MODULE 9 EQUITY

Stockholders' Equity
Stockholders' equity is often referred to as the book value of the company and it comes from
two main sources. The first source is the money originally and subsequently invested in the
company through share offerings. The second source consists of the retained earnings the
company accumulates over time through its operations. In most cases, especially when dealing
with companies that have been in business for many years, retained earnings is the largest
component.

Conceptually, stockholders' equity is useful as a means of judging the funds retained within a
business. If this figure is negative, it may indicate an oncoming bankruptcy for that business,
particularly if there exists a large debt liability as well.

Paid-In Capital and Stockholders' Equity

Companies fund their capital purchases with equity and borrowed capital. The equity
capital/stockholders' equity can also be viewed as a company's net assets (total assets
minus total liabilities). Investors contribute their share of (paid-in) capital as stockholders, which
is the basic source of total stockholders' equity. The amount of paid-in capital from an investor is
a factor in determining his/her ownership percentage.

Retained Earnings
Retained earnings are a company's net income from operations and other business activities
retained by the company as additional equity capital. Retained earnings are thus a part of
stockholders' equity. They represent returns on total stockholders' equity reinvested back into
the company. Retained earnings accumulate and grow larger over time. At some point,
accumulated retained earnings may exceed the amount of contributed equity capital and can
eventually grow to be the main source of stockholders' equity.

Treasury Shares
Companies may return a portion of stockholders' equity back to stockholders when unable to
adequately allocate equity capital in ways that produce desired profits. This reverse capital
exchange between a company and its stockholders is known as share buybacks. Shares bought
back by companies become treasury shares, and their peso value is noted in the treasury
stock contra account. Treasury shares continue to count as issued shares, but they are not
considered to be outstanding and are thus not included in dividends or the calculation of
earnings per share (EPS). Treasury shares can always be reissued back to stockholders for
purchase when companies need to raise more capital. If a company doesn't wish to hang on to
the shares for future financing, it can choose to retire the shares.

Assertions Related to Equity

Existence
A firm records the equity interest of each of its investors on its balance sheet. For publicly
traded companies, these records are filed with the Securities and Exchange Commission. As
a means of gathering evidence, an auditor can gauge the records a public or private firms
keeps of its assets and liabilities -- in addition to the firm's equity interests -- to ensure
complete records of a firm's financial position exist. A firm must disclose all of its shareholder
equity to an auditor.
Rights and Obligations
Managers and shareholders in a firm have certain rights and obligations pertaining to the
firm's equity. An entity, be it an individual or a group investor, is entitled to the equity it
purchased from the firm and is obliged to cover all liabilities it undertook. The company's
management is responsible for asserting this information to the auditor in compliance with
PFRS. Management must also disclose each transaction pertinent to an entity's equity,
including evidence to support that each entity involved met its obligations.
Completeness

In addition to recording and disclosing all of a firm's equity interests, each disclosure made to
an auditor must be factually complete and accurate. All assets, liabilities and equity interests
that management should have recorded must be recorded on the firm's balance sheet. An
auditor should pay attention to the completeness of all records pertaining to cash transactions;
Employees can often overlook or fail to report cash receipts.

Valuation and Allocation

The standard requires a firm's equity interests to be accurately recorded in its financial
statements. Company managers must also record any equity valuations and allocations. If a
firm issues additional shares of common stock, for example, the volume of shares issued must
be recorded. The price at which the company issued the shares must also be recorded. If a
firm issues additional stock -- or recalls additional stock -- the percentage of shareholder
equity changes; such a change must also be reflected in the firm's financial statements.

Equity-Related Fraud and Errors

Theft seldom occurs in the sale of stock. If fraud happens, it’s usually a false equity
presentation. Why? Inflating equity makes the organization appear healthier than it really is.

Additionally, mistakes lead to errors in equity accounting. Such mistakes might occur if the entity
sells complex equity instruments.

Directional Risk for Equity

The directional risk for equity is that it is overstated (companies desire strong equity positions).
So, audit for existence.

Primary Risks for Equity

Primary risks for equity include:
1. Equity is intentionally overstated (fraud)
2. Misclassified equity (error)

As you think about these risks, consider the control deficiencies that allow equity misstatements.

Common Equity Control Deficiencies

In smaller entities, it is common to have the following control deficiencies:

 One person performs two or more of the following:

 Approves the sale of equity interests,
 Enters the new equity in the accounting system,
 Deposits funds from the sale of the equity instruments
 Accounting personnel lack knowledge regarding equity transactions
Another key to auditing equity is understanding the risks of material misstatement.

Risk of Material Misstatement for Equity

In auditing equity, the assertions that concern me the most are existence, classification, and
rights. So my risk of material misstatement for these assertions is usually moderate to high.
My response to the higher risk assessments is to perform certain substantive procedures:
namely, a review of equity transactions. Why?
A company may desire to overstate its equity. Also, misclassifications occur due to
misunderstandings about equity accounting.
Once your risk assessment is complete, you’ll decide what substantive procedures to perform.

Substantive Procedures for Equity

Substantive tests for auditing equity include:
1. Summarizing and reviewing all equity transactions
2. Reviewing all equity accounts for proper classification
3. Agreeing all beginning of period balances to the prior period’s ending balances
4. Reviewing equity disclosures for compliance with the requirements of the reporting
framework (e.g., PFRS)

In light of my risk assessment and substantive procedures, the equity work papers normally
includes:

Common Equity Work Papers

Equity work papers normally include the following:
 An understanding of equity-related internal controls
 Documentation of any equity internal control deficiencies
 Risk assessment of equity at the assertion level
 Equity audit program
 A copy of (sample) equity instruments
 Minutes reflecting the approval of new equity or the retirement of existing equity
 A summary of equity activity (beginning balances plus new equity less equity distributions
and ending balance)

In Summary
In summary, we’ve reviewed the keys to auditing equity. Those keys include risk assessment
procedures, determining relevant assertions, performing risk assessments, and developing
substantive procedures. The most important issues to address are usually (1) equity accounting
(especially when there are more complex types of equity transactions) and (2) the classification
of equity.

Shareholders’ equity
Shareholders’ equity is the residual interest in the assets of a corporation after deducting all its
liabilities.

The components of shareholders’ equity include the following:

1. Contributed capital (Capital stock)
 Preference share capital (Preferred stock)
 Ordinary share capital (Common stock)
 Subscribed share capital (subscribed capital stock)
  Subscription receivable (as deduction)
 Share dividends distributable
 Share premium (Additional paid-in capital)
2. Retained earnings (appropriated and unappropriated)
3. Treasury stocks
4. Other comprehensive income
 Revaluation surplus
 Cumulative unrealized fair value gain/losses on FVOCI securities
 Translation differences of foreign operations
 Effective portion of cash flow hedges

Preferred Stock Stock that has special rights and takes priority over common stock

Common Stock Par Value Par value of units of ownership of a corporation

Represents capital received by a company when its shares are sold

Share Premium (APIC) above their par value

Common stock that had been issued and then reacquired

Treasury Stock (bought back) by a company

Total amount of earnings of a company since its inception

Retained Earnings minus dividends and losses (if any)

Corporate form of organization

Share System
In the absence of restrictive provisions, each share carries the following rights:
1. To share proportionately in profits and losses.
2. To share proportionately in management (the right to vote for directors).
3. To share proportionately in assets upon liquidation.
4. To share proportionately in any new issues of shares of the same class—called
the preemptive right.

Issuance of Shares
Accounting problems:
1. Par value shares.
2. No-par shares.
3. Shares issued in combination with other securities.
4. Shares issued in non-cash transactions.
5. Costs of issuing shares.

Par Value Shares

Low par values help companies avoid a contingent liability.
Corporations maintain accounts for:
 Preference Shares or Ordinary Shares.
 Share Premium
Illustration:
An entity issues 5,000 shares with par value of 100 per share for 120 per share. The issuance
is recorded as follows:
Cash 600,000
Share capital 500,000
Share premium 100,000
Issued price (5,000 x 120) 600,000
Par value (5,000 x 100) 500,000
Share premium (5,000 x 20) 100,000
Note: The excess of issued price over the par value is share premium.

No-Par Shares
Reasons for issuance:
 Avoids contingent liability.
 Avoids confusion over recording par value versus fair market value.

No-par value shares is one without peso value fixed in the articles of incorporation. However,
a no-par value share has a stated value which is also indicated in the articles of incorporation
but not on a share certificate issued. Par value and no-par value share are distinguished by the
presence or absence of a value per share on the share certificate issued. Under the
Corporation Code, no-par value shares should not be issued for a consideration less than 5
pesos per share. Upon issuance the excess of issued price over the stated value s credited to
share premium.
Pro forma entry upon issuance:
Cash xx
Share capital xx
Share Premium xx

Shares Issued with Other Securities

Two methods of allocating proceeds:
 Proportional method.
 Incremental method.

Illustration:
Ozz Corp. issues 1,000 5 par value ordinary shares and 1,000 20 par value preference shares
for a lump sum of 60,000. At the issue date, the ordinary shares were selling for 36 and the
preference shares were selling for 28.
The entry to record the issuance is as follows:
Cash 60,000
Preference Share 20,000
Ordinary Share 5,000
Share Premium – PS 6,250
Share Premium – OS 28,750

Issue Price 60,000

Allocated to Preference share 26,250
Allocated to Ordinary share 33,750
Allocation using relative fair value: Allocation
FV of PS (1,000 x 28) = 28,000 28/64 x 60,000 = 26,250
 FV of OS (1,000 x 36) = 36,000 36/64 x 60,000 = 33,750
64,000 60,000
The excess of allocated proceeds over par value is share premium.

Shares Issued in Noncash Transactions

The general rule: Companies should record shares issued for services or property other than
cash at the
 fair value of the goods or services received.
 If the fair value of the goods or services cannot be measured reliably, use the fair
value of the shares issued.

Illustration:
On December 1, 2024, Tris Corporation exchanged 20,000 shares of its 10 par value ordinary
shares held in treasury for a used machine. The treasury shares were acquired by Tris at a cost
of 40 per share, and are accounted for under the cost method. On the date of the exchange,
the ordinary shares had a fair value of 55 per share (the shares were originally issued at 30
per share).
Entry:
Machinery 1,100.000
TS 800,000

Shares issued for services or property other than cash should be recognized at:
1. fair value of the goods or services received.
2. If the fair value of the goods or services cannot be measured reliably, use the fair value
of the shares issued.
Since the fair value of property received is not determinable, priority 2 shall be used.
FV of shares (20,000 x 55) = 1,100,00; the difference between FV and cost of TS is
share premium

Costs of Issuing Stock

Direct costs incurred to sell shares, such as
 underwriting costs,
 accounting and legal fees,
 printing costs, and
 taxes,
should reduce the proceeds received from the sale of the shares.

Share issuance cost

Issuing shares entails expenditures, such as regulatory fees, legal, accounting, and other
professional fees, commissions and underwriter’s fees, printing cost of certificates, and
documentary stamp tax and other transaction taxes.

These expenditures, called share issuance cost, are deducted from any resulting share
premium from the issuance. If share premium is insufficient, the excess is charge to retained
earnings.

Illustration:
On January 1, 20x1, XYZ Co. issued 1,000 shares with par value of 100 for 120 per share.
Share issuance cost amounted to 5,000.
The entries are as follows:
 Cash (115 x 1,000) 115,000
Share Capital (1,000 x 100) 100,000
Share Premium ((120-5-100) x 1,000) 15,000

Reacquisition of Shares
Corporations purchase their outstanding shares to:
 Provide tax-efficient distributions of excess cash to shareholders.
 Increase earnings per share and return on equity.
 Provide shares for employee compensation contracts or to meet potential merger
needs.
 To reduce the number of shareholders.
 Make a market in the shares.

Purchase of Treasury Shares

 Cost method (more widely used). TS shall be recognized at cost
TS xx
Cash xx

Sale of Treasury Shares

 Above Cost (I.P. >Cost = SP)
 Below Cost (I.P.<Cost = Indicated loss charge to
SP-TS/RE

Retiring Treasury Shares

Decision results in
 cancellation of the treasury shares and
 a reduction in the number of shares of issued shares.
Par > Cost = SP
Par < Cost = SP orig.; /SP – TS; /RE

Illustration:
On January 1, 20x1, the statement of financial position of XYZ Co. shows the following
information:
Share capital (100 par) 800,000
Share premium 160,000
Retained earnings 540,000
Total shareholders’ equity 1,500,000

Case 1: Acquisition of treasury stock.

On July 1, 20x1, XYZ acquires 1,000 shares at 90.
Treasury shares (1,000 x 90) 90,000
Cash 90,000

Case 2: Reissuance at more than cost.

On Sept. 1, reissues the 1,000 treasury shares at 140.
Cash (1,000 x 140) 140,000
Treasury shares (1,000 x 90) 90,000
Share premium – TS 50,000

Case 3: Reissuance at below cost

Assume that on Sept. 1, 20x1, reissues the 1,000 shares at 60.
 Cash (1,000 x 60) 60,000
Retained earnings 30,000
Treasury shares (1,000 x 90) 90,000

When treasury shares are subsequently reissued at below cost, the excess of cost over the
reissuance price is debited to the following order of priority:
a. Any balance in “share premium – treasury shares” arising from the same class of share
capital.
b. If the balance in “share premium – treasury shares” is insufficient, any excess is debited
to retained earnings.

Illustration: Retirement of shares

On January 1, 20x1, the statement of financial position of XYZ Co. shows the following:
Share capital (100 par) 800,000
Share Premium 160,000
Share Premium – treasury shares 5,000
Retained earnings 535,000
Total shareholders’ equity 1,500,000

Case 1: Retirement cost less than original price

XYZ reacquires 1,000 shares at 80 per share on July 1, 20x1 and retires them on
September 1, 20x1.
July 1
Treasury shares (1,000 x 80) 80,000
Cash 80,000
Sept. 1
Share capital (1,000 x 100) 100,000
Share premium – original issuance 20,000
Treasury shares 80,000
Share premium – retirement 40,000

Case 2: Retirement cost greater than original issuance price

XYZ reacquires 1,000 shares at 140 on July 1, 20x1 and immediately retires them.
July 1
Share capital (1,000 x 100) 100,000
Share premium – original issuance (1,000 x 20) 20,000
Share premium – treasury shares 5,000
Retained earning (balancing figure) 15,000
Cash (1,000 x 140) 140,000

When shares are reacquired and immediately retired, the excess of cost over the original issued
price shall be charge to:
1. Share premium from treasury stock
2. Retained earnings
 MODULE # 9 Post-test
APPLIED AUDITING – REVIEW
AUDIT OF EQUITY

PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. The following data were compiled prior to preparing the balance sheet of Angel Corporation as
of December 31, 2025:

Authorized ordinary stock, P100 par value P4,000,000

Cash dividends payable 160,000
Donated capital 800,000
Gain on sale of treasury stock 80,000
Net unrealized loss on available for sale securities 96,000
Premium on capital stock 320,000
Premium on bonds payable 240,000
Reserve for bond sinking fund 400,000
Reserve for depreciation 600,000
Revaluation increment on property 800,000
Retained earnings, unappropriated 720,000
Subscribe capital stock 480,000
Stock subscriptions receivables 120,000
Stock warrants outstanding 200,000
Treasury stock, at cost 800,000 144,000
Unissued ordinary stock 800,000

REQUIRED:

Compute for the following:

A B C D
1. Ordinary stock issued 4,000,000 3,200,000 3,056,000 3,680,000

2. Share premium (APIC) 320,000 1,400,000 1,320,000 1,200,000

Appropriated retained
3. earnings 400,000 544,000 1,000,000 -
4. Total stockholders’ equity 6,760,000 6,640,000 6,480,000 6,240,000
5. Legal capital 3,200,000 3,680,000 3,560,000 4,000,000

2. The “shareholders’ equity” account of Joseph Corporation, after its initial year of operation in
2024 shows the following:

Date Particulars Debit Credit

Jan. 1 Issued 6,000 shares at par of P100 in
exchange for real property with a
 market value of P800,000; P600,000
authorized 20,000 shares
Jan. 15 Sold 8,000 shares at P120 960,000
Mar. 10 Purchased 800 Joseph shares at P120,000
P150
May 15 Loss on sale of machinery 40,000
June 10 Sold 400 treasury shares 68,000
Dec. 31 Cash dividends declared payable 80,000
January 15, 2025
Dec. 31 Profit for the year 316,000

QUESTIONS:

Based on the information presented above and the result of your audit, answer the following.

1. The adjusted share capital as of December 31 2024 is

a. 1,360,000 c. 1,400,000
b. 1,560,000 d. 1,340,000

2. The total share premium as of December 31 2024 is

a. 360,000 c. 368,000
b. 160,000 d. 168,000

3. The unappropriated retained earnings as of December 31 2024 is

a. 96,000 c. 136,000
b. 156,000 d. 144,000

4. The adjusted total equity on December 31, 2024 is

a. 1,944,000 c. 1,744,000
b. 1,704,000 d. 1,904,000

5. The book value per share of Joseph Corporation on December 31, 2024 was
a. 140.00 c. 128.20
b. 132.22 d. 125.29

3. Following is the stockholders’ equity section of Jerome Corporation’s balance sheet at

December 31, 2024:

ordinary stock, P10 par value; authorized 1,500,000 shares;

issued and outstanding 900,000 shares P9,000,000
share premium 750,000
Retained earnings 2,700,000
 Total stockholders’ equity P12,450,000

Transactions during 2025 and other information relating to the stockholders’ equity accounts
were as follows:

 On January 26, Jerome reacquired 75,000 shares of its ordinary stock for P11 per share.

 On April 4, Jerome sold 45,000 shares of its treasury stock for P14 per share.

 On June 1, Jerome declared a cash dividend of P1 per share, payable on July 15, 2025 to
stockholders of record on July 1, 2025.

 On August 15, each stockholder was issued one stock right for each share held to purchase
two additional shares of stock for P12 per share. The rights expire on October 31, 2025.

 On September 30, 150,000 stock rights were exercised when the market value of the stock
was P12.50 per share.

 On November 2, Jerome declared a two for one stock split-up and changed the par value of
the stock from P10 to P5 per share. On November 20, shares were issued for the stock
split.

 On December 5, 60,000 shares were issued in exchange for a secondhand equipment. It

originally cost 600,000, was carried by the previous owner at a book value of 300,000, and
was recently appraised at P390,000.

 Net income for 2025 was 720,000.

QUESTIONS:

Based on the above and the result of your audit, determine the following as of December 31,
2025:

1. Ordinary stock
a. 12,600,000 b. 10,800,000 c. 10,050,000 d. 12,300,000

2. Share premium
a. 1,485,000 b. 1,575,000 c. 3,825,000 d. 1,275,000

3. Unapproriated retained earnings

a. 2,550,000 b. 2,422,500 c. 2,220,000 d. 2,190,000

4. Total stockholders’ equity

a. 16,425,000 b. 14,295,000 c. 16,095,000 d. 16,065,000

4. Angel Corporation was authorized at the beginning of 2024 with 300,000 authorized shares of
P100, par value ordinary stock. At December 31, 2024, the stockholders’ equity section of
Angel was as follows:

ordinary stock, par value P100 per share; authorized 300,000

shares; issued 30,000 shares P3,000,000
 share premium 300,000
Retained earnings 450,000
Total stockholders’ equity P3,750,000

On June 15, 2025, Angel issued 50,000 shares of its ordinary stock for 6,000,000. A 5% stock
dividend was declared on September 30, 2025 and issued on November 10, 2025 to
stockholders of record on October 31, 2025. Market value of ordinary stock was P110 per
share on declaration date. The net income of Angel for the year ended December 31, 2025 was
475,000.

During 2026, Angel had the following transactions;

March 1 Angel reacquired 3,000 shares of its ordinary stock for P95 per share.

May 31 Angel sold 1,500 shares of its treasury stock for P120 per share.

August 10 Issued to stockholders one stock right for each share held to purchase two
additional shares of ordinary stock for P125 per share. The rights expire on
December 31, 2026.

September 15 25,000 stock rights were exercised when the market value of ordinary stock
was P130 per share.

October 31 40,000 stock rights were exercised when the market value of the ordinary
stock was P140 per share.

December 10 Angel declared a cash dividend of P2 per share payable on January 5, 2027
to stockholders of record on December 31, 2026.

December 20 Angel retired 1,000 shares of its treasury stock and reverted them to an
unissued basis. On this date, the market value of the ordinary stock was
P150 per share.

December 31 Net income for 2026 was 500,000.

QUESTIONS:
Based on the above and the result of your audit, determine the following as of December 31,
2026:

1. Ordinary stock
a. 21,400,000 b. 21,300,000 c. 14,800,000 d. 21,250,000

2. Share premium
a. 4,627,500 b. 3,007,500 c. 4,632,500
d. 4,592,500

3. Retained earnings
a. 600,000 b. 565,000 c. 557,000 d. 560,000

4. Treasury stock
a. 10,000 b. 47,500 c. 50,000 d. 0
5. In connection with your audit of the Trisha Corporation, you were able to obtain the following
information pertaining to the corporation’s equity accounts.

Trisha Corporation has 32,000 shares of P2 par value ordinary stock authorized. Only 75% of
these shares have been issued, and of the shares issued, only 22,000 are outstanding. On
December 31, 2024, the stockholders’ equity section revealed that the balance in share
premium in Excess of Par Value – ordinary was 832,000, and the Retained Earnings balance
was 220,000. The Treasury stock was purchased at an average price of P37.50 per share.

During 2025, Trisha had the following transactions:

Jan. 15 Trisha issued, at P55 per share, 1,600 shares of P50 par, 5% cumulative
preference stock; 4,000 shares are authorized

Feb. 01 Trisha sold 3,000 shares of newly issued P2 par value ordinary stock at P42 per
share.

Mar. 15 Trisha declared a cash dividend on ordinary stock of P0.15 per share, payable on
April 30 to all stockholders of record on April 1

Apr. 15 Trisha reacquired 400 shares of its ordinary stock for P43 per share.

Employees exercised 2,000 stock options granted in 2024. When the options were
granted, each option entitled the employees to purchase 1 share of ordinary stock
for P50 per share. The share price on the date of grant was also P50 per share.
Trisha issued new shares to the employees.

May 01 Trisha declared a 10% stock dividend to be distributed on June 1 to stockholders

of record on May 7. The market price of the ordinary stock was P50 per share on
May 1.

31 Trisha sold 300 treasury shares reacquired on April 15 and an additional 400
shares costing 15,000 that had been on hand since the beginning of the year. The
selling price was P57 per share.

Sept.15 The semiannual cash dividend on ordinary stock was declared, amounting to
P0.15 per share. Trisha also declared the yearly dividend on preference stock.
Both are payable on October 15 to stockholders of record on October 1.

Net income for 2025 was P100,000.

QUESTIONS:
Based on the above and the result of your audit, determine the balances of the following as of
December 31, 2025:

1. Preference stock
a. 86,000 b. 80,000 c. 90,000 d. 84,000
 2. Ordinary stock
a. 63,320 b. 183,320 c. 23,320 d. 58,000

3. Additional paid in capital

a. 1,175,680 b. 1,195,680 c. 1,068,000 d. 1,099,680

4. Treasury stock
a. 64,300 b. 92,200 c. 77,200 d. 75,000

5. Total retained earnings

a. 74,756 b. 183,250 c. 99,756 d. 174,756

6. You were able to gather the following information in connection with your audit of Tricia
Corporation:

 On January 1, 2022, Tricia Corporation granted share options to officers and key employees
for the purchase of 30,000, P10 par value, ordinary shares of the company at P25 per
share. The options are exercisable within a 5-year period beginning January 1, 2024 by
grantees still in the employ of the company, and expiring December 31, 2024. The service
period for this award is 2 years. The fair value option pricing model determined total
compensation expense to be 525,000. The share was selling at 35 at the time the options
were granted.

 On April 1, 2023, 3,000 options were terminated when the employees resigned from the
company. The market value of ordinary share was P35 per share on this date.

 On March 31, 2024, 18,000 option shares were exercised when the market value of ordinary
share was P40 per share.

QUESTIONS:

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

1. Compensation expense in 2022

a. 525,000 c. 236,250
b. 262,500 d. 150,000

2. Net compensation expense in 2023

a. 262,500 c. 120,000
b. 210,000 d. 150,000

3. The exercise of the 18,000 options will result in a credit to Share premium - excess over par
of
a. 585,000 c. 270,000
b. 620,000 d. 450,000

4. Share premium - share options as of December 31, 2024

a. 0 c. 472,500
b. 90,000 d. 157,500
7. The stockholders’ equity section of the Joseph Inc. showed the following data on December 31,
2024: ordinary stock, P3 par, 450,000 shares authorized, 375,000 shares issued and
outstanding, P1,125,000; share premium in excess of par, P10,575,000; share premium from
stock options, P225,000; Retained earnings, P720,000. The stock options were granted to key
executives and provided them the right to acquire 45,000 shares of ordinary 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 2025:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31, 2024.
The market price per share was P44 at this time.

Apr. 1 The company issued bonds of 3,000,000 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 1,000 bond without
the warrant.

July 1 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 9,000 rights were exercised on July
31, and the additional stock was issued.

Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised. 40)

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 2025 was 375,750.

Based on the above and the result of your audit, determine the following as of December 31,
2025:

1. Ordinary stock
a. 1,165,950 b. 1,250,775 c. 1,275,075 d. 1,273,050

2. Total share premium

a. 12,629,175 b. 11,283,300 c. 12,329,475 d. 12,604,200

3. Retained earnings
a. 870,750 b. 1,095,750 c. 1,287,000 d. 981,225

4. Total stockholders’ equity

a. 13,545,000 b. 15,000,000 c. 14,676,000 d. 14,973,000
8. Shawn financial and operating circumstances warrant that Shawn Company undergo a quasi-
reorganization at December 31, 2024. The following information may be relevant in accounting
for the quasi-organization.
 Inventory with a fair value of 2,000,000 is currently recorded in the accounts at its
cost of 2,500,000.
 Plant assets with a fair value of 7,000,000 are currently recorded at 8,500,000 net
of accumulated depreciation.
 Individual stockholders contribute 4,000,000 to create share premium to facilitate
the reorganization. No new shares of stock are issued, although control of a
majority of the company’s outstanding stock passes to the company’s creditors.
 The par value of the ordinary share is reduced from P25 to P5
Immediately before those events, the stockholders’ equity section appears as follows:
Ordinary share (P25 par value, 100,000
shares authorized and outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000
After the quasi-organization, the Share premium should have a balance of
a. 2,750,000
b. 3,250,000
c. 3,750,000
d. 1,750,000

9. The Retained Earnings account of Trisha Company follows:

Date Item Debit Credit

01-01-2024 Balance 485,000
03-31-2024 Dividends declared 200,000
12-31-2024 Profit for the year 324,000
04-01-2025 Share Premium 150,000
06-30-2025 Gain on sale of treasury shares 100,000
09-30-2025 Dividends declared 300,000
12-31-2025 Profit for the year 451,000
12-31-2025 Appraisal increase of land 300,000
12-31-2025 Balance 1,310,000
1,810,000 1,810,000
The only other shareholder's equity account in the books of the company as of December 31,
2025 is ordinary share capital, which has a balance of 2,000,000. This is composed of 20,000
issued shares with par value of P100. All of these shares are outstanding as of December 31,
2025.

1. The correct balance of Retained Earnings as of December 31, 2025 is

a. 760,000 b. 860,000 c. 1,060,000 d. 1,310,000

2. Additional Paid in Capital is

a. 100,000 b. 150,000 c. 250,000 d. 550,000

3. Total shareholder's Equity is

a. 2,710,000 b. 2,760,000 c. 3,010,000 d. 3,310,000
10. The year-end audit of the records of Kaila Farms disclosed a shortage in cash amounting to
600,000. The treasurer had concealed the fraud by increasing inventories by 300,000, land by
100,000 and accounts receivable by 200,000.

Faced with prosecution, the treasurer offered to surrender 6,000 Kaila Farms shares owned by
him. The board of directors accepted the offer, with the agreement that the treasurer would pay
any deficiency between the shortage and the book value of the shares, after adjusting for the
fraud. The corporation would in turn pay the excess, if any, of the book value over the shortage.

As of December 31, 2025, there were 40,000 ordinary shares issued and outstanding with a par
value of P100; Retained earnings as of January 1, 2024 was 1,600,000 and net income from
2024 operations was 1,400,000.

REQUIRED:

Considering the above information, answer the following:

1. What would be the book value per share for purposes of the agreement?
a. 175 b. 206 c. 150 d. None of these

2. How much would the company pay the treasurer, if any?

a. 450,000 b. 300,000 c. 636,000 d. None of these

3. Assuming further the company distributes the 6,000 shares as dividend to the remaining
stockholders, what would be the balance of the Retained earnings as of December 31,
2024?
a. 1,950,000 b. 2,100,000 c. 1,764,000 d. None of these

11. Presented below is the stockholder’s equity of the comparative balance sheet of Ozz Co. on
December 31, 2025 and 2024:

Dec. 31, 2025 Dec. 31, 2024

12% Preferred stock, P100 par 165,000 135,000

Paid in capital in excess of par – preferred 26,800 18,400
Common stock, P10 par* 821,200 799,200
Paid in capital in excess of par – common 128,600 117,600
Paid in capital from treasury stock 3,600 1,600
Retained earnings 942,400 792,920
Total stockholder’s equity 2,087,600 1,864,720

*Par value after June 1, 2025 stock split

Ozz had 32,500 common stock outstanding at December 31, 2023.

The following stockholders’ equity transactions were recorded in 2024 and 2025:

2024
May 1 Sold 4,500 common shares for P24 par value P20
June 30 Sold 350 preferred shares for P124, par value P100
Aug. 1 Issue an 8% stock dividend on common stock. The market
 value of the stock was P30 per share.
Sept. 1 Declared cash dividends of 12% on preferred stock
and P3 on common stock
Dec. 31 Net income for the year is 632,400

2025
Jan. 31 Sold 1,100 common shares for P30
May 1 Sold 300 preferred shares for P128
June 1 Issued a 2-for-1 split of common stock. The par value of
common stock was reduced to P10 per share
Sept. 1 Purchased 500 common shares for P18 to be held as treasury stock.
Oct. 1 Declared cash dividends of 12% on preferred stock and P4
per share on outstanding common stock
Nov. 1 Sold 500 shares of treasury stock for P22

What is Ozz’s basic earnings per share for 2024?

a. 8.25
b. 8.04
c. 16.07
d. 16.49

What is Ozz’s net income for 2025?

a. 475,960
b. 456,160
c. 497,760
d. 495,760

What is Ozz’s basic earnings per share for 2025?

a. 5.81
b. 6.06
c. 5.82
d. 6.05

12. The capital structure of Jerome Corporation on December 31, 2024 follows:

Preference 12% Share, P200 par, 30,000 shares

issued and outstanding P 6,000,000
Ordinary share, P50 par, 100,000 shares issued
and outstanding 5,000,000
Preference Share Premium 1,800,000
Ordinary share Premium 1,500,000
Retained Earnings 2,200,000

During 2025, the following selected transactions occurred:

a. Purchased and retired 4,000 preference shares at P280 per share.

b. Purchased 8,000 shares of its own ordinary share at P75 per share when each share is
selling in the market at P78 each.
c. A two-for-one share split on the ordinary share was approved by the shareholders,
thereby reducing the par value to P25
d. Reissued 6,000 treasury shares at P45 each
e. Shareholders donated 4,000 ordinary shares when the market price was P46 per share. The
company recorded the donated shares as a memorandum in the treasury stock ledger.
f. Two thousand of the donated shares were issued for P48 per share
g. The profit for 2025 was 1,850,000. No dividends were declared.

1. The balance of Preference share at Dec. 31, 2025 statement of financial position is
a. 5,200,000 b. 6,000,000 c. 6,080,000 d. 6,800,000

2. The balance of Ordinary Share at December 31, 2025 statement of financial position is
a. 4,650,000 b. 4,625,000 c. 5,000,000 d. 10,000,000

3. Total Additional Paid in Capital is

a. 3,076,000 b.3, 201,000 c. 3,316,000 d. 3,340,000

4. The number of ordinary shares outstanding at December 31, 2025 is

a. 200,000 b. 190,000 c. 188,000 d. 178,000

5. Retained Earnings at December 31, 2025 is

a.2, 200,000 b. 3,730,000 c. 3,970,000 d. 4,050,000