Abbie Merry Vecina BSA 601

CASE ANALYSIS
Instructions: Presented below are a series of unrelated situations. Determine the requirements for each
independent case. Show your computations in good form. (20 items x 5 points)

AUDIT OF NON-CURRENT LIABILITIES

CASE 1: JULIUS COMPANY

On January 1, 20x1, Julius Company issued a three-year, 5,000 convertible bonds at face value of P1,000 per
bond. Interest is to be paid annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the
holder’s option, into 200, P2 par value ordinary shares at any time up to maturity. On the date of issuance, the
prevailing market interest rate for similar debt without conversion privilege was 9%. On the same date, the market
price of one (1) ordinary share was P3. The bonds were converted on December 31, 20x2.

REQUIRED: Compute the following:

1. The liability component of the convertible debt is ₱ 4,620,290

Principal value of principal (5,000,000 x 0.77218) ₱ 3,860,900

Principal value of interest payment
(5,000,000 x 6% = 300,000 x 2.53130) 759,390
Liability component of convertible debt ₱ 4,620,290

2. Interest expense for the year ended December 31, 20x2 is ₱ 426,250

Date Interest Paid Interest Expense Discount Carrying Value

Amortization
01/01/20x1 ₱ 4,620,290
12/31/20x1 300,000 415,826 115,826 4,736,116

12/31/20x2 300,000 426,250 126,250 4,862,366

12/31/20x3 300,000 437,613 137,613 ₱ 4,999,979

3. Share premium from issuance of ordinary shares is ₱ 3,242,076

Carrying value of book ₱ 4,862,366

Add: Share premium-conversion privilege
(5,000,000 – 4,620,290) 379,710
Total Conversion 5,242,076
Par value of ordinary share [2 x (5,000 x 200)] 2,000,000
Share premium-issuance ₱ 3,242,076

CASE 2: FUEGOLEON CORPORATION

In the audit of the Fuegoleon Corporation’s financial statements on December 31, 20x3, the chief accountant of
the said corporation provided the following information:

Additional information:

1. On March 1, 20x4, the P800,000 note payable was replaced by an 18-month note for the same amount.
Fuegoleon is considering similar action on the P200,000 note payable due on December 31, 20x4. The
20x3 financial statements were issued on March 31, 20x4.
2. On December 1, 20x3, a former employee filed a lawsuit seeking P400,000 for unlawful dismissal.
Fuegoleon’s attorneys believe that the suit is without merit. No court date has been set.
3. On January 15, 20x4, the BIR assessed Fuegoleon an additional income tax of P600,000 for the 20x1 tax
year. Fuegoleon’s attorneys and tax accountants have stated that it is likely that the BIR will agree to a
P400,000 settlement.

REQUIRED:
Based on the above and the result of your audit, compute the following:

4. Total current liabilities is ₱ 4,950,000

Notes Payable:
Arising from purchase of goods ₱ 608,000
Arising from 5 year-bank loans, on which marketable securities valued
at P1,200,000 have been pledged as security, P800,000 due on June 30, 1,000,000
2006; P200 due on Dec 31, 20x4
Arising from advances by officers, due on June 30, 30x4 100,000
Employees’ income tax withheld 40,000
Advances received from customers on purchase orders 100,000
Container's deposit 128,000
Accounts payable arising from purchase of goods (340,000 + 30,000) 370,000
Customers' account with credit balance 60,000
Cash dividends payable 160,000
Current portion of serial bond (100,000 x 2) 200,000
Overdraft with Allied Bank 180,000
 Estimated damages to be paid as a result of unsatisfactory performance on a 320,000
contract
Estimated expenses on meeting guarantee for service requirements on 240,000
merchandise sold
Estimated premiums payable 150,000
Deferred revenue 174,000
Accrued interest on bonds payable 720,000
Provision-deficiency income tax assessment 400,000
Total Current Liabilities ₱ 4,950,000

5. Total noncurrent liabilities is ₱ 6,250,000

Convertible bonds, due on January 31, 20x5 ₱ 2,000,000

Non-current portion of serial bonds (4,000,000 – 2,000,000) 3,800,000
Deferred tax liability 450,000
Total Non-current Liabilities ₱ 6,250,000

AUDIT OF SHAREHOLDERS’ EQUITY

CASE 3: YAMI, INC.

During May 20x1, Yami, Inc. issued 90,000 of its P10 par value ordinary shares for P1,080,000. Net income
through December 31, 20x1 was P102,500.

On July 3, 20x2, Yami issued 150,000 of its ordinary shares for P1,950,000. A 5% share dividend was declared
on October 2, 20x2, and issued in November 6, 20x2, to shareholders of record on October 23, 20x2. The market
value if the ordinary shares was P11 per share on the declaration date. Yami’s net income for the year ended
December 31 ,20x2 was P220,000.

During 20x3, Yami had the following transactions:

1. In February, Yami reacquired 9,000 of its ordinary shares for P9 per share. Yami uses the cost method to
account for treasury shares.
2. In June, Yami sold 4,500 of its treasury shares for P13 per share.
3. In September, each shareholder was issued for each share held one (1) right to purchase two (2) additional
ordinary shares for P13 per share. The rights expire on December 31, 20x3.
4. In October, 75,000 rights issues were exercised when the market value of the ordinary share was P14 per
share.
5. In November, 120,000 rights were exercised when the market value of the ordinary share was P15 per
share.
6. On December 10, Yami declared its first cash dividend to shareholders of P0.25 per share, payable, on
January 10, 20x4, to shareholders of record on December 31, 20x3.
7. On December 22, in accordance with the applicable law, Yami formally retired 3,000 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 20x3 was P270,000.

REQUIRED:

6. Ordinary share capital balance on December 31, 20x3 is ₱ 6,390,000

7. Share premium – ordinary shares on December 31, 20x3 is ₱ 1,815,000

8. Retained earnings balance on December 31, 20x3 is ₱ 301,125
9. Treasury shares balance on December 31, 20x3 is ₱ 13,500
 Share Capital Share Retained
Shares Par value Premium Earnings
May 20x1, Issuance 90,000 900,000 180,000
Dec. 31 Net Income 102,500
Balance, Dec. 31, 20x1 ₱ 90,000 ₱ 900,000 ₱ 180,000 ₱ 102,500

Share Capital Share Retained

Shares Par value Premium Earnings
Balances, Jan 1, 20x2 90,000 900,000 180,000 102,500
July 31, Issuance 150,000 1,500,000 450,000
Oct. 2 share Dividend (240,000 x 5%) 12,000 120,000 12,000 (132,000)
Dec 31, Net Income 220,000
Balance, Dec. 31, 20x2 ₱ 252,000 ₱ 2,520,000 ₱ 642,000 ₱ 190,500

Share Capital Share Retained Treasury Share

Share Par value Premium Earnings Shares Cost
Balance, Jan 1, 20x3 252,000 2,520,000 642,000 190,500 9,000 81,000
Feb. Acquisition of 9,000 81,000
treasury share
June sale of treasury (4,500) (40,500)
shares
Oct. Exercise of stock 150,000 1,500,000 450,000
rights (75,000 x 2)
Nov. Exercise of stock 240,000 2,400,000 720,000
rights (120,000 x 2)
Dec. 15 share dividend (159,375)
(0.25 x 637,500)
-3,000 -30,000 3,000 (3,000) (27,000)
Dec. Net Income 270,000
Balances, Dec, 31 20x3 ₱639,000 ₱6,390,000 ₱1,815,000 ₱301,125 ₱1,500 ₱13,500

CASE 4: BLACK CLOVER CORPORATION

You were engaged by Black Clover Corporation, a publicly held company whose shares are traded on the
Philippine Stock Exchange, to conduct an audit of tis 20x2 financial statements. You were told by the company’s
controller that there were numerous equity transactions that took place in 20x2. The shareholders’ equity accounts
at December 31, 20x1, had the following balances:

Preference share capital, P100 par value, 6% cumulative; 10,000

shares authorized; 6,000 shares issued and outstanding P600,000
Ordinary share capital, P1 par value, 600,000 shares authorized;
360,000 shares issued and outstanding 360,000
Share premium 720,000
Retained earnings 324,00
Total shareholders’ equity P2,004,00

You summarized the following equity transactions during 20x2 and other information relating to the
shareholders’ equity in your working papers as follows:
Issued 14,000 shares in exchange for land. On the date issued, the shares
• January 6, 20x2 had a market price of P16.50 per share. The land had a carrying value of
P126,000.
Sold 750, P1,000, 12% bonds due January 31, 2x12, at 98 with one
• January 31, 20x2
detachable warrant attached to each bond. Interest is payable annually on
January 31. The fair value of the bonds without the share warrants is 95.
Each warrant entitles the holder to purchase 10 ordinary shares at P10 per
share.
 Purchased 4,500 of its own ordinary shares to be held as treasury shares
• February 22, 20x2
for P24 per share.

Subscriptions for 12,600 ordinary shares were received at P26 share,

• February 28, 20x2 payable 50% down payment and the balance by March 15.

The balance due on 10,800 shares was received and those shares were
• March 15, 20x2 issued. The subscriber who defaulted on the 1,800 remaining shares
forfeited the down payment in accordance with the subscription
agreement.
Reissued 1,800 treasury shares for P20 per share.
• August 30, 20x2

There were 567 warrants detached from the bonds and exercised.
• September 14, 20x2

Declared a cash dividend of P0.50 per share to ordinary shareholders of

• November 30, 20x2 record on December 15, 20x2. The dividend was paid on December 30,
20x2
Declared the required annual cash dividends on preference shares for
• December 15, 20x2
20x2. The dividend was paid on January 15, 20x3.

Before closing the accounting records of 20x2, Black Clover became

• January 8, 20x3 aware that no depreciation had been recorded for a machine purchased on
July 1, 20x1. The machine was properly capitalized at P288,000 and had
an estimated useful life of eight (8) years when purchased. the appropriate
correcting entry was recorded on the same date.

• The adjusted net income for 20x2 was P252,000

REQUIRED: Determine the following balances for December 31, 20x2:

10. Ordinary share capital is ₱ 390,470

11. Total share premium is ₱ 1,303,930
12. Retained earnings before appropriation of treasury shares is ₱ 284,915
13. Unappropriated retained earnings is ₱ 220,115
14. Total shareholders’ equity is ₱ 2,514,515

Date Ordinary share capital Treasury Shares

Shares Par value Share Retained Shares Cost Shareholders'
Premium Earnings Equity
Balances, 360,000 360,000 720,000 324,000 ₱ 2,004,000
12/01/x1
01/06/x2 14,000 14,000 217,000 231,000
01/31 22,500 22,500
02/22 4,500 108,000 (108,000)
02/28 315,000 315,000
03/15 10,800 10,800 (45,000) (34,200)
23,400 23,400
08/30 (7,200) (1,800) (43,200) 36,000
09/14 5,670 5,670 (17,010) 56,700
68,040
11/30 (193,885) (193,885)
12/15 (36,000) (36,000)
01/08/x3 (54,000) (54,000)
Net Income 252,000 252,000
Total ₱390,470 ₱ 390,470 ₱ 1,303,930 ₱ 284,915 ₱ 2,700 ₱ 64,800 ₱ 2,514,515
Treasury shares at cost (64,800)
 Unappropriated ₱ 220,115
Retained Earnings

CASE 5: CHARLOTTE, INC.

On January 1, 20x1, Charlotte, Inc. entity grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee working for the entity over the next three (3) years. The entity estimates that the
fair value of the share option is P24. On the basis of a weighted average probability, the entity estimates that 20%
of employees will leave during the three (3) year period and therefore forfeit their rights to the share options.

REQUIRED:
If everything turns out exactly as expected, compute the following:

15. Salaries expense for 20x1 is ₱ 320,000

16. Salaries expense for 20x2 is ₱ 320,000

17. Salaries expense for 20x3 is ₱ 320,000

20x1
Number of employees 500
Employees expected to leave (500 x 20%) (100)
Employees entitled to share option 400
Multiply: Share options per employee 100
Total 40,000
Multiply: Fair value 24
Total Compensation ₱ 960,000
Salaries expense for 20x1 (960,000 / 3) ₱ 320,000
20x2
Cumulative salaries expense for 20x2 (960,000 x 2 / 3) ₱ 640,000
Less: Salaries recognized in 20x1 (320,000)
Salaries expense for 20x2 ₱ 320,000
20x3
Cumulative salaries expense for 20x3 (960,000 x 3 / 3) ₱ 960,000
Less: Cumulative salaries expense for 20x2 (640,000)
Salaries expense for 20x3 ₱ 320,000

CASE 6: MIMOSA COMPANY

On January 1, 20x1, Mimosa Company grants 10,000 share options with a 10-year life to each of the 12 senior
executives. The share options will vest and become exercisable immediately if and when the entity’s share price
increases from P50 to P70, provided that the executive remains in service until the share price target is achieved.

Mimosa applies the binomial option pricing model, which considers the possibility that the share target will be
achieved during the ten-year life of the options, and the possibility that the target will not be achieved. Mimosa
estimates that the fair value of the share options at grant date is P27 per option. From the option pricing model,
Mimosa determines that the mode of the distribution of possible vesting dates is five (5) years. In other words, of
all the possible outcomes, the most likely outcome of the market condition is that the share price target will be
achieved at the end of 20x5.

Therefore, Mimosa estimates that the expected vesting period is five (5) years. The entity also estimates that two
(2) executives will have left by the end of 20x5, and therefore expects that 80,000 share options will vest at the
end of 20x5.

Throughout years 20x1-20x4, the entity continues to estimate that a total of two (2) executives will leave by the
end of 20x5. However, in total three (3) executives leave, one in each of 20x3, 20x4, and 20x5. The share price
target is achieved at the end of 20x6. Another executive leaves during 20x6, before the share price target is
achieved.

REQUIRED: Compute the following:

18. Salaries expense for 20x3 is ₱ 432,000

19. Cumulative salaries expense for 20x4 is ₱ 1,728,000

20. Salaries expense for 20x5 is ₱ 162,000

20x1 20x2 20x3 20x4 20x5

Share options 80,000 80,000 80,000 80,000 70,000
Multiply: Fair value 27 27 27 27 27
Total value 2,160,000 2,160,000 2,160,000 2,160,000 1,890,000
Multiply: Ratio of actual 1/5 2/5 3/5 4/5 5/5
years
Cumulative salaries ₱ 432,000 ₱ 864,000 ₱ 1,296,000 ₱ 1,728,000 ₱1,890,000
expense
Prior year salaries 0 432,000 864,000 1,296,000 1,728,000
expense
Salaries expense ₱ 432,000 ₱ 432,000 ₱ 432,000 ₱432,000 ₱ 162,000