AUDIT OF

7 SHAREHOLDERS' EQUITY
AUDIT PROGRAM FOR STOCKHOLDERS' EQUITY
Audit Objectives
To determine that:
a. Proper authorization of transactions involving stockholders' equity accounts
b. Proper accounting treatment of transactions involving stockholders' equity.
c. Compliance with legal requirements related to corporate capitalization.
d. Propriety of financial statement presentation and adequacy of disclosures.

Audit Procedures
1. Obtain a copy of the latest articles of incorporation and determine for each class of stock:
a. Authorized capital stock
b. Par or stated value
c. Preferences and limitations, if any.

2. Obtain or prepare a schedule of the capital stock, subscribed capital stock, and treasury stock
accounts indicating the number of shares and amounts for the:
a. Beginning of the year balances
b. Additions and deductions for the current year
c. End-of-year balances.

3. Foot and cross-foot schedule.

4. Verify accuracy of the schedule:

a. Trace beginning balances to last year's working papers or in case of an initial audit,
establish accuracy of beginning balances by:
aa. Test tracing prior years' recordings and supporting documents.
bb. Trace beginning balances to general ledger balances.
b. Trace proceeds to cash receipts records for additional issues or subscription to capital
stocks and reissues of treasury stocks.
c. Trace payments for capital stock retirements and acquisition of treasury stocks to cash
disbursements records and cancelled checks.
d. Agree working paper ending balances with the general ledger balances.
e. Trace authorizations by reference to minutes of meetings of the board of directors and
stockholders.

5. Where the client is being serviced by an independent transfer agent or registrar:

a. Confirm
aa. Capital stock issued
bb. Treasury stock
b. Arrange for inspection and count of treasury stocks.

6. Where the client does not maintain an independent transfer agent or registrar:
a. Obtain from corporate secretary a schedule of:
 aa. Stockholders
bb. Subscribers
cc. Subscription receivable
dd. Treasury stocks
b. Foot and cross-foot the schedule
c. Test trace to stock and transfer book.
d. Trace balances per schedule to general ledger balances.
e. Inspect and account for:
aa. Unissued stock certificates
bb. Cancelled stock certificates
cc. Treasury stocks certificates
f. Determine that treasury stocks are endorsed in favor of the corporation.

7. Confirm subscription receivables and consider collectability.

8. Review articles of incorporation, by laws, and minutes related to capital stock and related
accounts.

9. Obtain or prepare analyses of other equity accounts, indicating :

a. Beginning-of-year balances
b. Additions and deductions during the current year.
c. End-of-year balances.

10. Foot and cross-foot the schedules.

11. Verify the accuracy of the schedules:

a. Trace beginning balances to last years' working papers or, in case of an initial audit,
establish accuracy of beginning balances by
aa. Test tracing to prior years' recordings and supporting documents.
bb. Trace beginning balances to general ledger balances.
b. For current year transactions:
aa. Ascertain authorization
bb. Determine propriety of accounting treatment
c. Agree working paper ending balances with general ledger balances.

12. Reconcile dividends paid to rates authorized in directors' minutes.

13. Ascertain compliance with requirements relating to capitalization and retained earnings by:
a. SEC and other regulatory bodies
b. Contractual obligations.

14. Determine propriety of financial statement presentation and adequacy of disclosures.

7 Eye Openers
1. Define corporation. Explain how a corporation is organized.

2. What is organization cost? What is the accounting treatment of

organization cost?

3. Explain the meaning of shareholders' equity.

4. What is the meaning of share capital.

5. Distinguish between:
a. Share capital and authorized share capital
b. Share certificate and share of stock
c. Par value and no par value shares.

6. What are the two classes of share capita? Explain each.

7. What are the two methods of accounting for share capital. Explain each.

8. Explain rights issue and sahre warrants.

9. Define treasury shares. Distinguish treasury shares from uniisued shares.

10. Explain share split and reverese share split.

al. Explain each.

uniisued shares.
 7 PROBLEMS
Problem 7-1
COMMON STOCK ISSUANCE

The Island Company is authorized to issue 600,000 shares of $10 par value common stock. The
company has the following transactions:

a. Issued 20,000 shares at $30 per share; received cash.

b. Issued 2,500 shares to attorneys fro services in securing the corporation charter and for
preliminary legal costs of organizing the corporation. The value of the services was $90,000.
c. issued 300 shares, valued objectively at $10,000 to the employees instead of paying the
cash wages.
d. Issued 125,000 shares of stock in exchange for a building valued at $2,950,000 and land
valued at $800,000. The building was originally acquired by the investor for $2,500,000 and
has $1,000,000 of accumulated depreciation; the land was originally acquired for $300,000.

Required:
Prepare the journal entries to record the preceding transactions.
Solution
a. Cash (30 x 20,000) 600,000
Share capital-commo (10 x 20,000) 200,000
Additional paid-in capital-common shares 400,000

b. Organization cost 90,000

Share capital-common(10x2,500) 25,000
Additional paid-in capital-common shares 65,000

c. Salaries expense 10,000

Share capital-common(10x300) 3,000
Additional paid-in capital-common shares 7,000

d. Buildings 2,950,000
Land 800,000
Share capital-common(10x125,000) 1,250,000
Additional paid-in capital-common shares 2,500,000

Problem 7-2
ADDITIONAL PAID-IN CAPITAL

The following are Santana Company's equity section at December 31, 2017:

Common stock, par value $10, authorized 200,000 shares

issued and outstanding, 120,000 shares $1,200,000
Additional paid-in capital 140,000
Retained earnings 720,000

Santana Company uses the cost method of accounting for treasury stock.
The following transactions occurred in 2018:
a. Acquired 2,000 shares of common stock for $30,000.
b. Sold 1,200 treasury shares at $18 per share.
c. Retied the remaining treasury shares.

Required:
Compute the December 31, 2018 balance of the additional paid-in capital.
Solution:
Balance, January 1, 2010 140,000
Reissue of TS (18-15=3x1,200) 3,600
Retirement of TS (800 x 5) (4,000)
Balance, December 31, 2010 139,600

Problem 7-3
COMPUTATION OF TOTAL STOCKHOLDERS' EQUITY

Ceylon Company is authorized to issue 200,000 share of $10 par value common stock, and 60,000
shares of 6% cumulative and nonparticipating preferred stock, par value $100 per share. The
corporation engaged in the following stock transactions through December 31, 2017:

a. 60,000 shares of commons stock were issued for $700,000 and 24,000 shares of preferred
for machinery valued at $2,950,000.

b. Subscription for 9,000 shares of common have been taken, and 40% of the subscription price
$1 per share has been collected. The stock will be issued upon collection of the subscription
price in full.

c. Treasury stock of 2,000 shares of common has been purchased for $15 and accounted for
under the cost method.

The Retained Earnings balance is $420,000.

Required:
Prepare the Stockholders' Equity section of Ceylon Company as of December 2017.
Solution:
Preferred shares (100 x 24,000) 2,400,000
Additional paid in capital-preferred shares (2,950,000-2,400,000) 550,000
Common shares (10 x 60,000) 600,000
Additional paid in capital-common shares
(144,000-90,000+700,000-600,000) 154,000
Subscribed common shares 90,000
Subscription receivable (86,400)
Treasury shares (15 x 2,000) (30,000)
Retained earnings 420,000

Problem 7-4
TREASURY STOCK

The stockholders' equity of the Delmar Company as of December 31, 2017 was as follows:

Common stock, $10 par, authorized 300,000 shares;

250,000 shares issued and outstanding $2,500,000
Paid-in capital in excess of par 3,750,000
Retained earnings 1,800,000
On June 2018, Delmar Company reacquired 40,000 shares of its common stock at $40. The
following transactions occurred in 2018 with regard to these shares.

July 1. Sold 15,000 shares at $45.

Aug. 1. Sold 17,000 shares at $30.
Sept. 1. Retired 1,000 shares.

The following entries were made by the company's accountant to record the preceding transactions.

2018

June 1. Treasury stock 1,600,000

Cash 1,600,000

July 1. Cash 675,000

Treasury stock 675,000

Aug. 1. Cash 510,000

Treasury stock 510,000

Sept. 1. Common stock 10,000

Treasury stock 10,000

Required:
Adjusting journal entries.
Solution:
1. Treasury shares 75,000
Additional paid-in capital from TS 75,000

2. Additional paid-in capital from TS 75,000

Retained earnings 95,000
Treasury shares (680,000-510,000) 170,000

3. Additional paid-in capital from TS

(1,000/250,000 x 3,750,000) 15,000
Retained earnings 15,000
Treasury shares (40,000-10,000) 30,000

Problem 7-5
RETAINED EARNINGS

The following information has been taken from the ledger accounts of Pedroza Company:

Total Income since incorporation $3,200,000

Total cash dividend paid 150,000
Cost of the company's investment in Yale Company
declared as property dividend (market
value $750,000) 600,000
Proceeds from sale of donated stock 150,500
Total value of stock dividends distributed 420,000
Gains on treasury stock transactions 375,000
Unamortized premium on bonds payable 413,200
Appropriated for contingencies 700,000
Required:
Compute the current balance of unappropriated retained earnings.
Solution:
Total Income since incorporation 3,200,000
Total cash dividend paid (150,000)
Cost of investments declared as property dividend (600,000)
Total value of stock dividends distributed (420,000)
Appropriated for contingencies (700,000)
1,330,000

Problem 7-6
CASH DIVIDEND

The following selected accounts were taken from the December 31, 2017 trial balance of Caine
Company:

Subscribed capital stock $1,250,000

Treasury stock, 600 shares at cost 90,000
Unissued common stock 6,000,000
Additional paid-in capital 180,000
Appropriation for plant expansion 500,000
Retained earnings 1,200,000
Authorized common stock-100,000 shares 10,000,000
Subscription receivable 320,000

The minutes of meetings of the board of directors reveal that on December 5, 2017, the company's
board declared a 10% cash dividend payable to stockholders and subscribers of record on
December 20, 2017. The dividend checks are to be distributed on January 10, 2018. The
company's accountant has not recorded this dividend declaration.

Required:
Compute the amount of unrecorded dividend payable.
Solution:
Authorized 10,000,000
Less: Unissued 6,000,000
Issued 4,000,000
Less: Treasury shares at par (100 x 600) 60,000
Issued and outstanding 3,940,000
Add: Subscribed 1,250,000
Basis for dividend 5,190,000
Dividend rate 10%
Unrecorded dividend 519,000

Problem 7-7
ISSUANCE AND BUY BACK OF SHARE CAPITAL

Sonny Company recently hired a new accountant with a very limited experience in corporation
accounting. During the first month, he made the following entries for the corporation's share
capital transactions:

Jan. 2. Cash 180,000

Share capital
Issued 12,000 shares of $5 par value share 180,000
capital-common at $15 per share.
 10. Cash 500,000
Share capital 500,000
Issued 10,000 shares of $30 par value
share capital preferred at $50 per share

15. Share capital 10,000

Cash 10,000
Purchased 1,000 share capital-common
for the treasury at $10 per share.

31. Cash 8,500

Share capital 2,500
Gain on sale of share capital 6,000
Sold 500 shares of treasury shares at
$17 per share

Required:
Prepare the necessary correcting entries.

Solution:

Jan. 2. Share capital 180,000

Share capital-common (12,000 x 5) 60,000
Addiional paid on share capital-common 120,000

10. Share capital 500,000

Share capital-preferred (20 x 10,000) 300,000
Additional paid in on share capital-preferred 200,000

15 Treasury shares-common 10,000

Share capital 10,000

31. Share capital 2,500

Gain on sale of share capital 6,000
Treasury shares (10 x 500)-common 5,000
Additional paid-in on treasury shares-common 3,500

Problem 7-8
CONVERTIBLE PREFERRED SHARES

Shareholders' equity for the Quantas Company on December 31 was as follows:

Preferred shares, $20 par, 60,000 shares issued and outstanding $ 1,200,000
Additional paid in on preferred shares 300,000
Common shares, $10 par, 300,000 shares issued and outstanding 3,000,000
Additional paid in on common shares 600,000
Retained earnings 2,500,000

Each share of preferred shares in convertible into 4 shares of common. On June 1, Quantas
Company converted 4,000 of preferred shares into common shares.

Required:
Prepare the entry to record the conversion of preferred shares to common shares.
Solution:
Share capital-preferred (20 x 4,000) 80,000
Additional paid on preferred shares
(300,000/60,000 x 4,000) 20,000
Retained earnings 60,000
Common shares (10 x 16,000) 160,000

Problem 7-9
SHARE WARRANTS

Laos Company wants to raise its working capital. After analysis of the avilable options, the company
decides to issue 2,000 shares of $30 par preferred shares with detachable warrants. The package
of the shares and warants sells for $120. The warrants enable the holder to purchase 1,000 shares
of $10 par common shares at $40 perr share. Immediately following the issuance of the shares, the
share warants are selling at $10 per share. The market value of the preferred shares without the
warrants is $90.

Required:
1. Determine the amount to be assigned to the share warrants issued.
2. Assuming that only 60% of the warrants are exercised, give the entry to record the exercise
of the warrants.

Solution:
1. Allocated
MV Fraction Value
Warrants (10 x 2,000) 20,000 2/20 24,000
Preferred (90 x 2,000) 180,000 18/20 216,000
200,000 240,000
** 120 x 2,000 = 240,000

2. Warrants-common shares (60% x 24,000) 14,400

Cash (40 x 600) 24,000
Share capital - common (10 x 600) 6,000
Additional paid in capital-common 32,400

Problem 7-10
DIVIDENDS; COMPUTATION OF EQUITY ACCOUNT BALANCES

Unity Company reported the following amounts in the shareholders' equity section of its December 31,
2016, statement of financial position:

Preferred shares, 10%, $10 par value, 100,000 shares authorized,

20,000 shares issued $ 200,000
Common shares, $5, 50,000 shares authorized, 10,000 shares issued 50,000
Additional paid in capital 96,000
Retained earnigs 600,000
$ 946,000

The following transactions occurred during 2017:

1. Paid the annual 2016 $1 per share dividend on the preferred shares and $0.50 per share dividend
on common shares. These dividends had been declared on December 31, 2016.

2. Purchased 2,000 shares of its own outstanding common shares for $20 per share.
3. Reissued 700 treasury shares for equipment valued at $25,000.

4. Issued 5,000 shares of preferred shares at $15 per share.

5. Declared a 10% share dividend on the outstanding common shares when the shares are selling
for $12 per share.

6. Issued th share dividend.

7. Declared the annual 2017 $1 per share on preferred shares and $0.50 per share dividend on
common shares. These dividends are payable in 2018.

8. Appropriated retained earnings for plant expansion, $300,000.

9. Appropriated retained earnings for treasury stock.

The net income for 2017 was $470,000.

Required:
Based on the above data, deerming the correct amount balances on December 31,2017:

1. Preferred shares 4 Treasury shares

2. Common shares 5. Unappropriated Retained Earnings
3 Additional paidin capital

Solution:
1. Balance, January 1 200,000
issuance of 5,000 (5,000 x 10) 50,000
Balance-preferred shars 250,000

2. Balance, January 1 50,000

10% share dividentsn(10,000-1,300=8,700 x 10% =
870 x 5 4,350
Balance, December 31, 2017 54,350

3. Balance, January 1 96,000

From reissue of TS (25,000- {20 x 700]) 11,000
From issuance of PS (15-10 = 5 x 50,000) 25,000
From share dividend (12-5 = 7 x 870) 6,090
Balance, additional paid in 138,090

4. Treasury shares

(2,000 - 700 = 1,300 x 20) 26,000

5. Unapproprited retained earnings

Balance, January 1 0
Commin share dividend (12 x 870) (10,440)
Cash dividend:
Preferred (1 x 25,000) 25,000
Common ( 0.50 x 9,570) 4,785 (29,785)
Appropriated for plant expansion (300,000)
Appropriated for TS (26,000)
Net income 2017 470,000
Balance, December 31. 103,775
Prepferred beginning 20000
Additional 5000
25000 shares

Common: 10,000
TS (2,000)
Reissued 700
Share dividend (8,700 x 10%) 870
9,570
 7 PROBLEMS
Problem 7-1
Analysis of Various Equity Transactions
The retained earnings account for Corey Company shows the following:

Jan. 1. Balance $ 2,917,000

Loss from fire (3,175)
Goodwill impairment (322,000)
Share dividend (500,000)
Loss on sale of equipment (175,500)
Officers' compensation related to income of prior periods-accrual ovelooked (2,104,000)
Share premium-issuance 795,000
Share subscription defaults 37,250
Gain on sale of treasury shares 147,000
Gain on early retirement of bonds at less than carrying value 81,000
Gain on life insurancepolicy settlement 78,000
Correction of prior-period error 30,500

Required:
What is the corrected amount of retained earnings?
Solution:
Balance 2,917,000
Share dividend (500,000)
Correction of prior-period (2,104,000)
Correction of prior-period 30,500
343,500

Problem 7-2
Analysis of Various Equity Transactions

Kowloon Company began operations on January 1, 2018, by issuing $15 per share, one-half of
the 475,000 ordinary share ($1 par value) that had been authorized for issue. In addition, Kowloon
has 250,000, 6% preference shares ($5 par value) authorized. During 2018, Kowloon reported
net income of $512,500 and declared dividends of $118,750.

During 2019, Kowloon Company completed the following transations:

Jan. 10. Issued an additional 50,000 ordinary shares for $17 per share.
Apr. 2. Issued 75,000 preference shares for $8 per share.
July 21. Authorized the acquisition of a custom-made machine to be delivered in January 2020.
Kowloon Company appropriated $147,500 of retained earnings for the purchase of the
machine.
Oct. 25. Issued an additional 25,000 preference shares for $9 per share.
Dec.31. Reported $607,500 of net income and declared a dividend of $317,500 to shareholders
of record on January 31, 2020, to be paid on February 4, 2020.

Required:
1. What is the total shareholders' equity on December 31, 2019?
2. What is the unappropriated retained earnings balance on December 31, 2017?
Solution:
1. Issuance of ordinary shares ($15 x 237,500) 3,562,500
Retained earnings (512,500-118,750) 393,750
Total 2018 3,956,250
2019
Issuance of ordinary shares, Jan.10 ($17 x 50,000) 850,000
issuance of preference shares, Apr 2 ($8 x 75,000) 600,000
Issuance of preference shares, Oc. 25 ($9 x 25,000) 225,000
Net income 607,500
Dividends declares (317,500)
Shareholders' equity, Dec. 31, 2018 5,921,250

2. Retained earnings, Jan. 1, 2018 393,750

Net income 607,500
Dividends (317,500)
Appropriated for machine (147,500)
Retained earnings (unappropriated) Dec. 31, 2019 536,250

Problem 7-3
Issuance of Ordinary Shares

The National Company is authorized to issue 600,000 shares of $10 par value ordinary share
capital. National Company's accounting year ends on December 31. The following transactions
occurred in 2017, the company's first year of operations.

a. Issued 20,000 shares at $20 per share, received cash.

b. Issued 2,500 shares to attorneys for services in securing the corporate charter and for
preliminary legal costs of organizing the corporation. The fair value of the services was $85,000.

c. Issued 300 shares, valued objectively at $15,000, to the employees instead of paying the wages.
d. Issued 325,000 shares in exchange for a buidling valued at $3,000,000 and land valued at
$4,000,000. The building was originally acquired by the investor for $2,500,000, and has
$1,000,000 of accumulated depreciation; the land was originally acquired for $1,500,000.

Required:
1. Prepare journal entries to record the above transactions.
2. Compute:
a. Ordinary share capital balance on December 31, 2017.
b. Amount of share premium to be reported at December 31, 2017 statement of
financial position.
c. Organization expense to be charged against income for 2017.

Solution: (1)
1. Cash (20 x 20,000shares) 400,000
Ordinary shares capital(10 x 20,000) 200,000
Share premium 200,000

2. Organization expense 85,000

Ordinary share capital (10 x 2,500 shares) 25,000
Share premium 60,000

3. Salaries expense 15,000

 Ordinary share capital (10 x 300 shares) 3,000
Share premium 12,000

4. Buildings 3,000,000
Land 4,000,000
Ordinary share capital (10 x 325,000 shares) 3,250,000
Share premium 3,750,000

Solution: (2)
a. Ordinary share
1. 200,000
2. 25,000
3. 3,000
4. 3,250,000
3,478,000

b. Share premium
1. 200,000
2. 60,000
3. 12,000
4. 3,750,000
4,022,000

c. Organization expense 85,000

Problem 7-4
Analyzing Varous Equity Transactions

As the newly appointed auditor in 2017 for Jerome Company, you have analyzed the company's
"Share Premium" account. The following is a summary of the account since the inception of
Jerome Company:
Debits Credits

Cash dividends-preference shares $ 160,000

Cash dividends- ordinary shares 195,000
Excess of amount paid in over par value of ordinary shares $ 375,000
Net income 500,000
Gain on early extinguishment of debt 42,000
Treasury preference shares; issued and reacquired at par 90,000
Loss on litigation 75,000
Correction of a prior period error 23,000
$ 543,000 $ 917,000
Credit balance of share premium account 374,000
$ 917,000 $ 917,000

Required:
Compute:
1. The correct amount of Jerome Company net income for 2017.
2. The correct retained earnings balance (before appropriation for treasury shares) as at the
end of 2017.
3. Correct share premium balance as at the end of 2017?
Solution:
1. Net income, as reported 500,000
Gain on early exinguishment of debt 42,000
 Loss on litigation (75,000)
Net income, as adjusted 467,000

2. Net income, as adjusted 467,000

Correction, prior period (23,000)
Dividends (160,000+195,000) (355,000)
Retained earnings, balance 89,000

3. Share premium, Dec. 31 375,000

Problem 7-5
Issuance and Buy Back of Share Capital

Sonora Corporation recently hired a new accountant with very limited experience in corporation
accounting. During the first month, he made the following entries for the corporation's share capital.

Jan. 2. Cash 200,000

Share capital 200,000
Issued 10,000 of $5 par value ordinary shares at
$20 per share.

10. Cash 600,000

Share capital 600,000
Issued 15,000 of $30 par value preference shares
at $40 per share.

15. Share capital 8,000

Cash 8,000
Purchased 1,000 ordinary shares for the treasury at
$8 per share.

31. Cash 1,000

Loss on sale of share capital 1,500
Share capital 2,500
Slod 500 treasury shares at $2 per share.

Required:
Prepare the necessary correcting entries.
Solutions:
Jan. 2. Share capital 200,000
Ordinary share capital (5 x 10,000 shares) 50,000
Share premium-ordinary shares 150,000

10. Share capital 600,000

Preference share capital (30 x 15,000 shares) 450,000
Share premium-ordinary shares 150,000

15. Treasury shares 8,000

Share capital 8,000

31. Share capital 2,500

Retained earnings 3,000
Loss on sale of share capital 1,500
Treasury ordinary shares (500 x $8) 4,000
Problem 7-6
Retained Earnings

Chloe Rogers has been employed as an accountant by Irian Company for a number of years. She
handles all accounting duties, including the preparation of financial statements. The following is a
statement of earned surplus prepared by Chloe Rogers for 2017:

IRIAN COMPANY
STATEMENT OF EARNED SURPLUS FOR 2017

Balance, January 1, 2017 $ 365,000

Additions:
Change in estimate of 2016 amortization $ 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Net income, 2017 150,000
Decreased depreciation due to change in estimated life 13,000 173,000
Total $ 538,000
Deductions:
Dividends declared and paid 100,000
Loss on sale of equipment 2,500
Loss on earthquake 83,000 185,500
Balance at December 31, 2017 $ 352,500

Required:
1. What is the correct net income of Irian Company for 2017?
2. What is the correct retained earnings balance as of December 31, 2017?
Solution:
1. Reported net income 150,000
Add:
Change in estimate of 2016 amortization $ 5,000
Gain on sale of trading securities 3,000
Interest revenue 2,000
Decreased depreciation due to change in estimated life 13,000 23,000
Deduct: 173,000
Loss on sale of equipment 2,500
Loss on earthquake 83,000 85,500
Corrected net income, 2017 87,500

2. Retained earnins, Jan. 1 365,000

Net income (adjusted) 87,500
Dividends declared (100,000)
352,500

Problem 7-7
Cash Dividend

Archer Company has been paying regular quarterly dividends to its shareholderrs. The following
equity transactions are shown in the company's books:

Jan. 1. $2 par value ordinary shares; (1,600,000 shares outstanding; 3,000,000 shares authorized)
Feb. 15. Issued 100,000 new shares at $5.
Mar. 31. Paid quarterly dividends of $2,550,000.
May 13. $2,000,000 of $1,000 bonds were converted to ordinary shares at the rate of 100 shares
 per $1,000 bonds.
June 16. Issued an 11% stock dividend.
30. Paid quarterly dividends. The dividend per share is the same as that paid in the first
quarter.

No other equity transactions occurred after June 30.

Required:
1. What is the amount of dividend per share that Archer Company paid on March 31?
2. What is the amount of dividend that Archer Company will have to pay in the third qurter in
order to pay the same dividend rate as that paid in previous quarters?
3. What is the total amount of dividends to be paid during the current year?
Solution:
1. Dividends paid 2,550,000
Divide by shares outstanding (1,600,000 +100,000) 1,700,000
Divdend per share $1.50

2. Number of shares outstanding:

Jan. 1 1,600,000
Feb. 15 100,000
May 13 (2,000 x 100) 200,000
June 16 (1,600,000 +100,000+200,000) x 11% 209,000
2,109,000
Amount of dividends to be paid for the 3rd quarter (1.5 x 2,109,000) 3,163,500

3. Current year dividends:

First quarter 2,550,000
Second, third, fourth quarters (3,163,500 x 3) 9,490,500
12,040,500

Problem 7-8
Computation of Book Value per Share

You are auditing the financial statements of the Iceland Company as of December 31, 2017. The
company's generral ledger shows the following liability and equity accounts at the end of the
reporting period:

Accounts payable $ 530,000

Accrued expenses 41,600
Reserve for bond retirement 320,000
Preferrence shares, 6% cumulative, $100 par; 6,000 shares
authorized; 4,000 shares issued; 3,700 shares outstanding
($110 liquidation value per share) 400,000
Ordinary shares, $10 par; 200,000 shares authorized; 80,000 shares
issued and outstanding 800,000
Share premium 154,600
Retained earnings 262,520
Treasury preference shares, at cost 36,000

Required:
What is the book value of preference and ordinary shares on December 31, 2017?
Solution:
** For book value computation purposes, the treasury shares are treated as retired, hence:
Preference share (300 x 100) 30,000
Share premium 6,000
Treasury shares (cost) 36,000
 Therefore: Excess over par"
Share premium 154,600
Treasury retirement (6,000)
Retained earnings 262,520
Retained earnings appropriated (retirement of bond) 320,000
731,120
Preference share: Shares Par Value
Issued 4,000
Treasury (300) 100
3,700 370,000

Exces over Par Preference Ordinary

Balances: 731,120 370,000 800,000
Preference dividend (6% x 370,000) (22,200) 22,200
Liquidation premium (10 x 370,000) (37,000) 37,000
Balance to Ordinary 671,920 671,920
429,200 1,471,920

Divide by shares outstanding 3,700 80,000

Book value per share 116.00 18.40

Problem 7-9
Analyzing Various Equity Transactions

Cyrus Company began operations on January 1. Authorized were 20,000 shares of $10 par value
ordinary shares and 40,000 shares of 10%, $100 par value preference shares. The following
transactions involving shareholders equity occurred during the first year of operrations:

Jan. 1. Issued 500 ordinary shares to the corporation promoters in exchange for property valued
at $170,000 and services valued at $70,000. The property had cost the promoters
$90,000 3 years before and was carried on the promoters' books at $50,000.

Feb. 23. Issued 10,000 preference shares at a price of $150 per share, and the company paid
$75,000 to an agent for selling the shares.

Mar. 10. Sold 3,000 ordinary shares for $390 per share. Issue costs were $25.000.

Apr. 10. 4,000 ordinary shares were sold under share subscription at $450 per share. No shares
are issued until a subscription contract is paid in full. No cash was received.

July 14. Exchanged 700 ordinary shares and 1,400 preference shares for a building with a fair
market value of $510,000. The building was originaly purchased for $380,000 by the
investors and has a book value of $220,000. In addition, 600 ordinary shares were sold
for $240,000 cash.

Aug. 3. Received payments in full for half of the share subcriptions and payments on account on
the rest of the subscriptions. Total cash received was $1,400,000. Shares were issued
for the subscription paid in full.

Dec. 1. Declared a cash dividend of $10 per share on preference shares, payable on December
31 to shareholders of record on December 15, and a $20 per share cash dividend on
ordinary shares, payable on January 5 of the following year to shareholders of record
on December 15.
Dec. 31. Paid the dividends to preference share.

Net income for the first year of operations was $600,000.

Required:
1. Prepare journal entries to record the foregoing transactions.
2. Calculate the balances of the following:
a. Preference share
b. Share premium-preference shares
c. Ordiary shares
d. Share premium-ordinary shares
e. Retained earnings
3. Prepare the sharehlders' equity section of the current year statement of financial position.
Solution:
Jan. 1. Property 170,000
Organization expense 70,000
Share capital-ordinary (500 x 10) 5,000
Share premium 235,000

Feb. 23. Cash [(10,000 x 150) - 75,000] 1,425,000

Preference share (10,000 x 100) 1,000,000
Share-premium-preference share 425,000

Mar. 10. Cash [(390 x 3,000) - 25,000] 1,145,000

Share capital-ordinary (3,000 x 10) 30,000
Share premium-ordinary shares 1,115,000

Apr. 10. Subscription receivable (450 x 4,000) 1,800,000

Subscribed share capital-ordinary (4,000 x 10) 40,000
Share premium-ordinary shares 1,760,000

July 14. Building 510,000

Ordinary shares (700 x 10) 7,000
Preference share (100 x 1,400) 140,000
Share premium-ordinary (280,000-7,000) 273,000
Share premium-preference share (230,000-140,000) 90,000

*** FV of building 510,000

MV of ordiary shares (240,000/600 = 400 x 700) 280,000
Assumed market value of preference share 230,000

14. Cash 240,000

Share capital-ordinary (10 x 600) 6,000
Share premium-ordinary shares 234,000

Aug. 3. Cash 1,400,000

Subscription receivable 1,400,000

3. Subscribed ordinary shares 20,000

Share capital-ordinary (10 x 2,000) 20,000

Dec. 1. Retained earnings 290,000

Dividend payable 290,000

*** Preference (10 x (10,000+1,400) 114,000

Ordinary (6,800 issued +2,000 subscribed) x 20 176,000
 290,000

31. Dividend payable 114,000

Cash 114,000

31. Income summary 600,000

Retained earnings 600,000

Preference Share Ordinary Share Retained

share premium-PS Shares premium_OR Earings
Jan. 1. 5,000 235,000
Feb. 23. 1,000,000 425,000
Mar. 10. 30,000 1,115,000
Apr. 10. 1,760,000
July 14. 140,000 90,000 7,000 273,000
14. 6,000 234,000
Aug. 3. 20,000
Dec. 1 (290,000)
31. 600,000
1,140,000 515,000 68,000 3,617,000 310,000
11,400 6,800
Shareholders' Equity
10% Preference share, $100 par value, 40,000 shares authorized, 11,400 shares
issued and outstanding 1,140,000
Share premiun-preference shares 515,000 1,655,000
Ordinary share capital, $10 par value, 20,000 shares authorized,
6,800 shares issued and outstanding 68,000
Subscribed ordinary share capital 20,000
Share premium-ordinary shares 3,617,000
Subscription receivable (400,000) 3,305,000
Total 4,960,000
Retained earnings 310,000
Total shareholders' equity 5,270,000
1800000