Page |1

Chapter 10
Shareholders’ Equity (Part 1)

NAME: Date:
Professor: Section: Score:

QUIZ:
1. The entry to record the reissuance of treasury shares above their original acquisition cost
includes
a. a credit to share premium
b. a debit to share premium
c. a debit to retained earnings
d. b and c

2. Ten thousand shares of ₱20 par value common stock were initially issued at ₱25 per share.
Subsequently, two thousand of these shares were purchased as treasury stock at ₱30 per share.
What is the effect of the purchase of the treasury stock on the amount reported in the balance
sheet for each of the following?
Share premium Retained earnings
a. No effect No effect
b. No effect Decrease
c. Decrease No effect
d. Decrease Decrease

3. The entry to record the retirement of shares at below their original acquisition cost includes
a. a debit to share premium arising from the original issuance
b. a debit to any share premium arising from treasury shares
c. a debit to retained earnings
d. all of these including (c) when (a) and (b) are insufficient to offset any difference between the
original issuance price and the retirement price.

4. In 20x1, Fogg, Inc., issued ₱10 par value ordinary share for ₱25 per share. No other share
transactions occurred until March 31, 20x1, when Fogg acquired some of the issued shares for
₱20 per share and retired them. Which of the following statements correctly states an effect of
this acquisition and retirement?
a. 20x1 profit is decreased.
b. 20x1 profit is increased.
c. Share premium is decreased.
d. Retained earnings is increased.

5. Redeemable preference shares are classified by the issuer as

a. financial liability
b. own equity, presented in shareholders’ equity
c. a or b
d. reduction of share capital in shareholders’ equity
 Page |2

6. In 20x0, Newt Corp. acquired 6,000 shares of its own ₱1 par value ordinary share at ₱18 per
share. In 20x1, Newt issued 3,000 of these shares at ₱25 per share. Newt uses the cost method to
account for its treasury stock transactions. What accounts and amounts should Newt credit in
20x1 to record the issuance of the 3,000 shares?

Treasury sh. Sh. premium Retained earnings Ordinary sh.

a. ₱54,000 ₱21,000
b. ₱54,000 ₱21,000
c. ₱72,000 ₱3,000
d. ₱51,000 ₱21,000 ₱3,000

7. On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its ₱5 par value ordinary
shares from a shareholder. On that date, the stock’s market value was ₱35 per share. The stock
was originally issued for ₱25 per share. By what amount would this donation cause total
stockholders’ equity to decrease?
a. 70,000 b. 50,000 c. 20,000 d. 0

8. On July 1, 20x1, Vail Corp. issued rights to stockholders to subscribe to additional share of its
common stock. One right was issued for each share owned. A stockholder could purchase one
additional share for 10 rights plus ₱15 cash. The rights expired on September 30, 20x1. On July 1,
20x1, the market price of a share with the right attached was ₱40, while the market price of one
right alone was ₱2. Vail’s stockholders’ equity on June 30, 20x1, comprised the following:

Ordinary shares, ₱25 par value, 4,000 shares issued and outstanding…..₱100,000
Share premium…………………….……………………………………………..60,000
Retained earnings……………..…………………………………………………80,000

By what amount should Vail’s retained earnings decrease as a result of issuance of the stock rights
on July 1, 20x1?
a. 0 b. 5,000 c. 8,000 d. 10,000

9. On September 20x1, West Corp. made a dividend distribution of one right for each of its 120,000
shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a
share of West's ₱50 variable rate preference share at an exercise price of ₱80 per share. On March
20, 20x3, none of the rights had been exercised, and West redeemed them by paying each
stockholder ₱0.10 per right. As a result of this redemption, West's stockholders' equity was
reduced by
a. 120 b. 2,400 c. 12,000 d. 36,000

10. The following trial balance of Shaw Corp. at December 31, 20x1, has been adjusted except for
income tax expense.
 Page |3

Dr. Cr.
Cash 675,000
Accounts receivable (net) 2,695,000
Inventory 2,185,000
Property, plant and equipment (net) 7,366,000
Accounts payable and accrued
liabilities 1,801,000
Income tax payable 654,000
Deferred income tax liability 85,000
Ordinary shares 2,300,000
Share premium 3,680,000
Retained earnings, 1/1/x1 3,350,000
Net sales and other revenues 13,360,000
Costs and expenses 11,180,000
Income tax expense 1,129,000
25,230,00 25,230,00
Totals 0 0

Other financial data for the year ended December 31, 20x1:
 Included in accounts receivable is ₱1,000,000 due from a customer and payable in quarterly
installments of ₱125,000. The last payment is due December 30, 20x3.
 The balance in the deferred income tax liability account pertains to a temporary difference not
related to a balance sheet account that arose in a prior year, of which ₱15,000 is expected to be
paid in 20x2.
 During the year, estimated tax payments of ₱475,000 were charged to income tax expense. The
current and future tax rate on all types of income is 30%. In Shaw's December 31, 20x1, balance
sheet,

The working capital and the total shareholders’ equity as of December 31, 20x1 are
Working capital Total Shareholders’ Equity
a. 2,600,000 10,856,000
b. 2,881,000 10,856,000
c. 3,075,000 9,330,000
d. 3,075,000 10,856,000

"A cheerful heart is good medicine but a crushed spirit dries up the bones." - (Proverbs 17:22)

- END -
 Page |4

SOLUTIONS:
1. A
2. A
3. D
4. C
5. A

6. B
Solution:
Dec. 27, Cash (3,000 x 25) 75,000
20x1
Treasury shares (3,000 x 18) 54,000
Share premium – Treasury shares 21,000

7. D

8. A

9. C (120,000 rights x ₱0.10) = 12,000 debit to share premium

10. D
Solutions:
Cash 675,000
Accounts receivable (net) [2.695M - 1M + (125K x 4)] 2,195,000
Inventory 2,185,000
Total current assets 5,055,000

Net sales and other revenues 13,360,000

Costs and expenses (11,180,000)
Profit before tax 2,180,000
Multiply by: Tax rate 30%
Income tax expense 654,000
Income tax payments during the year (475,000)
Adjusted income tax payable 179,000

Accounts payable and accrued liabilities 1,801,000

Income tax payable 179,000
Total current liabilities 1,980,000

Working capital = Current assets – Current liabilities

Working capital = (5,055,000 – 1,980,000) = 3,075,000

Net sales and other revenues 13,360,000

Costs and expenses (11,180,000)
Profit before tax 2,180,000
Income tax expense (30% x 2,180,000) (654,000)
Profit after tax 1,526,000
Retained earnings, Jan. 1 3,350,000
Retained earnings, Dec. 31 4,876,000

Ordinary shares 2,300,000

Share premium 3,680,000
Retained earnings, Dec. 31, 20x1 4,876,000
Shareholders' Equity 10,856,000