SUMMIT PROFESSIONAL REVIEW CENTER

Room 2 3/F ABE International College of Business and Accountancy-Tacloban

Avenida Veteranos Street, Tacloban City
Mobile No: 09157251003
Email: [email protected]
FB: Summit Professional Review Center

AUDITING PROBLEMS
Shareholders’ Equity

PROBLEM 1:

On December 31, 2013, Nam Inc.’s ordinary shares were selling for P55 per share. On this date, the company
creates a compensatory share option plan for its 70 employees. On this date, the company creates a
compensatory share option plan for its 70 employees. The plan document states that each employee may
purchase 500 shares of its P20 par ordinary shares for P35 per share after one year if revenues reach P15M,
after 2 years if revenues reach 18M, or after three years if revenues reach P20M. On this date, based on a
reliable option pricing model, Nam Inc. estimates that each option which can be exercised up to 2018 under
the condition that the employee is still within the employ of the company, has a fair value of P18.

The company has experienced a stable 25% increase in revenues for the past 5 years and reasonably expects
the same trend for the upcoming years.

The following information are available from the company’s records:

Year Actual Revenues remaining employees Expected additional

Earned at year end employee resignation

2014 P14.5M 68 8

2015 17.5M 65 5

2016 20.5M 63 -

Forty-five employees exercised their vested options on June 15, 2017 while three employees resigned on the
same year without exercising their options, thus were forfeited.

Required:

1. What is the compensation expense related to the share option plan to be recognized in the 2014
financial statements?
A. 315,000 C. 207,000
B. 270,000 D. 90,000
2. What is the compensation expense related to the share option plan to be recognized in the 2015
financial statements?
A. 315,000 C. 207,000
B. 270,000 D. 90,000
3. What is the balance of the additional paid in capital account related to tbe share options as of
December 31, 2016?
A. 207,000 C. 567,000
B. 540,000 D. 630,000
4. What is the balance of the ordinary share options outstanding account as of December 31, 2017?
A. 135,000 C. 270,000
B. 162,000 D. 405,000
5. What is the resulting share premium from the issuance of shares from the exercise of the employee
options?
A. 405,000 C. 742,000
B. 432,000 D. 877,500
PROBLEM 2:
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On January 1, 2011, MARS Company granted share options to 10 of its key employees entitling them to
acquire P100 par value shares of the company at P110 per share conditional upon the employees’ remaining in
the company’s employ during the vesting period. The 10,000 share options shall vest at the end of 2011 if the
company’s revenues reach 90M; or at the end of 2012 if the company’s revenues reach P100M; or at the end
of 2013 if the revenues reach P110M.

The market value of the option on the date of grant is P30. The company has a steady pattern of 25% increase
in revenues every year over the last 5 years and expects the same pattern during the vesting period. The
company also expects that no employees shall leave the company during the vesting period.

Revenues actually earned and recorded by the company during 2011 through 2013 follow:

2011 P80M
2012 90M
2013 110M
6. What is the compensation expense to be recognized in 2011?
A. 50,000 c. 150,000
B. 100,000 d. 300,000
7. What is the compensation expense to be recognized in 2012?
A. 50,000 c. 150,000
B. 100,000 d. 300,000
8. What is the compensation expense to be recognized in 2013?
A. 50,000 c. 150,000
B. 100,000 d. 300,000
9. If employees exercised all their options in 2014, how much is credited to share premium from the
related issuance of shares?
A. 100,000 c. 400,000
B. 300,000 d. 500,000
PROBLEM 3:

On January 1, 2011, ABC Corporation issued 300 share options to 10 of its key employees that will vest once
its share price equals P90. The employee is required to be employed with the company at the time the
condition is met in order to receive the options. The share options will expire in 5 years. On the grant date, it is
expected that the condition will be satisfied in 3 years.

The company applies binomial options pricing model, which takes into account the possibility that the share will
equal/exceed P90 in 3 years (hence the share options become exercisable) and the possibility that the share
price will not equal/exceed P90 in 3 years (hence the option will be forfeited). The company estimates that the
market value of the stock option on the date of grant with this market condition is P25 per option.

The corresponding share price at the end of each year and the corresponding estimated number of employees
expected to leave the company at the end of each year are as follows:

Date Estimated number of Actual Share Price

Employees who will

leave the company

Dec. 31, 2011 1 80

Dec. 31, 2012 2 85

Dec. 31, 2013 3* 91

*actual number of employees who left the company

10. The entry to record the corresponding compensation expense in 2011 involves a debit to compensation
expense amounting to:
A. 75,000 B. 67,500 C. 25,000 D. 22,500
11. The entry to record the corresponding compensation expense in 2011 involves a debit to compensation
expense amounting to:
A. 40,000 B. 25,000 C. 20,000 D. 17,500
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 12. The entry to record the corresponding compensation expense in 2011 involves a debit to compensation
expense amounting to:
A. 52,500 B. 17,500 C. 12,500 D. 10,500
PROBLEM 4:

A Corp. issued share appreciation rights (SARs) to 40 of its employees. The SARs will vest at the end of 3
years, provided the employees remain with the company and provided each employee depending upon the
average growth rate is:

Average Revenue Growth Percentage No. of SARs per Employee

5 to 10 1,000

11 to 15 2,000

More than 15% 3,000

On the grant date, each SAR has fair value of P60. A expects an average revenue growth rate of 8% during the
3-year vesting period, and that 16 of its employees will leave before the vesting period ends.

13. Assuming the estimates do not change during Year 1, the compensation expense in Year 1 is
A. 800,000 C. 960,000
B. 320,000 D. 480,000
14. At the end of Year 2, the average revenue growth projection over the three-year vesting period is 11%
and 32 employees are expected to remain in the entity’s employ. The fair value of each SAR is P70.
The compensation expense in Year 2 is
A. 2,506,667 C. 1,440,000
B. 2,186,667 D. 1,986,667
15. At the end of Year 3, the average revenue growth over the three-year vesting period is 13% and 36
employees did not leave the company. The fair value of each SAR is P80. The compensation expense
in Year 3 is
A. 2,773,333 C. 3,413,333
B. 5,760,000 D. 2,986,667
PROBLEM 5:

The shareholders’ equity section of Mart Co. showed the following data on December 31, 2010:

Ordinary shares, P3 par, 150,000 shares authorized,

125,000 shares issued and outstanding P375,000
Share premium 3,525,000
Ordinary share options outstanding 75,000
Accumulated profit 240,000
The share options were granted to key executives and provided the right to acquire 15,000 shares of ordinary
share at P35 per share. The options had a fair value of P5 on the grant date. The following transactions
occurred during 2011:

3/30 Key executives exercised 2,250 options. The market price per share wad P44 at this time.

4/1 The company issued bonds of P1,000,000 at 105, giving each P1,000 bond a detachable warrant
enabling the holder to purchase 2 shares of share at P40 for 1-year period. Market values immediately
following issuance of the bonds were: P4 per warrant and P998 per P1,000 bond without warrant.

6/30 The company issues rights to shareholders (1 right on each share, exercisable within a 30-day period)
permitting holders to acquire 1 share at P40 with every 10 rights submitted. Shares were selling for P43 at this
time. All, but 3,000 rights were exercised on July 31, and the additional shares were issued.

9/30 All warrants issued with bonds on April 1 were exercised.

11/30 The market price per share dropped to P33 and options came due. Since the market price was below
the option price, no remaining options were exercised.

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 16. What is the credit to the share premium account related to the issuance of ordinary shares through the
exercise of options on 3/30?
A. 83,250 B. 72,000 C. 4,500 D. No adjustment is necessary
17. What amount should have been allocated to the Share Warrants Outstanding account as a result of the
issuance of bonds with the detachable warrants?
A. 52,000 B. 4,192 C. 4,000 D. No adjustment is necessary
18. What amount should be credited to the share premium account as a result of the issuance of shares
through the rights exercised by stockholders?
A. 534,275 B. 497,000 C. 462,500 D. 459 725
19. What is the credit to the share premium account from the exercise of warrants which were originally
attached to the bonds?
A. 126,000 B. 52,000 C. 22,000 D. 12,000
20. What is the adjusted balance of the ordinary share options outstanding?
A. 75,000 B. 63,750 C. 11,250 D. 0
21. What is the balance of the ordinary Share Warrants Outstanding?
A. 52,000 B. 22,000 C. 10,000 D. 0

PROBLEM 6:

On October 31, Bon Inc. declared a building as property dividend distributable to stockholders in January 31 of
the following year. The building had a carrying value of P1.5M on October 31. The building had a market value
of P1.4M on the same date. In December 31 the value of the building further deteriorated and latest estimates
placed the fair value of the building at P1.2M.

The building was transferred to shareholders on January 31 when the prevailing fair value of the building was
at P1.3M.

22. The entry to record the declaration of the property dividends would include a debit to retained earnings
of:
A. 0 B. 1.5M C. 1.4M D. 1.2M
23. How much property dividend payable should be reported in the statement of financial position ad of
December 31?
A. 0 B. 1.5M C. 1.4M D. 1.2M
24. How much loss should be recognized in the income statement on the reclassification of the building to
asset held for disposal on the declaration date?
A. 0 B. 100,000 C. 300,000 D. 200,000
PROBLEM 7:

The accumulated profits account of Billy Jean Corp. shows the following debits and credits for the year 2011:

UNAPPROPRIATED ACCUMULATED PROFIT

Date Debit Credit

Balance

Jan. 1 Balance
P565,500

(a) Gain on life insurance policy settlement 50,000 615,500

(b) Write off of intangibles (goodwill) 30,000 585,500

( c) Effect of a change in accounting principle (from FIFO

To weighted average) 100,000 685,500

(d) Loss on sale of treasury stock (APIC from treasury stock

transaction is enough to cover the loss) 20,000 665,500

( e) 10% stock dividends on 10,000, P10 par value shares issued

and outstanding (FMV at the same date at P12.50) 100,000 565,500

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(f) 2010 unaccrued employee compensation 160,000 405,500

(g) Premium on ordinary shares issued 65,000 470,500

(h) Stock issuance expenses related to ordinary share

issued above 5,000 465,500

( i) Defaults on ordinary shares subscription 15,000 480,500

(j) Loss on sale of an equipment 25,000

455,500

(k) Gain on retirement of preference shares

at less than issue price 35,000 490,500

(l) Gain on early retirement of bonds 12,500 503,000

(m) Correction of a prior period error 45,000 548,000

(n) Cash dividends payable 75,000

473,000

(o) Inventory loss from flood 10,500 462,500

(p) Proceeds from sale of donated stocks 37,500 500,000

(q) Revaluation increase in land 150,000 650,000

( r) Appropriation for plant expansion 100,000 550,000

(s) Net income for the period 175,000 725,000

25. How much is the adjusted net income for the year?
A. 207,000 B. 187,000 C. 172,000 D. 159,500
26. How much is the correct unappropriated accumulated profits restated beginning balance?
A. 710,500 B. 680,500 C. 550,500 D. 520,500
27. How much is the correct unappropriated accumulate profits ending balance?
A. 447,500 B. 460,000 C. 422,500 D. 377,500

PROBLEM 8.

Peanut Corp. has incurred losses from operations for many years. At the recommendation of the newly hired
president, the board of directors noted to implement a quasi-reorganization, subject to the stockholders’ and
creditors’ approval. Immediately, prior to the quasi-reorganization, on June 30, 2011, Peanut’s balance sheet
was as follows:

ASSETS

Current Assets P1,375,000

Property, plant and equipment 3,375,000

Other noncurrent assets 500,000

Total Assets P5, 250,000

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Total liabilities P1, 500,000

Ordinary Shares, P10 par value 4,000,000

Additional paid-in capital 750,000

Deficit (1,000,000)

Total liabilities and stockholders’ equity P5,250,000

The stockholders and creditors approved the quasi-reorganization effective July 1, 2011, to be accomplished
by a reduction in property, plant and equipment (net) P875,000, a reduction in other noncurrent assets of
P375,000, and a reduction in par value from P10 to P5.

28. Peanut’s July 1 balance sheet after the quasi-reorganization should show total assets of:
A. 4,000,000 B. 2,500,000 C. 4,375,000 D. 3,875,000
29. The balance in the Additional paid-in capital after the quasi-reorganization on July 1, is:
A. 750,000 B. 2,000,000 C. 500,000 D. 0
30. Peanut’s deficit after the quasi-reorganization on July 1, 2011, should be:
A. 750,000 B. 2,000,000 C. 500,000 D. 0

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