CHAPTER 3SHAREHOLDERS’ EQUITY
PROBLEMS
3-1. (Budomo Company) Cash (20,000 x 300) 6,000,000
Ordinary Share 6,000,000
Legal Expense/Professional Fees 90,000 Ordinary Share (250 x 300) 75,000 Share Premium - Ordinary 15,000
Land 1,000,000Building 2,950,000 Ordinary Share (12,500 x 300) 3,750,000
Share Premium - Ordinary 200,000
Cash (6,500 x 380) 2,470,000 Ordinary Share (6,500 x 300) 1,950,000 Share Premium - Ordinary 520,000
3-2.a. Cash (10,000 x 200) 2,000,000
Ordinary Share (10,000 x 150) 1,500,000 Share Premium - Ordinary 500,000
Share Premium-Ordinary 60,000 Cash 60,000
b. Land (3,500 x 560) 1,960,000 Ordinary Share (3,500 x 200) 700,000 Share Premium – Ordinary 1,260,000
c. Cash 18,000,000 Preference Share 2,500,000 Ordinary Share 10,000,000 Share Premium – Preference 2,000,000 Share Premium – Ordinary 3,500,000 MV: Pref – 5,000 x 800=4M Ord – 100,000 x 120 = 12M Allocation: Pref: 18M x 4/16 = 4.5M Ord: 18M x 12/16 = 13.5M
d. Subscription Receivable 450,000Cash 150,000 Subscribed Ordinary Share 500,000 Share Premium – Ordinary 100,000
e. Land 5,000,000 Cash 40,000 Donated Capital 4,960,000
3-3. (Blazing Red Corporation)
Chapter 3 – Shareholders’ Equity
Shareholders’ EquityContributed Capital 10% Preference Share, cumulative and non-participating, P100 par 30,000 shares authorized; 12,000 shares issued and outstanding
P1,200,000
Ordinary Share, P10 par, 100,000 shares authorized, 30,000 shares issued, 29,000 shares outstanding
300,000
Subscribed Ordinary Share, 4,500 shares 45,000 Subscription Receivable – Ordinary (43,200) Share Premium – Preference 275,000 Share Premium –Ordinary 77,000 Total contributed capital P1,853,800Retained Earnings Appropriated for Treasury Share P 15,000 Unappropriated 335,000
350,000
Treasury Shares, 1,000 ordinary shares, at cost ( 15,000)Total Shareholders’ Equity P2,188,800
The total amount of P2,188,800 may also be obtained without necessary preparing the shareholders’ equity in good format (if not required) as follows:
Issue of 30,000 ordinary shares P 350,000Issue of preference shares in exchange of equipment
1,475,000Subscriptions for 4,500 ordinary shares at 16
72,000Subscriptions receivable (60%)
(43,200)Purchase of 1,000 treasury shares at 15
(15,000)Retained earnings 350,000Total shareholders’ equity, December 31, 2007 P
2,188,800
3-4. (Millennium Company)(a) (1) Treasury Share 140,000
Cash 140,000
(2) Cash 60,000 Treasury Share 56,000 Paid in Capital from Treasury Share
4,000
(3) Cash 65,000Paid in Capital from Treasury Share 4,000Retained Earnings 1,000 Treasury Share 70,000
(4) Ordinary Share 10,000Share Premium 3,000Retained Earnings 1,000
23
Chapter 3 – Shareholders’ Equity
Treasury Share 14,000 (b) Total shareholders’ equity, December 31, 2006 P2,200,000
(1) Purchase of treasury share (10,000 x 14) (140,000)(2) Sale of treasury share (4,000 x 15) 60,000(3) Sale of treasury share (5,000 x 13) 65,000Net income for the year 180,000Dividends declared (200,000)Total shareholders’ equity, December 31, 2007 P2,165,000
The total shareholders’ equity may also be obtained by determining the balance of the shareholders’ equity accounts, as follows:
Ordinary Share, P10 par (99,000 shares issued and outstanding)P 990,000
Share Premium 297,000Retained Earnings 878,000Total shareholders’ equity
P2,165,000
3-5. (Consuelo Enterprises, Inc.)(a) Preference Share (4,000 x 20) 80,000
Share Premium – Preference (4,000 x 1.60)
6,400
Retained Earnings 1,600 Cash (4,000 x 22) 88,000
(b) Preference Share (4,000 x 20) 80,000Share Premium – Preference (4,000 x 1.60)
6,400
Retained Earnings 17,600 Cash (4,000 x 26) 104,000
(c) Preference Share (4,000 x 20) 80,000Share Premium – Preference (4,000 x 1.60)
6,400
Cash (4,000 x 20.50) 82,000 PIC from Retirement of Preference 4,400
Average preference share premium per share160,000 / 100,000 shares = 1.60
3-6. (Concepcion Enterprises, Inc.)
(a) Preference Share (3,000 x 20) 60,000Share Premium – Preference (3,000 x 1.60)
4,800
Retained Earnings 25,200 Ordinary Share (3,000 x 30) 90,000
(b) Preference Share (3,000 x 20) 60,000Share Premium – Preference (3,000 x 1.60)
4,800
Ordinary Share (1,500 x 30) 45,000 PIC from Conversion of Preference 19,800
3-7. (Red Heart Corporation)
06/15/07 Cash 6,000,000
24
Chapter 3 – Shareholders’ Equity
Ordinary Share 5,000,000 Share Premium – Ordinary 1,000,000
09/30/07 Retained Earnings (80,000 x 5% x 110)
440,000
Share Dividends Distributable (4,000 x 100)
400,000
Share Premium – Ordinary 40,000
11/10/07 Share Dividends Distributable 400,000 Ordinary Share 400,000
12/31/07 Income Summary 1,175,000 Retained Earnings 1,175,000
03/31/08 Treasury Share (3,000 x 95) 285,000 Cash 285,000
05/01/08 Cash (1,500 x 120) 180,000 Treasury Share (1,500 x 95) 142,500 Paid in Capital from Treasury Shares
37,500
08/10/08 Issued 82,500 rights to shareholders entitling holders to purchase 2 additional shares for P125 per share.
09/15/08 Cash (30,000 x 125) 3,750,000 Ordinary Share (30,000 x 100) 3,000,000 Share Premium – Ordinary 750,000
10/31/08 Cash (80,000 x 125) 10,000,000
Ordinary Share (80,000 x 100) 8,000,000 Share Premium – Ordinary 2,000,000
12/10/08 Retained Earnings 962,500 Dividends Payable (192,500 x 5) 962,500
12/20/08 Ordinary Share (1,000 x 100) 100,000Share Premium – Ordinary (1,000 x 10)*
10,000
Paid in Capital from Treasury Shares
15,000
Treasury Share 95,000 *Share premium per share 300,000/30,000 = 10
12/31/08 Income Summary 1,200,000 Retained Earnings 1,200,000
(b)
Shareholders’ EquityContributed Capital Ordinary Share, P100 par, 300,000 shares authorized, 193,000
shares issued, 192,500 shares outstanding P19,300,000
25
Chapter 3 – Shareholders’ Equity
Share Premium –Ordinary 4,080,000 Paid in Capital from Treasury Shares 52,500 Total contributed capital P23,432,50
0Retained Earnings Appropriated for Treasury Share P 47,500 Unappropriated 1,375,000
1,422,500
Treasury Shares, 1,000 ordinary shares, at cost (47,500)Total Shareholders’ Equity P24,807,50
0
3-8. (Red Carpet Company)(a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows:
Securities Market value Allocation Allocated PricePreference 90 147,000 x 90/100 132,300Warrant 10 147,000 x 10/100 14,700
Entry Cash 147,000 Preference Share (1,500 x 30) 45,000 Share Premium – Preference 87,300 Share Warrants Outstanding 14,700
(b) Cash (600 x 40) 24,000Share Warrants Outstanding 11,760 Ordinary Share 6,000 Share Premium – Ordinary 29,760
3-9. (Red Hot Company)
(a) Value of each option P8Number of shares granted x 30,000Total value assigned to share options P240,000Required service period 3yearsAnnual compensation expense P 80,000
(b) Share Options Outstanding 240,000Cash (30,000 x 50) 1,500,000 Ordinary Share (30,000 x 20) 600,000 Share Premium - Ordinary 1,140,000
3-10. (Fire Red Company)01/02/07 Memo: granted 40,000 share options were granted to certain
officers for the purchase of the company’s P100 par ordinary shares at P430 per share.
12/31/07 Compensation Expense 800,000 Share Options Outstanding 800,000 (40,000 x 80) 4 years
12/31/08 Compensation Expense 800,000 Share Options Outstanding 800,000 (40,000 x 80) 4 years
01/01/09 Memo: 6,000 share options were cancelled.
26
Chapter 3 – Shareholders’ Equity
12/31/09 Compensation Expense 440,000
Share Options Outstanding 440,000 Total accrued compensation expense (34,000 x 80) x 3/4 2,040,00
0 Less: previously accrued 1,600,00
0 Compensation expense-2009
440,000
12/31/10 Compensation Expense 680,000 Share Options Outstanding 680,000 (34,000 x 80) / 4
06/30/11 Cash (34,000 x 430) 14,620,000Share Options Outstanding (34,000 x 80)
2,720,000
Ordinary Shares (34,000 x 100) 3,400,000 Share Premium – Ordinary 13,940,000
3-11. (Red Fox Corporation)(a)2007 200 – 10 – 15 = 175 employees x 100
options=17,50017,500 x 32 = 560,000; 560,000 x 1/3 186,667
2008 200–10–12–5=173 employees x 100 options=17,30017,300 x 32 x 2/3 = 369,067; 369,067 – 186,667 182,400
2009 200-10-12-8=170 employees x 100 options=17,00017,000 x 32 = 544,000; 544,000 – 369,067 174,933
(b)01/01/07 Granted 100 share options to each of its 200 employees to
buy P100 par ordinary share at P220 per share. The options are exercisable starting January 1, 2010 provided that the employees are still in the service. Options expire on December 31, 2011.
12/31/07 Compensation Expense 186,667 Share Options Outstanding 186,667 Share Options Outstanding 182,400
12/31/09 Compensation Expense 174,933 Share Options Outstanding 174,933
2010 Cash (140 x 100 x 220) 3,080,000Share Options Outstanding (14,000 x 32)
448,000
Ordinary Share (14,000 x 200) 2,800,000 Share Premium – Ordinary 728,000
27
Chapter 3 – Shareholders’ Equity
2011 Cash (10 x 100 x 220) 220,000Share Options Outstanding (1,000 x 32)
32,000
Ordinary Share (1,000 x 200) 200,000 Share Premium – Ordinary 10,400
Share Options Outstanding (2,000 x 32)
64,000
PIC from Forfeited Share Options 64,000
3-12. (Cherry Company)(a)01/01/07 Memo: Granted 10,000 share options for the purchase of P100
par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2010.
12/31/07 Compensation Expense 66,667 Share Options Outstanding 66,667 (10,000 x 20) / 3 years
12/31/08 Compensation Expense 133,333 Share Options Outstanding 133,333 (10,000 x 20) - 66,667
2009 Cash (10,000 x 120) 1,200,000Share Options Outstanding 200,000 Ordinary Shares (10,000 x 100) 1,000,00
0 Share Premium-Ordinary 400,000
(b)01/01/07 Memo: Granted 10,000 share options for the purchase of P100
par ordinary shares at P120 per share. The options vest once the market price of ordinary shares reached P200. Options expire at the end of 2010.
12/31/07 Compensation Expense 66,667 Share Options Outstanding 66,667 (10,000 x 20) / 3 years
12/31/08 Compensation Expense 66,667 Share Options Outstanding 66,667
12/31/09 Compensation Expense 66,666 Share Options Outstanding 66,666
2010 Cash (8,000 x 120) 960,000Share Options Outstanding (80% x 200,000)
160,000
Ordinary Shares (8,000 x 100) 800,000 Share Premium-Ordinary 320,000
Share Options Outstanding (20% x 200,000)
40,000
PIC from Forfeited Share Options 40,000
28
Chapter 3 – Shareholders’ Equity
(c) If the stock price reached P200 by June 2010, the same entries will be made for year 2007 through 2009, as given in (b) The recorded share options, however, will be cancelled at the end of 2010, as the options already expire.
12/31/10 Share Options Outstanding 200,000 PIC from Forfeited Share Options 200,000
3-13. (Panda Company)(a) 01/01/07 Granted 80 share options to each of 400 employees for
the purchase of P100 par ordinary shares at P140 per share.
12/31/07 Compensation Expense 352,000 Share Options Outstanding 352,000 400 x 80 x 22 = 704,000 704,000/2 = 352,000
12/31/08 Compensation Expense 352,000 Share Options Outstanding 352,000
2009 Cash (32,000 x 140) 4,480,000
Share Options Outstanding 704,000 Ordinary Share (32,000 x 100) 3,200,00
0 Share Premium – Ordinary 1,984,00
0
(b) The full amount of P704,000 is recognized as compensation expense since the options vests already in 2007.
3-14. (Paul Company)(a)01/01/07 Memo: Issued to its CEO share options for the purchase of ordinary
shares at a strike price of P50. The options are exercisable beginning January 1, 2010 and expire on December 31, 2011. The number of share options will be based on the level of sales for 2009.
12/31/07 Compensation Expense 100,000 Share Options Outstanding 100,000 10,000 sh x 30 x 1/3
12/31/08 Compensation Expense 200,000 Share Options Outstanding 200,000
15,000 sh x 30 x 2/3 300,000 Less: previously accrued 100,000 Compensation expense 200,000
29
Chapter 3 – Shareholders’ Equity
12/31/09 Compensation Expense 240,000 Share Options Outstanding 240,000
18,000 sh x 30 x 3/3 540,000 Less: previously accrued 300,000 Compensation expense 240,000
(b) Assuming that the chief executive officer resigned in 2008.
12/31/08 Share Options Outstanding 100,000 Compensation Expense 100,000
Note: When the grant of share options is based on non-market performance condition, the amount of recognized services received during the vesting period shall be based on the number of share options expected to vest. The entity shall reverse that estimate, if necessary, if the share options are later forfeited, or lapse at the end of the share option’s life. Thus, in effect, on a cumulative basis, no compensation expense is recorded as a result of the stock options.
3-15. (Joey Corporation)(a)12/31/07 Compensation Expense 66,667
Share Appreciation Rights Payable 66,667 10,000 x (140 -120) x 1/3
12/31/08 Compensation Expense 133,333 Share Appreciation Rights Payable 133,333 10,000 x (150 - 120) x 2/3 = 200,000 200,000 – 66,667 = 133,333
12/31/09 Compensation Expense 250,000 Share Appreciation Rights Payable 250,000 10,000 x (165 - 120) = 450,000 450,000 –200,000 = 250,000
(b) (1)Assuming that the rights were exercised on January 1, 2010, when the market price is P165.
01/01/10 Share Appreciation Rights Payable 450,000 Cash 450,000
(b) (2)Assuming that the rights were exercised on December 31, 2010, when the market price is P172.
12/31/10 Share Appreciation Rights Payable 450,000Compensation Expense 70,000 Cash 10,000 x (172-120) 520,000
3-16. (Red Bull Corporation)12/31/07 Compensation Expense 89,333
Share Appreciation Rights Payable 89,333 10,000 x 26.80 x 1/3
12/31/08 Compensation Expense 118,667 Share Appreciation Rights Payable 116,667
30
Chapter 3 – Shareholders’ Equity
10,000 x 31.20 x 2/3 = 208,000 208,000 – 83,333 = 118,667
12/31/09 Compensation Expense 194,000 Share Appreciation Rights Payable 194,000 10,000 x 39.40 = 394,000 394,000 –200,000 = 194,000
2010 Share Appreciation Rights Payable 394,000Compensation Expense 56,000 Cash 10,000 x (165-120) 450,000
3-17. (Emerald Company)(a) Fair value of the equity alternative
4,000 shares x 150 600,000Fair value of debt component 3,600 shares x 158 568,800Fair value of equity component 31,200
(b) 2007: 3,600 x 160=576,000/3 192,000 31,200/3 10,400 Total compensation expense 202,400
2008: 3,600 x 165 x 2/3 = 396,000 396,000 – 192,000 204,000 31,200/3 10,400 Total compensation expense 214,400
2009: 3,600 x 168 = 604,800 604,800 – 396,000 208,800 31,200/3 10,400 Total compensation expense 219,200
2010: 2,700 x (172-165) 18,900
(c)01/01/07 Granted each of the four executives the right to choose
either 1,000 ordinary shares or to receive cash payment equal to 900 shares, conditional upon the completion of three years of service.
12/31/07 Compensation Expense 202,400 Share Options Outstanding 10,400 Share Appreciation Rights Payable 192,000
12/31/08 Compensation Expense 214,400 Share Options Outstanding 10,400 Share Appreciation Rights Payable 204,000
12/31/09 Compensation Expense 219,200 Share Options Outstanding 10,400 Share Appreciation Rights Payable 208,800
12/31/09 Share Options Outstanding 7,800Share Appreciation Rights Payable 151,200 Cash 151,200 PIC from Unexercised Share 7,800
31
Chapter 3 – Shareholders’ Equity
Options 31,200 / 4 = 7,800 604,800 / 4 =151,200
12/31/10 Compensation Expense 18,900 Share Appreciation Rights Payable 18,900
12/31/10 Share Options Outstanding 23,400Share Appreciation Rights Payable 472,500 Ordinary Share (3,000 x 100) 300,000 Share Premium – Ordinary 195,900 7,800 x 3 = 23,400 151,200 x 3 = 453,600 + 18,900
3-18. (Red Stone Company)(a) Retained Earnings ( 10,000 shares x P20) 200,000
Share Dividends Distributable 100,000 Share Premium 100,000
Share Dividends Distributable 100,000 Ordinary Shares 100,000
(b) Retained Earnings (30,000 x 10) Share Dividends Distributable
300,000300,000
Share Dividends Distributable 300,000 Ordinary Shares 300,000
(c) Memo: Effected a 2 for 1 stock split on 100,000 shares P100 par previously issued and outstanding.
3-19. (Buenviaje Corporation)Capital structure:
Preference OrdinaryNumber of shares outstanding 20,000 250,000Total par value P2,000,000 P2,500,000
(a) Preference share is non-cumulative and non-participating2006 Preference OrdinaryCurrent preference dividends (9% x 2,000,000) P 180,000Excess (1,500,000 – 180,000) P1,320,000Dividend per share P9.00 P5.28
2007 Preference OrdinaryCurrent preference dividends (9% x 2,000,000) P 180,000Excess (2,400,000 – 180,000) P2,220,000Dividend per share P9.00 P8.88
2008 Preference OrdinaryCurrent preference dividends (9% x 2,000,000) P 180,000Excess (5,600,000 – 180,000) P5,420,000Dividend per share P9.00 P21.68
(b) Preference share is cumulative and non-participating.2006 Preference Ordinary
32
Chapter 3 – Shareholders’ Equity
Dividends in arrears (9% x 2,000,000 x 3) P 540,000Excess (1,500,000 – 540,000) P 960,000Dividend per share P2.70 P3.842007 Preference OrdinaryCurrent preference dividends (9% x 2,000,000) P 180,000Excess (2,400,000 – 180,000) P2,220,000Dividend per share P9.00 P8.88
2008 Preference OrdinaryCurrent preference dividends (9% x 2,000,000) P 180,000Excess (5,600,000 – 180,000) P5,420,000Dividend per share P9.00 P21.68
(c) Preference share is cumulative and fully participating2006 Preference OrdinaryCurrent dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 P 225,000Excess: 1,095,000 x 2.0/4.5 486,667 1,095,000 x 2.5/4.5 608,333Total dividends P 666,667 P 833,333Dividend per share P33.33 P3.33
2007 Preference OrdinaryCurrent dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 P 225,000Excess: 1,995,000 x 2.0/4.5 886,667 1,995,000 x 2.5/4.5 1,108,333Total dividends P1,066,667 P1,333,333Dividend per share P53.33 P 5.33
2008 Preference OrdinaryCurrent dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 P 225,000Excess: 5,195,000 x 2.0/4.5 2,308,889 5,195,000 x 2.5/4.5 2,886,111Total P2,488,889 3,111,111Dividend per share P124.44 P 12.44
3-20. (Mama Mia Company)Retained Earnings 500,000 Share Dividends Distributable 500,000 50% x 100,000 x 10 = 500,000Share Dividends Distributable 500,000 Ordinary Shares 400,000 Fractional Share Warrants Outstanding 100,000Fractional Share Warrants Outstanding 100,000 Ordinary Share 80,000 PIC from Unexercised Fractional Share 20,000
33
Chapter 3 – Shareholders’ Equity
Warrants
3-21. (Buenas Aires Corporation)
Total SHE
Preference
Shares Issued
Ordinary Shares Issued
Treasury Share
Shares Cost
12/31/07Balances P16,500,000 30,000 100,0002008 transactions:a) 4,000 x 280 (1,120,000) (4,000)b) 8,000 x 75 (600,000) 8,000 P600,000c) 2:1 share split 100,000 8,000d) 6,000 x 45 270,000 (6,000) (225,000)*e) 4,000 x 46 4,000 f) 2,000 x 48 96,000 (2,000)g) Net income 1,850,00012/31/08 balances P16,996,000 26,000 200,000 12,000 P375,000
*P600,000 x 6,000/16,000 = 225,000
(a) Total shareholders’ equity P16,996,000(b) Number of preference shares issued and outstanding 26,000 (c) Number of ordinary shares issued 200,000
Number of ordinary shares outstanding(200,000 – 12,000) 188,000(d) Cost of remaining treasury shares P 375,000
3-22. (La Vida Company)Retained earnings balance as of December 31, 2008 3,900,000 – 600,000 – 240,000 P 3,060,000Total shareholders’ equity as of December 31, 2008 6,000,000 + 8,000,000 + 3,060,000 P17,060,000
(a) Preference
Ordinary
Par value of preference share P6,000,000
Dividends in arrears (6,000,000 x 9% x 3 yrs.)
1,620,000
Excess to ordinary (17,060,000 – 7,620,000) P9,440,000
Total equity P7,620,000
P9,440,000
Divide by the number of shares outstanding 60,000 800,000Book value per share P 127 P 11.80
(b) Preference
Ordinary
Liquidation value (60,000 shares x P105) P6,300,000
Dividends in arrears (P6,000,000 x 9% x 3 yrs.)
1,620,000
Excess to ordinary (17,060,000 – 7,920,000) P9,140,000
Total equity P7,920,000
P9,140,000
Divide by the number of shares outstanding 60,000 800,000Book value per share P132 P11.425
34
Chapter 3 – Shareholders’ Equity
3-23. (Los Angeles Company)(a) Retained Earnings 400,000
Accumulated Depreciation 75,000 Current Assets 100,000 Building 375,000
Ordinary Share 6,000,000 Ordinary Share 4,000,00
0 Share Premium 2,000,00
0
Share Premium 1,400,000 Retained Earnings 1,400,00
0
(b) Current Assets P 400,000 Liabilities P1,000,000
Land 1,500,000 Ordinary Share 4,000,000 Building 4,625,000 Share Premium 600,000 Accumulated Depreciation ( 925,000) Total Assets P5,600,000 Total Equities P5,600,000
3-24. (Las Vegas, Inc.) Retained Earnings 300,000 Inventory 300,000
Land 1,500,000Buildings 1,875,000Machinery and Equipment 350,000 Accum. Depreciation – Buildings 875,000 Accum. Depreciation – Machinery & Equipment
150,000
Revaluation Surplus 3,700,000
Revaluation Surplus 2,300,000 Retained Earnings 2,300,00
0
35