| Sepselion’ Equity (Pari?) PROBLEMS | PROBLEM 1; TRUE OR FALSE 1. The appropriation of retained earnings decreases total shareholders’ equity. 2. A deficit means a negative balance of total shareholders’ equity. Dividends are normally declared out of the paid-in capital. Only outstanding shares are entitled to dividends. According to IFRIC 17, the liability to pay cash dividends is ( recognized on the date the entity’s management declares the dividends, | 6. The liability for property dividend is initially measured at the non-cash asset's carrying amount on the date of declaration. | 7. Depreciable assets classified as “Non-current asset held for i distribution to owners” are continued to be depreciated until the date of distribution. | 8. The settlement of property dividends payable can give rise to | a gain or loss that is recognized in the income statement. | 9. Preferred dividends in arrears should not be accrued as 2 liability. _ 10. A stock split up has occurred when 1,000 (P10 par) aaigd are replaced with 500 (P20 par) shares. wee PROBLEM 2: MULTIPLE CHOICE - THEORY 1. The appropriation of retained earnings (use of equity reserves) under the PFRS . must arise eithér from a contractual or legal requirement. is made mainly for the benefit of the entity’s owners. ‘should result in the elimination of retained earnings from entity’s total equity. dicates the amounts that can and cannot be distributed the entity's owners. Scanned with CamScanner0,000 shares of Day Co., an unrelatey, inny’s owners. Sunny has declared c. share dividends, d. liquidating dividends, s share dividends, the retaineg don the c. date of distribution d. not debited. ligation for dividends not been declared for a very long ; hem. cash dividends, but not other types Scanned with CamScanneri Liquidating dividends are dividends a, in the form of cash or other liquid assets. || b, declared out of unrestricted earnings. c. declared out of legal capital. d ._ in the form of the corporation’s own shares of stock. a Imagine you are a CPA. You are preparing the financial statements of your company for the year ended December 31, 20x1. The board of directors declared dividends on February 1, 20x2. The dividend declaration is not subject to further approval. The financial statements were authorized for issue on April 1, 20x2. How should the dividends declared be ~ accounted for in the 20x1 financial statements? ~ a, included in current liabilities c. disclosed only b. included in noncurrent liabilities d. not accounted for © 40, A quasi-reorganization usually results in a net a. write-down of assets and the elimination of a deficit. .-b. write-down of assets and the continuation of a deficit. c. write-up of assets and a net write-down of retained earnings. d. write-down of assets and a net write-down of retained earnings. ; 3 mOBLEM 3: EXERCISES 1. Dinakdakan Co. declared P50 cash dividends per share. On the date of declaration, Dinakdakan Co.'s equity was as follows: peers 100 par 1,600,000 ibed share capital 440,000 cae sso tained earnings | Treasury shares, P120 cost (288,000) Other components of equity 140,000 _ Total shareholders’ equity 3,000,000 Scanned with CamScannerRequirement: Provide the journal entries on the dates of declaration, record and distribution. 2. Tinuno Co. declared 10,000 shares held as investment in associate as property dividends. The investment has a carrying amount of P2,000,000, and fair values of P1,600,000 on date of declaration, P2,200,000 at the end of the reporting period and P1,900,000 on the date of distribution. Cost to distribute is zero. Requirement: Provide the journal. entries on the dates of declaration, record and distribution. 3. During the year, Chinawish Co. distributed property dividends in the form of inventories. The carrying amount on the date of declaration was P2,000,000 and the fair values, which approximated the net realizable values, were P1,600,000 on the date of declaration and 2,200,000 on the date of distribution. Requirement: Provide the journal entries on the dates of declaration and distribution. 4. Doleful Co, has 16,000 issued shares, 4,400 subscribed shares and 2,400 treasury shares. The par value per share is P100. The fair value per share is P120. Requirements: Provide the entries on the dates of declaration, record and distribution under each of the following scenarios: q a. Doleful Co. declares share dividends in the ratio of “1 share for every 10 shares held.” 4 b. Doleful Co. declares share dividends in the ratio of “1 for every 5 shares held.” Scanned with CamScanner|, Relief Co. declared P3,600,000 cash dividends to its | ~ outstanding 20,000, P200 par, 10% preference shares and I 160,000, P100 par, ordinary shares. Dividends are in arrears for three years, including the current year. Requirements: Compute for the dividend to be received by each ‘lass of shares assuming the preference shares are: Noncumulative and non-participating ‘p. Cumulative and non-participating ‘¢ Noncumulative and fully participating ‘Cumulative and fully participating Cumulative and participating up to 16% The shareholders’ equity of Stormy Co. is as follows: jolders' equity, P100 par 2,000,000 Share premium 400,000 _ Retained earnings 600,000 al shareholders’ equity 000, my Co. reduces the par value per share to P80. irement: Prepare the shareholders’ equity of Stormy Co. after e recapitalization. Hurricane Co.'s financial position is as follows: LIABILITIES & EQUITY s 200,000 Liabilities 2,940,000 ivables 4,000,000 Share capital, P100 par 10,000,000 3,100,000 Retained earnings (deficit) (3,940,000) 100,000 “9,000,000 Total 9,000,000 SS es Revalued the building at a fair value of P3,000,000. Written off 30% of the receivables. Scanned with CamScannerWritten down the inventory to an NRV of P2,000,000, Written off the goodwill, «Recognized a loss provision of P60,000 on a pending lawsuit. «Reduced the par value per share to P50, Offset the resulting revaluation surplus and share premium to the deficit. Requirement; Prepare the entries to effect the reorganization and prepare the financial position after the reorganization. PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. Bliss Co. has 260,000 outstanding (P10 par) ordinary shares and retained earnings balance of P1,780,000 on January 1, 20x1. During the year, Bliss Co. acquired 2,000 treasury shares at'P18 per share and reissued them at P22 before year-end, Bliss Co. earned profit of P2,260,000 in [Link] December 31, 20x1, Bliss Co. declared P8 cash dividends per share and “1- for-20" stock dividends, both to be distributed on February 1, 20x2. The fair value per share on Dec. 31, 20x1 was P22. What amount of retained earnings should Bliss Co. report on December 31, 20x1? a. 1,582,000 1,642,000 c.1,674,000 —d. 1,682,000 2. On Jan, 1, 20x1, Expertise Co. had 100,000 outstanding (P10 par) ordinary shares. The following transactions occurred during 20x1: ‘May.21, 20:1 | Reacquired 2,000 treasury shares at P16 per share July 20, 20x1_| Issued 30,000 new shares at P17 per share. Sept. 21, 20x1 | Declared a “2-for-1" stock split Oct. 5, 20x1_| Reissued 1,000 treasury shares at P9 per share. Dec. 19, 20x1 | Declared cash dividends of P3 per share and “2-for-5” stock dividends. The fair value per share was P8, What total amount is debited to retained earnings on Dec. 19, 20x1? Scanned with CamScanner5 Lssoo0 1,378,000 «1,593,400. 1,799,000 «On April 1, 20x1, Heritage Co. declared 50% scrip dividends to ~ ‘4s 18,000 outstanding (P100 par) ordinary shares. The scrip dividends bear a 10% per annum interest rate and are payable ‘on August 31, 20x1, What total amount of cash is paid to the shareholders on August 31, 20x1? a. 945,000 b. 937,500 cc. 900,000 d. 875,000 4, Hard Co. declared as property dividends inventories with carrying amount of P2,000,000. The inventories have fair values of P2,200,000 on declaration date and P2,400,000 on distribution date. The fair values approximate the net realizable values. How much is the gain (loss) recognized in profit or loss on distribution date? a. 400,000 b. 200,000 ¢. (200,000) d.0 Use the following information for the next four questions: On December 1, 20x1, Love Co. declared the distribution of its investment in associate, consisting of 100,000 shares of Happy Co., as property dividends, The investment has a carrying amount of P1,800,000. The date of distribution is on January 15, 20x2, The investment has the following fair values: P1,650,000 on December 1, 20x1; P1,950,000 on Dec. 31, 20x1, and 2,050,000 on Jan. 15, 20x2. The investment qualifies for accounting under PFRS 5. The costs to distribute are negligible. 5, What amount is debited to retained earnings on Dec. 1, 20x1? a. 1,800,000 b. 1,650,000. 150,000 do What amount of gain (loss) is recognized in profit or loss on Dec. 31, 20x1? a. 300,000 b.200,000 150,00. 0 How much is the gain (loss) on the distribution of dividends? 300,000 b. 250,000 cc. 100,000 40 Scanned with CamScanneree ic ae & What is the net effect of the dividend declaration ang distribution to Love Co.'s retained earnings? a, 1,800,000 Dr. b, 1,650,000 Dr. ¢. 250,000Cr. 0 9, Circulation Co. has 10,000 (P 100 par) outstanding shares at the beginning of the year. Circulation Co. declared two stocky dividends during the year - a “2-for-10" on July 1 and a “1- for-20” on Dec. 31. The stock dividends were distributed thirty days after their declaration. The fair values per share were P150 on July 1 and P120 on Dec. 31. What total amount was debited to retained earnings for the share dividends? a. 302,000 b. 272,000 cc. 260,000 di. 200,000 10. Wet Co. has total shareholders’ equity of P3,670,000 as of Jan, 1, 20x1. Wet Co, has never declared dividends since it started operations two years ago. Information for 20x1 is as follows: Jan.7 Acquired 3,000 ordinary shares, originally issued at the par value of P5 per share, for P10 per share and immediately retired them. June30_ Reported semi-annual profit of P2,080,000. July20 Declared a 1-for-2 reverse stock split on the 180,000 outstanding ordinary shares (P5 par). Sepl.21 Acquired “500 ordinary shares (P10 par) for P25 per share to be held in treasury. Oxl.20 Reissued 300 treasury shares for P30 per share. Nov.23 Issued 1,000 new ordinary shares for P32 per share. Dec.31 Reported an annual profit of P4,260,000. Dec, 31 Declared and paid all accruing dividends to its 50,000 outstanding, 10%, noncumulative preference shares (P8 par) and P40 cash dividends per share to it ordinary shares. How much is Wet Co.'s total shareholders’ equity on De 20x1? a, 3,864,500 b, 4,180,500 4,256,500 dif Scanned with CamScanner11. Headache Co, has outstanding 100,000 shares of P100 par value 6% cumulative preferred stock and 200,000 shares of P10 par value common stock. Dividends are in arrears for two years, including the current year. If Headache Co. declares a total of P1,000,000 cash dividends, how much would each common stock receive? , a. 200,000 bl c. 60 d.0 3 2. Water Co, has 100,000 (P10 par), 5% cumulative preference shares and 300,000 (P5 par) ordinary shares outstanding on | Dec, 31, 20x2. There were no unpaid dividends as of January 1, 20x0. Water Co. declared dividends of P40,000 in 20x0 and P50,000 in 20x1. If Water Co. declares total cash dividends of P75,000 on Dec. 31, 20x2, how much would each ordinary share receive? ° a. 15,000 b, 0.05 20 do - 13. Fast Co. has 100,000 (P50 par) 10% preference shares and 500,000 (P40 par) ordinary shares outstanding. Dividends are in arrears for two years. If Fast Co. declares P3,500,000 cash dividends, what total amount would the ordinary shareholders receive if the preference shares are: (1) Noncumulative; (2) Cumulative; (3) Noncumulative and participating; and (4) Cumulative and participating? (1) 3,000,000; (2) 2,500,000; (3) 2,800,000; and (4) 2,200,000 b. (1) 2,300,000; (2) 2,000,000; (3) 2,400,000; and (4) 2,400,000 c. (1) 2,800,000; (2) 2,800,000; (3) 2,200,000; and (4) 2,000,000 d. (1) 3,000,000; (2) 2,500,000; (3) 2,800,000; and (4) 2,400,000 » |. 14. Late Co. has 100,000 (P50 par, cumulative and participating) B 10% preference shares, 50,000 (P60 par, noncumulative and participating) 5% preference shares and 250,000 (P40 par) ordinary shares. Dividends are in arrears for 3 years, inclusive : current year. “ Co. declares P4,000,000 cash Scanned with CamScannerRT ee ot eae 1 a a . Pain Co. has 100,000 (P50 par) 6% cumulative preference dividends in the current year, how much dividends would b paid to the ordinary shareholders? a. 1,433,228 -b. 1,527,778 c. 1,620,000 d. 1,756,799 Sigh Co. has outstanding 20,000, P200 par, 10% cumulatiyy and participating preference shares and 160,000, P100 par ordinary shares. Dividends are in arrears for three years including the current year. If Sigh Co. pays P14 cash dividends per share to its ordinary shareholders, what amount per share, would the preference shareholders receive? a. 180 b. 68 54 ©. 28 Signal Co. declared one-year cash dividends on its 100,000) outstanding, P10 par value, 6% redeemable preference shares, The fair value per share was P12, What amount is debited to the retained earnings account on date of declaration? a. 1,200,000 b. 72,000 , 60,000 d.0 Slippery Co. declared P800,000 cash dividends, 20% of which represented liquidating dividends. The entry on the date of declaration includes a a. debit to retained earnings for 160,000. b. credit to retained earnings for P160,000. c. debit to capital liquidated account for P160,000. d. credit to capital liquidated account for P160,000. shares and 250,000 (P40 par) ordinary shares outstanding. O January 15, 20x2, Pain Co. declared P200,000 cash divider from 20x1 profit. Pain Co.'s 20x1 financial statements authorized for issue on March 1, 20x2, What amot dividends to preference shareholders should Pain Co. as a liability in its December 31, 20x1 statement of fi position? a. 300,000 b. 200,000 ¢. 100,000 d. Scanned with CamScanneree es a, An entity’s equity before undergoing quasi-reorganization is as follows: ordinary share capital, P20 par 2,600,000 gelained earnings (deficit) (1,670,000) ne shareholders’ equity , Fixed assets with carrying amount of P400,000 shall be revalued to a fair value of P770,000. ~ The par value per share shall be reduced to P10. «The deficit shall be offset to any resulting share premium and revaluation surplus, How much is the total shareholders’ equity after implementing the quasi-reorganization? a. 900,000 b. 1,300,000. 1,670,000 4.0 20. Poof Co.’s equity as of June 30, 20x1 is as follows: 10% Preference shares, P400 par, cumulative 4,000,000 Ordinary shares, P400 par 8,000,000 Retained earnings (deficit) (2,000,000) Total shareholders’ equity The following transactions occurred during the rest of the year: | Inv, | All the ordinary shares were recalled and replaced in the | ratio of “1 new share for every 2 old shares.” The par value was not changed. Share dividends of “1 new ordinary share .per 2 preference shares held” were issued to the preference shareholders as payment for dividends in arrears. The deficit was wiped out using the resulting share premium. 5,000 preference shares were retired at a premium of P40. | Dividends for 3 months were paid on the retired shares. 3 "3,000 new ordinary shares were sold at P600. | itemtipien a T Profit “For the second half of the year amounted to | p40 | Ge | Scanned with CamScannera i ee iaeall Ne ee eer Ta aE saa rere “3 |A semi-annual cash dividend was declared on the 20:1 | preference shares and a P2 cash dividend was declared on |__| the ordinary shares, Baie How much is the total shareholders’ equity on December 31, 20x17 a. 13,453,500 —_b. 13,516,500. 13,814,000 d. 14,041,500 PROBLEM 5: FOR CLASSROOM DISCUSSION Cash dividends 1. Rain Co. declared cash dividends of P60 per share. On dividend declaration date, Rain Co. has 10,000 ordinary shares issued, 2,000 subscribed shares and 1,200 shares held in treasury. Requirement: Provide the journal entries on the dates of declaration, record and distribution. Property dividends 2. On Dec. 1, 20x1, Summer Co. declared 40,000 shares held as investment in associate as property dividend. The investment has a carrying amount of P1,200,000. Information on fair values is as follows: Date Fair value* Dec.1,20x1 * 1,100,000 Dec. 31, 20x1 1,250,000 Jan. 15, 20x2 1,000,000 “Assume costs to distribute are immaterial Requirements: Provide all the relevant entries. Share dividends 3. Summer Co. has 600,000 (P10 par) ordinary shares issued and — outstanding. The current fair value per sharé is P25, Scanned with CamScannerCase 1: If Summer Co. declares share dividends in the ratio of 2 new shares for every 5 shares held, what would be the journal entries on the dates of declaration, record and distribution? Case 2: If Summer Co. declares share dividends in the ratio of 1 new share for every 6 shares held, what would be the journal entries on the dates of declaration, record and distribution? Preference over dividends 4, Rainbow Co. has 100,000 (P50 par) 6% preference shares and 250,000 (P40 par) ordinary shares outstanding since it started operations three years ago. Rainbow Co. has never declared dividends. In Year 3, Rainbow Co. plans to declare P2,000,000 dividends. What amounts of dividends would the preference and ordinary shareholders receive, respectively, if the preference shares are: a) Noncumulative and non-participating? b) Cumulative and non-participating? c) Noncumulative and participating? d) Cumulative and participating? e) Cumulative and participating up to 16%? f) Cumulative and non-participating and Rainbow Co. declared total cash dividends of 100,000 in Year 1 and P80,000 in Year 2? More than one class of preference shares 5. Typhoon Co. has 100,000 (P50 par, cumulative and participating) 6% preference shares, 50,000 (P60 par, noncumulative and participating) 3% preference shares and 250,000 (P40 par) ordinary shares. Dividends are in arrears for 3 years, inclusive of the current year. If Typhoon Co. declares 2,000,000 cash dividends in the current year, what amounts of dividends would the different classes of shares receive? Scanned with CamScannerLiquidating dividends 6. Uncertain Co. declared P80,000 cash dividends, of which P15,000 represent liquidating dividends, What are the entries on the dates of declaration, record and distribution? Recapitalization 7. Windy Co.'s shareholders’ equity is as follows: Ordinary shares (920 par, 400,09) outstanding shares) 8,000,000 Share premium 2,400,000 i Retained earnings 10,800,000 Total stockholders’ equity 21,200,000 Requirements: Prepare the new shareholders’ equity of Windy Co, after each of the transactions below. (Treat each one independently.) a) All the outstanding shares are recalled and replaced with 400,000 no-par shares with stated value of P25 per share. b) A 2-for-l stock split is declared. Quasi-reorganization 8. Creek Co.'s financial position is as follows: ASSETS LIABILITIES & EQUITY | Current assets 400,000. Current liabilities 200,000 | Land 200,000 Share capital (50 pr) 1,600,000 Building, net 1,100,000 Share premium 320,000 Retained earnings (deficit) Total 1,700,000_ Total Creek Co.'s quasi-reorganization plan is as follows: a) The building shall be revalued. The building's replacement cost is P1,100,000. The observed depreciation is 40%. b) The par value per share shall be reduced to P20. ¢) Any resulting revaluation surplus and share premium shall applied to the deficit. Requirement: Prepare Creek Co.'s financial position after the reorganization, Scanned with CamScanner