Lesson 5b

Answer to Practice Exercise

 2. Retained earnings (for five years) 3,600,000
– Total dividends for five years
(360,000 x 5) 1,800,000
Retained earnings after five years 1,800,000

3. Preference shares (20,000 x 100) 2,000,000

Ordinary shares (80,000 x 10) 800,000
1. Preference shares (20,000 x 100) 2,000,000 Share premium-ordinary (80,000 x 5)* 400,000
Dividend rate 10% Total contributed capital 3,200,000
Annual dividend for preference 200,000 Retained earnings 1,800,000
Total shareholders’ equity 5,000,000
Ordinary no. of shares 80,000 *ordinary shares were issued at 15 while
X 2 the par value is 10
Annual dividend 160,000
Total dividends per year 360,000
 Declaration
Retained earnings 300,000
Ordinary share distributable 200,000
Share premium – ordinary 100,000
Date of payment
Ordinary share distributable 200,000
Ordinary share 200,000

5. 20,000 shares x 20% = 4,000

X par 100
400,000
Journal entry assuming date of declaration and payment are the same
Retained earnings 400,000
Ordinary share (4,000 x 100) 400,000
Total contributed capital after distribution of bonus issue:
Ordinary share capital (2,000,000 + 400,000) 2,400,000
Share premium – ordinary 100,000
4. 20,000 shares x 10% = 2,000 Total 2,500,000
x FMV 150 After Bonus
Before Bonus Bonus
300,000 Ordinary share capital 2,000,000 400,000 2,400,000
Share premium 100,000 100,000
Retained earnings 1,000,000 (400,000) 600,000
Journal entry assuming date of declaration and payment are the same Total SHE 3,100,000 0 3,100,000
Retained earnings 300,000
Ordinary share (2,000 x 100) 200,000
Share premium – ordinary 100,000
7. Beg bal. 100,000 8. If 1:1 is it big or small bonus?
Net profit 50,000 1 share for each share is like 100% bonus
Cash div. (30,000) issue so big bonus (at par)
Bonus issue
1,500 x 20* (30,000) Bonus issue additional 6,000 shares
End bal. 90,000 x par 30
Charged to Retained Earnings 180,000
* small bonus only 10% so at FMV
Since the cost is higher than the selling price, the difference is loss but is not
recorded as loss instead charge to PIC from treasury shares if there is any if none or
if not enough charge to retained earnings
Cash 20,000
Paid in capital from treasury shares 3,000
Retained earnings 2,000
Treasury shares 25,000
 a. Treasury shares 70,000
Cash 70,000
* 70,000 ÷ 2,000 = 35 per share
b. Cash (1,200 x 42) 50,400
Treasury shares (1,200 x 35) 42,000
PIC from treasury shares 8,400
c. Ordinary shares (800 x 20) 16,000
Retained earnings (difference) 12,000
Treasury shares (800 x 35) 28,000

* There is no given original issue so we cannot

determine the share premium so we assume at par

13. Included in APIC are:

Share premium 280,000
Paid in capital from TS 8,400
Total APIC 288,400
 Treasury shares (6,000 x 12) 72,000
Cash 72,000

Cash (4,000 x 8) 32,000

Retained earnings (difference) 16,000
Treasury shares (4,000 x 12) 48,000

Ordinary share capital (100,000 x 10) 1,000,000

Share premium (100,000 x 5) 500,000
Retained earnings:
Net profit (2016-2018) 450,000
Dividends paid (2016-2018) (230,000)
Excess of cost over the selling price of TS (16,000) 204,000
Total contributed capital and retained earnings 1,704,000
Less balance of the treasury shares (2,000 x 12) (24,000)
Total shareholders’ equity 1,680,000
15. Additional paid in capital:
Share premium (10,000 shares x 4) 40,000
* issue price is 14 while par value is 10
Paid in capital from TS (800 x 2) 1,600
* TS were purchased at 13 and sold at 15
Total APIC 41,600

16. Ordinary shares 10,000 shares x par value 10 = 100,000