Chapter 11

Shareholders’ Equity (Part 2)

PROBLEM 1: TRUE OR FALSE

1. FALSE 6. TRUE
2. TRUE 7. FALSE
3. TRUE 8. TRUE
4. FALSE 9. TRUE
5. FALSE 10. TRUE

PROBLEM 2: FOR CLASSROOM DISCUSSION

1. B

2. B

3. B

4. B

5. D

6. C

7. B

8. B

9. A

10. D

11. B

12. D

13. C

14. A

15. C

16. D

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17. B

18. A

19. A

20. D

21. Solutions:

(1)
Dividends (or Retained Earnings) ............ 65,000
Capital liquidated 15,000
Dividends Payable ......................... 80,000

(2)
Dividends Payable ........................... 80,000
Cash ...................................... 80,000

22. Solutions:

Requirement (a):
Total dividends declared 200,000
Preferred dividends:
Dividends in arrears (6% x 100 x 2,000 x 2 yrs.) (24,000)
Dividend to ordinary shares 176,000

Requirement (b):

Date of declaration:
Retained earnings 200,000
Dividends payable – preference shares 24,000
Dividends payable – ordinary shares 176,000

Date of record:
No entry

Date of distribution:
Dividends payable – preference shares 24,000
Dividends payable – ordinary shares 176,000
Cash 200,000

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23. Solutions:

Requirement (a):
(a) Retained earnings (400,000 x 15% x 25) 1,500,000
Share dividends distributable (400,000 x 15% x 20) 1,200,000
Share premium (Additional paid-in capital) 300,000

(b) Memo entry only

(c) Retained earnings (400,000 x 100% x 20) 8,000,000

Share dividends distributable (400,000 x 100% x 20) 8,000,000

Requirement (b):
TABLE:
Additional Total
Outstanding Common Paid-In Retained Stockholders'
Shares Stock Capital Earnings Equity
(a) 460,000 ₱ 9,200,000 ₱2,700,000 ₱ 9,300,000 ₱21,200,000
(b) 800,000 ₱ 8,000,000 ₱2,400,000 ₱10,800,000 ₱21,200,000
(c) 800,000 ₱16,000,000 ₱2,400,000 ₱ 2,800,000 ₱21,200,000

24. Solution:

Aug. Retained Earnings .................. 440,000

15
Accumulated Depreciation--Buildings
and Equipment ..................... 160,000

Buildings and Equipment .......... 600,000

15 Capital Stock (₱50 par) ............ 1,600,000

Capital Stock (₱20 par) .......... 640,000
Paid-In Capital from Reduction
in Stock Par Value ................. 960,000

15 Paid-In Capital in Excess of Par ... 320,000

Paid-In Capital from Reduction in
Stock Par Value ................... 540,000
Retained Earnings ................ 860,000

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PROBLEM 3: EXERCISES

1. Solution:
Retained earnings, October 1, 2001, as ₱860,000
originally reported ....................
Prior period adjustment--overstatement 43,400
of depreciation, net of income taxes of
₱18,600 ...............................

Retained earnings, October 1, 2001, as ₱903,400

restated ..............................
Add: Net income ..................... 75,000
Less: Cash dividends declared ........ ₱16,400
Stock dividends declared ..... 41,000 57,400)
Retained earnings, September 30, 2002 ... ₱921,000

2. Solution:

Unrealized loss (1.6M – 1.45M) 150,000

Held for trading securities 150,000
to remeasure the investment to fair value as of declaration date

Retained earnings 1,450,000

Dividends payable 1,450,000
to record the property dividends declared

3. Solution:

Retained Earnings (600,000 sh. x 5par) 3,000,000

Stock Dividend Distributable. 3,000,000

4. Solution:
(1)

Cumulative preferred
Preferred dividends per year: 100,000 shares x ₱3 =
₱300,000
Paid In Arrears
Preferred dividends in 2000 ₱150,000 ₱150,000
Preferred dividends in 2001:
Arrearage from 2000 ₱ 75,000 (75,000)
Arrearage from 2001 ₱300,000
Total in arrears at
₱375,000
12/31/2001
Dividends for 2002:
Arrearage from years 2000 and 2001 ₱375,000
Current year preferred dividend 300,000
Total preferred dividends paid in 2002 ₱675,000
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Remainder to common: ₱800,000 - ₱675,000 = ₱125,000
Common dividends per
₱125,000/25,000 shares = ₱5.00 per share
share:

(2)

Noncumulative preferred
Preferred dividends per year: 50,000 shares x ₱3 = ₱150,000
Dividends in arrears for 2000: ₱ 0
Dividends in arrears for 2001: 0
Dividends for 2002: 150,000
Total preferred dividends ₱150,000

Remainder to common: ₱800,000 - ₱150,000 = ₱650,000

Common dividends per share: ₱650,000/25,000 shares = ₱26.00 per
share

(3)

Cumulative preferred
Preferred dividends per 70,000 shares x ₱6 = ₱420,000
year:
Paid In Arrears
Preferred dividends in 2000 ₱150,000 ₱270,000
Preferred dividends in 2001:
Arrearage from
₱ 75,000 (75,000)
2000
Arrearage from
420,000
2001
Total in arrears at 12/31/2001 ₱615,000
Dividends for 2002:
Total dividends paid in 2002 ₱800,000
Arrearage from years 2000 and 2001 615,000
Amount available for preferred dividend in 2002 ₱185,000
Total preferred dividends ₱800,000

Remainder to common: ₱0
Common dividends per
₱0
share:

5. Solution:

2002
July 1 Retained Earnings ................. 1,540,000
Stock Dividends Distributable ... 1,540,000
[(30,800/2) x ₱100] .............

Sep. 1 Stock Dividends Distributable ..... 1,540,000

Common Stock (₱100 par) ......... 1,540,000

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2003
June Retained Earnings ................... 554,400
1
Stock Dividends Distributable ..... 462,000
Paid-In Capital from Stock
Dividends ........................ 92,400
30,800 + 15,400 = 46,200
outstanding shares .............
46,200 x 10% = 4,620 shares .....
4,620 shares x ₱120 = ₱554,400 ..

Aug. 1 Stock Dividends Distributed ......... 462,000

Common Stock (₱100 par) ........... 462,000

6. Solutions:

Common Stock Description Shares

Issued during 2002 ...................... 110,000
Reacquired during 2002 .................. (6,000)
Outstanding on December 31, 2002 ........ 104,000

Outstanding after 2-for-1 stock split,

December 31, 2002 (104,000 x 2) ....... 208,000

10% stock dividend, April 12

(10% x 208,000) ....................... 20,800
Resale of treasury stock, Oct. 17
(6,000 x 2) ........................... 12,000
Outstanding December 4, 2003 ............ 240,800

2003
Dec. 4 Retained Earnings ................... 240,800
Cash Dividends Payable
(240,800 x ₱1) .................... 240,800

Cash Dividends Payable .............. 240,800

Cash .............................. 240,800

Dec. 4 Retained Earnings (24,080 x ₱30) .... 722,400

Property Dividends Payable
(24,080 x ₱25) .................... 602,000
Gain on Distribution of Property
Dividends (24,080 x ₱5) ......... 120,400

Property Dividends Payable .......... 602,000

Investment in Hall Co. Stock ...... 602,000

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7. Solutions:

Jan. 7 Retained Earnings (150,000 x ₱.75) .. 112,500

Cash Dividends Payable--Preferred
Stock ............................ 112,500

Feb. 7 Cash Dividends Payable--Preferred

Stock .............................. 112,500
Cash .............................. 112,500

Mar. 4 Retained Earnings (200,000 x ₱.50) .. 100,000

Cash Dividends Payable--Common
Stock ............................. 100,000

Mar. 18 Cash Dividends Payable--Common 100,000

Stock
Cash .............................. 100,000

June 30 Memorandum entry ....................

July 9 Treasury Stock--Common .............. 384,000

Cash .............................. 384,000

Sept. Retained Earnings ................... 315,200

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Cash Dividends Payable--Common
Stock [(800,000 - 12,000) x ₱.40] . 315,200

Sept. Cash Dividends Payable--Common 315,200

18 Stock
Cash .............................. 315,200

8. Solutions:

(1)
Adjustment of asset values to proper carrying
amounts:
Retained Earnings ....................... 140,000
Building .............................. 125,000
Equipment ............................. 15,000

(2)
Recapitalization:
Common Stock (25,000 x ₱5 par reduction) 125,000
Additional Paid-In Capital ............ 125,000

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(3)
Elimination of deficit:
Additional Paid-In Capital .............. 365,000
Retained Earnings ..................... 365,000
(₱225,000 + ₱140,000)

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PROBLEM 4: CLASSROOM ACTIVITY

Solutions:
Requirement (a) – Preference share is noncumulative
Total dividends declared 3,600,000
Allocation:
Allocation to preference shares: (4M par x 10% x 1 yr.) 400,000
Excess allocated to ordinary shares: (1.8M - 200,000) 3,200,000
Balance -

Requirement (b) – Preference share is cumulative

Total dividends declared 3,600,000
Allocation:
Allocation to preference shares: (4M par x 10% x 3 yrs.) 1,200,000
Excess allocated to ordinary shares: (1.8M - 200,000) 2,400,000
Balance -

Requirement (c) – Preference share is noncumulative and fully

participating
Total dividends declared 3,600,000
Allocation:
Basic allocation to preference shares:
(4M par x 10% x 1 yr.) 400,000
Basic allocation to ordinary shares:
(16M par x 10% x 1 yr.) 1,600,000
Excess subject to participation (3.6M - .4 - 1.6) 1,600,000
Participation of preference shares
(1,600,000 x 4M par/ 20M par) 320,000
Participation of ordinary shares
(1,600,000 x 16M par/ 20M par) 1,280,000
Balance -

The allocated amounts are reconciled with the total dividends

declared as follows:
Total dividends declared 3,600,000
Total dividends allocated as:
Allocation to preference shares:
(400K basic + 320K participation) 720,000
Allocation to ordinary shares:
(1.6M basic + 1.28M participation) 2,880,000
As allocated 3,600,000

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Requirement (d) – Preference share is cumulative and fully
participating
Total dividends declared 3,600,000
Allocation:
Basic allocation to preference shares:
(4M par x 10% x 3 yrs.) 1,200,000
Basic allocation to ordinary shares:
(16M par x 10% x 1 yr.) 1,600,000
Excess subject to participation 800,000
Participation of preference shares (800,000 x 4M/20M) 160,000
Participation of ordinary shares (800,000 x 16M/20M) 640,000
Balance -

The allocated amounts are reconciled with the total dividends

declared as follows:
Total dividends declared 3,600,000
Total dividends allocated as:
Allocation to preference shares:
(1.2M basic + 160K participation) 1,360,000
Allocation to ordinary shares:
(1.6M basic + 640K participation) 2,240,000
As allocated 3,600,000

Requirement (e) – Preference share is cumulative and

participating up to 16%
Total dividends declared 3,600,000
Allocation:
Basic allocation to preference shares:
(4M par x 10% x 3 yrs.) 1,200,000
Basic allocation to ordinary shares:
(16M par x 10% x 1 yr.) 1,600,000
Excess subject to participation 800,000
Participation of preference shares [4M par x (16% - 10%)*] 240,000
Excess allocated to ordinary shares (800,000 - 240,000) 560,000
Balance -

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The allocated amounts are reconciled with the total dividends
declared as follows:
Total dividends declared 3,600,000
Total dividends allocated as:
Allocation to preference shares:
(1.2M basic + 240K participation) 1,440,000
Allocation to ordinary shares:
(1.6M basic + 560K participation) 2,160,000
As allocated 3,600,000

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PROBLEM 5: MULTIPLE CHOICE - THEORY
1. C 6. D
2. A 7. B
3. D 8. C
4. C 9. A
5. A 10. C

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PROBLEM 6: MULTIPLE CHOICE - COMPUTATIONAL
1. A (300,000 + 60,000 profit) = 360,000. The reissuance of the
treasury shares did not affect retained earnings because the
reissuance price exceeds the cost.

2. A
Solution:
Total profit since incorporation 420,000
Total cash dividends paid (130,000)
Total value of property dividends distributed (30,000)
Retained earnings to date 260,000

The excess proceeds on the sale of treasury shares are credited to

share premium.

3. A
Solution:
Issued Outstanding
Issued as of Dec. 31, 20x1 100,000 100,000
Treasury shares as of Dec. 31, 20x1 (5,000)
20x2 transactions:
May 3 - reissuance of treasury shares 1,000
Aug. 6 - issuance of new shares 10,000 10,000
Totals 110,000 106,000
Nov. 18 - 2-for-1 share split 2 2
Ending balances 220,000 212,000

4. A
Solution:
Outstanding shares - Dec. 31, 20x1 300,000
Jan. 31 - 10% stock dividend (300,000 x 10%) 30,000
June 30 - treasury stock acquisition (100,000)
Aug. 1 - reissuance of treasury stock 50,000
Total 280,000
Nov. 30 - 2-for-1 stock split 2
Outstanding shares - Dec. 31, 20x2 560,000

5. B (100,000 x 2) x .50 = 100,000

6. B
Solution:
Total cash dividends declared 44,000
Dividends to preference sh. [(4,000 x 100 x 6%) + 12,000] (36,000)
Dividends to ordinary sh. 8,000

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7. C
Solution:
Total dividends declared 100,000
Allocation:
Basic allocation to preference shares: (30,000 x 10 x 5%) 15,000
Basic allocation to ordinary shares: (200,000 x 1 x 5%) 10,000
Excess subject to participation (100,000 – 15,000 – 10,000) 75,000
Participation of preference sh. (75,000 x 3/5) 45,000
Participation of ordinary sh. (75,000 x 2/5) 30,000
Balance -

Total dividends to ordinary shareholders = 10,000 + 30,000 = 40,000

8. A Although property dividends are accounted for at fair value,

their net effect on retained earnings is a decrease equal to the
carrying amount of the property dividends as at the declaration
date.

9. C (2.50 – 2) x 100,000 = 50,000

10. B
Solution:
10% ('small' dividend) - at fair value 15,000
28% ('large' dividend) - at par value 30,800
Total debit to retained earnings 45,800

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