 2012,
should be
A. P750,000 C. P500,000
B. P2,000,000 D. P0
3. Yemen’s deficit after the quasi-reorganization on July 1, 2012, should be
A. P1,000,000 C. P500,000
B. P250,000 D. P0

PROBLEM 35:
Shown below are ALBANIA COMPANY’s condensed statements of financial position immediately
before and one year after it had completed a quasi-reorganization.

Dec. 31, Dec. 31,

2012 2013
(Before
Quasi)
Current assets P900,000 P 1,350,000
Property, Plant, and Equipment (net) 5,100,000 3,870,000
TOTAL assets P P5,220,000
6,000,000

Ordinary shares P7,200,000 P4,650,000

Share premium 660,000 90,000
 Retained earnings (1,860,000) 480,000
Total shareholders’ equity P P
6,000,000 5,220,000

In 2013, Albania reported net income of P480,000 and depreciation expense of P330,000. The
quasi-reorganization on December 31, 2012, included the write down of the company’s
inventories by P360,000. No purchases or sales of property, plant, and equipment items and
no share transactions occurred in 2013.

Prepare all the journal entries made at the time of the quasi-reorganization.

PROBLEM 36:
BALILI, INC. began operations in January 2010, and reported the following results for each of its
three years of operations.

2010 P300,000 Net loss

2011 30,000 Net loss
2012 3,950,000 Net income

At December 31, 2012, the company’s capital accounts were as follows:

5% cumulative preference shares, par value P100;

authorized, 100,000 P
shares; issued and outstanding, 60,000 shares 6,000,000

Ordinary shares, par value P10; authorized, 1,000,000

shares; issued 8,000,000
and outstanding, 800,000 shares

Balili, Inc. has never paid a cash or share dividend and there has been no change in the capital
accounts since it began operations.
1. What is the book value of the preference shares on December 31, 2012?
A. P105 C. P100
B. P110 D. P115
2. What is the book value of the ordinary shares on December 31, 2012?
A. P13.40 C. P14.15
B. P14.52 D. P13.78

Assume that the preference shares have a liquidation value of P105 per share.
3. What is the book value of the preference shares on December 31, 2012?
A. P115 C. P110
B. P120 D. P105
4. What is the book value of the ordinary shares on December 31, 2012?
A. P13.78 C. P13.40
B. P14.15 D. P13.02

PROBLEM 37:
You are auditing the financial statements of the ITALY COMPANY as of December 31, 2012. The
company’s general ledger shows the following liability and equity accounts at the end of the
reporting period.

Accounts payable P 530,000

Accrued expenses 41,600
Reserve for bond retirement 320,000
Preference shares, 6% cumulative, P100 par; 6,000 shares
authorized; 400,000
4,000 shares issued; 3,700 shares outstanding
Ordinary shares, P10 par; 200,000 shares authorized;
80,000 shares 800,000
issued and outstanding
Share premium 154,600
Retained earnings 262,520
Treasury preference shares, at cost 36,000

1. What is the book value of the preference shares on December 31 2012?

 A. P116 C. P110
B. P115 D. P122
2. What is the book value of the ordinary shares on December 31,2012?
A. P18.47 C. P18.36
B. P18.68 D. P18.40