EXERCISE 1-5 (RETAINED EARNINGS)

EXERCISE 1
1. Retained earnings represent the cumulative balance of the net income or loss for the period, dividend
distributions, prior period errors, changes in accounting policy, reclassifications of some components of other
comprehensive income and other capital adjustments.
2. Appropriated retained earnings represent that portion which has been restricted and therefore is not available for
any dividend declaration, meanwhile unappropriated retained earnings represent that portion which is free and
can be declared as dividends to shareholders.
3. When the retained earnings account has a debit balance, it is called a deficit. A deficit is not an asset but a
deduction from shareholders’ equity.
4. Dividends are distributions of earnings or capital to the shareholders in proportion to their shareholdings.
5. Dividends out of earnings can be declared only from retained earnings and usually in the form of cash, property,
liability in form of bond and scrip and share dividends or bonus issue.
6. Property dividends, or so-called “dividends in kind” are distribution of earnings of the entity to the shareholders in
the form of noncash assets.
7. According to IFRIC 17, paragraph 11, provides that an entity shall measure a liability to distribute noncash asset
as a dividend to its owner at the fair value of the asset to be distributed.
8. Share dividend is the distribution of earnings of the entity in the form of the entity’s own shares.
9. If the share dividend is less than 20%, the amount charged to retained earnings is equal to the fair value on the
date of declaration. If the share dividend is 20% or more, the par or stated value is capitalized.
10. Yes, dividend may be accounted for as expense in terms of a distribution of an equity instrument classified as
financial liability. It is recognize in the same way as interest expense on a bond. If it is classified as expense, it
may be presented in the income statement either with interest on other liabilities or as a separate line item. The
best example is a redeemable preference share, which is a share with mandatory redemption date or a
preference share that must be redeemed at the option of the holder.

EXERCISE 2
December 31, 2020 Retained Earnings 1,350,000
Dividend Payable 1,350,000
January 15, 2021 -no entry-
January 31, 2021 Dividend Payable 1,350,000
Cash 1,350,000

EXERCISE 3
October 31, 2020 Retained Earnings 1,300,000
Dividend Payable 1,300,000
To record dividend payable on the date of declaration, Oct. 31, 2020

December 31, 2020 Retained Earnings 200,000

Dividend Payable 200,000
To record increase in dividend payable at the end of reporting period

March 31, 2021 Dividend Payable 400,000

Retained Earnings 400,000
To record decrease in dividend payable on the date of settlement, Mar. 31, 2021

Dividend Payable 1,100,000

Investment in equity securities 900,000
Gain on distribution of property dividend 200,000
To record the settlement of the dividend payable

EXERCISE 4
Date of Declaration Date of Payment
a) Retained Earnings 1,000,000 Share Dividends Payable 1,000,000
Share Dividends Payable 1,000,000 Share Capital 1,000,000

b) Retained Earnings 750,000 Share Dividends Payable 500,000

Share Dividends Payable 500,000 Share Capital 500,000
Share Premium 250,000

EXERCISE 5

October 1, 2020 Retained Earnings 3,800,000

Dividend Payable 3,800,000

December 31, 2020 Dividend Payable 100,000

Retained Earnings 100,000

Impairment Loss 300,000

Machinery 300,000

April 1, 2021 Dividend Payable 200,000

Retained Earnings 200,000
 Dividend Payable 3,500,000
Loss on distribution of property dividend 200,000
Machinery 3,700,000

EXERCISE 6-7 (QUASI-REORGANIZATION)

EXERCISE 6
1. Statement of retained earnings shows the changes affecting directly the retained earnings of an entity and relates
the income statement to the statement of financial position.
2. The usual items that affect directly retained earnings are net income or loss for the period, prior period errors,
dividends to shareholders, effect of change in accounting policy, appropriation of retained earnings and
components of other comprehensive income reclassified subsequently to retained earnings.
3. Reserves is not officially defined in any accounting standard or in the Conceptual Framework. Reserves form a
substantial part of the equity of an entity. Under international accounting standard, the use of equity reserves is
based on whether a reserve is part of distributable equity or nondistributable equity.
4. The items that may be included in the caption “nondistributable reserves” are share premium reserve,
appropriation reserve, asset revaluation reserve, and other comprehensive income reserve.
5. Quasi-reorganization is the procedure of restating assets, liabilities and share capital balances in conformity with
fair value for the purpose of eliminating a deficit.
6. The two ways of accomplishing a quasi-reorganization are through recapitalization and through revaluation of
property, plant and equipment.
7. The circumstances that may justify quasi-reorganization are as follows:
a. When a large deficit exists.
b. When approved by the shareholders and creditors.
c. When the cost basis of the accounting for property, plant and equipment becomes unrealistic.
d. When a “fresh start” appears to be desirable or advantageous to all parties concerned.
8. The SEC requirements for a quasi-reorganization are as follows:
a. If the quasi-reorganization is the result of revaluation of property, plant and equipment, the appraisal must
be made by an independent expert or specialist.
b. The increase in value of the property, plant and equipment is credited to ‘revaluation surplus’.
c. The adjustments concerning other assets, such as inventory, investment and intangible asset are made
through retained earnings.
d. The resulting deficit from the reorganization is offset against the revaluation surplus.
e. Retained earnings subsequent to the quasi-reorganization shall be restricted to the extent of the deficit
wiped out during the reorganization and therefore cannot be declared as dividend.
f. Losses subsequent to quasi-reorganization cannot be charged to the remaining revaluation surplus.
g. The quasi-reorganization shall be disclosed for at least 3 years – the date, mechanics, purpose and effect
of the quasi-reorganization on the entity’s statements.

EXERCISE 7

TASK 1: JOURNAL ENTRIES/ADJUSTMENTS

Retained Earnings 150,000
Inventory 150,000

Note Payable 500,000

Accumulated Depreciation 1.200.000
Retained Earnings 300,000
Property, Plant and Equipment 2,000,000

Mortgage Payable 4,200,000

Preference share capital 4,000,000
Share Premium 200,000

Ordinary share capital 4,000,000

Share Premium 4,000,000

Share Premium 3,250,000

Retained Earnings 3,250,000

TASK 2: STATEMENT OF FINANCIAL POSITION

S Company
Statement of Financial Position
December 31, 2020

ASSETS
Cash 200,000
Accounts Receivable 300,000
Inventory 350,000
Property, Plant and Equipment 7,900,000
Accumulated Depreciation (1,900,000)
Goodwill 1,200,000
TOTAL ASSETS 8,050,000
 LIABILITIES AND SHAREHOLDERS’ EQUITY

Accounts Payable 1,100,000

Ordinary share capital 1,000,000
Preference share capital 4,000,000
Share Premium 1,950,000
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY 8,050,000

EXERCISE 8-9 (SHAREHOLDERS’ EQUITY: PRESENTATION)

EXERCISE 8
1. Statement of changes in equity is a formal statement that shows the movements in the elements or components
of the shareholders’ equity.
2. The items that are disclosed in the statement of changes in equity are the following:
a. Total comprehensive income for the period
b. For each component of equity, the effects of changes in accounting policies and corrections of errors
c. For each component of equity, a reconciliation between the carrying amount of the beginning and end of
the period, separately disclosing changes from:
i. Profit or loss
ii. Each item of other comprehensive income
iii. Transactions with owners in their capacity as owners showing separately contributions by and
distributions to owners
3. The components of comprehensive income are as follows:
a. Net income or loss
b. Other comprehensive income which comprises items of income and expense that are not recognized in
profit or loss as required or permitted by PFRS
i. Unrealized gain or loss on equity investment designated at fair value through other
comprehensive income
ii. Unrealized gain or loss on debt investment measured at fair value through comprehensive
income
iii. Gain or loss from translating the financial statements of a foreign operation
iv. Change in revaluation surplus
v. Unrealized gain or loss from derivative contracts designated as cash flow hedge
vi. Remeasurements of defined benefit plan, such as actuarial gain or loss recognized in the current
year
vii. Change in the fair value attributable to the “credit risk” of a financial liability irrevocably
designated at fair value through profit or loss
4. Other comprehensive income are the items of income and expense that are not recognized in profit or loss as
required or permitted by PFRS. It includes all the following:
a. Unrealized gain or loss on equity investment designated at fair value through other comprehensive
income
b. Unrealized gain or loss on debt investment measured at fair value through comprehensive income
c. Gain or loss from translating the financial statements of a foreign operation
d. Change in revaluation surplus
e. Unrealized gain or loss from derivative contracts designated as cash flow hedge
f. Remeasurements of defined benefit plan, such as actuarial gain or loss recognized in the current year
g. Change in the fair value attributable to the “credit risk” of a financial liability irrevocably designated at fair
value through profit or loss

EXERCISE 9
TASK 1: JOURNAL ENTRIES

January 5, 2020 Cash 5,400,000

Preference share capital 5,000,000
Share Premium - preference 400,000

February 1, 2020 Treasury shares 320,000

Cash 320,000

April 30, 2020 Cash 8,500,000

Ordinary share capital 5,000,000
Share Premium – ordinary 3,500,000

June 18, 2020 Retained Earnings 2,480,000

Dividend Payable 2,480,000

July 12, 2020 Dividend Payable 2,480,000

Cash 2,480,000

November 19, 2020 Cash 210,000

Treasury shares 160,000
Share Premium – treasury 50,000
December 15, 2020 Retained Earnings 450,000
Dividend Payable 450,000

December 31, 2020 Income Summary 3,500,000

Retained Earnings 3,500,000

Retained Earnings 160,000

Retained Earnings appropriated for treasury shares 160,000

TASK 2: STATEMENT OF CHANGES IN EQUITY

N Company
Statement of Changes in Equity
December 31, 2020

Share Share Retained Treasury

Capital Premium Earnings Shares
Balance, January 1 20,000,000 6,000,000 5,000,000 -
Issuance of preference share capital 5,000,000 400,000
Acquistion of treasury shares 320,000
Issuance of ordinary share capital 5,000,000 3,500,000
Cash dividend declaration (2,480,000)
(out of ordinary share capital)
Reissuance of treasury shares 50,000 (160,000)
Cash dividend declaration (450,000)
(out of preference share capital)
Net income for the current year 3,500,000
Appropriated for treasury shares 160,000 (160,000)
Total 30,000,000 10,110,000 5,410,000 160,000

TASK 3: SHAREHOLDERS’ EQUITY

Preference share capital, P50 par, 9% cumulative,

400,000 shares authorized, 100,000 shares issued 5,000,000
Ordinary share capital, P20 par, 4,000,000 shares authorized
`1,250,000 shares issued, of which 5,000 shares are in treasury 25,000,000
Share premium 10,110,000
Retained earnings 5,410,000
Treasury shares (160,000)
Total Shareholders’ Equity 45,360,000