PROBLEM 1:
With your representation, as Managing Partner of the Sy Pee Ey & Co., your was engaged in the audit of the Fortitude Company at the close of the
company’s first year of operations on December 31, 2015. The company closed its books prior to the time you year-end fieldwork.
Your audit and review showed the following shareholder’s equity accounts in the general ledger:
Share Capital Retained Earnings P/L Summary
08/30 CD P550,000 01/02 CR P6,000,000 12/29 J P545,000 12/01 CR P287,500 12/31 J P26,000,000 12/31 P30,000,000
12/29 J 545,000 12/31 J 4,000,000 12/31 J 4,000,000
Based on the other working papers submitted by your audit staff, the following additional information was forwarded:
From the Articles of Incorporation of Fortitude Company:
Authorized share capital – 150,000 shares
Par value per share – P100
From the board of directors’ minutes of meetings, the following resolutions were extracted:
01/02 – authorized the issuance of 50,000 shares at P120 per share.
08/30 – authorized the acquisition of 5,000 shares at P110 per share.
12/01 – authorized the re-issuance of 2,500 treasury shares at P115 per share.
12/29 – declared a 10% share dividend, payable January 31, 2016 to shareholders on record as of January 16, 2016. The market value of the
share on December 29, 2015 was P130 per share.
REQUIRED:
1. Prepare adjusting entries as of December 31, 2015.
2. Based on the above and the result of your audit, determine the adjusted balances of the following as of December 31, 2015.
a. Share capital
b. Share premium
c. Total retained earnings
d. Total shareholders’ equity
PROBLEM 2:
The Retained Earnings account of Endurance Company shows the following debits and credits for the current year:
RETAINED EARNINGS
Date Debit Credit Balance
Jan 1 Balance P726,400
a. Loss from fire P5,250 721,150
b. Write- off of goodwill 52,500 668,650
c. Share dividends distributed 140,000 528,650
d. Loss on sale of equipment 48,300 480,350
e. Officers’ compensation related to income of prior
periods- accrual overlooked 325,500 154,850
f. Loss on retirement of preference shares at more than
Issue price 70,000 84,850
g. Paid in capital in excess of par 129,500 214,350
h. Share issuance expenses (related to letter g) 10,000 204,350
i. Share subscription defaults 8,470 212,820
j. Gain on retirement of preference shares at less than
Issue price 25,900 238,720
k. Gain on early retirement of bonds 15,050 253,770
l. Gain on life insurance policy settlement 10,500 264,270
m. Correction of a fundamental error 50,050 314,320
n. Effect of change in accounting principle form FIFO to
Weighted average 100,000 414,320
o. Dividends payable 25,000 389,320
p. Loss on sale of treasury shares 20,000 369,320
q. Proceeds from sale of donated shares 40,000 409,320
r. Appraisal increase in land 250,000 659,320
s. Appropriated for property acquisition 100,000 559,320
REQUIRED:
1. Prepare adjusting entries to correct the Retained Earnings account.
2. Determine the correct amount of Retained Earnings account.
PROBLEM 3:
Reliance Corporation was organized on January 1, 2013, and began operations immediately. Unfortunately, the company hired an incompetent
bookkeeper. For the years 2013 through 2015, the bookkeeper presented an annual balance sheet that reported only one amount for shareholders’
equity: 2013, P1,377,000; 2014, P1,566,000 and 2015, P1,850,000. Also, the condensed income statement reported as follows: 2013, net loss,
P175,00; 2014, net profit, P220,000; and 2015, net profit, P409,300 (cumulative earnings of P454,300). Based on the P354,300, the president has
recommended to the board of directors that a cash dividend of P450,000 be declared and paid during January 2016. The outside director on the board
has objected on the basis that the company’s financial statements contain major errors (there has never been an audit). You have been engaged to
clarify the situation. The single shareholders’ equity account, provided by the bookkeeper, appeared as follows:
Review: Auditing Problems Page 1
Shareholders’ Equity
2013 Share issue costs P13,000 2013 Ordinary shares, par P5
2013 Net loss 175,000 200,000 shares issued P1,600,000
2014 Bought 1,000 shares from 2014 Net profit (including P100,000
An unhappy shareholder Ekis 7,000 land write-up based on
Depreciation expense* president’s estimate) 220,000
(2013, P15,000; 2014, P17,000; 2014 Ordinary shares, 2,000
2015, P23,000) 55,000 shares issued 18,000
Miscellaneous expense* 2015 Sold 300 of the Ekis shares 2,700
(2013, P20,000; 2014, P25,000;
2015, P5,000) 50,000
2015 Cash loan to the company
President 100,000 2015 Net Profit 409,300
P400,000 P2,250,000
*Recorded as expense but not shown on the income statement.
REQUIRED:
Based on the concerns of the outside director, you must address the following questions:
1. What is the adjusted balance of retained earnings as of December 31, 2015?
2. What entry is necessary (a) to close the above single shareholders’ equity account and (b) to record the various components of
shareholders’ equity in separate accounts?
3. What is the adjusted total equity as of December 31, 2015?
PROBLEM 4:
Hawks Corporation was incorporated in 2014. During 2014, the company issued 100,000 shares of P1 par value ordinary shares for P27 per share.
During 2014, Hawks Corporation had a profit of P250,000 and paid dividends of P28,000.
During 2015, the company had the following transactions.
1/2 Issued 10,000 shares of P100 par value cumulative preference shares at par. The preference shares are convertible into five ordinary shares
and had a dividend rate of 6%.
3/1 issued 3,000 ordinary shares for legal service performed. The value of the legal services was P100,000. The shares are actively traded on a
stock exchange and valued on 3/1 at P32 per share.
7/1 issued 40,000 ordinary shares for P42 per share.
10/1 Repurchased 16,000 treasury shares for P34 per share.
12/1 Sold 3,000 treasury shares for P29 per share.
12/30 Declared and paid a dividend of P0.20 per share on ordinary shares and a 6% dividend on the preference shares.
During 2015 Hawks Corporation had a profit of P380,000.
Based on the above and the result of you audit, determine the following:
1. Total share premium as of December 31, 2015
a. P4,333,000 c. P4,337,000
b. 1,733,000 d. 4,348,000
2. Total retained earnings as of December 31, 2015
a. P516,000 c. P602,000
b. 501,000 d. 279,000
3. Total equity as of December 31, 2015
a. P5,621,000 c. P5,535,000
b. 5,539,000 d. 5,550,000
4. Basic earnings per share for the year 2015
a. P2.11 c. P3.20
b. 1.60 d. 2.69
5. Diluted earnings per share for the year 2015
a. P1.90 c. P2.11
b. 1.48 d. 2.25
Review: Auditing Problems Page 2
