Chapter 7

Statement of Changes in Equity

Problem 7-1
Reliable Company provided the following information for the year ended December 31,
2019:

Retained earnings – unapppropriated, January 1 200,000

Overdepreciation of 2018 due to prior period error 100,000
Net income for current year 1,300,000
Retained earnings appropriated for treasury shares,
Original balance is P500,000 and reduced by
P200,000 by reason of reissue of the treasury shares 300,000
Retained earnings appropriated for contingencies,
Beginning balance P700,000 and increased by
Current appropriation of P100,000 800,000
Cash dividends paid to shareholders 500,000
Change from FIFO to weighted average – credit 150,000

Required:

Prepare a statement of retained earnings for 2019.

Answer:

Reliable Company
Statement of Retained Earnings
December 31, 2019

Retained earnings – January 1 200,000

Prior period error – overdepreciation in 2018 100,000
Change in accounting policy from FIFO to weighted
Average method – credit adjustment 150,000
Corrected beginning balance 450,000
Net income for 2019 1,300,000
Decrease in appropriation for treasury share 200,000
Total 1,950,000
Cash dividends paid to shareholders ( 500,000)
Current appropriation for contingencies ( 100,000)
Retained earnings – December 31 1,350,000
Problem 7-2

Gondola Company showed the following charges and credits to retained earnings for
2019:

Balance – January 1 2,600,000

Loss from fire 50,000
Goodwill impairment 250,000
Stock dividend 700,000
Loss on sale of equipment 200,000
Compensation of prior period not accrued 500,000
Loss on retirement of preference share at more than
Issue price 350,000
Share premium 600,000
Gain on early retirement of bonds payable 100,000
Gain on life insurance settlement 450,000
Correction of prior period error – credit 400,000
Net income for the year 3,000,000
Appropriated for treasury shares during the year 1,000,000

Required:

Prepare a statement of retained earnings for 2019.

Answer:

Gondola Company
Statement of Retained Earnings
December 31, 2019

Balance – January 1 2,600,000

Compensation of prior period not accrued ( 500,000)
Correction of prior period error – credit 400,000
Adjusted beginning balance 2,500,000
Net income – adjusted 3,050,000
Stock dividend ( 700,000)
Loss on retirement of preference share ( 350,000)
Appropriated for treasury share (1,000,000)
Balance – December 31 3,500,000

*computation of net income – adjusted

Net income 3,000,000

Loss from fire ( 50,000)
Goodwill impairment ( 250,000)
Loss on sale of equipment ( 200,000)
Gain on retirement of bonds payable 100,000
Gain on life insurance settlement 450,000
Adjusted net income 3,050,000

Problem 7-3

Angola Company reported the following comparative statement of income and retained
earnings:

2020 2019

Sales 6,000,000 4,500,000

Cost of goods sold (2,800,000) (2,400,000)

Gross income 3,200,000 2,100,000

Expenses (1,500,000) (1,800,000)

Net income 1,700,000 300,000

Retained earnings – January 1 1,150,000 1,000,000

Net income 1,700,000 300,000
Dividends paid ( 500,000) ( 150,000)

Retained earnings – December 31 2,350,000 1,150,000

In 2020, the entity discovered that ending inventory for 2019 was understated by
P100,000.

In addition, the entity decided to change its method from double declining to straight
line. The differences in the two depreciation methods are as follows:

2020 2019

Double declining 350,000 450,000

Straight line 340,000 400,000

Expenses in the income statements include depreciation based on double declining

balance.

Required:

Prepare comparative statement of income and retained earnings.

Answer:

Angola Company
Comparative Income statement
December 31, 2020 and 2019

2020 2019
Sales 6,000,000 4,500,000
Cost of goods sold (2,900,000) (2,300,000)
Gross income 3,100,000 2,200,000
Expenses (1,490,000) (1,800,000)
Net income 1,610,000 400,000

Angola Company
Comparative statement of Retained Earnings
December 31, 2020 and 2019

2020 2019
Retained earnings – January 1 1,250,000 1,000,000
Net income 1,610,000 400,000
Dividends paid ( 500,000) ( 150,000)
Retained earnings – December 31 2,360,000 1,250,000

Problem 7-4

On January 1, 2019, Martha Company had 6,000,000 authorized ordinary shares of P5

par, of which 2,000,000 shares were issued and outstanding. The shareholders’ equity
on same date showed the following balances:

Ordinary share capital 10,000,000

Share premium 7,500,000
Retained earnings 3,250,000

On January 5, Martha issued at P54 per share, 100,000 shares of P50 par 9%
cumulative, convertible preference share capital. Martha had 250,000 authorized
preference shares.

On February 1, Martha reacquired 20,000 ordinary shares for P16 per share. Martha
uses the cost method.

On April 30, Martha had completed an additional public offering of 500,000 ordinary
shares with P5 par value. The shares were sold to the public at P12 per share.
On June 17, Martha declared a cash dividend of P1 per ordinary share, payable on July
10 to shareholders of record on July 1. On November 6, Martha sold 10,000 shares of
treasury for P21 per share.

On December 7, Martha declared the yearly cash dividend on preferences share,

payable on January 7, 2020, to shareholders of record on December 31,2019.

On January 17, 2020, before the books were closed for 2019, Martha became aware
that the ending inventory on December 31, 2018 was overstated by P200,000.

The after-tax effect on 2018 net income was P140,000. The appropriate correcting entry
was recorded.

After correction of the beginning inventory, net income for 2019 was P2,250,000.

Required:
Prepare a statement of changes in equity for the year ended December 31, 2019.
Answer:
Martha Company
Statement of Changes in Equity
December 31, 2019

Ordinary Preference Share RE TS

premium
Balance – 10,000,000 7,500,000 3,250,000
January 1
Issuance of 5,000,000 400,000
preference
Purchase of 320,000
treasury –
ordinary
Issuance of 2,500,000 3,500,000
ordinary
Dividend to (2,480,000)
ordinary
Reissuance of 50,000 (160,000)
TS
Dividend to (450,000)
preference
Overstatemen (140,000)
t of 2018
ending
inventory
Net income 2,250,000
Balances – 12,500,000 5,000,000 11,450,000 2,430,000 160,000
December 31
Problem 7-5

Carr Company reported the following shareholders’ equity on January 1, 2019.

Preference share capital 1,800,000

Share premium – preference 90,000
Ordinary share capital 5,150,000
Share premium – ordinary 3,500,000
Retained earnings 4,000,000
Treasury shares – ordinary 270,000

On January 1, 2019, Carr had 100,000 authorized shares of P100 par, 10% cumulative
preference share capital and 3,000,000 authorized shares of no par ordinary share
capital with a stated value of P5 per share.

On January 10, 2019, Carr formally retired all the 30,000 ordinary shares of treasury.
The treasury shares had been acquired in the previous year and were originally issued
at P10 per share.

Carr owned 10,000 ordinary shares of Bush Company purchased several years ago for
P600,000. On February 15, Carr declared and paid a dividend in kind of one share of
bush for every hundred ordinary shares of Carr held by a shareholder of record on
February 28, 2019. The market price of bush share was P75 on February 15, 2017.

On December 12, 2019, Carr declared the yearly cash dividend on preference share,
payable on January 14, 2020, to shareholders of record on December 31, 2019.

On January 15, 2020, before the accounting records were closed for 2019, Carr
became aware that rent income for the year ended December 31, 2018 was overstated
by P500,000.

The after-tax effect on 2018 net income was P350,000. The appropriate correcting entry
was recorded.

After correcting the rent income, net income for 2019 was P2,600,000.

Required:

Prepare a statement of changes in equity for 2019.

Answer:

Carr Company
Statement of Changes in Equity
December 31, 2019
Ordinary Preference Share RE TS
premium
Balances – 5,150,000 1,800,000 3,590,000 4,000,000 270,000
January 1
Retirement (150,000) (120,000) (270,000)
of TS
Property (750,000)
dividend
Dividend to (180,000)
preference
Error (350,000)
Net income 2,600,000
Balances - 5,000,000 1,800,000 3,470,000 5,320,000 -
December
31

Problem 7-6

United Company reported the following unadjusted current assets and shareholders’
equity at year-end:

Cash 600,000
Financial assets at fair value, including cost of
P300,000 of United Company shares 1,000,000
Trade accounts receivable 3,500,000
Inventory 1,500,000
Share capital 5,000,000
Share premium 2,000,000
Retained earnings 500,000

What amount should be reported as total shareholders’ equity at year-end?

a. 7,200,000
b. 7,500,000
c. 7,800,000
d. 5,200,000

Answer:
Problem 7-7

Bronze Company provided the following information at year-end:

Share capital 6,000,000

Share premium 3,500,000
Cumulative translation adjustment – debit 2,000,000
Treasury shares, at cost 700,000
Retained earnings 1,500,000
Cumulative unrealized gain on option contract
Designated as cash flow hedge 600,000

What is the shareholders’ equity at year-end?

a. 9,500,000
b. 8,900,000
c. 7,400,000
d. 7,500,000

Answer:

Share capital 6,000,000

Share premium 3,500,000
Retained earnings 1,500,000
Cumulative unrealized gain on option contract
Designated as cash flow hedge 600,000
Cumulative translation adjustment – debit (2,000,000)
Treasury shares, at cost (700,000)
Total shareholders’ equity 8,900,000

Problem 7-8

Silver Company provided the following information at year-end:

Share premium 1,000,000

Accounts payable 1,100,000
Preference share capital, at par 2,000,000
Ordinary share capital, at par 3,000,000
Sales 10,000,000
Total expenses 7,800,000
Treasury shares – ordinary 500,000
Dividends 700,000
Retained earnings – beginning 1,000,000
What is the shareholders’ equity at year-end?

a. 8,000,000
b. 8,500,000
c. 5,800,000
d. 8,700,000

Answer:

Sales 10,000,000
Total expenses ( 7,800,000)
Net income 2,200,000
Retained earnings – beginning 1,000,000
Dividends ( 700,000)
Retained earnings – Ending 2,500,000

Preference share capital 2,000,000

Ordinary share capital 3,000,000
Share premium 1,000,000
Retained earnings 2,500,000
Treasury shares ( 500,000)
Total shareholders’ equity 8,000,000

Problem 7-9

Kalinga Company reported the following adjusted accounts balances at year-end:

Share capital 15,000,000

Share premium 5,000,000
Treasury shares, at cost 2,000,000
Actuarial loss on defined benefit plan 1,000,000
Retained earnings appropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment – credit 1,500,000

What amount should be reported as shareholders’ equity at year-end?

a. 31,500,000
b. 32,500,000
c. 28,500,000
d. 25,500,000
 Answer:
Share capital 15,000,000
Share premium 5,000,000
Retained earnings appropriated 6,000,000
Retained earnings appropriated 3,000,000
Revaluation surplus 4,000,000
Cumulative translation adjustment – credit 1,500,000
Treasury shares, at cost (2,000,000)
Actuarial loss on defined benefit plan (1,000,000)
Total shareholders’ equity 31,500,000

Problem 7-10

1. In the statement of changes in equity, the effect of a change in accounting policy is

presented

a. Separately for each component of equity

b. In aggregate for total equity.
c. In total for the amount attribute to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of parent and the
noncontrolling interest

2. In the statement of changes in equity, the effect of the correction of a prior period
error is presented

a. Separately for each component of equity

b. In aggregate for total equity
c. In total for the amount attributable to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of the parent and the
noncontrolling interest.

3. Which of the following does not appear in the statement of retained earnings?

a. Net loss
b. Prior period error
c. Preference share dividend
d. Other comprehensive income
4. Which of the following would appear first in a statement of retained earnings?

a. Net income
b. Prior period error
c. Chas dividend
d. Share dividend

5. Corrections of errors in prior period are included in

a. Retained earnings
b. Other comprehensive income
c. Net income
d. Share premium