Page |1

CHAPTER 7
Exercise 7-1 p. 215

#s with false statements are: 3, 5, 9, 10, 13, 20

Exercise 7-2 pp. 216 – 218

1. B 6. A 11. B 16. B
2. A 7. A 12. A 17. D
3. B 8. B 13. C 18. D
4. B 9. C 14. A 19. B
5. C 10. C 15. D 20. A

Exercise 7-3 p. 219

4/1 Cash 15,000 shares x P12 = P 180,000
Ordinary Share Capital 15,000 shares x P5 = P 75,000
Share Premium – OS ………………………………….. 105,000

6/15 Retained Earnings ……………………….. P100,000

Dividends Payable ……………………………………… P100,000
(85,000 +15,000) x P1
6/30 No Entry

7/10 Dividends Payable ……………………….. P 100,000

Cash …………………………………………………..P 100,000

12/1 Cash 20,000 shares x P15 = P 300,000

Ordinary Share Capital 20,000 shares x P5 = P 100,000
Share Premium – OS ……………………………… 200,000

12/15 Retained Earnings ………………………… P156,000

Dividends Payable …………………………………. P 156,000
120,000 shares x P 1.30
 Page |2

Continuation - Exercise 7-3 p. 219

12/31 No Entry

1/5 Dividends Payable ………………………… P156,000

Cash …………………………………………………. P156,000

Exercise 7- 4 p. 219
Upon declaration of liquidating dividend:
Retained Earnings 100,000 shares x P 0.50 = P 50,000
Share Premium – OS 100,000 shares x P 4 = 400,000
Dividends Payable ………………………………………….P 450,000

Upon payment or distribution:

Dividends Payable ……………………………….. P 450,000
Cash ………………………………………………………… P 450,000

Exercise 7-5 p. 220

1) a. Treasury Shares – OS ………………………………… P 55,000

Cash ………………………………………………………………. P 55,000
2,000 shares x P 27.50

b. Cash 500 shares x P32 ………………………… P 16,000

Treasury Shares – OS ……500 shares x P 27.50 …………… P 13,750
Share Premium - Treasury Shares (OS) …………………….. 2,250

c. Cash 5,000 shares x P30 ……………………… P150,000

OS Capital ……5,000 shares x P 20 ……………….………… P100,000
Share Premium - OS …………………………………………… 50,000

d. Cash 1,000 shares x P52.50 …………………… P 52,500

PS Capital……1,000 shares x P50 ………………….………… P 50,000
Share Premium - PS ………………………………………….. 2,500
 Page |3

Continuation - Exercise 7-5 p. 220

e. Cash 600 shares x P26 ………………………… P 15,600

Share Premium –TS (OS) ……………………….. 900
Treasury Shares (OS) ……600 shares x P 27.50………….. P 16,500

f. Retained Earnings ……………………………………….. P 45,100

Dividends Payable ……………………………………………… P 45,100

PS = 8,000 shares x P 2 = P 16,000

OS = (30,000 – 900 shares) x P 1 = P 29,100

g. Dividends Payable ……………………………………….P 45,100

Cash ……………………………………………………………… P 45,100

h. Retained Earnings ………………………………………. P 24,750

Appropriated Retained Earnings for Treasury Shares ……… P 24,750
 Page |4

2)
Solar Corp.
Statement of Changes in Shareholders’ Equity
For the Fiscal Year Ended June 30, 2023

Share Share Share

Premium - Premium - Premium -
Unappr. Appropr. TS -

PS Capital PS OS Capital OS TS RE RE OS Total

Balance, 7/1/2021 350,000 28,000 500,000 90,000 - 537,000 - - 1,505,000

Profit 165,000 165,000
Cash dividends – OS (29,100) (29,100)
Cash dividends – PS (16,000) (16,000)
Issuance of OS 5,000 shares 100,000 50,000 150,000
Issuance of PS 1,000 shares 50,000 2,500 52,500
Purchase of TS (55,000) (55,000)
Reissuance of TS or Sale of TS 2,250 13,750 16,000
(900) 16,500 15,600
Appropriation for TS (24,750) 24,750 -0 -
Total 400,000 30,500 600,000 140,000 1,350 632,150 24,750 (24,750) 1,804,000

Shareholders’ Equity
1. Share Capital:
4% PS Capital, P50 par; 10,000 shares authorized; 8,000 shares issued and outstanding P 400,000
Share Premium – PS ……………………………………………………………………………… 30,500 P 430,500
OS Capital, P20 par; 50,000 shares authorized; 30,000 shares issued & 29,100 shares o/s P 600,000
Share Premium – OS ……………………………………………………………………………… 140,000 740,000
Share Premium – TS ……………………………………………………………………………… 1,350
Total Share Capital ………………………………………………………………………………………………… P1,171,850
Retained Earnings:
Unappropriated ……………………………………………………………………………………… P 632,150
Appropriated for TS ………………………………………………………………………………… 24,750 656,900
Total Share Capital and Retained Earnings …………………………………………………………………………….. P1,828,750
Less: Treasury Shares- OS ………………………………………………………………………………………………. (24,750)
Total Shareholders’ Equity P1,804,000
==========
 Page |5

Exercise 7-6 p. 221

Note: in #2, change 2020 with 2022 Millenium Corp.
Statement of Retained Earnings
For the year ended December 31, 2023

Unappropriated Retained Earnings, 1/1/2023 …………………………………….. P750,000

Less: Correction for Overstatement of 2022 Net Income due to depreciation error (45,000)
Adjusted Balance on January 1, 2023 P705,000
Add: 2023 Net Income ………………………………………………………………….. 350,000
Total ……………………………………………………………………………………….P1,055,000
Less: Cash Dividends Declared ……………………………………………………….. (180,000)
Share Dividends Declared ……………………………………………………… ( 90,000)
Unappropriated Retained Earnings, 12/31/2023 …………………………………….. P 785,000
=========
Exercise 7-7 p. 221
2021 2022 2023

a) PS=9%x10,000shrs.xP100=P90,000 PS = P90,000 PS = P90,000

OS =150,000-90,000 = 60,000 OS = 240,000 - 90,000 = 150,000 OS = 560,000 - 90,000 = 470,000
P150,000 Exercise 7-8 p. 222
DPS: DPS: DPS:
PS=P90,000/10,000 shrs.o/s=P9/shr. PS=P90,000/10,000 shrs.o/s=P9/shr. PS=P90,000/10,000 shrs.o/s=P9/shr.
OS=P60,000/300,000shrs.o/s=P0.20/shr. OS=P150,000/300,000shrs.o/s=P0.50/shr. OS=P470,000/300,000shrs.o/s=P1.57/shr

b) PS=9%x20,000shrs.xP100x1=P180,000 PS = P180,000 PS = P180,000

OS = -0- OS = 60,000 OS = 380,000
P240,000 P560,000
DPS: DPS: DPS:
PS=P150,000/20,000shrs.o/s=P7.50/shr. PS=P180,000/20,000 shrs.o/s=P9/shr. PS=P180,000/20,000 shrs.o/s=P9/shr.
OS= -0- OS=P60,000/250,000shrs.o/s=P0.24/shr. OS=P380,000/250,000shrs.o/s=P1.52/shr.

c) PS=9%x20,000shrs.xP100x1=P180,000 PS = P180,000 PS = P180,000

Paid Dividends for PS 150,000 Unpaid div. in 2018 30,000 OS = 560,000 – 180,000= 380,000
Unpaid in 2018 P 30,000 P210,000 P560,000
OS = 30,000
Total Dividends Paid in 2019 P 240,000
DPS: DPS: DPS:
PS=P150,000/20,000shrs.o/s=P7.50/shr. PS=P210,000/20,000shrs.o/s=P10.50/shr. PS=P180,000/20,000 shrs.o/s=P9/shr.
OS= -0- OS=P30,000/250,000shrs.o/s=P0.12/shr. OS=P380,000/250,000shrs.o/s=P1.52/shr.
 Page |6

PS OS
1. 60,000 shares x 5% x P50= P150,000
========
900,000 – 150,000 = P750,000
========
2. 60,000 shares x 5% x P50 x 2 years= P300,000
========
900,000 – 300,000 = P600,000
========
3. 60,000 shares x 5% x P50= P150,000

300,000 shares x 5% x P30 P450,000

PS = 3/12 x P300,000 P 75,000

OS = 9/12 x P300,000 _________ P 225,000
P 225,000 P 675,000
========= =========
4. Same computation with #3
5. 60,000 shares x 5% x P50 x 4 years P600,000
========
300,000 shares x 5% x P30 = P450,000* P300,000 *

Not enough to achieve the initial distribution of 5% to OS

before participation.

Exercise 7-9 p. 222

1-a) Retained Earnings 40,000 shares x 4% x P15 = P24,000
Ordinary Share Dividend Distributable 40,000 shares x 4% x P10 = P16,000
Share Premium – OS ……………………………………………………….. 8,000

1-b) Ordinary Share Dividend Distributable …………………………………………P16,000

 Page |7

Ordinary Share Capital …………………………………………………………….. P16,000

2-a) 400,000 + 42,500 = P442,500

2-b) P299,500
2-c) P442,500 + 299,500 = P 742,000

3-a) 442,500+24,000 = P466,500

3-b) P299,500 – 24,000 = P275,500
3-c) P742,000

PROBLEM 7-2 pp. 226-228

1. C 6. B 11. A
2. A 7. C 12. D
3. C 8. B 13. A
4. C 9. C 14. D
5. A 10. B 15. D

Stock Conversion

Preference Shares are convertible when it can be exchanged by its owner for some other security of the issuing corporation.
Shareholders may be permitted by the terms of their share agreement or by special action of the corporation to exchange their
holdings for shares of other classes. Conversion rights generally provide for the exchange of Preference Shares into Ordinary
Shares. The conversion of preference shares into ordinary shares will be decided during the Annual Shareholders’ Meeting. The
resolution to convert preference shares into ordinary shares also requires the approval of the holders of preference shares. Following
the principle of “one share – one vote” which stipulates that from a corporate governance perspective, each share should carry a
voting right. This conversion would be attractive when the company has done well, allowing the preference shareholders to escape
from the preferred dividend limits. The conversion of preference shares into ordinary shares is a transaction which does not result in
a profit realization. No gain or loss is recognized by the issuer on these conversions because it is an exchange of one form of equity
for another. In certain instances, the exchanges may affect only Share Capital accounts or it may affect both Share Capital and
Retained Earnings accounts.

Problem #1: Assume that the Shareholders’ Equity of Pinoy Corp. on December 31, 2022,
is as follows:
 Page |8

Preference Share Capital, P 50 par, 10,000 shares ………P 500,000

Share Premium – PS ……………………………………….. 100,000
Ordinary Share Capital, P1 par, 100,000 shares …………… 100,000
Share Premium – OS ……………………………………… 2,900,000
Retained Earnings ……………………………………………. 1,000,000
Each preference share is convertible into 4 ordinary shares at any time at the option of the shareholder.

Case A: On December 31, 2022, 1,000 preference shares are exchanged for 4,000
ordinary shares.

Preference Share Capital, P50 par…………………P 50,000

Share Premium – PS ………………………………. 10,000
Ordinary Share Capital, P1 par ………………………………P 4,000
Share Premium – OS …………………………………………. 56,000
Conversion of 1,000 preference shares into
4,000 ordinary shares

Case B: Assume instead that the par value of the ordinary shares is P 20 and there are
1,000 preference shares converted into 4,000 ordinary shares.

Preference Share Capital, P 50 par ………………….P 50,000

Share Premium – PS ………………………………… 10,000
Retained Earnings ………………………………….. 20,000
Ordinary Share Capital, P 20 par …………………………….P 80,000
Conversion of 1,000 preference shares into
4,000 ordinary shares