SHAREDOLDERS’ EQUITY – SHARE CAPITAL

COMPOSITION:

Share Capital Issued ( Fully paid Shares)

( If at par or stated value = par or stated value,

no par, no stated value = Consideration received) XX

Add: Share Dividend Distributable XX XX

Subscribed Share Capital ( Not Fully Paid Shares) XX

( If at par or stated value = par or stated value)

Less: Subscription Receivable(If collectible beyond one year) (XX) XX

Share Premium:

Share Premium in Excess of Par or Stated Value XX

Share Premium – Treasury Shares Transactions XX

Share Premium on Conversion Option on Liabilities XX

Quasi Reorganization XX

Recapitalization XX

Donated Capital XX

Small Share or Stock Dividend XX

Warrants Outstanding XX

Option Outstanding XX XX

Retained Earnings:

Unappropriated XX

Appropriated XX XX

 Net Income or Loss

 Prior Period Adjustments
 Dividends ( Cash Property, Liability and Shares)
 Quasi- Reorganization
 Appropriation or Restriction of Retained Earnings
 Reversal of Appropriation or Restriction
 Loss on Share Capital Transactions ( Treasury, Retirement)
Deposit on Subscription (Proposed Increase in share capital) XX

Other Comprehensive Income

Revaluation Surplus XX
Unrealized Gain or (Loss) on FVTOCI XX
Remeasurement Gain or (loss) under Employee Benefits XX
Translation Gain or (loss) XX
Effective Portion of cash Flow Hedge XX
Change in FV due to credit risk of designated FL@TPL XX XX

Discount on Share Capital (XX)

Treasury Shares ( Company’s own reacquired issued shares at cost) (XX)

Minority Interest ( In Consolidated Statement) XX

STOCKHOLDERS’ EQUITY XX

Preincorporation Subscription Requirements

a. 25% of the Authorized shares has been subscribed

b. 25% of the Subscribed shares has been paid, no lower than P 5,000.

The Corporate Form of Organization\

1. The corporate form of business organization generally begins with the submitting of articles of
incorporation to the appropriate governmental agency in the country in which incorporation is desired.
While a company can operate in many different countries, it is incorporated in only one country. Since
laws and restrictions vary from country to country, it’s to a company’s advantage to incorporate where
laws favor the corporate form of business. Assuming the requirements are properly fulfilled, the
corporation charter is issued and the corporation is recognized as a legal entity subject to the laws of the
country of incorporation. Many countries have their own business incorporation acts, and the accounting
for equity transactions follows these acts.

2. Within a given class of shares, each share is exactly equal to every other share. A person’s percent of
ownership in a corporation is determined by the number of shares he or she possesses in relation to the
total number of shares owned by all shareholders. In the absence of restrictive provisions, each share carries
the right to participate proportionately in: (a) profits, (b) management, (c) corporate assets upon
liquidation, and (d) any new issues of shares of the same class (preemptive right).

3. The transfer of ownership between individuals in the corporate form of organization is accomplished by
one individual selling or transferring his or her shares to another individual. The only requirement in terms
of the corporation involved is that it be made aware of the name of the individual owning the shares. A
subsidiary ledger of shareholders is maintained by the corporation for the purpose of dividend payments,
issuance of share rights, and voting proxies. Many corporations employ independent registrars and
transfer agents who specialize in providing services for recording and transferring shares.
 4. The basic ownership interest in a corporation is represented by ordinary shares. Ordinary shares are
guaranteed neither dividends nor assets upon dissolution of the corporation. Thus, ordinary shareholders
are considered to hold a residual interest in the corporation. However, ordinary shareholders generally
control the management of the corporation and tend to profit most if the company is successful. In the
event that a corporation has only one authorized issue of capital shares, that issue is by definition
ordinary shares, whether or not it is so designated in the charter.

Equity: Contributed Capital and Earned Capital

 Contributed capital is the amount paid in by shareholders and includes par value and any
premiums (less any discounts).
 Earned capital or Retained Earnings results from the company’s profitable operations (reduced by
any dividends distributed).
 Equity is the difference between the assets and the liabilities of the company—also known as the
residual interest.
 Equity is not a claim to specific assets but a claim against a portion of the total assets.
 Equity is not specified or fixed, it increases when the company is profitable and decreases when
the company loses money.

The Shareholders’ Equity

Equity in a corporation is the residual interest in the assets of the company after deducting all liabilities.
Equity is often sub-classified, and the following categories are commonly used.

a. Issued Share capital ( Capital Stock)

 Ordinary Share Capital ( Common Stock) and Preference Share Capital ( Preference Share)
 Measurement when Issued or Subscribed
1. With Par – At Par Value , any excess to Share Premium
2. Without Par but with stated value – At Stated Value , any excess to Share Premium
3. Without Par nor Stated Value – At total amount of proceeds on the issue of shares,
none to Share Premium

 Measurement of the Consideration Received in Exchange of the Shares

1. For Cash or Receivable – At Face Value
2. For Non Cash – at FMV of Non-Cash or FMV of shares issued whichever is clearly
determinable
3. For Services – at FMV of Services or FMV of shares issued whichever is clearly
determinable
 Basket Issuance ( Ordinary and Preference Shares Issued at Lump-sum Price )
1. If market values of both shares are known, prorate the total price based on their market
values

2. If only one of the shares has a market value, use the same as the allocated price of
that share and any excess from the total proceeds will be allocated to shares with no
market price.

3. If preferred shares are treated as debt ( Redeemable Preferred Shares) - The residual
method is used to allocate the proceeds ( The market value of the Preference will be its
initial measurement, and the balance after deducting the same from the total proceeds
will be for the Ordinary)
  Issuance of Shares with Warrants
1. If both have market values, allocate the total proceeds to both securities based on its
market values.

2. If only one has market value, assigned the same to that security and the balance after
deducting from the total proceeds will be the value for those without market value.

3. If Preferred shares are treated as debt and is issued with warrants, the residual
method will be used to allocate the proceeds to the securities – the value for preferred
(debt) first and the balance for the warrants ( equity)

 Direct costs incurred to sell shares such as underwriting costs, accounting and legal fees, and
printing costs should be recorded as reductions of amounts paid in (debited to Share
Premium)

 Management salaries and other indirect costs related to the share issuances should be
expensed as incurred

b. Treasury shares.
 Treasury shares are a corporation’s own shares that (a) were outstanding, (b) have been
reacquired by the corporation, and (c) are not retired.
 Treasury shares are not an asset and should be shown in the statement of financial position
as a reduction of equity.
 Treasury shares are essentially the same as unissued shares.
 The reasons corporations purchase their outstanding shares include: (a) to provide tax
efficient distributions of excess cash to shareholders; (b) to increase earnings per share and
return on equity; (c) to provide shares for employee share compensation; (d) to contract
operations or thwart takeover attempts; and (e) to make a market in the shares.

 Two methods are used in accounting for treasury shares, the cost method and the par value
method.

 The par or stated value method records all transactions in treasury shares at their par value
and reports the treasury shares as a deduction from share capital only.

 Under the cost method (the method most frequently used), treasury shares are recorded in
the accounts at acquisition cost. When the treasury shares are reissued the Treasury Shares
account is credited for the acquisition cost. If treasury shares are reissued for more than their
acquisition cost, the excess amount is credited to Share Premium— Treasury. If treasury
shares are reissued for less than their acquisition cost, the difference should be debited to
any Share Premium—Treasury from previous treasury share transactions. If the balance in
this account is insufficient, the remaining difference is charged to retained earnings.

 The cost of treasury shares is shown in the statement of financial position as a deduction
from equity, generally as the last item in the

g. Non-controlling interest (minority interest).

Accounting for the Issuance of Shares

1. The process for issuing shares begins with authorization by the appropriate governmental agency
(SEC)to issue shares (often the corporate charter)
2. The corporation offers the shares for sale, after receiving the sales price the shares are issued and
recorded in the company’s accounting records
3. The par value of a share has no relationship to its fair value. At present, the par value associated with
most ordinary share issues is very low. Low par values help companies avoid the contingent liability
associated with shares sold below par.

Preference Shares

Preference shares is the term used to describe a class of shares that possesses certain preferences or
features not possessed by the ordinary shares. The following features are those most often associated
with preference share issues:

a. Preference as to dividends.

b. Preference as to assets in the event of liquidation.

c. Convertible into ordinary shares.

d. Callable at the option of the corporation.

e. Nonvoting.
Some features used to distinguish preference shares from ordinary shares tend to be restrictive. For
example, preference shares may be nonvoting, noncumulative, and nonparticipating. A corporation
may attach whatever preferences or restrictions in whatever combination it desires to a preference share
issue so long as it does not specifically violate its country’s incorporation law. The dividend preference of
preference shares is normally stated as a percentage of the preference share’s par value. For example,
9% preference shares with a par value of P100 entitle its holder to an annual dividend of P9 per share.

However, a preference as to dividends does not assure the payment of dividends; it merely assures that
corporations must pay the applicable amount to the preference shares prior to paying any dividends on
the ordinary shares.

Certain terms are used to describe various features of preference shares. These terms are the following:

a. Cumulative. Dividends not paid in any year must be made up in a later year before paying any
dividends to ordinary shareholders. Unpaid annual dividends on cumulative preference shares are
referred to as dividends in arrears and are disclosed in a note to the financial statements.

b. Participating. Holders of participating preference shares share with the ordinary shareholders in any profit
distribution beyond a prescribed rate. This participation involves a pro rata distribution based on the total
par value of the outstanding preference and ordinary shares.

c. Convertible. Preference shareholders may, at their option, exchange their preference shares for
ordinary shares on the basis of a predetermined ratio.

d. Callable. At the option of the issuing corporation, preference shares can be redeemed at specified
future dates and at stipulated prices.
 e. Redeemable. The shares have a mandatory redemption period or a redemption feature that the
issuer cannot control.

Reporting of Preference Shares

 Preference shares generally have no maturity date and therefore no legal obligation exists to pay
preference shares. As a result, preference shares are classified as part of equity. Redeemable
preference shares, however, are required by IFRS to be reported as liabilities and accounted for
similar to liabilities

Dividends

 Very few companies pay dividends in amounts equal to their legally available retained earnings.
The major reasons are: (a) agreements with creditors, (b) corporation laws may require corporations
to restrict contributed capital from distribution as dividends to protect creditors, (c) to finance
growth or expansion, (d) to provide for continuous dividends whether in good or bad years, and
(e) to build a cushion.

 Before a dividend is declared, management must consider availability of funds to pay the
dividend. Directors must also consider economic conditions, most importantly, liquidity.

 Dividends may be paid in cash (most common means), shares, or some other asset. Dividends
other than a share dividend reduce the equity in a corporation through an immediate or promised
distribution of assets. When a share dividend is declared, the corporation does not pay out assets
or incur a liability. It issues additional shares to each shareholder and nothing more. Liquidating
dividends, which are dividends not based on retained earnings, should be disclosed to
shareholders so they do not misunderstand the source of the dividend.

Cash Dividends

 The accounting for a cash dividend requires information concerning three dates: (a) date of
declaration, (b) date of record, and (c) date of payment. A liability is established by a charge to
retained earnings on the declaration date for the amount of the dividend declared. No accounting entry
is required on the date of record. The shareholders who have earned the right to the dividend are
determined by who owns the shares on the date of record. The liability is liquidated on the payment date
through a distribution of cash. The following journal entries would be made by a corporation that declared
a P50,000 cash dividend on March 10, payable on April 6 to shareholders of record on March 25.

Declaration Date (March 10)

Retained Earnings (or Cash Dividends Declared)............. 50,000

Dividends Payable....................................................... 50,000

Record Date (March 25)

No entry

Payment Date (April 6)

 Dividends Payable............................................................ 50,000

Cash............................................................................ 50,000

Property Dividends

 . Property dividends, or dividends in kind, represent distributions of corporate assets other than cash.
Such transfers should be recorded at the fair value of the assets transferred. When the property
dividend is declared, fair value should be recognized in the accounts with the appropriate gain or loss
recorded. The fair value then serves as the basis used in accounting for the property dividend. For
example, if a corporation held shares of another company that it intended to distribute to its own
shareholders as a property dividend, it would first be required to make sure the carrying amount reflected
current fair value. If on the date the dividend was declared, the difference between the cost and fair
value of the shares to be distributed was P75,000, the following additional entry would be made.
Equity Investments............................................................ 75,000

Unrealized Holding Gain or Loss—Income.................. 75,000

Liquidating Dividends

Liquidating dividends represent a return of the shareholders’ investment rather than

a distribution of profits. In a more general sense, any dividend not based on profits must be a reduction of
corporate capital, and to that extent, it is a liquidating dividend.

Share Dividends

 When a company issues a share dividend, no assets are distributed and each shareholder has exactly
the same proportionate interest in the company before and after the dividend. The book value per share
will decrease since there are more shares outstanding, but overall equity does not change. It can be
defined as a capitalization of retained earnings that results in a reduction in retained earnings and a
corresponding increase in certain contributed capital accounts.

 When a share dividend is declared, Retained Earnings is debited for the number of shares issued times
their par value and Ordinary Share Dividend Distributable is credited for the same amount. A share
dividend is recorded at par value and does not affect any asset or liability accounts. If a statement of
financial position is prepared between the dates of declaration and distribution, it should show the
ordinary share dividend distributable in the equity section as an addition to share capital—ordinary. For
example, consider the following set of facts. Vonesh Corporation, which has 50,000 ordinary P10 par
value shares outstanding, declares a 10% share dividend on December 3. The following entry would be
made when the share dividend is declared:
Retained Earnings (5,000 X P10)...................................... 50,000

Ordinary Share Dividend Distributable........................ 50,000

When the shares are issued, the entry is:

Ordinary Share Dividend Distributable.............................. 50,000

Share Capital—Ordinary............................................. 50,000

Share Split
  A share split results in an increase or decrease in the number of shares outstanding with a
corresponding decrease or increase in the par or stated value per share. In general, no
accounting entry is required for a share split as the total dollar amount of all equity accounts
remains unchanged. A share split is usually intended to improve the marketability of the shares by
reducing the market price of the shares being split. In general, the difference between a share
split and a share dividend is a share split increases the number of shares outstanding and
decreases par value per share whereas a share dividend increases the number of shares
outstanding and increases the total par value outstanding (since the par value per share is
transferred from retained earnings to share capital).

Restrictions on Retained Earnings

In many corporations restrictions on retained earnings or dividends exist, but no formal journal entries are
made. Such restrictions are best disclosed by note.

Presentation and Analysis of Equity

 An example of a comprehensive equity section taken from a statement of financial position is given
in the textbook. A company should disclose the pertinent rights and privileges of the various
securities outstanding. Examples of information that should be disclosed are dividend and
liquidation preferences, participation rights, call prices, and dates.

 IFRS requires companies to present a statement of changes in equity which includes the
following:

a. Total comprehensive income for the period, showing separately the amounts attributable to owners of
the parent and the non-controlling interests.

b. Effects of retrospective application or retrospective restatement on each component of equity.

c. For each component of equity, a reconciliation between carrying amount at the beginning and the end
of the period, showing separately changes resulting from: (1) profit or loss, (2) each item of
comprehensive income, and (3) transactions with owners.

Several ratios use shares equity related amounts to evaluate a company’s profitability and long-term
solvency. The following three ratios are discussed and illustrated in the chapter: (1) rate of return on
ordinary shares equity, (2) payout ratio, (3) book value per share.

Rate ofReturn Net income– Preferencedividends

=
OnOrdinary Share Equity Averageordinary stockholders' equity

Cashdividends
PayoutRatio =
Netincome– Preference dividends

Ordinary shareholders' equity

Book ValuePer Share =
Outstanding shares
Dividend Preferences

Preference shares generally have a preference in the receipt of dividends. Preference shares can also
carry features which require consideration at the time a dividend is declared and at the time of payment.
These features are (a) the cumulative feature, and (b) the participating feature. The text material includes
computational examples of these features in various combinations showing their impact on dividend
distributions when both ordinary and preference shares are involved. When computing book value per
share there are additional complications.
Use the following information for questions 1 and 6.

Presented below is information related to Hale Corporation:

Share Capital—Ordinary, P1 par P4,300,000

Unrealized Gain on Available for Sales Securities 200,000

Share premium—Ordinary in Excess of par 550,000

Translation Gain on statements of foreign operation 600,000

Share Capital—Preference 8 1/2%, P50 par 2,000,000

Share premium—Preference in Excess of Par 400,000

Long Term Investment in Available for Sale Securities 1,000,000

Revaluation Surplus 500,000

Cash Dividend Payable 100,000

Unappropriated Retained Earnings 1,500,000

Treasury Shares—Ordinary 100,000 shares (at cost) 150,000

Share premium—Treasury Shares Preference 100,000

Share premium—Ordinary on Stock Dividend 400,000

Share Dividend Payable 10,000

Subscribed Ordinary Shares , 10,000 shares 10,000

Bonds Payable 20,000

Share Option Outstanding - Ordinary 400,000

Subscription Receivable – Ordinary – Current 5,000

Retained Earnings Appropriated for Plant Expansion 100,000

Unrealized loss on hedging as Cash Flow Hedge 300,000

Re-measurement Gain on defined benefit pension plan 200,000

Subscribed Preference Shares, 2,000 shares 100,000

Share premium—Treasury Shares Ordinary 300,000

 Property Dividend Distributable 100,000

Share Warrants Outstanding 300,000

Subscription Receivable Preference Share – Long Term 50,000

Share premium—Retirement of Preference 400,000

Donated Capital 500,000

1. The Legal Capital is a. P 6,300,000b. P 4,310,000 c. P 6,410,000 d. P 6,420,000

 It cannot be returned to the shareholders in any form during the lifetime of the corporation for
the protection of the corporate creditors. Corporate creditors are under limited liability.
 In case of par value shares, it is equal to the aggregate par value of shares issued and
subscribed.
 In case of no par, it is equal to aggregate par issued and subscribed plus excess of stated
value.

Share Capital—Ordinary, P1 par P4,300,000

Share Capital—Preference 8 1/2%, P50 par 2,000,000

Share Dividend Payable 10,000

Subscribed Ordinary Shares , 10,000 shares (AT PAR) 10,000

Subscribed Preference Shares, 2,000 shares (AT PAR) 100,000

Total 6,420,000

2. The Outstanding capital a. P 6,320,000b. P 6,300,000 c. P 6,410,000 d. P 6,310,000

 It is equivalent to legal capital less (number of treasury shares at par)
Share Capital—Ordinary, P1 par P4,300,000

Share Capital—Preference 8 1/2%, P50 par 2,000,000

Share Dividend Payable (Addition to Share Capital) 10,000

Subscribed Ordinary Shares , 10,000 shares 10,000

Subscribed Preference Shares, 2,000 shares 100,000

Treasury Shares—Ordinary 100,000 shares (at par) (100,000)

Total 6,320,000

3. The Contributed Capital is a. P 6,310,00 b. P 9,660,000 c. P 9,720,000 d. P 9,715,000

 Arregate par Issued, Net Subscription and All Share Premium
 Subsciption Receivable collectible within one year and Treasury Shares are not included
Share Capital—Ordinary, P1 par P4,300,000

Share Capital—Preference 8 1/2%, P50 par 2,000,000

Stock Dividend Payable 10,000

Share Capital P 6,310,000

Subscribed Ordinary Shares , 10,000 shares 10,000

Subscription Receivable – Ordinary – Current -

Subscribed Preference Shares, 2,000 shares 100,000

Subscription Receivable Preference Share – Long Term ( 50,000) 60,000

Share premium—Ordinary in Excess of par 550,000

Share premium—Preference in Excess of Par 400,000

Share premium—Treasury Shares Preference 100,000

Share premium—Ordinary on Stock Dividend 400,000

Share Option Outstanding - Ordinary 400,000

Share premium—Treasury Shares Ordinary 300,000

Share Warrants Outstanding 300,000

Share premium—Retirement of Preference 400,000

Donated Capital 500,000 P 3,350,000

Contributed Capital) 9,720,000

4. Other Comprehensive Income is a. P 1,800,000 b. P 1,200,000 c. P 1,500,000 d.1,300,000

Unrealized Gain on Available for Sales Securities 200,000

Translation Gain on statements of foreign operation 600,000

Revaluation Surplus 500,000

Unrealized loss on hedging as Cash Flow Hedge (300,000)

Remeasurement Gain on defined benefit pension plan 200,000 P 1,200,000

5. Total Reserves is a. P 12,365,000 b. P 11,015,000 c. P 10,865,000 d. P 12,355,000

Reserve = Includes Stockholders’ Items except Total par and unrestricted RE

6. Total Stockholders’ Equity is a. P 12,370,000 b. P 12,515,000 c. P 12,355,000 d. P

12,365,000

Share Capital—Ordinary, P1 par P4,300,000

Share Capital—Preference 8 1/2%, P50 par 2,000,000

Stock Dividend Payable 10,000

Share Capital P 6,310,000

Subscribed Ordinary Shares , 10,000 shares 10,000

Subscription Receivable – Ordinary – Current -

Subscribed Preference Shares, 2,000 shares 100,000

Subscription Receivable Preference Share – Long Term ( 50,000) 60,000

Share premium—Ordinary in Excess of par 550,000

Share premium—Preference in Excess of Par 400,000

Share premium—Treasury Shares Preference 100,000

Share premium—Ordinary on Stock Dividend 400,000

Share Option Outstanding - Ordinary 400,000

Share premium—Treasury Shares Ordinary 300,000

Share Warrants Outstanding 300,000

Share premium—Retirement of Preference 400,000

Donated Capital 500,000 P 3,350,000

Unappropriated Retained Earnings 1,500,000

Retained Earnings Appropriated for Plant Expansion 100,000 P 1,600,000

 Unrealized Gain on Available for Sales Securities 200,000

Translation Gain on statements of foreign operation 600,000

Revaluation Surplus 500,000

Unrealized loss on hedging as Cash Floe Hedge (300,000)

Remeasurement Gain on defined benefit pension plan 200,000 P 1,200,000

Treasury Shares—Ordinary 100,000 shares (at cost) 150,000 (150,000)

P 12,370,000

Classification of Other Items:

Long Term Investment in Available for Sale Securities 1,000,000 (Asset)

Cash Dividend Payable 100,000 (Liability)

Bonds Payable 20,000 (Liability)

Property Dividend Distributable 100,000 ( Liability)

Subscription Receivable – Ordinary – Current (Current Assets)

I. Share Capital

Par Share Specific Value fixed in the Article of Incorportation appearing on the share
certificate to fix the minimum issue price of the share
No Par Share With no value appearing in the share certificate. It may have a stated value. A no
par share should have a minimum issue price of P 5 per share
Cannot be returned to shareholders during the lifetime of the corporation, except
for wasting asset company, for the protection of corporate creditors. Equal to
Legal Capital aggregate par value of shares issued and subscribed. In case of no par share, it is
equal to all considerations received from issuance of the shares
Issuance of Share Valuations are equal to the following order of priority:
Capital for Non-Cash a. Fair Value of Non-cash Considerations received
Consideration b. Fair Value of Shares Issued
including Services c. Par Value of the Shares Issued
For Debt Payment (IFRIC 19(
a. Fair Value of Shares Issued
b. Fair Value of liabilities extinguished
c. Book Value of liabilities extinguished
Share Issue at It is prohibited in its initial issuance. It is not void but it is illegal and unenforceable.
Discount It will be recorded as discount and a deduction from the total shareholders’
equity
Transaction directly related to issuance of shares – Deducted from the order of
priority. 1. Share Premium from current Issuance 2. Share Premium from
Share Issuance Costs previous share issuance 3. Retained Earnings
 Cost of Public Offering related to stock market listings = Expense

Callable Preference Called in for Redemption at the option of the issuing corporation. This is an equity
Share security. If called more than the issuance price, Retained Earnings will cover. If
called in less than the original price, Premium will be credited.
Redeemable Redemption is at the option the holder. This is classified as liability. Dividend paid
Preference Share to the holder is debited to Interest Expense. Gain or loss in Redemption is charge
to Profit or loss.
Convertible One with feature to give the holder the right to exchange ones security holding by
Preference Share another kind. Close the book value of Share Capital and corresponding Premium.
Any loss will be charged to Retained Earnings and any gain will be credited to
Premium.
Equity

1. Equity in a corporation is the residual interest in the assets of the company after deducting all
liabilities. Equity is often subclassified, and the following categories are commonly used.
2. Issuance Rulings
Valuations on noncash assets received are equal to the following order of priority:
 Fair Value of Non-cash Considerations received ( goods and services)
 Fair Value of Shares Issued
 Par Value of the Shares Issued
For Debt Payment = Book Value of the Debt set off.
Preincorporation Subscription Requirements

c. 25% of the Authorized shares has been subscribed

d. 25% of the Subscribed shares has been paid, no lower than P 5,000.

1. Laguna Corporation was organized at the beginning of 2017. The entity provided the following
transactions affecting Shareholders’ Equity.s
a. Authorized to issue 100,000 ordinary shares with par value of P 100.
b. The minimum required subscription has been complied at par value
c. The minimum required payment has been collected
d. Full collection has been received on the 10,000 shares subscribed above and issued the
corresponding certificates
e. 1,000 shares were issued for payment of legal fees of P 100,000 in connection with organizing the
corporation.
f. 30,000 shares has been issued for Land and Building with fair values of P 800,000 and P
2,500,000, respectively. These assets were recorded in the books of the seller at P 600,000 and
P 2,000,000 for land and Building, respectively.
g. Issued 10,000 shares for an outstanding bank loan of P 1,100,000 and accrued interest of P
200,000. On this date the share has market value of P 120.
h. Issued 10,000 shares for P 90 per share
i. Net Income for the year is P 2,500,000
1.1 Prepare entries using both the memorandum entry and journal entry methods.
1.2 Prepare Shareholders’ Equity of the Statement of Financial Position

Memo Journal
a. 100,000 x 100 Laguna Corporation is authorized to Unissued Ordinary Shares 10,000,000
= 10,000,000 issue 100,000 ordinary shares at P 100 Authorized Ordinary Shares
par 10,000,000
 b. 100,000 x .25 OS Subscription Rec 2,500,000 OS Subscription Rec 2,500,000
x P 100 Subscribed OS 2,500,000 SubscribedOS 2,500,000
c. 2,500,000 x . Cash 625,000 Cash 625,000
25 OSSubscription Rec 625,000 OSSubscriptionRec 625,000
d. 10,000 x 100 Cash 750,000 Cash 750,000
x .75 OS Subscription Rec 750,000 OS Subscription Rec 750,000
Subscribed OS 1,000,000 Subscribed OS 1,000,000
OS Capital 1,000,000 Unissued OS Capital 1,000,000

e. P 100,000 Organization Cost 100,000 Organization Cost 100,000

OS Capital (1,000x100) 100,000 Unissued OS Capital (1,000x100) 100,000
f. Based on the Land 800,000 Land 800,000
fair values of Building 2,500,000 Building 2,500,000
assets OS Capital (30,000 x 100) 3,000,000 Unissued OS Capital 3,000,000
received Share Premium – OS 300,000 Share Premium – OS 300,000
g IFRIC 19 Bank Loan Payable 1,100,000 Bank Loan Payable 1,100,000
Interest Payable 200,000 Interest Payable 200,000
OS Capital (10,000 x 100) 1,000,000 Unissued OS Capital 1,000,000
Share Premium 200,000 Share Premium 200,000
Gain on Early Ext of debt 100,000 Gain on Early Ext of debt 100,000
h. Discount Cash ( 10,000 x 90) 900,000 Cash ( 10,000 x 90) 900,000
Discount on Share Cap 100,000 Discount on Share Cap 100,000
OS Capital 1,000,000 UnissuedOSCapital 1,000,000
i. Income Summary 2,500,000 Income Summary 2,500,000
Retained Earnings 2,500,000 Retained Earnings 2,500,000

Memo Journal
Ordinary Share Capital 6,100,000 Authorized Share Capital 10,000,000
Less: Unisuued Capital 3,900,000
Issued Share Capital 6,100,000
Subscribed Share Capital 1,500,000 Subscribed Share Capital 1,500,000
Less: Subscription Receivable 1,125,000 Less: Subscription Receivable 1,125,000
Subscribed 375,000 Subscribed 375,000

Share Premium 500,000 Share Premium 500,000

Retained Earnings 2,600,000 Retained Earnings 2,600,000
Discount on Share Capital (100,000) Discount on Share Capital (100,000)

TOTAL 9,475,000 TOTAL 9,475,000

Share Issuance Costs

 Share Issuance Cost deducted from Premium, If not enough to cover, close to Premium
from previous share issuance and then Retained Earnings
 Cost of public offering is expensed such as listings and joint cost pertaining to old shares.

2. ABC Corporation has incurred the following costs to undertake its IPO for listings and issuance of
450,000 new shares and 150,000 old existing shares.
` Documentary Stamp tax P 50,000
 Listing Fees 600,000
Publication in Periodicals 400,000
Tax Opinion 200,000
Fairness Opinion and Valuation Report 250,000
Other Joint Costs 350,000

2.1 The amount expensed during the period.

Listing Fees 600,000
Joint Costs ( Tax, Fairness and Others) P 800,000 x 150/600 200,000
Total 800,000

2.2 The amount deducted from share premium

Documentary Stamps 50,000
Publication in Periodicals 400,000
Joint Costs ( Tax, Fairness and Others) P 800,000 x 450/600 600,000
Total 1,050,000

Delinquent Shares:
a. Highest Bidder – Willing to pay a fixed price to get the lowest number of shares.
b. Fixed Price? = Unpaid Subscription of the defaulting subscriber + Other Marketing Cost on the
bidding and other Charges like interest.
c. No Bidder? Consider as a Treasury Shares and the new shares will be issued.

3. . Vav Corporation was organized in January 2016 with authorized capital of P100 par value ordinary
shares. On February 1, 2016, John Marcia subscribed 10,000 shares at 110, paying 40% of the
subscribed price. On March 1, 2016, John made another 20% payment before he was declared
delinquent subscriber. Vav incurred P 20,000 advertising for bidders and P 40,000 for underwriting
fees. The following bidders are willing to receive number of shares as follows
Jong 6,000 shares Jun 5,800 shares
Jin 6,200 shares Jay 6,800 shares

3-1. The highest bidder and his payment is

a. Jun – P 440,000 b. Jun – P 460,000 c. Jay – P 440,000 d. Jay – P 460,000
(highest bidder is Jun since he is willing to get the lowest number of shares at 5,800 shares)
( Fixed Amount to be paid is = (10,000 x 110) x .40 + 20,000 = 460,000

3-2. John will receive how many number of shares

a. 0 b. 5,000 shares c. 4,200 shares d. 3,200 shares
(Excess of the number of subscribed shares and the shares highest bidder willing to get = 10,000 –
5800

3-3. Net Share premium for the issuance is

a. P 60,000 b. P 100,000 c. P 120,000 d. P 40,000
Premium on Issuance = 10,000 x 10 = P 100,000 less underwriting fees of P 40,000 = 60,000

Convertible / Callable Shares upon their conversion and called:

1. Based everything on the Carrying Value of the shares (Original Issuance price).
2. Close the Old Shares (Debit them) and credit the new issuance.
3. If the carrying value of the old shares is higher than the par of the new issuance – credit
Premium on new issuance shares
 4. If the carrying value of the old shares is lower than the par of the new issuance – debit Retained
Earnings

The equity of Bet Company is presented below:

Share Capital - 6% Preference shares, P50 par value, 20,000 shares

authorized, 6,000 shares issued and outstanding P 300,000
Share capital—ordinary, P10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Ordinary share dividend distributable 40,000
Share premium—ordinary 110,000
Share premium—Preference 60,000
Retained earnings—unappropriated P390,000
Appropriated for plant expansion 70,000
Total retained earnings 460,000
Total equity P1,370,000

In this problem:
The Carrying value of Preference Shares = (300,000 + 60,000 ) / 6,000 issued shares = 60 (premium is P10)
The Carrying value of Ordinary Shares = (400,000 + 110,000) / 40,000 shares = 12.75 (Premium is
2.75)

4-1. If Preference shares are convertible into 4 ordinary shares, and half of the shares issued were converted,
how much will the balance be on Share Premium – Ordinary after the conversion?
a. P 110,000 b. P 170,000 c. P 50,000 d. P 160,000
Preference Shares (3,000 x P50) 150,000
Share premium—Preference (3,000 x P10) 30,000
Ordinary Shares ( 3,000 x 4 x P 10 ) 120,000
Share Premium - Ordinary 60,000

4-2. If Preference shares are convertible into 6 ordinary shares, and half of the shares issued were converted,
how much will the balance be on Share Premium – Ordinary after the conversion?
a. P 110,000 b. P 170,000 c. P 50,000 d. P 160,000
Preference Shares (3,000 x P 50) 150,000
Share premium—Preference ( 3,000 x P 10) 30,000
Ordinary Shares (3,000 x 6 x P 10 ) 180,000

4-3. If Preference shares are callable and half of the shares were called for P 70 per share, how much will the
balance be on Share Premium – Preference be after the call?
a. P 30,000b. P 60,000 c. P 90,000 d. P 0
Preference Shares (3,000 x P 50) 150,000
Share premium—Preference ( 3,000 x P 10) 30,000
Retained Earnings 30,000
Cash ( 3,000 x P 70) 210,000

4-4. If Preference shares are callable and half of the shares were called for par, how much will the balance be
on Share Premium – Ordinary be after the call?
a. P 140,000 b. P 110,000 c. P 80,000 d. P 0
Preference Shares 150,000
Share premium—Preference 30,000
 Cash (3,000 x P 50) 150,000
Share premium—Ordinary 30,000

5. The equity of Gimel Company is presented below:

Share Capital - 6% Preference shares, P50 par value, 20,000 shares

authorized, 6,000 shares issued and outstanding P 300,000
Share capital—ordinary, P10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Subscribed Ordinary Share Capital (at P15 per share,50% currently collectible) 100,000
Ordinary share dividend distributable 40,000
Share premium—ordinary 160,000
Share premium—Preference 60,000
Retained earnings—unappropriated P390,000
Appropriated for plant expansion 70,000
Total retained earnings 460,000
Treasury Shares- Ordinary, (10,000 shares at cost) (120,000)
Total equity P1,400,000

5-1 How much is the legal capital ?

a. P 700,000 b. P 800,000 c. P 840,000 d. P 1,020,000
( 300,000 + 400,000 + 100,000 + 40,000 = 840,000)

5-2 How much is the contributed capital ?

b. P 985,000 b. P 800,000 c. P 1,060,000 d. P 940,000
( 300,000 + 400,000 + 100,000+ 40,000 + 160,000 + 60,000) = 1,060,000

6. The shareholders’ account of Dalest Company are shown below:

Subscription Receivable- Preference P 120,000
Subscription Receivable – Ordinary 360,000
Share Capital - 6% Preference shares, P100 par value, 100,000 shares
authorized, 22,000 shares issued and outstanding 300,000
Subscribed Preference Shares, 2,000 shares 200,000
Share capital—ordinary, P10 par value, 200,000 shares authorized,
24,000 shares issued and outstanding 240,000
Subscribed Ordinary Share Capital, 24,000 shares 240,000
Share premium—ordinary 950,000
Share premium—Preference 80,000
Other data:

a. The corporation was organized at the beginning of the current year and immediately received
subscriptions to 20,000 preference shares. Subscriptions to ordinary shares were received on the same
date.
b. During the year, subscriptions were received for an additional 4,000 preference shares at P 120 per
share.
c. Cash payments were received from subscribers at frequent intervals for several months after
subscription. The entity followed the policy of issuing shares only when fully paid.
d. During the year, the entity issued 8,000 ordinary shares in exchange of tract of land with a fair value of
P 230,000.
6.1. Reconstruct the journal entries of the above shareholders’ equity.
6.2. Compute the amount of contributed capital for each class of shares at year end.

1. Arrange the capital accounts per class of share:

Share Capital - 6% Preference shares, P100 par value, 100,000 shares
authorized, 22,000 shares issued and outstanding 300,000
Subscribed Preference Shares, 2,000 shares 200,000
Subscription Receivable- Preference (120,000)
Share premium—Preference 80,000

Contributed Capital – Preference 820,000

Share capital—ordinary, P10 par value, 200,000 shares authorized,

24,000 shares issued and outstanding 240,000
Subscribed Ordinary Share Capital, 24,000 shares 240,000
Subscription Receivable – Ordinary (360,000)
Share premium—ordinary 950,000
Contributed Capital – Ordinary Shares 1,070,000

Use the following flow to analyze the transactions:

Authorized ----- Subscription ----- Payment --- (Paid in Full) Issuance ------ Treasury ------ Retirement

Lets Apply first to Preference Share:

1. Following the flow, Subscribed Shares = 24,000 shares and issued shares is equal to 22,000 shares
2. Statements a and b refers to Preference shares and these are equal to 24,000 shares (subscribed)
3. If b stated that 4,000 shares are issued at P 120 per share, the premium in this transaction covers the
total premium per book (20 x 4,000 = P 80,000), so statement a pertains to shares issued at par.
4. Since statement a stated that the payment on a is outright, only 2,000 shares in statement b are
issued in full leaving 2,000 the balance in subscribed.

Reconstructed Entries:
On Statement A.
Cash (20,000 x 100) 2,000,000
Preference Shares (20,000 x 100) 2,000,000
Issuance on Statement A.
On Statement B.
P/Shares Subscription Receivable (4,000 x 120) 480,000
Subscribed Preference Shares (always at par, 4,000 x 100) 400,000
Share Premium Preference 80,000
Subscription on B

Cash ( 480,000 – 120,000 ) 360,000

P/Shares Subscription Receivable 360,000
Payment on Subscription B

Subscribed Preference Shares (always at par, 2,000 x 100) 200,000

Preference Shares 200,000
Issuance of Shares on B

Lets Apply to Ordinary Shares:

1. Following the flow , Subscribed Shares = 48,000 shares and issued shares is equal to 24,000 shares
2. Statements a , c and d refers to Ordinary shares and these are equal to 48,000 shares (subscribed)
 3. If d stated that 8,000 shares are issued for land with a fair value of P 230,000, so we can have P
150,000 (230,000 – par of shares at P80,000) of premium for ordinary shares. And if we have a total
premium per book of P 950,000, so we can have a total premium of P 800,000 from transaction stated
in a above.
4. Transaction stated in a includes 40,000 shares in subscription. 16,000 shares issued and 24,000
shares still in subscription, but all are subscribed at the total amount of P 1,200,000 ( 40,000 x 10 plus
P 800,000 premium)

Reconstructed Entries:

On statement D.
Land 230,000
Ordinary Shares ( 8,000 x P 10) 80,000
Premium Ordinary Shares ( 230,000 – 80,000) 150,000

Ordinary Shares Subscription Receivable 1,200,000

Subscribed Ordinary Shares ( 40,000 x 10) 400,000
Premium Ordinary Shares 800,000

Cash ( 1,200,000 – 360,000) 840,000

Ordinary Shares Subscription Receivable 840,000

Subscribed Ordinary Shares (16,000 x 10) 160,000

Ordinary Shares 160,000

Callable Preference Shares – shares called for redemption at the option of the corporation. There is no
definite redemption date on this.
a. If at more than the original issue price, the excess is debited to retained earnings.
b. If at less than the original issuance, the excess is credited to premium related to ordinary
shares.
Redeemable Preference Shares - shares called for redemption at the option of the holder or
stockholder. There is a mandatory redemption date on this.
 This is to be considered as liability, and its classification as current or non current depends upon
the redemption date.
 Dividend paid on this share is considered interest expense.
 Gain or loss associated to the redemption is closed to profit or loss.

II. Share Premium

Share Premium comprises of the following items:

1. Excess of par value or stated value
2. Resale of Treasury Shares above cost
3. Donated Capital
4. Issuance of Shares Warrants
5. Distribution of Small Share Dividends ( if fair is higher than par)
6. Quasi Reorganization ( Eliminate Deficit for a new start)
7. Recapitalization ( changing capital structure )
Donated Shares – shares received from shareholders by way of donation. It is actually treasury shares
without a cost. 1. At the date of donation – Memo Entry. 2. When shares are sold – Donated
Capital 3. When retired Close Capital with Donated capital account.
Treasury Shares Subterfuge – When we issue more shares than the fair values assets received with the
understanding that the shareholders will eventually donate the shares.Creating water. When
shares are eventually donated, adjust the asset to its fair value by crediting the same.
If nonholders will donate gifts or grants – charged as INCOME based on its FAIR value when received
or receivable. If there are conditions, charged the same to liability until conditions are met.

7. Hay Corporation received 10,000,P 100 par value ordinary shares as donation. The shares has a fair market
value of P 120 per share at the date of donation. It was subsequently sold at P 130 a month after of
which the corporation incurred P 20,000 as facilitation fee.
7-1 What is the balance of Donated capital account at the date of donation if the donor is a stockholder?
a. P 1,200,000 b. P 1,180,000 c. P 1,280,000 d. P 0
7-2 What is the balance of Donated Capital account at the date of sale of shares?
a. P 1,200,000 b. P 1,180,000 c. P 1,280,000 d. P 0
7-3 If the donor is a nonstockholder, how much is the amount reflected as Donated Capital?
a. P 1,200,000 b. P 1,180,000 c. P 1,280,000 d. P 0

Recapitalization occurs when there are changes in capital structure of the entity. The old shares are
cancelled and the new one will be issued.
Change from Par to No par/ stated – The original issued priced is closed and the new one will be
issued. The difference will be charged to Share Premium – Recap (Gain) and Retained Earnings
(loss)
 Change from No Par to Par - The difference will be charged to Share Premium – Recap (Gain)
and Retained Earnings (loss)
Reduction of Par
Reduction of Stated Value
Split UP / Split DOWN – increase/decrease of shares , corresponding adjustment to par/ stated –
JUST MEMO entry since there is no change in the amount of Share Capital.
8. Vav Company has the following capital structure :
Ordinary Share Capital , 50,000 shares P 10,000,000
Share Premium 1,000,000
Retained Earnings 5,000,000
8-1 If the shares have P 200 par and they will be changed to no par, P 100 stated value. Share Premium
will increase (decrease) by what amount?
a. P 6,000,000 b. P 5,000,000 c. P 7,000,000 d. P 0

Share Capital 10,000,0000

Share Premium 1,000,000
Share Capital ( 50,000 x 100) 5,000,000
Share Premium - Recap 6,000,000

8-2 If the shares have P 200 par and they will be changed to no par, P 250 stated value. Share
Premium will increase (decrease) by what amount?
a. P 6,000,000 b. P 5,000,000 c. P 7,000,000 d. P 1,000,000

Share Capital 10,000,0000

Share Premium 1,000,000
 Retained Earnings 1,500,000
Share Capital ( 50,000 x 250) 12,500,000
8-3 If the shares have no par value and they will be changed to a P100 par, Share Premium will
increase (decrease) by what amount?
b. P 6,000,000 b. P 5,000,000 c. P 7,000,000 d. P 1,000,000

Share Capital 10,000,0000

Share Premium 1,000,000
Share Capital ( 50,000 x 100) 5,000,000
Share Premium 6,000,000

Shares with Warrants - The consideration received shall be allocated between the shares and the
warrants based on their fair market values

9. Zayen Company issued 20,000 10%, P 100 par value, preference shares for P 3,250,000. Each preference
share is accompanied by a share warrant enabling the holder to acquire one P 50 par value ordinary
share at P 60 per share. On this date the market values of the securities are as follows:
Preference, warrants on P 130; Warrant, P 10, Ordinary shares, P 70
9-1 How much is the share warrant outstanding to be reflected as share premium?
a. P 232,143 b. P 250,000 c. P 3,017,857 d. P 0

Preference ( 120 x 20,000 ) 2,400,000

Warrant ( 20,000 x 10 ) 200,000
Total 2,600,000

Preference (2.4 / 2.6 x 3,250,000 ) 3,000,000

Warrant ( .2 / 2.6 x 3,250,000) 250,000

9-2 If the preference shares have market value of P 120 and the warrants have no market value, How
much is the share warrant outstanding to be reflected as share premium?
b. P 850,000 b. P 250,000 c. P 3,000,000 d. P 0

Preference ( 120 x 20,000 ) 2,400,000

Proceeds 3,250,000
Warrant 850,000

9-3 If the preference shares and the warrants have no market values and that ordinary shares have
P 100 market value, How much is the share warrant outstanding to be reflected as share premium?
c. P 800,000 b. P 250,000 c. P 2,450,000 d. P 0
Warrants –100 – 60 = 40 x 20,000 800,000
Proceeds 3,250,000
Preference 2,450,000

10. On July 1, 2016, an additional 40,000 shares with detachable warrants were issued for cash at P 150
per share. The average market price of ordinary shares and warrants were P90 and P 10, respectively.
Two warrants required to purchase additional ordinary share for P 120. What amount is recorded for
Ordinary Share Warrants Outstanding.

a. 400,000 b. 600,000 c. 3,600, 000 d. 0

11. On May 1, 2016, Marly Co. issued P500,000 of 7% bonds at 103, which are due on April 30, 2026.
Twenty detachable stock warrants entitling the holder to purchase for P40 one share of Marly’s
ordinary shares P15 par value, were attached to each P1,000 bond. The bonds without the warrants
would sell at 96. On May 1, 2016, the fair value of Marly’s shares was P35 per share and of the
warrants was P2.On May 1, 2016, Marly should credit Share Premium–Share Warrants for a.
P20,600 b. P35,000 c. P20,000 d. P15,000

b (P500,000 ´ 1.03) = P15,000

(P500,000 ´ .96) = P480,000.

P515,000 – P480,000 = P35,000.

Right Issue ( Stock Right) – Right of preemption.

a. Upon Issuance of Warrants / Exercise of Rights / Expiration – Just Memo Entry

12. The equity section of Gunkel Corporation as of December 31, 2015, was as follows:

Share capital—ordinary, par value P2; authorized 20,000 shares;

issued and outstanding 10,000 shares P 20,000

Share premium—ordinary 30,000

Retained earnings 75,000

P125,000

On March 1, 2016, the board of directors issue rights to shareholders enabling them to purchase I
share for every 10 rights held for P4 per share. On March 1, 2016, the fair value of the share was P6
per share and each right is P 1. What is the value of the share warrants?

a. P10,000. b. P20,000. c. P 2,000. d. 0.

Quasi Reorganization –is a permissive but not mandatory to restate assets, liabilities and capital for
the purpose of eliminating deficit. It can be accomplished by recapitalization or revaluation of
property, plant and equipment. This must be approved by SEC.

13. Tet Company has the following shareholders’ equity items on December 31, 2016:
Share Capital- Ordinary, 100,000 shares P 2,500,000
Share Premium 1,750,000
Retained Earnings ( 3,000,000)
The company will undergo quasi-reorganization with the following data:
a. Inventory has a book value of P 2,500,000 and a fair value of P 2,000,000
b. Plant Assets with book value of P 8,500,000 and the fair value of P 7,000,000
 c. Individual shareholders will contribute P 4,000,000 for reorganization, No additional shares will be
issued
d. The par value will be reduced to P 5.
After the quasi- reorganization, what amount should be reported as share premium
a. P 2,750,000 b. P 3,250,000 c. P 3,750,000 d. P 1,750,000

Inventory (500,000)
Plant Assets (1,500,000)
Contribution 4,000,000
Reduction of Par 2,500,000
Deficit (3,000,000)
Increase in APIC 1,500,000 (1,500,000 + 1,750,000) = 3,250,000

LONG PROBLEMS

Problem 1
The shareholder’s equity section of Standard Corporation’s statement of financial position as of December 31, 2016, is as
follows:
Ordinary Shares, P 10 par value; authorized, 2,00,000 shares; issued 400,000 shares P 4,000,000
Preference Shares, P 5 par value; authorized, 1,000,000 shares; issued 200,000 shares 1,000,000
Share Premium- Ordinary Shares 1,800,000
Share Premium – Preference Shares 600,000
Retained Earnings 6,000,000
The following transactions occurred during 2017:
January 5 The company issued for P 2,350,000, 100,000 ordinary shares and 50,000 preference shares. The
company incurred shares issue cost at P 150,000. The ordinary and preference shares are currently
selling at P 15 and P 10, respectively.
February 16 50,000 preference shares were subscribed at P 12 per share
March 25 20,000 previously unissued ordinary shares were issued in exchanged of an equipment with a fair
value of P 500,000. The company incurred share issue costs at P 20,000.
April 20 Reacquired 40,000 ordinary shares as treasury shares at P18 per share
June 30 The company declared and paid P 0.50 to ordinary shares and P 1 per share to preference shares
July 30 Reissued half of the treasury shares at P 16 per share.
August 30 A 10% ordinary stock dividend was declared and issued to ordinary shares. Market value per share is
P1.
Sept. 16 Collected full payments on 80% of the preference shares subscribed on February 16.
December 31 The company declared and paid P 0.50 to ordinary shares and P 1 per share to preference shares
December 31 Adjusted Net Income for the year is P 3,510,000
1. The entry to record cash dividend on June 30, requires a debit to retained earnings at
a. P 560,000 b. P 540,000 c. P 575,000 d. P 585,000
2. The entry to record the reissue of treasury shares on July 30 requires a debit to
a. Shares premium, P 40,000 b. Retained Earnings, P 40,000
c. Share Premium, P 80,000 d. Retained Earnings, P 80,000
8. The entry required to record the stock dividends on August 30 requires a debit to retained earnings at
a. P 500,000 b. P 540,000 c. P 850,000 d. P 918,000
9. The balance of Premium in Excess of Par from Ordinary Shares as of December 31, 2017 is
a. P 3,080,000 b. P 3,152,500 c. P 2,842,500 d. P 2,730,000
10. The balance of Unappropriated Retained Earning as of December 31, 2017 is
a. P 7,436,000 b. P 7,465,000 c. P 7,103,000 d. P 7,145,000
(7,505,000 – 360,000)
DEBIT CREDIT
1/5 Cash 2,200,000 Ordinary Shares ( 100,000 x 10) 1,000,000
Premium-Ordinary (1,650,000- 1M) 650,000
Ordinary 1,500,000=1.5/2 x 1,650,000 Preference Shares (50,000 x 5) 250,000
2.2M
Preferred 500,000= .5/2 x 2.2M 550,000 Premium – Preference (550-250) 300,000
Total Fair 2,000,000 2,200,000
2/16 Subscription Receivable 600,000 Preferred Shares Subscribed 250,000
Share Premium- Preference 350,000

3/25 Equipment 500,000 Ordinary Share 200,000

Share Premium - Ordinary 280,000
Cash 20,000

4/20 Treasury - Ordinary 720,000 Cash 720,000

6/30 Retained Earnings 540,000 Cash/Dividend Payable 540,000

(480,000 x .50) + (300,000 x 1)

7/30 Cash 320,000 Treasury Shares 360,000

Retained Earnings 40,000

8/30 Retained Earnings 850,000 Share Dividend Payable/ Ordinary 500,000

( 500,000 x .10 x P 17) Share Premium 350,000

9/16 Cash ( 50,000 x 12 x .80) 480,000 Subscription Receivable 480,000

Subscribed Preferred Shares 200,000 Preference Shares 200,000

( 50,000 x .80 x P 5)
12/31 Retained Earnings 575,000 Cash Dividend Payable / Cash 575,000
(550,000 x 0.50) + ( 300,000 x 1)
Income Summary 3,510,000 Retained Earnings 3,510,000

Ordinary Preference
January balance 400,000 200,000
Jan 5 Issuance 100,000 50,000
Feb 16 subscription 50,000
March 25 Issuance 20,000
April 20 Treasury (40,000)
Outstanding Shares June 30, 2017 480,000 300,000
Jul 30 Reissuance of Treasury Shares 20,000
August 30 Share Dividend 50,000
December 31, Outstanding Balance 550,000 300,000

OS PS PS Subsd Prem-OS Prem -PS RE Treasury Total

Jan 1 4,000,000 1,000,000 1,800,000 600,000 6,000,000 13,400,000
Jan 5 1,000,000 250,000 650,000 300,000 2,200,000
Feb 16 250,000 350,000 600,000
March 25 200,000 280,000 480,000
April 20 (720,000) (720,000)
June 30 ( 540,000) (540,000)
 July 30 (40,000) 360,000 320,000
Aug 30 500,000 350,000 (850,000) -
Sept 16 200,000 (200,000) -
Dec. 31 (575,000) (575,000)
3,510,000 3,510,000
5,700,000 1,450,000 50,000 3,080,000 1,250,000 7,505,000 (360,000) 18,675,000

Problem 2
On May 2015, Baby Inc.was organized with 3,000,000 authorized shares of P 10 par value ordinary shares, and 300,000
of its ordinary shares were issued for P 3,300,000. Net Income in 2015 was P 525,000.

On July 23, 2016, when the shares are selling at P 13 per share, Baby Inc. issued 500,000 ordinary shares in exchanged of
a real estate properties which were fairly valued at P 6,250,000. A 5% share dividend was declared on October 2, 2016,
to shareholders’ of record on October 23, 2016. The market value of ordinary share is P 11 per share on the declaration
date. Baby’s net income for 2016 was P 350,000.

During 2017, Baby, Inc. has the following transactions:

a. In February, reacquired 30,000 of its ordinary shares ,originally issued in 2015, for P 9 per share.
b. In June, sold 15,000 os its treasury shares for P 12 per share.
c. In September, each shareholder was issued one right to purchase two additional ordinary shares for P13 per
share. The right will expire on December 31, 2017.
d. In October, 250,000 rights were exercised when the market value of the ordinary shares was P14 per share.
e. In November, 400,000 rights issues were exercised when the market value of the ordinary shares was P 15 per
share.
f. On December 15, declared its first cash dividend to shareholders of P0.30 per share, payable on January 10,
2017, to shareholders of record December 31, 2017.
g. On December 31, formally retired 10,000 of its treasury shares and have them revert back to an unissued basis.
The market value of the ordinary share was P 16 per share on this date.
h. Net income for 2017 was P 800,000.
Based from the above above information, determine the following
11. The stock dividends declaration on October 2, 2016 includes a debit to retained earnings at
a. P 400,000 b. P 440,000 c. P 250,000 d. P 275,000
12. The cash dividends declaration on December 15, 2017 includes a debit to retained earnings at
a. P 349,500 b. P 351,000 c. P 637,500 d. P 639,000
13. The adjusted total share premium as of December 31, 2017 is
a. P 5,545,000 b. P 5,505,000 c. P 3,585,000 d. P 3,595,000
14. The adjusted total retained earnings as of December 31, 2017 is
a. P 885,500 b. P 884,000 c. P 597,500 d. P 596,000
15. The total stockholders’ equity as of December 31, 2017 is
a. P 27,397,500 b. P 27,442,500 c. P 14,822,500 d. P 14,867,500

Shares Ordinary APIC Retained

Outstandin Shares Earnings
g
May 2014 balance 300,000 3,000,000 300,000
Net Income 2016 525,000
July 23 issuance 500,000 5,000,000 1,250,000
Oct 2 stock dividends 40,000 400,000 40,000 (440,000)
Net income 2015 350,000
Feb 2016 treasury (30,000)
June, reissuance of Treasury 15,000 45,000
Oct issuance thru rights 500,000 5,000,000 1,500,000
 Nov issuance thru rights 800,000 8,000,000 2,400,000
Dec 15 (2,125,000 x 0.30) (637,500)
Dec 31 retirement of TS (100,000) 10,000
Net income 2017 800,000
2,125,000 21,300,00 5,545,000 597,500
0

Ordinary Share 21,300,000

APIC 5,545,000
Retained Earnings 597,500
Treasury Shares ( 5,000 x P 9) (45,000)
Total Equity 27,397,500

Problem 3
You were assigned to audit the shareholders’ equity of Stony Corporation for the year ended, December 31, 2017. The
corporation was incorporated in early 2016 when it was authorized to issue 100,000 , P 100 par, ordinary shares and
50,000, P 50 par, preference shares.The following is the capital structure as of December 31, 2016.

Ordinary shares, 50,000 shares issued at P 150 per share on encorporation P 7,500,000
Preference shares, 20,000 issued in exchange of a building with fair value of P 1,200,000 1,200,000
Retained Earnings ( The company’s net income in 2016) 5,540,000
14,240,000

Your inquiries and investigation revealed the following transactions which occurred in 2017:
a. In early 2017, the company reacquired 20,000 from its previously issued ordinary shares at P 160 per share and
reverted them to treasury since it has an intent of reissuing the same.
b. On March 10, the company issued 10,000 ordinary shares and 10,000 preference shares for a total lump sum
payment of P 2,800,000. On this date, ordinary shares are quoted in the market at P 175 per share while
preference are quoted at P 75 per share.
c. On June the company issued, through a broker, additional 5,000 preference shares at P 85 per share. The
company incurred P 25,000 in broker’s fees and commission.
d. On July 1, the company issued 15,000 ordnary shares with a 3 – year, P 2,000,000, 12% bonds for a total
consideration of P 5,000,000. The bonds with pay semi-annual interest every January 1 and July 1, are currently
quoted at P 110, while ordinary shares are quoted in the market at P 180 per share.
e. On October 11, the company reissued 8,000 treasury shares at P 185 per share.
f. On December 1, the company retired 7,000 treasury shares and reverted them to unissued basis.
g. The company registered an adjusted net income in 2017 at P 4,530,000.
Based from the above information, answer the following:
16. The amount to be credited to Share Premium from Preference Shares as a result of the transaction on March 10 is
a. P 250,000 b. P 960,000 c. P 340,000 d. P 360,000
17. The amount to be credited to Share Premium from Ordinary Shares as a result of the transaction on July 1 is
a. P 1,300,000 b. P 1,200,000 c. P 1,500,000 d. P 1,400,000
18. The entry to record the retirement of the treasury shares on December 1, shall involve a debit to Share Premium
from Treasury Share Transaction at what amount?
a. None b. P 200,000 c. P 130,000 d. P 70,000
19. The total amount of Additional Paid In Capital as of December 31, 2017 is
a. P 5,100,000 b. P 5,230,000 c. P 5,650,000 d. P 5,580,000
20. The correct Accumulated Profit – Unappropriated balance as of December 31, 2017 is
a. P 10,070,000 b. P 10,000,000 c. P 9,270,000 d. P 9,200,000

Entries before 2017:

a. Cash ( 50,000 x 150) 7,500,000
 Ordinary Share Capital ( 50,000 x 100) 5,000,000
Share Premium – OS 2,500,000

b. Building 1,200,000
Preference Share ( 20,000 x 500 1,000,000
Share Premium – PS 200,000
c. Income Summary 5,540,000
Retained Earnings 5,540,000

Entries in 2017:
a. Treasury Shares – OS ( 20,000 x 160) 3,200,000
Cash 3,000,000
b. Cash 2,800,000
Ordinary Share Capital(10,000 x 100) 1,000,000
Share Premium – Odinary 960,000
Preference Shares ( 10,000 x 50) 500,000
Share premium – Preference 340,000
( Prorate at fair Value)
c. Cash ( 5,000 x 85 ) – 25,000 400,000
Preference Shares ( 5,000 x 50) 250,000
Share Premium – PS 150,000
d. Cash 5,000,000
Bonds Payable 2,000,000
Premium on Bonds Payable 200,000
Ordinary Share ( 15,000 x 100) 1,500,000
Share Premium – Ordinary 1,300,000
( Residual Value after FV of Bonds)
e. Cash ( 8,000 x 185) 1,480,000
Treasury Shares ( 8,000 x 160) 1,280,000
Share Premium – Treasury 200,000
f. Ordinary Shares ( 7,000 x 100) 700,000
Share Premium ( 7,000 x 50) 350,000
Share Premium Treasury 70,000
Treasury Shares ( 7,000 x 160) 1,120,000
g. Income Summary 4,530,000
Retained Earnings 4,530,000
h. Retained Earnings 800,000
Retained Earnings Appropriated for TS 800,000

Summary:

Ordinary Preference Prem-OS Prem-PS Prem-TS RE-Unapp RE-Appro TS

a. 5,000,000 2,500,000
b. 1,000,000 200,000
c. 5,540,000
a. (3,200,000)
b. 1,000,000 500,000 960,000 340,000
c. 250,000 150,000
d. 1,500,000 1,300,000
e. 200,000 1,280,000
f. (700,000) (350,000) (70,000) 1,120,000
 g. 4,530,000
h. (800,000) 800,000
TOTAL 6,800,000 1,750,000 4,410,000 690,000 130,000 9,270,000 800,000 (800,000)

Problem 4
An analysis of Boodle Inc.’s Retained Earnings account in relation to your audit of the financial statements as of and for
the period ended, December 31, 2017 revealed the following information:

Date Particular Debit Credit

January 1 Beginning Balance 13,120,000
February 3 Declaration of P 5 per share cash dividend to shareholders as of Feb 14 to
be distributed on March 5 ?
April 1 Declaration of a Building with a carrying value of P 2.2M as property
dividends to shareholders as of April 15 to be distributed on August 1 2,200,000
December Accumulated cost incurred to repair merchandise sold to customers
30 returned to the company as these are covered by a warranty promotional
program which commenced during the current period 1,840,000
December Accumulated cash collected from customers availing of company’s
30 premium’s promotional program which it inaugurated during the current 1,780,000
period
Dec. 31 Unadjusted Net Income 8,250,000
Audit notes:
a. The company had 250,000 ordinary shares issued, 30,000 of which are in the treasury. There was no capital
transactions during the year.
b. The Building which was declared as dividend had a fair market value of P 2,500,000 on April 1. The same had a
fair market value of P 2,000,000 on August 1. The property dividend was recorded by the client as debit to
retained earnings and credit to property dividends payable at P 2.2M. Upon distribution, the company debited
the property dividends payable account and credited building at P 2.2M
c. The company’s warranty program covering certain merchandise is for a two-year period. 4,500 units sold during
the year are covered by the said warranty program, The company estimates, based on industry experience, that
40% of the units sold shall be needing repairs on the year of sale and another 20% shall be returned for repair on
the year following the year of repair.The company further estimates that the repair costs will be at P 800 in labor
and P 500 in materials per unit. Actual cost incurred which was charged to Retained Earnings account was P
1,840,000.
d. The company also started promotional program during the year in which for every accumulated receipt of
P 50,000 plus P 500, a customer can avail of a premium item which the company had purchased at a cost of
P 1,200 per unit. The following table summarizes the relevant facts about the promotional program:
Number of Premiums Purchased 5,200
Number of Premiums Actually Distributed 3,560
Number of units that will still probably distributed over the following period 1,940
The company recorded the related transactions by charging premium expense for the total cost of premium
purchased, while crediting retained earnings for the total cash collection from customers for the premium
redemption.
21. The gain or loss to be recognized on August 1 upon distribution of the Building as property dividend is
a. None b. P 200,000 c. P 300,000 d. P 500,000
Retained Earnings 2,500,000
Property Dividend Payable 2,500,000
Non Current Asset Held for Disposal 2,200,000
Building 2,200,000
Property Dividend Payable 500,000
Retained Earnings 500,000
 Property Dividend Payable 2,000,000
Loss on Distribution 200,000
Non Current Asset Held for Disposal 2,200,000
22. The correct estimated warranty payable as of December 31, 2017 is
a. P 500,000 b. P 1,840,000 c. P 1,670,000 d. P 3,510,000
WARRANTY PREMIUMS
Number of Unist sold under warranty 4,500 Number of units Distributed 3,560
Estimated rate of Repairs 60% Number of Premiums to be Distributed 1,940
Est. Units to be returned for repairs 2,700 Estimated premium to be distributed 5,500
Estimated Cost of repairs P 1,300 Net Cost of Premium ( 1,200 – 500 ) P 700
Warranty Expense P 3,510,000 Premium Expense P 3,850,000
Actual cost paid during the year (1,840,000)
Estimated Warranty Payable P 1,670,000

23. The premium expense to be recognized for the year is

a. P 6,600,000 b. P 2,328,000 c. P 3,640,000 d. P 3,850,000
24. The adjusted net income for the year as the result of your audit is
a. P 7,130,000 b. P 6,930,000 c. P 7,430,000 d. P 8,100,000
25. The adjusted retained earnings as a result of your audit as of December 31, 2017 is
a. P 17,150,000 b. P 17,450,000 c. P 18,120,000 d. P 16,950,000

NET INCOME RETAINED EARNINGS

Unadjusted Net Income 8,250,000 Retined Earnings, Beg 13,120,000
Loss on Distribution (200,000) Cash Dividend ( 220,000 x P 5 ) (1,100,000)
Unrecorded Warranty Expense (3,510,000) Property Dividend (Final FMV) (2,000,000)
Premium Expense recorded (5,200 x 1,200) Adjusted Net Income 6,930,000
Premium Expense as computed- P 2,390,000 Adjusted Retained Earnings 16,950,000
3,850,000
Adjusted Net Income 6,930,000