Financial Accounting 2 Chapter 3 Solman

CHAPTER 3 SHAREHOLDERS’ EQUITY PROBLEMS 3-1.

(Budomo Company) Cash (20,000 x 300) Ordinary share

6,000,000 6,000,000

Legal expense/Professional fees Ordinary share (250 x 300) Share premium - Ordinary

90,000

Land Building Ordinary share (12,500 x 300) Share premium - Ordinary

1,000,000 2,950,000

Cash (6,500 x 380) Ordinary share (6,500 x 300) Share premium - Ordinary

2,470,000

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

2,000,000

75,000 15,000

3,750,000 200,000 1,950,000 520,000

3-2. a.

Share premium-Ordinary Cash b.

c.

d.

e.

Land (3,500 x 560) Ordinary share (3,500 x 200) Share premium – Ordinary 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 Subscription receivable Cash Subscribed ordinary share Share premium – Ordinary Land Cash Donated capital

1,500,000 500,000 60,000 60,000 1,960,000 700,000 1,260,000 18,000,000 2,500,000 10,000,000 2,000,000 3,500,000

450,000 150,000 500,000 100,000 5,000,000 40,000 4,960,000

Chapter 3 – Shareholders’ Equity

3-3.

(Blazing Red Corporation) Correction to the problem: RE balance on December 31, 2012, instead of 2010. Shareholders’ Equity 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 P2,048,800 may also be obtained without necessarily preparing the shareholders’ equity in good format (if not required) as follows: P 350,000

Issue of 30,000 ordinary shares Issue of preference shares in exchange of equipment Subscriptions for 4,500 ordinary shares at 16 Subscriptions receivable (60%) Purchase of 1,000 treasury shares at 15 Retained earnings

1,475,000 72,000 (43,200) (15,000) 350,000 P 2,188,800

Total shareholders’ equity, December 31, 2012 3-4.

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

(3)

(4)

(b)

140,000 140,000

Cash Treasury share Paid in capital from treasury chare

60,000

Cash Paid in capital from treasury share Retained earnings Treasury share

65,000 4,000 1,000

Ordinary share Share premium Retained earnings Treasury share Total shareholders’ equity, December 31, 2011 (1) Purchase of treasury share (10,000 x 14)

10,000 3,000 1,000

56,000 4,000

70,000

14,000 P2,200,000 (140,000)

(2) Sale of treasury share (4,000 x 15) (3) Sale of treasury share (5,000 x 13) Net income for the year

60,000 65,000 280,000

26

Chapter 3 – Shareholders’ Equity

Dividends declared (200,000) Total shareholders’ equity, December 31, 2012 P2,265,000 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 978,000 P2,265,00 Total shareholders’ equity 0 3-5.

(Consuelo Enterprises, Inc.) Preference share (4,000 x (a) 20) Share premium – Preference (4,000 x 1.60) Retained earnings Cash (4,000 x 22) Preference share (4,000 x (b) 20) Share premium – Preference (4,000 x 1.60) Retained earnings Cash (4,000 x 26) Preference share (4,000 x (c) 20) Share premium – Preference (4,000 x 1.60) Cash (4,000 x 20.50) PIC from retirement of preference

80,000 6,400 1,600 88,000 80,000 6,400 17,600 104,000 80,000 6,400 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)

3-7.

Preference share (3,000 x 20) Share premium – Preference (3,000 x 1.60) Ordinary share (1,500 x 30) Share premium – Ordinary share

(Red Stone Company) (a) Retained Earnings ( 10,000 shares x P20) Share Dividends Distributable Share Premium Share Dividends Distributable Ordinary Share Capital (b)

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

60,000 4,800 25,200 90,000 60,000 4,800 45,000 19,800 200,000 100,000 100,000 100,000 100,000 300,000 300,000

Share Dividends Distributable Ordinary Share Capital

300,000 300,000

27

Chapter 3 – Shareholders’ Equity

(3) 3-8.

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

(Dark Red Company) Capital structure: Preference 20,000 P2,000,000

Number of shares outstanding Total par value

(1)

Ordinary 250,000 P2,500,000

Preference share is non-cumulative and non-participating

2011 Current preference dividends (9% x 2,000,000 = 180,000; dividends declared were P150,000 only. Dividend per share

Preference

2012 Current preference dividends (9% x 2,000,000) Excess (240,000 – 180,000) Dividend per share

Preference P 180,000

2013 Current preference dividends (9% x 2,000,000) Excess (540,000 – 180,000) Dividend per share

Preference P 180,000

(2)

P0 P 150,000 P7,50

P9.00

P9.00

P0 Ordinary P60,000 P0.24 Ordinary P360,000 P1.44

Preference share is cumulative and non-participating.

2011 Current on preference is P180,000 Arrears, end (P180,000 – 150,000 = 30,000) Dividend per share 2012 Arrears, beginning Current year Total Excess to ordinary = 240,000 – 210,000

Preferen Ordinar ce y P150,000

Preference P 30,000 180,000 P210,000

2013 Current year Excess – to ordinary = 540,000 – 180,000 Dividend per share

P0 P0

P7.50 Ordinary

P210,000 P30,000

Dividend per share

(3)

Ordinary

P10.50 Preference P180,000 P9.00

P0.12 Ordinary P360,000 P1.44

Preference share is cumulative and fully participating

2011 Current dividends: 9% x 2,000,000 = P180,000 Arrears, end = 180,000 – 150,000 = 30,000 Dividend per share

Preference

Ordinary

P 150,000

P0

P 7.50

P0

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Chapter 3 – Shareholders’ Equity

3-9.

2012 Arrears, beginning P30,000 Current on preference 180,000 To ordinary: initial limit 9% x P2,500,000 = P225,000, but remaining is only Total dividends Dividend per share

Preference

2013 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: P135,000 x 2.0/4.5 135,000 x 2.5/4.5 Total Dividend per share

Preference

Ordinary

P 210,000

P210,000 P10.50

P30,000 P30,000 P 0.12 Ordinary

P 180,000 P 225,000 60,000 P240,000 P12.00

75,000 P300,000 P1.20

Additional information: Preference has P100 par value per share.

Capital structure: Number of shares outstanding Total par value (a) Preference is participating up to 14%. 2013 Current dividends: 9% x P2,000,000 9% x P2,500,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which is less than the limit of additional 5%; therefore full excess is prorated. P155,000 x 2M/4.5M P155,000 x 2.5M/4.5M Total Dividend per share (b) Preference is participating up to 12%. 2013 Current dividends: 9% x P2,000,000 9% x P2,500,000 Excess divided by total par 155,000/4,500,000 = 3.44%, which exceeds the additional limit of 3%; therefore, additional to preference is limited to 3%; remainder goes to ordinary 3% x P2,000,000 P155,000 – 60,000 Total Dividend per share

Preference 20,000 P2,000,000

Ordinary 250,000 P2,500,000

Preference

Ordinary

P180,000 P225,000

68,889 P248,889 P12.44 Preference

86,111 P311,111 P1.24 Ordinary

P180,000 P225,000

60,000

P240,000 P12.44

95,000 P320,000 P1.24

29

Chapter 3 – Shareholders’ Equity

3-10. (Red Mama Company) Retained Earnings Share Dividends Distributable 50% x 100,000 x 10 = 500,000

3-11

500,000 500,000

Share Dividends Distributable Ordinary Shares Fractional Share Warrants Outstanding

500,000

Fractional Share Warrants Outstanding Ordinary Share PIC from Unexercised Fractional Share Warrants

100,000

(Red Ball Corporation) October 31, 2012 Trading Securities Unrealized Gain on Trading Securities 10,000 shares x (15 – 14) Retained Earnings Property Dividends Payable 10,000 shares x 15 December 31, 2012 Trading Securities Unrealized Gain on Trading Securities 10,000 shares x (17 – 15) Retained Earnings Property Dividends Payable February 28, 2013 Retained Earnings Property Dividends Payable Property Dividends Payable Trading Securities Gain on Disposal of Trading Securities

400,000 100,000 80,000 20,000

10,000 10,000 150,000 150,000

20,000 20,000 20,000 20,000 30,000 30,000 200,000 170,000 30,000

3-12. (Red Chili Company) 10/1/12 Depreciation Expense Accumulated Depreciation – Equipment 450,000/10 x 9/12

33,750 33,750

Retained Earnings Property Dividends Payable

190,000

Assets Held for Distribution Accumulated Depreciation – Equipment Property, Plant and Equipment

180,000 270,000

190,000

450,000

Cost P450,000 Acc. Deprn 450,000/10 x 6 270,000 Carrying value P180,000

30

Chapter 3 – Shareholders’ Equity

FV(because it is higher) P190,000 12/31/12 Impairment Loss Assets Held for Distribution 180,000 – 160,000 = 20,000

20,000 20,000

Property Dividends Payable

30,000

Retained Earnings 190,000 – 160,000 = 30,000 decrease 1/31/13

Retained Earnings Property Dividends Payable 175,000 – 160,000 = 15,000 increase

Property Dividends Payable Assets Held for Distribution Gain on Disposal of Assets 3-13. (Red Ribbon Corporation) Total SHE 12/31/11 Balances 2010 transactions: a) 4,000 x 280 b) 8,000 x 75 c) 2:1 share split d) 6,000 x 45 e) 4,000 x 46 f) 2,000 x 48 g) Profit 12/31/12 balances *P 60 0,0 00 x 6,0 00/ 16, 00 0= 22 5,0 00

(a) (b)

Total shareh olders’ equity Numbe r of

15,000 15,000

175,000 160,000 15,000

Preference Shares Issued

P16,500,000

30,000

(1,120,000) (600,000)

(4,000)

Ordinary Shares Issued

270,000 96,000 2,000,000 26,000

Treasury Share Shares

Cost

100,000

100,000

P7,146,000

30,000

200,000

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

P600,000 (225,000)*

12,000

P375,000

P17,146,000 26,000

(c)

prefere nce shares issued and outstan ding Numbe r of ordinar y shares issued Numbe r of ordinar y shares outsta nding( 200,00 0– 12,000) Cost of remaini ng treasur y shares

(d) 3-14. (Red Heart Corporati on) 0 6/ 1 5/ 1 1 Cash

200,000

188,000

P

375,000

6,000,000 Ordin ary share Shar e prem ium – Ordin ary

0 9/ 3 0/ 1 1 R e t ai n e d

5,000,000

1,000,000 440,000

e a r ni n g s ( 8 0, 0 0 0 x 5 % x 1 1 0 )

1 1/ 1 0/ 1 1

Share divide nds distrib utable (4,000 x 100)

400,000

Shar e prem ium – Ordin ary

40,000

Share dividen ds distribu table

1 2/ 3 1/ Income 1 summar 1 y

400,000 Ordin ary share

Retai ned earni ngs

400,000

1,175,000

1,175,000

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Chapter 3 – Shareholders’ Equity

03/01/12 05/01/12

Treasury share (3,000 x 95) Cash Cash (1,500 x 120) Treasury share (1,500 x 95) PIC from treasury share

285,000 285,000 180,000 142,500 37,500

08/10/12

Issued

09/15/12

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

3,750,000

Cash (80,000 x 125) Ordinary share (80,000 x 100) Share premium – Ordinary

10,000,000

10/31/12

12/10/12 12/20/12

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

Retained earnings Dividends payable (192,500 x 5) 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

12/31/12

Income summary Retained earnings

3,000,000 750,000 8,000,000 2,000,000 962,500 962,500 100,000 10,000 15,000 95,000

1,200,000 1,200,000

3-15. (Red Carpet Company) (1) Total lump sum price is P147,000 (1,500 x 98), allocated as follows: Securities Preference Warrant Entry

(b)

Market value 90 10

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

Cash Preference share (1,500 x 30) Share premium – Preference Share warrants outstanding Cash (600 x 40) Share warrants outstanding Ordinary share Share premium – Ordinary

Allocated Price 132,300 14,700 147,000 45,000 87,300 14,700 24,000 11,760 6,000 29,760

32

Chapter 3 – Shareholders’ Equity

3-16. (Red Hot Company) (a) Value of each option Number of shares granted Total value assigned to share options Required service period Annual compensation expense

P8 x 30,000 P240,000  3years P 80,000

(b) 1/1/12

12/31/12

12/31/13

12/31/14

12/31/15

Memo: Granted share options to selected senior employees for the purchase of 30,000 ordinary shares at P50 per share, from January 1 to December 31, 2015. Compensation Expense Share Options Outstanding

80,000 80,000

Compensation Expense Share Options Outstanding

80,000

Compensation Expense Share Options Outstanding

80,000

Share options outstanding Cash (30,000 x 50) Ordinary share (30,000 x 20) Share premium - Ordinary

80,000

80,000 240,000 1,500,000 600,000 1,140,000

3-17. (Fire Red Company) Memo: granted 40,000 share options certain officers for 01/02/12 to the purchase of the company’s P100 par ordinary shares at P430 per share. 12/31/12

12/31/13

2014 12/31/14

Compensation expense Share options outstanding (40,000 x 80)  4 years

800,000

Compensation expense Share options outstanding (40,000 x 80)  4 years Memo: 8,000 share options were cancelled.

800,000

800,000

Compensation expense 440,000 Share options outstanding Total accrued compensation expense (34,000 x 80) x 3/4 2,040,000 Less: previously accrued 1,600,000 440,000 Compensation expense-2008

800,000

440,000

12/31/15

Compensation expense Share options outstanding (34,000 x 80) / 4

680,000 680,000

01/01/14 Cash (34,000 x 430) 14,620,000 Share options outstanding (34,000 x 80) 2,720,000 Ordinary shares (34,000 x 100) 3,400,000 Share premium – Ordinary 13,940,000

33

Chapter 3 – Shareholders’ Equity

3-18. (Red Fox Corporation) (a) Compensation Expense 200 – 10 – 15 = 175 employees x 100 2012 options=17,500 17,500 x 32 = 560,000; 560,000 x 1/3 2013

2014

(b) 01/01/12

12/31/12 12/31/13 12/31/14 2015

2016

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 100 options=17,000 17,000 x 32 = 544,000; 544,000 – 369,067

174,933

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, 2011 provided that the employees are still in the service. Options expire on December 31, 2012. Compensation expense Share options outstanding

186,667

Compensation expense Share options outstanding

182,400

Compensation expense Share options outstanding

174,933

Cash (140 x 100 x 220) Share options outstanding (14,000 x 32) Ordinary share (14,000 x 200) Share Premium - Ordinary Cash (10 x 100 x 220) Share options outstanding (1,000 x 32) Ordinary share (1,000 x 200) Share premium – Ordinary Share options outstanding (2,000 x 32) PIC from forfeited share options

186,667 182,400 174,933 3,080,000 448,000 2,800,000 728,000 220,000 32,000 200,000 52,000 64,000 64,000

3-19. (Cherry Red Company) (a) 01/01/12 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, up to Dec. 31, 2014 Options expire at the end of 2015. 12/31/12 Compensation Expense Share Options Outstanding

66,667 66,667

(10,000 x 20) / 3 years 12/31/13 Compensation Expense Share Options Outstanding (10,000 x 20) - 66,667

133,333 133,333

34

Chapter 3 – Shareholders’ Equity

2014

Cash (10,000 x 120) Share Options Outstanding Ordinary Share Capital (10,000 x 100) Share Premium-Ordinary

1,200,000 200,000 1,000,000 400,000

(b) 01/01/12

12/31/12

12/31/13 12/31/14 2015

(3)

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 2013. Compensation Expense Share Options Outstanding (10,000 x 20) / 3 years

66,667

Compensation Expense Share Options Outstanding

66,667

Compensation Expense Share Options Outstanding

66,666

Cash (8,000 x 120) Share Options Outstanding (80% x 200,000) Ordinary Shares (8,000 x 100) Share Premium-Ordinary Share Options Outstanding (20% x 200,000) PIC from Forfeited Share Options

66,667

66,667 66,666 960,000 160,000 800,000 320,000 40,000 40,000

If the stock price reached P200 by June 2015, the same entries will be made for year 2012 through 2014, as given in (b) The recorded share options, however, will be cancelled at the end of 2015, as the options already expire.

12/31/15 Share Options Outstanding PIC from Forfeited Share Options

200,000 200,000

3-20. (Red Day Company) (a) 01/01/12 Granted 80 share options to each of 400 employees for the purchase of P100 par ordinary shares at P140 per share. Options shall vest in 2012 if earnings increase by 15% or at the end of 2013 if average annual earnings for 2012 and 2013 increased by an average of 12%. 12/31/12

12/31/13

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

352,000

352,000

2014

Cash (32,000 x 140)

4,480,000

35

Chapter 3 – Shareholders’ Equity

Share Options Outstanding Ordinary Share (32,000 x 100) Share Premium – Ordinary

(2)

704,000

3,200 1,984

The full amount of P704,000 is recognized as compensation expense since the options vest already in 2012.

3-21. (Bloody Red Company) 01/01/12

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, 2015 and expire on December 31, 2016. The number of share options will be based on the level of sales for 2014.

12/31/12 Compensation Expense Share Options Outstanding 15,000 sh x 30 x 1/3

150,000

12/31/13 Compensation Expense Share Options Outstanding

150,000

15,000 sh x 30 x 2/3 Less: previously accrued Compensation expense 12/31/14 Compensation Expense Share Options Outstanding 18,000 sh x 30 x 3/3 Less: previously accrued Compensation expense

150,000

150,000 300,000 150,000 150,000 240,000 240,000 540,000 300,000 240,000

3-22. (Striking Red Corporation) (a) 12/31/12 Compensation Expense Share Appreciation Rights Payable

66,667 66,667

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

12/31/13 Compensation Expense Share Appreciation Rights Payable

133,333 133,333

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

12/31/14 Compensation Expense Share Appreciation Rights Payable 10,000 x (165 - 120) = 450,000 450,000 –200,000 = 250,000

250,000 250,000

(2) (1) Assuming that the rights were exercised on January 1, 2015, when the market price is P165. 01/01/15 Share Appreciation Rights Payable Cash

450,000 450,000

(2) (2) Assuming that the rights were exercised on December 31, 2015, when the market price is P172.

36

Chapter 3 – Shareholders’ Equity

12/31/15 Share Appreciation Rights Payable Compensation Expense 10,000 (172 – 165) Cash 10,000 x (172-120)

450,000 70,000 520,000

3-23. (Red Bull Corporation) (a) Liability at December 31, 2012 = P89,333 December 31, 2013 = P208,000 December 31, 2014 = P394,000 12/31/12

12/31/13

Compensation Expense Share Appreciation Rights Payable 10,000 x 26.80 x 1/3

89,333

Compensation Expense Share Appreciation Rights Payable

118,667

89,333

118,667

10,000 x 31.20 x 2/3 = 208,000 208,000 – 89,333 = 118,667

12/31/14

Compensation Expense Share Appreciation Rights Payable

186,000 186,000

10,000 x 39.40 = 394,000 394,000 –208,000 = 194,000

2015

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

394,000 56,000

3-24. (Ruby Red Company) (1) 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 1/1/12 (b)

450,000

600,000 568,800 31,200

2012: 3,600 x 160=576,000; 576,000/3 31,200/3 Total compensation expense

192,000 10,400 202,400

2013: 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

2014: 3,600 x 168 = 604,800 604,800 – 396,000 31,200/3 Total compensation expense

208,800 10,400 219,200

2013: 2,700 x (172-168)

10,800

37

Chapter 3 – Shareholders’ Equity

(2) Correction to the problem: One executive exercised his right to receive the cash alternative on December 31, 2014, instead of 2012.

01/01/12

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.

12/31/12

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable

202,400

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable

214,400

Compensation Expense Share Options Outstanding Share Appreciation Rights Payable Share Options Outstanding ¼x 31 , 200 Share Appreciation Rights Payable Cash PIC from Unexercised Share Options 31,200 / 4 = 7,800 604,800 / 4 =151,200

219,200

12/31/13

12/31/14

12/31/14

12/31/15

12/31/13

3-25

Compensation Expense Share Appreciation Rights Payable 900 x 3 x (172 – 168) Share Options Outstanding Share Appreciation Rights Payable Ordinary Share (3,000 x 100) Share Premium – Ordinary 31,200¾ x

(Red Santa Company) RE, January 1, 2012 2012 Transactions (1) 200,000 x 70% (2) Dividends On preference: 200,000 x P100 x 8% On ordinary: 300,000 x P5 (3) 10,000 (150 – 130) (4) Release of appropriation (5) 45,000/300,000 = 15% bonus issue 45,000 x P150 (6) Appropriation for bond redemption

10,400 192,000 10,400 204,000 10,400 208,800 7,800 151,200 151,200 7,800

10,800 10,800

23,400 464,400 300,000 187,800

Appropriated P 4,000,000

Unappropriate d P9,000,000 (140,000)

(4,000,000)

(1,600,000) (1,500,000) (200,000) 4,000,000

2,000,000

(6,750,000) (2,000,000)

(7) Profit for the year Balance, December 31, 2012 Total retained earnings, (P2,000,000 unavailable for dividends)

P2,000,000

3,000,000 P3,810,000 P5,810,000

38

Chapter 3 – Shareholders’ Equity

3-26. (Red Hat Company) Retained earnings balance as of December 31, 2012 3,900,000 – 600,000 – 240,000 Total shareholders’ equity as of December 31, 2012 6,000,000 + 8,000,000 + 3,060,000

P 3,060,000 P17,060,000

(a) Preference Ordinary Par value of preference share P6,000,000 Dividends in arrears (6,000,000 x 9% x 3 yrs.) 1,620,000 Excess to ordinary (17,060,000 – 7,620,000) P9,440,000 Total equity P7,620,000 P9,440,000 Divide by the number of shares outstanding 60,000 800,000 Book value per share P 127 P 11.80 (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 Divide by the number of shares outstanding Book value per share 3-27. (Red, Inc.) Retained Earnings Inventory

Preference P6,300,000

Ordinary

1,620,000 P9,140,000 P7,920,000 P9,140,000 60,000 800,000 P132 P11.425 300,000 300,000

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

3-28. (Skinny Red Company) (a) Retained Earnings Accumulated Depreciation Current Assets Building

875,000 150,000 3,700,000

2,300,000

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

Ordinary Share Ordinary Share Share Premium

6,000,000

Share Premium Retained Earnings

1,400,000

4,000,000 2,000,000 1,400,000

39

Chapter 3 – Shareholders’ Equity

Skinny Red Company Statement of Financial Position Current Assets Land Building Accumulated Depreciation Total

P 400,000 1,500,000 4,625,000 ( 925,000) P5,600,000

Liabilities Ordinary Share Share Premium

P1,000,000 4,000,000 600,000

Total

P5,600,000

3-29. Same as 3-27.

MULTIPLE CHOICE QUESTIONS Theory MC1 MC2 MC3 MC4 MC5 MC6 MC7 MC8 MC9 MC10 MC11

C D B B B C C C A C C

MC12 MC13 MC14 MC15 MC16 MC17 MC18 MC19 MC20 MC21 MC22

A C C A D B D C D C C

Problems MC23 MC24 MC25 MC26 MC27 MC28 MC29 MC30 MC31 MC32 MC33 MC34 MC35 MC36 MC37 MC38 MC39 MC40 MC41

C B D D B A A C B A B C B B D C B D D

MC42 MC43

B A

MC44 MC45

A A

230,000 + 525,000 + 5,000 = 760,000 480,000 x 110/120 = 440,000; 440,000-400,000 = 40,000 (60,000 x 2) – (5,000 x 2) = 110,000 125,000 x 3 = 375,000 375,000 – [(12,000 x 3) + 5,000] = 334,000 20,000 x 9 = 180,000; 180,000/2 = 90,000 x 1/2 = 45,000 600,000 x 5 = 3,000,000 1,000,000 + (10,000 x 20) – (2,000 x 20) = 1,160,000 7,000,000 + (35,000 x 70) = 9,450,000 2,000 x 8 = 16,000 70 – (70/2) = 35 (5,000 x 80) – (5,000 x 40) = 200,000 600 x 10 x 60% = 3,600; 6,000 – 3600 = 2,400 Interest expense for 2009 = 100,000 x 10% x 9/12 = 7,500 2,120,000 – (2,000 bonds x 1,040) = 40,000 945,000/ 70 = 13,500; 13,500/90,000 = 15% 80,000 + (2,000,000 x 8%) = 240,000; 300,000 – 240,000 = 60,000 (3,000,000 x 5% x 2 years) – 100,000 = 200,000 arrears, end (110,000 + 10,000) x 2 = 220,000 issued; 220,000 – (4,000 x 2) = 212,000 24,000+48,000=72,000; 108,000-72,000-24,000 = 12,000 72,000 + (12,000 x 4/6) = 80,000; 24,000 + (12,000 x 2/6) =28,000 80,000/4,000 = 20; 28,000/20,000 = 1.40 8,000,000 – (10,000 x 70) – 1,200,000 = 6,100,000 (15 x 2)/5 = 6.00

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Chapter 3 – Shareholders’ Equity

MC46

B

MC47

C

MC48 MC49 MC50 MC51

C A D C

MC52 MC53 MC54 MC55 MC56 MC57

B B D B B B

MC58

B

MC59

C

MC60

D

25,000 x 40 = 1,000,000; 10% x 2,500,000 = 150,000 1,000,000 + 250,000 = 1,250,000 (40,000x 105) – (600 x 110) + (400 x 95) + 830,000 – 200,000 = 4,802,000 5,520,000 – 25,000 – 170,000 + 40,000 + 900,000 = 6,265,000 (2,000 x 85) – (800 x 42.50) = 136,000 [3,000 x (50-20)] / 3 years = 30,000 4,500,000 x 95% = 4,275,000; 4,275,000/3 = 1,425,000 4,500,000 x 94% x 2/3 = 2,820,000; 2,820,000 – 1,425,000=1,395,000 (4 x ½200=120,000x3) x (90% x 7 x 200 x 300) – 120,000 = 258,000 360,000 – 70,000 = 290,000; 290,000/5,000 = 58 3,150,000/ 50,000 = 63 3,150,000 – (5,000 x 120) = 2,550,000; 2,550,000/50,000 = 51 RE = 1,000,000; cumulative dividends in arrears = 5,000,000 x 8% x 3 years = 1,200,000, but dividends are limited to the extent of RE balance of P1,000,000; Thus, equity of ordinary share is 13,500,000 – 5,000,000 – 1,000,000 = 7,500,000; 7,500,000/ 750,000 shares = P10 13,500,000 – (50,000 x 106) – 1,000,000 = 7,200,000 ; 7,200,000/750,000 shares = 9.60 (200,000 x 2) + (200,000 x 5) – 950,000 = 450,000

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