NATIONAL UNIVERSITY

Manila

SHAREHOLDERS’ EQUITY

PROBLEM 1 – MALAY COMPANY

You have been assigned to the audit of MALAY CO., a manufacturing company. You have been
asked to summarize the transactions for the year ended December 31, 2023, affecting
shareholders’ equity and other related accounts. The shareholders’ equity section of Malay’s
December 31, 2022, statement of financial position follows:

Ordinary share capital, P2 par value, 1,000,000

shares authorized, 180,000 shares issued,
177,580 shares outstanding P 360,000
Share premium - issuance 3,640,000
Share premium – treasury shares 45,000
Retained earnings 649,378
Cost of 2,420 treasury shares (145,200)
Total shareholders’ equity P4,549,178

You have extracted the following information from the accounting records and audit working
papers.
2023
Jan. 15 Malay reissued 1,300 treasury shares for P40 per share. The 2,420 treasury shares on
hand at December 31, 2022, were purchased in one block in 2020.
Feb. 1 Sold 180, P1,000, 9% bonds due February 1, 2033, at 103 with one detachable share
warrant attached to each bond. Interest is payable annually on February 1. The fair
market value of the bonds without the share warrants is 95. The detachable warrants
have a fair value of P50 each and expire on February 1, 2024. Each warrant entitles
the holder to purchase 10 ordinary shares at P40 per share.
Mar. 6 2,800 ordinary shares were subscribed for at P44 per share. 40% of the subscription
was collected.
20 The balance due on 2,400 shares was received and those shares were issued.
Nov. 1 There were 110 share warrants detached from the bonds and exercised.
Malay’s net income for 2023 is P950,000.

Based on the preceding information, determine the correct December 31, 2023, balance of each
of the following:

1. Ordinary share capital

A. P364,800 B. P375,800 C. P372,600 D. P367,000

2. Share premium – issuance

A. P3,827,200 B. P3,808,200 C. P3,805,065 D. P3,791,400

3. Share premium – treasury shares

A. P19,000 B. P45,000 C. P187,200 D. P192,800

4. Unappropriated retained earnings

A. P1,532,178 B. P1,599,378 C. P1,573,378 D. P1,454,178

5. Total shareholders’ equity

A. P5,722,218 B. P5,716,618 C. P5,720,223 D. P5,717,088
PROBLEM 2 – UBE COMPANY

UBE COMPANY reported the following amounts in the shareholders’ equity section of its December
31, 2022, statement of financial position:

Preference shares, 10%, P10 par (100,000 shares

authorized, 20,000 shares issued) P200,000
Ordinary shares, P5 par (50,000 shares authorized
10,000 shares issued) 50,000
Share premium 96,000
Retained earnings 600,000
Total P946,000

The following transactions occurred during 2023:

1. Paid the annual 2022 P1 per share dividend on preference shares and P0.50 per share
dividend on ordinary shares. These dividends had been declared on December 31, 2022.

2. Purchased 2,000 shares of its own outstanding ordinary shares for P20 per share.

3. Reissued 700 treasury shares for equipment valued at P25,000.

4. Issued 5,000 preference shares at P15 per share.

5. Declared a 10% stock dividend on the outstanding ordinary shares when the shares were
selling for P12 per share.

6. Issued the stock dividend.

7. Declared the annual 2023 P1 per share dividend on preference shares and the P0.50 per
share dividend on ordinary shares. These dividends are payable in 2024.

8. Appropriated retained earnings for plant expansion, P300,000.

9. Appropriated retained earnings for treasury shares.

The net income for 2023 was P470,000.

Based on the above data, determine the correct December 31, 2023, balances of each of the
following accounts:

1. Preference shares
A. P200,000 B. P275,000 C. P250,000 D. P1,000,000

2. Ordinary shares
A. P54,000 B. P54,350 C. P53,500 D. P50,000

3. Share premium
A. P138,090 B. P137,600 C. P127,090 D. P132,000

4. Treasury shares
A. P40,000 B. P15,000 C. P26,000 D. P14,000

5. Unappropriated retained earnings

A. P714,775 B. P709,775 C. P703,775 D. P729,775
PROBLEM 3 – ROBUSTA, INC.

At December 31, 2022, ROBUSTA, INC. had 1,800,000 authorized shares of P10 par value
ordinary shares, of which 600,000 shares were issued and outstanding.

The shareholders’ equity accounts at December 31, 2022, had the following balances.
Ordinary shares..............................................P6,000,000
Share premium.................................................2,250,000
Retained earnings.............................................1,941,000

Transactions during 2023 and other information relating to the shareholders’ equity accounts
were as follows:

1. On January 7, 2023, ROBUSTA issued at P54 per share, 30,000 shares of P50 par value, 9%
cumulative convertible preference shares. Each share of preference is convertible, at the
option of the holder, into two ordinary shares. ROBUSTA had 180,000 authorized
preference shares.

2. On February 2, 2023, ROBUSTA reacquired 6,000 of its ordinary shares for P16 per share.
ROBUSTA uses the cost method to account for treasury shares.

3. On April 29, 2023, ROBUSTA sold 150,000 shares (previously unissued) of P10 par value
ordinary shares at P17 per share.

4. On June 17, 2023, ROBUSTA declared a cash dividend of P1 per ordinary share, payable on
July 14, 2023, to shareholders of record on July 1, 2023.

5. On November 12, 2023, ROBUSTA sold 3,000 treasury shares for P21 per share.

6. On December 15, 2023, ROBUSTA declared the yearly cash dividend on preference shares,
payable on January 14, 2024, to shareholders of record on December 31, 2023.

7. On January 22, 2024, before the books were closed for 2023, ROBUSTA became aware that
the ending inventories at December 31, 2022, were understated by P63,000. The
appropriate correcting entry was recorded the same day.

8. After correcting the beginning inventory, net income for 2023 was P1,350,000. Ignore income
tax implications.

Questions:

1. The retained earnings, as restated, as of January 1, 2023, is

A. P1,941,000 B. P2,004,000 C. P2,031,000 D. P2,034,000

2. The retained earnings balance as of December 31, 2023, is

A. P1,875,000 B. P2,460,000 C. P2,475,000 D. P2,556,000

3. The share premium from preference shares as of December 31, 2023, is

A. P30,000 B. P90,000 C. P105,000 D. P120,000

4. The share premium from ordinary shares (including sale of treasury shares) as of
December 31, 2023, is
A. P3,000,000 B. P3,300,000 C. P3,315,000 D. P3,450,000

5. Total shareholders’ equity as of December 31, 2023, is

A. P14,835,000 B. P14,851,200 C. P14,862,000 D. P14,910,000
PROBLEM 4 – Entity A
At the beginning of year 1, Entity A grants share options to each of its 100 employees working
in the sales department. The share options will vest at the end of year 3, provided that the
employees remain in the entity’s employ, and provided that the volume of sales of a particular
product increases by at least an average of 5 percent per year. If the volume of sales of the
product increases by an average of between 5 percent and 10 percent per year, each employee
will receive 100 share options. If the volume of sales increases by an average of between 11
percent and 15 percent each year, each employee will receive 200 share options. If the volume
of sales increases by an average of 16 percent or more, each employee will receive 300 share
options.

On grant date, Entity A estimates that the share options have a fair value of P20 per option.
Entity A also estimates that the volume of sales of the product will increase by an average of
between 11 percent and 15 percent per year, and therefore expects that, for each employee
who remains in service until the end of year 3, 200 share options will vest. The entity also
estimates, on the basis of a weighted average probability, that 20 percent of employees will
leave before the end of year 3.

By the end of year 1, seven employees have left and the entity still expects that a total of 20
employees will leave by the end of year 3. Hence, the entity expects that 80 employees will
remain in service for the three-year period. Product sales have increased by 12 percent and the
entity expects this rate of increase to continue over the next 2 years.

By the end of year 2, a further five employees have left, bringing the total to 12 to date. The
entity now expects only three more employees will leave during year 3, and therefore expects a
total of 85 employees will remain at the end of year 3. Product sales have increased by 20
percent, resulting in an average of 16 percent over the two years to date. The entity now
expects that sales will average 16 percent or more over the three-year period, and hence
expects each sales employee to receive 300 share options at the end of year 3.

By the end of year 3, a further two employees have left. Hence, 14 employees have left during
the three-year period, and 86 employees remain. The entity’s sales have increased by an
average of 16 percent over the three years.

Based on the preceding information, answer the following:

1. What is the compensation expense for year 1?
A. P53,333 B. P106,667 C. P160,000 D. P172,000
2. What is the compensation expense for year 2?
A. P168,000 B. P180,000 C. P233,333 D. P286,667
3. What is the compensation expense for year 3?
A. P114,667 B. P176,000 C. P188,000 D. P282,667
4. What is the cumulative compensation expense for years 1, 2, and 3?
A. P172,000 B. P320,000 C. P344,000 D. P516,000
5. At the end of year 2, the entity should report share options outstanding of
A. P226,667 B. P286,667 C. P328,000 D. P340,000