Shareholders Equity Problems and Solutions

PROBLEMS and SOLUTIONS
Practical Accounting 1 – Corporation

By Conrado Valix
PROBLEM 24-1 (IAA)
Extra Company provided the following data at year end:

Authorized share capital 5,000,000
Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost 100,000
What total amount should be reported as shareholders equity?

a. 5,100,000
b. 5,500,000
c. 4,900,000
d. 4,800,000
SOLUTIONS 24-1. ANSWER A

Authorized share capital 500,000
Unissued share capital (2,000,000)
Issued share capital 3,000,000
Subscribed share capital 1,000,000
Subscription receivable (400,000) 600,000
Share Premium 500,000
Unappropriated 600,000
Appropriated 300,000 900,000
Total 5,200,000
Treasury shares (100,000)
Shareholders’ equity 5,100,000
PROBLEM 24-2 (PHILCPA ADOPTED)
Bai Company provided the following information at year end:

Preference share capital, P100 par 3,000,000
Share premium- preference share 500,000
Ordinary share capital, P10 par 6,000,000
Share premium- ordinary share 2,000,000
Subscribed ordinary share capital 4,000,000
Retained earnings 2,500,000
Subscription receivable – ordinary share 1,000,000
What is the amount of legal capital?

a. 15,500,000
b. 13,000,000
c. 15,000,000
d. 12,000,000
SOLUTION 24-2 ANSWER B

Preference share capital 3,000,000
Ordinary share capital 6,000,000
Total Legal capital 13,000,000
PROBLEM 24-3 (AICPA ADOPTED)
At the beginning of the current year, Ria Company issued 10,000 ordinary shares P20 par value
and 20,000 convertible preference shares of P20 par value for a total of P800,000.
At this date, the ordinary share was selling for P36 and the convertible preference share was
selling for P27.
1. What amount of the proceeds should be allocated to the preference shares?
a. 600,000
b. 540,000
c. 480,000
d. 440,000
2. What amount of the proceeds should be allocated to the ordinary shares?
a. 360,000
b. 200,000
c. 320,000
d. 400,000
3. What amount should be recorded as share premium from the issuance of preference
shares?
a. 180,000
b. 100,000
c. 80,000
d. 0
4. What amount should be recorded as share premium from the issuance of ordinary
shares?
a. 200,000
b. 160,000
c. 120,000
d. 0
SOLUTION 24 – 3
Question 1: Answer C
Market Value Fraction Allocated
Proceeds
Ordinary shares (10,000x36) 360,000 36/90 320,000
Preference shares 540,000 54/90 480,000
900,000 800,000
Proceeds from preference shares 480,000
Par value of preference shares (20,000 x 20) 400,000
Share Premium – preference shares 80,000
Proceeds from ordinary shares 320,000
Par value of ordinary shares (10,000x20) 200,000
Share Premium-ordinary shares 120,000
JOURNAL ENTRY
Cash 800,000
Preference share capital 400,000
Share premium-preference 80,000
Ordinary share capital 200,000
Share Premium- ordinary 120,000
PROBLEM 24-4 (AICPA ADOPTED)
At the beginning of the current year, Cove Company a closely held entity, issued 6% bonds with
a maturity value of P6,000,000, together with 10,000 ordinary shares of P50 par value, for a
combine cash amount of P11,000,000.
If issued separately, the bonds would have sold for P4,000,000 on an 8% yield to maturity basis.
1. What amount of the proceeds should be allocated to the ordinary shares?

a. 4,000,000
b. 7,000,000
c. 8,000,000
d. 5,000,000
2. What amount should be reported for share premium on the issuance of the ordinary
shares?
a. 7,500,000
b. 6,500,000
c. 5,500,000
d. 4,500,000
SOLUTION 24-4
Question 1: Answer B
Cash Received 11,000,000
Market Value of bonds payable (4,000,000)
Residual amount allocated to ordinary shares 7,000,000
Par value of ordinary shares (10,000x50) (500,000)
Share premium 6,500,000
Cash 11,000,000
Discount on bonds payable 2,000,000
Bonds payable 6,000,000
Share capital 500,000
PROBLEM 24-5 (AICPA ADAPTED)
At the beginning of current year, Ashe company was organized with authorized capital of
100,000 shares of P200 par value.
January 10 Issued 25,000 shares at P220 a share
March 25 Issued 1,000 shares for legal services when the fair value was P240 share
September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a
share
1. What amount should be responded as share capital?
a. 7,640,000
b. 6,200,000
c. 7,440,000
d. 5,000,000
2. What amount should be reported for share premium?
a. 840,000
b. 800,000
c. 540,000
d. 500,000
SOLUTION 24-5
January 10 (25,000x200) 5,000,000
March 25 (1,000x200) 200,000
September 30 (5,000x200) 1,000,000
Share capital 6,200,000
Question 2: Answer A
January 10 (25,000x20) 500,000
March 25 (1,000x40) 40,000
September 30 (5,000x60) 300,000
Total share premium 840,000
PROBLEM 24-6 (IAA)

On January 1, 2019, Baguio company was incorporated with the following authorized
capitalization:
Ordinary share capital, 200,000 shares, no par, P100 stated value 20,000,000
Preference share capital, 200,000 shares, 10% fixed rate, P50 par value 10,000,000
During 2019, the entity issued 150,000 ordinary shares for a total of P18,000,000 and 50,000
preference shares at P60 per share.
In addition, on December 15, 2019, subscriptions for 20,000 preference shares were taken at a
purchase price of P100. These subscribed shares were paid for on January 15, 2020.
Net income for 2019 was P5,000,000.
What amount should be reported as total contributed capital on December 31, 2019?
a. 28,000,000
b. 21,000,000
c. 23,000,000
d. 26,000,000
SOLUTION 24-6 ANSWER C
Ordinary share capital – 150,000 shares 18,000,000

Preference share capital – 50,000x60 3,000,000
Subscribed preference share capital – 20,000 x 100 2,000,000
Total distributed capital 23,000,000
PROBLEM 24-7
During the current year, Hyatt Company issued for P110 per share, 15,000 convertible
preference shares of P100 par value.
One preference share may be converted into three ordinary shares of P25 par value at the
option of the preference shareholder.
At year-end, all of the preference shares were converted into ordinary shares. The market value
of the ordinary share at the conversion date was P40.
1. What amount should be credited to ordinary share capital as a result of conversion?

a. 1,125,000
b. 1,500,000
c. 1,650,000
d. 1,800,000
2. What amount should be credited to share premium as a result of conversion?
a. 375,000
b. 525,000
c. 150,000
d. 0
SOLUTION 24-7 QUESTION 1 ANSWER A QUESTION 2 ANSWER B

To record the issuance of preference shares:
Cash (15,000 x 110) 1,650,000
Share premium- preference 150,000
To record the conversion of preference shares into ordinary shares:

Share premium – preference 150,000
Share premium-ordinary 525,000
(15,000 preference shares x 3 = 45,000 ordinary shares)
PROBLEM 24-8 (IAA)

On January 1, 2019, Penn Company began operations by issuing at P15 per share one-half of the
950,000 ordinary shares of P1 par value that had been authorized for issue.
In addition, the entity had P1,025,000 of net income and declared P230,000 of dividend.
During 2020, the entity had the following transactions:
 Issued 100,000 ordinary shares for P17 per share.
 Issued 150,000 preference shares for P8 per share.
 Authorized the purchase of custom-made machine to be delivered in January 2021. The
entity restricted P300,000 of retained earnings for the purchase of the machine.
 Issued additional 50,000 preference shares for P9 per share.
 Record P1,215,000 of net income and declared on December 31,2020 a dividend of
P635,000 to shareholders of record on January 15, 2021 to be paid on February 1, 2021.
1. What amount should be reported as total shareholder’s equity on December 31, 2019?
a. 7,920,000
b. 7,125,000
c. 8,150,000
d. 8,380,000
2. What amount should be reported as total shareholders’ equity on December 31, 2020?
a. 11,850,000
b. 11,550,000
c. 12,485,000
d. 10,635,000
SOLUTION 24-8
Issuance of ordinary shares on January 1, 2019
(950,000 x ½ x 15) 7,125,000
Net income for 2019 1,025,000
Dividend Declared in 2019 (230,000)
Total shareholders’ equity – December 31, 2019 7, 920,000
Shareholders’ equity- December 31, 2019 7,920,000
Issuance of ordinary shares (100,000 x 17) 1,700,000
Issuance of preference shares (150,000 x 8) 1,200,000

Issuance of preference shares (50,000 x 9) 450,000
Dividend declared in 2020 (635,000)
Total shareholders’ equity – December 31, 2020 11,850,000
PROBLEM 24-9
At the beginning of current year, Guess Company was organized and authorized to the issue
100,000 shares with P50 par value.
During the current year, the entity had the following transactions relating to shareholder’s
equity.
 Issued 10,000 shares at P70 per share
 Issued 20,000 shares at P80 per share
 Reported net income of P1,000,000
 Paid dividends of P200,000
 Purchased 3,000 treasury shares
1. What amount should be reported as share capital at year end?

a. 1,500,000
b. 3,300,000
c. 1,200,000
d. 1,800,000
2. What amount should be reported as share premium at year end?
a. 800,000
b. 200,000
c. 600,000
d. 0
3. What amount should be reported as total shareholder’s equity at year end?
a. 2,800,000
b. 3,000,000
c. 3,300,000
d. 2,000,000
4. What amount should be reported as contributed capital at year end?
a. 2,300,000
b. 1,500,000
c. 3,000,000
d. 2,000,000
Solution 24-9
Question 1 Answer A
Issued (10,000shares x 50) 500,000
Issued (20,000 shares x 50) 1,00,000
Share Capital 1,500,000
Question 2 Answer A
Issued (10,000shares x 20) 200,000
Issued (20,000 shares x 30) 600,000
Question 3 Answer A

Retained Earnings 800,000
Treasury Shares (3,000x100) (300,000)
Total Shareholder’s Equity 2,800,000
Net Income 1,000,000

Dividends Paid (200,000)
Question 4 Answer A

PROBLEM 24-10
Levi Company provided the following information from a comparative statement of financial
position:
December 31, 2020 December 31,2019
Share Capital, P5par 7,500,000 4,500,000
Share Premium 52,000,000 40,000,000
Retained Earnings 19,500,000 15,500,000
Treasury Shares, at cost, 600,000 shares
On December 31,2020 and 400,000 shares
On December 31,2019 7,000,000 5,000,000
1. What is the number outstanding shares on December 31, 2020?

a. 1,500,000
b. 1,000,000
c. 900,000
d. 600,000
2. What is the number outstanding shares on December 31, 2019?
a. 900,000
b. 500,000
c. 400,000
d. 700,000
3. How many shares were issued during 2020?
a. 600,000
b. 300,000
c. 200,000
d. 500,000
4. What was the average price of additional shares issued in 2020?
a. 25
b. 20
c. 10
d. 5
SOLUTION 24-10
Question 1 Answer C
Share issued- December 31 2020 (7,500,000/P5 par) 1,500,000
Treasury Shares-December 31,2020 (600,000)
Shares Outstanding December 31,2020 900,000
Question 2 Answer B
Share issued- December 31 2019 (4,500,000/P5 par) 900,000

Treasury Shares-December 31,2019 (400,000)
Shares Outstanding December 31,2019 500,000
Question 3 Answer A
December 31, 2020 December 31,2019 Increase
Share Capital 7,500,000 4,500,000 3,000,000
Share Premium 52,000,000 40,000,000 12,000,000
Total issue price in 2020 15,000,000

Divide by shares issued during 600,000
2020
Average issue Price 25
Day Company held 10,000 shares of P10 par value as treasury reacquired for P120,000. At year
end, the entity reissued all 10,000 shares for P190,000.
What id credited for the excess of the reissue price over the cost of treasury shares?
a. Share capital P100,000
b. Retained Earnings P70,000
c. Gain on sale of investment P70,000
d. Share premium P70,000
SOLUTION 25-1 ANSWER D

1. The treasury shares are recorded at cost
2. If the treasury shares are reissued or sold at more than cost, the gain is credited to the
share premium.
3. If the shares are sold at less than cost, the loss on sale is debited to the following:
a. Share premium from treasury shares
b. Retained Earnings
4. If the treasury shares are not reissued but retired, any gain on retirement cost less than par)
is credited to share premium.
5. If the treasury shares are not reissued but retired, any loss on retirement (cost more than
par) is debited to the following:
a. Share Premium from original issuance
b. Share Premium from treasury shares
c. Retained Earnings
PROBLEM 25-2
At the beginning of current year, Rona Company issued 50,000 shares of P10 par value for P100
per share.
During the year, the entity reacquired 2,000 shares at P150 per share and immediately
cancelled these 2,000 shares.
1. In connection with the retirement of shares, what amount should be debited to share
premium?
a. 20,000
b. 100,000
c. 180,000
d. 280,000
2. In connection with the retirement of shares, what amount should be debited to retained
earnings?
a. 280,000
b. 180,000
c. 100,000
d. 0
SOLUTION 25-2
Question 1 Answer C
Question 2 Answer C
Share Capital (2,000x10) 20,000
Share Premium (2,000x90) 180,000
Retained Earnings (balancing) 100,000
Cash 300,000
If an entity’s share capital is retired, the share capital is reduced by the par value.
If the retirement results in a loss (cost exceeds par value) such loss is debited to:
a. Share premium from original issuance first

b. Share premium from treasury shares second
c. retained earnings last
PROBLEM 25-3 (IAA)

At the beginning of current year, Hanna Company reported the following shareholder’s equity:
Share Premium 1,500,000
Retained Earnings 2,000,000
Share Capital, P10 par, outstanding 225,000 shares 2,250,000
During the current year, the entity had the following transactions:
 Acquired 10,000 treasury shares for P50 per share or P500,000.
 Sold 5,000 treasury shares at P 60 a share
 Sold 2,000 treasury shares at P45 per share
 Net Income for the year was P2,500,000
1. What amount should be reported as total amount of share premium at year-end.

a. 1,500,000
b. 1,560,000
c. 1,540,000
d. 2,550,000
2. What amount should be reported as share capital at year-end?
a. 2,250,000
b. 2,150,000
c. 2,320,000
d. 2,300,000
3. What amount should be reported as total shareholder’s equity at year-end?
a. 8,140,000
b. 8,300,000
c. 8,250,000
d. 8,290,000
SOLUTION 25-3
QUESTION 1 ANSWER C
Treasury Shares 500,000
Cash 500,000
Cash (5,000 x50) 300,000

Treasury Share (5,000x 50) 250,000
Share-Premium Treasury 50,000
Cash (2,000x 45) 90,000

Share-Premium Treasury 10,000
Treasury Share (2,000x50) 100,000
Share Premium-issuance January 1 1,500,000

Share Premium- Treasury (50,000-10,000) 40,000
1,540,000
QUESTION 2 ANSWER A
The share capital issued is not affected by the acquisition and sale of treasury share.
QUESTION 3 ANSWER A
Treasury Share (3,000 shares remaining x 50) (150,000)
Total Shareholder’s Equity 8,140,000
Retained Earnings- Beginning 2,000,000

Net Income for the year 2,500,000
Retained Earnings- Ending 4,500,000
At year end, Pack Company canceled 5,000 shares of P50 par value held in treasury at an
average cost of P120 per share.
Before recording the cancelation of the treasury shares, the entity had the following balances:
Share capital issued originally at P75 per share 2, 500, 000

Share Premium 1, 250, 000
Retained earnings 1, 000, 000
Treasury shares at cost 600, 000
1. What amount should be reported as adjusted share capital at year-end?

a. 2,250,000
b. 2,500,000
c. 1,900,000
d. 2,125,000
2. What amount should be reported as adjusted share premium at year-end?
a. 1,250,000
b. 1,125,000
c. 900,000
d. 800,000
3. What amount should be reported as adjusted retained earnings at year-end?
a. 1,000,000
b. 1,200,000
c. 775,000
d. 650,000
SOLUTION 25-4
Question 1 Answer a
Share capital 2, 000, 000
Par value of treasury shares canceled (5, 000 x 50) 250, 000
Adjusted share capital 2, 250, 000
Question 2 Answer b
Share premium 1, 250, 000
Share premium of treasury shares canceled (5, 000 x 50) (125, 000)
Adjusted share premium 1, 125, 000
Question 3 Answer c
Retained earnings 1, 000, 000
Loss on cancelation of treasury shares (225, 000)
Adjusted retained earnings 775, 000
Cost of treasury shares 600, 000

Original issue price of treasury shares (375, 000)
Loss on cancelation of treasury shares 225, 000
Journal entry for the cancelation

Share capital (5, 000 x 50) 250, 000
Share Premium (5, 000 x 25) 125, 000
Retained earnings 225, 000
Treasury shares 600, 000
Vicar Company was organized at the beginning of current year with 100,000 authorized shares
of P100 par value and issued 75,000 shares P140 per share.
During the year, the entity purchased 5,000 shares at P110 per share. The entity used the par
value method to record the purchase of the treasury shares.
1. What is the balance of the share premium from the original issuance of shares at year-end?
a. 3,000,000
b. 2,800,000
c. 4,000,000
d. 3,800,000
2. What is the balance of the share premium from treasury shares at year-end?
a. 200,000
b. 150,000
c. 50,000
d. 0
SOLUTION 25-5
QUESTION 1 ANSWER B (3,000,000-200,000) 2,800,000

Cash (75, 000 x 140) 10, 500, 000
Share capital (75, 000 x 100) 7, 500, 000
Share premium- issuance 3, 000, 000
QUESTION 2 ANSWER B 150,000
Under the par value method, the treasury shares account is debited at par and any share
premium from original issuance is canceled.
Treasury shares (5, 000 x 100) 500, 000
Share Premium (5, 000 x 40) 200, 000
Cash ( 5, 000 x 110) 550, 000
Share premium-Treasury shares (balancing) 150, 000
The shareholders of Dorr Company approved a two-for-one share split and an increase in
authorized shares from 100,000 shares with P20 par value to 200,000 shares with P10 par value.
The shareholders’ equity accounts immediately before the split shares were share capital
P1,000,000 share premium P150,000 and retained earnings P1,350,000.
1. What is the balance of the share premium after the share split is affected?
a. 1,150,000
b. 2,300,000
c. 150,000
d. 300,000
2. What is the balance of the retained earnings after the share split effected?
a. 1,350,000
b. 2,700,000
c. 1,500,000
d. 2,350,000
SOLUTION 25-6
QUESTION 1 ANSWER C
QUESTION 2 ANSWER A
Share split does not affect the elements of shareholders’ equity. Only the number of shares and
par value are affected.
Share split up increases the number of shares but decreases the par value.
Beck Company issued 200,000 ordinary shares when it began operations and issued an
additional 100,000 shares in the current year.
During the current year, the entity also issued preference shares convertible into 100,000
ordinary shares and purchased 75,000 ordinary shares to be held in treasury.
At year-end, how many ordinary shares were outstanding?

a. 400,000
b. 325,000
c. 300,000
d. 225,000

Total ordinary shares issued (200,000 + 100,000) 300, 000
Treasury shares (75, 000)
Ordinary shares outstanding 225, 000
Seco Company was incorporated at the beginning of current year:

Jan. 2 Number of shares authorized 80,000
Feb. 1 Number of shares issued 60,000
July. 1 Number of shares reacquired but not canceled 5,000
Dec. 1 Two-for-one share split
What is the number of shares outstanding at year-end?

a. 150,000
b. 120,000
c. 115,000
d. 110,000
Issued shares after split (60, 000 x 2) 120, 000
Treasury shares after split (5, 000 x 2) (10, 000)
Outstanding shares 110, 000
The treasury shares are included in the share split
At the beginning of current year, Very Company had 125,000 shares issued which included
25,000 shares held as treasury.
January 1 through October 31- 13, 000 treasury shares were distributed to officers as part of a
share compensation plan.
November 1- A3- for-1 share split took effect.
December 1- The entity purchased 5, 000 of its own shares to discourage an unfriendly
takeover. These shares were not retired.
1. How many shares were issued at year-end?

a. 375,000
b. 300,000
c. 450,000
d. 125,000
2. How many shares were outstanding at year-end?
a. 334,000
b. 324,000
c. 300,000
d. 285,000
SOLUTION 25-9
QUESTION 1 ANSWER A
QUESTION 2 ANSWER A
Issued shares after split (125,000 x 3) 379, 000
Old treasury shares ( 12,000 x 3) (36, 000)
New treasury shares (5, 000)
Outstanding shares 334, 000
PROBLEM 25-10 (AIDPA ADAPTED)
At the beginning of current year, Nest Company issued 100,000 0rdinary shares. Of these 5,000
shares were held as treasury.
During the current year, the entity reported the following transactions:
May 1 1,000 shares of treasury were sold

Aug. 1 10,000 unissued shares were sold
Nov. 15 A 2-for-1 share split took effect.
1. How many shares were issued at year-end?

a. 220,000
b. 110,000
c. 222,000
d. 106,000
2. How many shares were outstanding at year-end?
a. 212,000
b. 216,000
c. 214,000
d. 218,000
SOLUTION 25-10
QUESTION 1 ANSWER A
QUESTION 2 ANSWER A
Original shares issued 100, 000

New shares issued 10, 000
Total shares issued before split 110, 000
Shares issued after split 220, 000

Treasury shares after split (8, 000)
Outstanding ordinary share 212, 000
At the beginning of current year, Rudd Company had 700,000 ordinary shares authorized and
300,000 shares outstanding
January 31 Declared 10% share dividend

June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-1 share split
How many ordinary shares are outstanding at year-end?

a. 560,000
b. 600,000
c. 630,000
d. 660,000
SOLUTION 25-11 ANSWER A

Original shares 300, 000
Share dividend (10% x 300,000) 30, 000
Total shares issued before split 330, 000
Remaining treasury shares (50, 000)
Outstanding shares before split 280, 000
Share issued after split (330, 000 x 2) 660, 000

Treasury shares after split (50, 000 x 2) (100, 000)
Outstanding shares after split 560, 000
Newton Company was organized on January 1, 2019. On that date, it issued 200,000 ordinary
shares of P10 par value at P15 per share. The entity was authorized to issue 400,000 0rdinary
shares.
During the period January 1, 2019 through December 31, 2020, the entity reported net income
of P750,000 and paid cash dividend of P380,000.
On January 5, 2020, the entity purchased 12,000 ordinary shares at P12 per share.
On December 31,2020, 8,000 treasury shares were sold at P8 per share and the remaining
treasury shares were retired. The entity used the cost method of accounting for treasury shares.
What amount should be reported as total shareholders’ equity on December 31, 2020?
a. 3,290,000
b. 3,338,000
c. 3,370,000
d. 3,306,000

Issuance of ordinary shares (200, 000 x 15) 3, 000, 000
Net income 750, 000
Cash dividend paid (380, 000)
Purchase of treasury shares (12, 000 x 12) (144, 000)
Sale of treasury shares (8, 000 x 8) 64, 000
Retirement of treasury shares -
Total shareholders’ equity – December 31, 2020 3, 290, 000
The retirement of treasury shares affects the elements of shareholders’ equity but no longer
affects the total amount of shareholders’ equity.
PROBLEM 25-13 (IAA)

Kalinga Company reported the following shareholders’ equity at the beginning of current year:
Preference share capital, 100,000 shares, P10 par 1,000,000
Ordinary share capital, 500,000 shares, P10 par 5,000,000
Share premium – Preference 50,000
Share premium – Ordinary 200,000
Retained earnings 100,000
During the current year, the following transactions were completed:
Retirement of 5,000 preference shares at P11 per share.
Purchase of 5,000 ordinary shares of treasury at P12 per share.
Share split, ordinary share 2 for 1.
Reissue of 2,000 shares of treasury at P10 per share.
Net income for the year, P300,000.
What amount should be reported as total shareholders’ equity at year-end?
a. 6,255,000
b. 6,350,000
c. 6,555,000
d. 6,560,000
ANSWER C
SOLUTION 25-13
Shareholders’ equity – January 1 6,350,000
Retirement of preference shares (5,000 x 11) (55,000)
Purchase of treasury shares (5,000 x 12) (60,000)
Share split – no effect –
Reissue of treasury shares (2,000 x 10) 20,000
Net income 300,000
Shareholders’ equity – December 31 6,555,000
PROBLEM 25-14 (IAA)

At the beginning of current year, Juan Company was organized with 100,000 authorized shares
of P100 par value. The following transactions occurred during the year:
January 15 Sold 30,000 shares at P150 per share
February 14 Issued 2,000 shares for legal services with a fair value of P250,000. The
shares on this date are quoted at P140 per share.
March 27 Purchased 5,000 treasury shares at a cost of P120 per share
October 31 Issued P5,000,000 convertible bonds at 120. The bonds are quoted at 98
without the conversion feature.
November 5 Declared a 2-for-1 share split when the market value of the share was
P160.
December 15 Sold 20,000 shares at P75 per share.
December 31 Net income for the year was P2,000,000.
a. 5,200,000
b. 3,600,000
c. 4,200,000
d. 5,300,000
2. What amount should be reported as share premium at year-end?
a. 2,050,000
b. 3,150,000
c. 3,130,000
d. 2,650,000
3. What is the total shareholders’ equity at year-end?
a. 8,750,000
b. 7,650,000
c. 9,350,000
d. 9,250,000
Solution 25-14
QUESTION 1: ANSWER C
Jan. 1 (30,000 shares x 100 par value) 3,000,000
Feb. 1 ( 2,000 shares x 100 par value) 200,000
Dec. 15 ( 20,000 shares x 50 par value) 1,000,000
Original par 100

value
Split 2 for 1 2
New par value 50
QUESTION 2: ANSWER B
Jan. 1 (30,000 shares x 50) 1,500,000
Feb. 1 (250,000 – 200,000) 50,000
Oct. 31 Conversion feature 1,100,000
Dec. 15 ( 20,000 x 25) 500,000
Issue price of bonds (5,000,000 x 120) 6,000,000

Market price of bonds without
conversion feature (5,000,000 x 98) 4,900,000
Share premium – conversion feature 1,100,000
QUESTION 3: ANSWER A
Retained earnings – net income 2,000,000
Treasury shares (5,000 x 120) (600,000)
Total shareholders’ equity 8,750,000
Shares before share split (30,000 + 2,000) 32,000

Multiply by share split 2
Shares issued after share split 64,000
Treasury shares after share split (5,000 x 2) (10,000)
Shares outstanding after share split 54,000
Shares issued after share split 20,000
Total shares outstanding 74,000
PROBLEM 25-15
At the beginning of current year, Franta Company was authorized to issue share capital of
100,000 shares with P50 par value. The entity had the following share capital transactions
during the year:
Jan. 1 Sold 8,000 shares at P60 per share.
May 1 Reacquired 4,000 treasury shares at P65 per share.
July 1 Approved a share split of 5 for 1.
Oct. 31 Issued a 10% share dividend when the market value of a share is P25.
Dec. 31 Reissued all of the treasury shares at P30.
Dec. 31 Net income for the year was P3,000,000.
1. What is the number of shares outstanding at year-end?
a. 418,000
b. 438,000
c. 440,000
d. 422,000
a. 4,000,000
b. 4,380,000
c. 3,800,000
d. 3,760,000
3. What total amount should be reported as share premium at year-end?
a. 1,370,000
b. 1,710,000
c. 1,400,000
d. 1,970,000
4. What amount should be reported as total shareholders’ equity at year-end?
a. 8,140,000
b. 7,800,000
c. 7,560,000
d. 8,450,000
Solution 25-15
Share issued as split (80,000 x 5) 400,000
Treasury shares as split ( 4,000 x 5) (20,000)
Outstanding shares 380,000
10% share dividend 38,000
Reissuance of treasury shares 20,000
Total outstanding shares 438,000
Share capital (438,000 shares x 10 par value after split) 4,380,000
Share premium - issuance (80,000 x 10) 800,000
Share premium – share dividend (38,000 x 15) 570,000
Share premium – treasury 340,000
Total share premium 1,710,000
Market price on October 31 25

New par value after split (50/5) 10
Share premium – share dividend 15
Reissue of treasury shares (20,000 x 30) 600,000

Cost of treasury shares ( 4,000 x 65) (260,000)
Share premium - treasury 340,000
QUESTION 4: ANSWER A
Retained earnings – net income 3,000,000

Share dividend (38,000 x 25 market value) (950,000)
Adjusted retained earnings 2,050,000
PROBLEM 26-1 (AICPA Adapted)

East Company had sufficient retained earnings in 2019 as a basis for dividends but was
temporarily short of cash.
The entity declared a dividend of P1,000,000 on April 1, 2019, and issued promissory notes to
the shareholders in lieu of cash.
The notes, which were dated April 1, 2019, had a maturity date of March 31, 2020 and a 10%
interest rate.
How should the scrip dividend and related interest be accounted for?
a. Debit retained earnings P1,100,000 on April 1, 2019.
b. Debit retained earnings P1,100,000 on March 31, 2020.
c. Debit retained earnings P1,000,000 on April 1, 2019 and debit interest expense
P100,000 on March 31, 2020.
d. Debit retained earnings P1,000,000 on April 1, 2019 and debit interest expense P75,000
on December 31, 2019.
ANSWER: D
SOLUTION 26-1
April 1, 2019
Note Payable 1,000,000
The dividend should be recognized on the date of declaration on April 1, 2019
December 31, 2019

Interest expense ((1,000,000 x 10% x 9/12) 75,000
Accrued interest payable 75,000
The interest on the note payable should be accrued on December 31, 2019 for
nine months from April 1 to December 31, 2019.
PROBLEM 26-2
Cyan Company issued 200,000 shares of P5 par value at P10 per share. On January 1, 2019, the
retained earnings amounted to P3,000,000.
In March 2019, the entity reacquired 50,000 treasury shares at P20 per share. In June 2019, the
entity sold 10,000 of these shares to corporate officers for P25 per share. The entity used the
cost method to record treasury shares.
Net income for the current year was P600,000.
1. What total amount should be reported as retained earnings at year-end?
a. 4,400,000
b. 2,200,000
c. 3,600,000
d. 3,400,000
2. What amount should be reported as unappropriated retained earnings at year-end?
a. 3,600,000
b. 3,650,000
c. 3,750,000
d. 2,800,000
QUESTION 1: ANSWER C
QUESTION 2: ANSWER D
SOLUTION 26–2
Retained earnings – January 1 3,000,000
Net income for current year 600,000
Total retained earnings 3,600,000
Appropriated for treasury shares (40,000 x P20) (800,000)
Unappropriated retained earnings 2,800,000
Legally, the retained earnings must be appropriated to the extent of the remaining
cost of the treasury shares.
The entity reacquired 50,000 treasury shares and subsequently sold 10,000 treasury
shares.
Thus, there are 40,000 treasury shares remaining with total cost of P800,000.
PROBLEM 26-3 (IAA)

At the beginning of current year, Lauretta Company reported the following shareholders’ equity:
The entity had 400,000 authorized shares of P5 par value, of which 300,000 shares were issued
and outstanding.
During the year, the entity acquired 50,000 shares for P10 per share to be held as treasury. The
shares were originally issued at P8 per share. The entity used the cost method to account for
treasury shares.
At year-end, the entity declared and distributed a property dividend of inventory.
The inventory had a P750,000 carrying amount and a P1,000,000 fair value. The net income for
2019 was P2,500,000.
What amount should be reported as unappropriated retained earnings at year-end?
a. 3,500,000
b. 3,250,000
c. 3,350,000
d. 3,000,000
Retained earnings –beginning 2,000,000

Net income 2,500,000
Property dividend of inventory at fair value (1,100,000)
Appropriated for treasury shares (50,000 x P10) (500,000)
Unappropriated retained earnings - endings 3,000,000
Under International Financial Reporting Interpretations Committee (IFRIC) 17,

paragraph 11, an entity shall measure a liability to distribute noncash asset as
dividend to the owners at the fair value of the asset to be distributed.
In other words, a property dividend is recognized as liability at the fair value of the
property.
PROBLEM 26 – 4 (IFRS)
Global Company, a real estate developer, is owned by five founding shareholders.
On December 1, 2019, the entity declared a property dividend of a “one-bedroom flat” for each
shareholder. The property dividend is payable on January 31, 2020.
On December 1, 2019, the carrying amount of a one-bedroom flat is P1,000,000 and the fair
value is P1,500,000.
However, the fair value is P1,800,000 on December 31, 2019 and P1,900,000 on January 31,
2020.
1. What amount should be reported as dividend payable on December 1, 2019?
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. 0
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. 0
3. What amount of gain is included in profit or loss as a result of the settlement of the property
dividend on January 31, 2020?
a. 2,500,000
b. 4,000,000
c. 2,000,000
d. 4,500,000
SOLUTION 26-4
QUESTION 1 ANSWER B
Fair value of property (5 × 1,500,000). 7,500,000
To recognize the dividend payable on December 1, 2019:
Dividend payable 7,500,000
QUESTION 2 ANSWER C
Fair value - December 31, 2019 (5 × 1,800,000) 9,000,000

Fair value - December 1, 2019 (7,500,000)
Increase in dividend payable 1,500,000

IFRIC 17, paragraph 13, provides that at the end of each reporting period and at the date of
settlement, the entity shall adjust the carrying amount of the dividend payable with any change
recognized in equity.
QUESTION 3 ANSWER D
Fair value - January 31, 2020 (5 × P1,900,000) 9,500,000

Increase in dividend payable 500,000

Dividend payable 500,000
Dividend payable - January 31, 2020 9,500,000

Carrying amount of property 5,000,000
Gain on distribution of property dividend 4,500,000

Inventory 5,000,000
IFRIC 17, paragraph 14, provides that when an entity settles the dividend payable, the difference
between the carrying amount of the dividend payable and the carrying amount of the property
is recognized in profit or loss.
PROBLEM 26-5 (IFRS)

On November 1, 2019, Grande Company declared a property dividend of equipment payable on
March 1, 2020.
The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on
November 1, 2019.
However, the fair value less cost to distribute the equipment is P2,200,000 on December 31,
2019 and P2,000,000 on March 1, 2020.
a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 0
2. What is the measurement of equipment on December 31, 2019?
a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 2,000,000
3. What amount of loss on distribution of property dividend is recognized on March 1, 2020?
a. 300,000
b. 200,000
c. 500,000
d. 0
SOLUTION 26-5
QUESTION 1 ANSWER B
To recognize the dividend payable on November 1, 2019:

To recognize the decrease in dividend payable on December 31, 2019:

Fair value - December 31, 2019 2,200,000

Fair value - November 1, 2019 (2,500,000)
Decrease in dividend payable (300,000)
QUESTION 2 ANSWER B
Carrying amount 3,000,000

Fair value less cost to distribute 2,200,000
Impairment loss 800,000
Impairment loss 800,000

Equipment 800,000
PFRS 5, paragraph 15A, provides that an entity shall measure a noncurrent asset classified for
distribution to owners at the lower of carrying amount and fair value less cost to distribute.
QUESTION 3 ANSWER B
Fair value - March 1, 2020 2,000,000

Decrease in dividend payable (200,000)

Dividend payable - March 1, 2020 2,000,000

Carrying amount of equipment - December 31, 2019 (2,200,000)
Loss on distribution of property dividend (200,000)

Loss on distribution of property dividend 200,000
Equipment 2,200,000
PROBLEM 26-6 (IFRS)

On January 1, 2019, Easy Company had ordinary and preference shares outstanding. The
incorporators or original shareholders own ten ordinary shares but no preference shares.
On December 31, 2019, the entity declared dividends on the ordinary shares. The entity
decided to give the ordinary shareholders a choice between receiving a cash dividend of
P500,000 per share or a property dividend in the form of a noncash asset.
The noncash asset is a standard model from the entity's car fleet. Each car has a fair value of
P600,000 and carrying amount of P450,000. The fair value of the car is P700,000 on December
31, 2020.
The entity estimated that 80% of the ordinary shareholders will take the option of the cash
dividend and 20% will elect for the noncash asset.
1. What amount should be recognized as dividend payable on December 31, 2019?
a. 5,500,000
b. 5,200,000
c. 4,000,000
d. 6,000,000
2. What amount should be reported as gain on distribution of property dividend in 2020 if the
shareholders elected to receive the noncash asset?
a. 2,000,000
b. 2,500,000
c. 1,500,000
d. 1,800,000
3. What is included in the journal entry on December 31, 2020 if the shareholders elected to
receive the cash?
a. Debit dividend payable P5,200,000
b. Credit cash P5,000,000
c. Credit retained earnings P200,000
d. All of these are included in the journal entry
QUESTION 1 ANSWER B
IFRIC 17, paragraph 12, requires that if an entity gives the shareholders a choice of receiving
either cash or noncash asset, the entity shall estimate the dividend payable by considering both
the fair value of each alternative and the associated probabilities of shareholders selecting each
alternative.
Cash alternative (500,000 × 10 × 80%) 4,000,000

Noncash alternative (600,000 × 10 × 20%) 1,200,000
Dividend Payable 5,200,000
The entry to recognize the declaration on December 31, 2019:

Dividends payable 5,200,000
QUESTION 2 ANSWER B
Fair value of noncash asset - December 31, 2020 7,000,000

Dividend Payable - December 31, 2019 5,200,000
Increase in dividend payable 1,800,000
December 31, 2020


Inventory 4,500,000
QUESTION 3 ANSWER D

Cash 5,000,000
PROBLEM 26-7 (IFRS)

At the beginning of the current year, Sol Company declared a 10% share dividend. The market
price of the entity's 300,000 outstanding shares of P50 par value was P90 per share on that
date.
The share dividend was distributed on July 1 when the market price was P100 per share.
What amount should be credited to share premium for the share dividend?
a. 1,200,000
b. 2,700,000
c. 1,500,000
d. 0
Market value on date of declaration

(10% × 300,000 = 30,000 shares × 90) 2,700,000
Par value of shares issued as share dividend
(30,000 × 50) (1,500,000)
To record the declaration of the share dividend January 1:
Retained earning 2,700,000

Share dividend payable 1,500,000
To record the issuance of the stock dividend on July 1:
Share dividend payable 1,500,000

If the share dividend is less than 20%, the market value of the share on the date of declaration
is debited to retained earnings.
However, if market value is lower than par or stated value, the par or stated value is charged to
retained earnings.
PROBLEM 26-8 (IFRS)

At the current year-end, Grey Company issued 4,000 ordinary shares at P100 par value in
connection with a share dividend. The market value per share on the date of declaration was
P150.
The shareholders' equity accounts immediately before issuance of the share dividend were:
Ordinary share capital, P100 par, 50,000 shares authorized, 2,000,000

3,000,000
Share premium
1,500,000
Retained earnings
What amount should be reported as retained earnings immediately after the share dividend?
a. 1,100,000
b. 1,500,000
c. 2,100,000
d. 900,000
4,000 shares/20,000 = 20% share dividend

Retained earnings before share dividend 1,500,000
Share dividend (4,000 × 100) ( 400,000)
Retained earnings after share dividend 1,100,000
If the share dividend is 20% or more, the par or stated value is debited to retained earnings.
To record the declaration of the share dividend.

Share dividend payable 400,000
To record the issuance of the share dividend:
Share dividend payable 400,000

Ordinary share capital 400,000
PROBLEM 26-9 (IFRS)

On January 1, 2019, Katrina Company provided the following information:
Share capital, 250,000 shares authorized; 100,000 shares issued and outstanding 3,000,000
The entity declared a 10% share dividend on April 1, 2019 when the market value of the share
was P70.
The share dividend was issued on July 1, 2019 when the market value of the share was P100.
The share has a par value of P30.
The entity sustained a net loss of P1,200,000 for 2019.
What amount should be reported as retained earnings on December 31, 2019?
a. 6,100,000
b. 6,500,000
c. 6,800,000
d. 5,050,000
Retained earnings - January 1, 2019 8,000,000

Share dividend declared on April 1, 2019
(10% × 100 shares × P70) ( 700,000)
Net loss (1,200,000)
The 10% share dividend should be charged to retained earnings at the fair value on the date of
declaration.
This is regardless of the fair value of the shares on the date of issue.
However, the fair value on the date of declaration should not be lower than par or stated value.
Otherwise, the par or stated value is charged to retained earnings.
PROBLEM 26-10 (IAA)

Kiara Company provided the following data at year-end:
2019 2020
Share capital (P100 par value) 5,000,000 5,100,000
Share Premium 2,500,000 2,900,000
Retained Earnings 5,000,000 ?
During 2020, the entity declared and paid cash dividend of P750,000 and also declared and
issued a share dividend.
There were no other changes in shares issued and outstanding during 2020.
The net income for 2020 was P1,500,000.
a. 5,250,000
b. 5,750,000
c. 5,650,000
d. 6,500,000
Retained Earnings - December 31, 2019 5,000,000

Net Income for 2020 1,500,000
Cash dividend (750,000)
Share dividend (500,000)
Increase in share capital (5,100,000 - 100,000

5,000,000)
Increase in share premium (2,900,000 -
2,500,000) 400,000
Share Dividend 500,000
PROBLEM 26 – 11 (ACP)
Zoe Company reported the following shareholder’s equity at year – end:
Share Capital, par P25, authorized 150,000 shares,
55,000 shares issued of which 5,000 shares are in treasury 1,375,000
Treasury shares, at cost 150,000
A 100% share dividends was declared and all of the treasury shares were issued as share
dividend and the balance from the unissued share. The share has market of P40.
What amount of retained earnings should be capitalized?
a. 1,250,000
b. 1,800,000
c. 1,275,000
d. 1,125,000
SOLUTION 26 – 11 ANSWER C
Shares issued 55,000
Outstanding 50,000
Share dividends (100% x 50,000) 50,000
Treasury share as share dividend (5,000 shares at cost) 150,000

Unissued shares as share dividend at par (45,000 x P25) 1,125,000
Retained earnings to be capitalized 1,275,000
That treasury shares may be reissued as dividends; in which case the cost of the shares should
be charged to retained earnings.
PROBLEM 26 – 12 (AICPA ADAPTED)

On December 31, 2019, Blake Mining Company declared a cash dividend of P800,000 to
shareholders of record on January 15, 2020 and payable on February 15, 2020.
The entity reported the following information on December 31, 2019:
Accumulated depletion 200,000
What amount should be recognized as liquidating dividends?

a. 600,000
b. 300,000
c. 200,000
d. 50,000
SOLUTION 26 – 12 ANSWER C
Dividend declared 800,000
Retained earnings balance 600,000
Liquidating dividend 200,000
Any amount paid in excess of the retained earnings balance is a liquidating dividend or return
of capital.
This liquidating dividend is legal under the wasting asset doctrine embodied in the Philippine
Corporation Code.
PROBLEM 26 – 13 (PHILCPA ADAPTED)

Cerritos Company began operation on January 1, 2016. During the first three years of
operations, the entity reported following net income and dividends declared:
Net Income Dividends declared
2016 1,500,000 0
2017 2,500,000 1,000,000
2018 3,000,000 1,000,000
The entity provided the following information for 2019:

Income before income tax 5,000,000
Prior period error – understatement of 2018 depreciation before tax 500,000
Cumulative decrease in income from change in inventory method 1,000,000
before tax
Dividend declared 2,000,000
Income tax rate 30%

a. 5,450,000
b. 5,000,000
c. 6,500,000
d. 6,150,000
SOLUTION 26 – 13 ANSWER A
Net income – 2016, 2017 and 2018 7,000,000
Dividends declared – 2017 and 2018 (2,000,000)
Retained Earnings – January 1, 2019 5,000,000
Net income for 2019 (5,000 x 70%) 3,500,000
Prior period error (500,000 x 70%) (350,000)
Cumulative decrease in income from change in inventory method (700,000)
(1,000,000 x 70%0
Dividend declared in 2019 (2,000,000)
Retained earnings – December 31, 2019 5,450,000
PROBLEM 26 – 14 (IAA)
On January 1, 2019, Nam Company reported the following shareholder’s equity:
Preference share capital (P150 par value, 20,000 shares) 3,000,000
Ordinary share capital (P50 par value, 100,000 shares) 5,000,000
On January 1, 2019, the entity sold 20,000 additional ordinary shares for P90 per share.
Late in 2019, it was learned that because of mathematical error, an overstatement of
depreciation expense by P500,000 had occurred in 2018.
The entity reported net income of P4,000,000 for 2019.
The entity declared cash dividend of P1,000,000 on preference shares and P2,000,000 on
ordinary shares during 2019.
The income tax rate is 30%.
a. 5,850,000
b. 6,000,000
c. 5,150,000
d. 5,000,000
Retained earnings – January 1, 2019 4,500,000
Prior period – over depreciation (500,000 x 70%) 350,000
Cash dividend – preference (1,000,000)
Cash dividend – ordinary (2,000,000)
Retained earnings – December 31, 2019 5,850,000
PROBLEM 26 – 15 (PHILCPA ADAPTED)

On January 1, 2019, Albay Company had the following shareholders’ equity:
Preference share capital, P100 par, 10% cumulative 2,000,000
Ordinary share capital, no par, P5 stated value 5,150,000
Treasury ordinary shares 400,000
 On January 15, 2019, the entity formally retired all the 30,000 treasury shares
The treasury shares were originally issued at P10 per share.
 The entity owned 10,000 shares of Digos Company purchased for P800,000. The Digos
shares were included in noncurrent equity securities.
On December 31, 2019, the entity declared a dividend in kind of one share of Digos for
every hundred ordinary shares held by a shareholder.
The fair value of the Digos share is P90 on December 31, 2019. The dividend in kind was
distributed on March 15, 2020 when the fair value of Digos share is P95.
 On December 31, 2019, the entity declared the yearly cash dividend on preference
share, payable on January 15, 2020
 On January 15, 2020, before the accounting records were closed for 2019, the entity
became aware that rent income for the year ended December 31, 2018 was overstated
by PI 000,000.
The after-tax effect on 2018 net income was P700,000.
 After correcting the rent income, net income for 2019 was P3,000,000.
1. What amount should be charged to retained earnings for the retirement of treasury shares
on January 15, 2019?
a. 100,000
b. 400,000
c. 250,000
d. 0
2. What amount should be charged to retained earnings for the property dividends on
ordinary shares on December 31, 2019?
a. 950,000
b. 900,000
c. 800,000
d. 400,000
3. What amount should be charged to retained earnings for the preference dividend declared
on December 31, 2019?
a. 100,000
b. 150,000
c. 200,000
d. 300,000
4. What amount should be reported as retained earnings on December 31,2019?
a. 5,000,000
b. 5,200,000
c. 5,100,000
d. 4,800,000
QUESTION 1 ANSWER A
Share capital (30,000 x 5 par) 150,000
Share premium – issuance (30,000 x 5) 150,000
Treasury shares 400,000
Cost of treasury shares 400,000

Par value of treasury shares (30,000 x 5) (150,000)
Loss on retirement of treasury shares 250,000
The loss on retirement is charged first to the share premium from the original issuance of the
treasury shares and the balance to retained earnings.
QUESTION 2 ANSWER B
Ordinary share issued (5,150,000 / 5 par) 1,030,000
Outstanding ordinary shares 1,000,000
Divided by 100
Digos shares distributed as property dividend 10,000
Amount charged to retained earnings (10,000 x 90 fair value on 900,000

December 31, 2019
QUESTION 3 ANSWER C
Preference dividends (10% x 2,000,000) 200,000
QUESTION 4 ANSWER C
Retained earnings – January 1, 2019 4,000,000
Retirement of treasury shares (100,000)
Property dividend of Digos shares (900,000)
Preference dividend (200,000)
Overstatements of 2018 rent income – net of tax (700,000)
BOOK VALUE AND PREFERENCE DIVIDENDS
PROBLEM 30 -1 (IAA)
Tarr Company reported the following shareholders’ equity at year – end:
Preference share capital – 12%, P50 par, 20,000 shares 1,000,000
Ordinary share capital, P25 par, 100,000 shares 2,500,000
Retained earnings appropriated 100,000
Dividends on preference share have not been paid for three years. The preference share has a
liquidating value of P55 and a call price of P58.
What is the book value per preference share?
a. 61
b. 56
c. 55
d. 58
Liquidation premium – excess of liquidating value over par (20,000 100,000
x 5)
Preference dividend for current year (1,000,000 x 12%) 120,000
Total preference shareholders’ equity 1,220,000
Book value per preference share (1,200,00 / 20,000) 61
In the absence of any contrary statement, the preference share is noncumulative and
nonparticipating. Thus, the preference share is entitled to current year dividend only.
The liquidating value of the preference share is used instead of the call price because book
value computation is on the premises that the entire will dissolve and liquidate.

5% cumulative preference share capital, par
value
P100 per share; 25,000 shares issued 2,500,000
and outstanding
Ordinary share capital, par value P35 per
share; 3,500,000
100,000 shares issued and outstanding

Retained earnings 3, 000,000
Dividends in arrears on the preference share amounted to P250, 000

If the entity were to be liquidated, the preference shareholders would be received par value
plus premium of P500, 000.
What is the book value per ordinary share?
a. 77.50
b. 75. 00
c. 72.50
d. 70.00

Preference shareholders’ equity:
Preference share capital 2, 500,000
Preference dividends in arrears 250,000
Liquidation premium 500,000 3,250,000
Ordinary shareholders’ equity 7,000,000

Divide by ordinary shares 100,000
outstanding
Book value per ordinary 70
outstanding
If the preference share is cumulative, all dividends in arrears should be satisfied.

Dix Company reported the following shareholders’ equity on December 31, 2019:
8% cumulative preference share capital, P50 par,
Liquidating value P55 per share;

Authorized, issued and outstanding 20,000 shares 1,000,000
Ordinary share capital, P25 par; 200,000 share authorized;
100,000 shares issued and outstanding 2,500,000
Dividends on preference share have not been declared for 2018 and 2019.
On December 31, 2019, what is the book value per ordinary share?
a. 25.00
b. 27.20
c. 26.40
d. 29.00
Total Equity 3,900,000
Preferences shareholders’ equity
Liquidation premium (20,000 x 5) 100,000
Preference dividend in arrears
(1,000,000 x 8% x 2) 160,000 1,260,000
Divide by ordinary shares 100,000
Book value per ordinary share 26.40

Nova Company provided the following shareholders’ equity on December 31, 2019.
Cumulative preference share capital, P100 par, 8% 500,000
Ordinary share capital, P100 par 1,100,000
Treasury ordinary shares-1,000 at cost (150,000)
Dividends on preference shares are in arrears for 2018 and 2019.
What is the book value per ordinary share on December 31, 2019?
a. 125
b. 191
c. 133
d. 141
Total shareholders’ equity per book 1,910,000
Preference share capital 500,000
Preference dividends for 2018 and 2019
(500,000 x 8% x 2) 80,000 580,000
Ordinary share issued (1,100,000/100) 11,000
Treasury ordinary shares (1,000)
Ordinary share outstanding 10,000
Book value per ordinary share 133
(1,330,000/10,000)
Book value per preference share
(580,000/5,000 shares) 116

At the beginning of current year, Trojan Company was organized with the following capital
structure:
10% cumulative preference share capital, par value P10, liquidation value P12 authorized, issue
and outstanding 100,000 shares, P1, 000,000
Ordinary share capital, par value P100, authorized 40,000 shares, issued and outstanding 30,000
shares, P3, 000,000
The net income for the current year was P6, 000,000 and no dividends were declared.
a. 290
b. 293
c. 300
d. 333
Retained earnings-equal to net income 6,000,000
Preference shareholders’ equity
Preference share capital 1, 000,000
Preference dividend (1,000,000 x 10%) 100,000
Liquidation premium (100,000 x 2) 200,000 1,300,000

Divide by ordinary shares outstanding 30,000
(2,500,000 / 10 par value)
Book value per ordinary share 290
PROBLEM 30-6
Karen Company provided following data at year-end:
2019 2018
10% cumulative preference 2,000,000 2,000,000
shares P50 par
Ordinary shares, P10 par 2,500,000 2,000,000
Share premium 1,500,000 1,300,000
Retained earnings 4,800,000 4,800,000
Net income for the year 1,800,000
On July 1 2019, 50,000 ordinary shares were issued

The Preference dividends were paid in 2018 but not declared during 2019
The market price of the ordinary share was P50 on December 31, 2019
1. What is the book value per preference share for 2019?
a. 50
b. 55
c. 60
d. 45
2. What is the book value per ordinary share for 2019?
a. 34.40
b. 35.20
c. 38.22
d. 39.11
SOLUTION 30-6
QUESTION 1 ANSWER B
Preference shares 2,000,000
Preference dividend for 2019 (10% x 2,000,000) 200,000
Preference shareholder equity 2,200,000
Number of preference shares (2,000,000 / 50 par) 40,000
Book value per preference share
(2,200,000 / 40,000) 55.00
Question 2 Answer a
Preference shares 2,000,000
Ordinary shares 2,500,000
Preference shareholders’ equity (2,200,000)
Divide by ordinary shares outstanding
(2,500,000 / 10 par value) 250,000
Book value per ordinary share 34.40
PROBLEM 30-7 (ACP)

Retro Company provided following data at year-end:
12% Preference share capital, 20,000 shares, P100 par value 2,000,000
14% Preference share capital, 10,000 shares, P300 par value 3,000,000
Ordinary share capital, 50,000 shares, P100 par value 5,000,000
The 12% preference share is cumulative and participating. The 14% preference share is
noncumulative and participating. Dividends are in arrears for 3 years.
a. 132
b. 126
c. 100
d. 112

Excess 12%PS 14PS Ordinary
Balances (3,740,000) 2,000,000 3,000,000 5,000,000
12%x2,000,000 (720,000) 720,000
x3
14%x (420,000) 420,000
3,000,000x1
12%x (600,000) 600,000
5,000,000x1
Balance-prorata 2,000,000 400,000 600,000 1,000,000
Total 3, 120,000 4,020,000 6,600,000
Divide by share
outstanding 20,000 10,000 50,000
Book value per
share 156 402 132
Before participation, the current year dividend should be given to ordinary share using the
lower preference rate
Share capital Fraction Allocation
12% Preference share 2,000,000 2/10 400,000
14% Preference share 3,000,000 3/10 600,000
Ordinary 5,000,000 5/10 1,000,000
10,000,000 2,000,000
PROBLEM 30-8 (ACP)

Simplex Company provided the following data at year-end:
Preference share capital, 10% cumulative and nonparticipating, P100 par, 2,000,000
dividends are in arrears for 3 years
Ordinary share capital, P100 par, 40,000 shares 4,000,000
Subscribed ordinary share capital, 200,000 shares 2,000,000
Subscription receivable 500,000
Treasury ordinary share, 10,000 at cost 800,000

a. 172
b. 200
c. 160
d. 150
SOLUTION 30-8 ANSWER C (8,000,000 / 50,000) 160
Preference dividend for three years
(2,000,000 x 10% x 3) 600,000 2,600,00
For book value purposes, the subscription receivable is not deducted from subscribed share
capital.
Ordinary share issued 40,000
Ordinary share subscribed 20,000
Total 60,000
Ordinary share outstanding 50,000

On December 31, 2019 and 2020, Carr Company had outstanding 40,000 6% cumulative
preference share of P100 par value and 200,000 ordinaries of P10 par value.
On December 31, 2019, preference dividends in arrears amounted to P120, 000. Cash dividends
declared in 2020 totaled P440, 000.
1. What amount should be reported as dividend payable to preference share in 2020?
a. 440,000
b. 360,000
c. 320,000
d. 240,000
2. What amount should be reported as dividend payable to ordinary shares in 2020?
a. 200,000
b. 120,000
c. 80,000
d. 0
SOLUTION: 30-9
QUESTION 1 ANSWER B
In arrears on December 31, 2019 120,000
Preference dividend for 2020 (6%x 4,000,000) 240,000
Total preference dividends 360,000
QUESTION 2 ANSWER C
Total dividend declared 440,000
Preference dividends (360,000)
Balance to ordinary shares 80,000
Problem 30-10 (Adapted)

On December 31, 2019, Arp Company had outstanding 30,000 5% cumulative and fully
participating preference shares, P100 par, and 200,000 ordinary shares, P10 par.
No dividends were in arrears on December 31, 2018. On December 31, 2019, the entity
declared dividend of P1,000,000.
1. What amount should be reported as dividend payable to preference shareholders?
a. 600,000
b. 300,000
c. 150,000
d. 100,000
2. What amount should be reported as dividend payable to the ordinary shareholders?
a. 100,000
b. 340,000
c. 400,000
d. 475,000
SOLUTION 30-10
QUESTION 1 ANSWER A
QUESTION 2 ANSWER C
Preference share capital (30,000 x 100) 3,000,000
Ordinary share capital (200,000 x 10) 2,000,000
Total 5,000,000
Preference dividends (3/5 x 1,000,000) 600,000

Ordinary dividends (2/5 x 1,000,000) 400,000
Total dividends declared on December 31,2019 1,000,000
Since there were no dividends in arrears on December 31,2018 and the preference share is
fully participating, the dividend of P1,000,000 is simply allocated on a prorata basis.
PROBLEM 30-11 (IAA)

Yodel Company had 50,000 ordinary shares of P100 par value and 25,000 preference shares of
P100 par value, 6% cumulative and participating.
Dividends on the preference shares are two years in arrears including the current year.
The entity distributed P1,350,000 as dividends in the current year.
What amount should be reported as dividend payable to the ordinary shareholders?
a. 1,050,000
b. 1,200,000
c. 800,000
d. 550,000
Dividend Preference Ordinary
Amount 1,350,000
6% x 2,500,000 x 2 (300,000) 300,000
6% x 5,000,000 (300,000) 300,000
Balance prorate 750,000 250,000 500,000
Total dividend - 550,000 800,000
Total par Fraction Participation

Preference (25,000 x 100) 2,500,000 25/75 250,000
Ordinary (50,000 x 100) 5,000,000 50/75 500,000
7,500,000 750,000
The preference share is participating.

Before participation, the ordinary share is paid an amount equal to the current year dividend
using the preference rate.
PROBLEM 30-12 (CFA ADAPTED)

Culture Company provided the following on December 31, 2019:
Ordinary share capital, P20 par value, 200,000 shares 4,000,000
Preference share capital, 6% P100 par value, cumulative and fully participating, 1,000,000
Preference dividends have been in arrears for 2017 and 2018.

On December 31, 2019, cash dividend of P900,000 was declared.
1. What amount should be recorded as dividend payable to preference shareholders?
a. 324,000
b. 220,000
c. 276,000
d. 180,000
2. What amount should be recorded as dividend payable to ordinary shareholders?
a. 576,000
b. 672,000
c. 624,000
d. 720,000
SOLUTION 30-12
QUESTION 1 ANSWER C
QUESTION 2 ANSWER C
Dividend Preference Ordinary
Amount 900,000
6% x 1,000 x 3 (180,000) 180,000
6% x 4,000,000 (240,000) 240,000
Balance prorate 480,000
1/5 x 480,000 96,000
4/5 x 480,000 _______ 384,000
Total dividends 276,000 624,000
PROBLEM 30-13(IAA)
The directors of Lora Company wish to declare a dividend whereby ordinary shareholders are to
receive a total per share dividend of P4. The shareholders’ equity at year-end appears as
follows:
Preference share capital; P100 par 7% participating up to 10%, 2,500,000
noncumulative, 100,000 shares authorized, 25,000 shares issued
Ordinary share capital, P25 par, 250,000 shares authorized and issued 6,250,000
What is the total amount of the dividend that must be declared to meet the per share goal of
the board of directors?
a. 1,175,000
b. 1,700,000
c. 1,000,000
d. 1,250,000
Ordinary dividend (250,000 x 4) 1,000,000
Preference dividend (2,500,000 x 10%) 250,000
Total dividend 1,250,000
The preference dividend rate is 7% but the preference share capital participates up to 10% each
year.
PROBLEM 30-14 (ADAPTED)

Turn Company reported the following balances on December 31,2019.
12% nonparticipating, noncumulative preference share capital, 1,000,000
par value of P100, 10,000 shares
10% fully participating, cumulative preference share capital, par 2,500,000
value of P100, 25,000 shares
Ordinary share capital, par value of P100, 75,000 shares 7,500,000
The entity plans to declare cash dividends. It has not paid a cash or a share dividend before.
There has been no change in the capital balances since the entity started operations five years
ago.
The entity reported the following net income and loss for the five years of operations:
2015 1,500,000 loss
2016 1,000,000 loss
2017 500,000 loss
2018 1,750,000 income
2019 6,250,000 income
If the maximum amount available for dividend on December 31, 2019 is declared and paid,
what amount should be distributed to
1. 12% Preference shareholders?
a. 600,000
b. 120,000
c. 300,000
d. 150,000
2. 10% Preference shareholders?
a. 1,970,000
b. 1,250,000
c. 250,000
d. 500,000
3. Ordinary shareholders?
a. 3,750,000
b. 2,910,000
c. 500,000
d. 750,000
SOLUTION 30-14
QUESTION 1 ANSWER B
QUESTION 2 ANSWER A
QUESTION 3 ANSWER B
Total income 2018 and 2019 8,000,000
Total loss 2015, 2016 and 2017 (3,000,000)
Retained earnings- maximum dividend 5,000,000
Retained 12% 10% Ordinary

earnings Preference Preference
Dividend 5,000,000
12% x 1,000,000 (120,000) 120,000
10% x 2,500,000 x 5 (1,250,000) 1,250,000
10% x 7,500,000 (750,000) 750,000
Balance for participation 2,880,000 -____ 720,000 2,160,000
Total dividend 120,000 1,970,000 2,910,000
Before participation, one year dividend is paid to ordinary share capital using the participating
preference rate.
The balance for participation is distributed on a prorate basis.
Amount Fraction Allocation
10% Preference shares 2,500,000 25/100 720,000
Ordinary shares 7,500,000 75/100 2,160,000
10,000,000 2,880,000
Problem 30-15 (IAA)

Bonanza Company provided the following shareholders’ equity on December 31,2019:
Preference share capital, P100 par, 80,000 shares issued, 12% 8,000,000
cumulative and fully participating
Ordinary share capital, P50 par, 200,000 shares issued 10,000,000
Dividends on the preference shares are in arrears for two years including the current year.
On December 31, 2019, the entity intends to pay cash dividend of P10 per share to the ordinary
shareholders.
What total amount of dividends should be declared for the preference and ordinary
shareholders?
a. 4,560,000
b. 3,920,000
c. 3,600,000
d. 5,520,000

Ordinary dividend (200,000 x 10) 2,000,000
Preference dividend:
2018 (12% x 8,000,000) 960,000
2019 (20% x 8,000,000) 1,600,000 2,560,000
Total amount of dividends to be declared 4,560,000
The percentage of ordinary dividend is P2,000,000 divided by P10,000,000 ordinary share

capital or 20%.
Since the ordinary shareholders receive 20% in the current year, the preference shareholders
shall receive also in 2019 20% of preference share capital outstanding because the preference
shares are fully participating.
Proof
Preference Ordinary
2018 dividend 960,000
2019 dividend:
12% x 8,000,000 960,000
12% x 10,000,000 1,200,000
Balance for participation 640,000 800,000
Total dividend 2,560,000 2,000,000
Total dividend 4,560,000

Preference dividend:
2018 (960,000)
2019 (960,000)
Ordinary dividend (1,200,000)
Balance for participation 1,440,000
Outstanding Fraction Allocation

Preference 8,000,000 8/18 640,000
Ordinary 10,000,000 10/18 800,000
18,000,000 1,440,000

Shareholders Equity Problems and Solutions

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Shareholders Equity Problems and Solutions

Uploaded by

Copyright:

Available Formats

PROBLEMS and SOLUTIONS

Practical Accounting 1 – Corporation

Extra Company provided the following data at year end:

What total amount should be reported as shareholders equity?

SOLUTIONS 24-1. ANSWER A

Bai Company provided the following information at year end:

What is the amount of legal capital?

SOLUTION 24-2 ANSWER B

PROBLEM 24-4 (AICPA ADOPTED)

1. What amount of the proceeds should be allocated to the ordinary shares?

PROBLEM 24-5 (AICPA ADAPTED)

PROBLEM 24-6 (IAA)

Net income for 2019 was P5,000,000.

SOLUTION 24-6 ANSWER C

Ordinary share capital – 150,000 shares 18,000,000

1. What amount should be credited to ordinary share capital as a result of conversion?

SOLUTION 24-7 QUESTION 1 ANSWER A QUESTION 2 ANSWER B

To record the conversion of preference shares into ordinary shares:

PROBLEM 24-8 (IAA)

Issuance of preference shares (150,000 x 8) 1,200,000

1. What amount should be reported as share capital at year end?

Share Capital 1,500,000

Net Income 1,000,000

Share Capital 1,500,000

1. What is the number outstanding shares on December 31, 2020?

Share issued- December 31 2019 (4,500,000/P5 par) 900,000

Total issue price in 2020 15,000,000

PROBLEM 25-1 (AICPA ADAPTED)

SOLUTION 25-1 ANSWER D

a. Share premium from original issuance first

PROBLEM 25-3 (IAA)

1. What amount should be reported as total amount of share premium at year-end.

Cash (5,000 x50) 300,000

Cash (2,000x 45) 90,000

Share Premium-issuance January 1 1,500,000

Retained Earnings- Beginning 2,000,000

PROBLEM 25-4 (AICPA ADAPTED)

Share capital issued originally at P75 per share 2, 500, 000

1. What amount should be reported as adjusted share capital at year-end?

Cost of treasury shares 600, 000

Journal entry for the cancelation

QUESTION 1 ANSWER B (3,000,000-200,000) 2,800,000

PROBLEM 25-7 (AICPA ADAPTED)

At year-end, how many ordinary shares were outstanding?

SOLUTION 25-7 ANSWER D

PROBLEM 25-8 (AICPA ADAPTED)

Seco Company was incorporated at the beginning of current year:

What is the number of shares outstanding at year-end?

PROBLEM 25-9 (AICPA ADAPTED)

November 1- A3- for-1 share split took effect.

1. How many shares were issued at year-end?

May 1 1,000 shares of treasury were sold

1. How many shares were issued at year-end?

Original shares issued 100, 000

Shares issued after split 220, 000

PROBLEM 25-11 (AICPA ADAPTED)

January 31 Declared 10% share dividend

How many ordinary shares are outstanding at year-end?

SOLUTION 25-11 ANSWER A

Share issued after split (330, 000 x 2) 660, 000

SOLUTION 25-12 ANSWER A

PROBLEM 25-13 (IAA)

PROBLEM 25-14 (IAA)

2. What amount should be reported as share premium at year-end?