College of Business Management and Accountancy

Aquinas University of Legazpi

S.Y. 2016 - 2017
Accounting 502: Applied Auditing
Quiz#1: Audit of Shareholders Equity
Name: ________________________________________ Date: __________________ Score: _______________
Instruction: Encircle the letter of the correct answer. Solution is required. Answers without
solution will not earn a point.
Problem # 1
You gathered the following information pertaining to the equity section of the Rona Corporation in
connection with your audit of the companys financial statements for 2010:
Ordinary share capital, P1 par value;
authorized
1,500,00
shares
issued
750,000 shares; outstanding 700,000
shares
Share premium:
Excess over par
From treasury shares
Total paid-in capital
Unappropriated retained earnings
Total equity

700,000

7,000,000
100,000
P7,800,000
4,050,000
P11,850,000

All of the outstanding ordinary and treasury shares were originally issued in 2007 for P11 per
share. The treasury shares were acquired on March 31, 2009. Rona uses par value method of
accounting for treasury shares.
During 2010, the following events or transactions occurred relating to Ronas equity:
Feb. 10
Issued 200,000 of unissued ordinary shares for P12.50 per share.
Mar. 15
Declared cash dividends of P0.20 per share to shareholders of record on April 1,
2010 and payable on April 15, 2010. This was the first dividend ever declared by
Rona.
Aug. 30
Ronas president retired, Rona purchased from the retiring president 50,000 ordinary
share of Rona for P13 per share, which was equal to the market value on this date.
These shares were cancelled.
Dec. 15
Declared a cash dividend of P0.20 per share to shareholders of record on January 2,
2011 and payable on January 15, 2011.
Rona is being sued by two separate parties for patent infringements. Ronas management and
outside legal counsel share the following opinions regarding these suits:
Suit
Likelihood of losing the suit
Estimated loss
#1
Reasonable possible
P300,000
#2
Probable
200,000
Based on the above and the result of your audit, answer the following:
1. The issuance of 200,000 ordinary shares on February 10, 2010 caused Ronas share premium
to increase by
a. 200,000
b. 2,500,000
c. 3,200,000
d. 0
2. The retirement of 50,000 ordinary shares on August 30, 2010 caused Ronas share premium
to decrease by
a. 50,000
b. 600,000
c. 500,000
d. 0
3. Rona wants to appropriate retained earnings for all loss contingencies that are not properly
accruable by a charged to expense. How much of Ronas loss contingency should be
appropriated by charged to unappropriated retained earnings?
a. 300,000
b. 200,000
c. 500,000
d. 0
4. How much cash dividends should Rona charge against unappropriated retained earnings?
a. 350,000
b. 180,000
c. 370,000
d. 170,000
5. How much should Rona show in note to financial statement as a restriction on retained
earnings because of the acquisition of treasury shares?
a. 100,000
b. 450,000
c. 600,000
d. 650,000
Problem #2
Nikki Corporation was authorized at the beginning of 2008 with 540,000, P100 par value,
ordinary shares. At December 31, 2008, the equity section of Nikki was as follows:
Share capital, par value 100 per share, authorized

College of Business Management and Accountancy

Aquinas University of Legazpi
S.Y. 2016 - 2017
540,000 shares; issued 54,000 shares
P5,400,000
Share premium
540,000
Retained earnings
810,000
Total equity
P6,750,000
On May 10, 2009, Nikki issued 90,000 ordinary shares forP10,800,000. A 5% share dividend was
declared on September 30, 2009 and issued on November 10, 2009 to shareholders of record on
October 31, 2009. Market value of ordinary share was P110 per share on declaration date. The
profit of Nikki for the year ended December 31, 2009 was P855,000.
During 2010, Nikki had the following transactions:
Feb. 15
Nikki reacquired 5,400 ordinary shares for P95 per share
May 15
Nikki sold 2,700 treasury shares for P120 per share
Jun 30
Issued to shareholders one right for each share held to purchase two additional
ordinary shares for P125 per share. The rights expire on December 31, 2010.
Aug 15
45,000 rights were exercised when the market value of the ordinary share wasP130
per share
Sep 30
72,000 rights were exercised when the market value of the ordinary share wasP140
per share
Dec 01
Nikki declared a cash dividend of P2 per share payable on January 15, 2011 to
shareholders of record on December 31, 2010.
Dec 15
Nikki retired 1,800 treasury shares. On this date, the market value of the ordinary
shares was P150 per share.
Dec 31
Profit for 2010 was P900,000.
Based on the above and the result of your audit, determine the following as of December 31,
2010:
6. Share capital
a. P38,520,000
b. P26,640,000
c. P38,340,000
d. P38,250,000
7. Share premium
a. P8,329,500
b. P8,338,500
c. P5,413,500
d. P8,266,500
8. Retained earnings
a. P8,329,500
b. P8,338,500
c. P5,413,500
d. P8,266,500
9. Treasury shares
a. P18,000
b. P90,000
c. P85,500
d. P0
Problem #3
The equity section of Archie Corporations statement of financial position as of December 31,
2009 is as follows
Shareholders Equity
Share capital, P5 par value, authorized, 2,000,000
shares; issued 400,000 shares
P2,000,000
Share premium
850,000
Retained earnings
3,000,000
P5,850,000
The following events occurred during 2010:
Jan 5
10,000 shares were sold for P9 per share
Jan 16
Declared a cash dividend of P0.40 per share, payable February 15 to shareholders of
record of February 5.
Feb 10
40,000 shares were sold for P11 per share
Mar 1
A 40% share dividend was declared and issued. Market value per share is currently
P15
Apr 1
A two-for-one split was carried out. The par value of the share was to be reduced to
P2.50 per share. Market value on March 31 was P18 per share.
July 1
A 10% share dividend was declared and issued. Market value is currently P10 per
share.
Aug 1
A cash dividend of P0.40 per share was declared, payable September 1 to
shareholders of record on August 21.
Dec 31
Profit for 2010 was P1,880,000
Based on the above and the result of your audit, answer the following:
10.The number of shares issued and outstanding as of December 31, 2010, is
a. 2,079,000
b. 1,386,000
c. 1,188,000
d. 346,500

College of Business Management and Accountancy

Aquinas University of Legazpi
S.Y. 2016 - 2017
11.The balance of share capital as of December 31, 2010, is
a. P3,465,000
b. P3,780,000
c. P3,228,750
d. P3,622,500
12.The balance of share premium as of December 31, 2010, is
a. P2,075,000
b. P2,547,500
c. P1,760,000
d. P3,695,000
13.The balance of retained earnings as of December 31, 2010, is
a. P381,600
b. P3,362,400
c. P1,094,400
d. P2,001,600

Problem #4
At the beginning of 2010, Lozada Corporation grants share options to each of its 100 employees
working in the sales department. The share options will vest at the end of 2012, 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 per cent per year. If the volume of sales
of the product increases by an average of between 5 per cent and 10 per cent per year, each
employee will receive 100 share options. If the volume of sales increases by an average of 10 per
cent and 15 per cent per year, each employee will receive 200 share options. If the volume of
sales increases by an average of 15 per cent or more, each employee will receive 300 share
options.
On grant date, Lozada estimates that the share options have fair value of P20 per option. Lozada
also estimates that the volume of sales of the product will increase by an average of between 10
per cent and 15 per cent per year. The entity also estimates, on a basis of a weighted average
probability, that 19 per cent of employees will leave before end of 2012.
By the end of 2010, seven employees have left and the entity still expect that a total of 19
employees will leave by the end of 2012. Product sales have increased by 12 per cent and the
entity expect this rate of increase to continue over the next 2 years.
By the end of 2011, a further six employees have left. The entity now expects only three more
employees will leave during 2012. Product sales have increased by 18 per cent. The entity now
expects that sales that sales will average 15 per cent or more over three-year period.
By the end of 2012, a further two employees have left. The entitys sales have increased by an
average of 16 per cent over the three years.
Based on the above and the result of the audit, determine
14.Compensation expense in 2010
a. P162,000
b.
c. P108,000
d.
15.Share premium share options at the end of 2011
a. P348,000
b.
c. P340,000
d.
16.Compensation expense in 2011
a. P228,000
b.
c. P232,000
d.
17.Compensation expense in 2012
a. P510,000
b.
c. P174,000
d.

the following:
P124,000
P0
P336,000
P0
P224,000
P0
P162,000
P0