ESSAY QUESTION:

1. Explain the two classes of share capital.

2. How much is legal capital?

Answer:

The amount of the legal capital of the corporation is the aggregate amount of the par value of all
of its shares. So, if a corporation has 10 shares outstanding with a par value of $1 each, its legal capital
would be $10.

3. Explain the accounting for issuance of par value shares and no-par value shares.

4. Explain the accounting for share capital issued for non-cash consideration.

5. Explain the treatment of share issuance cost.

6. What is a callable preference share, redeemable preference share, and convertible preference share?

7. What is a treasury share?

8. How treasury shares are measured and accounted for in the books of corporation?

9. What is a donated capital and how it is accounted?

10. Describe the accounting for recapitalization and/or quasi-reorganization.

11. Explain share split and reverse share split.

12. Explain right issue and share warrants.

13. Enumerate the different classes of dividends and describe how each is accounted for.

14. Discuss the two kinds of retained earnings.

Answer:

UNAPPROPRIATED RETAINED EARNINGS represent that portion which is free and can be
declared as dividends to shareholders while the APPROPRIATED RETAINED EARNINGS represent that
portion which has been restricted and therefore is not available for any dividend declaration.

15. Differentiate share options to share appreciation rights.

16. Describe the accounting of share options and share appreciation rights.

17. What is the meaning of book value per share?

18. What is the basic formula in the computation of book value per share?

19. What is the significance of computing the book value per share?
PROBLEM SOLVING:

Problem 3-1
Required:
a. Prepare the necessary journal entries for 2018.

Date Particulars Debit Credit

Jan 17 Shares 400,000
Share Premium 200,000
Share Capital 200,000
(Being shares are issued at premium of P10; Premium = 20,000 shares *
P10)

Shares 1,200
Cash/Bank 1,200
(Being issuance cost incurred on shares)
Jan 31 Attorney services 85,000
Share Premium 60,000
Share Capital 25,000
(Being shares are issued for attorney services)

Apr 18 A's A/C 75,000

Share Premium 25,000
Share Capital 50,000
(Being shares are subscribed by A but not paid)

Aug 26 Bank 150,000

Share Premium 75,000
Share Capital 75,000
 (Being 50% of outstanding shares are subscribed and paid)

Sep 30 Employees cash wages 15,000

Share Premium 12,000
Share Capital 3,000
(Being shares are issued for employee’s cash wages)

b. What is the ordinary share capital balance on December 31, 2018?

Issue to attorney services 2,500shares * P10 25,000

50% subscribed and paid 7,500shares * P10 75,000
Issued to employees 300shares * P10 3,000
Issued for building and land 32,500shares * P10 325,000

Ordinary share capital balance 428,000

c. What amount of share premium to be reported on statement of financial position

at December 31, 2018?

Issue to attorney services 2,500shares * P24 60,000

50% subscribed and paid 7,500shares * P10 75,000
Issued to employees 300shares * P40 12,000
Issued for buildings and land 32,500shares * P8 260,000

Share Premium 407,000

d. What is the total balance of shareholders’ equity as of December 31, 2018?

Ordinary Share Capital 428,000

Share Premium 407,000
Earnings of the year 4,320,000
Total balance of shareholder's equity 5,155,000

Problem 3-2
Required:
What is the amount of legal capital?
Preference share capital 2,300,000
Ordinary share capital 5,250,000
Subscribed ordinary shares 50,000
Total legal capital 7,600,000

Problem 3-3

On the transactions provided from 2017 to 2018, what are the necessary
journal entries?
Date Particulars Debit Credit
2017 Treasury shares 120,000
Cash 120,000

2018 Cash 190,000

Treasury shares 120,000
Share Premium 70,000

Problem 3-4

Required:
On December 31, 2018, what is the number of shares outstanding?
Date Details Outstanding shares
1-Feb Number of shares issued 60,000
1-Jul Number of shares reacquired
But not canceled -5,000
55,000

1-Dec Two-for-one stock split (55,000*2) 110,000

Share outstanding shares on 31 Dec-2018 110,000

Problem 3-5

Required:
 On December 31, 2013, how many shares were issued and outstanding,
respectively?
Date Details Outstanding shares
Jan-1 2018 Company shares 125,000
Treasury shares-issued 13,000
138,000

1-Dec Three-for-one stock split (138,000*3) 414,000

Re-purchase of own shares -5,000
Share outstanding shares on 31 Dec-2018 409,000

Problem 3-6
Required:
What is the total shareholders’ equity on December 31, 2018?
Shareholder’s Equity:
Preference share, 100,000 shares, P10 par 1,000,000
Less: Treasury Stock (5,000*10) (50,000) 950,000
Ordinary shares capital 5,000,00
Less: Treasury stock (Repurchased and sold) 0 5,000,000
Share premium – Preference 50,000
Less: Share premium on Treasury preference shares (500*1) (5,000) 45,000
Share premium – Ordinary 200,000
Less: Loss on sale of Treasury stock [(5,000*12) -(5,000*8)] (20,000) 180,000
Retained Earnings 3,000,000
Less: Dividend (5,000,000*10%) (500,000) 2,500,00
Total Shareholders’ Equity 6,175,00

Problem 3-7
Required:
Prepare the necessary entries related to treasury shares.
Date Particulars Debit Credit

06/01/2019 Treasury Stock (40,000*10) 400,000

Share premium - Issuance 1,200,000
Cash (40,000*40) 1,600,000
 07/01/2019 Cash (15,000*48) 720,000
Share premium – Issuance 570,000
Treasury Atock (15,000*48) 150,000

08/01/2019 Cash (19,000*27) 513,000

Share premium – Issuance 323,000
Treasury stock (19,000*10) 190,000

09/01/2019 Common Stock (1000*10) 10,000

Treasury Stock (1000*10) 10,000

Problem 3-8
a) Retained Earnings 50,000
Stock Dividend distributable 50,000
To record declaration of stock dividend

Stock Dividend distributable 50,000

Ordinary share capital 50,000
To record issue of stock dividend

b) Retained Earnings 1,50,000

Stock Dividend distributable 1,50,000
To record declaration of stock dividend

Stock Dividend distributable 1,50,000

Ordinary share capital 1,50,000
To record issue of stock dividend
Problem 3-9

a. Retained Earnings 90,000

Cash dividend (Preference shares) 10,000
Cash dividend (ordinary shares) 80,000
To record declaration of cash dividend

Cash dividend (Preference shares) 10,000

Cash dividend (ordinary shares) 80,000
Cash 90,000
To record issue of cash dividend

b. Retained Earnings 90,000

Cash dividend (ordinary shares) 90,000
To record declaration of cash dividend

Cash dividend (ordinary shares) 90,000

Cash 90,000
To record issue of cash dividend

c. Retained Earnings 90,000

Cash dividend (Preference shares) 10,000
Cash dividend (ordinary shares) 80,000
To record declaration of cash dividend
 Cash dividend (Preference shares) 10,000
Cash dividend (ordinary shares) 80,000
Cash 90,000
To record issue of cash dividend

d. Retained Earnings 90,000

Cash dividend (ordinary shares) 90,000
To record declaration of cash dividend

Cash dividend (ordinary shares 90,000

Cash 90,000
To record issue of cash dividend

Problem 3-10

A. Date Particulars Debit Credit

2019 Dec. 31 Compensation Expense 2,000
Liability under share appreciation 2,000
(Being expense of SAR recognized)

2020 Dec. 31 Compensation Expense 2,000

Liability under share appreciation 2,000
(Being expense of SAR recognized)

2021 Dec. 31 Compensation Expense 4,000

Liability under share appreciation 4,000
(Being expense of SAR recognized)
2022 Dec. 31 Compensation Expense 2,000
Liability under share appreciation 2,000
(Being expense of SAR recognized)

Problem 3-11
 A. Prepare journal entries from 2019 to 2021.

Date Particulars Debit Credit

2019 Salaries – share options 400,000
Share options outstanding 400,000

2020 Salaries – share options 800,000

Share options outstanding 800,000

2021 Salaries – share options 480,000

Share options outstanding 480,000

Problem 3-12

A. Date Particulars Debit Credit

2019 Salaries – share options 200,000

Share options outstanding 200,000

2020 Salaries – share options 200,000

Share options outstanding 200,000

2021 Salaries – share options 100,000

Share options outstanding 100,000

Problem 3-13
Dec. 31 Salaries – share options 125,000

Share options outstanding 125,000

 Market value – Dec. 31, 2019 150

Less: Option price 125

Intrinsic value of each option 25

Multiply by share options 10,000

Total compensation 250,000

Compensation expense for 2019 (250,000 / 2) 125,000

Problem 3-14

Share capital, P100 5,000,000

Share premium 1,000,000
Retained Earnings 1,500,000
Appropriated Earnings 500,000
Total shareholder’s equity 8,800,000

Book Value per Share = Total net worth/total share oustanding

=8,000,000/500,000
=16
Revaluation surplus is not arised due to earning in cash.

Problem 3-16
Required:
Compute the book value per ordinary share and per preference share under each of
the following conditions with respect to preference share:

a) Cumulative and fully participating

Excess Preference Ordinary

Balance (2,000,000 + 1,000,000) 3,000,000 1,000,000 4,000,000
Preference dividend
(12% x 1,000,000 x 2 years)
Ordinary Dividend
(12% x 4,000,000)
Balance for participation

b) Cumulative and fully participating after ordinary share receives 15%

c) Cumulative and participating up to 16%
d) Cumulative and non-participating
 e) Noncumulative and non-participating

Problem 3-17
Required:
Compute the book value per ordinary share and per preference share on December
31, 2019.