CHAPTER 12

Owners’ Equity; Revenue and Expenses

Answers to Questions

1. Authorized share capital – the number of shares that can be issued legally as
specified in the charter.
Issued share capital – the number of authorized shares that have been issued to
date; includes treasury shares.
Unissued share capital – the number of authorized share capital that have never
been issued.
Outstanding share capital – the number of shares that have been issued and are
being held by shareholders at a given date; shares issued less treasury shares
held.
Subscribed share – unissued shares set aside to meet subscription contracts in
force. Subscribed share usually is not issued until full payment of the
subscription price is received.
Treasury share – shares once issued and later reacquired, and currently held by
the corporation, i.e., the difference between issued shares and outstanding
shares.
2. Par value share has a designated peso “value” per share, as specified in the
charter of the corporation. The par value has no necessary relationship to
market price. True no par share does not carry a designated or assigned value
per share.
Ordinary share is the basic issue of share with no particular preferences or
priorities; normally, it carries the four rights accruing to shareholders.
Preference share is so designated because it has some preference or priority over
the ordinary shares; the preference or priority may be positive or negative and
may relate to: (a) dividends, (b) assets upon liquidation, (c) redemption, (d)
convertibility, and (e) voting.
3. A share dividend increases various accounts included in the “contributed
capital” category without the firm receiving any contribution of assets. It is a
reclassification, sometimes called “capitalization” of retained earnings, or
sometimes “additional contributed capital,” in order to maintain legal capital.
4. When a corporation issues shares as payment for service or in exchange for
other noncash assets, the following guidelines should be applied:
a. Use current market value of the share issued or the current market value of
the assets or services received, whichever is the more reliably determinable.
b. Use appraised market value of the assets if (a) cannot be applied reliably.
5. Unrealized capital increases or increments (a credit) is a positive item in
shareholders’ equity (it is added to the other sources). It arises when assets are
 written up from cost to fair value such as appraisal of property, plant and
equipment (when fair value is greater than cost). This is also required for
investments in securities carried on Financial Assets at Fair Value Through
Other Comprehensive Income whose fair value is greater than their cost.
Unrealized capital decreases or decrements (a debit) is a negative, or contra,
item in the shareholders’ equity (it is deducted from the total of other sources).
It arises from the writedown investments in securities from cost to fair value as
specified by PAS 39 or FA at FV Through Other Comprehensive Income.
6. Effects of treasury share on total:
Purchase Sale

(a) Assets Decrease Increase

(b) Liabilities None None
(c) Shareholders’ equity Decrease Increase
7. Rights issues – provide the holder with an option to acquire a specified number
of shares of the share capital of a company under specific conditions. Share
warrants – a certificate that evidences ownership of one or more rights issues.
8. An appropriation of retained earnings reduces the amount of retained earnings
available for dividends. Appropriations are established to protect the cash
position of the corporation by reducing the amount of cash dividends that might
otherwise be paid. To the extent that the amount of cash dividends is reduced
because of inadequate retained earnings, cash is saved.
9. The principal source of retained earnings is income from operations (including
gains). The primary uses of retained earnings are cash dividends, share
dividends, recapitalizations, retirement of shares and treasury share transactions,
and absorption of losses.
10. A cash dividend is one paid in cash. A property dividend is the same as a cash
dividend except payment is in noncash assets. A liability or scrip dividend is
one declared for which payment is withheld for some period in the future. With
respect to a scrip dividend, normally the corporation issues to the shareholders
notes payable or scrip as evidence of the liability for the dividend.
11. When a property dividend is declared, it must be recorded at the market value of
the property distributed. Therefore, a gain or loss on disposal of the property
must be recorded. The gain or loss is the difference between the market value
and carrying value of the property distributed at declaration rate.
12. A corporation is required under PAS 1 to disclose the separate changes in all its
shareholders’ equity accounts as well as the changes in the number of shares of
share capital. Typically, the corporation will summarize these changes in its
statement of changes in shareholders’ equity. This statement frequently will
include the changes in retained earnings. Examples of changes included are the
issuance of share capital, the issuance and exercise of share options, transactions
involving treasury shares, net income, and dividends.
Answers to Matching Type

1.
1. A 5. D
2. E 6. H
3. G 7. C
4. B 8. F

2.
1. The receipt of donated plant site is treated as an income statement element
(a gain), and increases retained earnings indirectly as a portion of net
income. This is the treatment required under SFAS No. 116.
2. The purchase of treasury share and accounting for it using the cost method
is reported as a separate, contra component of shareholders’ equity,
reducing the total amount of shareholders’ equity.
3. A declaration of a cash dividend reduces retained earnings.
4. An unrealized loss on marketable securities classified as securities-
available-for-sale results in a reduction of unrealized capital.
5. Sale of additional ordinary shares increases the contributed capital category
of shareholders’ equity by the amount of the proceeds.
6. Sale of ordinary share on credit increases contributed capital, but the total
amount of shareholders’ equity is usually unchanged because the receivable
is usually treated as a contra to shareholders’ equity.
7. Correction of a prior period error is a prior period adjustment, which results
in an adjustment to the opening balance of retained earnings.
8. A restriction does not effect the amounts in any of the categories of
shareholders’ equity. It identifies some portion of retained earnings as being
unavailable for dividends.
9. An issuance of ordinary shares for land increases the contributed capital
category of shareholders’ equity.
10. Conversion of preferred share into ordinary shares generally would not
affect the total amount of shareholders’ equity. Conversion usually is
simply a reclassification of amounts already reported in contributed capital.
It is possible that some retained earnings will be transferred to contributed
capital to maintain legal capital. In any case, the total amount of
shareholders’ equity is unchanged.
Answers to Multiple Choice Questions

1. A 11. B 21. D 31. C 41. C

2. D 12. C 22. D 32. D 42. B
3. D 13. B 23. A 33. B 43. B
4. D 14. B 24. B 34. C 44. B
5. D 15. C 25. D 35. A 45. A
6. D 16. D 26. C 36. A 46. B
7. D 17. D 27. B 37. B 47. B
8. D 18. D 28. C 38. A
9. D 19. D 29. C 39. B
10. A 20. D 30. C 40. C