Chapter 9 - Shareholder's Equity

CHAPTER 9 - SHAREHOLDERS’ EQUITY MULTIPLE CHOICE – THEORY 1. B

2. D

3. D

4. B

5. B

6. A

PROBLEMS Problem 1 Audit Adjusting Entries: Retained Earnings (950 – 90) – 50,000 Ordinary Shares Ordinary Share Dividend Distributable Paid in Capital in Excess of Stated Value 9,500 x 10% = 950

35,500 50,000

Retained Earnings (Income Tax Expense) Income Tax Payable

240,000

47,500 38,000

240,000

Problem 2 Total income since incorporation Cash dividends paid Total value of bonus issue distributed Correct balance of retained earnings

P630,000 ( 195,000) ( 45,000) P 390,000

Problem 3 Balance, January 1 Profit for the year Dividends Retained Earnings, December 31

P1,590,000 860,000 ( 750,000) P1,700,000

Appropriated for Plant Expansion Unappropriated Total Retained Earnings

P 150,000 1,550,000 P 1,700,000

Chapter 9 – Shareholders’ Equity Problem 4 Paid in Capital Preference Share, P100 par, 10,000 shares authorized, 4,000 shares issued Ordinary Share, P50 par, 15,000 shares authorized, 8,000 shares issued, 7,700 shares outstanding Additional paid in capital Total Paid in Capital Retained Earnings Appropriated For Treasury Shares P19,800 For Fixed Asset Replacement 75,000 Unappropriated 160,400 Total Less: Treasury Shares, at cost (300 shares) Total Shareholders’ Equity

P400,000 400,000 117,700 P917,700

235,400 P1,153,100 19,800 P 1,133,300

Additional paid in capital: 7,000 x P7 1,000 x 12 4,000 x 13 Reissue of treasury shares – preference Total additional paid in capital

P49,000 12,000 52,000 4,700 P117,700

Retained earnings: Accumulated profit Cash dividends paid Bonus issue ( 1,000 x 62) Total Retained Earnings

P610,000 ( 312,600) ( 62,000) P235,400

Problem 5 Date 1/1/12 1/15/12 2/1/12 3/15/12 4/15/12 4/30/12 5/1/12 5/31/12 9/15/12 12/31/12 12/31/12 balances

Preference Share Shares Amount 800

Ordinary Share Shares Amount 15,000 300,000

40,000 1,500

30,000

APIC 4,160,000 4,000 33,000

Retained Earnings 1,100,000

Treasury Shares Shares Amount 4,000 150,000

(18,750) 10,000 2,230

800

40,000

28,730

200,000 44,600

574,600

200,000 78,050 41,100

4,516,150

(122,650) (43,220) ( 39,995) 500,000 1,415,380

200

8,600

(2,150)

(81,450)

2,050

77,150

Chapter 9 – Shareholders’ Equity Supporting Computations and Entries March 15 dividends (16,500 – 4,000) x 1.50 = P18,750 Apr. 30 entry Share Options Outstanding (APIC 10,000 x 6) 60,000 Cash (10,000 x 40) 400,000 Ordinary Share (10,000 x 20) 200,000 Share Premium – Ordinary 260,000 Net increase in APIC = 260,000 – 60,000 = 200,000 May 1 bonus issue: Ordinary shares issued Treasury Outstanding shares

26,500 ( 4,200) 22,300

Charge to Retained Earnings 2,230 x P55= Par value of bonus issue 2,230 x 20 = Credit to additional paid in capital May 31 Sale of Treasury Shares Selling price 2,150 shares x P57 Cost of treasury shares sold: 150 @ P43 2,000 shares Additional paid in capital from this sale

P122,650 ( 44,600) P 78,050 P122,550 P6,450 75,000

September 15 dividends: On ordinary share : (28,730 - 2,050) x P1.50 = On preference share: 8% x 40,000 = Total

81,450 P 41,100 P40,020 3,200 P43,220

Problem 6 Entries for the quasi-reorganization: Retained Earnings 180,000 Inventory (215,000 – 190,000) 25,000 Property, Plant and Equipment (875,000 – 720,000) Cash

155,000

600,000 Additional Paid in Capital

Ordinary Share Capital, P25 par Ordinary Share Capital, P15 par Additional Paid in Capital

600,000 2,500,000 1,500,000 1,000,000

Chapter 9 – Shareholders’ Equity Additional Paid in Capital Retained Earnings (750,000 + 180,000)

930,000 930,000

Shareholders’ Equity Ordinary Share Capital, P15 par, 100,000 shares Additional Paid in Capital (1,750,000 + 600,000 + 1,000,000 - 930,000) Total Shareholders’ Equity

P1,500,000 2,420,000 P3,920,000

Problem 7 LTC Company Statement of Comprehensive Income For the Years Ended December 31, 2012 and 2011 Sales Cost of goods sold Gross profit Selling expenses General and administrative expenses Profit before income tax Income tax expense Profit

2012 P3,000,000 1,420,000 P1,580,000 (350,000) (260,000) P 970,000 291,000 P 679,000

2011 Cost of Goods Sold – weighted average Cost of goods sold under FIFO Difference in beginning inventory Difference in ending inventory Cost of goods sold as restated 2011 income tax expense Before restatement Adjustment due to change in inventory costing procedure (1,150,000 – 1,140,000) x 30% 2011 income tax expense as restated

2011 P2,540,000 1,150,000 P1,390,000 (210,000) (220,000) 960,000 336,500 P 623,500

P1,140,000 30,000 ( 20,000) P 1,150,000

P 339,500 ( 3,000) P 336,500

Chapter 9 – Shareholders’ Equity

LTC Company Statement of Changes in Equity For the Years Ended December 31, 2010 and 2009 Ordinary Share Balances, January 1, 2011 Cumulative effect of changing from FIFO costing to weighted average, net of applicable income tax of P9,000 (30,000 x 70%) Dividends Profit for the year Balance, December 31, 2011

P 1,000,000

Retained Earnings P600,000

P1,000,000

21,000 (400,000) 623,500 P 844,500

Profit for the year 2012 Balances, December 31, 2012

P1,000,000

679,000 P1,523,500

Problem 8 Reported profit Loss from fire Write off of goodwill Loss on sale of equipment Gain on early retirement of bonds Gain on insurance policy settlement Corrected profit

P120,000 ( 2,625) ( 26,250) ( 24,150) 7,525 5,250 P 79,750

Retained Earnings, January 1 Stock dividends Loss on retirement of preference shares Officers’ compensation in prior period Other correction of errors Corrected profit (see above) Corrected retained earnings, Dec. 31

P263,200 ( 70,000) ( 35,000) ( 162,750) 25,025 79,750 P100,225

Total P1,600,000

21,000 (400,000) 623,500 P 1,844,500 679,000 P2,523,500

Chapter 9 – Shareholders’ Equity MULTIPLE CHOICE - PROBLEMS Items 1 through 5 1. B

Balance, December 31, 2011 Mar. 31 4,500 x 3 June 30 ( 250,000 + 4,500 – 6,000) / 10 = 24,850 shares 24,850 shares x P3 Sept. 30 P2,000,000/P1,000 x 2 shares = 4,000 shares 4,000 shares x P3 Balance, Dec. 31

P 750,000 13,500

2. C

RE, January 1, 2012 Profit Understatement in depreciation 40,000 x 65% Balance, December 31, 2012

P 480,000 600,000 ( 26,000) P 1,054,000

3. B

Issue price Attributable to the debt PV of face = P2,000,000 x 0.32197 = P 643,940 PV of interest = P200,000 x 5.65022 1,130,044 Amount credited to equity

P2,000,000

4. B

Interest expense for 2012 = 1,773,984 x 12% x 9/12 =

P 159,659

5. C

Effective interest for 2012 Nominal interest 200,000 x 9/12 Amortization Carrying value, April 1 Carrying value, Dec. 31

6. A

Correct balance of Retained Earnings 485,000 – 200,000 + 324,000 – 300,000 + 451,000 =

P760,000

Additional paid in capital 150,000 + 100,000 =

P 250,000

7. C

74,550 12,000 P 850,050

1,773,984 P 226,016

P159,659 150,000 P 9,659 1,773,984 P1,783,645

8. D

Ordinary share Additional paid in capital Retained earnings Revaluation surplus (appraisal increase) Total shareholders’ equity

P2,000,000 250,000 760,000 300,000 P3,310,000

9. A

Preference share = P6,000,000 – (4,000 x P200) =

P5,200,000

10. C Ordinary share = 200,000 shares x P25 par =

P5,000,000

Chapter 9 – Shareholders’ Equity

11. B

APIC, January 1, 2012 Cancelled upon retirement of preference P1,800,000 / 30,000 x 4,000 From sale of treasury shares 6,000 x (45 – 37.50) Sale of donated shares 2,000 x 48 APIC, December 31, 2012

P3,300,000 ( 240,000) 45,000 96,000 P3,201,000

12. C Ordinary shares outstanding Issued = 100,000 x 2 Treasury (8,000 x 2) – 6,000 + 4,000 – 2,000 = Outstanding

200,000 12,000 188,000

13. C Retained Earnings January 1, 2012 Excess of retirement price over issue price 280 – (200 + 60 share premium per share) x 4,000 Profit Balance, December 31, 2012 14.

P2,200,000 ( 80,000) 1,850,000 P3,970,000

There is no number 14 (Sorry)

15. D Ordinary shares issued: January 1, 2012 Mar. 6 – 20 Nov. 3 55 x 10 shares Total shares issued Par value per share December 31, 2012 balance

90,000 1,400 550 91,950 P 2 P183,900

16. D Share premium January 1, 2012 balance Mar. 6 1,400 x 42 Nov. 3 (see entry below) Dec. 31 balance Issue price of bonds 90,000 x 103% Issue price of debt 90,000 x 97% = Value assigned to 90 share warrants

P1,820,00 58,800 24,200 P1,903,000 P 92,700 87,300 P 5,400

Entry upon exercise of 55 warrants Share warrants issued (5,400 x 55/90) Cash 550 x 40 Ordinary share (550 x 2) Share premium

3,300 22,000 1,100 24,200

Chapter 9 – Shareholders’ Equity

17. D Paid in capital from treasury shares Sales price 650 x P40 Cost = P72,600/1,210 x 650 Deduction from previous APIC from treasury shares Previous balance of APIC APIC from Treasury shares

P 26,000 39,000 P 13,000 22,500 P 9,500

18. C Ordinary Share Warrants Outstanding Issue Price of bonds and warrants P90,000 x 103% Fair value of bonds ex-warrants Value initially assigned to warrants Value of warrants exercised (5,400 x 55/90) Value of remaining warrants

P92,700 87,300 P 5,400 ( 3,300) P 2,100

19. A Cost of remaining treasury shares Cost of 1,210 treasury shares originally held Cost of treasury shares sold ( 72,600 x 650 / 1,210) Cost of remaining treasury shares 20 – 28 See worksheet 20. 21. 22. 23. 24. 25. 26. 27. 28.

D D B C A B C A D

P 72,600 ( 39,000) P 33,600

Chapter 9 – Shareholders’ Equity

Date 1/1/12 1/6/12 1/31 2/22 2/28 4/30 – 5/31 8/31 9/14 11/30 12/15 12/31 12/31 12/31 bal.

Preference Share Shares Amount 9,000

P900,000

Ordinary Share Shares Amount

Retained Earnings

APIC

600,000 22,500

P600,000 22,500

P1,200,000 348,750 40,500

21,000

21,000

525,000

Treasury Shares Shares Amount

P3,198,000 7,500

P180,000

(12,000)

(3,000)

(72,000)

(1,278,900) ( 54,000) (42,000) 1,800,000 P2,691,100

4,500

P108,000

(920,000) 450

9,000

P900,000

643,950

450

P643,950

(1,350) 5,400

P2,118,300

January 31: Value assigned to warrants 1,350,000 x (98% - 95%) = P40,500 (classified as APIC) Entry on Sept. 14 Cash (450 x 10) Share Warrants Outstanding (APIC) Ordinary Share Share Premium – Ordinary Share

4,500 1,350 450 5,400

SUMMATIVE EXERCISE – CONQUEST MOTORS CORPORATION Operating Expenses Petty Cash Fund

2,200

Materials Inventory Materials Acquisition Fund

9,000

Cash

12,000

2,200 9,000

Salaries Payable

12,000

Goods in Process Inventory Cash

900

Operating Expenses Cash

1,000

Notes Payable Interest Expense

900 1,000 300,000 18,000

Chapter 9 – Shareholders’ Equity Cash Other Financial Assets Cash

318,000 350,000 350,000

Other Income (Dividend Revenue) Trading Securities

6,600

Dividend Receivable Other Income

2,000

Trading Securities Unrealized Gain on Trading Securities

12,800

Installment Sales Cost of Installment Sales Deferred Gross Profit

610,000

Deferred Gross Profit Realized Gross Profit

108,500

Repossessed Inventory (Finished Goods Inventory) Deferred Gross Profit Loss on Default Materials Inventory Accounts Payable Goods in Process Inventory Applied Factory Overhead

6,600 2,000 12,800 396,500 213,500 108,500 70,000 52,000 122,000 18,000 18,000 69,600 69,600

Factory Overhead Control Operating Expenses Accumulated Depreciation – Building

30,000 20,000

Discount on Notes Payable Equipment Operating Expenses

12,000

Retained Earnings Other Assets

36,000

Interest Receivable Other Income

16,200

Interest Expense Operating Expenses

67,500

Interest Expense

22,500

50,000 10,800 1,200 36,000 16,200 67,500

Chapter 9 – Shareholders’ Equity Interest Payable Share Capital Retained Earnings Share Capital Share Premium

22,500 80,000 80,000 250,000 250,000

Retained Earnings Dividends Payable

348,000 348,000

Operating Expenses Accrued Operating Expenses

115,000 115,000

Applied Factory Overhead Overapplied Factory Overhead Factory Overhead Control

747,600

Overapplied Factory Overhead Cost of Goods Sold

11,600 736,000 11,600 11,600

Income Statement Correct Balances: Sales Cost of goods sold Gross profit Realized gross profit on installment sales Total gross profit Loss from Repossession Gross profit, net of loss on repossession Operating Expenses Other Income Unrealized Gains on Trading Securities Other Expenses and Losses Income before interest and taxes Interest expense Income before income tax Income tax expense Net income

P2,800,000 1,948,400 P 851,600 108,500 P 960,100 ( 8,000) P 952,100 ( 609,500) 71,600 12,800 ( 36,500) P 390,500 158,000 P 232,500 69,750 P 162,750

Balance sheet accounts Current Assets Cash Trading Securities Installment Accounts Receivable Interest Receivable Dividend receivable Receivable from officers

P1,015,900 214,800 340,000 16,200 2,000 45,000

Chapter 9 – Shareholders’ Equity Inventories Prepaid expenses Total current assets Non-current Assets Property, Plant and Equipment, at cost Accumulated Depreciation Net carrying value Other Financial Assets Total Non-current assets Total Assets Current Liabilities Accounts payable Salaries payable Notes payable Accrued expenses Dividends payable Interest payable Deferred gross profit Income tax payable Total current liabilities Non-current liabilities Notes payable Total liabilities Shareholders’ Equity Share Capital Share Premium Retained Earnings Total Liabilities and Shareholders’ Equity

486,500 40,000 P2,160,400 P5,409,200 186,000 P5,223,200 485,000 5,708,200 P7,868,600

P 508,000 12,000 538,000 115,000 348,000 22,500 119,000 69,750 P1,732,250 1,000,000 P2,732,250 P2,900,000 1,450,000 692,350

5,042,350 P7,774,600