Shareholders’ Equity Exercises

Problem 1
The Gallery Company is authorized to issue 100,000 shares of 500 par value ordinary share capital. Gallery has the
following transactions during the month:
I. Issued 20,000 shares at par, receiving cash.
II. Issued 250 shares to attorneys for services in securing the corporate charter and for preliminary legal costs of
organizing the corporation. The value of the services was 150,000.
III. Issued 12,500 ordinary shares in exchange for a land and a building with fair values of 5,000,000 and 3,000,000
respectively.
IV. Received cash for 6,500 ordinary shares sold at 550 per share.

Required: Journal entries to record the foregoing transactions

Problem 2
The following are independent transactions relating to share capital:
I. Issued 10,000 ordinary shares of 150 par value at 200 per share. The company incurred and paid share issue costs of
60,000.
II. Issued 3,500 ordinary shares of 200 par in exchange for a parcel of land to be used as a plant site. The ordinary share
capital is actively traded on the Philippines Stock Exchange at an average price of 560 per share.
III. Issued 100,000; 100 par ordinary shares for 18,000,000. One share of 500 par preference was issued with every 20
ordinary shares. The market price per ordinary share was 120 and per preference share was 800.
IV. Subscriptions to 5,000 ordinary shares with 100 par value are received from various subscribers along with checks
amounting to 25% of the subscription price as down payment. The share capital was subscribed at 120 per share. The
balance of the subscription price is to be paid in three equal monthly installments.
V. Received a parcel of land from a wealthy shareholder to be used for the construction of a new factory building. Legal
fees of 40,000 were paid. The fair market value of the land was 5,000,000. Its cost to the shareholder was 800,000 ten
years ago.

Required: Journal entries to record the foregoing transactions

Problem 3
The Blazing Red Corporation is authorized to issue 100,000; 10 par value ordinary shares and 30,000 10% cumulative and
non-participating 100 par preference shares. The corporation engaged in the following share capital transactions through
December 31, 2020.
I. 30,000 ordinary shares were issued for 380,000 and 12,000 preference shares for an equipment valued at 1,500,000.
II. Subscriptions for 10,000 ordinary shares have been taken and 40% of the subscription price of 16 per share has been
collected. The shares will be issued upon collection of the subscription price in full.
III. 1,000 ordinary treasury shares were purchased for 18. The company uses the cost method of accounting for treasury
shares.
IV. Collected the balance on the subscription of 8,000 shares above and share certificates were accordingly issued.
Subscribers on 2,000 shares defaulted and the shares were declared delinquent. Blazing Red paid 2,000 cost for
advertising the delinquent shares.
V. Received bids on the delinquent shares. The amount due from the highest bidder was collected and the shares were
issued.
VI. The entity reported profit of 400,000 for the year 2020.

Required: Journal entries to record the foregoing transactions and total shareholders’ equity at December 31, 2020

Problem 4
The Millennium Company had 100,000 shares of Ordinary Share Capital on December 31, 2019. Its statement of financial
position on that date showed the following shareholders’ equity balances:
Ordinary Share Capital, 10 par 1,000,000
Share Premium 300,000
Retained Earnings 900,000

The following treasury share transactions took place in 2020:

I. Purchased 10,000 ordinary shares at 14 per share
II. Sold 4,000 of the treasury shares at 15 per share
III. Sold 5,000 of the treasury shares at 13 per share
IV. Retired the remaining treasury shares
Required:
a. Journal entries related to the above transactions
b. Determine the shareholders’ equity at December 31, 2020 assuming that profit for the year is 280,000 and cash
dividend declared amounting to 200,000.

Problem 5
The Consuelo Enterprises, Inc. had the following shareholders’ equity balances at December 31, 2020:
Preference Share Capital, 20 par, 100,000 shares authorized 2,000,000
Ordinary Share Capital, 30 par, 100,000 shares authorized 1,800,000
Share Premium - Preference Share 160,000
Share Premium - Ordinary Share 250,000
Retained Earnings 800,000

Journalize the retirement of 4,000 preference shares, assuming that the retirement price is
a. 21 per share
b. 26 per share

Problem 6
The Conception Enterprises, Inc. had the following shareholders’ equity balances at December 31, 2020:
Preference Share Capital, 20 par, 100,000 shares authorized 2,000,000
Ordinary Share Capital, 30 par, 100,000 shares authorized 1,800,000
Share Premium - Preference Share 160,000
Share Premium - Ordinary Share 250,000
Retained Earnings 800,000

The preference share is convertible into ordinary share.

Required: Journalize the conversion of 10,000 preference shares under each of the following independent assumptions:
a. Preference share is convertible into ordinary share on a share for share basis
b. 2 shares of preference are convertible into one ordinary share

Problem 7
The capital accounts for the Red Stone Company on July 1, 2020 are as follows:
Ordinary Share Capital, 10 par, 100,000 shares issued and outstanding 1,000,000
Share Premium 500,000
Retained Earnings 3,135,000

The company’s ordinary shares are currently selling at 20.

Required: Entries to record the following independent transactions

a. A 10% bonus issue is declared and issued
b. A 30% bonus issue is declared and issued
c. A 2-for-1 share split is declared and issued

Problem 8
The Dark Red Company, which started operations in 2018, paid dividends at the end of 2018, 2019 and 2020 as follows:
2018 - 150,000
2019 - 260,000
2020 - 540,000

Through these years, the corporation has 250,000 shares of 10 par value ordinary share and 20,000 shares of 9%, 100 par
value preference share.

Required: Compute the amount of total dividends per share at the end of 2018, 2019 and 2020 on both preference and
ordinary share under each of the following assumptions:
a. Preference share is non-cumulative and non-participating
b. Preference share is cumulative and non-participating
c. Preference share is cumulative and fully participating
Problem 9
The Red Violet Company paid a total of 610,000 dividends in 2020 to its 250,000 shares of 10 par ordinary share and
20,000 shares of 9% 100 par preference share.

Dividends of 50,000 were in arrears at January 1, 2020.

Required: Compute the total amount of dividends on both preference share capital an ordinary share capital, assuming
a. Preference is participating up to 14%
b. Preference is participating up to 12%

Problem 10
Red Mama Company has 100,000 shares of 10 par ordinary share outstanding. In declaring and distributing a 50% bonus
issue, Red Mama initially issued only 45,000 new shares; the other shares were not issued because some investors did not
own Red Mama shares in even multiples of 2. To these shareholders, Red Mama issued fractional share warrants.
Subsequently, 80% of the fractional share warrants were turned in for full shares.

Required: Journal entries to record the foregoing

Problem 11
On October 31, 2020, Red Ball Corporation declared dividends to its 100,000 ordinary shares payable in the form of
Tivoli Company ordinary. One share of Tivoli Company ordinary is distributable for each 10 shares of Red Ball
Corporation ordinary. The dividends are distributable on February 28, 2021. The market value of Tivoli Company
ordinary was 15 on October 31, 2020; 17 on December 31, 2020 and 20 on February 28, 2021.

Required: Journal entries to record the foregoing (The Tivoli Company was carried in the books of Red Ball on October
31, 2020 at 14 and classifies it at FA at FVTPL)

Problem 12
On October 1, 2020, the Red Chili Company declared dividends to its ordinary shareholders distributable in the form of
pieces of equipment. These equipment were acquired on October 1, 2014 at a total cost of 450,000 and were depreciated
over a ten year estimated useful life with no estimated scrap value using the straight-line depreciation. The dividends were
distributed on January 31, 2021. The equipment were estimated to have the following fair values:
October 1, 2020 190,000
December 31, 2020 160,000
January 31, 2021 175,000

Give the entries relative to the foregoing, including any adjustment on December 31, 2020.

Problem 13
The capital structure of Red Ribbon Corporation on December 31, 2019 follows:
Preference 12% Share Capital, 200 par, 30,000 shares issued and outstanding 6,000,000
Ordinary Share Capital, 50 par, 100,000 shares issued and outstanding 5,000,000
Share Premium - Preference 1,800,000
Share Premium - Ordinary 1,500,000
Retained Earnings 2,200,000

During 2020, the following selected transactions occurred:

I. Purchased and retired 4,000 preference shares at 280 per share
II. Purchased 8,000 shares of its own ordinary share at 80 per share
III. A 2-for-1 share split on the ordinary share was approved by the shareholders, thereby reducing the par value to 25
IV. Reissued 6,000 treasury shares at 45 each
V. Shareholders donated 4,000 ordinary shares when the market price was 46 per share
VI. 2,000 of the donated shares were issued for 48 per share
VII. Declared the annual dividends on the preference share and P1 per share dividend on the ordinary share
VIII. The profit for 2020 was 2,000,000

Required: Determine the following at December 31, 2020:

a. Number of preference shares issued and number of preference shares outstanding
b. Number of ordinary shares issued and number of ordinary shares outstanding
c. Cost of remaining treasury shares (acquired by purchase)
d. The amount of total dividends declared during the year
e. Total shareholders’ equity
Problem 14
Red Heart Corporation was organized at the beginning of 2018 with 300,000 authorized shares of 100 par value ordinary
share capital. At December 31, 2018, the shareholders’ equity section of Red Heart was as follows:
Ordinary Share Capital, 100 par, 30,000 share issued 3,000,000
Share Premium 300,000
Retained Earnings 450,000
Total Shareholders’ Equity 3,750,000

On June 15, 2019, Red Heart issued 50,000 ordinary shares for 6,000,000. A 5% bonus issue was declared on September
30, 2019 and issued on November 10, 2019 to shareholders of record on October 31, 2019. The market value of the
ordinary share was 110 each on the declaration date. The profit of Red Heart for the year ended December 31, 2019 was
1,175,000.

During 2020, Red Heart had the following transactions:

March 1 - Red Heart acquired 3,000 of its own ordinary share for 95 each

May 1 - Red Heart sold 1,500 shares of its treasury for 120 per share

August 10 - Issued shareholders one stock right for each share held to purchase two additional ordinary shares for 125 per
share. The rights expire on December 31, 2020.

September 15 - 15,000 stock rights were exercised when the market value of ordinary share was 130 each

October 31 - 40,000 stock rights were exercised when the market value of ordinary share was 140 each

December 10 - Red Heart declared cash dividends of 5 per share payable on January 5, 2021

December 20 - Red Heart retired 1,000 shares of its treasury and reverted them to an unissued basis. On this date, the
market value of the ordinary share was 150 each.

Profit for 2020 was 1,200,000

Required:
a. Journal entries for years 2019 and 2020
b. Shareholders’ equity section at December 31, 2019 and December 31, 2020

Problem 15
The Red Carpet Company wants to raise its working capital. After analysis of available alternatives, the company decides
to issue 1,500 shares of 30 par preference share capital with detachable warrants. The package of the preference shares
and warrants sells for 98. The warrants enable the holder to purchase 750 shares of 10 par ordinary shares at 40 per share.
Immediately following the issuance of shares, the share warrants are selling at 10 each. Each preference share without the
warrant sells for 90.

Required: a. Amount assigned to the preference share and share warrants issued
b. Entry to record the exercise of the warrants, assuming that only 80% of the warrants were issued

Problem 16
The Red Santa Company began 2020 with 13,000,000 retained earnings account balance, of which 4,000,000 is
appropriated for plant expansion. During the year 2020, the following events occurred:
1. A material error was discovered in the financial statements for the year 2019 which caused depreciation of 2019 to be
understated by 200,000. The company’s income tax rate is 30%.

2. Cash dividends of 5 per share on the 300,000, 100 par ordinary shares outstanding were declared and distributed, after
paying the required annual dividend on its 200,000 shares of 8% 100 par preference share.

3. 10,000 shares of preference share capital were retired at 150 per share. These shares were originally issued at 130 per
share.

4. The company completed its plant expansion project and released the retained earnings previously appropriated for this
purpose.
5. A bonus issue of 45,000 shares of ordinary share capital was distributed to shareholders. The shares sell at 150 per
share on date of declaration and 140 per share on the date of distribution. There were 300,000 shares issued and
outstanding before the bonus issue.

6. During 2020, the company issued 20,000,000, 10-year, 12 bonds. The bond indenture provides that Red Santa shall
restrict 2,000,000 of retained earnings annually for the accumulation of enough funds for this indebtedness.

7. Profit for the year was 3,000,000.

Required: Compute the retained earnings balance that will be shown in the statement of financial position at December 31,
2020. How much of this balance is unavailable for further distribution of dividends?

Problem 17
Red Hat Company began operations in January 2019 and reported the following results of operations for each of its first 3
years of operations: 2019 – 600,000 loss; 2020 – 240,000 loss and 2021 – 3,900,000 profit. At December 31, 2021, the
company’s capital accounts were as follows:
I. 9% cumulative preference share capital, 100 par,
100,000 shares authorized, 60,000 shares issued and outstanding 6,000,000
II. Ordinary share capital, 10 par, 1,000,000 shares authorized,
800,000 shares issued and outstanding 8,000,000

Red Hat Company has never paid a cash or bonus issue and there has been no change in the capital accounts since it began
operations.

Required:
a. Computation of book value per share of preference and ordinary share at December 31, 2021
b. Assuming that the preference share has a liquidation value of 105 per share, compute the book value per share of the
preference and ordinary share at December 31, 2021

Problem 18
Red Company has experienced several poor earnings and has several assets on its books that are undervalued. It desires to
revalue its assets and eliminate deficit. At December 31, 2020, the company owns the following identifiable assets:
Cost Accumulated Book Fair
Depreciation Value Value
Inventory 1,000,000 1,000,000 700,000
Land 5,000,000 5,000,000 6,500,000
Buildings 7,500,000 3,500,000 4,000,000 5,000,000
Machinery & Equipment 3,500,000 1,500,000 2,000,000 2,200,000

The statement of financial position on December 31, 2020, reported a deficit of 2,000,000.

Required: Journal entries to record the quasi-reorganization

Problem 19
The Skinny Red Company has a deficit in retained earnings of 1,000,000. Business appears to be turning around, so the
president wants the company to go through a quasi-reorganization. The statement of financial position of the company
prior to the reorganization contains the following information:
Current assets 500,000
Land 1,500,000
Buildings 5,000,000
Liabilities 1,000,000
Accumulated depreciation 1,000,000
Ordinary share capital, 20 par value 6,000,000
Retained earnings (Deficit) (1,000,000)

As part of the quasi-reorganization, the current assets and buildings are to be written down by 100,000 and 300,000,
respectively. Ordinary share capital is to be exchanged and will be restated at a legal capital of 4,000,000. The resulting
additional paid in capital will be used to cancel the resulting deficit.

Required:
a. Journal entries to record the quasi-reorganization
b. A statement of financial position immediately after the quasi-reorganization