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699 viewsChapter 19
Uploaded by
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/ 32
Chapter
AUDIT OF
OWNER(S)’ EQUITY
ACCOUNTS
Expected Learning Outcomes
After studying this chapter, you should be able to:
1. Describe the general procedures in auditing the
partnership and the sole proprietorship accounts.
2. Describe the auditor's objectives for the substantive audit
of owners’ equity in a corporate setting.
3. Describe the nature of the audit procedures to accomplish
the auditors’ objectives for the audit of shareholders’
equity accounts.
4. Understand and prepare audit working papers to
document audit procedures for shareholders’ equity.
LBZ
‘Seanad wthCamS:aner
el CHAPTER 19
AUDIT OF OWNER(S)’ EQUITY ACCOUNTS
INTRODUCTION
Audit of Sole Proprietorship and Partnership Accounts
In general, the examination of the capital accounts and drawing account fo,
sole proprietorship and partnership will involve application of the tame
principles. as
Procedures for the Audit of Sole Proprietorship Accounts
Analyses are made for all proprietorship accounts from the beginning of te
business: the initial capital investment and any additions are traced to the cash
asset records and the net income or loss for the period and any withdrawals are
Verified. One common source of difficulty, however, in auditing a soi,
proprietorship is the practice of intermingling business and personal transaction
making it necessary for the auditors to segregate personal net worth fom
business capital. Corrections may also be required to transfer from expense
accounts to the owner's drawing account any personal expenditures paid with
company funds.
Procedures for the Audit of Partners’ Accounts
In the audit of the Partners’ accounts, the auditors are particularly interested in
determining that the distribution of net income has been carried in accordance
with the profit-sharing provisions of the partnership contract. In a situation where
a partnership operates without any written agreement of partnership, the auditor
may wish to obtain from each partner a written statement confirming the balance
in his or her capital account and approval of the method used in dividing the
year's earnings. They may also suggest that the firm develop a written partnership
agreement.
Audit of Shareholders' Equity Accounts
In examining shareholders' equity accounts, the auditor aims. to determine (a) the
propriety of the charges and credits to the accounts, (b) the propriety of
presentation Of the accounts on the statement of financial position, and (¢)
client's compliance with relevant legal requirement. A summary of the
management assertions, audit objectives and audit procedures for the
shareholders’ equity accounts are presented in Figure 19-1.
ee iii all
‘Seana wthComS:aner AUDIT OBJECTIVES AND PROCEDURES
Figure 19-1 Substantive Testing of Shareholders’ Equity Accounts
Audit of Owners” Equity 563
Assertions Audit Objectives ‘Audit Procedures
[1 Existence or To determine the valdily | 1. Oblain schedules of
Occurrence of recorded shareholders’ shareholders’ equity accounts
equity balances and and reconcile to the general
whether the transactions ledger balances.
actually occurred. 2. Review authorizations and
terms of share issues.
3. Confirm shares outstanding
with registrar on share and
transfer agent.
4, Inspect share certificate book.
5, Inspect certificates of shares
held in treasury.
TL Completeness To determine whether | 6. In addition to the above
recorded shareholders’ mentioned procedures, perform
equity accounts reflect al analylical review procedures.
data that should be
recorded
Rights and To determine whether the | 7. Review articles of incorporation
Obligation entity has the authority and by laws.
and execute the 8. Make inquiries of legal counsel.
shareholders’ equity
transactions, e.g,
whether share capital
was legally issued and
shareholders have a legal
claim on corporate assets.
at the statement of
financial position date
WV. Valuation or To determine whelher the | 9. Vouch share capital entries,
Allocation shareholders’ equity dividend entries and entries to
balances are shown in retained earings.
the proper statement
amounts in accordance
with PAS/PFRS,
V._ Presentation and To determine thatthe | 10. Review minutes of board
Disclosure shareholders’ equity directors’ and shareholders’
accounts are properly meetings for share options and
presented in the dividend restrictions.
‘statement of financial 11. Evaluate financial statement
Position. presentation and disclosure for
shareholders’ equity accounts.
‘Seanad wthCamS:aner 364 Chapter 19
DISCUSSION OF AUDIT PROCEDURES
4. Obtain schedule of shareholders" eyuity accounts and reconcile 1 th
general ledger balances, a
The auditor establishes the accuracy of the supporting schedule footi
the schedules and reconciling the data on the schedules tothe u®®
balances
2. Review authorization and terms of share issues.
The auditor should review the minutes of the directors meetings to obtain
evidence of authorization of shareholders’ equity transactions such as
issues, share reacquisition’s and dividend declarations. The auditor shoulg
also examine whether restriction provisions are observed by the client in
the issuance of shares, dividend declaration and liquidation.
3. Confirm shares outstanding with registrar and transfer agents,
The auditor should confinin with the registrar or share and transfer agent
the total shares authorized, issued and outstanding at the Statement of
financial position date. The shares held by each shareholder may also be
confirmed with the transfer agent.
4. Inspect share certificate book.
This is done when the client serves as its own transfer agent: The following
steps are followed in this test:
a) Examine the share certificate book to determine that (1) stubs for
shares issued and outstanding have been properly filled out, (2)
canceled certificates are attached to the original stubs, and (3) all
unissued certificates are accounted for.
b) Ascertain that the changes during the year have been correcly
recorded in the shareholders’ subsidiary ledger.
©) Reconcile the total shares issued and outstanding as shown in the share
certificate book with total shares reported in the shareholders’ ledger
and share capital accounts.
‘Seanad wth Comsat Audit of Owners’ Equity $65
Inspect certificates of shares held in treasury.
If there are shares held in treasury, the auditor should inspect the
certificates at the same time other securities are counted. He should note in
the working paper the number of shares acquired during the year for
subsequent tracing to the cash records.
Figure 17-2 shows a Share Book Examination Schedule.
Perform analytical review procedures.
To assess completeness and. reasonableness of the capital accounts the
following relationships or ratios may be established:
1. Book value per share
2. Return on shareholders’ equity
3. Equity ratio
4. Dividend payment ratio
5. Price-earnings ratio
These ratios may be compared with both internal data (prior year’s figures)
and external data (industry averages) and unusual fluctuations and
questionable items should be investigated by the auditor.
. Review articles of incorporation and by laws. Make inquires of legal
counsel.
The auditor should review the articles of incorporation and by laws to
determine that the corporation is authorized to do business and that shares
of all classes of shares outstanding have been authorized as required by the
corporate charter. Evidence of legality of any changes in capitalization may
be obtained through inquiry of the client’s legal counsel whose response
should preferably be in writing.
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‘Scand wthCamSsaner Audit of Owners’ Equity 567
9. Vouch entries in the shareholders’ equity accounts.
1) For new issue of shares and sule of treasury shares: Examine
remittance adv ices of the cash proceeds from the issue and trace the
proceeds to the cash receipt records and share capital and other paid-in
capital.
2) For purchase of treasury shares and payment of dividends: Examine
authorizations in the minutes, trace to disbursement vouchers, canceled
checks and cash disbursement books.
The auditor should also obtain evidence supporting the other shareholders’
equity accounts such as:
a) Appropriation of retained earnings which should be traced to the
minutes book
b) Prior-period adjustment.
Figure 17-3 shows the working papers for Test of Dividend Payments.
9&10. Review minutes of the board of directors' and shareholders' meetings.
Evaluate financial statement presentation and disclosure of the
shareholders’ equity accounts.
Disclosures related to the equity section include details of par or stated
value, share option plans, dividends in arrears, and dividend and
liquidation preferences. To meet this objective, the auditor should review
the evidences obtained in the foregoing tests and from the review of the
corporate minutes for provisions and agreements affecting the
shareholders’ equity accounts. Additional evidence may also be obtained
from discussions and communication with legal counsel.
‘Seanad wth Comsat ae
568_ Chapter 10 —
Figure 19-3: Test of Di
Angel Company
Test of Divceng Payments
12.31.X7
Shares of Owidend
Shareholder Record Rate Amount
| Per share book record as of dividend dale
O Per 12.15 10 minutes of BD
Calculation checked
# Examined properly endorsed canceled check
“Footed,
Prepared by. Reviewed by.
intial [Date | initial [Date
ad
‘Seanad wth Comsat 569
Illustrative Audit Case 19-1: Analysis of Shareholders’ Equity Accounts
During May 20X6, Glenn, Inc., was organized with 3,000,000 authorized shares
of P10 par value ordinary shares. and 300,000 of its ordinary shares were issued
for P3,300,000. Net income through December 31, 20X6, was P125,000.
On July 3, 20X7, Glenn issued 500,000 of its ordinary shares for P6,250,000. A
5% share dividend was declared on October 2, 0X7. and issued on November 6,
2018, to shareholders of record on October 23, 20X7. The market value of the
ordinary shares was Pll per share on the declaration date. Glenn's net income for
the year ended December 31, 20X7. was P350,000.
During 20X8, Glenn had the following transactions:
In February, Glenn reacquired 30,000 of its ordinary shares for P9 per
share. Glenn uses the cost method to account for treasury shares.
In June, Glenn sold 15,000 of its treasury shares for P 12 per share.
In September, each shareholder was issued (for each share held) one right
to purchase two additional ordinary shares for P13 per share. The rights
expire on December 31, 20X8.
4. In October, 250,000 rights issues were exercised when the market value of
the ordinary share was P14 per share.
5. In November, 400,000 rights issues were exercised when the market value
of the ordinary share was P15 per share.
6. On December 15, Glenn declared its first cash dividend to shareholders of
PO.30 per share, payable on January 10, 20X9, to shareholders of record on
December 31, 20X8.
7. On December 21, in accordance with the applicable law, Glenn formally
retired 10,000 of its treasury shares and had them revert to an unissued
basis. The market value of the ordinary share was P16 per share on this
date.
8. Net income for 20X8 was P800,000
1
Required:
Prepare a schedule of all transactions affecting the share capital (share and peso
amounts), additional paid-in capital, retained earnings, and the treasury shares
(shares and peso amounts) and the amounts that would be included in Glenn's
statement of financial position at December 31, 20X6, 20X7. and 20X8, as a
result of the above transactions. Show supporting computations in good form.
‘Seanad wthCamS:aner $10 Chapter 19
Solution: Mustrative Audit Case 19-1
Glenn, Inc. =
Computation of Shareholders’ Equity Accounts Balance
December 31, 20X6
Share capital Capital in Reta
Shares [Amount | Excess of Par | gant
Issuance of P10 par value es |
ordinary shares in May 20X6 300,000 | P3,000,000 300,000
Net income for 20X6 [Psat
Balance, Dec. 31, 206 300.000 | P3.000000 | Fang SR
Glenn, Inc.
Computation of Shareholders’ Equity Accounts Balance
December 31, 20X7
Paid-in
Share capital Capital in | Retaineg
Shares Amount _| Excess of Par Eamings
Balance, Dec. 31, 20X6 300,000 | _P3,000,000 300,000 | P125,000
Issuance of P10 par value
ordinary shares in July 20X7 500,000 | 5,000,000 1,250,000
5% share dividend issued on
Nov. 6, 20X7 (Schedule ,t) 40,000 400,000 40,000 | (440,009)
Net income for 20X7 a 350,000
Balance, Dec. 31, 20X7 840,000 | P8.400.000 | P1,590,000 | P35.000
Schedule 1
Share Dividend |
Ordinary shares issued and outstanding on October 2, 20X7 800,000 Shares
Share dividends issued on Nov. 6, 20X7 (5% x 800,000) 40,000 Shares
| Market value of ordinary shares on declaration date xX Pt
Charge to retained earnings for share dividend 440,000
_d
‘Seanad wth CamS:aner Audit of Owners" Equity S71
Gen, he
‘Computation of Shareholders’ Equity Accounts Batance
December 31, 20%8
|
Pain Cantal i
Share capital a Retained Treasury Shares j
Sass | Amort léxessofPar|_Eamigs [Shares | Amoxt_ |
re r
Dec. 31,207 840.000 |ps4o0.000 | pr.s90.000 | 735,000 \ |
Reacquisition of shares T 1
for PS per share in | |
Fen 208, socoo | pzroee |
Gales of treasury snes | |
for P12 per share in |
June 20X8 45,000 (15,000) }_ (135.000)
Brerase of rights ses | j j
for P13 per share in 1 \ {
Gt 20%8 250.0002) | soncon | sc00.000 |_ 1.500.000 \ |
Brercse ofits issues | |
for P13 per share in | |
Nov. 2078 (400,000 x2) | 800900 | 8.000.000 |_2.400.000
Cash dividend of P03 | | \
declared on Dec. 15, 2008 |
|__ (Schedule 2) | | 637500) |
Retrement oftressory | 1 | |
shares on Dec. 21,20x8_| (10.0001 (100.000)|__10.000 (roo) | (60,000) |
Schedule 2 \
i
Cash Dividend |
|
Ordinary shares issued and outstanding 2,130,000 Shares |
Deduct treasury shares held at Dec. 31, 20X8 5,000 Shares |
Ordinary shares subject to dividend 2,125,000 Shares |
Cash dividend of PO.20 per share X_P.30 \
Cash dividend 637.500
‘Seanad wthCamS:aner 572__ Chapter 19
udit of Retained Earnings and
Shareholders’ Equity
Illustrative Audit Case 19-
Detdet, Inc., is a public enterprise whose shares are traded in the over-the.coun,
market. At December 31, 20X7, Detdet had 6,00,000 authorized shares cara
par value ordinary shares, of which 2,000,000 shares were issueq ,”
outstanding. The shareholders’ equity accounts at December 31, 20X7 had
following balances. ~
Ordinary shares P 20,000,000
Additional paid-in capital 7,500,000
Retained earnings 6,470,000
Transactions during 20X8 and other information relating to the shareholdery
equity accounts were as follows:
1. On January 5, 20X8, Detdet issued at P54 per share, 100,000 shares of psp
par value, 9% cumulative convertible preference shares. Each share of
preference is convertible, at the option of the holder, into two ordinary
shares. Detdet had 600,000 authorized preference shares.
On February 1, 20X8, Detdet reacquired 20,000 of its ordinary shares for
P16 per share. Detdet uses the cost method to account for treasury shares,
3. On April 30, 20X8, Detdet sold 500,000 shares (previously unissued) of
P10 par value ordinary shares to the public at P17 per share.
4. On June 18, 20X8, Detdet declared a cash dividend of PI per ordinary
share, payable on July 12, 20X8, to shareholders of record on July 1, 20X8.
5. On November 10, 20X8, Detdet sold 10,000 treasury shares for P21 per
share.
6. On December 14, 20X8, Detdet declared the yearly cash dividend on
preference shares, payable on January 14, 20X9, to shareholders of record
on December 31, 20X8.
7. On January 20, 20X9, before the books were closed for 20X8, Detdet
became aware that the ending inventories at December 31, 20X7, were
understated by P300,000 (the after-tax effect on 20X6 net income was
P210,000). The appropriate correcting entry was recorded the same day.
8. After correcting the beginning inventory, net income for 20X8 vss
4,500,000
v
Required:
I. Prepare a statement of retained earings for Detdet for the year ended
December 31, 20X8. Assume that only single-period financial statemen
for 20X8 are presented
|
Prepare the shareholders’ equity section of Detdet’s statement of financ™
position at December 31, 20X8.
no
‘Seanad wth CamS:aner Audit of Owners’ Equity 573
Solution: Mustrative Audit Case 19-2
Requirement (1)
del Inc.
‘Statement of Retained Earrings
For the Year Ended December 31. 20X8
Balance, December 31. 20X7, as orginally ‘epored P 6.470000
Add Pror penod agiustment for error understating
oo al December 31 20X7 P 300.000 10
ess income tax efiect 90,000 210,000
As restated P 6,680,000
Netincome 4,500,000
11,180,000
Desuct cash ewidenss
On preference shares at requires rei2
[Pe 50 (P50 x 94) x 100 000 snares} P 450,000
On orcinary snares, PY 00 per stare
[P+ x 2,480,000 shares,
{2,090,000 ~ $00,000 - 20 090)] 2.480000 © _.2.930,000
Balance. December 31, 20X8 28,280,000
Requirement (2)
Deitdet, Inc.
‘Statement of Financial Position
‘Shareholders’ Equity Section
December 31, 20X8
Preference shares. PSO per value S% cumulative, convenible 600,000 shaves
‘authonzed, 100,000 shares issued and outstanding P 5.000 000,
Orcinary shares. P10 par valve. 6.000.000 shares authonzed. 2 00.000 snares
ssued are held in treasury 25,000 000
Acdinora’pad-n captal fom preterence shares [100,000 x P4 (P54 - P50)] 400.000
o3torai pad-in caplal fom ordinary shares (Schedule 1! 11,050 000
Retsned earings 5
49,700 000
ary shares « treasury 10 000 shares at cos!
‘P16 x 10,000 (20,000 - 10 000)] 160.000
Total snarehoigers equity P49.540.000
Schedule 4
‘Acdit onal Pad-In Capital From Ordinary Shares
December 31. 20X7 P 7.800.000
ce of 500,000 snares on Apa 30. 20XB
(550.000 x P7 (P17 - P10}} 3 500 200)
From sale of 10 000 treasury snares on November 10. 20XB
(10.000 x P5 (P21 - P16}
Balance Decemaer 31, 20X8
‘Seanad wthCamS:aner $14 Chapter 19
Illustrative Audit Case 17-3: Correcting Entries for Equity Transactions
Pastel, Inc. recently hired new accountant with extensive xperie,
accounting for partnerships. Because of the pressure of the new
accountant was unable to review what he had learned earlier about coy
accounting. During the first month, he made the following entrie
corporation's share capital.
in
Job, the
ion
S for the
May 2 Cash 192,000
Share capital 192,009
(Issued 12,000 shares of P5 par value
ordinary share at P16 per share)
10 Cash 600,000
Share capital
(Issued 10,000 shares of P30 par value
Preference share at P60 per share)
15 Share capital 15,000
Cash
(Purchased 1,000 ordinary shares for the
treasury at P15 per share)
15,000
31 Cash
Share capital
Gain on sale of shares
(Sold 500 treasury shares at P17 per
share)
8,500
5,000
3,500
Required:
On the basis of the exp
janation of each entry, Prepare the entries that should have
been made for the share
capital transactions.
‘Scand wth Comsat Audit of Owners’ Equity 575
Solution: Wlustrative Audit Case 19-3
Date Correct Entry 4 “Adjusting Journal Entry
May 2 | Cash 192,000 ‘JE (4) | Share capetal ~
Share cite! - ‘onary w200
pearary| Pagan capt! in
(52,900 x F5) 3.000 excess cf 93° -
Partin canta n cxsairy shares 1200
ol par
y shares
412,000 x P11). 152,000
May 10 | Cash CO AJE (2) | Share capital 00,000
Frefererce shares Preference shares. 200,003
ue P3} xO) Peid-in capital 00,000
Pacnesoia a
encess of 72" ~
prelerence shares
(10,000 x P30} 300,000
May 15 | Treasury shares 15,000 Treasury shaves... 15.000
Cash ‘Share capatal - 16,000
May 31 Cash asto ‘JE (4) | Share capital 6,000
‘Treasury shares” Ganon sale . 3500
1500 < P15) 7500 Treasury shares 7500
Paden cane 10 Peidan cpt 000
ueasury snares
(500 x P2) 1000
Illustrative Audit Case 19-4: Comprehensive Case ~ Owners’ Equity
‘The Canada Company’s Contributed Capital section of its January 1, 20X7
statement of financial position is as follows:
Preference share capital (6%, P50 par, 8,000
shares authorized, 3,400 share issued and outstanding) P170,000
Ordinary share capital (P10 stated value, 30,000 shares
authorized, 12,000 shares issued and outstanding) 120,000
Preference shares subscribed (800 shares subscribed at
P54 per share) 40,000
‘Additional paid-in capital on preference shares 12,800
Additional paid-in capital on ordinary shares 72,000
Total contributed capital P414,800
‘Seanad wthCamS:aner Dur the company entered into the follo transactions:
Jan.3__ Established a compensatory share option plan for its key e
options vest after a 3-year service period. The estimated fair Value oe
options expected to be exercised is P81,000. be
Mar.6 Received the remaining P40 per share on the subscribed
and issued the shares.
Apr. 24 Sold 300 preference shares at P55 per share.
Preference Shay
May5 Received a subscription down payment of P6 per share on 1
shares. The remaining P11 per share balance is due in 60 days,
June & — Sold 600 ordinary shares at P 17 per share.
:000 ordinay
July3 Received the remaining balance on subscribed ordinary shares and issued the
shares.
Sept. 22 Purchased building by paying P9,000 cash and issuing 800 ordinary shares
and 450 preference shares. Ordinary and preference shares are currently
selling for P19 and P57 per share, respectively.
Oct. 13 Reacquired 900 ordinary shares at P19.50 per share. The company uses the
Cost method to account for treasury shares.
Nov. 14 Issued for P32,000 a combination of 700 ordinary shares and 12% bonds wit
a face value of P20,000. The ordinary share is currently seling for P18 pe
share. No market value exists for the bonds.
Dec. 15 Reissued the 900 treasury shares at P20.50 per share.
Dec. 28 Distributed a P3.00 per share dividend to all Outstanding preference shares
and @ P1.50 per share dividend to all ordinary shares outstanding on this da
(debit Retained Eamings and credit Cash for each dividend).
Dec. 29 Declared a two-for-one share split on the ordinary shares, reducing the sil
value to P4 per share and increasing the authorized shares to 60,000.
Required:
Prepare the contributed capital section of the December 31, 20X7 statement
financial position
‘Seanad wthComS:aner Audit of Owners” Equity S77
Mustrative Audit Case 19-4
~~ Canada Com Company
Statement of Financial Position
Contributed Capital Section
____ December 31, 20X7
Contnbuted Capital
Preference shares (6%, P50 par, 8,000 shares authonzed, 4,950 247,500
___Shares issued and outstanding)
Ordinary shares (P4 stated value, 60,000 shares authorized, 120,800
30.200 shares issued and outstanding)
[Ordinary share opton warrants 27,000
Additional paid-in capital on preference shares" __ 17,450 |
~ Additional paid-in capital on ordinary shares’ 96,000
~_Additvonal paid-in capital from treasury shares |___900 |
~ Additional paid-in capital from share split |___30,200 |
P539,850
___Contnbuted capital
* Preference P 12.800 + P1,500 + P3,150 = P17,450
Ordinary: P72,000 + P7 000 + P4,200 + P7,200 + P5,600 = P96,000
The following entries for the transactions that occurred in year 20X7 support the
above schedule.
20x7
Jan 3 Memo entry: On this date a compensatory share option plan was granted to key
executives. The options vest after a 3-year service period is completed. The
estimated fair value of the options expected to be exercised is P81,000.
Mar.6 Cash (800 x P40) 32,000
Preference Shares Subscribed (800 x P50) 40,000
‘Subscriptions Receivable 32,000
Preference Shares, P50 par 40,000
Apr. 24 Cash (300 x P55) 16,500
Preference Shares, P50 par 15,000
Additional Paid-in Capital on Preference Shares 1,500
May5 — Cash (1,000 x P6) 6,000
Subscriptions Receivable (1,000 x P11) 11,000
Ordinary Shares Subscribed 10,000
Additional Paid-in Capital on Ordinary Shares 7,000
‘Seanad wthCamS:aner 578 Chapter 19
June 6 Cash (600 x P17) 10,200
Ordinary Shares, P10 stated value 800)
Additional Paid-in Capital on Ordinary Shares 4209
July3 Cash (1,000 x P11) 11,000
Ordinary Shares, P10 stated value 10,000
Ordinary Shares, P10 stated value 10,009
Subscriptions Receivable 11,000
Sept 10 Building 49,850
Cash 9.000
Ordinary Shares, P10 stated value 8000
Additional Paid-in Capital on Ordinary Shares
(P9 x 800) 7200
Preference Shares, P50 par 203
Additional Paid-in Capital on Preference Shares
(7 x 450) 3,150
Oct 13 Treasury Shares 17,550
Cash (P19.50 x 900) 47,580
Nov 14 Cash 32,000
Discount on Bonds Payable 600
Bonds Payable, 12% 20,000
Ordinary Shares, P10 stated value 7,000
Additional Paid-in Capital on Ordinary Shares
(P8 x 700) 5,600
Dec 15 Cash (P20.50 x 900) 18,450
Treasury Shares 17,550
Additional Paid-in Capital from Treasury Shares 900
28 Retained Eamings* 14,850
Cash 14,850
* Preference dividends: (3,400 + 800 + 300 + 450) x (0.06 x P50) = P14,060
Dec 28 Retained Earnings* 22,650
Cash 22,650
* Ordinary dividends: (12,000 + 600 + 1,000 + 800 + 700) x P 1.50 = pass
‘Scand wthCamSsaner Anat of Owners’ hg’, $19
Dec 29 Ordinary Shares, P10 stated value (P10 xP15,100) 11,000
Ordinary Shares, Pé stated value (Px 30,00) a
Additional Paid-in Capital from Share Split
Memo entry: The authorized ordinary share is incroased from
30,000 fo 60,000 shares.
31 Compensation Expense (P81,000 + 3) 27,000 27,000
Ordinary Shares Option Warrants
Illustrative Audit Case 19-5: Share Option Plan
ber 30, 20X6, that
ated as available for
of PR a share, The
ETC Company adopted a share option plan on Novem!
provided that 70,000 shares of PS par value share be dest
the granting of options to officers of the corporation ata pr ic
market value was P12 a share on November 30, 20X6
28,000 shares were granted to president
and 13,000 for service
On January 2, 20X7, options to purch:
Dee Posadas — 15,000 for service to be rendered in 20N7
to be rendered in 20X8. Also on that date, options to purchase 14,000. shaves
were granted to vice president Bobbie Leandro -- 7,000 for services te be
rendered in 20X7 and 7,000 for services to be rendered in 20X8. The market
value of the share was P14 a share on January 2, 20X7 The options were
exercisable for a period of one year following the year in which the services were
rendered.
In 20X8, neither the president nor the vice president exercised their options
because the market price of the share was below the exercise price, The market
value of the share was P7 a share on December 31, 20X8, when the options for
20X7 services lapsed.
On December 31, 20X9, both president Posadas and vice president Leandro
exercised their options for 13,000 and 7,000 shares, respectively, when the
market price was P16 a share.
Required:
Prepare the necessary journal entries in 20X6 when the share option plan was
adopted, in 20X7 when options were granted, in 20X8 when options lapsed, and
in 20X9 when options were exercised. The company elects to use the intrinsic
value method
‘Seanad wthCamS:aner $80 Chapter 19
Solution: Mustrative Audit Case 19-5
na
0X6
No journal entry would be recorded at the time the share option plan
adopted. However, a memorandum entry in the journal might be made an
November 30, 20X4, indicating that a share option plan had authorized the future
granting to officers of options to buy 70,000 shares of P5 value ordinary Shares at
P8 a share.
20X7
January 2
No entry
December 31
Compensation Expense 132,000
Paid-in Capital - Share Options 132,000
(To record compensation expense attribute to
20X7 - 22,000 options at P6 (P14- P8))
ho
IS
Pa
les
December 31
Compensation Expense 120,000
Paid-in Capital - Share Options
(To record compensation expense attribute
to 20X8 - 20,000 options at P6 (P14 - P8))
120,000
Paid-in Capital - Share Options 132,000
Paid-in Capital from Expired Share Options ‘320000
(To record lapse of president's and vice
president's options to buy 22,000 shares)
‘Scan wthComS:aner ‘Audit of Owners’ Equity 581
REVIEW QUESTIONS, EXERCISES AND PROBLEMS
Questions
lish the (a) existence or
1. What audit procedures may be employed to estab!
f shareholders’ equity
occurrence and (b) rights and obligations o
balances?
2. List the procedures that are required in vouching dividend payments.
g whether there is proper
3. What procedures are used in determinin,
ity iterns?
statement presentation and disclosure of shareholders’ equi
Exercises
Exercise 1
‘The Earla Company was incorporated July 10, 20X7, with an authorized
capital as follows:
‘ares, Class A, 20,000 shares, par value P25 per share.
1. Ordinary sh
par value PS per share.
2. Ordinary shares, Class B, 100,000 shares,
‘The share capital account in the general ledger is credited with only one item
in the year 20X7. This represents share capital sold for cash, at par, as
follows:
1. Class A, 12,000 shares.
2. Class B, 60,000 shares.
The sum of open certificate stubs in the share certificate books at December
31, 20X7 indicates that 82,000 shares were outstanding.
Required:
a. State possible explanations for
b. State the procedures you woul
discrepancy.
this apparent discrepancy.
Id perform to determine the cause of the
‘Seanad wthCamS:aner 382_ Chapter 19
Exercise 2
You are engaged in doing the audit of a corporation whose Fecords h,
previously been audited by you. The corporation has both an ing’ Ra
transfer agent and a registrar for its share capital. The trans?
maintains the record of shareholders and the registrar checks that there
overissue of shares Signatures ofboth are required to validate ceninen®™
It has been proposed that confirmations be obtained from both the
agent and the registrar as to the shares outstanding at statement of
Position. If such confirmations agree with the books, no additional
be performed as to share capital.
fer
financigy
Work istg
Required:
If you agree that obtaining the confirmations as Suggested would be
sufficient in this case, give the justification for your position. If you donot
agree, state specifically all additional steps you would take and explain you
reason for taking them.
Exercise 3: Correction of Errors;
Statement of Financial Position Preparation
Talisay Corporation presented the following statement of financial positon
for December 31, 20X7:
Assets
Current assets P 30,000
Treasury shares (at market; cost = P15,000) 14,000
Fixed assels 56,000
Total assets P00,000
Liabilities and Shareholders’ Equity
Current liabilities P 20,000
Ordinary shares subsctibed (500 shares) 10,000
Long-term debt 8,000
Total liabilities 38,000
Shareholders’ equity
Ordinary shares (4,000 shares issued) 18,000
10% Preference shares (1,000 shares issued) 12,000
Less: Share subscriptions receivable (4,000)
Reserve for depreciation 16,000
Eamed surplus 20,000
Total iabiliies and shareholders’ equity P90,000
‘Seanad wthComS:aner Audit of Owners’ Equity S83
Your investigation of Talisay Corporation's financial records indicates that
all authorized shares have been either issued or subscribed. In addition. the
par values for the ordinary and preference shares are P2 and P10.
respectively. The treasury share was originally purchased when the market
price was P20 per share. During 20X7. 250 treasury shares were resold for,
P25 per share. A “gain on treasury share transactions” was credited for the
difference between the original cost and the selling price. Furthermore, the
excess of cost over market of the treasury shares at the end of the period was
recognized as an unrealized loss on the 20X7 income statement. You also
discovered that the City of Makati donated land with a market value of
P9,000 to Talisay during 20X7. Share subscriptions receivable are due six
months from December 31. 20X7
Required.
Revise the December 31, 20X7. statement of financial position for Talisay
Corporation as it should be presented according to financial reporting
standards.
Exercise 4: Preparation of Shareholders ' Equity Section
Hope. Inc, a manufacturer of restaurant and kitchen equipment,
incorporated in 20X3. Its share is publicly held. The shareholders’ equity
section of the statement of financial position at September 30, 207, follows.
P2 Cumulative redeemable preference shares (P15 par value;
500,000 shares authorized, 4,000 shares issued and outstanding) P 60,000
Ordinary shares (P10 par value; 1,000,000 shares authorized,
110,000 shares issued and outstanding) 1,100,000
Retained eamings 622,000
Total shareholders’ equity 1.782.000
Hope's share capital transactions during fiscal 20X8 were as follows:
1. On January 2, 8.000 preference shares were issued in exchange for land
with an appraised value of P100,000. Six months ago, 1,000 shares of
Hope preference were exchanged “over the counter" for P14 per share
2. On January 17, 4,500 ordinary shares were sold to Torn Santos at P25
per share,
3. On September 14, Hope purchased dissident shareholder Santos’ 4,500
shares at P27 per share. The shares are to be held as treasury shares and
accounted for at cost. (Santos violently opposed Hope's business strategy
and Hope's management decided to eliminate his interest.)
‘Seanad wthCamS:aner S84 Chapter 19
4. On September 28, Hope contracted with Kathryn Keyes for he sale
10,000 previously unissued shares at P25 per share to bi ated Whey, .
purchase price is fully paid. AU September 30, only 2195099 Nnd ba
Paid. Reyes apreed to pay the balance on or before Noverner 3, sya
Xt,
onding i,
On September 40, Hope redeemed 4,000 preference shares ace
the issue agreement. The shares were redeemed at 18 per share,
A cash dividend of P2 was declared on the
V1, and paid on March 30.
7. A cash dividend of P1.S0 per share
payable October 1
Hope's net income for fiscal year 2018 was P:
preference shares op March
was declared on September 15, ayy
0,000,
quired.
Prepare the shai
cholders' equity section of the statement of financial Position
for the year ended September 30, 20X8, This statement should be supported
by the following schedules, presented in the order given
a. Changes in preference shares account
b. Changes in ordinary shares account
€. Calculation of paid-in capital in excess of par,
d. Changes in retained earnings.
Exercise 5:
: Preparation of Statement of Financial Position
After Quasi-Reorganization
Adverse financial and operating circumstan
arrant that Baguio Company
undergo a quasi reorganization at December 31, 20X8. ‘The following
information may be relevant in accounting for the quasi reorganization
1. Inventory with a cost of P215,000 is currently recorded in the accounts at
its market value of P200,000.
2. Plant assets with a fair market value of P700,000 are currently recorded
at P875,000 net of accumulated depreciation.
3. A creditor agrees to extend the maturity date of a loan for five years,
although interest as originally stated must continue to be paid. .
4. Individual shareholders contribute P600,000 to create additional paid-in
capital to facilitate the reorganization. No new. shares are. issued:
although control of a majority of the company's outstanding share pass®
to the company's creditors,
5
The par value of the ordinary share is reduced from P25 to P14.
‘Seanad wthComS:aner Ait of Owners’ Equity, 388
6. Immediately before the events described above, the shareholders’ equity
section appears as follows:
Ordinary shares (P25 par value; 100,000 shares
authorized and outstanding) 2,500,000
Paid-in capital in excess of par 1,750,000
Retained earnings (deficit) 750,000)
3,300,000
Total shareholders’ equity
Required:
Prepare the shareholders’ equity section of Baguio Compan;
financial position after the quasi-reorganization.
’s statement of
Exercise 6: Determination of Correct Retained Earnings Balance
The Retained Earnings account of Paranaque Company follows:
Date Item Dr. | Cr.
7-01-2017 | Balance [— P 48,500
3-31-2017 | Dividends paid P 20,000
12-31-2017 | Net income for the year 32,400 |
4-01-2018 | Premium on share capital 7 1 ll
6-30-2018 | Gain on sale of treasury shares = | 40,000
9-30-2018 | Dividends declared 30,000
72-31-2018 | Net income for the year 45,100
‘Appraisal increase of land 30,000
Balance 431,000
P.481,000 P.181,100
The corrected balance of Retained Earnings as at December 31, 20X8 should
be:
a. P76,000. b. P106,000. ce. P 131,000. d. None of these
Exercise 7
The A4 Corporation has been operating successfully for several years, It is
authorized to issue 24,000 shares of no-par ordinary share and 6,000 shares
of 8%, P100 par preference share. The Contributed Capital section of its
January 1, 20X7 statement of financial position is as follows:
8% preference shares, P100 par 210,000
Ordinary shares, no par 207,000
Premium on preference shares 18,900
P435,900
‘Seanad wthCamS:aner $86 Chapter 19
Part a. A shareholder has raised the following questions:
1. What is the legal capital of the corporation?
2. At what average price per share has the preference share been issued?
3. How many ordinary shares have been issued (the ordinary share ha been
issued at an average price of P23 per share)?
Part b, The company engaged in the following transactions in 20X7:
Mar. 2 Received a subscription to 400 shares of the 8% preference share. The
subscription price is P122 per share and the contract requires a Pig
share down payment. The remaining balance must be paid within 60 days cy
the share subscrigtion is defaulted. In the case of default, 20% of the
Payment on the defaulted shares is forfeited, and the remainder is retumed
to the defaulting subscribers.
Apt. 3 Sold 900 ordinary shares for P33 per share.
Apr. 13 Issued 400 ordinary shares in exchange for land. The share is currently
selling at P34 per share.
May 1 Received remaining subscription ‘balance (from March 2) owed on 350
pr nce shares and issued the shares.
May 4 Retumed 80% of their down payment to defaulting subscribers and canceled
the related account balances.
June 1 Reacquired 500 ordinary shares at P37 per share. The company uses the
cost method to account for treasury shares.
Oct. 19 Issued for 27,000 a combination of 500 ordinary shares and 100
preference sheres. The ordinary and preference shares are currently selling
for P35 and P125 per share, respectively.
Nov. 16 Reissued the 500 treasury shares at P39 per share.
Dec. 31 Distributed an P8 per share dividend on all preference shares outstanding
and a P2 per share dividend on all ordinary shares outstanding on this dt@
(debit Retained Eamings and credit Cash for each dividend).
Required:
Prepare the contributed capital section of the December 31, 20X7 statemet!
of financial position.
‘Seanad wth ComS:aner Audit of Owners Equity $87
Exercise 8
Partner Corporation's post-closing trial balance at December 31, 20X7 was 25
follows:
L 1 Gast
Accounts payable T [ Pen o0
Accounts receivable [TP 550.090 |
Accumulated depreciation — building and equipment | 1 20000
‘Additional paid-in captal — ordinary shares | I _|
In excess of par value T TTF
From sale of treasury shares | 2
‘Allowance for doubiful accounts [ ma
Bonds payable | [405,000
Building and equipment [1,100,000 | }
Cash | 220,000 |
Ordinary share capital (P 1 par value) | 1_ 150,000
Dividends payable on preference shares — cash | 4.000
Inventories [620,000 | }
Land [320.000 | |
Investment in equity securties (at market) @ FVOCI [285,000 | }
Trading equity secures (at market) [215,000 |
Preference shares (P50 par value) | [500.900 |
Prepaid expenses [__ 40,000 | |
Retained earings | [231,000 |
Treasury shares — ordinary (at cost) [120,000 | 1!
|
Unrealized decrease in value of investment in secunties -OCI|__25,000 |
Totals | P3.615.000 | |
‘At December 31, 20X7 Partner had the following number of ordinary and
preference shares:
Ordinary Preference
Authorized 500,000 50,000
Issued 150,000 10,000
Outstanding 140,000 10,000
The dividends on preference shares are P4 cumulative. In addition, the
preference share has a preference in liquidation of P50 per share.
Required:
Prepare the shareholders’ equity section of Partner's statement of financial
position at December 31, 20X7.
‘Seana wthComS:aner $88 Chapter 19
Problems
Problem 1
On January 1, 20X7. Del-V Company had a retained earnings haley
P206.000. During 2017, the follow ing events occurred: of
1. Treasury shares (ordinary) was acquired at a cost OF PL4.000. The fg,
requires a restriction of retained eamings in an equal amount, The
company reports its retained eamings restrictions ina note tp the
financial statements.
Cash dividends totaling P9.000 and share dividends total
were declared and distributed
3. Net income was P58,000
w
ling P6.000
4. Two thousand shares of callable prefe
retired at a price of P1SO per share. Th
issued at P130 per share.
5. A material error in net income for a previous period was corrected
This error correction decreased retained earnings by P 12,600 after
related income tax credit of P5,400.
ce shares were recalled ang
share had originally been
Required:
|. Prepare a statement of retained earings for the year ended December 3,
20X7,
Prepare a note to disclose the restriction of retained earnings.
Problem 2
RICY Corporation has experienced a net loss for a number of years. On the
advice of the board of directors, a new management team was appointed
Furthermore. the corporation has agreed to a quasi-reoreanization and tothe
revaluation of certain statement of financial Position account balances,
subject to shareholder approval. The RICY statement of financial position ca
December 31, 20X7 contained the following information prior to the
reorganization: |
P 20,000 | Liabilities Pam] |
i and equipment 110,000 | Ordinary shares, P10 par fone,
| Less: Accumulated (30,000) | Additional paid-in capital on 40.00
| depreciation ordinary shares 7
L Retained earnings (deficit u
| Total Liabiities and !
Total Assets P100,000 | Shareholders’ Equit
‘Scan wth Comsat Audit of Owners’ Equity 589
The following information is relevant to the quasi-reorganization as approved
by the shareholders:
1. Property and equipment is determined to have a fair value of P45,000.
2. Current assets contain inventories overstated by P6,000.
3. Current assets contain uncollectible accounts receivable of P3,000.
4.
Par value of ordinary shares is to be reduced to PI per share as approved
by the state of incorporation.
Required: .
1. Prepare journal entries to record the quasi-reorganization. ,
2. Prepare the statement of financial position of RICY Corporation
immediately following the quasi-reorganization. Include a note to
accompany retained earnings.
Problem 3
JTC Company has P80,000 available to pay dividends. It has 2,000 shares of
10%, P100 par, preference shares and 30,000 shares of P10 par ordinary
share outstanding. The preference share is selling for P125 per share and the
ordinary share is selling for P20 per share.
Required:
1. Determine the amount of dividends to be paid to each class of
shareholder for each of the following independent assumptions:
a. Preference share is nonparticipating and noncumulative.
b. Preference share is nonparticipating and cumulative. Preference
dividends are two s at the beginning of the year.
c. Preference share is fully participating and cumulative. Preference
dividends are one year in arrears at the beginning of the year,
d. Preference share is participating up to a maximum of 15% of its par
value and is noncumulati
w
For 1(a), compute the dividend yield on the preference share and the
ordinary share.
‘Seanad wthCamS:aner $90 Chapter 19
