Exercise Session 5

(maximum 45 minutes)
Question 1

Briefly explain :

1. Distinguish between contributed capital (paid-in capital) and retained earnings.

2. Distinguish between ordinary and preference shares.
3. Explain each of the following terms: authorized ordinary shares, unissued ordinary shares, issued
ordinary shares, outstanding ordinary shares, and treasury shares.
4. What are the bases for share valuation when assets other than cash are received for issued shares?
5. Explain how underwriting costs and accounting and legal fees associated with the issuance of
shares should be recorded.

Question 2

Rainy Corporation has the following capital structure at the beginning of the year of 2022:

Item Amount
Share capital—preference 6%, $50 par value, 50,000 shares authorized, 6,000 $300,000
shares issued and outstanding
Share capital—ordinary, $10 par value, 300,000 shares authorized, 40,000 shares 400,000
issued and outstanding
Share premium—ordinary 110,000
Retained earnings 440,000
Total $1,250,000

Below are the transactions during 2022 :

January 10 Purchased 2,000 ordinary shares of to be held as treasury shares, paying $16 per
share. Rainy uses the cost method.
March 20 Issued 5,000 shares of ordinary shares and 1,000 shares of preference shares for a
lump sum of $180,000. The fair value of the ordinary shares is $18 each and fair value
of the preference shares is $60 each.
June 1 Declared the preference cash dividend and $0,50 per share cash dividend to ordinary
shareholders of record as of June 14, payable June 30.
June 30 Paid cash dividend to all shareholders.
August 15 Issued 6,000 ordinary shares for land. The fair value of the land was $80,000. Costs
related to the issuance of the shares totalling $1,000.
October 1 Sold all the treasury shares at $18 per share.
December 5 Declared a 2-for-1 share split for ordinary shares.
December 31 Reported net income of $120,000 for 2022.

Required (show all supporting computations):

1. Prepare the journal entries for the transactions listed above.
2. Prepare the equity section of the statement of financial position for Rainy at December 31,
2022.

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