Mercado, Zet John A.

BSA 1-2

Discussion Questions pg. 372

1. What are the components of the shareholder’s equity section of the statement of financial position?
Answer: The components of the shareholder’s equity section consists of the Contributed Capital which represents the
corporate capital arising from investment by shareholders and Retained Earnings.

2. Identify and discuss the two components of contributed capital.

Answer: Contributed Capital is divided into:
Share Capital/ capital stock- also known as legal capital that reports both preference and ordinary share capital
issued, subscribed, and distributable as dividends stated at par or stated value. Share capital subscription receivable
that are not currently collectible are shown as deduction from share capital subscribed.
Additional Paid- In Capital- this section reports the investment by shareholders in excess of the par or stated value
of the share capital. It includes paid-in capital in excess of par value or stated value of both preference and ordinary
share capital. It also includes donated capital and other paid-in capital items arising from various share capital
transactions.
3. What is the purpose of preparing a statement of changes in shareholders’ equity?
Answer: A statement of changes in shareholders’ equity is a financial statement that presents a summary of the
changes in shareholders’ equity accounts over the reporting period. It reconciles the opening balances of equity
accounts with their closing balances. It shows the profit/loss for the period, other comprehensive income, capital share
transactions with shareholders and distributions to shareholders and balance of retained earnings at the beginning and
end of the period and the movement during the period.
4. What are the 3 significant dates in the distribution of dividends?
Answer:
Date of Declaration- the date when the board of directors approved the resolution to distribute dividends. The
liability of the corporation to the shareholders is recorded on this date.
Date of shareholders of record- the date when the company determines the shareholders who are entitled to
the receipt of declared dividends. No entry is required on this date; however, a list of registered shareholders is
made as of the close of business on this date.
Date of payment or distribution- the date when dividends declared are paid or distributed to the shareholders.
The liability recognized on the date of declaration is canceled or extinguished on this date.
5. What are the different types of dividends? How much is debited to Retained Earnings upon declaration of each of
these types of dividends?
Answer:
Cash dividends are dividends that are distributable in the form of cash and this is the most common type of
dividend. The amount of cash dividends declared should not exceed the amount of cash reported on the
statement of financial position. It may be peso dividend which is multiplied by the number of outstanding
shares equals the total amount of Retained earnings. It can also be percentage dividend which is multiplied by
the total par value /total stated value equals the total amount of Retained Earnings.
Scrip Dividends are deferred cash dividends. It is declared when the corporation has sufficient Retained
Earnings balance but not sufficient funds at that time for a cash dividend. It consists of a written promise to pay
certain amounts at some future date.
Property dividends are distributable in the form of non-cash assets.
Scrip and Property dividends has a decrease in total assets and total retained earnings of the corporation.
Share Capital Dividends (Stock Dividends) is a distribution to shareholders in the form of corporation’s own
share capital/ stock. Retained Earnings is decreased while contributed capital is increased as a result of the
declaration and distribution of share capital dividends.
6. How will you distinguish a small from large share capital dividends?
Answer: Under a small share capital dividend, retained earnings is debited for the fair value of the share capital on the
date of declaration while under a large share dividend, retained earnings is debited for the par or stated value of the
share capital.
7. What are dividends in arrears? How do they affect allocation of dividends to preference and ordinary shareholders if
(a) preference share capitals are noncumulative, (b) preference share capitals are cumulative?
Answer: Dividends in arrears are unpaid dividends in prior years.
a. When it’s preference shares are noncumulative, the dividends in arrears are ignored and preference shareholders
are entitled to the current year’s dividend only.
b. When it’s preference share are cumulative, they are entitled to the payment of dividends in arrears.
8. What is the significance of book value per share? How is it computed (a) only one class of share capital is
outstanding, (b) two classes of share capital are outstanding?
Answer: Book value per share is the peso equity in corporate capital share. It is the amount that would be paid on each
share owned by a shareholder in case of corporate liquidation assuming the amount available to shareholders is exactly
the same as the total shareholders’ equity.
a. If there’s only one class of share capital outstanding, book value per share is calculated by dividing the total’s
shareholders’ equity by the number of shares outstanding.
b. When more than one class of share capital are outstanding, rights of different classes of shareholders should be
taken into consideration. The balance of the shareholders’ equity after deducting the equity of preference
shareholders represents the equity of the ordinary shareholders. Equity identified with each class of share capital
divided by the number of shares outstanding yields the book value per share.
9. What is Earnings per share? What is its significance to the shareholders? How is it computed if (a) only one class of
share capital is outstanding, (b) two classes of share capital are outstanding?
Answer: Earnings per share (EPS) is the amount earned during a given period on each ordinary share outstanding. It is
very useful to investors and prospective investors in evaluating the results of operations of a business in order to make
investment decisions.
a. One class of share capital outstanding is computed:
EPS= Profit/ outstanding shares
b. Two classes of share capital outstanding are computed:
Profit/ loss per income statement – dividends on preference shares = profit attributable to ordinary shares/ outstanding
shares = EPS
10. What are the three types of appropriations to Retained Earnings? What is the effect of an appropriation of Retained
Earnings to dividends?
Answer:
Appropriations to Report Legal restrictions on Retained Earnings- when company requires its own shares, the
law requires that Retained Earnings is equal to the cost of the shares reacquired be appropriated or set aside.
The appropriated balance is reverted to unappropriated classification upon reissuance of the acquired shares.
Appropriations to Report Contractual Restrictions on Retained Earnings- made to protect the interest of
creditors and shareholders and to assure redemption of the securities they hold. The appropriation balance is
reverted back to unappropriated balance upon payment of the obligation.
Appropriations to Report Discretionary Action by the Board of Directors in the Presentation of Retained
Earnings- a portio0n of the Retained Earnings may be presented in a manner disclosing the actual use or
planned use in the future of the resources as authorized by the Board of Directors.

CHAPTER 9
Operations, Dividends, Book Value and Earnings per Share

Exercises 9-1

Contributed Capital
Share Capital:
10% Preference Share Capital, P100 par, cumulative, 10,000 shares authorized,
4,000 shares issued and outstanding P400,000
Ordinary Share Capital, P20 par, 100,000 shares authorized,
50,000 shares issued and outstanding 1,000,000
Ordinary Share Capital Subscribed- 10,000 shares 200,000 1,600,000
Additional Paid-In Capital:
Preference Share Premium 150,000
Ordinary Share Premium 200,000 350,000
Total Contributed Capital 1,950,000
Retained Earnings 250,000
Total Shareholders’ Equity 2,200,000
Exercises 9-2

Contributed Capital:
10% Preference Share Capital, P40 par, 40,000 shares authorized,
20,000 shares issued and outstanding P800,000
Preference Share Capital Subscribed P40,000
Less PSC Subscription Receivable 14,000 26,000
Ordinary Share Capital, P10 stated value, 500,000 shares authorized,
200,000 shares issued and outstanding 2,000,0
00
Paid-in Capital in Excess of Par – Preference Shares 120,000
Paid-in Capital in Excess of Stated Value – Ordinary Shares 100,0
00
Total Contributed Capital P3,046,0
00
Retained Earnings 400,0
00
Total Shareholders’ Equity P3,446,0
00

Total Shareholders’ Equity P3,446,0

00
Exercises 9-3
Mar. 1 Retained Earnings 400,00
0
Dividends Payable 400,000
40,000 sh x P10 = P400,000

Apr. 15 Dividends Payable 400,00

0
Cash 400,000

Sept. 1 Retained Earnings 800,00

0
Dividends Payable 800,000
40,000 sh x P20= P800,000

30 Dividends Payable 800,00

0
Cash 800,000

Exercises 9-4
Apr. 1 Retained Earnings 200,00
0
Dividends Payable 200,000

100,000 sh x P2= P200,000

May 2 Dividends Payable 200,000

Cash 200,000

June 1 Retained Earnings 600,000

Stock Dividends Distributable 500,000

PIC from Stock Dividends 100,000

100,000 sh x 10% x P60= 600,000

100,000 sh x 10% x P50= 500,000
100,000 sh x 10% x P10= 100,000
July 15 Stock Dividends Distributable 500,000

Ordinary Share Capital 500,000

Exercises 9-1 Page 377

1. 2014

Jan. 2 Cash 3,125,000

Ordinary Share Capital 2,500,000

Ordinary Share Premium 625,000

125,000 sh x P25

Mar. 2 Cash (62,500 sh x P30) 1,875,000

Ordinary Share Capital 1,250,000

Ordinary Share Premium 625,000

Mar. 31 Land 300,000

Building 500,500

Ordinary Share Capital 500,000

Ordinary Share Premium 300,500

Dec. 31 Income Summary 750,000

Retained Earnings 750,000

31 Retained Earnings 531,250

Dividends Payable 531,250

125,000 + 62,500 + 25,000 = 212,500 sh x P2.50

2015

Jan. 31 Dividends Payable 531,250

Cash 531,250

Feb. 14 OSC Subscription Receivable (50,000 x P50) 2,500,000

OSC Subscribed 1,000,000

Ordinary Share Premium 1,500,000

14 Cash 1,000,000
Ordinary Share Capital Subscription Receivable 1,000,000

P2,500,000 x 40%

Mar. 15 Cash 1,500,000

Ordinary Share Capital Subscription Receivable 1,500,000

P2,500,000 x 60%

15 Ordinary Share Capital Subscribed 1,000,000

 Ordinary Share Capital 1,000,000

Dec. 31 Income Summary 2,000,000

Retained Earnings 2,000,000

31 Retained Earnings 525,000

Dividends Payable 525,000

212,500 + 50,000 = 262,500 x P2

31 Retained Earnings 656,250

Stock Dividends Distributable 525,000

Paid-In Capital from Stock Dividend 131,250

656,250 x 10% x P10 = 656,250

656,250 x 10% x P8 = 525,000
656,250 x 10% x P2 = 131,250

2. Shareholder’s Equity- December 31, 2014

Contributed Capital:

Ordinary share Capital, P20 par, 500,000 shares authorized,

212,500 shares issued and outstanding P4,250,000

Ordinary Share Premium 1,550,000

Total Contributed Capital P5,800,000

Retained Earnings 218,750

Total Shareholders’ Equity P6,018,750

3.

BCD Corporation
Statement of Changes in Shareholders’ Equity For the Year
Ended December 31, 2014

Ordinary Ordinary
Share Share Retained
Capital Premium Earnings Total
Issuance of Ordinary Share
125,000 shares@P25 2,500,000 625,000 3,125,000
62,500 shares @ 30 1,250,000 625,000 1,875,000
25,000 shares @ 32 500,000 300,000 800,000
Declaration of cash dividends ( 531,250) ( 531,250)
Profit for 2014 750,000 750,000
Balances, December 31, 2014 P 4,250,000 P 1,550,000 P 218,750 P6,018,750

Multiple Choice Page 382-385

9-1. A
9-2. B
9-3. B
9-4. C
9-5. A
9-6. A
 Retained Earnings
80,000
Less: profit loss
12,000
Share capital (1,000 sh
x P7) 7,000
Balance
P61,000

9-7. B
9-8. C
9-9. D
9-10. B
Total Shareholders’ Equity P4,100,000
Less Equity identified with preference shares:
Liquidation value = 5,000 sh x P120 P 600,000
Dividends in Arrears= P500,000 x 10% x 5 yrs 250,000 850,000
Equity identified with ordinary shares P3,250,000
Book Value Per Share:
Preference = P850,000/5,000 sh P 170.00
Ordinary = P3,250,000/50,000 sh P 65.00

9-11. A 20,000 sh x 25% x P2 = P10,000

9-12. D
9-13. C
9-14. D
P300,000/25,000 sh = P 12
P300,000/12,000 sh = P 25
P105,000 – 30,000 sh = 75,000/25,000sh = P 3
P 40
9-15. B
9-16. A
9-17. B
10% Preference Share Capital (25,000 shares authorized, 12,000 shares outstanding) P300,000
Ordinary Share Capital (P5 par, 500,00 shares authorized) 750,000
Ordinary Share Capital Subscribed (10,000 shares) 25,000
Total Share Capital P1,075,000

9-18. C
Total Share Capital P1,075,000
Preference Share Premium 30,000
Ordinary Share Premium 50,000
Ordinary Share Capital Dividends Distributable 105,000
Dividends Payable 40,000
Paid- In Capital from Share Capital Dividend 63,000
Total Contributed Capital P1,363,000

9-19. A
9-20. D
Total Contributed Capital P1,363,000
Retained Earnings Appropriated for Contingencies 150,000
Retained Earnings Appropriated for Bond Retirement 100,000
Retained Earnings – Unappropriated 450,000
Total Shareholders’ Equity P2,063,000