ACCT 2A&B: Accounting for Partnership & Corporation

BCSV

ACCTG 2A&B: Accounting for Partnership & Corporation II

Accounting for Shareholders Equity

I. CONCEPT ANALYZATION
A. Multiple Choices.
Choose the letter of the best answer.

1. Which of the following statements is false concerning treasury shares?

A. They are entitled to dividends
B. They have no voting right
C. They may be disposed of for a price lower than the par value provided such price is
reasonable
D. They are not outstanding shares

2. Which of the following rights is the subscriber of shares not fully paid who is not
delinquent, not entitled to?
A. Right to dividends
B. Right to vote in stockholders meeting
C. Right to a stock certificate
D. Right to inspection of corporate books and records

3. Share capital dividends declared but not yet distributed as of the balance sheet date should
be reported as a(n)
A. Current liability
B. Addition to share capital outstanding
C. Reduction in total shareholders equity
D. Noncurrent liability

4. Zion Company declared a cash dividend on its ordinary share capital in November 2011,
payable in January 2012. Retained earnings would
A. Increase on the date of declaration
B. Not be affected on the date of declaration
C. Not be affected on the date of payment
D. Decrease on the date of payment

5. The retained earnings account

A. Has a credit balance if earnings have been greater than losses and dividends, and is
reported as part of shareholders equity on the statement of financial position
B. Has a debit balance if losses have exceeded earnings, and is reported as part of assets on
the statement of financial position
C. Represents the amount of cash available for payment of dividends if there has been
profitable operations
D. Is a special fund for paying shareholders dividends on the basis of income.

6. The peso equity in corporate capital for each share capital owned by a stockholder is known
as
A. Book value per share
B. Dividends per share
C. Earnings per share

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D. None of these

7. Donated capital is reported as part of

A. Share capital
B. Additional paid in capital
C. Appropriated retained earnings
D. Unappropriated retained earnings

8. When a small share capital dividend is declared, retained earnings is debited for the
A. Par value of the share capital
B. Fair market value of the share capital on the date of record
C. Fair market value of the share capital on the date of declaration
D. Fair market value of the share capital on the date of distribution

9. An appropriation of retained earnings

A. Leaves total retained earnings unchanged
B. Means that cash has been set aside for a specific purpose
C. Reduces the amount of retained earnings available for dividends
D. Both A and C

10. Dividends representing a return of invested capital is known as

A. Stock dividend
B. Scrip dividend
C. Property dividend
D. Liquidating dividend

11. Which of the following will reduce retained earnings?

A. Declaration of stock dividend
B. Payment of cash dividend
C. Net income for the period
D. None of these

12. Which of the following is (are) attributed to market value of share capital?
A. Share capital dividend
B. One-tenth
C. Date of declaration value
D. All of the above

13. Which of the following statements about treasury shares is (are) true?
A. Treasury shares are recorded at cost
B. Purchase of treasury shares reduces the corporations total assets and total
shareholders equity
C. Treasury shares are issued shares that are subsequently reacquired, hence, they are no
longer outstanding
D. All of the foregoing statements are true

14. At the date of the financial statements, ordinary shares issued would exceed ordinary
shares outstanding as a result of the
A. Payment in full of the subscribed shares
B. Declaration of a share capital dividend

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C. Declaration of a share split

D. Purchase of treasury shares

15. Loss on retirement of treasury shares shall be debited to

A. Retained earnings
B. Share premium from treasury shares and then retained earnings
C. Share premium from treasury shares, share premium from original issuance and then
retained earnings
D. Share premium from original issuance, share premium from treasury shares and then
retained earnings

16. An entity shall measure a liability to distribute noncash asset as dividend to its owners at
the
A. Carrying amount of the asset distributed
B. Fair value of the asset distributed
C. Either the carrying amount or fair value of the asset distributed
D. Neither the carrying amount or fair value of the asset distributed

17. When an entity settles the dividend payable, it shall be recognize the difference between the
carrying amount of the asset distributed and the carrying amount of the dividend payable in
A. Profit or loss
B. Other comprehensive income
C. Equity
D. Retained earnings

18. An entity shall measure a noncurrent asset classified as held for distribution to owners at
A. Book value
B. Fair value less cost to distribute
C. Lower of carrying amount and fair value less cost to distribute
D. Higher of carrying amount and fair value less cost to distribute

19. Total shareholders equity is not affected by the

A. Issuance of a share capital dividend
B. Conversion of bonds payable into share capital
C. Sale of treasury shares at more than cost
D. Declaration of a cash dividend

20. Cash dividends are paid on the basis of the number of shares
A. Authorized
B. Issued
C. Outstanding
D. Outstanding less the number of treasury shares

21. When a corporation pays dividends, the three relevant dates for dividends occur in this
order:
A. Date of record, date of declaration, date of payment
B. Date of payment, date of declaration, date of record
C. Date of declaration, date of payment, date of record
D. Date of declaration, date of record, date of payment

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22. The date when the board of directors announces the intention to pay dividends is known as
A. Dividend date
B. Declaration date
C. Record date
D. Payment date

23. Which of the following is not attributed to book value on preference shares?
A. Enjoy priorities over ordinary stockholders as to distribution of assets upon corporate
liquidation.
B. Equity identified them is determined first
C. Equity identified them divided by the number of outstanding shares yields their book
value per share
D. The balance of the shareholders equity after deducting the equity identified with the
ordinary shares represent their equity

24. Which of the following is not reported in the statement of changes in shareholders equity?
A. Profit for the year
B. Undistributed dividends declared during the year
C. Finance cost
D. Ordinary shares issued at more than par value

25. Which of the following is not correct relative to an appropriation of retained earnings?
A. Retained earnings set aside for a special or specific purpose
B. Undistributed funds for dividends declared during the year
C. Reduction in the amount available to shareholders as dividends
D. Total retained earnings remains unchanged

B. True or False.
Write A if the statement is true otherwise, write B.

26. Property dividends should be recorded using the carrying value of the assets as of the
declaration date.
27. A debit balance in the accumulated profits and losses is called deficit.
28. The liquidation value of a preference share is always equal to its par value.
29. Book value per share is the amount earned for every capital share owned by a shareholder.
30. Declaring dividends even the corporation has a deficit is illegal.
31. A cumulative preference share capital is entitled to payment of dividends in arrears.
32. Unappropriated retained earnings represents amount of cash available for dividend
distribution.
33. A deficit in retained earnings means that retained earnings appears in the asset section of
the balance sheet.
34. Reacquisition of shares does not give rise to a gain or loss.
35. The retirement of share capital requires the cancellation of the stock certificate originally
issued to the shareholders.
36. When a corporation retires its own share capital, there is usually a gain or loss on the
transaction.
37. A corporation may never earn a profit or incur a loss by selling or buying its own stock.
38. Cash dividends increase the legal capital of a corporation.
39. Treasury shares, since they are issued, are outstanding shares.

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40. A stock dividend that has been declared but not yet distributed should be reported as a
current liability.
41. The accounting cycle of a corporation is very much different from the accounting cycle of a
partnership or a sole proprietorship.
42. Appropriation of retained earnings is necessary when the corporation reacquires its own
share capital.
43. Book value of share capital is a measurement of the amount of income earned for each share
of stock.
44. Convertible preference share capital allows the holder to exchange the shares for ordinary
shares.
45. The acquisition of treasury shares will reduce the amount of retained earnings available for
dividends.

II. PROBLEM ANALYZATION

Problem1:
The statement of financial position of Bloodseeker Corporation reported the following:

13% cumulative and convertible preference share capital, P 95 par value P 11,870,250
Ordinary share capital no par, P 25 stated value, 2,500,000 shares 32,887,125
authorized
Paid in capital in excess of par 1,561,875
Paid in capital in excess of stated value 4,472,649
Retained earnings 2,250,000

The company has not declared dividends for 3 years, including the current year. The market value
of the ordinary shares is P 50 per share. The preference shares have liquidation value of P 120 per
share.

Instruction: based on the foregoing information, compute for each of the items listed below
1. Amount of annual dividend per share on preference share.
2. Paid in capital of the corporation.
3. Total number of preference share issued.
4. Total dividend in arrears on preference shares.
5. Book value per share on preference share capital.
6. Book value per share on ordinary share capital.

Problem2:
MI7 Corporation began operations on January 1, 2012, by issuing at P 15 per share one-half of the
475,000 ordinary shares (P 1 par value) that had been authorized for issue. In addition, MI7 has
250,000 6% preference shares (P 5 par value) authorized. During 2012, MI7 reported profit of P
512,500 and declared dividends of P 118,750. During 2013, MI7 completed the following
transactions:
Jan. 12 Issued an additional 50,000 ordinary shares for P 17 per share.
Apr. 5 Issued 75,000 preference shares for P 8 per share.
July 18 Authorized the acquisition of a custom-made machine to be delivered in January
2013. MI7 appropriated P 147,500 of retained earnings for the purchase of the
machine.
Oct. 23 Issued an additional 25,000 preference shares for P 9 per share.
Dec. 31 Reported P 607,500 of net income and declared a dividend of P 317,500 to

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shareholders of record on January 31, 2014, to be paid on February 3, 2014.

Instruction: based on the foregoing information, compute for each of the items listed below
7. Total shareholders equity on December 31, 2013.
8. Unappropriated retained earnings balance on December 31, 2013.

Problem3:
The following are Warrunner Co.s equity accounts at December 31, 2012:

Ordinary share capital, par value P 10; authorized 200,000 P 1,200,000

Share premium 180,000
Retained earnings 720,000

Warrunner Co. uses the cost method of accounting for treasury shares.

The following transactions occurred in 2013:

(a) Acquired 8,000 ordinary shares for P 144,000
(b) Sold 6,500 treasury shares at P 20 per share
(c) Retired the remaining treasury shares

Instruction: based on the foregoing information, compute for the item below
9. Share premium balance on December 31, 2013.

Problem4:
The shareholders equity section of San Andres Corp.s statement of financial position as of
December 31, 2012, is as follows:

Ordinary share capital (P 5 par, 250,000 shares

authorized) P 687,500
Share premium 275,000
Total contributed capital P 962,500
Unappropriated retained earnings P 667,500
Appropriated retained earnings 250,000
Total retained earnings 917,500
Total shareholders equity P 1,880,000

San Andres Corp. had the following shareholders equity transactions during 2013:

Jan. 17 Completed the building renovation for which P 250,000 of retained earnings had
been restricted. Paid the contractor P 242,500, all of which is capitalized.
Mar. 7 Issued 50,000 additional ordinary shares for P 8 per share.
May 22 Declared a cash dividend of P 1.50 per share to be paid on July 31, 2013, to
shareholders of record on June 30, 2013.
June 20 Approved additional building renovation to be funded internally. The estimated
cost of the project is P 200,000, and retained earnings are to be restricted for that
amount.
July 31 Paid the cash dividend.
Dec. 31 Declared a property dividend to be paid on January 11, 2014, to shareholders of
record on Jan. 5, 2014. The dividend is to consist of equipment with historical cost
of P 235,000 and accumulated depreciation of P 85,000. The equipments fair value

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at December 31, 2013, is P 157,500.

Reported P 442,500 of net income on December 31, 2013, income statement.

Instruction: based on the foregoing information, compute for each of the items listed below
10. Ordinary share capital account at Dec. 31, 2013.
11. Share premium account at Dec. 31, 2013.
12. Unappropriated retained earnings account at Dec. 31, 2013.
13. Total shareholders equity at Dec. 31, 2013.

Problem5:
Presented below is the shareholders equity reported by Ivan Corporation

10% Preference share capital, P 220 par P 2,640,000

Ordinary share capital, P 90 par 1,305,000
Retained earnings 600,000

The preference share has a liquidation value of P 300 and is cumulative with dividends four years in
arrears (including the current year) that must be paid in the event of liquidation to the extent of the
retained earnings balance.

14. What is the book value per ordinary share?

15. How much is the equity identified with preference shares?

Problem6:
The capital structure of Chichay Corporation on December 31, 2014 follows:

12% Preference share capital, 30,000 shares

issued and outstanding P 6,000,000
Ordinary share capital, P 50 par 5,000,000
Paid in capital excess of par (Preference) 1,800,000
Paid in capital excess of par (Ordinary) 1,500,000
Retained Earnings 2,200,000

During 2015, the following transactions occurred:

A. Purchased and retired 4,000 preference shares at a total cost of P 1,120,000.

B. Acquired 8,000 shares of its own ordinary shares at a cost of P 600,000 when each share is
selling in the market at P 78 each.

C. A 2-for-1 share split on the ordinary share was approved by the shareholders.

D. Reissued 6,000 treasury shares at P 45 each.

E. Shareholders donated 4,000 ordinary shares when the market price was P 46 per share.

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F. 2,000 of the donated shares were issued for P 48 per share.

G. The net income for 2015 was P 2,000,000. No dividends were declared.

DETERMINE THE FOLLOWING FOR THE YEAR ENDED 2015:

16. Total Shareholders equity.

17. Number of preference share issued.
18. Number of ordinary shares outstanding.
19. Cost of remaining treasury shares acquired by purchase.

Problem7:
The Gie Corporation issued 6,000 and 5,500 shares of P 70 par ordinary and P 95 par preference
shares, respectively for a lump sum amount of P 1,340,000. Market value per share is P 110 and P
108 for preference and ordinary shares, respectively.

20. What is the amount to be credited to Paid in capital in excess of par Preference?
21. Assuming the market value of the ordinary shares is not known, what is the amount
assigned to Ordinary shares?

Problem8:
The C2 Corporation began 2013 with P 13,000,000 retained earnings account balance, of which P
4,000,000 is appropriated for plant expansion. During the year 2013, the following events occurred:

A. A material error was discovered in the financial statements for the year 2012, which caused
depreciation of 2012 to be understated by P 200,000. Income tax rate is 30%.

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

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

D. The corporation completed its expansion project and released the retained earnings
previously appropriated.

E. A stock dividend of 45,000 shares of ordinary shares was distributed to shareholders. The
shares sell at P 150 per share on declaration date and P 140 per share on distribution date.
There were 300,000 shares issued and outstanding before the stock dividend.

F. During the year 2013, the corporation issued P 20,000,000 10-year 12% bonds. The bond
indenture provides that the corporation shall restrict P 2,000,000 of retained earnings
annually for the accumulation of enough funds for this indebtedness.

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G. Net income for the year was P 3,000,000.

22. What is the balance of the retained earnings that will be shown in the statement of
financial position at December 31, 2013 as available for further dividend distribution?

Problem9:
On May 31, 2013, Maine Corporation declared a bonus issue entitling its shareholders to one
additional share for four shares held. At the time the dividend was declared, the market value was P
10 per share and the par value was P 5 per share. On this date, Maine had 605,000 ordinary shares
issued and had 5,000 shares held in its treasury.

23. What amount is to be credited to additional paid in capital account?

Problem10:
Fiend Corporation had sufficient retained earnings in 2013 as a basis for dividends, but was
temporarily short of cash. Fiend declared a dividend of P 100,000 on March 31, 2013, and issued
promissory notes to its stockholders in lieu of cash. The notes, which were dated March 31, 2013,
had a maturity after one year, and a 10% interest rate.

24. How much is to be debited to Retained Earnings on March 31, 2013?

25. How much is the accrued interest on December 31, 2013?

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THEORIES
1. A 24. C
2. C 25. B
3. B 26.B
4. C 27.A
5. A 28.B
6. A 29.B
7. B 30.A
8. C 31.A
9. D 32.B
10. D 33.B
11. A 34.A
12. D 35.A
13. D 36.B
14. D 37.A
15. D 38.B
16. B 39.B
17. A 40.B
18. C 41.B
19. A 42.A
20. C 43.B
21. D 44.A
22. B 45.A
23. D

PROBLEMS:
1. P 12.35 14. P 23.79
2. P 50,791,899 15. P 4,200,000
3. 124,950 16. P 17,146,000
4. P 4,629,397.50 17. 26,000
5. P 157.05 18. 188,000
6. P 25.40 19. P 375,000
7. P 5,921,250 20. P 124,507
8. P 536,250 21. P 735,000
9. P 181,000 22. P 3,810,000
10. P937,500 23. P 0
11. P 425,000 24. P 100,000
12. P 721,250 25. P 7,500
13. P 2,283,750

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