CHAPTER 2

SHAREHOLDERS’ EQUITY

Problems

2-1. (Gallery Company)

 Cash (20,000 x 500) 10,000,000

Ordinary Share Capital 10,000,000

 Legal Expense/Professional Fees 150,000

Ordinary Share Capital (250 x 500) 125,000
Share Premium - Ordinary 25,000

 Land 5,000,000
Building 3,000,000
Ordinary Share Capital (12,500 x 500) 6,250,000
Share Premium - Ordinary 1,750,000

 Cash (6,500 x 550) 3,575,000

Ordinary Share Capital (6,500 x 500) 3,250,000
Share Premium - Ordinary 325,000

 Cash (20,000 x 550 x 25%) 2,750,000

Subscription Receivable (20,000 x 550 x 75%) 8,250,000
Subscribed Ordinary share (20,000 x 500) 10,000,000
Share Premium - Ordinary 1,000,000

 Cash (12,000 x 550 x 75%) 4,950,000

Subscription Receivable 4,950,000

 Subscribed Ordinary Share 6,000,000

Ordinary Share Capital 6,000,000

2-2.
a. Cash (10,000 x 200) 2,000,000
Ordinary Share Capital (10,000 x 150) 1,500,000
Share Premium - Ordinary 500,000

Share Premium-Ordinary 60,000

Promotions and Advertising Expense 25,000
Cash 85,000

b. Land (3,500 x 560) 1,960,000

Ordinary Share Capital (3,500 x 200) 700,000
Share Premium – Ordinary 1,260,000

c. Cash 18,000,000
Preference Share Capital 2,500,000
Ordinary Share Capital 10,000,000
Share Premium – Preference 2,000,000
Share Premium – Ordinary 3,500,000
MV: Pref – 5,000 x 800=4M
Ord – 100,000 x 120 = 12M
Allocation:
Pref: 18M x 4/16 = 4.5M
Ord: 18M x 12/16 = 13.5M
 Chapter 2 – Shareholders’ Equity

d. Subscription Receivable 450,000

Cash 150,000
Subscribed Ordinary Share 500,000
Share Premium – Ordinary 100,000

e. Land 5,000,000
Cash 40,000
Donated Capital 4,960,000

2-3. (Blazing Red Corporation)

Contributed Capital
10% Preference Share Capital, cumulative and non-participating, P100 par
30,000 shares authorized; 12,000 shares issued and outstanding P1,200,000
Ordinary Share Capital, P10 par, 100,000 shares authorized, 40,000 shares
issued, 39,000 shares outstanding 400,000
Share Premium – Preference 300,000
Share Premium –Ordinary 140,000
Total Contributed Capital P2,040,000
Retained Earnings
Appropriated for Treasury Share P 18,000
Unappropriated 332,000 350,000
Treasury Shares, 1,000 ordinary shares, at cost ( 18,000)
Total Shareholders’ Equity P2,372,000

The total amount of P2,372,000 may also be obtained without necessarily preparing the
shareholders’ equity in good format (if not required) as follows:

Issue of 30,000 ordinary shares P 380,000

Issue of preference shares in exchange of equipment 1,500,000
Subscriptions for 10,000 ordinary shares at 16 160,000
Purchase of 1,000 treasury shares at 18 (18,000)
Retained earnings 350,000
Total shareholders’ equity, December 31, 2020 P 2,372,000

2-4. (Millenniun Company)

(a)
(1) Treasury Shares 140,000
Cash 140,000

(2) Cash 60,000

Treasury Shares 56,000
Paid in Capital from Treasury Share 4,000

(3) Cash 65,000

Paid in Capital from Treasury Shares 4,000
Retained Earnings 1,000
Treasury Shares 70,000

(4) Ordinary Share Capital 10,000

Share Premium - Ordinary 3,000
Retained Earnings 1,000
Treasury Shares 14,000

9
 Chapter 2 – Shareholders’ Equity

(b) Total Shareholders’ Equity, December 31, 2019 P2,200,000

(1) Purchase of treasury shares (10,000 x 14) (140,000)
(2) Sale of treasury shares (4,000 x 15) 60,000
(3) Sale of treasury shares (5,000 x 13) 65,000
Profit for the year 280,000
Dividends declared (200,000)
Total Shareholders’ Equity, December 31, 2020 P2,265,000

The total shareholders’ equity may also be obtained by determining the balance of the
shareholders’ equity accounts, as follows:

Ordinary share capital, P10 par (99,000 shares issued and outstanding) P 990,000
Share premium - ordinary 297,000
Retained Earnings 978,000
Total shareholders’ equity, December 31, 2020 P2,265,000

2-5. (Consuelo Enterprises)

(a) Preference Share Capital (4,000 x 20) 80,000

Share Premium – Preference (4,000 x 1.60) 6,400
PIC from Retirement of Preference Shares 2,400
Cash (4,000 x 21) 84,000

(b) Preference Share Capital (4,000 x 20) 80,000

Share Premium – Preference (4,000 x 1.60) 6,400
Retained Earnings 17,600
Cash (4,000 x 26) 104,000

Average preference share premium per share: 160,000/100,000 shares = 1.60

2-6. (Concepcion Enterprises, Inc.)

(a) Preference Share Capital (10,000 x 20) 200,000

Share Premium – Preference (10,000 x 1.60) 16,000
Retained Earnings 84,000
Ordinary Share Capital (10,000 x 30) 300,000

(b) Preference Share Capital (10,000 x 20) 200,000

Share Premium – Preference (10,000 x 1.60) 16,000
Ordinary Share Capital (5,000 x 30) 150,000
Share Premium – Ordinary 66,000

2-7. (Red Stone Company)

(a) Retained Earnings (10,000 shares x P20) 200,000

Share Dividends Distributable 100,000
Share Premium - Ordinary 100,000

Share Dividends Distributable 100,000

Ordinary Share Capital 100,000

(b) Retained Earnings (30,000 x 10) 300,000

Share Dividends Distributable 300,000

Share Dividends Distributable 300,000

Ordinary Share Capital 300,000

(c) Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued

10
 Chapter 2 – Shareholders’ Equity

and outstanding.
2-8. (Dark Red Company)

Capital structure:
Preference Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000

(a) Preference share is non-cumulative and non-participating

2018 Preference Ordinary

Current preference dividends (9% x 2,000,000 = P0
180,000; dividends declared were P150,000 only. P 150,000
Dividend per share P7.50 P0

2019
Current preference dividends (9% x 2,000,000) P 180,000
Excess (240,000 – 180,000) P80,000
Dividend per share P9.00 P0.32

2020
Current preference dividends (9% x 2,000,000) P 180,000
Excess (540,000 – 180,000) P360,000
Dividend per share P9.00 P1.44

(b) Preference share is cumulative and non-participating.

2018 Preference Ordinary

Current on preference is P180,000 P150,000
Arrears, end (P180,000 – 150,000 = 30,000) P0
Dividend per share P7.50 P0

2019
Arrears, beginning P 30,000
Current year 180,000
Total P210,000 P210,000
Excess to ordinary = 260,000 – 210,000 P50,000

Dividend per share P10.50 P0.20

2020
Current year P180,000
Excess – to ordinary = 540,000 – 180,000 P360,000
Dividend per share P9.00 P1.44

(c) Preference share is cumulative and fully participating

2018 Preference Ordinary

Current dividends:
9% x 2,000,000 = P180,000 P 150,000 P0
Arrears, end = 180,000 – 150,000 = 30,000
Dividend per share P 7.50 P0

2019
Arrears, beginning P 30,000
Current on preference 180,000 P 210,000
To ordinary: initial limit 9% x P2,500,000
= P225,000, but remaining is only P50,000
Total dividends P210,000 P50,000
Dividend per share P10.50 P 0.20

11
 Chapter 2 – Shareholders’ Equity

2020 Preference Ordinary

Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess: P135,000 x 2.0/4.5 60,000
135,000 x 2.5/4.5 75,000
Total P240,000 P300,000
Dividend per share P12.00 P1.20

2-9. (Red Violet Company)

Capital structure:
Preference Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000

(a) Preference is participating up to 14%.

Preference Ordinary
Arrears, January 1 P 50,000
Current dividends:
9% x P2,000,000 180,000
9% x P2,500,000 P225,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which is less
than the limit of additional 5%; therefore full
excess is prorated.
P155,000 x 2M/4.5M 68,889
P155,000 x 2.5M/4.5M 86,111
Total P298,889 P311,111
Dividend per share P14.94 P1.24

(b) Preference is participating up to 12%.

Arrears, January 1 P 50,000

Current dividends:
9% x P2,000,000 180,000
9% x P2,500,000 P225,000
Excess divided by total par
155,000/4,500,000 = 3.44%, which exceeds
the additional limit of 3%; therefore, additional
to preference is limited to 3%; remainder goes to
ordinary 60,000
3% x P2,000,000
P155,000 – 60,000 95,000
Total P290,000 P320,000
Dividend per share P14.50 P1.28

2-10. (Red Mama Company)

Retained Earnings 500,000

Share Dividends Distributable 500,000
50% x 100,000 x 10 = 500,000

Share Dividends Distributable 500,000

Ordinary Share Capital 450,000
Fractional Share Warrants Outstanding 50,000

Fractional Share Warrants Outstanding 50,000

12
 Chapter 2 – Shareholders’ Equity

Ordinary Share Capital 40,000

PIC from Unexercised Fractional Share Warrants 10,000
2-11. (Red Ball Corporation)

2020
Oct. 31
Financial Assets at FV through Profit or Loss 10,000
Unrealized Gain on Financial Assets at FVPL 10,000
10,000 shares x (15 – 14)

Retained Earnings 150,000

Property Dividends Payable 150,000
10,000 shares x 15

Financial Assets at FV through Profit or Loss 20,000

Unrealized Gain on Financial Assets at FVPL 20,000
10,000 shares x (17 – 15)

Retained earnings 20,000

Property Dividends Payable 20,000

2021
Feb. 28
Retained Earnings 30,000
Property Dividends Payable 30,000

Property Dividends Payable 200,000

Financial Assets at FV through Profit or Loss 170,000
Gain on Disposal of Financial Assets at FVPL 30,000

2-12. (Red Chili Company

2020
Oct. 1 Depreciation Expense 33,750
Accumulated Depreciation – Equipment 33,750
450,000/10 x 9/12

Retained Earnings 190,000

Property Dividends Payable 190,000

Assets Held for Distribution 180,000

Accumulated Depreciation – Equipment 270,000
Property, Plant and Equipment 450,000
Cost P450,000
Acc. Depr. 450,000/10 x 6 270,000
Carrying value P180,000
FV (because it is higher) P190,000

Dec. 31 Impairment Loss 20,000

Assets Held for Distribution 20,000
180,000 – 160,000 = 20,000

Property Dividends Payable 30,000

Retained Earnings 30,000
190,000 – 160,000 = 30,000 decrease

2021
Jan. 31 Retained Earnings 15,000
Property Dividends Payable 15,000
175,000 – 160,000 = 15,000 increase

13
 Chapter 2 – Shareholders’ Equity

Jan. 31 Property Dividends Payable 175,000

Assets Held for Distribution 160,000
Gain on Disposal of Assets 15,000

2-13. (Red Ribbon Corporation)

Total Preference Ordinary Treasury Shares

Shareholders’ Shares Shares Number of
Equity issued issued Shares Cost
12/31/19 balances P16,500,000 30,000 100,000
2020 transactions:
a) 4,000 x 280 (1,120,000) (4,000)
b) 8,000 x 75 (600,000) 8,000 P640,000
c) 2:1 share split 100,000 8,000
d) 6,000 x 45 270,000 (6,000) (240,000)*
e) 4,000 x 46 4,000
f) 2,000 x 48 96,000 (2,000)
g) Dividends (812,000)
h) Profit 2,000,000
12/31/20 balances P16,334,000 26,000 200,000 12,000 P400,000
*P640,000 x 6,000/16,000 = 240,000

(a) Number of preference shares issued and outstanding 26,000

(b) Number of ordinary shares issued 200,000
Number of ordinary shares outstanding (200,000 – 12,000) 188,000
(c) Cost of remaining treasury shares acquired by purchase P400,000
(d) Amount of total dividends (26,000 sh x P200 x 12%) + (188,000 x 1) P812,000
(e) Total shareholders’ equity, December 31, 2020 P16,334,000

2-14. (Red Heart Corporation)

(a)
2020
June 15 Cash 6,000,000
Ordinary Share Capital 5,000,000
Share Premium – Ordinary 1,000,000

Sept. 30 Retained Earnings (80,000 x 5% x 110) 440,000

Share Dividends Distributable (4,000 x 100) 400,000
Share Premium – Ordinary 40,000

Nov. 10 Share Dividends Distributable 400,000

Ordinary Share Capital 400,000

Dec. 31 Income Summary 1,175,000

Retained Earnings 1,175,000

2021
Mar. 1 Treasury Share (3,000 x 95) 285,000
Cash 285,000

May 1 Cash (1,500 x 120) 180,000

14
 Chapter 2 – Shareholders’ Equity

Treasury Share (1,500 x 95) 142,500

Pain in Capital from Treasury Shares 37,500

Aug. 10 Issued 82,500 rights to shareholders entitling

holders to purchase 2 additional shares for
P125 per share.

Sept. 15 Cash (30,000 x 125) 3,750,000

Ordinary Share Capital (30,000 x 100) 3,000,000
Share Premium – Ordinary 750,000

Oct. 31 Cash (80,000 x 125) 10,000,000

Ordinary Share Capital (80,000 x 100) 8,000,000
Share Premium – Ordinary 2,000,000

Dec. 10 Retained Earnings 962,500

Dividends Payable (192,500 x 5) 962,500

Dec. 20 Ordinary Share Capital (1,000 x 100) 100,000

Share Premium – Ordinary (1,000 x 10)* 10,000
Paid in Capital from Treasury Shares 15,000
Treasury Share 95,000
*Share premium/share
300,000/30,000 = 10

Dec. 31 Income Summary 1,200,000

Retained Earnings 1,200,000

(b)
Shareholders’ Equity
Ordinary Share Capital, P100 par, 193,000 shares
issued; 500 shares in the treasury P19,300,000
Share Premium - Ordinary 4,080,000
Paid in Capital from Treasury Shares 52,500
Retained Earnings 1,422,500
Treasury Shares (47,500)
Total Shareholders’ Equity, December 31, 2021 P24,807,500

2-15. (Red Carpet Company)

(a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows:

Securities Market value Allocation Allocated Price

Preference 90 147,000 x 90/100 132,300
Warrant 10 147,000 x 10/100 14,700

Entry Cash 147,000

Preference Share Capital (1,500 x 30) 45,000
Share Premium – Preference 87,300
Share Warrants Outstanding 14,700

(b) Cash (600 x 40) 24,000

Share Warrants Outstanding 11,760
Ordinary Share Capital 6,000
Share Premium – Ordinary 29,760

2-16. (Red Hot Company)

15
 Chapter 2 – Shareholders’ Equity

(a) Value of each option P8

Number of shares granted x 30,000
Total value assigned to share options P240,000
Required service period  3 years
Annual compensation expense P 80,000
(b)
2020
Jan. 1 Memo: Granted share options to selected senior
employees for the purchase of 30,000 ordinary
shares at P35 per share, from January 1, 202 to
December 31, 2023.

Dec. 31 Compensation Expense 80,000

Share Options Outstanding 80,000

2021
Dec. 31 Compensation Expense 80,000
Share Options Outstanding 80,000

2022
Dec. 31 Compensation Expense 80,000
Share Options Outstanding 80,000

2023
Dec. 31 Share Options Outstanding (28,000 x 8) 224,000
Cash (28,000 x 35) 980,000
Ordinary Share Capital (28,000 x 20) 560,000
Share Premium - Ordinary 644,000

2-17. (Fire Red Company)

2020
Jan. 2 Memo: granted 50,000 share options to certain officers for the purchase of the
company’s P100 par ordinary shares at P280 per share.
Dec. 31 Compensation Expense 900,000
Share Options Outstanding 900,000
(45,000 x 60)  3 years
2021
June Memo: 6,000 share options were cancelled.

Dec. 31 Compensation Expense 860,000

Share Options Outstanding 860,000
(50,000-6,000) x 60 x 2/3 = 1,760,000
1,760,000 – 900,000 = 860,000
2022
August Memo: 1,500 share options were cancelled.

Dec. 31 Compensation Expense 790,000

Share Options Outstanding 790,000
Total accrued compensation expense
(44,000 – 1,500) x 60 2,550,000
Less: previously accrued 1,760,000
Compensation expense 790,000

2023 Cash (42,500 x 280) 11,900,000

Share Options Outstanding (42,500 x 60) 2,550,000
Ordinary Share Capital (42,500 x 100) 4,250,000
Share Premium – Ordinary 10,200,000

16
 Chapter 2 – Shareholders’ Equity

2-18. (Red Fox Corporation)

(a) Compensation Expense

2020 200 – 10 – 15 = 175 employees x 100 options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3 186,667

2021 200–10–12–5=173 employees x 100 options=17,300

17,300 x 32 x 2/3 = 369,067; 369,067 – 186,667 182,400

2022 200-10-12-8=170 employees x 100 options=17,000

17,000 x 32 = 544,000; 544,000 – 369,067 174,933

(b)

2023 Cash (140 x 100 x 220) 3,080,000

Share Options Outstanding (14,000 x 32) 448,000
Ordinary Share Capital (14,000 x 200) 2,800,000
Share Premium - Ordinary 728,000

2024 Cash (10 x 100 x 220) 220,000

Share Options Outstanding (1,000 x 32) 32,000
Ordinary Share Capital (1,000 x 200) 200,000
Share Premium – Ordinary 52,000

Share Options Outstanding (2,000 x 32) 64,000

PIC from Forfeited Share Options 64,000

2-19. (Cherry Red Company)

(a)
2020
Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary
shares at P120 per share. The options vest once the market price of ordinary
shares reached P200, up to Dec. 31, 2021. Options expire at the end of 2022.

Dec. 31 Compensation Expense 66,667

Share Options Outstanding 66,667
(10,000 x 20) / 3 years

2021
Dec. 31 Compensation Expense 133,333
Share Options Outstanding 133,333
(10,000 x 20) - 66,667

2022 Cash (10,000 x 120) 1,200,000

Share Options Outstanding 200,000
Ordinary Share Capital (10,000 x 100) 1,000,000
Share Premium-Ordinary 400,000
(b)

17
 Chapter 2 – Shareholders’ Equity

2020
Jan. 1 Memo: Granted 10,000 share options for the purchase of P100 par ordinary
shares at P120 per share. The options vest once the market price of ordinary
shares reached P200 up to December 31, 2022. Options expire at the end of
2023.

Dec. 31 Compensation Expense 66,667

Share Options Outstanding 66,667
(10,000 x 20) / 3 years

2021
Dec. 31 Compensation Expense 66,667
Share Options Outstanding 66,667

2022
Dec. 31 Compensation Expense 66,666
Share Options Outstanding 66,666

2023 Cash (8,000 x 120) 960,000

Share Options Outstanding (80% x 200,000) 160,000
Ordinary Share Capital (8,000 x 100) 800,000
Share Premium-Ordinary 320,000

Share Options Outstanding (20% x 200,000) 40,000

PIC from Forfeited Share Options 40,000
(c) If the stock price reached P200 by June 2023, the same entries will be made for
year 2020 through 2022, as given in (b) The recorded share options, however,
will be cancelled at the end of 2023, as the options already expire.
2023
Dec. 31 Share Options Outstanding 200,000
PIC from Forfeited Share Options 200,000

2-20. (Red Day Company)

(a)
2020
Jan. 1 Granted 80 share options to each of 400 employees for the purchase of P100
par ordinary shares at P140 per share. Options shall vest in 2020 if
earnings increase by 15%, or at the end of 2021 if average annual earnings
for 2020 and 2021 increased by 12%.

Dec. 31 Compensation Expense 352,000

Share Options Outstanding 352,000
400 x 80 x 22 = 704,000
704,000/2 = 352,000

2021
Dec. 31 Compensation Expense 352,000
Share Options Outstanding 352,000

2022 Cash (32,000 x 140) 4,480,000

Share Options Outstanding 704,000
Ordinary Share Capital (32,000 x 100) 3,200,000
Share Premium – Ordinary 1,984,000

(b) The full amount of P704,000 is recognized as compensation expense

18
 Chapter 2 – Shareholders’ Equity

since the options vest already in 2020.

2-21. (Bloody Red Company)

2020
Jan. 1 Memo: Issued to its CEO share options for the purchase of ordinary shares at a
strike price of P50. The options are exercisable beginning January 1, 2023 and
expire on December 31, 2024. The number of share options will be based on the
level of sales for 2022.

Dec. 31 Compensation Expense 150,000

Share Options Outstanding 150,000
15,000 sh x 30 x 1/3
2021
Dec. 31 Compensation Expense 150,000
Share Options Outstanding 150,000
15,000 sh x 30 x 2/3 300,000
Less: previously accrued 150,000
Compensation expense 150,000

2022
Dec. 31 Compensation Expense 240,000
Share Options Outstanding 240,000
18,000 sh x 30 x 3/3 540,000
Less: previously accrued 300,000
Compensation expense 240,000

2-22. (Striking Red Company)

(a)
2020
Dec. 31 Compensation Expense 66,667
Share Appreciation Rights Payable 66,667
10,000 x (140 – 120) x 1/3

2021
Dec. 31 Compensation Expense 133,333
Share Appreciation Rights Payable 133,333
10,000 x (150 – 120) x 2/3 = 200,000
200,000 – 66,667 = 133,333
2022
Dec. 31 Compensation Expense 250,000
Share Appreciation Rights Payable 250,000
10,000 x (165 – 120) = 450,000
450,000 –200,000 = 250,000

(b) (1) Assuming that the rights were exercised on January 1, 2023, when the market
price is P165.

2023
Jan. 1 Share Appreciation Rights Payable 450,000
Cash 450,000

(b) (2) Assuming that the rights were exercised on December 31, 2022, when the market
price is P172.

2023
Dec. 31 Share Appreciation Rights Payable 450,000
Compensation Expense 10,000 (172 – 165) 70,000
Cash 10,000 x (172-120) 520,000

19
 Chapter 2 – Shareholders’ Equity

2-23. (Red Bull Corporation)

(a) Liability at December 31, 2020 P 89,333

December 31, 2021 P208,000
December 31, 2022 P394,000

(b)
2020
Dec. 31 Compensation Expense 89,333
Share Appreciation Rights Payable 89,333
10,000 x 26.80 x 1/3

2021
Dec. 31 Compensation Expense 118,667
Share Appreciation Rights Payable 118,667
10,000 x 31.20 x 2/3 = 208,000
208,000 – 89,333 = 118,667

2022
Dec. 31 Compensation Expense 186,000
Share Appreciation Rights Payable 186,000
10,000 x 39.40 = 394,000
394,000 –208,000 = 194,000

2023 Share Appreciation Rights Payable 394,000

Compensation Expense 56,000
Cash 10,000 x (165-120) 450,000

2-24. (Ruby Red Company)

(a) Fair value of the equity alternative (4,000 shares x 150) P600,000
Fair value of debt component (3,600 shares x 158) 568,800
Fair value of equity component, January 1, 2019 P 31,200

(b) 2020: 3,600 x 160=576,000; 576,000/3 P192,000

31,200/3 10,400
Total compensation expense P202,400

2021: 3,600 x 165 x 2/3 = 396,000

396,000 – 192,000 P204,000
31,200/3 10,400
Total compensation expense P214,400

2022: 3,600 x 168 = 604,800

604,800 – 396,000 P208,800
31,200/3 10,400
Total compensation expense P219,200

2023: 2,700 x (172-168) P 10,800

(c)
2020
Jan. 1 Granted each of the four executives the right to choose either 1,000 ordinary
shares or to receive cash payment equal to 900 shares, conditional upon the
completion of three years of service.

Dec. 31 Compensation Expense 202,400

Share Options Outstanding 10,400
Share Appreciation Rights Payable 192,000

20
 Chapter 2 – Shareholders’ Equity

2021
Dec. 31 Compensation Expense 214,400
Share Options Outstanding 10,400
Share Appreciation Rights Payable 204,000

2022
Dec. 31 Compensation Expense 219,200
Share Options Outstanding 10,400
Share Appreciation Rights Payable 208,800

2022
Dec. 31 Share Options Outstanding ¼ x 31,200 7,800
Share Appreciation Rights Payable 151,200
Cash 151,200
PIC from Unexercised Share Options 7,800
31,200 / 4 = 7,800
604,800 / 4 =151,200
2023
Dec. 31 Compensation Expense 10,800
Share Appreciation Rights Payable 10,800
900 x 3 x (172 – 168)

31 Share Options Outstanding (31,200 x ¾) 23,400

Share Appreciation Rights Payable 464,400
Ordinary Share Capital (3,000 x 100) 300,000
Share Premium – Ordinary 187,800

2-25. (Red Santa Company)

Appropriated Unappropriated
Retained Earnings, January 1, 2020 P 4,000,000 P9,000,000
2020 Transactions
(1) Understatement of 2019 depreciation(200,000x70%) (140,000)
(2) Dividends
On Preference: 200,000 x P100 x 8% (1,600,000)
On Ordinary: 300,000 x P5 (1,500,000)
(3) Retirement of preference shares 10,000 (150 – 130) (200,000)
(4) Release of appropriation (4,000,000) 4,000,000
(5) 45,000/300,000 = 15% bonus issue
45,000 x P150 (6,750,000)
(6) Appropriation for bond redemption 2,000,000 (2,000,000)
(7) Profit for the year _____________ 3,000,000
Balance, December 31, 2020 P2,000,000 P3,810,000
Total Retained Earnings, (P2,000,000 unavailable for
dividends) P5,810,000

2-26. (Red Hat Company)

Retained earnings balance as of December 31, 2020

3,900,000 – 600,000 – 240,000 P 3,060,000
Total shareholders’ equity as of December 31, 2020
6,000,000 + 8,000,000 + 3,060,000 P17,060,000

(a) Preference Ordinary

Par value of preference share P6,000,000
Dividends in arrears (6,000,000 x 9% x 3 yrs.) 1,620,000

21
 Chapter 2 – Shareholders’ Equity

Excess to ordinary (17,060,000 – 7,620,000) P9,440,000

Total equity P7,620,000 P9,440,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P 127 P 11.80

(b) Preference Ordinary

Liquidation value (60,000 shares x P105) P6,300,000
Dividends in arrears (P6,000,000 x 9% x 3 yrs.) 1,620,000
Excess to ordinary (17,060,000 – 7,920,000) P9,140,000
Total equity P7,920,000 P9,140,000
Divide by the number of shares outstanding 60,000 800,000
Book value per share P132 P11.425

2-27. (Red, Inc.)

Retained Earnings 300,000

Inventory 300,000

Land 1,500,000
Buildings 1,875,000
Machinery and Equipment 350,000
Accum. Depreciation – Buildings 875,000
Accum. Depreciation – Machinery & Equipment 150,000
Revaluation Surplus 3,700,000

Revaluation Surplus 2,300,000

Retained Earnings 2,300,000

2-28. (Skinny Red Company)

(a) Retained Earnings 400,000

Accumulated Depreciation 75,000
Current Assets 100,000
Building 375,000

Ordinary Share Capital 6,000,000

Ordinary Share Capital 4,000,000
Share Premium - Ordinary 2,000,000

Share Premium - Ordinary 1,400,000

Retained Earnings 1,400,000

(b)
Skinny Red Company
Statement of Financial Position

Current Assets P 400,000 Liabilities P1,000,000

Land 1,500,000 Ordinary Share 4,000,000
Building 4,625,000 Share Premium 600,000
Accumulated Depreciation ( 925,000) ___________
Total P5,600,000 Total P5,600,000

22
 Chapter 2 – Shareholders’ Equity

MULTIPLE CHOICE QUESTIONS

Theory

MC1 B MC6 C MC11 C MC16 C MC21 D

MC2 C MC7 C MC12 C MC17 A MC22 B
MC3 D MC8 B MC13 C MC18 A MC23 A
MC4 D MC9 B MC14 A MC19 D MC24 C
MC5 D MC10 B MC15 C MC20 D MC25 C

Problems

MC26 C Reissue price (3,000 x 50) P150,000

Cost of treasury shares reissued (3,000 x 36) 108,000
Paid in capital from treasury shares P 42,000

MC27 B Preference Share Capital P230,000

Ordinary Share Capital 525,000
Subscribed Ordinary Share 5,000
Total legal capital P760,000

MC28 B Fair value of preference shares without warrants

4,000 x 110 P440,000
Total par of preference shares (4,000 x 100) 400,000
Share Premium – Preference P 40,000

MC29 D

MC30 D Number of shares issued after the split (60,000 x 2) 120,000

Number of shares reacquired after the split (5,000 x 2) 10,000
Number of shares outstanding, December 31, 2020 110,000

MC31 D Number of ordinary shares issued (125,000 x 3) P375,000

MC32 A Number of ordinary shares issued 375,000

Treasury shares held (12,000 x 3) + 5,000 41,000
Number of ordinary shares outstanding 334,000

MC33 C Amount recorded is equal to the par value

(100% bonus issue) 600,000 x P5 P3,000,000

MC34 B Preference share capital, December 31, 2019 P1,000,000

Total par of preferred shares issued in 2020 (10,000 x P20) 200,000

23
 Chapter 2 – Shareholders’ Equity

Retirement of preferred shares (2,000 x 20) (4,000)

Preference share capital, December 31, 2020 P1,160,000

MC35 A Ordinary share capital, December 31, 2019 P7,000,000

Issue of ordinary shares in 2019 (35,000 x 70) 2,450,000
Ordinary share capital, December 31, 2020 P9,450,000

MC36 B Average premium per share of preference share

(400,000/50,000) or (28 – 20) P8
Number of preference shares retired 2,000
Decrease in Share Premium-Preference upon retirement P16,000

MC37 C Original par value of ordinary P70

Revised par after 2-for-1 split 35
Reduction in par value P35
MC38 B Number of treasury shares after 2-for-1 split
and after reissue of 5,000 shares 5,000
Revised cost per share after split (80/2) P40
Cost of remaining treasury shares P200,000

MC39 B Total par of the fractional warrants issued (600 x 10) P6,000
Total par of the fractional warrants exercised
600 x 60% x 10 3,600
Total par of the fractional warrants forfeited P2,400

MC40 D Reduction in retained earnings (dividends declared) on

April 1, 2020 P100,000
Accrued interest to December 31, 2020
100,000 x 10% x 9/12 P 7,500

MC41 C Total issue price of bonds P2,120,000

Amount allocated to bonds without warrants (2,000 x 1,040) 2,080,000
Amount allocated to equity P 40,000

MC42 B Retained earnings desired to be capitalized P945,000

Divided by the market value per share P70
Number of shares to be declared as bonus issue 13,500
Percentage of bonus issue (13,500/90,000) 15%

MC43 D Preferred dividends

Arrears P 80,000
Current dividends (2M x 8%) 160,000 P240,000
Ordinary dividends (300,000 – 240,000) P 60,000

MC44 D Dividends in arrears and current year dividends

(3M x 5% x 2 years) P300,000
Dividends paid in 2020 (100,000)
Dividends in arrears, end of 2020 (disclosure) P200,000

MC45 B Shares issued, December 31, 2020 (100,000 + 10,000) x 2 220,000

Less treasury shares (5,000 – 1,000) x 2 8,000
Outstanding shares 212,000

MC46 A Preferred Ordinary

Arrears on preferred P24,000
Current on preferred (400,000 x 12%) 48,000
Current on ordinary (200,000 x 12%) P24,000
Balance of 12,000 divided ratably
12,000 x 4/6; 12,000 x 2/6 8,000 4,000
Totals P80,000 P28,000
Number of shares outstanding ÷ 4,000 sh ÷ 20,000 sh

24
 Chapter 2 – Shareholders’ Equity

Dividend per share P20.00 P1.40

MC47 A Retained earnings before dividends and net loss P8,000,000

10% bonus issue (100,000 x 10% x 70) (700,000)
Net loss for the year (1,200,000)
Retained earnings, December 31, 2020 P6,100,000

MC48 A Par value after the 5-for-2 split (15 x 2) / 5 P6.00

MC49 B Ordinary dividends (25,000 x 40) P1,000,000

Preferred dividends (2.5M x 10% 250,000
Dividend goal P1,250,000

MC50 C Issue of ordinary shares (40,000 x 105) P4,200,000

Purchase of treasury shares (600 x 110) (66,000)
Resale of treasury shares (400 x 95) 38,000
Profit after tax 830,000
Dividends paid (200,000)
Total shareholders’ equity, December 31, 2020 P4,802,000

MC51 C Total shareholders’ equity, December 31, 2019 P5,520,000

Retirement of preference shares (1,000 x 25) (25,000)
Purchase of treasury shares (2,000 x 85) (170,000)
Reissue of treasury shares (800 x 50) 40,000
Profit for the year 900,000
Total shareholders’ equity, December 31, 2020 P6,265,000

MC52 D Cost of remaining treasury shares

2,000 x 2 = 4,000; 4,000 – 800 = 3,200; 3,200 x 42.50 P136,000

MC53 A Total fair value of options (20,000 x 9) = 180,000

Compensation expense for 2020 (July 1-December 31)
180,000/2 years) x 6/12( P45,000

MC54 D Intrinsic value of options (50-20) x 3,000 shares= 90,000

Compensation expense for 2020 (90,000/3 years) P30,000

MC55 C Estimated fair value of options that will be exercised

4.5M x 95% 4,275,000
Vesting period ÷ 3 years
Compensation expense in 2020 P1,425,000

MC56 B Revised estimate in 2021 (4.5 M x 94% x 2/3) P2,820,000

Compensation expense recognized in 2020 1,425,000
Compensation expense in 2021 P1,395,000

MC57 B Liability for share appreciation rights, December 31, 2020

(200 x 300 x 4)/2 P120,000

MC58 D Total liability for share appreciation rights, 12/31/21

200 x 300 x 7 x 90% P378,000
Liability recognized in 2020 120,000
Liability for share appreciation rights, December 31, 2021 P258,000

MC59 B Total shareholders’ equity P3,600,000

Liquidation value of preference shares (140 x 5,000 shares) (700,000)
Equity identified with ordinary P2,900,000
Outstanding ordinary shares ÷ 50,000
Book value per ordinary share P58.00

25
 Chapter 2 – Shareholders’ Equity

MC60 B Book value per ordinary share

3,150,000/50,000 shares 63.00

MC61 B Total shareholders’ equity P3,150,000

Liquidation value of preference shares (5,000 x 120) (600,000)
Equity related to ordinary shares P2,550,000
Outstanding ordinary shares ÷ 50,000
Book value per ordinary share P51.00

MC62 B RE = 1,000,000; cumulative dividends in arrears =

5,000,000 x 8% x 3 years = 1,200,000, but dividends are
limited to the extent of RE balance of P1,000,000; Thus,
equity of ordinary share is 13,500,000 – 5,000,000 –
1,000,000 = 7,500,000; 7,500,000/ 750,000 shares P10.00
MC63 C Total shareholders’ equity P13,500,00
Liquidation value of preferred shares
50,000 x 106 5,300,000
Dividends in arrears (400,000 x 3 years)
= 1,200,000; but limited only to the
extent of retained earnings balance 1,000,000 6,300,000
Equity related to ordinary shares P7,200,000
Outstanding ordinary shares ÷ 750,000 sh
Book value per ordinary share P9.60

MC64 D Share premium before quasi reorganization

200,000 x (22 – 20) P400,000
Share premium resulting from recapitalization
200,000 x (20 – 15) 1,000,000
Write off of deficit (950,000)
Share premium after the quasi-reorganization P450,000

26