CHAPTER 3
SHAREHOLDERS’ EQUITY
PROBLEMS
3-1.

(Budomo Company)
•
Cash (20,000 x 300)
Ordinary share

6,000,000
6,000,000

•

Legal expense/Professional fees
Ordinary share (250 x 300)
Share premium - Ordinary

•

Land
Building
Ordinary share (12,500 x 300)
Share premium - Ordinary

1,000,000
2,950,000

Cash (6,500 x 380)
Ordinary share (6,500 x 300)

Share premium - Ordinary

2,470,000

Cash (10,000 x 200)
Ordinary share (10,000 x 150)
Share premium - Ordinary

2,000,000

•

90,000
75,000
15,000

3,750,000
200,000
1,950,000
520,000

3-2.
a.

Share premium-Ordinary
Cash
b.

c.


d.

e.

Land (3,500 x 560)
Ordinary share (3,500 x 200)
Share premium – Ordinary
Cash
Preference share
Ordinary share
Share premium – Preference
Share premium – Ordinary
MV: Pref – 5,000 x 800=4M
Ord – 100,000 x 120 = 12M
Allocation:
Pref: 18M x 4/16 = 4.5M
Ord: 18M x 12/16 = 13.5M
Subscription receivable
Cash
Subscribed ordinary share
Share premium – Ordinary
Land
Cash
Donated capital

1,500,000
500,000
60,000
60,000
1,960,000

700,000
1,260,000
18,000,000
2,500,000
10,000,000
2,000,000
3,500,000

450,000
150,000
500,000
100,000
5,000,000
40,000
4,960,000


Chapter 3 – Shareholders’ Equity

3-3.

(Blazing Red Corporation)
Correction to the problem: RE balance on December 31, 2012, instead of 2010.
Shareholders’ Equity
Contributed capital
10% Preference share, cumulative and non-participating, P100 par
30,000 shares authorized; 12,000 shares issued and outstanding
Ordinary share, P10 par, 100,000 shares authorized, 30,000 shares
issued, 29,000 shares outstanding
Subscribed ordinary share, 4,500 shares

Subscription receivable – Ordinary
Share premium – Preference
Share premium –Ordinary
Total contributed capital
Retained earnings
Appropriated for treasury share
P 15,000
Unappropriated
335,000
Treasury shares, 1,000 ordinary shares, at cost
Total shareholders’ equity

P1,200,000
300,000
45,000
(43,200)
275,000
77,000
P1,853,800
350,000
( 15,000)
P2,188,800

The total amount of P2,048,800 may also be obtained without necessarily preparing
the shareholders’ equity in good format (if not required) as follows:
Issue of 30,000 ordinary shares
Issue of preference shares in exchange of equipment
Subscriptions for 4,500 ordinary shares at 16
Subscriptions receivable (60%)
Purchase of 1,000 treasury shares at 15

Retained earnings
Total shareholders’ equity, December 31, 2012
3-4.

(Millennium Company)
(a)
(1)
Treasury share
Cash
(2)

(3)

(4)

(b)

P

350,000
1,475,000
72,000
(43,200)
(15,000)
350,000
P 2,188,800

140,000
140,000


Cash
Treasury share
Paid in capital from treasury chare

60,000

Cash
Paid in capital from treasury share
Retained earnings
Treasury share

65,000
4,000
1,000

Ordinary share
Share premium
Retained earnings
Treasury share

10,000
3,000
1,000

56,000
4,000

70,000

14,000


Total shareholders’ equity, December 31, 2011
(1) Purchase of treasury share (10,000 x 14)
(2) Sale of treasury share (4,000 x 15)
(3) Sale of treasury share (5,000 x 13)
Net income for the year

26

P2,200,000
(140,000)
60,000
65,000
280,000


Chapter 3 – Shareholders’ Equity

Dividends declared
Total shareholders’ equity, December 31, 2012

(200,000)
P2,265,000

The total shareholders’ equity may also be obtained by determining the balance of
the shareholders’ equity accounts, as follows:
Ordinary Share, P10 par (99,000 shares issued and outstanding) P 990,000
Share Premium
297,000
Retained Earnings

978,000
Total shareholders’ equity
P2,265,000
3-5.

(Consuelo Enterprises, Inc.)
(a)
Preference share (4,000 x 20)
Share premium – Preference (4,000 x 1.60)
Retained earnings
Cash (4,000 x 22)
(b)

(c)

80,000
6,400
1,600
88,000

Preference share (4,000 x 20)
Share premium – Preference (4,000 x 1.60)
Retained earnings
Cash (4,000 x 26)

80,000
6,400
17,600

Preference share (4,000 x 20)

Share premium – Preference (4,000 x 1.60)
Cash (4,000 x 20.50)
PIC from retirement of preference

80,000
6,400

104,000

82,000
4,400

Average preference share premium per share
160,000 / 100,000 shares =
1.60
3-6.

(Concepcion Enterprises, Inc.)
(a)
Preference share (3,000 x 20)
Share premium – Preference (3,000 x 1.60)
Retained earnings
Ordinary share (3,000 x 30)
(b)

3-7.

Preference share (3,000 x 20)
Share premium – Preference (3,000 x 1.60)
Ordinary share (1,500 x 30)

Share premium – Ordinary share

(Red Stone Company)
(a)
Retained Earnings ( 10,000 shares x P20)
Share Dividends Distributable
Share Premium

(b)

60,000
4,800
25,200
90,000
60,000
4,800
45,000
19,800
200,000
100,000
100,000

Share Dividends Distributable
Ordinary Share Capital

100,000

Retained Earnings (30,000 x 10)
Share Dividends Distributable


300,000

Share Dividends Distributable
Ordinary Share Capital

300,000

27

100,000
300,000
300,000


Chapter 3 – Shareholders’ Equity

(c)
3-8.

Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par
previously issued and outstanding.

(Dark Red Company)
Capital structure:
Preference
20,000
P2,000,000

Number of shares outstanding
Total par value

(a)

Preference share is non-cumulative and non-participating

2011
Current preference dividends (9% x 2,000,000 =
180,000; dividends declared were P150,000 only.
Dividend per share

Preference

2012
Current preference dividends (9% x 2,000,000)
Excess (240,000 – 180,000)
Dividend per share

Preference
P 180,000

2013
Current preference dividends (9% x 2,000,000)
Excess (540,000 – 180,000)
Dividend per share

Preference
P 180,000

(b)

Ordinary

P0

P 150,000
P7,50

P9.00

P9.00

P0
Ordinary
P60,000
P0.24
Ordinary
P360,000
P1.44

Preference share is cumulative and non-participating.

2011
Current on preference is P180,000
Arrears, end (P180,000 – 150,000 = 30,000)
Dividend per share

Preference
P150,000

2012
Arrears, beginning
P 30,000

Current year
180,000
Total
P210,000
Excess to ordinary = 240,000 – 210,000

Preference

P0
P0
Ordinary

P210,000
P30,000
P10.50

2013
Current year
Excess – to ordinary = 540,000 – 180,000
Dividend per share

Ordinary

P7.50

Dividend per share

(c)

Ordinary

250,000
P2,500,000

Preference
P180,000
P9.00

P0.12
Ordinary
P360,000
P1.44

Preference share is cumulative and fully participating

2011
Current dividends:
9% x 2,000,000 = P180,000
Arrears, end = 180,000 – 150,000 = 30,000
Dividend per share

28

Preference

Ordinary

P 150,000

P0


P 7.50

P0


Chapter 3 – Shareholders’ Equity

3-9.

2012
Arrears, beginning
P30,000
Current on preference 180,000
To ordinary: initial limit 9% x P2,500,000
= P225,000, but remaining is only
Total dividends
Dividend per share

Preference

2013
Current dividends:
9% x 2,000,000
9% x 2,500,000
Excess: P135,000 x 2.0/4.5
135,000 x 2.5/4.5
Total
Dividend per share

Preference


Ordinary

P 210,000

P210,000
P10.50

P30,000
P30,000
P 0.12
Ordinary

P 180,000
P 225,000
60,000
P240,000
P12.00

75,000
P300,000
P1.20

Additional information: Preference has P100 par value per share.
Capital structure:
Number of shares outstanding
Total par value
(a) Preference is participating up to 14%.
2013
Current dividends:

9% x P2,000,000
9% x P2,500,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which is
less than the limit of additional 5%;
therefore full excess is prorated.
P155,000 x 2M/4.5M
P155,000 x 2.5M/4.5M
Total
Dividend per share
(b) Preference is participating up to 12%.
2013
Current dividends:
9% x P2,000,000
9% x P2,500,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which
exceeds the additional limit of 3%;
therefore, additional to preference is
limited to 3%; remainder goes to ordinary
3% x P2,000,000
P155,000 – 60,000
Total
Dividend per share

29

Preference
20,000
P2,000,000


Ordinary
250,000
P2,500,000

Preference

Ordinary

P180,000
P225,000

68,889
P248,889
P12.44

Preference

86,111
P311,111
P1.24

Ordinary

P180,000
P225,000

60,000

P240,000

P12.44

95,000
P320,000
P1.24


Chapter 3 – Shareholders’ Equity

3-10. (Red Mama Company)
Retained Earnings
Share Dividends Distributable
50% x 100,000 x 10 = 500,000

3-11

500,000
500,000

Share Dividends Distributable
Ordinary Shares
Fractional Share Warrants Outstanding

500,000

Fractional Share Warrants Outstanding
Ordinary Share
PIC from Unexercised Fractional Share Warrants

100,000


(Red Ball Corporation)
October 31, 2012
Trading Securities
Unrealized Gain on Trading Securities
10,000 shares x (15 – 14)
Retained Earnings
Property Dividends Payable
10,000 shares x 15

400,000
100,000
80,000
20,000

10,000
10,000
150,000
150,000

December 31, 2012
Trading Securities
Unrealized Gain on Trading Securities
10,000 shares x (17 – 15)
Retained Earnings
Property Dividends Payable

20,000
20,000
20,000

20,000

February 28, 2013
Retained Earnings
Property Dividends Payable

30,000
30,000

Property Dividends Payable
Trading Securities
Gain on Disposal of Trading Securities

200,000
170,000
30,000

3-12. (Red Chili Company)
10/1/12 Depreciation Expense
Accumulated Depreciation – Equipment
450,000/10 x 9/12

33,750
33,750

Retained Earnings
Property Dividends Payable

190,000


Assets Held for Distribution
Accumulated Depreciation – Equipment
Property, Plant and Equipment
Cost
P450,000
Acc. Deprn 450,000/10 x 6
270,000
Carrying value
P180,000

180,000
270,000

30

190,000

450,000


Chapter 3 – Shareholders’ Equity

FV(because it is higher)

P190,000

12/31/12 Impairment Loss
Assets Held for Distribution
180,000 – 160,000 = 20,000


20,000
20,000

Property Dividends Payable

30,000

Retained Earnings
190,000 – 160,000 = 30,000 decrease
1/31/13

30,000

Retained Earnings
Property Dividends Payable
175,000 – 160,000 = 15,000 increase

15,000
15,000

Property Dividends Payable
Assets Held for Distribution
Gain on Disposal of Assets

175,000
160,000
15,000

3-13. (Red Ribbon Corporation)
Total SHE

12/31/11 Balances
P16,500,000
2010 transactions:
a) 4,000 x 280
(1,120,000)
b) 8,000 x 75
(600,000)
c) 2:1 share split
d) 6,000 x 45
270,000
e) 4,000 x 46
f) 2,000 x 48
96,000
g) Profit
2,000,000
12/31/12 balances
P7,146,000
*P600,000 x 6,000/16,000 = 225,000

(a)
(b)
(c)
(d)

Preference
Shares
Issued
30,000

Ordinary

Shares
Issued
100,000

Treasury Share
Shares

Cost

(4,000)
100,000

26,000

200,000

8,000
8,000
(6,000)
4,000
(2,000)

P600,000
(225,000)*

12,000

P375,000

Total shareholders’ equity

P17,146,000
Number of preference shares issued and outstanding
26,000
Number of ordinary shares issued
200,000
Number of ordinary shares outstanding(200,000 – 12,000)
188,000
Cost of remaining treasury shares
P
375,000

3-14. (Red Heart Corporation)
06/15/11 Cash
Ordinary share
Share premium – Ordinary
09/30/11

Retained earnings (80,000 x 5% x 110)

6,000,000
5,000,000
1,000,000
440,000

Share dividends distributable (4,000 x 100)

400,000
40,000

Share premium – Ordinary

11/10/11
12/31/11

Share dividends distributable
Ordinary share
Income summary
Retained earnings

400,000
400,000
1,175,000
1,175,000

31


Chapter 3 – Shareholders’ Equity

03/01/12
05/01/12

Treasury share (3,000 x 95)
Cash
Cash (1,500 x 120)
Treasury share (1,500 x 95)
PIC from treasury share

285,000
285,000
180,000

142,500
37,500

08/10/12

Issued 82,500 rights to shareholders
entitling holders to purchase 2 additional
shares for P125 per share.

09/15/12

Cash (30,000 x 125)
Ordinary share (30,000 x 100)
Share premium – Ordinary

3,750,000

Cash (80,000 x 125)
Ordinary share (80,000 x 100)
Share premium – Ordinary

10,000,000

10/31/12

12/10/12
12/20/12

12/31/12


3,000,000
750,000
8,000,000
2,000,000

Retained earnings
Dividends payable (192,500 x 5)

962,500

Ordinary share (1,000 x 100)
Share premium – Ordinary (1,000 x 10)*
Paid in Capital from Treasury Shares
Treasury share
*Share premium per share
300,000/30,000 = 10

100,000
10,000

Income summary
Retained earnings

962,500

15,000
95,000

1,200,000
1,200,000


3-15. (Red Carpet Company)
(a)
Total lump sum price is P147,000 (1,500 x 98), allocated as follows:
Securities
Preference
Warrant
Entry

(b)

Market value
90
10

Allocation
147,000 x 90/100
147,000 x 10/100

Cash
Preference share (1,500 x 30)
Share premium – Preference
Share warrants outstanding
Cash (600 x 40)
Share warrants outstanding
Ordinary share
Share premium – Ordinary

32


Allocated Price
132,300
14,700
147,000
45,000
87,300
14,700
24,000
11,760
6,000
29,760


Chapter 3 – Shareholders’ Equity

3-16. (Red Hot Company)
(a)
Value of each option
Number of shares granted
Total value assigned to share options
Required service period
Annual compensation expense
(b)
1/1/12

12/31/12
12/31/13
12/31/14
12/31/15


P8
x 30,000
P240,000
÷ 3years
P 80,000

Memo: Granted share options to selected
senior employees for the purchase of
30,000 ordinary shares at P50 per share,
from January 1 to December 31, 2015.
Compensation Expense
Share Options Outstanding

80,000
80,000

Compensation Expense
Share Options Outstanding

80,000

Compensation Expense
Share Options Outstanding

80,000

Share options outstanding
Cash (30,000 x 50)
Ordinary share (30,000 x 20)
Share premium - Ordinary


80,000
80,000
240,000
1,500,000
600,000
1,140,000

3-17. (Fire Red Company)
01/02/12 Memo: granted 40,000 share options to certain officers for the
purchase of the company’s P100 par ordinary shares at P430 per share.
12/31/12

12/31/13

Compensation expense
Share options outstanding
(40,000 x 80) ÷ 4 years

800,000

Compensation expense
Share options outstanding
(40,000 x 80) ÷ 4 years

800,000

800,000

800,000


2014

Memo: 8,000 share options were cancelled.

12/31/14

Compensation expense
Share options outstanding
Total accrued compensation expense
(34,000 x 80) x 3/4
2,040,000
Less: previously accrued
1,600,000
Compensation expense-2008
440,000

12/31/15

01/01/14

Compensation expense
Share options outstanding
(34,000 x 80) / 4
Cash (34,000 x 430)
Share options outstanding (34,000 x 80)
Ordinary shares (34,000 x 100)
Share premium – Ordinary

33


440,000
440,000

680,000
680,000
14,620,000
2,720,000
3,400,000
13,940,000


Chapter 3 – Shareholders’ Equity

3-18. (Red Fox Corporation)
(a) Compensation Expense
2012
200 – 10 – 15 = 175 employees x 100 options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3
2013
2014
(b)
01/01/12

12/31/12
12/31/13
12/31/14
2015

2016


186,667

200–10–12–5=173 employees x 100 options=17,300
17,300 x 32 x 2/3 = 369,067; 369,067 – 186,667

182,400

200-10-12-8=170 employees x 100 options=17,000
17,000 x 32 = 544,000; 544,000 – 369,067

174,933

Granted 100 share options to each of its 200 employees to buy
P100 par ordinary share at P220 per share. The options are
exercisable starting January 1, 2011 provided that the employees
are still in the service. Options expire on December 31, 2012.
Compensation expense
Share options outstanding

186,667

Compensation expense
Share options outstanding

182,400

Compensation expense
Share options outstanding


174,933

Cash (140 x 100 x 220)
Share options outstanding (14,000 x 32)
Ordinary share (14,000 x 200)
Share Premium - Ordinary

186,667
182,400
174,933
3,080,000
448,000
2,800,000
728,000

Cash (10 x 100 x 220)
Share options outstanding (1,000 x 32)
Ordinary share (1,000 x 200)
Share premium – Ordinary

220,000
32,000

Share options outstanding (2,000 x 32)
PIC from forfeited share options

64,000

200,000
52,000

64,000

3-19. (Cherry Red Company)
(a)
01/01/12 Memo: Granted 10,000 share options for the purchase of P100 par
ordinary shares at P120 per share. The options vest once the market
price of ordinary shares reached P200, up to Dec. 31, 2014 Options
expire at the end of 2015.
12/31/12

12/31/13

Compensation Expense
Share Options Outstanding
(10,000 x 20) / 3 years

66,667

Compensation Expense
Share Options Outstanding
(10,000 x 20) - 66,667

133,333

34

66,667

133,333



Chapter 3 – Shareholders’ Equity

2014

Cash (10,000 x 120)
Share Options Outstanding
Ordinary Share Capital (10,000 x 100)
Share Premium-Ordinary

(b)
01/01/12

12/31/12

12/31/13
12/31/14
2015

(c)

1,200,000
200,000
1,000,000
400,000

Memo: Granted 10,000 share options for the purchase of P100 par
ordinary shares at P120 per share. The options vest once the market
price of ordinary shares reached P200. Options expire at the end of
2013.

Compensation Expense
Share Options Outstanding
(10,000 x 20) / 3 years

66,667

Compensation Expense
Share Options Outstanding

66,667

Compensation Expense
Share Options Outstanding

66,666

66,667

66,667
66,666

Cash (8,000 x 120)
Share Options Outstanding (80% x 200,000)
Ordinary Shares (8,000 x 100)
Share Premium-Ordinary

960,000
160,000

Share Options Outstanding (20% x 200,000)

PIC from Forfeited Share Options

40,000

800,000
320,000
40,000

If the stock price reached P200 by June 2015, the same entries will be made
for year 2012 through 2014, as given in (b) The recorded share options,
however, will be cancelled at the end of 2015, as the options already expire.

12/31/15

Share Options Outstanding
PIC from Forfeited Share Options

200,000
200,000

3-20. (Red Day Company)
(a)
01/01/12 Granted 80 share options to each of 400 employees for the
purchase of P100 par ordinary shares at P140 per share. Options
shall vest in 2012 if earnings increase by 15% or at the end of
2013 if average annual earnings for 2012 and 2013 increased by an
average of 12%.
12/31/12

12/31/13

2014

Compensation Expense
Share Options Outstanding
400 x 80 x 22 = 704,000
704,000/2 = 352,000

352,000

Compensation Expense
Share Options Outstanding

352,000

Cash (32,000 x 140)

352,000

352,000
4,480,000

35


Chapter 3 – Shareholders’ Equity

Share Options Outstanding
Ordinary Share (32,000 x 100)
Share Premium – Ordinary
(b)


704,000
3,200,000
1,984,000

The full amount of P704,000 is recognized as compensation
expense since the options vest already in 2012.

3-21. (Bloody Red Company)
01/01/12

Memo: Issued to its CEO share options for the purchase of ordinary shares at
a strike price of P50. The options are exercisable beginning January 1, 2015
and expire on December 31, 2016. The number of share options will be based
on the level of sales for 2014.

12/31/12

Compensation Expense
Share Options Outstanding
15,000 sh x 30 x 1/3

150,000

Compensation Expense
Share Options Outstanding

150,000

12/31/13


15,000 sh x 30 x 2/3
Less: previously accrued
Compensation expense
12/31/14

Compensation Expense
Share Options Outstanding
18,000 sh x 30 x 3/3
Less: previously accrued
Compensation expense

150,000

150,000
300,000
150,000
150,000
240,000
240,000
540,000
300,000
240,000

3-22. (Striking Red Corporation)
(a)
12/31/12 Compensation Expense
Share Appreciation Rights Payable

66,667

66,667

10,000 x (140 -120) x 1/3

12/31/13

Compensation Expense
Share Appreciation Rights Payable

133,333
133,333

10,000 x (150 - 120) x 2/3 = 200,000
200,000 – 66,667 = 133,333

12/31/14

Compensation Expense
Share Appreciation Rights Payable
10,000 x (165 - 120) = 450,000
450,000 –200,000 = 250,000

250,000
250,000

(b) (1) Assuming that the rights were exercised on January 1, 2015, when the market
price is P165.
01/01/15

Share Appreciation Rights Payable

Cash

450,000
450,000

(b) (2) Assuming that the rights were exercised on December 31, 2015, when the
market price is P172.

36


Chapter 3 – Shareholders’ Equity

12/31/15

Share Appreciation Rights Payable
Compensation Expense 10,000 (172 – 165)
Cash 10,000 x (172-120)

450,000
70,000
520,000

3-23. (Red Bull Corporation)
(a) Liability at December 31, 2012 = P89,333
December 31, 2013 = P208,000
December 31, 2014 = P394,000
12/31/12

12/31/13


Compensation Expense
Share Appreciation Rights Payable
10,000 x 26.80 x 1/3

89,333

Compensation Expense
Share Appreciation Rights Payable

118,667

89,333

118,667

10,000 x 31.20 x 2/3 = 208,000
208,000 – 89,333 = 118,667

12/31/14

Compensation Expense
Share Appreciation Rights Payable

186,000
186,000

10,000 x 39.40 = 394,000
394,000 –208,000 = 194,000


2015

Share Appreciation Rights Payable
Compensation Expense
Cash 10,000 x (165-120)

3-24. (Ruby Red Company)
(a)
Fair value of the equity alternative
4,000 shares x 150
Fair value of debt component
3,600 shares x 158
Fair value of equity component 1/1/12
(b)

394,000
56,000
450,000

600,000
568,800
31,200

2012: 3,600 x 160=576,000; 576,000/3
31,200/3
Total compensation expense

192,000
10,400
202,400


2013: 3,600 x 165 x 2/3 = 396,000
396,000 – 192,000
31,200/3
Total compensation expense

204,000
10,400
214,400

2014: 3,600 x 168 = 604,800
604,800 – 396,000
31,200/3
Total compensation expense

208,800
10,400
219,200

2013: 2,700 x (172-168)

37

10,800


Chapter 3 – Shareholders’ Equity

(b) Correction to the problem: One executive exercised his right to receive
the cash alternative on December 31, 2014, instead of 2012.

01/01/12

Granted each of the four executives the right to choose either
1,000 ordinary shares or to receive cash payment equal to 900
shares, conditional upon the completion of three years of service.

12/31/12

Compensation Expense
Share Options Outstanding
Share Appreciation Rights Payable

202,400

Compensation Expense
Share Options Outstanding
Share Appreciation Rights Payable

214,400

Compensation Expense
Share Options Outstanding
Share Appreciation Rights Payable

219,200

Share Options Outstanding ¼ x 31,200
Share Appreciation Rights Payable
Cash
PIC from Unexercised Share Options

31,200 / 4 = 7,800
604,800 / 4 =151,200

7,800
151,200

12/31/13

12/31/14

12/31/14

12/31/15

12/31/13

3-25

Compensation Expense
Share Appreciation Rights Payable
900 x 3 x (172 – 168)
Share Options Outstanding
Share Appreciation Rights Payable
Ordinary Share (3,000 x 100)
Share Premium – Ordinary
31,200 x ¾

10,400
192,000
10,400

204,000
10,400
208,800

151,200
7,800

10,800
10,800

23,400
464,400
300,000
187,800

(Red Santa Company)
RE, January 1, 2012
2012 Transactions
(1) 200,000 x 70%
(2) Dividends
On preference: 200,000 x P100 x 8%
On ordinary: 300,000 x P5
(3) 10,000 (150 – 130)
(4) Release of appropriation
(5) 45,000/300,000 = 15% bonus issue
45,000 x P150
(6) Appropriation for bond redemption
(7) Profit for the year
Balance, December 31, 2012
Total retained earnings, (P2,000,000 unavailable

for dividends)

38

Appropriated
P 4,000,000

Unappropriated
P9,000,000
(140,000)

(4,000,000)
2,000,000
P2,000,000

(1,600,000)
(1,500,000)
(200,000)
4,000,000
(6,750,000)
(2,000,000)
3,000,000
P3,810,000
P5,810,000


Chapter 3 – Shareholders’ Equity

3-26. (Red Hat Company)
Retained earnings balance as of December 31, 2012

3,900,000 – 600,000 – 240,000
Total shareholders’ equity as of December 31, 2012
6,000,000 + 8,000,000 + 3,060,000

P 3,060,000
P17,060,000

(a)
Par value of preference share
Dividends in arrears (6,000,000 x 9% x 3 yrs.)
Excess to ordinary (17,060,000 – 7,620,000)
Total equity
Divide by the number of shares outstanding
Book value per share

Preference
P6,000,000
1,620,000

(b)
Liquidation value (60,000 shares x P105)
Dividends in arrears (P6,000,000 x 9% x 3 yrs.)
Excess to ordinary (17,060,000 – 7,920,000)
Total equity
Divide by the number of shares outstanding
Book value per share

Preference
P6,300,000
1,620,000


3-27. (Red, Inc.)
Retained Earnings
Inventory

P7,620,000
60,000
P 127

P7,920,000
60,000
P132

Ordinary
P9,440,000
P9,440,000
800,000
P 11.80
Ordinary
P9,140,000
P9,140,000
800,000
P11.425

300,000
300,000

Land
Buildings
Machinery and Equipment

Accum. Depreciation – Buildings
Accum. Depreciation – Machinery & Equipment
Revaluation Surplus

1,500,000
1,875,000
350,000

Revaluation Surplus
Retained Earnings

2,300,000

875,000
150,000
3,700,000

2,300,000

3-28. (Skinny Red Company)
(a) Retained Earnings
Accumulated Depreciation
Current Assets
Building

400,000
75,000
100,000
375,000


Ordinary Share
Ordinary Share
Share Premium

6,000,000

Share Premium
Retained Earnings

1,400,000

4,000,000
2,000,000
1,400,000

39


Chapter 3 – Shareholders’ Equity

Skinny Red Company
Statement of Financial Position
Current Assets
P 400,000
Land
1,500,000
Building
4,625,000
Accumulated Depreciation ( 925,000)
Total

P5,600,000

Liabilities
Ordinary Share
Share Premium

P1,000,000
4,000,000
600,000

Total

P5,600,000

3-29. Same as 3-27.

MULTIPLE CHOICE QUESTIONS
Theory
MC1
MC2
MC3
MC4
MC5
MC6
MC7
MC8
MC9
MC10
MC11


C
D
B
B
B
C
C
C
A
C
C

MC12
MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20
MC21
MC22

A
C
C
A
D
B

D
C
D
C
C

Problems
MC23
MC24
MC25
MC26
MC27
MC28
MC29
MC30
MC31
MC32
MC33
MC34
MC35
MC36
MC37
MC38
MC39
MC40
MC41
MC42
MC43

C

B
D
D
B
A
A
C
B
A
B
C
B
B
D
C
B
D
D
B
A

MC44
MC45

A
A

230,000 + 525,000 + 5,000 = 760,000
480,000 x 110/120 = 440,000; 440,000-400,000 = 40,000
(60,000 x 2) – (5,000 x 2) = 110,000

125,000 x 3 = 375,000
375,000 – [(12,000 x 3) + 5,000] = 334,000
20,000 x 9 = 180,000; 180,000/2 = 90,000 x 1/2 = 45,000
600,000 x 5 = 3,000,000
1,000,000 + (10,000 x 20) – (2,000 x 20) = 1,160,000
7,000,000 + (35,000 x 70) = 9,450,000
2,000 x 8 = 16,000
70 – (70/2) = 35
(5,000 x 80) – (5,000 x 40) = 200,000
600 x 10 x 60% = 3,600; 6,000 – 3600 = 2,400
Interest expense for 2009 = 100,000 x 10% x 9/12 = 7,500
2,120,000 – (2,000 bonds x 1,040) = 40,000
945,000/ 70 = 13,500; 13,500/90,000 = 15%
80,000 + (2,000,000 x 8%) = 240,000; 300,000 – 240,000 = 60,000
(3,000,000 x 5% x 2 years) – 100,000 = 200,000 arrears, end
(110,000 + 10,000) x 2 = 220,000 issued; 220,000 – (4,000 x 2) = 212,000
24,000+48,000=72,000; 108,000-72,000-24,000 = 12,000
72,000 + (12,000 x 4/6) = 80,000; 24,000 + (12,000 x 2/6) =28,000
80,000/4,000 = 20; 28,000/20,000 = 1.40
8,000,000 – (10,000 x 70) – 1,200,000 = 6,100,000
(15 x 2)/5 = 6.00

40


Chapter 3 – Shareholders’ Equity

MC46

B


MC47

C

MC48
MC49
MC50
MC51
MC52
MC53
MC54
MC55
MC56
MC57
MC58

C
A
D
C
B
B
D
B
B
B
B

MC59


C

MC60

D

25,000 x 40 = 1,000,000; 10% x 2,500,000 = 150,000
1,000,000 + 250,000 = 1,250,000
(40,000x 105) – (600 x 110) + (400 x 95) + 830,000 – 200,000 =
4,802,000
5,520,000 – 25,000 – 170,000 + 40,000 + 900,000 = 6,265,000
(2,000 x 85) – (800 x 42.50) = 136,000
[3,000 x (50-20)] / 3 years = 30,000
4,500,000 x 95% = 4,275,000; 4,275,000/3 = 1,425,000
4,500,000 x 94% x 2/3 = 2,820,000; 2,820,000 – 1,425,000=1,395,000
(4 x 200 x 300) x ½ = 120,000
(90% x 7 x 200 x 300) – 120,000 = 258,000
360,000 – 70,000 = 290,000; 290,000/5,000 = 58
3,150,000/ 50,000 = 63
3,150,000 – (5,000 x 120) = 2,550,000; 2,550,000/50,000 = 51
RE = 1,000,000; cumulative dividends in arrears = 5,000,000 x 8% x 3
years = 1,200,000, but dividends are limited to the extent of RE balance of
P1,000,000; Thus, equity of ordinary share is 13,500,000 – 5,000,000 –
1,000,000 = 7,500,000; 7,500,000/ 750,000 shares = P10
13,500,000 – (50,000 x 106) – 1,000,000 = 7,200,000 ; 7,200,000/750,000
shares = 9.60
(200,000 x 2) + (200,000 x 5) – 950,000 = 450,000

41