CHAPTER 8

EXERCISES:

1. Retained Earnings
Dividends 500,000 Jan. 1 1,275,000
Appropriation 250,000
Net Loss 80,000
Dec. 31 445,000

6/30 Retained Earnings 500,000

Cash 500,000

12/1 Retained Earnings 250,000

Appropriation for Plant Expansion 250,000

12/31 Retained Earnings 80,000

Income Summary 80,000

2. a) Retained Earnings 500,000

Cash Dividends Payable 500,000
(50,000 x P100 x .1)
Cash Dividends Payable 500,000
Cash 500,000

b) Retained Earnings 250,000

Cash Dividends Payable 250,000
(P5 x 50,000)

Cash Dividends Payable 250,000

Cash 250,000

c) Retained Earnings 750,000

Property Dividends Payable 750,000
(P15 x 50,000)
Property Dividends Payable 750,000
Merchandise Inventory 750,000

d) Retained Earnings 1,500,000

Property Dividends Payable 1,500,000
(2 x 50,000 x 15)
Property Dividends Payable 1,500,000
Investment in SMB 1,500,000

e) Retained Earnings 1,100,000

Stock Dividends Payable 1,100,000
(.22 x 50,000 x P100)
Stock Dividends Payable 1,100,000
Capital Stock 1,100,000

f) Retained Earnings
(.12 x 50,000 x P120) 720,000
Stock Dividends Payable
(.12 x 50,000 x P100) 600,000

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 Paid In Capital From Stock Dividends 120,000

Ex 3. a) P500,000 is not allowable for the cash dividend declaration as the

cash available is only P300,000.
b) The cash dividend declaration is possible because the company has
enough cash to pay for the dividends.

Ex. 4. a) Share Capital , par P100 authorized 200,000, issued 50,000 P5,000,000
Stock Dividends for distribution 600,000
P5,600,000

Share Premium P 230,000

Paid In Capital from Stock Dividends 120,000 350,000
Retained Earnings 580,000
Total P6,530,000

b) Share Capital, par P100, authorized 200,000, issued 56,000 P 5,600,000

Share Premium P 230,000
Paid In Capital from Stock Dividends 120,000 350,000
Retained Earnings 580,000
Total P6,530,000

5. a) 80,000 issued and subscribed less 1,000 treasury shares= 79,000

c) Free retained earnings 2,000,000 – 1,185,000 – 550,000= P265,000

b) Entries:
11/15 Retained Earnings 1,185,000
Cash Dividends Payable 1,185,000
( 79,000 x 15

1/10 Cash Dividends Payable 1,185,000

Cash 1,185,000

Ex. 6
a) 2/21 Retained Earnings (.10 x 25,000 x P18 45,000
Stock Dividends for Distribution 25,000
Paid in Capital from Stock Div 20,000

4/30 Stock Dividends for Distribution 25,000

Share Capital 25,000

b) and d) After declaration After Distribution

Share Capital P250,000 P275,000
Stocks for Distribution 25,000
APIC 32,000 32,000
Retained Earnings 30,000 30,000
Total P337,000 P337,000

c) and d) Effects on: After declaration After Distribution

a. assets none None
b. liabilities none None
c. SHE Increase in contributed capital Increase in share capital
Decrease in retained earnings Decrease in stocks for dist

Ex. 7

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 a) 2/21 Retained Earnings (.2 x 25,000 x P10 50,000
Stock Dividends for Distribution 50,000

4/30 Stock Dividends for Distribution 50,000

Share Capital 50,000

b) and d) After declaration After Distribution

Share Capital P 250,000 P300,000
Stocks for Distribution 50,000
APIC 12,000 12,000
Retained Earnings 25,000 25,000
Total P337,000 P337,000

c) and d) Effects on: After declaration After Distribution

a. assets none none
b. liabilities none none
c. SHE Increase in contributed capital Increase in share capital
Decrease in retained earnings Decrease in stocks for dist

8. a) PS in non-cumulative and non-part.

Pref Com Total

12% x 3,000,000 x 1 yr. 360,000 360,000

Rem. to common ________ 540,000 540,000
360,000 540,000 900,000
Dividend/ Share P12 P27

Retained Earnings 900,000

Cash Dividends Payable - Pref 360,000
Cash Dividends Payable - Com 540,000

b) PS is participating and non-cumulative

Pref Com Total
12% x 3,000,000 x 1 yr. 360,000 360,000
12% x 1,000,000 120,000 120,000
Remainder: 420,000
Pref (3,000/ 4,000) x 420,000 315,000 315,000
Com (1,000/ 4,000) x 420,000 ______ 105,000 105,000
675,000 225,000 900,000

Dividend per share P22.50 P11.25

Retained Earnings 900,000

Cash Dividends Payable - Pref 675,000
Cash Dividends Payable - Com 225,000

c) PS is cumulative & non-participating

Pref Com Total
12% x 3,000,000 x 2 yrs. 720,000 720,000
Remainder to Common 180,000 180,000
720,000 180,000 900,000
Dividend per share P24 P9

Retained earnings 900,000

Cash Dividends Payable - Pref 720,000

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 Cash Dividends Payable - com 180,000

d) PS is cumulative and participating

Pref Com Total
12% x 3,000,000 x 2 yr. 720,000 720,000
12% x 1,000,000 x 1 120,000 120,000
P (3,000,000/4,000,000 x 60,000) 45,000 45,000
C (1,000,000/4,000,000 x 60,000) 15,000 15,000
765,000 135,000 900,000
Dividend per share P25.50 P6.75

Retained Earnings 900,000

Cash Dividends Payable - Pref 765,000
Cash Dividends Payable - Com 135,000

e) PS is participating only up to 15%

Pref Com Total
.12 x 3,000,000 x 1 yr. 360,000 360,000
.12 x 1,000,000 x 1 yr. 120,000 120,000
Remainder: 03 x 3,000,000 90,000 90,000
900,000 – 570,000 330,000 330,000
P450,000 P450,000 P900,000
Dividend per Share P15.00 P22.50

Retained Earnings 900,000

Cash Dividends Payable - Pref 450,000
Cash Dividends Payable - Com 450,000

Ex. 9. a) Preference Share Capital 6,000 x P50 P300,000

c) Premium on Preference Share 6,000 x P3 18,000
b) Average price of ordinary shares P620,000/50,000 P12.40
d) Average cost of treasury stock P24.00
e) Retained Earnings P 86,000
Add net income for the year 167,000
Less preferred dividends (.06 x P50x 6,000) ( 18,000)
Ordinary dividends (32,000)
Retained Earnings, Dec 31 P203,000
Less Appropriated for Treasury Shares ( 8,400)
Free Retained Earnings P194,600

f) Total SHE (300,000 + 500,000 +18,000 +120,000 + 194,600)= P1,132,600

Ex. 10
a. Shares issued (P2,000,000 / P5) 400,000
b. Shares outstanding (390,000 x 1.2 – 10,000) 468,000
c. APIC (400,000 x P3) P1,200,000
d. EPS (481,000 / (390,000 +470,000 )= P1.1186
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e. Dividends (390,000 x P2) P780,000
f. Treasury shares P 60,000

Ex 11 a) Retained Earnings, Jan 1 P 76,000

Net Income 84,000
Dividends ( 26,000)

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 P132,000
Appropriated for Treasury Stocks P 20,000
Unappropriated 112.000

Ex 12.a) 1/10 Retained Earnings 380,000

Cash Dividends Payable 380,000
(19,000 x P20)
2/4 Retained Earnings 100,000
Appropriated for Plant Expansion 100,000

2/10 Cash Dividends Payable 380,000

Cash 380,000
5/15 Cash 28,000
Treasury SHARES 25,200
Paid In Capital from T/S 2,700
Retained Earning Approp for TS 25,200
Retained Earnings 25,200

6/1 Retained Earnings 95,000

Scrip Dividends Payable 95,000
(20,000-1,000) x 10% x P50

12/31 Investment in Ayala 25,000.00

Unrealized Gain 25,000

11/1 Scrip Dividends Payable 95,000.00

Interest Expense 7,125.00
Cash 102,125.00
(95,000 x .18 x 5/12)
12/31 Income & Expense Summary 250,000
Retained Earnings -Unapp. 250,000
b)
Share APIC
Transactions Capital Reserves RE TS Total
Jan. 1 1,000,000 600,000 50,000 750,000 (36,000) 2,400,000
36,000
Dividends (380,000) (380,000)
Appropriation 100,000 (100,000)
TS Sold 2,800 25,200 28,000
Reverse Appr. (25,200) 25,200
Dividends (95,000) (95,000)
Unrealized Gain 25,000 25,000
Net Income ________ _______ _______ 250,000 ______ 250,000
1,000,000 602,800 185,800 450,200 (10,800) 2,228,000

c) Shareholders’ Equity
Paid In Capital
Ordinary Shares, 30,000 authorized at a par of P50,
20,000 shares issued of which 300 is in treasury P1,000,000
Additional Paid In Capital
Paid In Capital in Excess of Par P600,000
Paid In Capital From Treasury Shares 2,800 602,800
Unrealized Gain 25.000
Retained Earnings

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 Unappropriated 450,200
Appropriated For Plant Expansion 150,000
Appropriated for Treasury Stock 10,800 621,000
Total 2,214,800
Less: Treasury Shares 10,800
P2,228,000

c) Earnings/ share= Net Income/Common Shares Outstanding

= 250,000/19,350 = P12.92

d) ROE = 250,000 / 2,314,000* = 10.8%

* (2,400,000 + 2,228,000) /2

Ex 13.
Ruthbeer Corp.
Statement of Comprehensive Income
For the year ended Dec. 31, 2015
Net Sales 1,483,540
Cost of Sales 878,600
Gross Income 568,940
Dividends Income 12,500
Interest Revenue 2,400
Distribution Cost (174,200)
Administrative Expense (191,500)
Interest Expense (38,800)
Net Income 179,340
30% tax 53,802
Net Income After Tax P125,538
Unrealized Gain 50,000
Total Comprehensive Income P175,538

Ruthbeer Corp.
Statement of Retained Earnings
For the year ended Dec. 31, 2015
Retained Earnings Beg. P1,375,000
Net Income 125,538
Dividends (500,000)
Retained Earnings P1,000,538

GP% 568,940/1,447,540 = 39.3% vs 40%

PM 125,538/1,447,540 = 8.67% vs 10%
EPS 125,538/50,000 = P2.51076

Exercise 14

April 10 Treasury Shares 100,000

Cash 100,000

15 Cash 150,000
Treasury Shares 56,250
Paid In Captl from TS 93,750

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 May 15 Retained Earnings 8,500
Cash Dividends Payble 8,500

June 10 Retained Earnings 54,400

Stock Dividends for Dist 17,000
Paid In Captl from Stock Div 37,400

July 30 Cash Dividends Payable 8,500

Cash 8,500

Stock Dividends for Dist 17,000

Share Capital 17,000

31 Income Summary 175,000

Retained Earnings 175,000

Retained Earnings 133,750

Appropriation for TS 133,750

Paid In Capital
Ordinary Shares, 50,000 authorized at a par of P10,
25,000 shares issued of which 8,000 are in the treasury P 250,000
Additional Paid In Capital
Share Premium P375,000
Paid in Capital from Stock Dividends 17,000
Paid In Capital From Treasury Shares 93,750 485,750
Total Paid In P 795,750
Retained Earnings
Unappropriated 428,250
Appropriated for Treasury Stock 133,750 562,000
Total P1,295,750
Less: Treasury Shares 8,000 133,750
P2,228,500
Ex. 15 Journal Entries

1/15 Retained Earnings 2,500,000

Cash Div Payable-Preference 1,350,000
Cash Div Payable-Ordinary 1,150,000

2/15 Treasury Stock 600,000

Cash 600,000

4/11 Retained Earnings 200,000

RE App. for Purch. of Mach. 200,000

5/31 Cash 125,000

Treasury Stock 120,000
PIC from Treasury Stock 5,000

6/1 Retained Earnings 912,000

Stock Dividends Payable 760,000
PIC from Stock Dividends Payable 152,000

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 Stock Dividends Payable 760,000
Common Stock 760,000

7/1 R E Approp for Contingencies 725,000

Retained Earnings 725,000

12/31 Common Stock 200,000

Premium 12,500
Paid In Capital from TS 5,000
Retained Earnings 22,500
Treasury Stock 240,000

Income & Expense Summary 1,750,000

Retained Earnings 1,750,000

Retained Earnings 240,000

R E Approp for T/S 240,000

Stockholders’ Equity
Paid In Capital
18% preferred stock, par P500, authorized 150,000 shares,
issued 25,000 shares P12,500,000
Common Stock,, par P100 authorized 100,000 shares
issued 85,600 of which 2,000 are in the treasury ___8,560,000
21,060,000
Additional Paid In Capital
Premium On Common Stock P 487,500
Paid In Capital for Stock Dividend 152,000 639,500

Retained Earnings
Unappropriated 3,150,500
Appropriated for purchase of machinery 200,000
Appropriated for Treasury Stock 240,000 3,590,500
Total 25,290,000
Less: Treasury Stock 240,000
P25,050,000

Ex 16. EPS for common shares (1,750,000-1,125,000)/83,600= P7.476

It means that a share of stock is earning P7.476.

Total SHE P25,050,000

Less: Preferred Stock (12,500,000)
Share of PS in Retained Earnings ( 1,125,000)
Net Assets for Common Stock P11,425,000 / 83,600 common shares
= BV/common share P136.66

It means that a share owns P136.66 of net assets.

ROE= 625,000/11,425,000= 5.47% Return on a share invested is 5.47%.

PER= 120/7.476= 16.05 The price of the stock in the market is sixteen times
than what it is

Div per share= 1,500,000- 1,125,000= 375,000/25,000 shares= P15

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 Dividend paid per share is P15 which is twice more than its earning per share.

Short term investors would be happy with the dividend per share, and the fact that the stock
is earning. It seems that it has much resources and retained earnings else it will not give a
very high dividend.

17. Davao Corporation

Income Statement
For the year ended Dec. 31, 2017

Sales P3,800,000
Less: Sales Discount 94,000
Net Sales P3,706,000
Less: Cost of Goods Sold
Inventory, Jan 1 P 220,000
Purchases 3,46,000
Freight In 24,000
Total 3,690,000
Less: Purchase Discount 171,200
Goods Available for Sale 3,518,800
Less: Inventory Dec.31, 550,000 2,968,800
Gross Profit 737,200
Less: Operating Expenses
Distribution Costs
Salaries Expenses 72,000
Utilities 1,750
Rent 11,100
Freight 5,400
Advertising 18,000
Depn Expense- Furniture & Equipment 10,500
Depn. Expense – Building 8,750
Total ( 27,500)
Administrative Costs
Insurance 12,000
Salaries 36,000
Utilities 11,100
Rent 1,750
Depreciation 10,500
Depreciation 8,750
Taxes 11,200
Bed Debts 19,000 (110,300)
Operating Income P499,400

Net Operating Income `

499,400
Less: Other Expenses
Interest Expenses 46,800
Income before Tax 452,600
Less: 30% Tax
135,780
Net Income for Continuing Entity 316,820
Add: Other Comprehensive Income
Unrealized Gain from Pepsico Shares 20,000
Comprehensive Income P336,820

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 Davao Corporation
Statement of Financial Position
Dec. 31, 2017
Assets
Current Asset
Cash P180,000
Accounts Receivable P450,000
Estim Uncollectible Accounts 42,000 408,000
Inventory 550,000
Investment in Pepsico 200,000
Prepaid Insurance 2,600
Total Current Assets P1,340,600

Plant, Property & Equipment

Land P 800,000
Building P350,000
Less: Accumulated Depreciation 52,500 297,500
Furniture & Equipment 210,000
Less: Accumulated Depreciation 63,000 147,000
Total Plant, Property & Equipment 1,244,500
Total Assets P2,585,100

Liabilities & Stockholders Equity

Current Liabilities
Accounts Payable 380,000.00
Accrued Rent 1,850.00
Current portion of LT Debt 25,000.00
Cash Dividend Payable 30,380.00
Income Tax Payable 135,780.00
Total Current Liabilities P 619,810.00
Long-term debt
10% Mortgage Payable 225,000.00
Total Liabilities P 844,810.00

Stockholder’s Equity
12% Preferred Stock, Par P100 P 400,000.00
Common Stock 800,000.00
Share Premium 80,000.00
Retained Earnings 590,240.00
Unrealized Gain 20,000.00
Total 1,890,240.00
Less: Treasury Stock 150,000.00
Total Stockholder’s Equity 1,740,240.00
Total Liabilities & Stockholder’s Equity P2,585,100.00

Davao Corporation
Statement of Retained Earnings
For the year ended Dec. 31, 2017

Retained Earnings, Jan 1 P303,800.00

Add: Net Income 316,820.00
Total 620,620.00
Less: Dividends P 30,380
Approp for Treasury Stock 150,000 180,380.00
Retained Earnings, Unappropriated 590,240.00

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 Appropriated for Treasury Stock 150,000.00
Total Retained Earnings P529,812.50

ETHICAL ISSUE

Trust on people managing the business is high on the list of stakeholders. Otherwise they will
lose confidence and possibly withdraw their support and investment. Officers must earn the
respect of their employees and role model for them. All these will bring the downfall of the
company: lose of confidence will mean withdrawal of support - withdrawal of investment by the
stockholders, disapproval of credit by suppliers, withdrawal of efficient service of employees, or
worst employees become scrupulous, also .

ACCOUNTING ISSUE

a) Compute for the- EPS of the firm to determine income earned per share of stock.
Dividend Payout also may be computed.

b) However, since net income is not given, the recourse will be to compare dividend distribution
given by the company for each kind of stock. With P500,000, Mr Lee can buy 1,000
preference shares x P8= P8,000 dividends or 2,000 ordinary shares x P20= P40,000
dividends. If profit is always stable common shareholders will get more specially if preferred is
not participating. The advantage of preferred however is that they get preference in the
distribution.

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 DAVAO Corp.
Working Paper
For the year ended Dec. 31, 2017
Trial Balance Adjustments Income Statement Retained Earnings Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 180,000 180,000
Accounts Receivable 450,000 450,000
Estimated Uncollectible Accounts 23,000 19,000 42,000
Investment in Pepsi 200,000 200,000 200,000
Inventory, Jan. 1’00 220,000 220,000
Land 800,000 800,000
Building 350,000 350,000
Accum. Depn. –Bldg. 35,000 17,500 52,500
Furniture Equipment 210,000 210,000
Accum. Depn. Furn. & Equipt. 42,000 21,000 63,000
Accounts Payable 380,000 380,000
10-yrs Mortgage Pay’ble 250,000 45,000 295,000
12% Preferred Stock, par P100 400,000 400,000
Common Stock 800,000 800,000
Share Premium 80,000 80,000
Unrealized Gain 20,000 20,000
Treasury Stock – Preferred 150,000 150,000 150,000
Retained Earnings 303,800 30,380 123,420
Sales 3,800,000 3,800,000
Sales Returns 56,000 56,000
Sales Discounts 38,000 38,000
Purchases 3,506,000 3,506,000
Purchase Returns 89,000 89,000
Purchase Discounts 82,200 82,200
Freight In 24,000 24,000
Office Salaries 36,000 36,000
Sales Salries 72,000 72,000
Advertising 18,000 18,000
Utilities Expense 1,650 1,650
Rent 20,350 1,850 22,200
Repairs 5,400 5,400
Insurance 14,600 2,600 12,000
License & Taxes 11,200 11,200
Interest Expense 1,800 45,000 46,800
Total 6,305,000 6,305,000

Inventory, Dec. 31, ‘00 550,000 550,000

Income & Expense Summary 550,000 550,000
Cash Dividends Payable 30,380 30,380
Depn. Exp. – Building 17,500 17,500
Depn. Exp.- Furniture & Equipment 21,000 21,000
Prepaid Insurance 2,600 2,600
Accrued Rent 1,850 1,850
Bad debts Expense 19,000 19,000
Appropriated for Treasury Stock 150,000 150,000
747,330 747,330 4,126,750 4,521,200
Net Income / Tax Provision 394,450 316,820 135,780
4,521,200 4,521,200
Retained Earnings to BS 590,240 590,240
590,240 590,240 2,832,600 2,832,600
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