ACCOUNTING QUIZZES

10.3.2.7 Evaluate 10.1 – Problem

Explanation:
• The Notes Payable is a Noncurrent Liability.
• Allowance for Uncollectible Accounts is a Contra-Asset account.
• Ordinary Shares are Shares issued to ordinary shareholder. This is part of the
shareholder's equity.
• Retained Earnings - Unappropriated are the accumulated earnings of the company
that is available for dividends to shareholders. This is part of the shareholder's
equity.
• Cash Dividends Payable is a Current Liability.
• Appropriation for Pending Litigation is a Retained Earnings - Appropriated. This
is part of the shareholder's equity.
• Preference Shares are shares issued to preference shareholder. This is part of the
shareholder's equity.
• Donated Capital is a capital received as a donation from the government. This is
part of the shareholder's equity.
• Share Premium - Preference is an additional paid-in capital in excess of par. This
is part of Shareholder's Equity.

10.3.2.3 Elaborate 10.1

Problem 1 - Shares Issuance for Cash
Roa Corporation’s articles authorized the issuance of 100,000 ordinary shares. Roa
sold the following ordinary shares during 2019:
o Feb. 12 Sold 1,000 shares for P100,000
o July 10 Sold 5,000 shares for P630,000
o Nov. 5 Sold 7,500 shares for P1,050,000
Required:
Prepare journal entries to record each issuance, assuming that:
o The ordinary shares has a P100 par value.
o The ordinary shares has a P10 stated value.
o The ordinary shares has no-par or stated value.
Answers:
Problem 2 - Issuance of Ordinary Shares
The Delgado Software Corporation is authorized to issue 80,000 ordinary shares.
During the current year, the corporation issued 25,000 shares.
Required:
Prepare the required entry to record the issuance of ordinary shares under each of
the following assumptions:
o The shares have a P5 par value and were sold for P20 per share.
o The shares are no-par but have a stated value of P10. The total issue price
was P850,000.
o The shares are no-par and have no stated value. They were issued at P25 per
share.
Answers:

Problem 3 - Treasury Stock Transaction

On January 1, 2019, Gulane Corporation had the following balances in its
shareholders’ equity accounts:
o Ordinary Shares, P5 par P 500,000
o Share Premium – Ordinary 2,000,000
o Retained Earnings 7,000,000
On March 28, the corporation purchased 10,000 shares as treasury stock at P15
per share. On April 10, it sold 4,000 of the treasury shares at P14 per share. On
July 5, it sold 2,000 shares at P16 per share.
Required:
1. Calculate the number of shares issued and the number of shares outstanding on
Jan. 1, Mar. 1, June 30, and Sept. 30, 2019 assuming no other equity transactions
occurred.
2. Prepare the journal entries for the treasury stock transactions.
Answers:
Explanation:
1. Number of Shares Issued and Number of Shares Outstanding

Shares issued refer to shares of stock issued or sold by a company, or shares that
are currently owned by the stakeholders. Shares issued also includes shares of
stock that are reacquired by the issuing company but are not yet retired.
The Ordinary Shares account presented on the Shareholder's Equity is measured at
par value per share. To arrive at the number of shares issued, we will use the
balance of the Ordinary Shares account and divide it with the par value per share.

Since number of shares issued include shares of stock that are reacquired by the
issuing company but are not yet retired, it will remain at 100,000 shares even after
the treasury stock transactions.
Shares outstanding refer to shares of stock issued or sold to the public and excludes
shares of stock that are repurchased or reacquired by the issuing company. These
shares that are repurchased or reacquired refer to treasury shares.
To arrive at the number of shares outstanding, simply deduct the number of
treasury shares from the number of shares issued.
2. Journal Entries for the Treasury Stock Transactions
Treasury Shares are accounted for under two methods: (1) The Cost Method and
the (2) Par Value Method.
Under the Cost Method, the treasury shares are measured at cost which is equal to
the face value of cash surrendered or fair market value of non-cash asset
surrendered in reacquiring the shares of stock.
To record the transaction March 28, we will debit the Treasury Shares account to
recognize the shares of stock reacquired by the corporation and measure it using
the face value of cash surrendered in order to repurchase these stocks.

Under the Par Value Method, instead of using the cost, the treasury shares are
measured using the par value. This method is used when the corporation assumes
that these reacquired shares will be retired eventually.

To record the transaction above using the Par Value Method, we will still debit the
Treasury Shares account but this time we will measure it using the par value of the
repurchased shares. We will also debit the Share Premium - Ordinary account to
deduct the amount originally paid by the stockholder that are in excess of the par
value. Any remaining excess between the amount of cash surrendered to reacquire
the shares and the original amount including excess of par is recognized in the
Retained Earnings account.
Treasury stocks can be reissued or retired at a later date. Using the cost method, the
cash account is debited to record the receipt of cash. The Treasury Shares account
is credited and is measured at the original price it was repurchased. Any excess is
either debited or credited to Share Premium - Treasury. A negative excess is
debited only to the extent of an existing credit balance prior to reissuance, if any,
and the remaining amount shall be charged to Retained Earnings.

Using the par value method, the cash account is still debited to record the proceeds
received. The difference is that Treasury Shares account is measured at the original
par value. The excess between the cash amount received for the reissued shares
and their original par value shall either be credited or debited to the Share Premium
- Ordinary account.

The transactions for April 19 and July 5 are recorded as follows using the par value
method:

3. Reason behind corporations buying its own shares of stock

Treasury stocks are previously issued shares of stock reacquired or repurchased by

the issuing corporation. As a result, these shares cannot receive dividends and
cannot have voting rights. When a corporation reacquires its issued stocks, it
reduces the total number of its outstanding shares in the market. This will have the
desired effect of increasing the wealth of stakeholders, which is the main objective
of most corporations. Also, corporations buy back its issued stock because its
market value is deemed too low or discounted.
Problem 4 - Small Share Dividends
The E. Delos Santos, Inc. board of directors voted on June 1, 2019, to declare a
10% shares distributable on July 1, to shareholders of record as of June 15, 2019.
On June 1, E. Delos Santos has 500,000 shares of P10 par ordinary shares
authorized, 55,000 shares are issued and 5,000 shares are held as treasury stock. E.
Delos Santos stock is selling for P45 per share on June 1, 2019.

Required:
Prepare the entries needed on the declaration, record and payment dates.

Answers:
1. Declaration (June 1) - Dr. Retained earnings 50,000 Cr. Dividends payable
50,000 (55,000-5,000)*(10*10%)

The dividend is always declared by the company on the face value (FV) of a
share irrespective of its market value.)

2. Record (June 15) - no entry

No entry is required but a list of the shareholders entitled to receive

dividends is made.

3. Payment (July 1) - Dr. Dividends payable 50,000 Cr. Cash 50,000

The entry is to extinguish the recorded dividends payable which is already

paid to shareholders.