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The cumulative feature of preference shares a. Limited the amount of cumulative dividends to the par value of the preference shares. b. Requires that dividends not paid in any year must be made up in a later year before dividends are distributed to ordinary shareholders. c. Means that the shareholde...

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1. The cumulative feature of preference shares a. Limited the amount of cumulative dividends to the par value of the preference shares. b. Requires that dividends not paid in any year must be made up in a later year before dividends are distributed to ordinary shareholders. c. Means that the shareholder can accumulate preference shares equal to the par value of ordinary shares at which time the preference shares can be converted into ordinary shares. d. Enables a preference shareholder to accumulate dividends equal to the par value of the shares.

2. a. b. c. d.

Which feature of preference share would most likely be opposed by ordinary shareholders? Callable Convertible Redeemable Participating

3. How should cumulative preference dividends in arrears be reported? a. Increase in noncurrent liabilities b. Note disclosure c. Increase in current liabilities d. Increase in shareholder’s equity

4. Which of the following shareholder rights is most commonly enhanced in an issue of preference share? a. The right to vote for the board of directors. b. The right to vote on major corporate issues. c. The right to maintain proportional interest. d. The right to receive a full cash dividend before dividends are paid to other classes of share capital.

5. A. B. C. D.

Noncumulative preference dividends in arrears Are disclosed as liability until paid. Are not paid and not disclosed. Must be paid before any other cash dividends can be distributed. Are paid to preference shareholders is sufficient funds remain after payment of ordinary dividend.

6. Features most frequently associated with preference shares, except; a. Convertible into ordinary shares b. Nonvoting c. Preference as to assets in the event of liquidation d. Callable at the option of the shareholder

7. The effect of recoding a 100% share dividend would be to a. Decrease the current ratio, decrease working capital and decrease book value per share. b. Leave inventory turnover unaffected, increase earnings per share and increase book value per share. c. Leave working capital unaffected, decrease earnings per share and increase book value per share. d. Leave working capital unaffected, decrease earnings per share and decrease book value per share. 8. Preference shares participate ratably with the ordinary shareholders in any profit distribution beyond the prescribed rate. a. Callable feature b. Cumulative feature c. Redeemable feature d. Participating feat Book Value Per share (solvings 2 points each ) ( show solutions)

1. Pamparampam Company provided the following shareholders’ equity on December 31, 2018:

Cumulative preference share capital, P100 par, 8%

500,000

Ordinary share capital, P100 par

1,100,000

Share Premium

200,000

Retained earnings

260,000

Treasury ordinary shares – 1,000 at cost

(150,000)

Dividends on preference shares are in arrears for 2017 and 2018.

What is the book value per ordinary share on December 31, 2018?

Answer: Total shareholders’ equity per book

1,910,000

Preference shareholders’ equity: Preference Shareholders’ capital

500,000

Preference dividends for 2017 and 2018

80,000

580,000

(500,000 x 8% x 2) Ordinary shareholders’ equity

1,330,000

Ordinary shares issued (1,100,000/100)

11,000

Treasury ordinary shares

(1,000)

Ordinary shares outstanding

10,000

Book value per ordinary share ( 1,330,000/10,000)

133

2. Melktea Company reported the following shareholders’ equity at year end: Preference share capital – 12%, P50 par, 20,000 shares Ordinary share capital, P25 par, 100,000 shares Share Premium Retained earnings Retained earnings appropriated Revaluation Surplus

1,000,000 2,500,000 200,000 400,000 100,000 300,000

Dividends on preference share have not been paid for three years. The preference share has a liquidating value of P55 and a call price of P58. What is the book value per preference share? SOLUTION: Preference share capital Liquidation premium – excess of liquidating value

1,000,000

Over par (20,000 x5) Preference dividend for current year ( 1,000,000 X 12%) Total preference shareholders’ equity

100,000 120,000 1,220,000

Book value per preference share ( 1,220,000/20,000)

61

3. SUKONAKOSIS Company reported the following shareholders’ equity on December 31, 2018: 8% cumulative preference share capital, P50 par; Liquidating value P55 per share; authorized, issued and outstanding 20,000 shares Ordinary share capital, P25 par; 200,000 shares authorized; 100,000 shares issued and outstanding Retained earnings

1,000,000 2,500,000 400,000

Dividends on preference shares have not been declared for 2017 and 2018. On December 31, 2018, what is the book value per ordinary share?

Total equity Preference shareholders’ equity: Preference share capital Liquidating premium (20,000 x 5) Preference dividend in arrears (1,000,000 x 8% x 2) Ordinary shareholders’ equity Divide by ordinary shares Book value per ordinary share

3,900,000 1,000,000 100,000 160,000

1,260,000 2,640,000 100,000 26.40

4. At the beginning of current year, HINABANG Company was organized with the following capital structure: 10% cumulative preference share capital, par value 10, liquidation value P12, authorized, issued and outstanding 100,000 shares, 1,000,000.

Ordinary share capital, par value P100, authorized 40,000 shares, issued and outstanding 30,000 shares, P3,000,000.

The net income for the current year was P6,000,000 and no dividends were declared.

What is the book value per ordinary share?

Preference share capital

1,000,000

Ordinary share capital

3,000,000

Retained earnings – equal to net income

6,000,000

Total shareholders’ equity

10,000,000

Preference shareholders equity: Preference share Capital

1,000,000

Preference dividend (1,000,000 x 10%)

100,000

Liquidation premium (100,000 x 2)

200,000

1,300,000

Ordinary shareholders’ equity

8,700,000

Divide by ordinary shares

30,000

Book value per ordinary share

290

5. Kishy Company provided following data at year end: 2018

2017

10% cumulative preference shares,P50 par

2,000,000

2,000,000

Ordinary shares, P10 par

2,500,000

2,000,000

Share premium

1,500,000

1,300,000

Retained earnings

4,800,000

4,200,000

Net income for the year

1,800,000

On July 1, 2018, 50,000 ordinary shares were issued.

The preference dividends were paid in 2017 but not declared during 2018. The market price of the ordinary share was P50 on December 31, 2018.

What is the book value per preference share for 2018?

Preference shares

2,000,000

Preference dividend for 2018 (10% x 2,000,000)

200,000

Preference shareholders’ equity

2,200,000

Number of preference shares (2,000,000/50 par)

40,000

Book value per preference share (2,200,000/40,000)

55.00

6. Kishy Company provided following data at year end: 2018

2017

10% cumulative preference shares,P50 par

2,000,000

2,000,000

Ordinary shares, P10 par

2,500,000

2,000,000

Share premium

1,500,000

1,300,000

Retained earnings

4,800,000

4,200,000

Net income for the year

1,800,000

On July 1, 2018, 50,000 ordinary shares were issued.

The preference dividends were paid in 2017 but not declared during 2018. The market price of the ordinary share was P50 on December 31, 2018.

What is the book value per ordinary share for 2019?

Preference shares

2,000,000

Ordinary shares

2,500,000

Share premium

1,500,000

Retained earnings

4,800,000

Preference shareholders’ equity

(2,200,000)

Ordinary shareholders’

8,600,000

Divide by ordinary shares outstanding

250,000

Book value per ordinary share

34.40

EARNINGS PER SHARE PROBLEM (2points each)

QUESTION 1: Alucard Company provided the following information for the current year.

January 1

Shares outstanding

200,000

April 1

2-for-1 share split

200,000

July 1

1 shares issued

100,000

What is the average number of shares? Solution January 1

(200,000x2x12/12)

400,000

July 1

(100,000 x 6/12)

50,000 450,000

QUESTION 2: Layla Company provided the following information in relation to share capital for the current year:

January 1

Share Outstanding

1,250,000

April 1

Shares issued

200,000

October 1

Treasury shares purchased

100,000

December 1

Issued a 100% share dividend

What is the number of weighted average shares?

Solution: January 1

(1,250,000 x 200%)

2,500,000

April 1

(200,000 x 200%x9/12)

300,000

October 1

(100,000 x 200%x3/12)

(50,000)

Average shares

2,750,000

QUESTION 3: Pharsa Company had 100,000 ordinary shares issued and outstanding at the beginning of current year.

During the current year the entity had the following ordinary share transactions:

April 1

Issued 30,000 previously unissued shares.

May 1

1 Split the share 2 for 1

June 30

Purchased 10,000 shares for the treasury.

July 31

Distributed a 20% share dividend

December 31

Split the share 3 for 1.

What is the weighted average number of shares that should be used in calculating earnings per share? Solution: January 1

(100,000 x 2 x 1.20 x 3 x 12/12)

720,000

April 1

(30,000 x 2 x 1.20 x 3 x 9/12)

162,000

June 30

(10,000 x 1.20 x 3 x 6/12)

(18,000) 864,000

QUESTION 4 Esmeralda Company provided the following share transactions for the current year:

January 1

Shares Outstanding

44,000

February 1

Issued for Cash

56,000

May 1

Acquired treasury shares

25,000

August 1

25% share dividend

September 1

Resold treasury shares

November 1

Issued 3 for 1 share split

10,000

What is the weighted average number of shares for EPS computation?

Solution:

January 1

(44,000 x 1.25 x 3 x 12/12)

165,000

February 1

(56,000 x 1.25 x 3 x 11/12)

192,500

May 1

(25,000 x 1.25 x 3 x 8/12)

(62,500)

September 1

(10,000 x 3 x 4/12)

10,000 305,000

QUESTION 5 On January 1, 2018, Chou Company had 2,000,000 or ordinary shares outstanding. On July 1, 2018, the entity issued 500,000 shares preference shares which were convertible into 300,000 ordinary shares. During the year, the entity declared and paid 1,000,000 cash dividend on the preference shares. The net income for the current year was 6,500,000.

What amount should be reported as BASIC EARNINGS PER SHARE?

SOLUTIONS:

Net Income

6,500,000

Preference share dividend

(800,000)

Net income – ordinary

5,700,000

BASIC EPS ( 5,700,000/2,000,000)

2.85

QUESTION 6: On June 30, 2018, Lomond Company issued 200, P10,000, 7% bonds at face amount. Each bond was convertible into 200 ordinary shares. On January 1, 2019, 100,000 ordinary shares were outstanding. The bondholders converted all the bonds on July 1, 2019. The net income for the current year was 3,500,000. The tax rate is 30%.

Which amount should be reported as basic earnings per share?

January 1

Outstanding

100,000

July 1

Conversion(200 x 200 x 6/12)

20,000

Average number of shares

120,000

Basic Earning per share (3,500,000/120,000)

29.17

THEORIES BASIC EARNINGS PER SHARE

1.Earnings per share should be computed on the basis of a. Preference shares b. Voting ordinary shares c. Voting and non voting ordinary shares d. Voting ordinary shares and participating preference shares

2.Earnings per share should always be reported for a. Gross profit b. Income before tax c. Income from continuing operations d. Prior period error

3.In determining diluted earnings per share, dividends on non convertible cumulative preference shares should be A. Disregarded B. Added back to net income whether declared or not. C. Deducted from net income only if declared D. Deducted from the numerator of basic EPS whether declared or not.

4. Where in the financial statements should basic and diluted EPS be reported? A. In the accompanying notes B. In management discussion and analysis C. In the income statement D. In the statement of cash flows.

5. An entity that reports a discontinued operation shall present basic and diluted earnings per share for the discontinued operation A. Only on the face of the income statement. B. Only in the notes to financial statements C. Either on the face of the income statement or in the notes to financial statements. D. Only if management chooses to do so.

6.Undeclared preference dividends are deducted from net income in the earnings per share computation for which type of preference shares? A. Noncumulative B. Cumulative

C. Neither cumulative nor noncumulative D. Both cumulative and non cumulative

INCOME STATEMENT

Chesse Company provided the following information for the current year: Purchases

5,300,00

Purchase discounts

100,000

Beginnings inventory

1,600,000

Ending inventory

2,150,000

Freight in

400,000

QUESTION 1: What is the cost of goods sold for the current year? Solution: Beginning Inventory

1,600,000

Purchases

5,300,000

Freight In

400,000

Total

5,700,000

Purchase Discount

(100,000)

5,600,000

Goods available for sale

7,400,000

Ending Inventory

(2,150,000)

Cost of goods sold

5,250,000

Claire Company provided the following for the current year Central warehouse Beginning inventory

1,100,000

Purchases

4,800,000

Freight in

100,000

Transportation to consignees Freight out

300,000

Ending inventory

1,450,000

QUESTION 2: What is the cost of sales for the current year? Solution Beginning inventory Purchases Freight in (100,000 + 50,000)

1,220,000 5,400,000 150,000

5,550,000

Goods available for sale

6,770,000

Ending inventory

(1,650,000)

Cost of sales

5,120,000

Brooke Company uses a perpetual inventory system. At the end of 2010, the balance in the inventory account wasP360,000 and P30,000 of those goods included in ending inventory were purchased FOB Shipping point and did notarrived until 2011. Purchases in 2011 were P3,000,000. The perpetual inventory records showed an ending inventory of P420,000 for 2011. A physical count of the goods on hand at the end of 2011 showed an inventory of P380,000. Inventory shortages are included in cost of goods sold. QUESTION 3: What amount should be reported in the 2011 income statement for cost of goods.

Solution: Inventory- December 31, 2010

360,000

Purchases-2011

3,000,000

Good available for sale

3,360,000

Inventory- December 31, 2011

(380,000)

Cost of good sold

2,980,000

STATEMENT OF FINANCIAL POSITION 1. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash. a. Solvency b. Completeness c. Liquidity d. Financial flexibility

2. Which criticism is not normally aimed at the statement of financial position? a. The extensive use of separate classification. b. Failure to reflect current value information. c. Failure to include items of financial value. d. An extensive use of estimate.

3. In which section of the statement of financial position should cash that is restricted for the settlement of a liability due 18 months after the reporting period be presented? a. Equity. b. Noncurrent liabilities. c. Current asset.

d. Noncurrent assets.

4. The following are not included in the face of statement of financial position, except. a. Contingent liability. b. Shares in an entity owned by that entity. c. Investment property. d. Number of shares authorized.

5. Which financial statement would a potential investor primarily use to assess liquidity and financial flexibility? a. Income statement. b. Statement of changes in equity. c. Statement of financial position. d. Statement of retained earnings.

6. An essential characteristic of an asset. a. An asset is tangible. b. The claims to an asset’s benefit are legally enforceable. c. An asset is obtained at a cost. d. An asset provides future benefits.

7. The operation cycle concept a. Affects the income statement. b. Permits some asset to be classified as current even if more than one year removed from becoming cash.

c. Cause current and noncurrent items to depend on whether they will affect cash within one year. d. Has become obsolete.

8. Which statement about financial position is not true? a. Biological assets should be reported in the statement of financial position. b. Revaluation surplus on property, plant and equipment in the current year should not be recognized in the statement of comprehensive income for the current year. c. Provision should be recognized in the statement of financial position. d. none of the above.

SOLVINGS – FINANCIAL POSITION

SAYONKO Company provided the following information on December 31, 2017:

Accounts payable

350,000

Accounts receivable

450,000

Property plant a...