Answers - Chapter 3 Vol 2 Rvsed

CHAPTER 3 SHAREHOLDERS’ EQUITY PROBLEMS 3-1.

(Budomo Company) Cash (20,000 x 300) •

6,000,000

Ordinary Share •

Legal Expense/Professional Fees

6,000,000 90,000

Ordinary Share (250 x 300) Share Premium - Ordinary •

•

75,000 15,000

Land

1,000,000

Building Ordinary Share (12,500 x 300) Share Premium - Ordinary

2,950,000

Cash (6,500 x 380)

2,470,000

Ordinary Share (6,500 x 300) Share Premium - Ordinary 3-2.

a.

Cash (10,000 x 200) Ordinary Share (10,000 x 150) Share Premium - Ordinary Share Premium-Ordinary Cash

b.

Land (3,500 x 560) Ordinary Share (3,500 x 200) Share Premium – Ordinary

c.

Cash Preference Share Ordinary Share Share Premium – Preference Share Premium – Ordinary MV: Pref – 5,000 x 800=4M Ord – 100,000 x 120 = 12M Allocation: Pref: 18M x 4/16 = 4.5M Ord: 18M x 12/16 = 13.5M

d.

Subscription Receivable Cash Subscribed Ordinary Share

3,750,000 200,000

1,950,000 520,000 2,000,000 1,500,000 500,000 60,000 60,000 1,960,000

18,000,000

700,000 1,260,000 2,500,000 10,000,000 2,000,000 3,500,000

450,000 150,000 500,000

Chapter 3 – Shareholders’ Equity

Share Premium – Ordinary e.

3-3.

Land Cash Donated Capital (Blazing Red Corporation) Shareholders’ Equity

100,000 5,000,000 40,000 4,960,000

Contributed Capital 10% Preference Share, cumulative and non-participating, P100 par 30,000 shares authorized; 12,000 shares issued and outstanding Ordinary Share, P10 par, 100,000 shares authorized, 30,000 shares issued, 29,000 shares outstanding Subscribed Ordinary Share, 4,500 shares Subscription Receivable – Ordinary Share Premium – Preference Share Premium –Ordinary Total contributed capital Retained Earnings Appropriated for Treasury Share P 15,000 Unappropriated 335,000 Treasury Shares, 1,000 ordinary shares, at cost Total Shareholders’ Equity

P1,200,000

300,000 45,000 (43,200) 275,000 77,000 P1,853,800

350,000 ( 15,000) P2,188,800

The total amount of P2,188,800 may also be obtained without necessary preparing the shareholders’ equity in good format (if not required) as follows: Issue of 30,000 ordinary shares Issue of preference shares in exchange of equipment 1,475,000 Subscriptions for 4,500 ordinary shares at 16 72,000 Subscriptions receivable (60%) (43,200) Purchase of 1,000 treasury shares at 15 (15,000) Retained earnings Total shareholders’ equity, December 31, 2007 2,188,800 3-4.

(Millennium Company) (a) (1) Treasury Share Cash (2)

(3)

P

350,000 P

140,000

Cash Treasury Share Paid in Capital from Treasury Share

60,000

Cash Paid in Capital from Treasury Share

65,000 4,000

23

350,000

140,000 56,000 4,000

Chapter 3 – Shareholders’ Equity

(4)

Retained Earnings Treasury Share

1,000

Ordinary Share Share Premium Retained Earnings Treasury Share

10,000 3,000 1,000

70,000

14,000

(b)

Total shareholders’ equity, December 31, 2006 P2,200,000 (1) Purchase of treasury share (10,000 x 14) (140,000) (2) Sale of treasury share (4,000 x 15) 60,000 (3) Sale of treasury share (5,000 x 13) 65,000 Net income for the year 180,000 Dividends declared (200,000) Total shareholders’ equity, December 31, 2007 P2,165,000 The total shareholders’ equity may also be obtained by determining the balance of the shareholders’ equity accounts, as follows: Ordinary Share, P10 par (99,000 shares issued and outstanding) P 990,000 Share Premium 297,000 Retained Earnings 878,000 Total shareholders’ equity P2,165,000 3-5.

(Consuelo Enterprises, Inc.) (a) Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Retained Earnings Cash (4,000 x 22) (b)

(c)

80,000 6,400 1,600

Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Retained Earnings Cash (4,000 x 26)

80,000 6,400

Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Cash (4,000 x 20.50) PIC from Retirement of Preference

80,000 6,400

17,600

88,000

104,000

82,000 4,400

Average preference share premium per share 160,000 / 100,000 shares = 1.60 3-6.

(Concepcion Enterprises, Inc.) (a) Preference Share (3,000 x 20) Share Premium – Preference (3,000 x 1.60) Retained Earnings Ordinary Share (3,000 x 30) (b)

Preference Share (3,000 x 20) Share Premium – Preference (3,000 x

24

60,000 4,800 25,200 60,000 4,800

90,000

Chapter 3 – Shareholders’ Equity

1.60) Ordinary Share (1,500 x 30) PIC from Conversion of Preference 3-7.

(Red Heart Corporation) 06/15/07 Cash Ordinary Share Share Premium – Ordinary 09/30/07

Retained Earnings (80,000 x 5% x 110)

45,000 19,800 6,000,000

440,000 400,000

Share Dividends Distributable (4,000 x 100)

Share Premium – Ordinary 11/10/07

Share Dividends Distributable Ordinary Share

12/31/07

Income Summary Retained Earnings

03/31/08

Treasury Share (3,000 x 95) Cash Cash (1,500 x 120) Treasury Share (1,500 x 95) Paid in Capital from Treasury Shares

05/01/08

40,000 400,000 1,175,000 285,000 180,000

08/10/08

Issued 82,500 rights to shareholders entitling holders to purchase 2 additional shares for P125 per share.

09/15/08

Cash (30,000 x 125) Ordinary Share (30,000 x 100) Share Premium – Ordinary

3,750,000

Cash (80,000 x 125)

10,000,00 0

10/31/08

Ordinary Share (80,000 x 100) Share Premium – Ordinary Retained Earnings Dividends Payable (192,500 x 5)

962,500

12/20/08

Ordinary Share (1,000 x 100) Share Premium – Ordinary (1,000 x 10)* Paid in Capital from Treasury Shares Treasury Share *Share premium per share 300,000/30,000 = 10

100,000 10,000

Income Summary Retained Earnings

1,175,000 285,000 142,500 37,500

8,000,000 2,000,000 962,500

15,000 95,000

1,200,000

25

400,000

3,000,000 750,000

12/10/08

12/31/08

5,000,000 1,000,000

1,200,000

Chapter 3 – Shareholders’ Equity

(b) Shareholders’ Equity

Contributed Capital Ordinary Share, P100 par, 300,000 shares authorized, 193,000 shares issued, 192,500 shares outstanding Share Premium –Ordinary Paid in Capital from Treasury Shares Total contributed capital

P19,300,00 0 4,080,000 52,500 P23,432,50 0

Retained Earnings Appropriated P

for

Treasury

Share

47,500 Unappropriated

1,375,000 Treasury Shares, 1,000 ordinary shares, at cost Total Shareholders’ Equity

3-8.

(47,500) P24,807,50 0

(Red Carpet Company) (a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows: Securities Preference Warrant

3-9.

1,422,500

Market value 90 10

Allocation 147,000 x 90/100 147,000 x 10/100

Entry

Cash Preference Share (1,500 x 30) Share Premium – Preference Share Warrants Outstanding

(b)

Cash (600 x 40) Share Warrants Outstanding Ordinary Share Share Premium – Ordinary

Allocated Price 132,300 14,700 147,000

24,000 11,760

(Red Hot Company) (a) Value of each option Number of shares granted Total value assigned to share options Required service period Annual compensation expense (b)

Share Options Outstanding Cash (30,000 x 50) Ordinary Share (30,000 x 20) Share Premium - Ordinary

45,000 87,300 14,700

6,000 29,760 P8 x 30,000 P240,000 ÷ 3years P 80,000

240,000 1,500,000 600,000 1,140,000

3-10. (Fire Red Company) 01/02/07 Memo: granted 40,000 share options were granted to certain officers for the purchase of the company’s P100 par ordinary shares at P430 per share. 12/31/07

12/31/08

Compensation Expense Share Options Outstanding (40,000 x 80) ÷ 4 years

800,000

Compensation Expense

800,000

26

800,000

Chapter 3 – Shareholders’ Equity

Share Options Outstanding (40,000 x 80) ÷ 4 years 01/01/09

Memo: 6,000 cancelled.

share

12/31/09

Compensation Expense

options

800,000 were 440,00 0

Share Options Outstanding Total accrued compensation expense (34,000 x 80) x 3/4 2,040,00 0 Less: previously accrued 1,600,00 0 Compensation expense440,000

440,000

2009

12/31/10

Compensation Expense Share Options Outstanding (34,000 x 80) / 4

06/30/11

Cash (34,000 x 430) Share Options Outstanding (34,000 x 80) Ordinary Shares (34,000 x 100) Share Premium – Ordinary

680,000

14,620,000 2,720,000 3,400,000 13,940,000

3-11. (Red Fox Corporation) (a) 2007 200 – 10 – 15 = 175 employees options=17,500 17,500 x 32 = 560,000; 560,000 x 1/3 2008

2009

(b) 01/01/07

12/31/07

12/31/09 2010

680,000

x

100 186,667

200–10–12–5=173 employees x 100 options=17,300 17,300 x 32 x 2/3 = 369,067; 369,067 – 186,667

182,400

200-10-12-8=170 employees x options=17,000 17,000 x 32 = 544,000; 544,000 – 369,067

174,933

100

Granted 100 share options to each of its 200 employees to buy P100 par ordinary share at P220 per share. The options are exercisable starting January 1, 2010 provided that the employees are still in the service. Options expire on December 31, 2011. Compensation Expense Share Options Outstanding Share Options Outstanding

186,667

Compensation Expense Share Options Outstanding

174,933

Cash (140 x 100 x 220)

27

186,667 182,400 174,933 3,080,000

Chapter 3 – Shareholders’ Equity

2011

Share Options Outstanding (14,000 x 32) Ordinary Share (14,000 x 200) Share Premium – Ordinary

448,000

Cash (10 x 100 x 220) Share Options Outstanding (1,000 x 32) Ordinary Share (1,000 x 200) Share Premium – Ordinary

220,000 32,000

Share Options Outstanding (2,000 x 32) PIC from Forfeited Share Options

64,000

2,800,000 728,000

200,000 10,400

64,000

3-12. (Cherry Company) (a) 01/01/07 Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2010. 12/31/07

Compensation Expense Share Options Outstanding (10,000 x 20) / 3 years

66,667

12/31/08

Compensation Expense Share Options Outstanding (10,000 x 20) - 66,667

133,333

2009

Cash (10,000 x 120) Share Options Outstanding Ordinary Shares (10,000 x 100)

(b) 01/01/07

12/31/07

133,333

1,200,000 200,000 1,000,00 0 400,000

Share Premium-Ordinary

Memo: Granted 10,000 share options for the purchase of P100 par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2010. Compensation Expense 66,667 Share Options Outstanding 66,667 (10,000 x 20) / 3 years

12/31/08

Compensation Expense Share Options Outstanding

66,667

12/31/09

Compensation Expense Share Options Outstanding

66,666

2010

66,667

Cash (8,000 x 120) Share Options Outstanding (80% 200,000) Ordinary Shares (8,000 x 100) Share Premium-Ordinary

28

66,667 66,666

x

960,000 160,000 800,000 320,000

Chapter 3 – Shareholders’ Equity

Share Options Outstanding (20% 200,000) PIC from Forfeited Share Options (c)

x

40,000 40,000

If the stock price reached P200 by June 2010, the same entries will be made for year 2007 through 2009, as given in (b) The recorded share options, however, will be cancelled at the end of 2010, as the options already expire.

12/31/10

Share Options Outstanding PIC from Forfeited Share Options

200,000 200,000

3-13. (Panda Company) (a) 01/01/07 Granted 80 share options to each of 400 employees for the purchase of P100 par ordinary shares at P140 per share. 12/31/07

12/31/08 2009

Compensation Expense Share Options Outstanding 400 x 80 x 22 = 704,000 704,000/2 = 352,000

352,000

Compensation Expense Share Options Outstanding

352,000

Cash (32,000 x 140) Share Options Outstanding Ordinary Share (32,000 x 100)

352,000

352,000 4,480,00 0 704,000 3,200,00 0 1,984,00 0

Share Premium – Ordinary (b)

The full amount of P704,000 is recognized as compensation expense since the options vests already in 2007.

3-14. (Paul Company) (a) 01/01/07

Memo: Issued to its CEO share options for the purchase of ordinary shares at a strike price of P50. The options are exercisable beginning January 1, 2010 and expire on December 31, 2011. The number of share options will be based on the level of sales for 2009.

12/31/07

Compensation Expense Share Options Outstanding 10,000 sh x 30 x 1/3

100,000

Compensation Expense Share Options Outstanding 15,000 sh x 30 x 2/3 300,000 Less: previously accrued 100,000 Compensation expense

200,000

12/31/08

29

100,000

200,000

Chapter 3 – Shareholders’ Equity

200,000

12/31/09

(b)

Compensation Expense Share Options Outstanding 18,000 sh x 30 x 3/3 540,000 Less: previously accrued 300,000 Compensation expense 240,000

240,000 240,000

Assuming that the chief executive officer resigned in 2008.

12/31/08

Share Options Outstanding Compensation Expense

100,000

100,000

Note: When the grant of share options is based on non-market performance condition, the amount of recognized services received during the vesting period shall be based on the number of share options expected to vest. The entity shall reverse that estimate, if necessary, if the share options are later forfeited, or lapse at the end of the share option’s life. Thus, in effect, on a cumulative basis, no compensation expense is recorded as a result of the stock options. 3-15. (Joey Corporation) (a) 12/31/07 Compensation Expense Share Appreciation Rights Payable

66,667 66,667

10,000 x (140 -120) x 1/3

12/31/08

Compensation Expense Share Appreciation Rights Payable

133,333

Compensation Expense Share Appreciation Rights Payable 10,000 x (165 - 120) = 450,000 450,000 –200,000 = 250,000

250,000

10,000 x (150 - 120) x 2/3 = 200,000 200,000 – 66,667 = 133,333

12/31/09

133,333

250,000

(b) (1)Assuming that the rights were exercised on January 1, 2010, when the market price is P165. 01/01/10

Share Appreciation Rights Payable Cash

450,000 450,000

(b) (2)Assuming that the rights were exercised on December 31, 2010, when the market price is P172. 12/31/10

Share Appreciation Rights Payable Compensation Expense Cash 10,000 x (172-120)

3-16. (Red Bull Corporation) 12/31/07 Compensation Expense Share Appreciation Rights Payable

30

450,000 70,000

89,333

520,000

89,333

Chapter 3 – Shareholders’ Equity

10,000 x 26.80 x 1/3 12/31/08

Compensation Expense Share Appreciation Rights Payable

118,667

Compensation Expense Share Appreciation Rights Payable

194,000

Share Appreciation Rights Payable Compensation Expense Cash 10,000 x (165-120)

394,000 56,000

116,667

10,000 x 31.20 x 2/3 = 208,000 208,000 – 83,333 = 118,667

12/31/09

10,000 x 39.40 = 394,000 394,000 –200,000 = 194,000

2010

3-17. (Emerald Company) (a) Fair value of the equity alternative 4,000 shares x 150 Fair value of debt component 3,600 shares x 158 Fair value of equity component (b)

568,800 31,200

2007: 3,600 x 160=576,000/3 31,200/3 Total compensation expense

192,000 10,400 202,400

2008: 3,600 x 165 x 2/3 = 396,000 396,000 – 192,000 31,200/3 Total compensation expense

204,000 10,400 214,400

2009: 3,600 x 168 = 604,800 604,800 – 396,000 31,200/3 Total compensation expense

208,800 10,400 219,200 18,900

Granted each of the four executives the right to choose either 1,000 ordinary shares or to receive cash payment equal to 900 shares, conditional upon the completion of three years of service.

12/31/07

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable

202,400

12/31/08

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable

214,400

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable

219,200

12/31/09

450,000

600,000

2010: 2,700 x (172-165) (c) 01/01/07

194,000

31

10,400 192,000 10,400 204,000 10,400 208,800

Chapter 3 – Shareholders’ Equity

12/31/09

12/31/10 12/31/10

Share Options Outstanding Share Appreciation Rights Payable Cash PIC from Unexercised Share Options 31,200 / 4 = 7,800 604,800 / 4 =151,200 Compensation Expense Share Appreciation Rights Payable

7,800 151,200

Share Options Outstanding Share Appreciation Rights Payable Ordinary Share (3,000 x 100) Share Premium – Ordinary 7,800 x 3 = 23,400 151,200 x 3 = 453,600 + 18,900

23,400 472,500

18,900

3-18. (Red Stone Company) (a) Retained Earnings ( 10,000 shares x P20) Share Dividends Distributable Share Premium

(b)

(c)

151,200 7,800

18,900

300,000 195,900

200,000

Share Dividends Distributable Ordinary Shares

100,000

Retained Earnings (30,000 x 10) Share Dividends Distributable

300,000

Share Dividends Distributable Ordinary Shares

300,000

100,000 100,000 100,000 300,000 300,000

Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued and outstanding.

3-19. (Buenviaje Corporation) Capital structure: Preference 20,000 P2,000,000

Number of shares outstanding Total par value (a)

Ordinary 250,000 P2,500,000

Preference share is non-cumulative and non-participating

2006 Current preference dividends (9% x 2,000,000) Excess (1,500,000 – 180,000) Dividend per share

Preference P 180,000

2007 Current preference dividends (9% x 2,000,000) Excess (2,400,000 – 180,000) Dividend per share

Preference P 180,000

2008 Current preference dividends (9% x 2,000,000) Excess (5,600,000 – 180,000) Dividend per share

Preference P 180,000

32

P9.00

P9.00

P9.00

Ordinary P1,320,000 P5.28 Ordinary

P2,220,000 P8.88 Ordinary P5,420,000 P21.68

Chapter 3 – Shareholders’ Equity

(b)

Preference share is cumulative and non-participating.

2006 Dividends in arrears (9% x 2,000,000 x 3) Excess (1,500,000 – 540,000) Dividend per share 2007 Current preference dividends (9% x 2,000,000) Excess (2,400,000 – 180,000) Dividend per share

Preference P 540,000

2008 Current preference dividends (9% x 2,000,000) Excess (5,600,000 – 180,000) Dividend per share

Preference P 180,000

Ordinary P

960,000 P3.84 Ordinary

P2.70 Preference P 180,000

P2,220,000 P8.88

P9.00

P9.00

(c) Preference share is cumulative and fully participating 2006 Preference Current dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 Excess: 1,095,000 x 2.0/4.5 486,667 1,095,000 x 2.5/4.5 Total dividends P 666,667 Dividend per share P33.33 2007 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: 1,995,000 x 2.0/4.5 1,995,000 x 2.5/4.5 Total dividends Dividend per share

Preference

2008 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: 5,195,000 x 2.0/4.5 5,195,000 x 2.5/4.5 Total Dividend per share

Preference

P

Ordinary P5,420,000 P21.68

Ordinary P

608,333 P 833,333 P3.33 Ordinary

180,000 P 886,667

P1,066,667 P53.33

P

Ordinary

180,000

2,308,889 P2,488,889 P124.44

33

225,000

1,108,333 P1,333,333 P 5.33

P

3-20. (Mama Mia Company) Retained Earnings Share Dividends Distributable 50% x 100,000 x 10 = 500,000 Share Dividends Distributable Ordinary Shares Fractional Share Warrants Outstanding Fractional Share Warrants Outstanding

225,000

225,000 2,886,111 3,111,111 P 12.44

500,000 500,000 500,000 100,000

400,000 100,000

Chapter 3 – Shareholders’ Equity

Ordinary Share PIC from Unexercised Fractional Share Warrants

80,000 20,000

3-21. (Buenas Aires Corporation) Total SHE

Preferenc e Shares Issued

12/31/07Balances P16,500,000 2008 transactions: a) 4,000 x 280 (1,120,000) b) 8,000 x 75 (600,000) c) 2:1 share split d) 6,000 x 45 270,000 e) 4,000 x 46 f) 2,000 x 48 96,000 g) Net income 1,850,000 12/31/08 balances P16,996,000 *P600,000 x 6,000/16,000 = 225,000

(a) (b) (c) (d)

30,000

Ordinary Sha res Issu ed 100,000

Treasury Share Shares

Cost

(4,000) 100,000

26,000

8,000 8,000 (6,000) 4,000 (2,000)

(225,000)*

12,000

P375,000

200,000

P600,000

Total shareholders’ equity P16,996,000 Number of preference shares issued and outstanding 26,000 Number of ordinary shares issued 200,000 Number of ordinary shares outstanding(200,000 – 12,000) 188,000 Cost of remaining treasury shares P 375,000

3-22. (La Vida Company) Retained earnings balance as of December 31, 2008 3,900,000 – 600,000 – 240,000 Total shareholders’ equity as of December 31, 2008 6,000,000 + 8,000,000 + 3,060,000 (a) Par value of preference share Dividends in arrears (6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,620,000) Total equity Divide by the number of shares outstanding Book value per share (b) Liquidation value

(60,000 shares x P105)

Dividends in arrears (P6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,920,000) Total equity

Preferenc e P6,000,00 0 1,620,000

P7,620,00 0 60,000 P 127 Preferenc e P6,300,00 0 1,620,000

P7,920,00

34

P 3,060,000 P17,060,000 Ordinary

P9,440,00 0 P9,440,00 0 800,000 P 11.80 Ordinary

P9,140,00 0 P9,140,00

Chapter 3 – Shareholders’ Equity

0 60,000 P132

Divide by the number of shares outstanding Book value per share 3-23. (Los Angeles Company) (a) Retained Earnings Accumulated Depreciation Current Assets Building Ordinary Share Ordinary Share

400,000 75,000 100,000 375,000 6,000,000

Share Premium Share Premium Retained Earnings

0 800,000 P11.425

4,000,00 0 2,000,00 0

1,400,000 1,400,00 0

(b) Current Assets P 400,000 Liabilities P1,000,000 Land 1,500,000 Ordinary Share Building 4,625,000 Share Premium Accumulated Depreciation ( 925,000) Total Assets P5,600,000 Total Equities

3-24. (Las Vegas, Inc.) Retained Earnings Inventory

4,000,000 600,000 P5,600,000

300,000 300,000

Land Buildings Machinery and Equipment Accum. Depreciation – Buildings Accum. Depreciation – Machinery & Equipment Revaluation Surplus

1,500,000 1,875,000 350,000

Revaluation Surplus Retained Earnings

2,300,000

875,000 150,000 3,700,00 0 2,300,00 0

35