Answers - Chapter 3 Vol 2 Rvsed

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

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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

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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

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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.

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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

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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



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

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(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


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


15,000 sh x 30 x 2/3 300,000 Less: previously accrued 100,000 Compensation expense 200,000

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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

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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



12/31/09 Share Options Outstanding 7,800Share Appreciation Rights Payable 151,200 Cash 151,200 PIC from Unexercised Share 7,800

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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


(b) Preference share is cumulative and non-participating.2006 Preference Ordinary

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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


(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

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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

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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

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Answers - Chapter 3 Vol 2 Rvsed