STOCKHOLDERS EQUITY

PROBLEM NO. 1
Alcoy Corporations post-closing trial balance at December 31, 2006 was as
follows:
Alcoy Corporation
Post-Closing Trial Balance
December 31, 2006
Accounts payable
Accounts receivable
Reserve for depreciation
Reserve for doubtful accounts
Premium on common stock
Gain on sale of treasury stock
Bonds payable
Building and equipment
Cash
Cash dividends payable on preferred stock
Common stock (P1 par value)
Inventories
Land
Available-for-sale securities at fair value
Trading securities at fair value
Net unrealized loss on available-for-sale
securities
Preferred stock (P50 par value)
Prepaid expenses
Donated capital
Stock warrants outstanding
Retained earnings
Treasury stock common, at cost
Totals

Debit
P 963,000

1,980,000
396,000

1,116,000
684,000
513,000
387,000
45,000
72,000

324,000
P6,480,000

Credit
P 495,000
360,000
54,000
1,800,000
450,000
720,000

7,200
270,000

900,000
800,000
208,000
415,800
P6,480,000

At December 31, 2006, Alcoy had the following number of common and
preferred shares:
Common
225

Preferred

Authorized
Issued
Outstanding

900,000
270,000
252,000

90,000
18,000
18,000

The dividends on preferred stocks are P0.40 cumulative. In addition, the

preferred stock has a preference in liquidation of P50 per share.
QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Additional paid-in capital
a. P3,213,000
b. P3,258,000

c. P3,050,000
d. P2,600,000

2. Total contributed capital

a. P4,428,000
b. P4,220,000

c. P3,770,000
d. P1,170,000

3. Unappropriated retained earnings

a. P415,800
b. P739,800

c. P91,800
d. P37,800

4. Total stockholders equity

a. P4,266,800
b. P4,519,800

c. P4,888,800
d. P4,474,800

PROBLEM NO. 2
Your audit client, Argao, Inc., is a public enterprise whose shares are
traded in the over-the-counter market. At December 31, 2005, Argao had
3,000,000 authorized shares of P10 par value common stock, of which
1,000,000 shares were issued and outstanding. The stockholders equity
accounts at December 31, 2005 had a following balances.
Common stock
Additional paid-in capital

P10,000,000
3,750,000
226

Retained earnings

3,250,000

Transactions during 2006 and other information

stockholders equity accounts were as follows:

relating

to

the

On January 2, 2006, Argao issued at P54 per share, 50,000 shares of

P50 par value, 9% cumulative convertible preferred stock. Each share
of preferred stock is convertible into two shares of common stock.
Argao had 300,000 authorized shares of preferred stock. The preferred
stock has a liquidation value equal to its par value.

On February 1, 2006, Argao reacquired 10,000 shares of its common

stock for P16 per share.

On April 30, 2006, Argao sold 250,000 shares (previously unissued) of

P10 par value common stock to the public at P17 per share.

On June 15, 2006, Argao declared a cash dividend of P1 per share of

common stock, payable on July 15, 2006, to stockholders of record on
July 1, 2006.

On November 10, 2006, Argao sold 5,000 shares of treasury stock for
P21 per share.

On December 15, 2006, Argao declared the yearly cash dividend on

preferred stock, payable on January 15, 2007, to stockholders of record
on December 31, 2006.

On January 20, 2007, before the books were closed for 2006, Argao
became aware that the ending inventories at December 31, 2005 were
understated by P150,000 (after tax effect on 2005 net income was
P90,000). The appropriate correction entry was recorded the same day.

After correcting the beginning inventory, net income for 2006 was
P2,250,00.

QUESTIONS:

227

Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Additional paid-in capital
a. P5,700,000
b. P5,525,000

c. P5,500,000
d. P5,725,000

2. Unappropriated retained earnings

a. P4,125,000
b. P4,035,000

c. P4,045,000
d. P3,955,000

3. Treasury stock
a. P160,000
b. P 80,000

c. P55,000
d. P50,000

4. Total stockholders equity

a. P22,190,000
b. P24,770,000

c. P24,690,000
d. P24,840,000

5. Book value per share of common stock

a. P17.89
c. P17.71
b. P17.82
d. P15.41

PROBLEM NO. 3
The stockholders equity section of the Asturias Inc. showed the following
data on December 31, 2005: Common stock, P3 par, 300,000 shares
authorized, 250,000 shares issued and outstanding, P750,000; Paid-in
capital in excess of par, P7,050,000; Additional paid-in capital from stock
options, P150,000; Retained earnings, P480,000. The stock options were
granted to key executives and provided them the right to acquire 30,000
shares of common stock at P35 per share. Each option has a fair value of
P5 at the time the options were granted.
The following transactions occurred during 2006:
Feb.

Key executives exercised 4,500 options outstanding at

December 31, 2005. The market price per share was P44 at
228

this time.
Apr.

The company issued bonds of P2,000,000 at par, giving each

P1,000 bond a detachable warrant enabling the holder to
purchase two shares of stock at P40 each for a 1-year period.
The bonds would sell at P996 per P1,000 bond without the
warrant.

July

The company issued rights to stockholders (one right on each

share, exercisable within a 30-day period) permitting holders
to acquire one share at P40 with every 10 rights submitted.
All but 6,000 rights were exercised on July 31, and the
additional stock was issued.

Oct.

All warrants issued in connection with the bonds on April 1

were exercised.

Dec. 1

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

Dec. 31

Net income for 2006 was P250,500.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P777,300
b. P848,700

c. P833,850
d. P850,050

2. Total additional paid-in capital

a. P7,522,200
b. P8,402,800

c. P8,219,650
d. P8,419,450

3. Total contributed capital

a. P8,299,500
b. P9,053,500

c. P9,269,500
d. P9,251,500

229

4. Retained earnings
a. P580,500
b. P858,000

c. P730,500
d. P654,150

5. Total stockholders equity

a. P10,000,000
b. P 9,784,000

c. P9,030,000
d. P9,982,000

PROBLEM NO. 4
Balamban Corporation was authorized at the beginning of 2004 with
540,000 authorized shares of P100, par value common stock. At December
31, 2004, the stockholders equity section of Balamban was as follows:
Common stock, par value P100 per share; authorized
540,000 shares; issued 54,000 shares
Additional paid-in capital
Retained earnings
Total stockholders equity

P5,400,000
540,000
810,000
P6,750,000

On May 10, 2005, Balamban issued 90,000 shares of its common stock for
P10,800,000. A 5% stock dividend was declared on September 30, 2005
and issued on November 10, 2005 to stockholders of record on October 31,
2005. Market value of common stock was P110 per share on declaration
date. The net income of Balamban for the year ended December 31, 2005
was P855,000.
During 2006, Balamban had the following transactions;
Feb. 15

Balamban reacquired 5,400 shares of its common stock for

P95 per share.

May 15

Balamban sold 2,700 shares of its treasury stock for P120

per share.

Jun 30

Issued to stockholders one stock right for each share held to

purchase two additional shares of common stock for P125 per
share. The rights expire on December 31, 2006.
230

Aug. 15

45,000 stock rights were exercised when the market value of

common stock was P130 per share.

Sep. 30

72,000 stock rights were exercised when the market value of

the common stock was P140 per share.

Dec. 01

Balamban declared a cash dividend of P2 per share payable

on January 15, 2007 to stockholders of record on December
31, 2006.

Dec. 15

Balamban retired 1,800 shares of its treasury stock and

reverted them to an unused basis. On this date, the market
value of the common stock was P150 per share.

Dec. 31

Net income for 2006 was P900,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P38,520,000
b. P26,640,000

c. P38,340,000
d. P38,250,000

2. Additional paid-in capital

a. P8,329,500
b. P8,338,500

c. P5,413,500
d. P8,266,500

3. Retained earnings
a. P1,080,000
b. P1,002,600

c. P1,017,000
d. P1,008,000

4. Treasury stock
a. P18,000
b. P90,000

c. P85,500
d. P
0

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PROBLEM NO. 5
Bogo Corporation began operations on January 1, 2006. The company was
authorized to issue 60,000 shares of P10 par value common stock and
120,000 shares of 10%, P100 par value convertible preferred stock.
In connection with your audit of the companys financial statements, you
noted the following transactions involving stockholders equity during 2006:

Jan.

Issued 1,500 shares of common stock to the corporation

promoters in exchange for equipment valued at P510,000 and
services valued at P210,000. The property costs P270,000 3
years ago and was carried on the promoters books at
P150,000.

Jan. 31

Issued 30,000 shares of convertible preferred stock at P150

per share. Each share can be converted to five shares of
common stock. The corporation paid P225,000 to an agent
for selling the shares.

Feb. 15

Sold 9,000 shares of common stock at P390 per share. The

corporation paid issue costs of P75,000.

May 30

Received subscriptions for 12,000 shares of common stock at

P450 per share.

Aug. 30

Issued 2,100 shares of common stock and 4,200 shares of

preferred stock in exchanged for a building with a fair market
value of P1,530,000. The building was originally purchased
for P1,140,000 by the investors and has a book value of
P660,000. In addition, 1,800 shares of common stock were
sold for P720,000 cash.

Nov. 15

Payments in full for half of the subscriptions and partial

payments for the rest of the subscriptions were received.
Total cash received was P4,200,000. Shares of stock were
issued for the fully paid subscriptions.
The balance is
collectible next year.
232

Dec.

Dec. 31

Declared a cash dividend of P10 per share on preferred stock,

payable on December 31 to stockholders of record on
December 15, and P20 per share cash dividend on common
stock, payable on January 15, 2007 to stockholders of record
on December 15.
Paid the preferred stock dividend.
Net income for the first year of operations was P1,800,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Common stock
a. P204,000
b. P144,000

c. P264,000
d. P186,000

2. Paid-in capital in excess of par value of preferred stock

a. P1,500,000
c. P1,275,000
b. P1,545,000
d. P1,860,000
3. Paid-in capital in excess of par value of common stock
a. P 8,211,000
c. P11,121,000
b. P10,851,000
d. P10,032,000
4. Retained earnings
a. P1,050,000
b. P1,170,000

c. P 930,000
d. P1,458,000

5. Total stockholders equity

a. P17,295,000
b. P16,950,000

c. P15,810,000
d. P17,010,000

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PROBLEM NO. 6
The Borbon Corporation has requested you to audit its financial statements
for the year 2006. During your audit, Borbon presented to you its balance
sheet as of December 31, 2005 containing the following capital section:
Preferred stock P10 par; 60,000 shares authorized and
issued, of which 6,000 are treasury shares costing
P90,000 and shown as an asset
Common stock, par value P4; 600,000 shares authorized,
of which 450,000 are issued and outstanding
Additional paid in capital (P5 per share on preferred stock
issued in 2000)
Allowance for doubtful accounts receivable
Reserve for depreciation
Reserve for fire insurance
Retained earnings
Total stockholders equity

P 600,000
1,800,000
300,000
12,000
840,000
198,000
2,250,000
P6,000,000

Additional information:
1) Of the preferred stock, 3,000 shares were sold for P18 per share on
August 30, 2006. Borbon credited the proceeds to the Preferred Stock
account. The treasury shares as of December 31, 2005 were acquired
in one purchase in 2005.
2) The preferred stock carries an annual dividend of P1 per share. The
dividend is cumulative. As of December 31, 2005, unpaid cumulative
dividends amounted to P5 per share. The entire accumulation was
liquidated in June, 2006, by issuing to the preferred stockholders
54,000 shares of common stock.
3) A cash dividend of P1 per share was declared on December 1, 2006 to
preferred stockholders of record December 15, 2006. The dividend is
payable on January 15, 2007.

234

4) At December 31, 2006, the Allowance for Doubtful Accounts Receivable

and Reserve for Depreciation had balances of P25,000 and P1,050,000,
respectively.
5) On March 1, 2006, the Reserve for Fire Insurance was increased by
P60,000; Retained Earnings was debited.
6) On December 31, 2006, the Reserve for Fire Insurance was decreased
by P30,000, which represents the carrying value of a machine
destroyed by fire on that date. Estimated fire cleanup costs of P6,000
does not appear on the records.
7) The December 31, 2005 Retained Earnings consists of the following:
Donated land from a stockholder
(Market value on date of donation)
Gains from treasury stock transactions
Earnings retained in business

P450,000
51,000
1,749,000
P2,250,000

8) Net income for the year ended December 31, 2006 was P1,297,500 per
companys records.
QUESTIONS:
Based on the above and the result of your audit, determine the adjusted
balances of the following as of December 31, 2006.
(Disregard tax
implications)
1. Total Additional paid-in capital
a. P414,000
b. P804,000

c. P810,000
d. P864,000

2. Retained earnings - Appropriated

a. P258,000
b. P303,000

c. P228,000
d. P
0

3. Retained earnings - Unappropriated

235

a. P2,677,500
b. P2,626,500

c. P2,578,500
d. P2,623,500

4. Treasury stock
a. P45,000
b. P90,000

c. P36,000
d. P
0

5. Total stockholders equity

a. P3,700,500
b. P5,812,500

c. P6,316,500
d. P6,319,500

PROBLEM NO. 7
The stockholders equity of Cordova Corporation showed the following data
on December 31, 2005:
12% preferred stock, P30 par, 135,000 shares
issued and outstanding
Common stock, P50 par, 180,000 shares issued
and outstanding
Premium on preferred stock
Premium on common stock
Retained earnings

P4,050,000
9,000,000
1,080,000
3,240,000
1,395,000

The 2006 transactions of the company affecting its stockholders equity are
summarized chronologically as follows:
1.

Issued 27,000 shares of preferred stock at P40.

2.

Issued 94,500 shares of common stock at P70.

3.

Retired 5,400 shares of preferred stock at P45.

4.

Purchased 13,500 shares of its common stock at P80.

5.

Split common stock two for one (par value reduce to P25).

6.

Reissued 13,500 shares of treasury stock common at P50.

236

7.

Stockholders donated to the company 9,000 shares of common stock

when shares had a market price of P52. One half of these shares were
subsequently issued for P54.

8.

Dividends were paid at the end of the calendar year on the common
stock at P2 per share and on the preferred stock at the preferred rate.

9.

Net income for the year was P2,520,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P4,617,000
b. P4,698,000

c. P4,968,000
d. P4,860,000

2. Common stock
a. P15,615,000
b. P13,500,000

c. P13,968,000
d. P13,725,000

3. Additional paid-in capital

a. P6,777,000
b. P6,858,000

c. P6,679,800
d. P6,814,800

4. Unappropriated retained earnings

a. P1,749,240
b. P2,251,440

c. P1,711,440
d. P1,684,440

5. Total stockholders equity

a. P26,949,240
b. P26,922,240

c. P26,958,960
d. P26,940,240

PROBLEM NO. 8
You were able to gather the following information in connection with your
audit of the stockholders equity section of the balance sheet of Liloan, Inc.
237

The company is a manufacturer of school and office equipment. As of

December 31, 2005, the stockholders equity of the company is presented
below:
Cumulative preferred stock (P15 par value; 100,000
shares authorized, 12,000 shares issued and
outstanding)
Common stock (P10 par value; 1,000,000 shares
authorized, 330,000 shares issued and outstanding
Retained earnings

P 180,000
3,300,000
1,866,000
P5,346,000

Liloans capital stock transactions during 2006 were as follows:

a. On January 31, 24,000 preferred shares were issued in exchange for
land with a fair value of P300,000. Six months ago, 2,000 shares of
Liloans preferred stock were exchanged over the counter for P14 per
share.
b. On February 14, 13,500 shares of common stock were sold to Ms. P.
Saway at P25 per share.
c.

On December 14, Liloan purchased dissident stockholder Saways

13,500 shares at P27 per share. The shares are to be held as
treasury shares. (Saway violently opposed Liloan business strategy
and Liloans management decided to eliminate her interest.)

d. On December 20, Liloan contracted with Ms. Buti for the sale of
30,000 previously unissued shares at P25 per share to be issued
when the purchase price is fully paid. At December 31, only
P585,000 had been paid. Buti agreed to pay the balance on or before
January 31, 2007.
e.

On December 31, Liloan retired 12,000 preferred shares at P18 per

share.

f.

A cash dividend of P2 per share was declared on the preferred shares

on October 15, and paid on November 15.

238

g.

A cash dividend of P1.50 per share was declared on December 15,

and payable on January 15, 2007.

h. Liloans net income for the year 2006 was P750,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as
of December 31, 2006:
1. Preferred stock
a. P360,000
b. P300,000

c. P264,000
d. P324,000

2. Common stock
a. P3,435,000
b. P4,020,000

c. P3,735,000
d. P3,637,500

3. Additional paid-in capital

a. P592,500
b. P202,500

c. P625,500
d. P142,500

4. Total retained earnings

a. P1,977,000
b. P1,648,500

c. P2,013,000
d. P2,037,000

5. Total stockholders equity

a. P6,171,000
b. P6,036,000

c. P6,396,000
d. P6,336,000

PROBLEM NO. 9
In connection with your audit of the Poro Company, you were asked to
prepare comparative data from the companys inception to the present. The
following were gathered during your audit:

239

a.

Poro Companys charter became effective on January 2, 2002, when

80,000 shares of P10 common and 40,000 shares of 5% cumulative,
nonparticipating, preferred stock were issued. The common stock was
sold at P12 per share and the preferred stock was sold at its par value
of P100 per share.

b.

Poro was unable to pay preferred dividends at the end of its first year.
The owners of the preferred stock agreed to accept 2 shares of common
stock for every 50 shares of preferred stock owned in discharge of the
preferred dividends due on December 31, 2002. The shares were
issued on January 2, 2003. The fair market value was P30 per share
for common on the date of issue.

c.

Poro Company acquired all outstanding stock of Pos Corporation on

May 1, 2004, in exchange for 40,000 shares of Poro common stock.

d.

Poro split its common stock 3 for 2 on January 1, 2005, and 2 for 1 on
January 1, 2006.

e.

Poro offered to convert 20% of the preferred stock to common stock on

the basis of 2 shares of common for 1 share of preferred. The offer was
accepted, and the conversion was made on July 1, 2006.

f.

No cash dividends were declared on common stock until December 31,

2004. Cash dividends per share on common stock were declared and
paid as follows:
2004
2005
2006

July 1
P3.00
P2.50

December 31
P4.00
P5.00
P2.00

QUESTIONS:
Based on the above and the result of your audit, determine the following:
1. Outstanding number of common shares as of December 31, 2006
a. 364,800
c. 372,800
b. 684,800
d. 380,800

240

2. Outstanding number of preferred shares as of December 31, 2006

a. 40,000
c. 32,000
b. 24,000
d. 96,000
3. Amount of cash dividends declared and paid to common stockholders
for the year 2005
a. P972,800
c. P1,459,200
b. P608,000
d. P1,981,440
4. Amount of cash dividends declared and paid to common stockholders
for the year 2006
a. P3,911,040
c. P1,713,600
b. P3,041,600
d. P1,673,600
PROBLEM NO. 10
You were able to gather the following information in connection with your
audit of Sogod Corporation:

On January 1, 2004, Sogod Corporation granted stock options to

officers and key employees for the purchase of 30,000 shares of the
companys P10 par value common stock at P25 per share. The options
are exercisable within a 5-year period beginning January 1, 2006, by
grantees still in the employ of the company, and expiring December 31,
2010. The service period for this award is 2 years. The fair value
option pricing model determined total compensation expense to be
P525,000. The stock was selling at P35 at the time the options were
granted.

On April 1, 2005, 3,000 options were terminated when the employees

resigned from the company. The market value of common stock was
P35 per share on this date.

On March 31, 2006, 18,000 option shares were exercised when the
market value of common stock was P40 per share.

QUESTIONS:
Based on the above and the result of your audit, determine the following:
241

1. Compensation expense for 2004

a. P525,000
b. P262,500

c. P236,250
d. P150,000

2. Net compensation expense for 2005

a. P262,500
b. P210,000

c. P120,000
d. P150,000

3. The exercise of the 18,000 options will result in a credit to APIC-excess

over par of
a. P585,000
c. P270,000
b. P620,000
d. P450,000
4. APIC from stock options as of December 31, 2006
a. P
0
c. P472,500
b. P90,000
d. P157,500

PROBLEM NO. 7
On December 31, 2011, La Cost Company's financial statements
showed the following balances related to its securities accounts:
Trading securities
Available-for-sale securities (AFS)

P1,477,500
1,180,000

La Cost's securities portfolio on December 31, 2011, was made

up of the following securities:
Classification
Trading
Trading
Trading
Available
forsale

242

Cost

Fair Value

750,000

762,500

550,000

528,250

250,000

186,750

590,000

630,000

490,000

550,000

Security
10,000 Yeye
Bonel Corp.
shares
8,000 TotoyBibo
Inc. shares
10% Mayniladlad
bonds
10,000 Bulaklak
Inc. shares
20,000 Jumbo
Inc. shares
During 2012, the following transactions took place:
Mar. 1

Purchased 3,000 additional shares of YeyeBonel

Corp. for P229,500, classified as held for trading.
Apr. 15 Sold 4,000 shares of TotoyBibo Inc. for P69 per share.
May 4
Sold 4,000 shares of Bulaklak Inc. for P62 pershare.
Oct. 30
Purchased 15,000 shares of Pasaway Co. forP832,500,
classified as held for trading.
The fair values of the shares and bonds on December 31, 2012,
are as follows:
YeyeBonel Corp. shares
P76.60 per share
TotoyBibo Inc. shares
P68.50 per share
Pasaway Co. shares
P55.25 per share
Mayniladlad water bonds
P205,550
Bulaklak Inc. shares
P61.00 per share
Jumbo Unlimited Inc. shares
P27.00 per share
QUESTIONS:
Based on the above and the result of your audit, determine the
following:
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31.Gain or loss on sale of 4,000 TotoyBibo Inc. shares on April

15, 2012
a. P1,000 gain
c. P 1,875gain
b.. P1,000 loss
d. P 1,875 loss
32. Net realized gain or loss on sale of 4,000 Bulaklak Inc. shares
on May 4, 2012
a. P12,000 gain
c. P12,000 loss
b. P 4,000 gain
d. P 4,000 loss
33.Carrying amount of Trading Securities as of December 31,
2012
a. P2,337,000
c. P2,304,100
b. P2,287,800
d. P2,297,400
34. Carrying amount of Available for Sale Securities as of
December 31, 2012
a. P844,000
c. P906,000
b. P806,000
d. P944,000
35. In 2012, what amount of unrealized gain or loss should be
shown as component of income and equity?
Income
Equity
a.
P28,725 gain
P62,000 gain
b.
P28,725gain
P22,000 loss
c.
P32,900 loss
P122,000 loss
d.
P39,600 gain
P78.000 gain

244