Chapter 9 - Shareholder's Equity

CHAPTER 9 - SHAREHOLDERS’ EQUITY

MULTIPLE CHOICE – THEORY

1. B 2. D 3. D 4. B 5. B 6. A

PROBLEMS

Problem 1 Audit Adjusting Entries: Retained Earnings (950 – 90) – 50,000 35,500 Ordinary Shares 50,000 Ordinary Share Dividend Distributable 47,500 Paid in Capital in Excess of Stated Value 38,000 9,500 x 10% = 950 Retained Earnings (Income Tax Expense) 240,000 Income Tax Payable 240,000 Problem 2 Total income since incorporation P630,000 Cash dividends paid ( 195,000) Total value of bonus issue distributed ( 45,000) Correct balance of retained earnings P 390,000 Problem 3 Balance, January 1 P1,590,000 Profit for the year 860,000 Dividends ( 750,000) Retained Earnings, December 31 P1,700,000 Appropriated for Plant Expansion P 150,000 Unappropriated 1,550,000 Total Retained Earnings P 1,700,000

Chapter 9 – Shareholders’ Equity

Problem 4 Paid in Capital Preference Share, P100 par, 10,000 shares authorized, 4,000 shares issued P400,000 Ordinary Share, P50 par, 15,000 shares authorized, 8,000 shares issued, 7,700 shares outstanding 400,000 Additional paid in capital 117,700 Total Paid in Capital P917,700 Retained Earnings Appropriated For Treasury Shares P19,800 For Fixed Asset Replacement 75,000 Unappropriated 160,400 235,400 Total P1,153,100 Less: Treasury Shares, at cost (300 shares) 19,800 Total Shareholders’ Equity P 1,133,300 Additional paid in capital: 7,000 x P7 P49,000 1,000 x 12 12,000 4,000 x 13 52,000 Reissue of treasury shares – preference 4,700 Total additional paid in capital P117,700 Retained earnings: Accumulated profit P610,000 Cash dividends paid ( 312,600) Bonus issue ( 1,000 x 62) ( 62,000) Total Retained Earnings P235,400 Problem 5

Preference Share Ordinary Share Treasury Shares Date Shares Amount Shares Amount

APIC

Retained Earnings Shares Amount

1/1/12 15,000 300,000 4,160,000 1,100,000 4,000 150,000 1/15/12 800 40,000 4,000 2/1/12 1,500 30,000 33,000

3/15/12 (18,750) 4/15/12 200 8,600 4/30/12 10,000 200,000 200,000

5/1/12 2,230 44,600 78,050 (122,650) 5/31/12 41,100 (43,220) (2,150) (81,450) 9/15/12 ( 39,995)

12/31/12 500,000 12/31/12 balances

800

40,000

28,730

574,600

4,516,150

1,415,380

2,050

77,150


Supporting Computations and Entries March 15 dividends (16,500 – 4,000) x 1.50 = P18,750 Apr. 30 entry Share Options Outstanding (APIC 10,000 x 6) 60,000 Cash (10,000 x 40) 400,000 Ordinary Share (10,000 x 20) 200,000 Share Premium – Ordinary 260,000 Net increase in APIC = 260,000 – 60,000 = 200,000 May 1 bonus issue: Ordinary shares issued 26,500 Treasury ( 4,200) Outstanding shares 22,300 Charge to Retained Earnings 2,230 x P55= P122,650 Par value of bonus issue 2,230 x 20 = ( 44,600) Credit to additional paid in capital P 78,050 May 31 Sale of Treasury Shares Selling price 2,150 shares x P57 P122,550 Cost of treasury shares sold: 150 @ P43 P6,450 2,000 shares 75,000 81,450 Additional paid in capital from this sale P 41,100 September 15 dividends: On ordinary share : (28,730 - 2,050) x P1.50 = P40,020 On preference share: 8% x 40,000 = 3,200 Total P43,220 Problem 6 Entries for the quasi-reorganization: Retained Earnings 180,000 Inventory (215,000 – 190,000) 25,000 Property, Plant and Equipment (875,000 – 720,000) 155,000 Cash 600,000 Additional Paid in Capital 600,000 Ordinary Share Capital, P25 par 2,500,000 Ordinary Share Capital, P15 par 1,500,000 Additional Paid in Capital 1,000,000


Additional Paid in Capital 930,000 Retained Earnings (750,000 + 180,000) 930,000

Shareholders’ Equity Ordinary Share Capital, P15 par, 100,000 shares P1,500,000 Additional Paid in Capital (1,750,000 + 600,000 + 1,000,000 - 930,000) 2,420,000 Total Shareholders’ Equity P3,920,000 Problem 7

LTC Company Statement of Comprehensive Income

For the Years Ended December 31, 2012 and 2011

2012 2011 Sales P3,000,000 P2,540,000 Cost of goods sold 1,420,000 1,150,000 Gross profit P1,580,000 P1,390,000 Selling expenses (350,000) (210,000) General and administrative expenses (260,000) (220,000) Profit before income tax P 970,000 960,000 Income tax expense 291,000 336,500 Profit P 679,000 P 623,500

2011 Cost of Goods Sold – weighted average Cost of goods sold under FIFO P1,140,000 Difference in beginning inventory 30,000 Difference in ending inventory ( 20,000) Cost of goods sold as restated P 1,150,000 2011 income tax expense Before restatement P 339,500 Adjustment due to change in inventory costing procedure (1,150,000 – 1,140,000) x 30% ( 3,000) 2011 income tax expense as restated P 336,500


LTC Company Statement of Changes in Equity

For the Years Ended December 31, 2010 and 2009

Ordinary Share Retained Earnings

Total

Balances, January 1, 2011 P 1,000,000 P600,000 P1,600,000 Cumulative effect of changing from FIFO costing to weighted average, net of applicable income tax of P9,000 (30,000 x 70%)

21,000

21,000 Dividends (400,000) (400,000) Profit for the year 623,500 623,500 Balance, December 31, 2011 P1,000,000 P 844,500 P

1,844,500 Profit for the year 2012 679,000 679,000 Balances, December 31, 2012 P1,000,000 P1,523,500 P2,523,500

Problem 8 Reported profit P120,000 Loss from fire ( 2,625) Write off of goodwill ( 26,250) Loss on sale of equipment ( 24,150) Gain on early retirement of bonds 7,525 Gain on insurance policy settlement 5,250 Corrected profit P 79,750 Retained Earnings, January 1 P263,200 Stock dividends ( 70,000) Loss on retirement of preference shares ( 35,000) Officers’ compensation in prior period ( 162,750) Other correction of errors 25,025 Corrected profit (see above) 79,750 Corrected retained earnings, Dec. 31 P100,225


MULTIPLE CHOICE - PROBLEMS Items 1 through 5 1. B Balance, December 31, 2011 P 750,000 Mar. 31 4,500 x 3 13,500 June 30 ( 250,000 + 4,500 – 6,000) / 10 = 24,850 shares 24,850 shares x P3 74,550 Sept. 30 P2,000,000/P1,000 x 2 shares = 4,000 shares 4,000 shares x P3 12,000 Balance, Dec. 31 P 850,050 2. C RE, January 1, 2012 P 480,000 Profit 600,000 Understatement in depreciation 40,000 x 65% ( 26,000) Balance, December 31, 2012 P 1,054,000 3. B Issue price P2,000,000 Attributable to the debt PV of face = P2,000,000 x 0.32197 = P 643,940 PV of interest = P200,000 x 5.65022 1,130,044 1,773,984 Amount credited to equity P 226,016 4. B Interest expense for 2012 = 1,773,984 x 12% x 9/12 = P 159,659 5. C Effective interest for 2012 P159,659 Nominal interest 200,000 x 9/12 150,000 Amortization P 9,659 Carrying value, April 1 1,773,984 Carrying value, Dec. 31 P1,783,645 6. A Correct balance of Retained Earnings 485,000 – 200,000 + 324,000 – 300,000 + 451,000 = P760,000 7. C Additional paid in capital 150,000 + 100,000 = P 250,000 8. D Ordinary share P2,000,000 Additional paid in capital 250,000 Retained earnings 760,000 Revaluation surplus (appraisal increase) 300,000 Total shareholders’ equity P3,310,000 9. A Preference share = P6,000,000 – (4,000 x P200) = P5,200,000 10. C Ordinary share = 200,000 shares x P25 par = P5,000,000


11. B APIC, January 1, 2012 P3,300,000 Cancelled upon retirement of preference P1,800,000 / 30,000 x 4,000 ( 240,000) From sale of treasury shares 6,000 x (45 – 37.50) 45,000 Sale of donated shares 2,000 x 48 96,000 APIC, December 31, 2012 P3,201,000 12. C Ordinary shares outstanding Issued = 100,000 x 2 200,000 Treasury (8,000 x 2) – 6,000 + 4,000 – 2,000 = 12,000 Outstanding 188,000 13. C Retained Earnings January 1, 2012 P2,200,000 Excess of retirement price over issue price 280 – (200 + 60 share premium per share) x 4,000 ( 80,000) Profit 1,850,000 Balance, December 31, 2012 P3,970,000 14. There is no number 14 (Sorry) 15. D Ordinary shares issued: January 1, 2012 90,000 Mar. 6 – 20 1,400 Nov. 3 55 x 10 shares 550 Total shares issued 91,950 Par value per share P 2 December 31, 2012 balance P183,900 16. D Share premium January 1, 2012 balance P1,820,00 Mar. 6 1,400 x 42 58,800 Nov. 3 (see entry below) 24,200 Dec. 31 balance P1,903,000 Issue price of bonds 90,000 x 103% P 92,700 Issue price of debt 90,000 x 97% = 87,300 Value assigned to 90 share warrants P 5,400 Entry upon exercise of 55 warrants Share warrants issued (5,400 x 55/90) 3,300 Cash 550 x 40 22,000 Ordinary share (550 x 2) 1,100 Share premium 24,200


17. D Paid in capital from treasury shares Sales price 650 x P40 P 26,000 Cost = P72,600/1,210 x 650 39,000 Deduction from previous APIC from treasury shares P 13,000 Previous balance of APIC 22,500 APIC from Treasury shares P 9,500 18. C Ordinary Share Warrants Outstanding Issue Price of bonds and warrants P90,000 x 103% P92,700 Fair value of bonds ex-warrants 87,300 Value initially assigned to warrants P 5,400 Value of warrants exercised (5,400 x 55/90) ( 3,300) Value of remaining warrants P 2,100 19. A Cost of remaining treasury shares Cost of 1,210 treasury shares originally held P 72,600 Cost of treasury shares sold ( 72,600 x 650 / 1,210) ( 39,000) Cost of remaining treasury shares P 33,600 20 – 28 See worksheet 20. D 21. D 22. B 23. C 24. A 25. B 26. C 27. A 28. D


Preference Share Ordinary Share Treasury Shares

Date Shares Amount Shares Amount APIC

Retained Earnings Shares Amount

1/1/12 9,000 P900,000 600,000 P600,000 P1,200,000 P3,198,000 1/6/12 22,500 22,500 348,750 1/31 40,500 2/22 7,500 P180,000 2/28 21,000 21,000 525,000 4/30 – 5/31

(920,000)

8/31 (12,000) (3,000) (72,000) 9/14 450 450 (1,350)

5,400

11/30 (1,278,900) 12/15 ( 54,000) 12/31 (42,000) 12/31 1,800,000 12/31 bal.

9,000 P900,000 643,950 P643,950 P2,118,300 P2,691,100 4,500 P108,000

January 31: Value assigned to warrants 1,350,000 x (98% - 95%) = P40,500 (classified as APIC) Entry on Sept. 14 Cash (450 x 10) 4,500 Share Warrants Outstanding (APIC) 1,350 Ordinary Share 450 Share Premium – Ordinary Share 5,400 SUMMATIVE EXERCISE – CONQUEST MOTORS CORPORATION Operating Expenses 2,200 Petty Cash Fund 2,200 Materials Inventory 9,000 Materials Acquisition Fund 9,000 Cash 12,000 Salaries Payable 12,000 Goods in Process Inventory 900 Cash 900 Operating Expenses 1,000 Cash 1,000 Notes Payable 300,000 Interest Expense 18,000


Cash 318,000 Other Financial Assets 350,000 Cash 350,000 Other Income (Dividend Revenue) 6,600 Trading Securities 6,600 Dividend Receivable 2,000 Other Income 2,000 Trading Securities 12,800 Unrealized Gain on Trading Securities 12,800 Installment Sales 610,000 Cost of Installment Sales 396,500 Deferred Gross Profit 213,500 Deferred Gross Profit 108,500 Realized Gross Profit 108,500 Repossessed Inventory (Finished Goods Inventory) 70,000 Deferred Gross Profit 52,000 Loss on Default 122,000 Materials Inventory 18,000 Accounts Payable 18,000 Goods in Process Inventory 69,600 Applied Factory Overhead 69,600 Factory Overhead Control 30,000 Operating Expenses 20,000 Accumulated Depreciation – Building 50,000 Discount on Notes Payable 12,000 Equipment 10,800 Operating Expenses 1,200 Retained Earnings 36,000 Other Assets 36,000 Interest Receivable 16,200 Other Income 16,200 Interest Expense 67,500 Operating Expenses 67,500 Interest Expense 22,500


Interest Payable 22,500 Share Capital 80,000 Retained Earnings 80,000 Share Capital 250,000 Share Premium 250,000 Retained Earnings 348,000 Dividends Payable 348,000 Operating Expenses 115,000 Accrued Operating Expenses 115,000 Applied Factory Overhead 747,600 Overapplied Factory Overhead 11,600 Factory Overhead Control 736,000 Overapplied Factory Overhead 11,600 Cost of Goods Sold 11,600 Income Statement Correct Balances: Sales P2,800,000 Cost of goods sold 1,948,400 Gross profit P 851,600 Realized gross profit on installment sales 108,500 Total gross profit P 960,100 Loss from Repossession ( 8,000) Gross profit, net of loss on repossession P 952,100 Operating Expenses ( 609,500) Other Income 71,600 Unrealized Gains on Trading Securities 12,800 Other Expenses and Losses ( 36,500) Income before interest and taxes P 390,500 Interest expense 158,000 Income before income tax P 232,500 Income tax expense 69,750 Net income P 162,750 Balance sheet accounts Current Assets Cash P1,015,900 Trading Securities 214,800 Installment Accounts Receivable 340,000 Interest Receivable 16,200 Dividend receivable 2,000 Receivable from officers 45,000


Inventories 486,500 Prepaid expenses 40,000 Total current assets P2,160,400 Non-current Assets Property, Plant and Equipment, at cost P5,409,200 Accumulated Depreciation 186,000 Net carrying value P5,223,200 Other Financial Assets 485,000 Total Non-current assets 5,708,200 Total Assets P7,868,600 Current Liabilities Accounts payable P 508,000 Salaries payable 12,000 Notes payable 538,000 Accrued expenses 115,000 Dividends payable 348,000

Interest payable 22,500 Deferred gross profit 119,000 Income tax payable 69,750 Total current liabilities P1,732,250 Non-current liabilities Notes payable 1,000,000 Total liabilities P2,732,250 Shareholders’ Equity Share Capital P2,900,000 Share Premium 1,450,000 Retained Earnings 692,350 5,042,350 Total Liabilities and Shareholders’ Equity P7,774,600

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Chapter 9 - Shareholder's Equity