AUDIT OF SHAREHOLDERS EQUITY

PROBLEM NO. 1

KAYA CO. began operations on January 1. Authorized were 120,000 shares of P10 par value
ordinary shares and 240,000 shares of 10%, P100 par value preference shares. The following
transactions involving shareholders’ equity occurred during the first year of operations.

Subscribed share capital (120,000 shares x P10) = P120,000

Jan. 1 Issued 30,000 ordinary shares to the corporation promoters in exchange for land valued
at P1,020,000 and services valued at P420,000. The property had cost the promoters
P540,000 3 years before and was carried on the promoters’ books at P300,000.

NOTE:
*Share issuance for non-cash consideration
1. FV of non-cash given (properties, services, etc.)
2. FV of share securities issued
3. Par value of shares issued

*Share Issuance Cost (SIC) - deduction to resulting share premium

a. commissions
b. underwriting fees
c. documentary stamp paid
d. cost of printing certificates
e. filing fees paid to SEC

JOURNAL ENTRY:

Land 1,020,000
Legal Expenses 420,000
Ordinary shares 300,000
(30,000 shares x P10)
Share premium - OS 1,140,000

Feb. 23 Issued 60,000 preference shares with a par value of P100 per share. The shares were
issued at a price of P150 per share, and the company paid P450,000 to an agent for
selling the shares.

JOURNAL ENTRIES:

Cash (60,000 shares x P150) 9,000,000

Preference shares
(60,000 shares x P100) 6,000,000
Share premium - PS 3,000,000
##
Share Premium - PS 450,000
Cash 450,000

Mar. 10 Sold 18,000 ordinary shares for P390 per share. Issue costs were P150,000.

JOURNAL ENTRIES:

Cash (18,000 shares x P390) 7,020,000

Ordinary shares
(18,000 shares x P10) 180,000
Share premium - OS 6,840,000
##

Share Premium - OS 150,000

Cash 150,000

Apr. 10 24,000 ordinary shares were sold under share subscriptions at P450 per share. No
shares are issued until a subscription contract is paid in full. No cash was received.
 JOURNAL ENTRY:

Subscription Receivable 10,800,000

Subscribed OS 240,000
(24,000 shares x P10)
Share premium - OS 10,560,000

July 14 Exchanged 4,200 ordinary shares and 8,400 preference shares for a building with a fair
value of P3,060,000. The building was originally purchased for P2,280,000 by the
investors and has a book value of P1,320,000. In addition, 3,600 ordinary shares were
sold for P1,440,000 in cash.

NOTE: Market value of Ordinary shares: P400

JOURNAL ENTRIES:

Cash (3,600 shares x P400) 1,440,000

Ordinary shares
(3,600 shares x P10) 36,000
Share premium - OS 1,404,000
##

Building 3,060,000
Ordinary shares 42,000
(4,200 shares x P10)
Share premium - OS 1,638,000
Preference shares 840,000
(8,400 shares x P100)
Share premium - PS 540,000

COMPUTATION: (assuming na walang given market value for preference shares)

Building - 3,060,000
Market value of Ordinary shares (4200 shares x P400) = P1,680,000
Market value of Preference shares (8,400 shares x P400) = P1,380,000

WHAT IF MAY MARKET VALUE ANG ORDINARY SHARES AT PREFERENCE SHARES?

*To allocate:
Building - 3,060,000 Ordinary shares 1,680,000 [(1.68M/3M) x 3.06M] = 1,713,600
Preference shares 1,320,000 [(1.32M/3M) x 3.06M] = 1,346,400
3,000,000

Aug. 3 Received payments in full for half of the share subscriptions and payments on account
on the rest of the subscriptions. Total cash received was P8,400,000. Share
certificates were issued for the subscriptions paid in full.

JOURNAL ENTRY:

Cash 8,400,000
Subscription Receivable 8,400,000
` ##

Subscribed Ordinary Shares [(24,000 shares/2) x P10] 120,000

Ordinary shares (12,000 shares x P10) 120,000

Nov. 2 Issued 5,000 ordinary shares for an outstanding bank loan of P2,100,000, including
accrued interest of P100,000. KAYA CO.’s ordinary shares are quoted at P410 per
share on this date.

NOTE: EQUITY SWAP TRANSACTION - issuance of equity securities to extinguish an existing liability.

*ORDER OF PRIORITY:
1. FV of equity securities issued
2. FV of liability extinguished
3. Carrying value of the liability extinguished
 JOURNAL ENTRY:

Loan Payable 2,000,000

Accrued Interest Payable 100,000
Ordinary shares 50,000
(5000 shares x P10)
Share premium - OS 2,000,000
Gain on extinguishment of liability 50,000
` ##

NOTE:
Utang mo: P2,100,000
Binayaran mo: P2,050,000
Gain on extinguishment of liability: P50,000

Nov 10 Issued 10,000 preference shares for P1,250,000, with 10,000 warrants to acquire
5,000 ordinary shares at P400 per share. On this date, the warrants have a market
value of P10, but the preference share has no known market value ex-warrant.

NOTE: SHARE WARRANT - right given to investors to buy or acquire additional stocks
10,000 warrants:5,000 ordinary shares
1 warrant:2 ordinary shares

JOURNAL ENTRY:

Cash 1,250,000
Preference shares 1,000,000
(10,000 shares x P100)
Share premium - PS 150,000
Share warrants outstanding 100,000

COMPUTATION:
Issue Price - 1,250,000
Market value PS (assumed) 1,150,000
Market value of warrant 100,000
(P10 x 10,000 warrants)

TO ARRIVE AT ALLOCATED PRICE:

Issue Price 1,250,000
MV PS (MV-PS/Total Market Value) x ISSUE PRICE
MV-warrant (MV-warrant/Total Market Value) x ISSUE PRICE)
Total market value ISSUE PRICE

Note:
1. Kapag may binigay na MV ng Preference shares, walang naka attach na warrant.
2. Share warrants outstanding will form part of Share Premium - Ordinary shares at
year-end kung may balance pa.

Dec. 10 9,000 warrants issued on Nov. 10 were exercised and the remainder lapsed.

JOURNAL ENTRY:

Cash 1,800,000
(9/10 x 5000 shares x P400)
Share warrants outstanding 90,000
(9/10 x 100,000)
Ordinary shares 45,000
(9/10 x 5000 shares x P10)
Share premium - OS 1,845,000

##

Share Warrants Outstanding 10,000

Share premium - unexercised warrant 10.000
31 Net income for the first year of operations was P3,600,000.

JOURNAL ENTRY:

Income Summary 1,020,000

Retained Earnings 1,020,000

31 Declared a cash dividend of P10 per share on preference shares and P20 per share on
ordinary shares, payable on February 10 to shareholders of record on January 15.

JOURNAL ENTRY:

ORDINARY SHARES
Retained Earnings 1,786,000
Dividends Payable - OS 1,786,000

PREFERENCE SHARES
Retained Earnings 784,000
Dividends Payable - PS 784,000

Date Ordinary shares issued Preference shares issued

1/1 30,000

2/23 60,000

3/10 18,000

7/14 4,200 8,400

3,600

8/3 12,000

11/2 5,000

11/10 10,000

12/10 4,500

12,000 (subscribed share capital is

entitled to dividends)

89,300 ordinary shares 78,400 preference shares

Dividend P20 per share P10 per share

declared

Dividend P1,786,000 P784,000

payable

Date Preference SP-PS Ordinary SP-OS Retained

Shares Shares Earnings

1/1 300,000 1,140,000

2/23 6,000,000 3,000,000

(450,000)

3/10 180,000 6,840,000

(150,000)

4/10 10,560,000

7/14 840,000 540,000 36,000 1,404,000

42,000 1,638,000

8/3 120,000

11/2 50,000 2,000,000

 11/10 1,000,000 150,000 100,000

12/10 45,000 (100,000)

10,000
1,845,000

12/31 3,600,000
(1,786,000)
(784,000)

7,840,000 3,240,000 773,000 25,287,000 1,030,000

Statement presentation

Ordinary share capital, P10 par, 120K 773,000

shares authorized, 77,300 shares issued

Preference share capital, 10% P100 par, 7,840,000

240K shares authorized, 78,400 shares issued

Share premium - OS 25,287,000

Share premium - PS 3,240,000

Subscribed share capital, 12,000 shares 120,000

Subscription receivable(10,300,000 - (2,400,000

8,400,000)

Retained Earnings 1,030,000

Total Shareholder’s Equity 35,890,000

Based on the preceding information, calculate the balances of each of the following:

1. Preference share capital 7,840,000

2. Share premium – preference shares 3,240,000
3. Ordinary share capital 773,000
4. Retained earnings 1,030,000
5. Total shareholders’ equity 35,890,000
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