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STOCKHOLDERS’ EQUITY
The following table gives you an overview of a corporation’s equity accounts that need to be evaluated and analyzed in
the conduct of the audit of equity transactions and balances.

Minimum line items Specific accounts/transactions/considerations

Share capital Ordinary share capital

Preference share capital:
 Redeemable preference shares
 Convertible preference shares
Subscribed ordinary/preference share capital
Minus Subscriptions receivable if collectible beyond one year from the balance
sheet date.

Reserves Share premium reserve

Appropriation reserve (Retained Earnings Appropriated)
Other Comprehensive Income (OCI) reserve:
 Cumulative balance of unrealized gain or loss on investment in equity
instruments measured at FVTOCI.
 Cumulative balance of gain or loss from translating the financial
statements of a foreign operation.
 Unrealized balance of the revaluation surplus account.
 Cumulative balance of unrealized gain or loss from derivative contracts
designated as cash flow hedge.
 Cumulative balance of the remeasurement gains and losses in a defined
benefit obligation.
 Cumulative balance of gain or loss attributable to credit risk of a financial
liability designated at FVTPL.
Donated capital from shareholders

Retained Earnings (deficit) Net income or loss for the period

Prior period errors
Dividends declared and paid to shareholders:
 Cash dividends
 Property dividends
 Liability dividends in the form of bond and scrip
 Stock dividends or bonus issue
- Less than 20%
- 20% or more
- Fractional stock dividends
 Treasury shares as dividend
Special cases:
1. Capital or liquidating dividends
2. Dividends out of a redeemable preference share
Effect of change in accounting policy (retroactive application)
Appropriation of retained earnings

Treasury shares Special Considerations:

 Reissuance
1. At cost
2. At more than cost
3. At below cost
 Retirement
 Donated shares
 Treasury share subterfuge

Problem 1:

As the newly appointed auditor in 2015 for IRVING Company, you have analyzed the company’s “Share
Premium” account. The following is a summary of the account of the account since the inception of Irving Company.

Debits Credits
Cash dividends- preference shares P 160,000
Cash dividends- ordinary shares 195,000
Excess of amount paid in over par value of ordinary shares P 375,000
Net income 500,000
Gain on early extinguishment of debt 42,000
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Treasury preference shares; issued and reacquired at par 90,000

Loss on litigation 75,000
Correction of a prior period error 23,000
P 543,000 P 917,000
Credit balance of share premium account 374,000
P 917,000 P 917,000
Requirements:

1. What is Irving’s correct net income for 2015?

a. P500,000 c. P444,000
b. P467,000 d P477,000
.

2. What is the correct retained earnings balance (before appropriation for treasury shares) as at
the end of the current year?

a. P444,000 c. P89,000
b. P135,000 d P112,000
.

3. What is the correct share premium balance as at the end of the current year?
a. P554,000 c. P781,000
b. P600,000 d P375,000
.

Problem 2:
CURRY Company is authorized to issue 200,000 of P10 par value ordinary shares, and 60,000 of 6% cumulative and
nonparticipating preference shares, par value P100 per share. The company engaged in the following share capital
transactions through December 31, 2015:
a) 50,000 ordinary share were issued for P650,000 and 20,000 preference shares for machinery valued at
P2,600,000.
b) Subscriptions for 9,000 ordinary shares have been taken, and 40% of the subscription price of P18 per share has
been collected. The shares will be issued upon collection of the subscription price in full.
c) 2,000 treasury ordinary shares have been purchased for P12 and accounted for under the cost method.

The post-closing retained earnings balance at December 31, 2015 is P420,000.

Requirements:
1. What is the total shareholders’ equity at December 31, 2015?
a. P3,714,800 c. P3,638,800
b. P3,710,800 d P3,110,800
.

2. Prepare adjusting journal entries as of December 31, 2015.

Problem 3:
LEBRON Company recently hired a new accountant with very limited experience in corporation accounting.
During the first month, he made the following entries for the corporation’s share capital.

Jan 2 Cash 200,000

Share capital 200,000
Issued 10,000 of P5 par value ordinary shares at
P20 per share.

10 Cash 600,000
Share capital 600,000
Issued 15,000 of P30 par value preference shares at
P40 per share

15 Share Capital 8,000

Cash 8,000
Purchased 1,000 ordinary shares for the treasury
at P8 per share

31 Cash 1,000
Loss on sale of share capital 1,500
Share capital 2,500
Sold 500 treasury shares at P2 per share

Requirement: Prepare necessary correcting entries.

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Problem 4:
The shareholders’ equity of KOBE Company as of December 31, 2014, was as follows:

Ordinary shares, P10 par, authorized 300,000 shares; 250,000 shares issued and P2,500,000
outstanding
Share premium- issuance 3,500,000
Retained earnings 1,740,000

On June 1, 2015, Kobe reacquired 40,000 ordinary shares at P40. The following transactions occurred in 2015
with regard to these shares.
July 1 Sold 15,000 shares at P48.
Aug 1 Sold 19,000 shares at P27.
Sept 1 Retired 1,000 shares.

The following entries were made by the company’s accountant to record the preceding transactions.

2015
June 1 Treasury shares 1,600,000
Cash 1,600,000

July 1 Cash 720,000

Treasury shares 720,000

Aug 1 Cash 513,000

Treasury shares 513,000

Sept 1 Ordinary shares 10,000

Treasury shares 10,000

Kobe’s net income for 2015 was P135,000.

Requirements:
1. Prepare adjusting journal entries as of December 31, 2015.

2. Correct balance of treasury shares.

a. P160,000 c. P210,000
b. P190,000 d P200,000
.

3. Correct balance of ordinary shares.

a. P2,490,000 c. P2,460,000
b. P2,500,000 d P2,210,000
.

4. Correct balance of share premium-issuance.

a. P3,486,000 c. P3,620,000
b. P3,500,000 d P3,606,000
.

5. Correct balance of share premium- treasury shares.

a. P120,000 c. P240,000
b. P0 d P710,000
.

6. Retained earnings (before appropriation for treasury shares)

a. P1,732,000 c. P1,597,000
b. P1,859,000 d P1,718,000
.

Problem 5:
The shareholders’ equity section of CAVS Corporation’s statement of financial position as of December 31,
2014, is as follows:
Ordinary share capital (P5 par, 250,000 shares authorized, 137,500 issued P687,500
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and outstanding)
Share premium 275,000
Total paid-in capital P962,500
Unappropriated retained earnings P667,500
Appropriated retained earnings 250,000
Total retained earnings 917,500
Total shareholders’ equity P1,880,000

Cavs Corporation had the following shareholders’ equity transactions during 2015:
Jan 15 Completed the building renovation for which P250,000 of retained earnings had been
restricted. Paid the contractor P242,500, all of which is capitalized.

Mar 3 Issued 50,000 additional ordinary shares for P8 per share.

May 18 Declared a dividend of P1.50 per share to be paid on July 31, 2015, to shareholders of record
on June 30, 2014.

June 19 Approved additional building renovation to be funded internally. The estimated cost of the
project is P200,000, and retained earnings are to be restricted for that amount.

July 31 Paid the dividend.

Dec 31 Declared a property dividend to be paid on January 10, 2016 to shareholders of record on
January 5, 2016. The dividend is to consist of equipment with a carrying value of P150,000.
The equipment’s fair value at December 31, 2015, is P157,500.

Dec 31 Reported P442,500 of net income on December 31, 2015 income statement.
Determine the following:
1. The balance in ordinary share capital account at December 31, 2015, should be
a. P1,095,000 c. P937,500
b. P1,087,500 d P687,500
.

2. The balance in the share premium account at December 31, 2015 should be
a. P425,000 c. P275,000
b. P125,000 d P260,000
.

3. The balance in the unappropriated retained earnings account at December 31, 2015 should be
a. P921,250 c. P200,000
b. P713,750 d P721,250
.

4. The total shareholders’ equity at December 31, 2015 should be

a. P2,233,750 c. P2,083,750
b. P2,283,750 d P2,371,250
.

Problem 6:
You have been assigned to the audit of Warriors Company, a manufacturing company. You have been asked to
summarize the transactions for the year ended December 31, 2015, affecting shareholders’ equity and other related
accounts. The shareholders’ equity section of Warrior’s December 31, 2014, statement of financial position follows:
Ordinary share capital, P2 par value, 1,000,000 share authorized, 180,000 shares
issued, 177,580 shares outstanding P 360,000
Share premium-issuance 3,640,000
Share premium-treasury shares 45,000
Retained earnings 649,378
Cost of 2,420 treasury shares (145,200)
Total shareholders; equity P4,549,178

You have extracted the following information from the accounting records and audit working papers.

2015
Jan 15 Warriors reissued 1,300 treasury shares for P40 per share. The 2,420 treasury shares on hand at December
31, 2014, were purchased in one block in 2013.

Feb 1 Sold 180, P1,000, 9% bonds due February 1, 2024 at 103 with one detachable share warrant attached to
each bond. Interest is payable annually on February 1. The fair market value of the bonds without warrants
is 95. The detachable warrants have a fair value of P50 each and expire on February 1, 2016. Each warrant
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entitles the holder to purchase 10 ordinary shares at P40 per share.

Mar 6 2,800 ordinary shares were subscribed for at P44 per share. 40% of the subscription was collected.

20 The balance due on 2,400 shares was received and those shares were issued.

Nov 1 There were 110 share warrants detached from the bonds and exercised.

Warrior’s net income for 2015 is P950,000.

Determine the following balances as of December 31, 2015.

1. Ordinary share capital
a. P364,800 c. P372,600
b. P375,800 d P367,000
.

2. Share premium- issuance

a. P3,827,200 c. P1,597,000
b. P3,808,200 d P3,791,400
.

3. Share premium-treasury shares

a. P19,000 c. P187,200
b. P45,000 d P192,800
.

4. Retained earnings (before appropriation for treasury shares)

a. P649,378 c. P1,599,378
b. P1,573,378 d P1,454,178
.

5. Treasury shares
a. P67,200 c. P93,200
b. P145,200 d P142,600
.

6. Total shareholders’ equity

a. P5,722,218 c. P5,720,223
b. P5,716,618 d P5,717,088
.

Problem 7:
Mavericks Company was formed was formed on July 1, 2013. It was authorized to issue 600,000 shares of P10 par
value ordinary shares and 200,000 shares of 8 percent P25 par value, cumulative and nonparticipating preference shares.
Mavericks Company has a July 1 – June 30 fiscal year.

The following information relates to the shareholders’ equity accounts of Mavericks Company:

Ordinary shares
Prior to the 2014-2015 fiscal year, Mavericks Company had 220,000 of outstanding ordinary shares issued as follows:
1. 190,000 shares were issued for cash on July 1, 2012, at P31 per share.
2. On July 24, 2012, 10,000 shares were exchanged to a plot of land which cost the seller P140,000 in 2006 and
had an estimated market value of P440,000 on July 24, 2012.
3. 20,000 shares were issued on March 1, 2014; the shares had been subscribed for P42 per share on October 31,
2013.

During the 2014-2015 fiscal year, the following transactions regarding ordinary shares took place:

2014
Oct 1 4,000 shares were issued for cash at P46 per share.
Nov 30 Mavericks purchased 4,000 of its own ordinary shares in the open market at P39 per share.
Dec 15 Mavericks declared a 5% stock dividend for shareholders of record on January 15, 2015, to be issued on
January 31, 2015. Mavericks was having a liquidity problem and could not afford a cash dividend at the
time. Mavericks’ ordinary shares were selling at P52 per share on December 15, 2014.

2015
June Mavericks sold 1,000 of its own ordinary shares that it had purchased on November 30, 2014 for
20 P42,000.
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Preference Shares
Mavericks issued 100,000 preference shares at P44 per share on July 1, 2013.

Cash Dividends
Mavericks has followed a schedule of declaring cash dividends in December and June with payment being made to
shareholders of record in the following month. The cash dividends which have been declared since inception of the
company through June 30, 2015 are shown below:
Declaration Date Ordinary Shares Preference Shares
12/15/13 P0.30 per share P1.00 per share
06/15/14 P0.30 per share P1.00 per share
12/15/14 --- P1.00 per share

No cash dividends were declared during June 2015 due to the company’s liquidity problems.

Retained Earnings
as of June 30, 2014, Mavericks retained earnings account had a balance of P1,380,000. For the fiscal year ending
June 30, 2015, Mavericks reported net income of P80,000.

In March 2014, Mavericks received a term loan from JST National Bank. The bank requires Mavericks to establish a
sinking fund and restrict retained earnings for an amount equal to the sinking fund deposit. The annual sinking fund
payment of P100,000 is due on April 30 each year; the first payment was made on schedule on April 30, 2015.

1. What is the ordinary share capital account balance at June 3, 2015?

a. P2,350,000 c. P2,510,000
b. P2,320,000 d P2,500,000
.

2. The total share premium-ordinary shares at June 30, 2015, is

a. P5,435,000 c. P4,970,000
b. P5,579,000 d P5,693,000
.

3. The unappropriated retained earnings at June 30, 2015 should be

a. P788,000 c. P217,000
b. P571,000 d P1,033,000
.

4. The total number of ordinary shares issued and outstanding at June 30, 2015 should be
a. P248,000 c. P232,000
b. P251,000 d P235,000
.

5. The total shareholders’ equity at June 30, 2015 should be

a. P13,117,000 c. P12,783,000
b. P13,576,000 d P13,000,000
.