HO1 (Shareholders’ Equity) AUDITING PROBLEMS

1. Ocean Company was organized at the beginning of the current year and was authorized to issue share
capital of 100,000 shares with par value of P50. The following transactions occurred during the year.
 The incorporators subscribed for 25% of the authorized share capital at par value.
 The incorporators paid 25% on their subscription.
 Full payment was received on 15,000 shares originally subscribed.
 Land with fair value of P600,000 was acquired upon issuance of 10,000 shares. The market
value of the share at this time is P55.
 Cash subscription to 5,000 shares at P60 per share was received.
 Issued 2,000 shares to the legal counsel in payment for his 100,000 bill for organization
services.

REQUIRED:
a) Prepare the journal entries to record the above transactions
b) Compute for the amount of share capital.
c) Compute for the amount of subscribed share capital.
d) Compute for the amount of share premium.
e) Compute for the amount of total shareholders’ equity.
f) Compute for the amount of legal capital.

2. Brook Company was organized at the beginning of current year. The entity provided the following
transactions affecting shareholders’ equity:
 The entity was authorized to issue share capital as follows:
o Preference share capital, P100 par, 30,000 shares
o Ordinary share capital, P50 par, 100,000 shares
 40,000 ordinary shares were issued for cash at P60 per share.
 10,000 preference shares were issued at P120 for cash.
 10,000 preference shares were subscribed at par value.
 P400,000 was received on the above subscription to preference shares.
 1,000 preference shares were issued in payment of legal fees of P100,000 in connection with
organizing the corporation.
 20,000 ordinary shares were issued for property, plant and equipment which had a fair value of
P1,300,000.
 15,000 ordinary shares were subscribed for at par.
 Forty percent of the ordinary share capital subscription was collected.
 The balance owing on the subscription described in bullets 4 and 5 was collected, and the
preference shares were issued.
 The net income for the current year was P2,000,000.

REQUIRED:
a) Prepare the journal entries to record the above transactions
b) Compute for the amount of share capital.
c) Compute for the amount of subscribed share capital.
d) Compute for the amount of share premium.
e) Compute for the amount of total shareholders’ equity.
f) Compute for the amount of legal capital.

3. The accounts below appear in the December 31, 2017 trial balance of Mara Company:

Authorized share capital 5,000,000

Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost 100,000

REQUIRED: Compute for the amount of shareholders’ equity to be reported in the December 31, 2017
statement of financial position.
HO1 (Shareholders’ Equity) AUDITING PROBLEMS

4. Burdado Co. is authorized to issue 300,000 of P2 par value ordinary shares. The company has the
following transactions:
 Issued 60,000 shares at P30 per share; received cash.
 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.
 Issued 900 shares, valued objectively at P30,000, to the employees instead of paying them cash
wages.
 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.
 Received cash for 19,500 shares issued at P38 per share.
 Issued 12,000 shares at P45 per share; received cash.

REQUIRED: Compute for the amount of share premium.

5. At the beginning of the current year, Ria Company issued 10,000 ordinary shares of P20 par value and
20,000 convertible preference shares of P20 par value for a total of P800,000. At this date, the ordinary
share was selling for P36, and the convertible preference share was selling for P27.

REQUIRED:
a) Compute for the amount of proceeds that should be allocated to the preference shares.
b) Compute for the amount of proceeds that should be allocated to the ordinary shares.
c) Compute for the amount of share premium from issuance of preference shares.
d) Compute for the amount of share premium from issuance of ordinary shares.

6. During 2016, Hyatt Company issued for P110 per share, 15,000 convertible preference shares of P100
par value. One preference share may be converted into three ordinary shares of P25 par value at the
option of the preference shareholder. On December 31, 2016, all of the preference shares were
converted into ordinary shares. The market value of the ordinary share at the conversion date was P40.

REQUIRED:
a) Compute for the amount of ordinary share capital arising from conversion.
b) Compute for the amount of share premium arising from conversion.

7. 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 par 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.

REQUIRED:
a) Compute for the amount of that should be assigned to the share warrants issued.
b) Prepare journal entry assuming that only 80% of the warrants are exercised.

8. Kalinga reported the following shareholders’ equity on January 1, 2016.

Preference share capital, 100,000 shares, P10 par 1,000,000

Ordinary share capital, 500,000 shares, P10 par 5,000,000
Share premium – preference 50,000
Share premium – ordinary 200,000
Retained earnings 100,000

During the current year, the following transactions were completed:

 Retirement of 5,000 preference shares at P11 per share
 Purchase of 5,000 ordinary shares of treasury at P12 per share
 Share split, ordinary share 2 for 1
 Reissue of 2,000 shares of treasury at P8 per share
 Net income for the year, P300,000

REQUIRED: Present the shareholders’ equity in the December 31, 2016 statement of financial position.