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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)


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, 2013
3-4.

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

(3)

(4)

(b)

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 share

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, 2012


(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)
Profit for the year
Dividends declared
Total shareholders equity, December 31, 2013

26

P2,200,000
(140,000)
60,000
65,000
280,000
(200,000)
P2,265,000

Chapter 3 Shareholders Equity

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)

(c)

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

Memo:

100,000
300,000
300,000

Effected a 2 for 1 stock split on 100,000 shares P100 par

27

Chapter 3 Shareholders Equity

previously issued and outstanding.


3-8.

(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

(Red Violet Company)


Additional information: Preference has P100 par value per share.
Capital structure:
Preference
Number of shares outstanding
20,000
Total par value
P2,000,000

Ordinary
250,000
P2,500,000

(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

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
P12.00

95,000
P320,000
P1.28

Chapter 3 Shareholders Equity

3-10. (Red Mama Company)


Retained Earnings
Share Dividends Distributable
50% x 100,000 x 10 = 500,000

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

3-11. (Red Ball Corporation)


October 31, 2013
Financial Assets at FV through Profit or Loss
Unrealized Gain on Financial Assets at FVPL
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

Financial Assets at FV through Profit or Loss


Unrealized Gain on Financial Assets at FVPL
10,000 shares x (17 15)

20,000

Retained Earnings
Property Dividends Payable

20,000

20,000

20,000

February 28, 2014


Retained Earnings
Property Dividends Payable

30,000
30,000

Property Dividends Payable


Financial Assets at FV through Profit or Loss
Gain on Disposal of Financial Assets at FVPL

200,000
170,000
30,000

3-12. (Red Chili Company)


10/1/13 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
FV(because it is higher)
P190,000

180,000
270,000

30

190,000

450,000

Chapter 3 Shareholders Equity

12/31/13 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
1/31/14

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
12/31/12 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
12/31/13 balances
P17,146,000
*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)


(a)
06/15/12 Cash
Ordinary share
Share premium Ordinary
09/30/12

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


11/10/12
12/31/12

Share dividends distributable


Ordinary share
Income summary
Retained earnings

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

31

Chapter 3 Shareholders Equity

03/01/13
05/01/13

Treasury share (3,000 x 95)


Cash

285,000

Cash (1,500 x 120)


Treasury share (1,500 x 95)
PIC from treasury share

180,000

285,000
142,500
37,500

08/10/13

Issued 82,500 rights to shareholders


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

09/15/13

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

10/31/13

12/10/13
12/20/13

12/31/13

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

(b)
Shareholders Equity
Ordinary Share Capital, P100 par, 193,000 shares
issued; 500 shares in the treasury
Share Premium
Paid in Capital from Treasury Shares
Retained Earnings
Treasury Shares
Total shareholders equity, December 31, 2013

P19,300,000
4,080,000
52,500
1,422,500
(47,500)
P24,807,500

3-15. (Red Carpet Company)


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

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

32

Allocated Price
132,300
14,700
147,000
45,000
87,300
14,700

Chapter 3 Shareholders Equity

(b)

Cash (600 x 40)


Share warrants outstanding
Ordinary share
Share premium Ordinary

24,000
11,760
6,000
29,760

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)
1/1/13

12/31/13
12/31/14
12/31/15
12/31/16

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)


01/02/13 Memo: granted 40,000 share options to certain officers for the
purchase of the companys P100 par ordinary shares at P430 per share.
12/31/13

12/31/14

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

2015

Memo: 8,000 share options were cancelled.

12/31/15

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-2015
440,000

12/31/16

Compensation expense
Share options outstanding
(34,000 x 80) / 4

33

800,000

800,000

440,000
440,000

680,000
680,000

Chapter 3 Shareholders Equity

06/30/17

Cash (34,000 x 430)


Share options outstanding (34,000 x 80)
Ordinary shares (34,000 x 100)
Share premium Ordinary

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

3-18. (Red Fox Corporation)


(a) Compensation Expense
2013
200 10 15 = 175 employees x 100 options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3
2014
2015
(b)
01/01/13

12/31/13
12/31/14
12/31/15
2016

2017

186,667

20010125=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)
01/01/13 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, 2015 Options
expire at the end of 2016.
12/31/13

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

34

66,667
66,667

Chapter 3 Shareholders Equity

12/31/14

2015

Cash (10,000 x 120)


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

(b)
01/01/13

12/31/13

12/31/14
12/31/15
2016

(c)

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

133,333
133,333
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
2016.
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 2016, the same entries will be made
for year 2013 through 2015, as given in (b) The recorded share options,
however, will be cancelled at the end of 2016, as the options already expire.

12/31/16

Share Options Outstanding


PIC from Forfeited Share Options

200,000
200,000

3-20. (Red Day Company)


(a)
01/01/13 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 2013 if earnings increase by 15% or at the end of
2014 if average annual earnings for 2013 and 2014 increased by an
average of 12%.
12/31/13

12/31/14

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

35

352,000

352,000

Chapter 3 Shareholders Equity

2015

(b)

Cash (32,000 x 140)


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

4,480,000
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 2013.

3-21. (Bloody Red Company)


01/01/13

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, 2016
and expire on December 31, 2017. The number of share options will be based
on the level of sales for 2015.

12/31/13

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

150,000

Compensation Expense
Share Options Outstanding

150,000

12/31/14

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

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)
12/31/13 Compensation Expense
Share Appreciation Rights Payable

66,667
66,667

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

12/31/14

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

12/31/15

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, 2016, when the market
price is P165.
01/01/16

Share Appreciation Rights Payable


Cash

36

450,000
450,000

Chapter 3 Shareholders Equity

(b) (2) Assuming that the rights were exercised on December 31, 2016, when the
market price is P172.
12/31/16

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, 2013 = P89,333
December 31, 2014 = P208,000
December 31, 2015 = P394,000
12/31/13

12/31/14

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

12/31/15

Compensation Expense
Share Appreciation Rights Payable

186,000
186,000

10,000 x 39.40 = 394,000


394,000 208,000 = 194,000

2016

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 1/1/13
(b)

394,000
56,000
450,000

600,000
568,800
31,200

2013: 3,600 x 160=576,000; 576,000/3


31,200/3
Total compensation expense

192,000
10,400
202,400

2014: 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

2015: 3,600 x 168 = 604,800


604,800 396,000
31,200/3
Total compensation expense

208,800
10,400
219,200

2016: 2,700 x (172-168)

37

10,800

Chapter 3 Shareholders Equity

(c)
01/01/13

12/31/13

12/31/14

12/31/15

12/31/15

12/31/16

12/31/16

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.
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 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

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

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

3-25. (Red Santa Company)


RE, January 1, 2013
2013 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, 2013
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, 2014
3,900,000 600,000 240,000
Total shareholders equity as of December 31, 2014
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

P7,620,000
60,000
P 127

P7,920,000
60,000
P132

3-27. (Red, Inc.)


Retained Earnings
Inventory

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

Skinny Red Company


Statement of Financial Position
Current Assets
P 400,000
Liabilities
Land
1,500,000
Ordinary Share
Building
4,625,000
Share Premium
Accumulated Depreciation ( 925,000)
Total
P5,600,000
Total

39

P1,000,000
4,000,000
600,000
P5,600,000

Chapter 3 Shareholders Equity

MULTIPLE CHOICE QUESTIONS


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

C
D
B
B
B
C
C
C
C
No Answer; Answer is
Decrease; Increase
C

MC12
MC13
MC14
MC15
MC16
MC17
MC18
MC19
MC20
MC21

A
C
C
A
D
B
D
C
D
C

MC22

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

MC44
MC45
MC46

A
A
B

MC47
MC48
MC49
MC50
MC51
MC52
MC53
MC54
MC55
MC56
MC57

C
C
D
D
C
B
B
D
B
B
B

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
25,000 x 40 = 1,000,000; 10% x 2,500,000 = 150,000
1,000,000 + 250,000 = 1,250,000
(40,000x105) (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 = 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

40

Chapter 3 Shareholders Equity

MC58

MC59

MC60

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