SOLMAN_CHAP10_SHAREHOLDERS_EQUITY PDF

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Chapter 10Shareholders’ Equity (Part 1)PROBLEM 1: TRUE OR FALSE1. FALSE2. FALSE – SEC not DTI3. FALSE4. TRUE5. FALSE6. FALSE7. FALSE – fair value8. FALSE9. FALSE10PROBLEM 2: MULTIPLE CHOICE – THEORY1. B - 2,000 sh. x (18 – 5) = 26,000 share premiumrecorded at the subscription date, not collection da...

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Chapter 10 Shareholders’ Equity (Part 1) PROBLEM 1: TRUE OR FALSE 1. FALSE 2. FALSE – SEC not DTI 3. FALSE 4. TRUE 5. FALSE 6. FALSE 7. FALSE – fair value 8. FALSE 9. FALSE 10. FALSE PROBLEM 2: MULTIPLE CHOICE – THEORY 1. B - 2,000 sh. x (18 – 5) = 26,000 share premium recorded at the subscription date, not collection date 2. A 3. A 4. D – The purchase of treasury shares is recorded as debit to treasury shares and credit to cash. 5. D – The pro forma entry to record the reissuance of treasury shares above cost is as follows: Cash 120 (above cost) Treasury shares 100 (cost) Share premium 20 Choice (c) is incorrect. Although ‘share premium – retirement’ is credited, any share premium from the original issuance is also debited. The net effect on share premium is a credit. 6. A 7. A Choice (b) can happen if there is no down payment. 8. C 9. D 10. D

PROBLEM 3: EXERCISES 1. Solutions: Requirement (a): Jan. 1, 20x1 Memorandum method

Journal entry method

Memo entry – Authorized capitalization is ₱2,000,000 divided into 10,000 shares with par value per share of ₱200.

Unissued share capital 2M Authorized share capital 2M

Cash 125K (2M x 25% x 25%) Subscription receivable 375K Subscribed share capital 500K (2M x 25%)

Cash 125K (2M x 25% x 25%) Subscription receivable 375K Subscribed share capital 500K (2M x 25%)

Feb. 1, 20x1 Memorandum method Cash 300K* Subscription receivable 300K Subscribed share capital Share capital 400K

400K

Journal entry method Cash 300K* Subs. receivable 300K Subscribed share capital 400K Unissued share capital 400K

* Subscription price of 2,000 shares (2,000 x ₱200) 400,000 Portion already paid (400,000 x 25%) (100,000) Balance collected 300,000

Feb. 28, 20x1 Memorandum method

Journal entry method

Cash (1,000 x ₱200) Share capital 200K

Cash (1,000 x ₱200) 200K Unissued share capital 200K

200K

Requirement (b): Memorandum method 600,0 Share capital 00 Subscribed sh. 100,0

Journal entry method Authorized sh. 2,000,00 capital 0 Unissued sh. (1,400,0

capital Subs. receivable

Total Share capital

00 (75,00 0)

625,0 00

capital Issued share capital Subscribed sh. capital Subs. receivable Total Share capital

2. Solution: Jan. Cash (5,000 x ₱120) 1, Share capital (5,000 x ₱100) 20x Share premium [5,000 x (₱120 – 1

600,0 00

₱100)] Jan. 31, 20x 1

Subscription receivable (2,000 x ₱160)

Subscribed share capital

320,0 00

(2,000 x ₱100)

Share premium [2,000 x (₱160 – ₱100)]

3. Solutions: July Treasury shares (1,000 x ₱90) 1, Cash 20x1 July Retained earnings – 1, unrestricted 20x1 Retained earnings – appropriated Requirement (a): Sept. Cash (1,000 x ₱140) Treasury shares (1,000 x ₱90) 1, 20x1 Share premium – treasury shares Sept. 1, 20x1

Retained earnings – appropriated Retained earnings – unrestricted

90,00 0 90,00 0

140,0 00

90,00 0

00) 600,000 100,000 (75,000) 625,000

500,0 00 100,0 00 200,0 00 120,0 00

90,00 0 90,00 0

90,00 0 50,00 0 90,00 0

Requirement (b): Sept. Cash (1,000 x ₱60) (a) Share premium – treasury 1, 20x1 shares (b) Retained earnings Treasury shares (1,000 x

60,00 0 30,00 0

90,0 00

₱90)

Sept. 1, 20x1

Retained earnings – appropriated Retained earnings – unrestricted

4. Solution: Requirement (a): July 1, Treasury shares (1,000 x ₱80) 20x1 Cash July 1, 20x1

Sept. 1, 20x1

Retained earnings – unrestricted Retained earnings – appropriated Share capital (1,000 x ₱100) Share premium – original issuance (₱320K x 1,000/16,000)

Treasury shares (1,000 x ₱80) Share premium - retirement

Sept. 1, 20x1

Retained earnings – appropriated Retained earnings – unrestricted

Requirement (b): July Share capital (1,000 x ₱100) 1, Share premium – original issuance 20x

(₱320K x 1,000/16,000)

90,00 0

80,00 0 80,00 0

100,0 00 20,00 0

80,00 0

100,0 00 20,00

90,0 00

80,00 0 80,00 0

80,00 0 40,00 0 80,00 0

1

(a) Share premium – treasury shares (b) Retained earnings (balancing figure)

Cash

(1,000 x ₱140)

0 10,00 0 10,00 0

140,0 00

5. Solution: No entry (memo only)

June 1, 20x1 June 20, 20x1

June 30, 20x1

Cash (30,000 x ½ x ₱50) Ordinary share capital (30K x

750,0 00

½ x ₱10)

Share premium – Ordinary share No entry (memo only)

150,0 00 600,0 00

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. A Ordinary shares, ₱5 par 800,000 Subscribed share capital 100,000 Share premium 1,120,000 Subscription receivable (80,000) Cumulative losses on translation of foreign operation (60,000) Retained earnings - appropriated 320,000 Retained earnings - unappropriated 700,000 Treasury shares, at cost (200,000) 2,700,00 Total shareholders' equity 0 2. A

Share capital (30K x 10)

300,000

Subscribed shares (40K x 10) Subscriptions receivable (40K x 18 x 25%) Share premium (30K x 2) + (40K x 8) Total SHE

400,000 (180,000) 380,000 900,000

Short-cut for total equity: (30,000 x 12) + (40,000 x 18 x 75%) = 900,000

3. C Date

Date

Date

Cash (10,000 x ₱14) Share capital (10,000 x ₱1) Share premium

140,0 00

Share premium Cash Cash (20,000 x ₱20 x 25%) Subscriptions receivable (20K x

2,000

₱20 x 75%)

Subscribed share capital (20,000 x ₱1)

2,000 100,0 00 300,0 00

Share premium Da te Da te Da te

Cash (15,000 x ₱20 x 75%) Subscriptions receivable

225,0 00

Subscribed share capital (15,000 x

15,00 0

₱1)

Share capital Share premium Cash

10,00 0 130,0 00

20,00 0 380,0 00 225,0 00 15,00 0

3,000

Total SHE before share transactions Share capital (10,000 + 15,000) Subscribed share capital (20,000 - 15,000) Subscription receivable (300,000 – 225,000) Share premium (130,000 – 2,000 + 380,000 – 3,000) Total SHE after share transactions

3,000 900,000 25,000 5,000 (75,000) 505,000 1,360,0

00 Short-cut: 900,000 + (10,000 x 14 – 2,000) + (20,000 x 20 x 25%) + (15,000 x 20 x 75% - 3,000) = 1,360,000 4. C Jan. 3

No entry (memorandum method assumed)

Jan. 5

Cash (5K x ₱52) + (60K x ₱14) 1,100,000 Preference share capital (5K x ₱50) 250,000 Share premium - PS [5K x (₱52 - ₱50)] 10,000 Ordinary share capital (60K x ₱10) 600,000 Share premium - OS [60K x (₱14 - ₱10)] 240,000

Jan. 24

Organization costs (2K x ₱16) 32,000 Ordinary share capital (2K x ₱10) 20,000 Share premium - OS [2K x (₱16 - ₱10)] 12,000

Feb. 3

Land 250,000 Building 1,000,000 Ordinary share capital (80K x ₱10) 800,000 Share premium - OS 450,000

Sept. 12

Cash (3K x ₱53 x 40%) 63,600 Subscription receivable (3K x ₱53 x 60%) 95,400 Subscribed share capital – PS (3K x ₱50) 150,000 Share premium - PS [3K x (₱53 - ₱50)] 9,000

Oct. 1

Cash Subscription receivable 15,900

15,900

25 Preference share capital

0,000

Subscribed sh. Capital - PS

0,000

15

Share premium - PS (10K + 9K) Subscription receivable (95.4K - 15.9K) Ordinary share capital (600K + 20K + 800K) Share premium - OS (240K + 12K + 450K Total contributed capital

19,000 (79 ,500) 1,420 ,000 70 2,000 2,46 1,500

5. D Ordinary share capital Subscribed share capital Share premium Legal capital

Par 1,600,000 200,000 1,800,00 0

No-par 1,600,000 200,000 600,000 2,400,00 0

6. B Jan. 2, 20x1

Cash (25,000 x 15 x 50%) 187,50 Subscription receivable (25,000 x 15 0 x 50%) 187,50 Subscribed share capital 0 (25,000 x 10)

Share premium Jan. 28, 20x1

Cash (20,000 x 15 x 50%) Subscription receivable

150,00 0

250,0 00 125,0 00 150,00 0

Subscribed share capital (20,000 x 10)

Ordinary share capital

July 14, 20x1

Treasury shares (5,000 x 17) Cash

200,00 0 200,00 0 85,000 85,00 0

Dec. 27, 20x1

Cash (2,500 x 20) Treasury shares (2,500 x 17) Share premium – Treasury shares

50,000 42,50 0 7,500

Share premium, Dec. 31, 20x1: (125K + 7.5K) = 132,500

7. A Date

Cash (10,00 x ₱48) (a) Share premium – treasury shares (1) (b) Retained earnings Treasury shares (10,000 x

480,0 00 20,00 0

500,0 00

₱50) (1)

There is no balance in this account because the problem states that the reacquisition was the first treasury share transaction of Entity A. 8. D Date

Cash (10,000 x ½ x ₱58) Treasury shares (10,000 x ½ x

290,0 00

₱50)

Share premium – treasury shares Date

Share capital (5,000 x ₱10) 50,000 Share premium – original issuance (5K 25,000 x ₱5) 40,0 (a) Share premium – treasury 00 shares (see above) 135,0 250,00 (b) Retained earnings (balancing 00 0 figure) Treasury shares (5,000 x 50)

9. A Jan . 2, 20

250,0 00 40,00 0

Share capital (150,000 x ₱2 par) Share premium (2.55M x 300K ÷ 1.7M)

300,000 450,000 450,000

x3

Retained earnings Cash

1,200,0 00 1,400 ,000 2,100 ,000 6,250 ,000 9,75 0,000

Ordinary shares (1,700,000 – 300,000) Share premium (2,550,000 – 450,000) Retained earnings (6,700,000 – 450,000) Total shareholders' equity

10. D 10,000 Share capital (1,000 x ₱10) Share premium – original issuance (1K 20,000

Date

25,000 5,000

x ₱20)

Cash (1,000 x 25) Share premium – retirement 11. C  Proportional method: No. of shar es

Fair value per sh.

Total fair value

Preference shares Ordinary shares

200

150

30,000

1,000

120

120,000

Totals

1,200

Dat e

150,000

Cash Preference share capital (200 x ₱130 par)

Share premium – PS (40,000 – 26,000)

Ordinary share capital (1,000 x ₱100 par)

Share premium – OS (160,000 – 100,000)

 Incremental method: Lump sum price

Fractio n 30/150 120/15 0 150/15 0

200,0 00

Allocati on 40,000 160,000 200,000

26,00 0 14,00 0 100,0 00 60,00 0

200,000

Allocation to ordinary shares, at fair value (1,000 x ₱120)

(120,000)

Excess allocated to preference shares

80,000

The entry to record the issuance is as follows: 200,00 0

Dat Cash e Preference share capital (200 x ₱130 par)

Share premium – PS (80,000 – 24,000)

Ordinary share capital (1,000 x ₱100 par)

Share premium – OS (120,000 – 100,000)

26,00 0 54,00 0 100,00 0 20,00 0

12.C (120,000 rights x ₱0.10) = 12,000 debit to share premium 13. B (a)

Cash (3,000 x ₱18) Callable preference shares

54,00 0

(3,000 x ₱10)

Share premium – Callable PS to record issuance of callable preference shares

(b)

Cash (2,000 x ₱25) Convertible preference shares

50,00 0

(2,000 x ₱20)

Share premium – Convertible PS to record issuance of convertible preference shares

(c)

Callable preference shares (2,000 x ₱10)

Share premium – Callable PS (24K x 2K/3K)

(d)

Cash (2,000 x ₱17) Share premium – redemption Convertible preference shares (1,000 x ₱20)

Share premium – Convertible PS (10K x 1/2)

Ordinary share (1,000 x ₱25 par) Share premium, beg.

280,000

20,00 0 16,00 0 20,00 0 5,000

30,00 0 24,00 0 40,00 0 10,00 0

34,00 0 2,000

25,00 0

(a) (b) (c) (c) (d) Share premium, end.

24,000 10,000 (16,000) 2,000 (5,000) 295,000

14. C

Case (1): Equity instruments Preference sh. 4,000 Warrants

4,000

Fair value per sh.

Total Fair value

100

400,000

25

100,000 500,000

Date

Fracti on 400/50 0 100/50 0 500/50 0

Cash (4,000 x 124) Preference share capital (4,000 x

396,800 99,200 496,000

496,0 00

₱80 par)

Share premium – PS (396,800 – 320,000)

Share premium – warrants outstanding

Case (2): Fair value of ordinary share Subscription price Intrinsic value per share of warrant Number of ordinary shares purchasable under the warrants Assigned value of share warrants

Allocati on

320,0 00 76,80 0 99,20 0

58 (10) 48 2,000 * 96,00 0

* 4,000 preference shares ÷ 2 warrants per ordinary sh. = 2,000 Issue price

496,000

(96,0 00) 400,0 00

Assigned value of share warrants Excess allocated to preference shares Date

Cash (4,000 x 124) Preference share capital (4,000 x ₱80 par)

Share premium – PS (400,000 – 320,000)

Share premium – warrants outstanding

496,0 00

320,0 00 80,00 0 96,00 0

15. D

PROBLEM 5: CLASSROOM ACTIVITY Answer: Cash 45,678.60 Share capital 16,000.00 (100 shares per certificate x 16 certificates x ₱10 par*]

Share premium 29,678.60 * See share certificate below.

P a g e | 15

PROBLEM 6: FOR CLASSROOM DISCUSSION 1. Solution: Requirement (a): Jan. 6, 20x1 Memorandum method Journal entry method Memo entry – Authorized capitalization is ₱3,000,000 divided into 600,000 shares with par value per share of ₱5.

Unissued share capital 3M Authorized share capital 3M

Cash (3M x 25% x 25%) 187.5K Subscription receivable 562.5K Subscribed share capital 750K (3M x 25%)

Cash (3M x 25% x 25%) 187.5K Subscription receivable 562.5K Subscribed share capital 750K (3M x 25%)

Jan. 31, 20x1 Memorandum method Cash 450K* Subscription receivable 450K Subscribed share capital Share capital 600K

600K

Journal entry method Cash 450K* Subscription receivable 450K Subscribed share capital 600K Unissued share capital 600K

* Subscription price of 120,000 shares (120,000 x ₱5) 600,000 Portion already paid (120,000 x ₱5 x 25%) (150,000) Balance collected 450,000

Feb. 14, 20x1 Memorandum method Cash (60,000 x ₱20) 1.2M Share capital (60K x ₱5) 300K Share premium 900K Share premium Cash 12K

Feb. 28, 20x1

12K

Journal entry method Cash (60,000 x ₱20) 1.2M Unissued sh. capital (60K x ₱5) 300K Share premium 900K Share premium 12K Cash 12K

P a g e | 16 Memorandum method

Journal entry method

Subs. receivable (150K x ₱25) 3.75M Subs. sh. capital (150K x ₱5) 750K Share premium 3M

Subs. receivable (150K x ₱25) 3.75M Subs. sh. capital (150K x ₱5) 750K Share premium 3M

Requirement (b): Memorandum method Share capital 900,000 Subscribed sh. cap. 900,000 (3,862,5 Subs. receivable 00) 3,888,00 Share premium 0

Total Share capital

1,825,5 00

Journal entry method Authorized sh. capital 3,000,000 (2,100,00 Unissued sh. capital 0) Issued share capital Subscribed sh. capital Subs. receivable Share premium Total Share capital

2. Solutions: Sept. Treasury shares (3,000 x ₱90) 1, Cash 20x1

Sept. 1, 20x1

Retained earnings – unrestricted Retained earnings – appropriated

Requirement (a): Nov. Cash (3,000 x ₱140) 1, Treasury shares (3,000 x ₱90) 20x1 Share premium – treasury shares Nov. 1, 20x1

Retained earnings – appropriated Retained earnings – unrestricted

900,000 900,000 (3,862,50 0) 3,888,000 1,825,50 0

270,0 00 270,0 00

420,0 00

270,0 00

270,0 00 270,0 00

270,0 00 150,0 00 270,0 00

P a g e | 17

Requirement (b): Nov. Cash (3,000 x ₱60) 1, (a) Share premium – 20x1 treasury shares (b) Retained earnings Treasury shares (3,000 x

180,0 00 90,00 0

270,0 00

₱90)

Nov. 1, 20x1

Retained earnings – appropriated Retained earnings – unrestricted

3. Solution: Requirement (a): Ma Share capital (4,000 x ₱100 par) y 9, Share premium – original issuance 20x 1

(320K x 4,000/16,000 issued shares) Cash (4,000 x ₱80)

Share premium – retirement

Requirement (b): Ma Share capital (1,000 x ₱100) y 9, Share premium – original issuance 20x 1

(320K x 4,000/16,000 issued shares)

(a) Share premium – treasury shares (b) Retained earnings (balancing figure) Cash (4,000 x ₱140)

4. Solution: Sept No entry (memo only) 1, 20x1

270,0 00

400,0 00 80,00 0

270,0 00

320,0 00 160,0 00

400,0 00 80,00 0 10,00 0 70,00 0

560,0 00

P a g e | 18 Sept . 21, 20x1

Sept . 30, 20x1

Cash (30,000 x ₱60) Ordinary share capital (30,000 x ₱50)

Share premium – Ordinary share No entry (memo only)

5. Solution: May Cash 21, Share premium – donated 20x1 capital July 5, 20x1 July 20, 20x1 Dec. 19, 20x1

1,800, 000

200,00 0

1,500, 000 300,00 0

200,00 0

No entry (memo only) Land Share premium – donated capital Cash (1,000 x ₱260) Share premium – donated capital

1,000,0 00 260,00 0

1,000,0 00 260,00 0...