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CHAPTER 3

SHAREHOLDERS’ EQUITY

PROBLEMS

3-1. (Budomo Company)


• Cash (20,000 x 300) 6,000,000

Ordinary Share 6,000,000

• Legal Expense/Professional Fees 90,000

Ordinary Share (250 x 300) 75,000


Share Premium - Ordinary 15,000

• Land 1,000,000

Building 2,950,000
Ordinary Share (12,500 x 300) 3,750,000
Share Premium - Ordinary 200,000

• Cash (6,500 x 380) 2,470,000

Ordinary Share (6,500 x 300) 1,950,000


Share Premium - Ordinary 520,000

3-2.
a. Cash (10,000 x 200) 2,000,000
Ordinary Share (10,000 x 150) 1,500,000
Share Premium - Ordinary 500,000

Share Premium-Ordinary 60,000


Cash 60,000

b. Land (3,500 x 560) 1,960,000


Ordinary Share (3,500 x 200) 700,000
Share Premium – Ordinary 1,260,000

c. Cash 18,000,000
Preference Share 2,500,000
Ordinary Share 10,000,000
Share Premium – Preference 2,000,000
Share Premium – Ordinary 3,500,000
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

d. Subscription Receivable 450,000


Cash 150,000
Subscribed Ordinary Share 500,000
Chapter 3 – Shareholders’ Equity

Share Premium – Ordinary 100,000

e. Land 5,000,000
Cash 40,000
Donated Capital 4,960,000
3-3. (Blazing Red Corporation)
Shareholders’ Equity
Contributed Capital
10% Preference Share, cumulative and non-participating, P100
par P1,200,000
30,000 shares authorized; 12,000 shares issued and
outstanding
Ordinary Share, P10 par, 100,000 shares authorized, 30,000
shares 300,000
issued, 29,000 shares outstanding
Subscribed Ordinary Share, 4,500 shares 45,000
Subscription Receivable – Ordinary (43,200)
Share Premium – Preference 275,000
Share Premium –Ordinary 77,000
Total contributed capital P1,853,800
Retained Earnings
Appropriated for Treasury Share P
15,000
Unappropriated 350,000
335,000
Treasury Shares, 1,000 ordinary shares, at cost ( 15,000)
Total Shareholders’ Equity P2,188,800

The total amount of P2,188,800 may also be obtained without necessary


preparing the shareholders’ equity in good format (if not required) as
follows:

Issue of 30,000 ordinary shares P 350,000


Issue of preference shares in exchange of equipment
1,475,000
Subscriptions for 4,500 ordinary shares at 16
72,000
Subscriptions receivable (60%)
(43,200)
Purchase of 1,000 treasury shares at 15
(15,000)
Retained earnings 350,000
Total shareholders’ equity, December 31, 2007 P
2,188,800

3-4. (Millennium Company)


(a)
(1) Treasury Share 140,000
Cash 140,000

(2) Cash 60,000


Treasury Share 56,000
Paid in Capital from Treasury 4,000
Share

(3) Cash 65,000


Paid in Capital from Treasury Share 4,000

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Chapter 3 – Shareholders’ Equity

Retained Earnings 1,000


Treasury Share 70,000

(4) Ordinary Share 10,000


Share Premium 3,000
Retained Earnings 1,000
Treasury Share 14,000

(b) Total shareholders’ equity, December 31, 2006 P2,200,000


(1) Purchase of treasury share (10,000 x 14) (140,000)
(2) Sale of treasury share (4,000 x 15) 60,000
(3) Sale of treasury share (5,000 x 13) 65,000
Net income for the year 180,000
Dividends declared (200,000)
Total shareholders’ equity, December 31, 2007 P2,165,000
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 878,000
Total shareholders’ equity
P2,165,000

3-5. (Consuelo Enterprises, Inc.)


(a) Preference Share (4,000 x 20) 80,000
Share Premium – Preference (4,000 x 6,400
1.60)
Retained Earnings 1,600
Cash (4,000 x 22) 88,000

(b) Preference Share (4,000 x 20) 80,000


Share Premium – Preference (4,000 x 6,400
1.60)
Retained Earnings 17,600
Cash (4,000 x 26) 104,000

(c) Preference Share (4,000 x 20) 80,000


Share Premium – Preference (4,000 x 6,400
1.60)
Cash (4,000 x 20.50) 82,000
PIC from Retirement of Preference 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) 60,000
Share Premium – Preference (3,000 x 4,800
1.60)
Retained Earnings 25,200
Ordinary Share (3,000 x 30) 90,000

(b) Preference Share (3,000 x 20) 60,000


Share Premium – Preference (3,000 x 4,800

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Chapter 3 – Shareholders’ Equity

1.60)
Ordinary Share (1,500 x 30) 45,000
PIC from Conversion of Preference 19,800

3-7. (Red Heart Corporation)


06/15/07 Cash 6,000,000
Ordinary Share 5,000,000
Share Premium – Ordinary 1,000,000

09/30/07 Retained Earnings (80,000 x 5% x 440,000


110)
Share Dividends Distributable (4,000 x 400,000
100)
Share Premium – Ordinary 40,000

11/10/07 Share Dividends Distributable 400,000


Ordinary Share 400,000

12/31/07 Income Summary 1,175,000


Retained Earnings 1,175,000

03/31/08 Treasury Share (3,000 x 95) 285,000


Cash 285,000
05/01/08 Cash (1,500 x 120) 180,000
Treasury Share (1,500 x 95) 142,500
Paid in Capital from Treasury 37,500
Shares

08/10/08 Issued 82,500 rights to shareholders


entitling holders to purchase 2
additional shares for P125 per share.

09/15/08 Cash (30,000 x 125) 3,750,000


Ordinary Share (30,000 x 100) 3,000,000
Share Premium – Ordinary 750,000

10/31/08 Cash (80,000 x 125) 10,000,00


0
Ordinary Share (80,000 x 100) 8,000,000
Share Premium – Ordinary 2,000,000

12/10/08 Retained Earnings 962,500


Dividends Payable (192,500 x 5) 962,500

12/20/08 Ordinary Share (1,000 x 100) 100,000


Share Premium – Ordinary (1,000 x 10,000
10)*
Paid in Capital from Treasury 15,000
Shares
Treasury Share 95,000
*Share premium per share
300,000/30,000 = 10

12/31/08 Income Summary 1,200,000


Retained Earnings 1,200,000

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Chapter 3 – Shareholders’ Equity

(b)
Shareholders’ Equity
Contributed Capital
Ordinary Share, P100 par, 300,000 shares authorized, 193,000
shares issued, 192,500 shares outstanding P19,300,00
0
Share Premium –Ordinary 4,080,000
Paid in Capital from Treasury Shares 52,500
Total contributed capital P23,432,50
0
Retained Earnings
Appropriated for Treasury Share
P 47,500
Unappropriated 1,422,500
1,375,000
Treasury Shares, 1,000 ordinary shares, at cost (47,500)
Total Shareholders’ Equity P24,807,50
0

3-8. (Red Carpet Company)


(a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows:

Securities Market value Allocation Allocated Price


Preference 90 147,000 x 90/100 132,300
Warrant 10 147,000 x 10/100 14,700
Entry Cash 147,000
Preference Share (1,500 x 30) 45,000
Share Premium – Preference 87,300
Share Warrants Outstanding 14,700

(b) Cash (600 x 40) 24,000


Share Warrants Outstanding 11,760
Ordinary Share 6,000
Share Premium – Ordinary 29,760

3-9. (Red Hot Company)


(a) Value of each option P8
Number of shares granted x 30,000
Total value assigned to share options P240,000
Required service period ÷ 3years
Annual compensation expense P 80,000
(b) Share Options Outstanding 240,000
Cash (30,000 x 50) 1,500,000
Ordinary Share (30,000 x 20) 600,000
Share Premium - Ordinary 1,140,000

3-10. (Fire Red Company)


01/02/07 Memo: granted 40,000 share options were granted to certain
officers for the purchase of the company’s P100 par ordinary
shares at P430 per share.
12/31/07 Compensation Expense 800,000
Share Options Outstanding 800,000
(40,000 x 80) ÷ 4 years
12/31/08 Compensation Expense 800,000

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Chapter 3 – Shareholders’ Equity

Share Options Outstanding 800,000


(40,000 x 80) ÷ 4 years
01/01/09 Memo: 6,000 share options were
cancelled.
12/31/09 Compensation Expense 440,00
0
Share Options Outstanding 440,000
Total accrued compensation
expense
(34,000 x 80) x 3/4 2,040,00
0
Less: previously accrued 1,600,00
0
Compensation expense- 440,000
2009

12/31/10 Compensation Expense 680,000


Share Options Outstanding 680,000
(34,000 x 80) / 4

06/30/11 Cash (34,000 x 430) 14,620,000


Share Options Outstanding (34,000 x 2,720,000
80)
Ordinary Shares (34,000 x 100) 3,400,000
Share Premium – Ordinary 13,940,000

3-11. (Red Fox Corporation)


(a)
2007 200 – 10 – 15 = 175 employees x 100
options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3 186,667

2008 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

2009 200-10-12-8=170 employees x 100


options=17,000
17,000 x 32 = 544,000; 544,000 – 369,067 174,933

(b)
01/01/07 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, 2010 provided that the
employees are still in the service. Options expire on
December 31, 2011.

12/31/07 Compensation Expense 186,667


Share Options Outstanding 186,667
Share Options Outstanding 182,400

12/31/09 Compensation Expense 174,933


Share Options Outstanding 174,933

2010 Cash (140 x 100 x 220) 3,080,000

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Chapter 3 – Shareholders’ Equity

Share Options Outstanding (14,000 x 448,000


32)
Ordinary Share (14,000 x 200) 2,800,000
Share Premium – Ordinary 728,000

2011 Cash (10 x 100 x 220) 220,000


Share Options Outstanding (1,000 x 32,000
32)
Ordinary Share (1,000 x 200) 200,000
Share Premium – Ordinary 10,400

Share Options Outstanding (2,000 x 64,000


32)
PIC from Forfeited Share Options 64,000

3-12. (Cherry Company)


(a)
01/01/07 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 2010.

12/31/07 Compensation Expense 66,667


Share Options Outstanding 66,667
(10,000 x 20) / 3 years

12/31/08 Compensation Expense 133,333


Share Options Outstanding 133,333
(10,000 x 20) - 66,667

2009 Cash (10,000 x 120) 1,200,000


Share Options Outstanding 200,000
Ordinary Shares (10,000 x 100) 1,000,00
0
Share Premium-Ordinary 400,000
(b)
01/01/07 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 2010.
12/31/07 Compensation Expense 66,667
Share Options Outstanding 66,667
(10,000 x 20) / 3 years

12/31/08 Compensation Expense 66,667


Share Options Outstanding 66,667

12/31/09 Compensation Expense 66,666


Share Options Outstanding 66,666

2010 Cash (8,000 x 120) 960,000


Share Options Outstanding (80% x 160,000
200,000)
Ordinary Shares (8,000 x 100) 800,000
Share Premium-Ordinary 320,000

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Chapter 3 – Shareholders’ Equity

Share Options Outstanding (20% x 40,000


200,000)
PIC from Forfeited Share Options 40,000
(c) If the stock price reached P200 by June 2010, the same entries will be
made for year 2007 through 2009, as given in (b) The recorded share
options, however, will be cancelled at the end of 2010, as the options
already expire.
12/31/10 Share Options Outstanding 200,000
PIC from Forfeited Share Options 200,000

3-13. (Panda Company)


(a)
01/01/07 Granted 80 share options to each of 400 employees for
the purchase of P100 par ordinary shares at P140 per
share.

12/31/07 Compensation Expense 352,000


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

12/31/08 Compensation Expense 352,000


Share Options Outstanding 352,000

2009 Cash (32,000 x 140) 4,480,00


0
Share Options Outstanding 704,000
Ordinary Share (32,000 x 100) 3,200,00
0
Share Premium – Ordinary 1,984,00
0

(b) The full amount of P704,000 is


recognized as compensation expense
since the options vests already in 2007.

3-14. (Paul Company)


(a)
01/01/07 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, 2010 and expire on December 31, 2011. The number of
share options will be based on the level of sales for 2009.

12/31/07 Compensation Expense 100,000


Share Options Outstanding 100,000
10,000 sh x 30 x 1/3

12/31/08 Compensation Expense 200,000


Share Options Outstanding 200,000
15,000 sh x 30 x 2/3
300,000
Less: previously accrued
100,000
Compensation expense

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Chapter 3 – Shareholders’ Equity

200,000

12/31/09 Compensation Expense 240,000


Share Options Outstanding 240,000
18,000 sh x 30 x 3/3
540,000
Less: previously accrued
300,000
Compensation expense
240,000
(b) Assuming that the chief executive officer resigned in 2008.
12/31/08 Share Options Outstanding 100,000
Compensation Expense 100,000
Note: When the grant of share options is based on non-market
performance condition, the amount of recognized services received during
the vesting period shall be based on the number of share options expected
to vest. The entity shall reverse that estimate, if necessary, if the share
options are later forfeited, or lapse at the end of the share option’s life.
Thus, in effect, on a cumulative basis, no compensation expense is
recorded as a result of the stock options.

3-15. (Joey Corporation)


(a)
12/31/07 Compensation Expense 66,667
Share Appreciation Rights Payable 66,667
10,000 x (140 -120) x 1/3

12/31/08 Compensation Expense 133,333


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

12/31/09 Compensation Expense 250,000


Share Appreciation Rights Payable 250,000
10,000 x (165 - 120) = 450,000
450,000 –200,000 = 250,000
(b) (1)Assuming that the rights were exercised on January 1, 2010, when
the market price is P165.
01/01/10 Share Appreciation Rights Payable 450,000
Cash 450,000

(b) (2)Assuming that the rights were exercised on December 31, 2010,
when the market price is P172.
12/31/10 Share Appreciation Rights Payable 450,000
Compensation Expense 70,000
Cash 10,000 x (172-120) 520,000

3-16. (Red Bull Corporation)


12/31/07 Compensation Expense 89,333
Share Appreciation Rights Payable 89,333

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Chapter 3 – Shareholders’ Equity

10,000 x 26.80 x 1/3

12/31/08 Compensation Expense 118,667


Share Appreciation Rights Payable 116,667
10,000 x 31.20 x 2/3 = 208,000
208,000 – 83,333 = 118,667

12/31/09 Compensation Expense 194,000


Share Appreciation Rights Payable 194,000
10,000 x 39.40 = 394,000
394,000 –200,000 = 194,000

2010 Share Appreciation Rights Payable 394,000


Compensation Expense 56,000
Cash 10,000 x (165-120) 450,000

3-17. (Emerald Company)


(a) Fair value of the equity alternative
4,000 shares x 150 600,000
Fair value of debt component
3,600 shares x 158 568,800
Fair value of equity component 31,200

(b) 2007: 3,600 x 160=576,000/3 192,000


31,200/3 10,400
Total compensation expense 202,400

2008: 3,600 x 165 x 2/3 = 396,000


396,000 – 192,000 204,000
31,200/3 10,400
Total compensation expense 214,400

2009: 3,600 x 168 = 604,800


604,800 – 396,000 208,800
31,200/3 10,400
Total compensation expense 219,200

2010: 2,700 x (172-165) 18,900

(c)
01/01/07 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.

12/31/07 Compensation Expense 202,400


Share Options Outstanding 10,400
Share Appreciation Rights Payable 192,000

12/31/08 Compensation Expense 214,400


Share Options Outstanding 10,400
Share Appreciation Rights Payable 204,000

12/31/09 Compensation Expense 219,200


Share Options Outstanding 10,400
Share Appreciation Rights Payable 208,800

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Chapter 3 – Shareholders’ Equity

12/31/09 Share Options Outstanding 7,800


Share Appreciation Rights Payable 151,200
Cash 151,200
PIC from Unexercised Share 7,800
Options
31,200 / 4 = 7,800
604,800 / 4 =151,200
12/31/10 Compensation Expense 18,900
Share Appreciation Rights Payable 18,900

12/31/10 Share Options Outstanding 23,400


Share Appreciation Rights Payable 472,500
Ordinary Share (3,000 x 100) 300,000
Share Premium – Ordinary 195,900
7,800 x 3 = 23,400
151,200 x 3 = 453,600 +
18,900

3-18. (Red Stone Company)


(a) Retained Earnings ( 10,000 shares x P20) 200,000
Share Dividends Distributable 100,000
Share Premium 100,000

Share Dividends Distributable 100,000


Ordinary Shares 100,000

(b) Retained Earnings (30,000 x 10) 300,000


Share Dividends Distributable 300,000

Share Dividends Distributable 300,000


Ordinary Shares 300,000

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

3-19. (Buenviaje Corporation)


Capital structure:
Preference Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000

(a) Preference share is non-cumulative and non-participating


2006 Preference Ordinary
Current preference dividends (9% x 2,000,000) P 180,000
Excess (1,500,000 – 180,000) P1,320,000
Dividend per share P9.00 P5.28

2007 Preference Ordinary


Current preference dividends (9% x 2,000,000) P 180,000
Excess (2,400,000 – 180,000) P2,220,000
Dividend per share P9.00 P8.88

2008 Preference Ordinary


Current preference dividends (9% x 2,000,000) P 180,000
Excess (5,600,000 – 180,000) P5,420,000
Dividend per share P9.00 P21.68

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Chapter 3 – Shareholders’ Equity

(b) Preference share is cumulative and non-participating.


2006 Preference Ordinary
Dividends in arrears (9% x 2,000,000 x 3) P 540,000
Excess (1,500,000 – 540,000) P 960,000
Dividend per share P2.70 P3.84
2007 Preference Ordinary
Current preference dividends (9% x 2,000,000) P 180,000
Excess (2,400,000 – 180,000) P2,220,000
Dividend per share P9.00 P8.88

2008 Preference Ordinary


Current preference dividends (9% x 2,000,000) P 180,000
Excess (5,600,000 – 180,000) P5,420,000
Dividend per share P9.00 P21.68

(c) Preference share is cumulative and fully participating


2006 Preference Ordinary
Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
1,095,000 x 2.0/4.5 486,667
1,095,000 x 2.5/4.5 608,333
Total dividends P 666,667 P 833,333
Dividend per share P33.33 P3.33

2007 Preference Ordinary


Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
1,995,000 x 2.0/4.5 886,667
1,995,000 x 2.5/4.5 1,108,333
Total dividends P1,066,667 P1,333,333
Dividend per share P53.33 P 5.33

2008 Preference Ordinary


Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
5,195,000 x 2.0/4.5 2,308,889
5,195,000 x 2.5/4.5 2,886,111
Total P2,488,889 3,111,111
Dividend per share P124.44 P 12.44

3-20. (Mama Mia Company)


Retained Earnings 500,000
Share Dividends Distributable 500,000
50% x 100,000 x 10 = 500,000
Share Dividends Distributable 500,000
Ordinary Shares 400,000
Fractional Share Warrants Outstanding 100,000
Fractional Share Warrants Outstanding 100,000

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Chapter 3 – Shareholders’ Equity

Ordinary Share 80,000


PIC from Unexercised Fractional Share 20,000
Warrants

3-21. (Buenas Aires Corporation)


Preferenc Ordinary Treasury Share
e Sha
Total SHE Shares res Shares Cost
Issued Issu
ed
12/31/07Balances P16,500,000 30,000 100,000
2008 transactions:
a) 4,000 x 280 (1,120,000) (4,000)
b) 8,000 x 75 (600,000) 8,000 P600,000
c) 2:1 share split 100,000 8,000
d) 6,000 x 45 270,000 (6,000) (225,000)*
e) 4,000 x 46 4,000
f) 2,000 x 48 96,000 (2,000)
g) Net income 1,850,000
12/31/08 balances P16,996,000 26,000 200,000 12,000 P375,000
*P600,000 x 6,000/16,000 = 225,000

(a) Total shareholders’ equity P16,996,000


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

3-22. (La Vida Company)


Retained earnings balance as of December 31, 2008
3,900,000 – 600,000 – 240,000 P 3,060,000
Total shareholders’ equity as of December 31, 2008
6,000,000 + 8,000,000 + 3,060,000 P17,060,000
(a) Preferenc Ordinary
e
Par value of preference share P6,000,00
0
Dividends in arrears (6,000,000 x 9% x 3 1,620,000
yrs.)
Excess to ordinary (17,060,000 – 7,620,000) P9,440,00
0
Total equity P7,620,00 P9,440,00
0 0
Divide by the number of shares outstanding 60,000 800,000
Book value per share P 127 P 11.80

(b) Preferenc Ordinary


e
Liquidation value (60,000 shares x P105) P6,300,00
0
Dividends in arrears (P6,000,000 x 9% x 3 1,620,000
yrs.)
Excess to ordinary (17,060,000 – 7,920,000) P9,140,00
0
Total equity P7,920,00 P9,140,00

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Chapter 3 – Shareholders’ Equity

0 0
Divide by the number of shares outstanding 60,000 800,000
Book value per share P132 P11.425

3-23. (Los Angeles Company)


(a) Retained Earnings 400,000
Accumulated Depreciation 75,000
Current Assets 100,000
Building 375,000

Ordinary Share 6,000,000


Ordinary Share 4,000,00
0
Share Premium 2,000,00
0
Share Premium 1,400,000
Retained Earnings 1,400,00
0

(b) Current Assets P 400,000 Liabilities


P1,000,000
Land 1,500,000 Ordinary Share 4,000,000
Building 4,625,000 Share Premium 600,000
Accumulated Depreciation ( 925,000)
Total Assets P5,600,000 Total Equities P5,600,000

3-24. (Las Vegas, Inc.)


Retained Earnings 300,000
Inventory 300,000

Land 1,500,000
Buildings 1,875,000
Machinery and Equipment 350,000
Accum. Depreciation – Buildings 875,000
Accum. Depreciation – Machinery & 150,000
Equipment
Revaluation Surplus 3,700,00
0

Revaluation Surplus 2,300,000


Retained Earnings 2,300,00
0

35