UNIT 9

RETAINED EARNINGS
Topic 2 – Appropriation and Quasi-reorganization
ASSESSMENT

PROBLEM 1
Mega Company provided the following information:
• Dividends on 10,000 cumulative preference shares of 6% P100 par value have not been declared or paid for
3 years.
• Treasury shares were acquired at a cost of P1,500,000. The treasury shares had not been reissued as of
year-end.
What amount of retained earnings should be appropriated?
a. 1,500,000
b. 1,680,000
c. 180,000
d. 0
Explanation:

Cumulative preference dividends have not been declared and therefore are not recognized in the
accounts. In the problem, only the P1,500,000 cost of treasury shares that had not been
reissued will be the amount of retained earnings that should be appropriated.

PROBLEM 2
Elvis Company reported the following shareholders’ equity on January 1, 2022:
Share capital, P5 par, 600,000 shares authorized,
200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
Retained earnings 2,800,000
On January 31, 2022, the entity reacquired 10,000 shares at P30 per share to be held as treasury. On July 1,
2022, the entity declared and issued a 30% share dividend.
On December 31, 2022, the entity declared and paid cash dividend of P10 per share. The net income for the
current year was P3,000,000.
What is the unappropriated balance of retained earnings on December 31, 2022?
a. 2,745,000
b. 3,045,000
c. 2,700,000
d. 2,600,000
Solution:
Retained earnings balance P 2,800,000
Share dividend [30% (200Ka – 10K)] x 5 (285,000)
Cash dividend [130% (200Ka – 10K)] x 10 (2,470,000)
Net income 3,000,000
Appropriated treasury shares (10K x P30) (300,000)
Unappropriated retained earnings P 2,745,000
a
1M / P5 = 200K

PROBLEM 3
On January 1, 2022, Nam Company reported the following amounts in the shareholders’ equity:
Preference share capital, P150 par value, 20,000 shares 3,000,000
Ordinary share capital, P50 par value, 100,000 shares 5,000,000
Share premium 6,000,000
Retained earnings 4,500,000
On January 1, 2022, the entity sold 20,000 additional ordinary shares for P90 per share.
Late in 2022, it was learned that because of mathematical error, an overstatement of depreciation expense by
P500,000 had occurred in 2021. The entity reported net income of P4,000,000 for 2022.
The entity declared cash dividend of P1,000,000 on preference shares and P2,000,000 on ordinary shares
during 2022. The income tax rate is 30%.
What amount should be reported as retained earnings on December 31, 2022?
a. 5,850,000
b. 6,000,000
c. 5,150,000
d. 4,450,000
Solution:
Retained earnings – 1/1/2022 P 4,500,000
Prior period error – over depreciation (500K x 70%) 350,000
Net income for 2022 4,000,000
Cash dividend – preference (1,000,000)
Cash dividend – ordinary (2,000,000)
Retained earnings – 12/31/2022 P 5,850,000

PROBLEM 4
Gaston Company has sustained heavy losses over a period of time and conditions warrant that the entity
should undergo a quasi-reorganization at year-end.
• Inventory with cost of P6,500,000 was recorded at the market value of P6,000,000.
• Property, plant and equipment were recorded at P12,000,000, net accumulated depreciation. The sound
value was P8,000,000.
• The share capital is P7,000,000 consisting of 700,000 shares with par value of P10, the share premium is
P1,600,000, and the deficit in retained earnings is P900,00.
• The par value of the share is to be reduced from P10 to P5.
Immediately after the quasi-reorganization, what is the shareholders’ equity?
a. 3,300,000
 b. 3,500,000
c. 3,700,000
d. 4,200,000
Solution:

Retained earnings (12M – 8M) 4,000,000

Property, plant and equipment 4,000,000
Share capital (700K x 5) 3,500,000
Share premium 3,500,000
Share premium (4M + 900K) 4,900,000
Retained earnings 4,900,000

Share capital P 3,500,000

Share premium (3.5M + 1.6M – 4.9M) 200,000
Total shareholders’ equity P 3,700,000

PROBLEM 5
Adverse financial and operating circumstances warrant that Solid Company should undergo a quasi-
reorganization at year-end. The following information may be relevant in accounting for the quasi-organization:
• Inventory with a fair value of P2,000,000 is currently recorded in the accounts at cost of P2,500,000.
• Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated
depreciation.
• Individual shareholders contribute P4,000,000 to create additional capital to facilitate the reorganization. No
new shares are issued.
• The par value of the share is reduced from P25 to P5.
Immediately before these events, the shareholders’ equity appears as follows:
Share capital, P25 par, 100,000 shares outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
After the quasi-organization, what amount should be reported as share premium?
a. 2,750,000
b. 3,250,000
c. 3,750,000
d. 1,750,000
Solution:

Retained earnings (2.5M – 2M) 500,000

Inventory 500,000
Retained earnings (8.5M – 7M) 1,500,000
Accumulated depreciation 1,500,000
Cash 4,000,000
Share premium 4,000,000
Share capital [100K (P25 – P5)] 2,000,000
Share premium 2,000,000
 Share premium (3M + 500K + 1.5M) 5,000,000
Retained earnings 5,000,000

Share premium per book P 1,750,000

Reduction of par 2,000,000
Contribution of cash from shareholders 4,000,000
Elimination of deficit (3M + 500K + 1.5M) (5,000,000)
Adjusted share premium P 2,750,000