CENTER FOR TRAINING AND DEVELOPMENT, INC.

PRACTICAL ACCOUNTING 1

SHAREHOLDERS EQUITY

Problem 1. Minnesota Company is a publicly held company whose shares are traded in the over the counter market. The shareholders equity account at December 31, 2014 had the following balances:

Preference Share, P100 par, 12% cumulative; 50,000

shares authorized; 20,000 shares issued and outstandingP 2,000,000

Ordinary Share, P10 par; 150,000 shares authorized;

100,000 shares issued and outstanding

1,000,000

Share Premium

8,000,000

Accumulated Profits

2,586,000

Total shareholders equity

P 13,586,000

Transactions during 2015 and other information relating to shareholders equity accounts were as follows:

February 1: Issued 30,000 ordinary shares to Ram Company in exchange for a piece of land. On this date, the ordinary share had a market price of P20 per share. The land had a carrying value on Rams books of P420,000 and an assessed value for property taxes of P400,000.

March 1: Purchased 5,000 of its own ordinary shares to be held as treasury for P24 per share.

May 10: Declared a property dividend of trading securities held by Minnesota to ordinary shareholders. The securities had a carrying amount of P600,000 as of December 31, 2014 and fair values were P720,000 on May 10, 2015 (declaration date) and P736,000 on June 1, 2015 (distribution date).

October 1: Reissued 2,000 treasury shares at P26.

Declared a cash dividend of P5 per share to ordinary shareholders of record of November 15, 2015 and payable on November 25, 2015.

Declared the required annual cash dividend on preference share for 2015. The dividend was paid on January 5, 2014.

Net income for 2015 was P8,380,000.

a.How many ordinary shares are outstanding at December 31, 2015?

b.What is the total amount of cash dividends declared during 2015?

c.What is the accumulated profits balance reported at December 31, 2015?

d.What is the total shareholders equity at December 31, 2015?

Problem 2. The capital structure of Pen Company at December 31, 2014 follows:

Preference Share, 12%, P200 par, 15,000 shares issued and outstanding P3,000,000

Ordinary Share, P30 par, 250,000 shares issued and outstanding

7,500,000

Share Premium Preference

900,000

Share Premium Ordinary

750,000

Retained Earnings

2,100,000

During 2015, the following selected transactions relating to shareholders equity were noted:

a.Purchased and retired 2,000 preference shares at P280 each.

b.Purchased 30,000 of its own ordinary shares at P35 per share.

c.Reissued 5,000 treasury shares at P38 each.

d.Shareholders donated to the company 20,000 ordinary shares when the market price is P36 per share.

e.One half of the donated shares were issued for P39 each.

f.Profit for 2013 was P1,850,000.

g.The board of directors declared and paid the regular annual dividend on the preference share and P1.50 per ordinary share dividend.

Determine the following at December 31, 2015:

a.Number of preference shares issued and outstanding

b.Number of ordinary shares issued and outstanding

c.Total amount of dividends on preference and ordinary shares

d.Total shareholders equity

Problem 3. (Equity-settled share-based payment transaction). On January 1, 2015, the shareholders of LeMann Company approved a plan granting certain officers of the company non-transferable options to buy 30,000 shares of P100 par ordinary share capital at P230 per share. The option pricing model used by the company indicates that the fair value of each option on January 2, 2015 is P75. The plan provides that the officers must be employed by the company for the next three years and that the options will expire at the end of 2018.

At the beginning of 2016, one of the officers who had been granted options for 8,000 shares left the company. Officers with 20,000 options exercised their rights under the option plan at January 1, 2018. The remaining options lapsed.

a.What are the amounts of compensation expense for the years 2015, 2016 and 2017?

b.How would the exercise of the options be recorded at January 1, 2016?

Problem 3. (Equity-settled share-based payment transaction). The AIG Company granted 100 share options to each of its 200 employees on January 1, 2015. The option plan allows the employees to purchase a share of the entitys P100 par value ordinary at P180 per share. On January 1, 2015, the fair value of each option is P30. The option plan requires the employees receiving the options to be in the employ of the company for the next three years. Options are exercisable starting January 1, 2018 and options expire at the end of 2018.

At January 1, 2015, it was estimated that 20% of the employees will leave during the next three years. Actual and revised estimate of employees leaving the company during 2015, 2014 and 2015 are as follows:

2015:10 employees left; revised estimate is 10% of remaining options.

2016:15 employees left; revised estimate is 12% of remaining options.

2017:12 employees left.

During 2018, 150 employees exercised their options while the remaining employees allowed their options to lapse.

How much is the compensation expense for each of the years 2015, 2016 and 2017?

Problem 4. (Cash-settled share-based payment transaction). On January 1, 2015, an entity granted 100 share appreciation rights to each of its 200 employees on condition that the employees remain in its employ for the next three years. No employee left the entity during the three-year vesting period. Exercise of the share appreciation rights were as follows:

December 31, 201740 employees

December 31, 2018100 employees

December 31, 201660 employees

The fair value and intrinsic value of the share appreciation rights are as follows:

Fair valueIntrinsic value

December 31, 2015

15

December 31, 2016

18

December 31, 2017

20

15

December 31, 2018

21

20

December 31, 2016

25

a.How much is the compensation expense in each of the years 2015 through 2016?

b.What is the Liability for Share Appreciation Rights account balance at the end of 2015, 2016, 2017 and 2018?

MULTIPLE CHOICE

1.Cage Company had 80,000 ordinary shares outstanding in January, 2015. The company distributed a 15% share bonus in March. After acquiring 10,000 shares in November, the company split its shares 1-for-4 in December.

How many ordinary shares are outstanding as of December 31, 2015?

a.328,000

b. 23,000

c. 20,500

d. 13,000

2.Dayton Company had 8,000 ordinary shares outstanding in January, 2015. The company distributed a 15% bonus issue in March and another 10% bonus issue in June 2015. On July 31, 2015, the company reacquired 2,000 treasury shares. On October 15, it split its shares on a 3-for-1 basis.

How many ordinary shares are outstanding as of December 31, 2015?

a.30,360

b.24,360

c.10,120

d. 8,120

3.At the beginning of 2015, Better Company had retained earnings of P3,000,000. Throughout the year, the company had 20,000 shares of P100 par value ordinary shares that are issued and outstanding.

During the year 2015, Better Company reported profit of P5,000,000, purchased treasury shares for P580,000, declared cash dividends of P1,500,000, reissued all treasury shares at a gain of P180,000, and declared and issued 5,000 ordinary shares as bonus issue when the market value was P150 per share.

What is the retained earnings balance at December 31, 2015?

a.P6,180,000

b.P6,000,000

c.P5,930,000

d.P5,750,000

4.At the end of 2014, Cartoon Company has 18,000 shares of P20 par ordinary shares which were all issued at an average price of P24 per share. The retained earnings balance on this date is P550,000.

During 2015, the company entered into the following transactions:

January 16Issued 13,000 ordinary shares at P25 each.

March 21Exchanged 12,000 ordinary shares for an equipment. On this date, the ordinary share is selling at P27. There is no established fair market value for the equipment acquired.

May 7

Reacquired 5,000 of its own ordinary shares at P26.

July 1Accepted subscriptions for 10,000 ordinary shares at P28. The contract called for 20% downpayment

August 20Sold 4,000 treasury shares at P29 each.

December 1Collected the balance due on July 1 subscriptions and issued the corresponding certificates.

Profit for the year 2015 was P640,000. No dividends were declared during the year. What is Cartoons total shareholders equity at December 31, 2015?

a.P2,375,000

b.P2,537,000

c.P2,735,000

d.P1,895,000

5.At December 31, 2014, Travolta Company had 20,000 shares of P20 par value treasury shares, which were acquired in 2015 at P24 per share. In May 2015, Travolta issued 15,000 of these treasury shares at P20 each. The cost method is used to record the treasury share transactions.

At December 31, 2015, what amount should Travolta show in notes to financial statements as a restriction of retained earnings as a result of its treasury share transactions?

a.P 10,000

b.P100,000

c.P120,000

d.P180,000

6.The Power Company had 100,000 of P15 par value ordinary shares on January 1, 2015. During 2015, the following transactions pertaining to its ordinary shares occurred:

Purchased 5,000 shares as treasury at P30 each.

The ordinary share was split 3-for-1.

Reissued 3,000 treasury shares at P14 each.

What is the total cost of the remaining treasury shares at the end of 2015?

a.P120,000

b.P108,000

c.P 60,000

d.P 0

7.The Rockwell Corporation has two classes of ordinary shares outstanding: 9%, P20 par preference share and P70 par ordinary share. During the fiscal year ending December 31, 2015, the company had the following equity transactions in chronological order:

No. of sharesPrice per share

Issue of preference shares10,000P28

Issue of ordinary shares35,00070

Reacquisition and retirement of preference2,00030

Purchase of ordinary treasury shares5,00080

Share split2-for-1

Reissue of ordinary treasury shares5,00052

Balances of the accounts in the shareholders equity section of the December 31, 2014 statement of financial position were:

Preference share (50,000 shares)

P1,000,000

Ordinary share (100,000 shares)

7,000,000

Share premium Preference

400,000

Share premium Ordinary

1,200,000

Accumulated profits

550,000

How much is the Preference Share account balance shown on the December 31, 2015 statement of financial position?

a.P1,220,000

b.P1,160,000

c.P1,140,000

d.P1,116,000

8.How much is the Ordinary Share account balance shown on the December 31, 2015 statement of financial position?

a.P9,450,000

b.P9,310,000

c.P9,130,000

d.P4,725,000

9.After the split, the par value of each ordinary share

a.remained at P70.

b.increased by P70.

c.decreased by P35.

d.decreased by P14.

10.What is the total cost of remaining treasury shares?

a.P0

b.P200,000

c.P260,000

d.P400,000

11.On July 1, 2015, Wish Company issued rights to shareholders to subscribe to additional ordinary shares. One right was issued for each share owned. A shareholder could purchase one additional share for ten rights plus P60 cash. The rights expire on September 30, 2015. On July 1, 2015, the market price of a share with the right attached was P160 while the market price of one right alone was P8. Wish Companys shareholders equity on June 30, 2015 comprise the following:

Ordinary Share Capital, P100 par

(4,000 shares issued & outstanding)

P400,000

Share Premium

240,000

Accumulated Profits

320,000

By what amount should Wish Companys retained earnings decrease as a result of issuance of the share rights on July 1, 2015?

a.P0

b.P20,000

c.P32,000

d.P40,000

12.On April 1, 2015, Keene Corporation, a newly formed company, had the following shares issued and outstanding.

Ordinary share, P20 par (20,000 shares originally issued for P60 per share

Preference share, P50 par (6,000 shares originally issued for P100 per share

Keenes April 1, 2015 statement of changes in equity should report Ordinary Share Capital / Preference Share Capital / and Share Premium, respectively of

a.P400,000 / P300,000 / P1,100,000

b.P1,200,000 / P300,000 / P300,000

c.P400,000 / P600,000 / P800,000

d.P1,200,000 / P600,000 / P0

13.Dave Company retired 50,000 ordinary shares, P5 par value, which it held in the treasury at an average cost of P26 per share on December 31, 2015. The balance in Daves shareholders equity accounts before recording the retirement of the treasury shares are:

Ordinary Share Capital

P1,080,000

Share Premium

1,500,000

Treasury Shares (at cost) 1,300,000

Retained Earnings

1,800,000

Dave should report Ordinary Shares outstanding in its December 31, 2015 statement of financial position of

a.P1,080,000

b.P 830,000

c.P 500,000

d.P 0

14.Monterey Corporations shareholders equity is comprised of 10,000, P10 par ordinary shares, P40,000 share premium, and retained earnings of P600,000. If a 40% bonus issue is declared when the shares are selling for P50 per share, what amount should be transferred from the retained earnings account to the share premium account?

a.P 0

b.P 40,000

c.P160,000

d.P200,000

15.Of the 250,000 ordinary shares issued by Thorn Company, 50,000 shares were held as treasury at December 31, 2014. During 2015, transactions involving Thorns ordinary shares were as follows:

January 1 through October 31 26,000 treasury shares were distributed to officers as part of a share option plan

November 1 a 3 for 1 share split took effect

December 1 Thorn purchased 10,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.

At December 31, 2015, how many Thorns ordinary shares were issued and outstanding?

a.750,000 and 648,000

b.648,000 and 648,000

c.668,000 and 668,000

d.750,000 and 668,000

16.On July 1, 2015, Crafters, Inc. has 200,000 ordinary shares outstanding with par value of P10 per share and market value of P12 per share. On the same date, Crafters declared a 1-for-2 reverse share split. The par value of the share was increased from P10 to P20 and one new P20 par value share was issued for every two P10 par outstanding. Immediately before the 1-for-2 reverse share split, Crafters share premium account balance was P450,000.

What should be the balance in Crafters share premium account immediately after the reverse share split is effected?

a.P0

b.P450,000

c.P650,000

d.P850,000

17.Ben Company had the following classes of shares outstanding at December 31, 2015:

Ordinary Share Capital, P20 par

P8,000,000

12% Preference Share Capital, P100 par,

cumulative and fully participating

4,000,000

10% Preference Share Capital, P100 par,

cumulative and non-participating 2,000,000

Dividends on preference shares have been in arrears for 2013 and 2014. On December 31, 2015, total cash dividends of P6,000,000 was declared. What is the amount of dividends payable to ordinary shares?

a.P2,640,000

b.P2,906,667

c.P2,960,000

d.P3,960,000

18.Netrix Companys outstanding share capital at December 31, 2015 consisted of

30,000 shares of 5% Preference share, P10 par, fully participating as to dividends. No dividends were in arrears.

200,000 Ordinary share, P1 par.

On December 15, 2015, Netrix declared dividends of P100,000. What was the amount of dividends payable to Netrix ordinary shareholders?

a.P10,000

b.P34,000

c.P40,000

d.P47,500

19.At December 31, 2014 and 2015, Eagle Company had outstanding 4,000 shares of P100 par value, 12% cumulative, fully participating preference shares and 20,000, P10 par value ordinary shares. At December 31, 2015, dividends in arrears on the preference shares were P24,000. Cash dividends declared in 2015 totaled P108,000.

What is the total amount of dividends payable to preference shareholders?

a.P80,000

b.P72,000

c.P56,000

d.P24,000

20.What is the amount of dividend payable to each ordinary share?

a.P4.20

b.P2.60

c.P1.80

d.P1.40

21.The shareholders equity of F Company on December 31, 2015 consists of the following accounts:

Preference Share Capital, 10%, cumulative, P100 par

(50,000 shares)

P 5,000,000

Ordinary Share Capital, P100 par (200,000 shares)

20,000,000

Subscribed Ordinary Shares, net of Subscription

Receivable of P4,000,000 (100,000 shares)

6,000,000

Treasury Ordinary Shares, at cost (50,000 shares)

4,000,000

Share Premium

10,000,000

Retained Earnings

8,000,000

Preference dividends have not been paid for three years and have a liquidation value of P110. The book value per ordinary share is

a.P210

b.P168

c.P166

d.P152

22.Louis Company provided the following information on December 31, 2015:

Share Premium9,000,000Preference Share (at par)1,750,000

Accounts Payable1,100,000Ordinary Share (at par)400,000

Sales10,000,000Total costs and expenses7,800,000

Treasury Share (Ordinary)250,000Retained Earnings, Jan. 11,000,000

The net income is not yet closed to retained earnings. The total shareholders equity should be reported on December 31, 2015at

a.P14,100,000.

b.P13,400,000.

c.P11,900,000

d.P11,200,000

23.Quebec Company has incurred heavy losses since its inception. At the recommendation of its president, the board of directors voted to implement quasi-reorganization, through reduction of par value subject to shareholders approval. Immediately prior to the restatement on December 31, 2014, the Quebec Companys shareholders equity was as follows:

Ordinary Share Capital, P100 par (500,000 shares)

P50,000,000

Share Premium

25,000,000

Accumulated Losses

(30,000,000)

The shareholders approved the quasi-reorganization on January 1, 2015 to be accompanied by a reduction in inventory of P4,000,000, a reduction in property, plant and equipment of P5,500,000, write off of goodwill at P3,000,000 and unrecorded liabilities of P2,500,000.

To eliminate the deficit, Quebec should reduce the ordinary share capital by

a.P 0

b.P 5,000,000

c.P17,000,000

d.P20,000,000

24.T Company provided the following information for the year ended December 31, 2015:

Net income2,000,000Total assets14,950,000

Share capital5,600,000Share premium2,400,000

Dividends declared1,200,000Prior period adjustment for 2013 overdepreciation500,000

The debt to equity ratio is 30% at December 31, 2015. What was the retained earnings balance on January 1, 2015?

a.P3,200,000

b.P2,200,000

c.P2,165,000

d.P1,165,000

25.On January 1, 2013, the shareholders of Ethan Company, a calendar-year corporation, approved a plan and granted the companys three executives options to purchase a total of 3,000 shares of the companys P100 par value ordinary shares. The option may be exercised for one year effective January 1, 2016. Based on an option pricing model, the fair value of the option is P60. The option price per share is P120.

On February 14, 2015, one of the executives who was granted an option to purchase 800 shares, decided to resign from the organization. On January 21, 2016, the remaining executives exercised their options. How much is the compensation expense in the year 2015?

a.P60,000

b.P44,000

c.P12,000

d.P0

26.The Sun Company granted 100 share options to each of its 500 employees on January 1, 2015. The option plan allows the employees to purchase a share of the entitys P100 par value ordinary share at P120 per share. On January 1, 2015, the fair value of each option is P30. The option plan requires the employees receiving the options to be in the employ of the company for the next three years. Options are exercisable starting January 1, 2018 and options expire at the end of 2016.

At January 1, 2015, it was estimated that 20% of the employees will leave during the next three years. Actual and revised estimate of employees leaving the company during 2015, 2016 and 2017 are as follows:

2015: 20 employees left; revised estimate is 15% of remaining employees

2016: 10 employees left; revised estimate is 10% of remaining employees

2017: 18 employee left

During 2018 through 2016, 400 employees exercised their options while the remaining employees allowed their options to lapse.

How much is the compensation expense for the year 2015?

a.P612,000

b.P480,000

c.P408,000

d.P400,000

27.How much is the compensation expense for the year 2016?

a.P846,000

b.P438,000

c.P432,000

d.P423,000

28.How much is the share premium recognized upon exercise of options?

a.P3,600,000

b.P2,000,000

c.P1,200,000

d.P 800,000

29.On January 1, 2015, ABC Company issued share appreciation rights to its CEO exercisable for one year beginning January 1, 2017 provided that the officer is still in the employ of the company at the date of exercise. Each right provides for a cash payment equal to the excess of the ABC share price over P50. The equivalent number of shares for share appreciation rights will be based on the level of the companys sales at the date of exercise as follows:

Level of sales

Equivalent shares granted

P100 million to P300 million

10,000

Over P300 million

12,000

Actual sales achieved by ABC Company and the share price at the end of each year are as follows:

Year

Sales

Share Price

2015 P120 million P75

2016 P350 million P82

How much is the compensation expense recognized in the accounts for the year ended December 31, 2015?

a.P125,000

b.P250,000

c.P375,000

d.P750,000

30.How much is the compensation expense for the year 2016?

a.P384,000

b.P259,000

c.P192,000

d.P134,000

31.On January 1, 2015, Kin Company granted Morgan, its president, compensatory share options to buy 1,000 shares of Kins P10 par ordinary share. The options call for a price of P20 per share and are exercisable for three years following the grant date. Morgan exercised the options on December 31, 2017. The market price of the ordinary share was P50 on January 2, 2015 and P70 per share on December 31, 2015.

By what net amount should shareholders equity increase as a result of the grant and exercise of the options?

a.P20,000

b.P30,000

c.P50,000

d.P70,000

32.On January 1, 2015, an entity granted to an employee the right to choose either 12,000 shares (share alternative) or

cash payment equal 10,000 shares (cash alternative)

The grant is conditional upon the completion of three years of service. If the employee chooses the share alternative, the shares must be held for three years after vesting date.

The par value of the share is P25 and at grant date on January 1, 2015, the share price is P51. The share prices for the three-year vesting period are:

December 31, 2015 -P54

December 31, 2016-P60

December 31, 2017-P65

After taking into account the effects of post vesting restrictions, the entity has estimated that the fair value of the share alternative is P48 per share.

What are the amounts accounted for as liability and equity, respectively on January 1, 2015?

a.P510,000 and P66,000

b.P576,000 and P510,000

c.P576,000 and P0

d.P540,000 and P66,000

34.How much is the compensation expense for 2015 relating to the equity alternative and cash alternative, respectively?

a.P66,000 and P540,000

b.P22,000 and P180,000

c.P22,000 and P170,000

d.P0 and P0

35.How much is the compensation expense for 2016 relating the equity alternative and cash alternative, respectively?

a.P66,000 and P600,000

b.P22,000 and P200,000

c.P22,000 and P220,000

d.P22,000 and P180,000

36.Assuming that the employee opted for the cash alternative, how much is the total payment made by the company at time of exercise?

a.P650,000

b.P584,000

c.P540,000

d.P510,000

37.Assuming that the employee opted for the equity alternative, how many shares were issued upon exercise of the option?

a.10,000 shares

b.12,000 shares

c.20,000 shares

d.30,000 shares