SOL. MAN. Chapter 11 SHE (PART 2) 2021 PDF

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Chapter 11Shareholders’ Equity (Part 2)PROBLEM 1: TRUE OR FALSE1. FALSE2. FALSE3. FALSE4. TRUE5. FALSE6. FALSE – fair value7. FALSE8. TRUE9. TRUE10PROBLEM 2: MULTIPLE CHOICE – THEORY1. D2. B3. A4. B5. D6. D7. C8. C9. C10. APROBLEM 3: EXERCISES1. Solution:Shares issued (1,600,000 ÷ 100 par) 16, Share...

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Chapter 11 Shareholders’ Equity (Part 2) PROBLEM 1: TRUE OR FALSE 1. FALSE 2. FALSE 3. FALSE 4. TRUE 5. FALSE 6. FALSE – fair value 7. FALSE 8. TRUE 9. TRUE 10. FALSE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. D 2. B 3. A 4. B 5. D 6. D 7. C 8. C 9. C 10. A

Page | 2 PROBLEM 3: EXERCISES 1. Solution: Shares issued (1,600,000 ÷ 100 par) 16,000 Shares subscribed (440,000 ÷ 100 par) 4,400 Treasury shares (288,000 ÷ 120 cost) ( 2,400) Outstanding shares Multiply by: Dividends per share Total cash dividends declared 900,000 (Date of declaratio n)

Retained earnings Cash dividends payable

(Date of record) (Date of distributio n)

No entry Cash dividends payable Cash

18,000 50

900,000 900,000

900,000 900,000

2. Solution:  Date of declaration: Retained earnings Property dividends payable

1,600,00 0

NCA held for distribution to owners Impairment loss Investment in associate

1,600,00 0 400,000

 End of reporting period: Retained earnings Property dividends payable NCA held for distribution to owners Gain on impairment recovery  Date of distribution: Property dividends payable Retained earnings Property dividends payable Loss on distribution of property dividend

1,600,00 0

2,000,00 0

600,000 600,000 400,000 400,000

300,000 300,000 1,900,00 0 100,000

2,000,00

Page | 3 NCA held for distribution to owners

3. Solution:  Date of declaration: Retained earnings Property dividends payable Impairment loss Inventory

0

1,600,00 0 400,000

400,000

 Date of distribution: Retained earnings Property dividends payable Property dividends payable Inventory Gain on distribution of property dividend 4. Solution: Requirement (a): (Date of Retained earnings declaratio n)

(18,000 x

1/10 x ₱120)

600,00 0 2,200, 000

216,0 00

Share dividends distributable (18,000 x 1/10 x ₱100)

1,600,00 0 600,000

180,0 00

No entry Share dividends distributable Share capital

Requirement (b): (Date of Retained earnings declaratio n)

600,000

36,00 0

Share premium (Date of record) (Date of distributio n)

1,600,00 0

(18,000 x 1/5

x ₱100)

Share dividends distributable

180,0 00

360,0 00

180,0 00

360,0 00

(18,000 x 1/5 x ₱100) (Date of record) (Date of distributio n)

No entry Share dividends distributable Share capital

360,0 00

360,0 00

Page | 4

5. Solutions: Requirement (a): Noncumulative and nonparticipating Total dividends declared Allocation: PS (20,000 x 200 x 10% x 1 yr.) OS (3,600,000 - 400,000) Balance

3,600,0 00 400, 000 3,200, 000 -

Requirement (b): Cumulative and non-participating 3,600,0 Total dividends declared 00 Allocation: 1,200 ,000 PS (20,000 x 200 x 10% x 3 yrs.) 2,400, OS (3,600,000 – 1,200,000) 000 Balance

-

Requirement (c): Noncumulative and fully participating Total dividends declared Allocation: PS (20,000 x 200 x 10% x 1 yr.) OS (160,000 x 100 x 10%) Excess subject to participation (3.6M – 400K 1.6M) PS (1,600,000 x 4M par/ 20M par)

3,600,0 00 400,0 00 1,600, 000 1,600, 000 320,0 00

Page | 5

OS (1,600,000 x 16M par/ 20M par) Balance

PS (400K basic + 320K participation) OS (1.6M basic + 1.28M participation) Total dividends declared

1,280, 000 720, 000 2,880, 000 3,600,0 00

Requirement (d): Cumulative and fully participating 3,600,0 Total dividends declared 00 Allocation: 1,200, PS (20,000 x 200 x 10% x 3 yrs.) 000 1,600, OS (160,000 x 100 x 10%) 000 Excess subject to participation (3.6M – 1.2M 800,0 1.6M) 00 160, PS (800,000 x 4M/20M) 000 640,0 OS (800,000 x 16M/20M) 00 Balance

PS (1.2M basic + 160K participation) OS (1.6M basic + 640K participation) Total dividends declared

1,360 ,000 2,240, 000 3,600,0 00

Requirement (e): Cumulative and participating up to 16% 3,600, Total dividends declared 000 Allocation: PS (20,000 x 200 x 10% x 3 yrs.) 1,200,0

Page | 6 00 1,600,00 0 800,0 00 240,0 00 560,0 00

OS (160,000 x 100 x 10%) Excess subject to participation (3.6M – 1.2M 1.6M) PS [20,000 x 200 x (16% - 10%)] Excess allocated to ordinary shares (800,000 - 240,000)

-

Balance

1,440 ,000 2,160, 000 3,600,0 00

PS (1.2M basic + 240K participation) OS (1.6M basic + 560K participation) Total dividends declared

6. Solution: Date Share capital Share premium Share capital

[(2M ÷ ₱100) x

₱80]

Share premium – recapitalization

2,000,0 00 400,00 0

1,600,0 00 800,00 0

Shareholders' equity, ₱80 par

1,600,000

Share premium

800,000

Retained earnings

600,000

Total shareholders’ equity

3,000,000

Page | 7 7. Solution: 1 Building (3M – 1.6M) Revaluation surplus

1,400,0 00

to record revaluation of building

2

Retained earnings Receivables (4,000,000 x

1,200,0 00

30%)

to record write-off of receivables

3

Retained earnings Inventory (3.1M – 2M)

1,100,0 00

to record write-down of inventory

4

Retained earnings Goodwill

1,400,0 00 1,200,0 00

1,100,0 00

100,000 100,000

to record write-down of goodwill

5

60,000

Retained earnings Estimated liability on pending lawsuit

60,000

to recognize provision for probable loss on pending lawsuit

6

Share capital Share premium

5,000,0 00

to record recapitalization effected through reduction of share capital

7

Revaluation surplus Share premium Retained earnings to wipe out deficit

ASSETS Cash Receivable s Inventory Building net Goodwill Total

200,00 0 2,800,0 00 2,000,0 00 3,000,0 00 8,000,

1,400,0 00 5,000,0 00

LIABILITIES & EQUITY Liabilities (2.94M + 60K)

Share capital, ₱100 par Retained earnings (deficit)

Total

5,000,0 00

6,400,0 00

3,000,000 5,000,000 -

8,000,000

Page | 8 000

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. C Retained earnings, Jan. 1

1,780,000

Profit

2,260,000

Cash dividends (260,000 x 8)

(2,080,000)

Share dividends (260,000 x 1/20 x 22)

(286,000)

Retained earnings, Dec. 31

F

F

1,674,000

The treasury shares do not affect retained earnings because they were reissued above cost. Also, the treasury shares do not affect the outstanding shares because all of them were reissued before the dividends were declared. The share dividends are accounted for at fair value because they are considered “small” (i.e., 1/20 = 5%).

2. A Outstanding shares, Jan. 1 May. 21, 20x1 July 20, 20x1 Total Multiply by: Sept. 21, 20x1 Oct. 5, 20x1 Outstanding shares, Dec. 19

100,000 (2,000) 30,000 128,000 2 256,000 1,000 257,000

Outstanding shares, Dec. 19 Multiply by: Cash dividends per share

257,000 3

771,000

Page | 9

Outstanding shares, Dec. 19 Multiply by: Share dividends Multiply by: Revised par after stock split Total debit to retained earnings

257,000 2/5 5

514,000 1,285,00 0

3. B Outstanding shares Multiply by: Par Aggregate par Multiply by: Scrip dividends Total dividends Add: Interest (900K x 10% x 5/12) Total cash payment on Aug. 31

18,000 100 1,800,000 50% 900,000 37,500 937,500

4. A 2.4M fair value on distribution date – 2M carrying amount of inventories = 400,000 gain Supporting journal entries: Date of Retained earnings declara Property dividends tion payable

2,200,0 00

2,200,0 00

The inventories are not written-up above the ₱2,000,000 cost. Date of distribut ion

Date of distribut ion

Retained earnings (2.4M – 2.2M) Property dividends payable Property dividends payable Inventory Gain on distribution

200,00 0

2,400, 000

200,00 0

2,000, 000 400,00 0

P a g e | 10

5. B Retained earnings 1,650,000 Property dividends payable 1,650,000 NCA held for distribution to owners 1,650,000 Impairment loss 150,000 Investment in associate 1,800,000

6. C Retained earnings 300,000 Property dividends payable 300,000 NCA held for distribution to owners 150,000 Impairment gain

150,000

7. C Retained earnings 100,000 Property dividends payable 100,000 Property dividends payable 2,050,000 NCA held for distribution to owners 1,800,000 Gain on distribution 250,000 Alternative solution: 2,050,000 fair value on Jan. 15, 20x2 – 1,800,000 carrying amount of investment on Jan. 15, 20x2 = 250,000 gain 8. A – a net debit equal to the carrying amount of the non-cash asset as at the date of declaration. 9. B Dr. to ret. earnings

P a g e | 11 Outstanding shares, beg. July 1 (2-for-10) Multiply by: Par value Outstanding sh., Dec. 31 (10,000 + 2,000)

10,000 20% 2,000 100

200,000

12,000

Dec. 31 (1-for-20) Multiply by: Fair value

5% 600 120

72,000 272,000

10. C 3,670 ,000 (30, 000) 2,080 ,000

SHE, beg. Jan. 7 - cost of retirement (3,000 x 10) June 30 - semi-annual profit July 20 - reverse split Sept. 21 - cost of treasury shares (500 x 25) Oct. 20 - reissuance price of TS (300 x 30) Nov. 23 - issuance price (1,000 x 32) Dec. 31 - (4.260M annual profit - 2.08M first half) Dec. 31 - Dividends

(12, 500) 9 ,000 32 ,000 2,180 ,000

(1)

SHE, end. (1)

Outstanding OS after reverse split (180K ÷ 2) Sept. 21 treasury shares Oct. 20 reissuance Nov. 23 issuance Outstanding ordinary shares on Dec. 31

-

(3,672,000) 4,256,500 90 ,000 (500) 300 1 ,000 90, 800

P a g e | 12

Multiply by:

40 3,632, 000 40 ,000 3,672, 000

Dividends to OS Dividends to PS (50K x 10% x 8 par x 1 yr.) Total dividends

Only one-year dividend is paid to the PS because the PS is noncumulative. Supporting journal entries: Jan. 7 Ordinary share capital Retained earnings Cash 30,000

15,000 15,000

June 30

Income summary Retained earnings 2,080,000

July 20

Memo entry (90,000 new sh. @ ₱10 new par)

Sept. 21

2,080,000

Treasury shares (500 x 25) Cash 12,500

12,500

Oct. 20

Cash (300 x 30) Treasury shares (300 x 25) 7,500 Share premium – T/S 1,500

Nov. 23

Cash (1,000 x 32) 32,000 Ordinary share capital (1,000 x 10) 10,000 Share premium 22,000

Dec. 31

Inc. summary (4.26M – 2.08M) 2,180,000 Retained earnings

9,000

P a g e | 13 2,180,000 Dec, 31

Retained earnings Cash 3,672,000

(1)

3,672,000

11. D Total cash dividends declared Dividends to PS (100,000 sh. x ₱100 par x 6% x 2 years = 1.2M)

1,000,000 (1,000,000)

Dividends to OS

12. B Total dividends declared Allocation: ① Allocation to preference shares (a) ② Excess allocated to ordinary shares As allocated

0

75,000 60,0 00 15,000 -

(a)

100,000 x ₱10 par x 5% = 50,000 entitlement per year x 3 years (i.e., 20x0 to 20x2) = 150,000 total – previous payments (40,000 + 50,000) = 60,000 ② Excess allocated to ordinary shares Divided by: Outstanding OS Cash dividends per OS

15,000 300,000 0 .05

13. D (1) Noncumulative and non-participating

Total dividends declared Allocation: ① Preference shares (100,000 x ₱50 x 10% x 1 year)

3,500,0 00 500,

P a g e | 14

② Ordinary shares (₱3.5M - ₱.5M) As allocated

000 3,000, 000 -

(2) Cumulative and non-participating Total dividends declared Allocation: ① Preference shares (100,000 x ₱50 x 10% x 2 years)

② Ordinary shares (₱3.5M - ₱1M) As allocated

3,500,00 0 1,000, 000 2,500,0 00 -

(3) Noncumulative and participating Total dividends declared 3,500,000 Allocation: ① Basic allocation to PS (100,000 x ₱50 x 10% x 1

500,0 00 2,000,0 ② Basic allocation to OS (500,000 x ₱40 par x 10%) 00 1,000,00 Excess subject to participation (3.5M – 500K – 2M) 0 200,00 ③ Participation of preference sh. (1M x 5M par ÷ 25M par) (d) 0 800,00 ③ Participation of ordinary sh. (1M x 20M par ÷ 25M par) 0 As allocated year)

(d)

PS: 100,000 x ₱50 = 5M; OS: 500,000 x ₱40 = 20M; 5M + 20M = 25M

Preference shares: (₱500,000 basic + ₱200,000 participation)

Ordinary shares: (₱2,000,000 basic + ₱800,000 participation)

Total dividends

700,000 2,800,0 00 3,500 ,000

P a g e | 15

(4) Cumulative and participating Total dividends declared 3,500,000 Allocation: 1,000, ① Basic allocation to PS (100,000 x ₱50 x 10% x 2 000 years) 2,000,0 00 ② Basic allocation to OS (500,000 x ₱40 par x 10%) Excess subject to participation (3.5M – 1M – 2M) 500,000 ③ Participation of preference sh. (500K x 5M par ÷ 100,00 25M par) 0 400,00 ③ Participation of ordinary sh. (500K x 20M par ÷ 0 25M par) As allocated Preference shares: (₱1,000,000 basic + ₱100,000 participation)

Ordinary shares: (₱2,000,000 basic + ₱400,000 participation)

Total dividends

1,100,0 00 2,400,0 00 3,500 ,000

14. B Total dividends declared Allocation: ① Basic allocation to 6% PS (100,000 x ₱50 x 10% x 3 years)

① Basic allocation to 3% PS (50,000 x ₱60 x 5% x 1 year)

② Basic allocation to ordinary sh. (250,000 x ₱40 par x 5%)

Excess subject to participation (4M – 1.5M – 150K – 500K)

③ Participation of 6% PS (₱1.85M x 5M par ÷ 18M par)

4,000,0 00 1,500, 000 150,0 00 500,00 0 1,850,00 0 513,889

③ Participation of 3% PS (₱1.85M x 3M par ÷ 18M 308,333 ③ Participation of ordinary sh. (₱1.85M x 10M par ÷ 1,027,77 18M par) 8 As allocated par)

P a g e | 16 (a)

10% PS: 100,000 x ₱50 = 5M; 5% PS: 50,000 x ₱60 = 3M; OS: 250,000 x ₱40 = 10M; 5M + 3M + 10M = 18M

10% PS: (₱1,500,000 basic + ₱513,889 participation) 5% PS: (₱150,000 basic + ₱308,333 participation) Ordinary shares: (₱500,000 basic + ₱1,027,778 participation)

Total dividends

15. B Step 1: Total dividends declared Allocation: PS (20,000 x 200 x 10% x 3 yrs.) OS (160,000 x 100 x 10%) Excess subject to participation PS OS Balance

Step 2: Total dividends to OS (160,000 sh. x 14 per share) Basic dividend of OS Participation of OS 

2,013,88 9 458,333 1,527,7 78 4,000 ,000

? 1,200,00 0 1,600,00 0 ? ? ? -

2,240,000 (1,600,000) 640,000

Participation of OS = Excess subject to participation x 16M/20M*

* PS total par: 20,000 x 200 = 4M; OS total par: 160,000 x 100 = 16M; 4M + 16M = 20M

 

640,000 = Excess subject to participation x 16M/20M Excess subject to participation = 640,000 x 20/16 = 800,000

P a g e | 17

Step 3: Total dividends declared (squeeze)

800K + 1.6M

+ 1.2M

3,600,00 0

Allocation: 1,200,00 0 1,600,00 0 800,0 00 160, 000 640,000

PS OS Excess subject to participation PS (800,000 x 4M/20M) OS Balance

1,360, 000 2,240, 000 3,600,0 00

PS (1.2M basic + 160K participation) OS (160,000 x 14) Total dividends declared

1,360, 000 20,000 68

PS Divide by: outstanding PS Cash dividend per PS

16. D – Dividends on redeemable preference shares are recognized as interest expense. Supporting journal entries: Date of Interest expense (100,000 x 60,000 declarati 10 x 6%) 60,000 on Interest payable Date of record Date of distribut ion

17. C

No entry Interest payable Cash

60,000 60,000

P a g e | 18 18. D Dividends declared after the reporting period but before the financial statements are authorized for issue are not recognized as a liability at the end of the reporting period because no obligation exists at that time. The dividends are disclosed only in the notes. The ₱100,000 dividend in arrears on the preference shares are also only disclosed and are not accrued as liability. 19. B 1 Assets (770,000 – 400,000) Revaluation surplus 2 Share capital (2,600,000 x ½) Share premium 3

Revaluation surplus Share premium Retained earnings

370,000 370,000 1,300,0 00 370,000 1,300,0 00

Ordinary share capital (2,600,000 – 1,300,000) Retained earnings (-1,670,000 + 1,670,000) Total shareholders’ equity

20. C Total SHE (before and after recapitalization & share dividend) Retirement price of PS - Sept. 30, 20x1 (5,000 x 440)

Dividends on retired - Sept. 30, 20x1 (5,000x 400 x 10% x 3/12)

Proceeds from issuance of OS on Oct. 31, 20x1 (3,000 x 600)

Profit for the 6 months ended Dec. 31, 20x1 Dividends to PS - Dec. 31, 20x1 (1) Dividends to OS - Dec. 31, 20x1 (1) Total shareholders' equity - Dec. 31, 20x1

1,300,0 00

1,670,0 00 1,300,00 0 0 1,300,0 00

10,000,00 0 (2,200,00 0) (50,000) 1,800,00 0 4,400,000 (100,000 ) (36,000) 13,814 ,000

P a g e | 19

(1)

Outstanding shares as of June 30, 20x1 Recapitalization on July 1, 20x1 Share dividends on July 1, 20x1 a - Retired on Sept. 30, 20x1 Issuance on Oct. 31, 20x1 Outstanding shares as of Dec. 31, 20x1 Dividends (PS: ₱400 par x 10% x 1/2 semi-annual)

Dividends payable

Supporting journal entries: Jul Ordinary share capital – old y 1, OS capital – new (8M ÷ 2) 20x Share premium 1

Prefere nce

Ordina ry

10,000

20,000 (10,000) 5,000

(5,000) 3,000 5,000

18,000

₱20.00 100,000

₱2.00 36,000

8,000,0 00

to record the recapitalization

Jul y 1, 20x 1

Retained earnings [(4M ÷ 400) x ½

Jul y 1, 20x 1 Sep t 30, 20x 1

Share premium Retained earnings

Sep t 30, 20x 1 Oct . 31, 20x

x ₱400)

Ordinary share capital – new

2,000,0 00

to record the ordinary shares issued as dividend to preference shareholders

4,000,0 00

to wipe out the deficit

Preference shares (5,000 x ₱400 par value)

Retained earnings Cash [5,000 x (₱400 par + ₱40

2,000,0 00 200,000

premium)] to record the retirement of preference shares

Retained earnings Cash (5,000 x ₱400 x 10% x 3/12)

4,000,0 00 4,000,0 00 2,000,0 00

4,000,0 00

2,200,0 00

50,000 50,000

to record the dividends on shares retired

Cash (3,000 x ₱600) OS capital – new (3,000 x ₱400)

1,800,0 00