Intermediate Accounting 2 / Conceptual Framework and Accounting Standards Final Examination

I = 10%

True or False. Write true if the statement is correct, or false if the statement is incorrect. Erasures and
alterations will not be honored.

1. Retained Earnings is a nominal account reported in the balance sheet.

2. An income summary account with normal balance if closed to retained earnings will increase the
retained earnings balance.
3. The appropriated amounts of retained earnings are available for distribution to stockholders as
dividends.
4. Appropriation of retained earnings will reduce the total stockholders’ equity.
5. A declaration of stock split will require a debit to retained earnings and a credit to stock
distributable.
6. The issuing corporation could acquire from the market its own shares of stock, even in cases where
it has no retained earnings.
7. If the preferred stock is participating, it will participate with the common on the balance of dividend
declared after interest on both preferred and common are allocated.
8. Noncumulative, nonparticipating preferred stocks do not carry interest.
9. The declaration of stock dividend will increase the total stockholders’ equity when recorded at fair
value.
10. Stock preferred as to assets are entitled to back dividends.

II = 30%

The journal entries to record the dividend declarations and distributions made by the Michelle Corporation
over a 3-year period listed below for you to journalize (with supporting computations):

2025
July 1 Declared a 30% stock dividend on 1,000,000 shares of common stock, issued and
outstanding, par value, P15; market value on this date was P17.
15 Distributed the stock dividends declared on July 1, which included fractional shares
for 1,000 shares.
Sept. 1 800 common shares were issued for the fractional warrants; the balance expired.

2026
July 1 Declared a scrip dividends of P1 per share, payable on Jan. 1, 2027, interest of 6%
per annum
Dec. 1 Declared a dividend of one item of inventory for every one share of the Corporation
owned. The inventory was carried in the books at a unit cost of P1.50; its fair value is
P2.00 as of this date.
31 The fair value of the inventory is P1.80 each.
31 Compute and record the adjusting entry for interest

2027
Jan. 1 Prepare the reversing entry for interest expense.
1 Paid the scrip dividend.
31 Distributed the inventory declared last Dec. 1, 2026. The fair value of the inventory is
P1.85 as of this date.
Sept. 1 Declared a 100% stock dividend to stockholders of record, Sept. 15, 2027. The
market price today is P14 per share.
30 Distributed the stock dividend declared last Sept. 1, 2027.
Oct. 31 Declared a P0.10 liquidating dividends to be paid out of the depletion funds.
Dec. 31 Paid the liquidating dividends declared last Oct. 31.

III = 20%

Diana Corporation’s outstanding capital stock at Dec. 31, 2025 consisted of the following:

1. 60,000 shares of 5% preferred stock, par value is P5 per share; and

2. 100,000 shares of common stock, par value is P2 per share.
On Dec. 31, 2025, the corporation declared cash dividends of P200,000. What amount of dividends will be
payable to the preferred stockholders and the common stockholder under each of the following combination
features?

Case 1. The preferred stock is cumulative and fully participating. The last declaration and payment to
preferred is July 1, 2023.

Case 2. The preferred stock is noncumulative and nonparticipating. The last declaration and payment
to preferred is Oct. 1, 2024.

Case 3. The preferred stock is noncumulative and participating up to 12%. The last declaration and
payment to preferred is Dec. 31, 2023.

Case 4. The preferred stock is cumulative and participating up to 12%. The last declaration and payment
to preferred is July 1, 2024.

IV = 20%

Sheila Corporation provided the following independent transactions affecting stockholders’ equity to be
journalized by you:

1. Issued 50,000 rights to stockholders, one right on one share, permitting holders to acquire one P50
par common share at P60 with every four (4) rights submitted. Shares are selling at P66 per share
on this date. Subsequently, 40,000 rights were exercised, 10,000 rights expired.
2. Issued 100,000 preferred shares of P100 par value for P6,000,000 with 100,000 common stock
warrants to be able to acquired 50,000 common shares, P50 par value at P60 per share. On the date
of the issuance, the market values are: preferred share ex-warrant, none; and common share, P80.
Subsequently, 80,000 common stock warrants were exercised and 20,000 common stock warrants
expired.

V = 20%

On Jan. 1, 2025, the Pangcoga-Pena Corporation granted 20 stock options to each of 1,000 employees.
Each grant is conditional upon the employees remaining in service for three (3) years. The fair value of the
stock option on the date of grant is P120.

On Dec. 31, 2025, 40 employees left the company and 70 more are expected to leave by the end of the
vesting period. On Jan. 1, 2026, the company repriced the stock options by lowering the exercise price. As
a result, the fair value of the stock options increased by P40. The modification did not change the vesting
period. On Dec. 2026, 45 employees left the company and another 60 are expected to leave by the end of
the vesting period.

On Dec. 31, 2027, 25 employees actually left the company.

Required: Prepare the following:

1. Computation for compensation expenses for 2025, 2026, and 2027.
2. Prepare the correct journal entries to recognize the compensation expense over the vesting period.

VI = 10%

Essay. Read each question carefully and give your best correct professional (LOGICAL) opinion. Erasures
and alterations will not be honored in the answer sheet.

1. At the very first week of January, the auditor is reaching out to the audit-client regarding his audit
of equity. Why did the audit-client not answer the auditor on such dates?
2. There are two (2) kinds of independence in auditing – independence in fact and independence in
appearance. Miss Universe 2023 was held in San Salvador, El Salvador, on November 18, 2023.
In an Instagram post, they have posted the top 5 contestants which includes Ms. Michelle Dee from
the Philippines. Around ten (10) minutes later, they deleted and replaced the post which replaced
Ms. Michelle Dee with Ms. Anntonio Porsild from Thailand. With this controversy, how does this
affect their independence assuming it was an honest mistake?

Prepared by: Reggie M. Arriola, CPA Reviewed by: Atty. Prackie Jay T. Acaylar
Instructor In-Charge Dean of School of Business Education