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Equity-Retained Earnings

PROBLEMS
1. Cerritos Corporation began operations on January 1, dividend of P100,000 on April 1, 2009, and issued
2006. During its first three years of operations, promissory notes to its shareholders in lieu of cash.
Cerritos reported net income and declared dividends as The notes, which were dated April 1, 2009, had a
follows: maturity date of March 31, 2010, and a 10% interest
Net income Dividends declared rate. How should East account for the scrip dividend
2006 P 80,000 P 0 and related interest?
2007 250,000 100,000 a. Debit retained earnings for P110,000 on April 1,
2008 300,000 100,000 2009.
b. Debit retained earnings for P110,000 on March 31,
The following information related to 2009: 2010.
c. Debit retained earnings for P100,000 on April 1,
Income before income tax P480,000 2009, and debit interest expense for P10,000 on
Prior period adjustment: March 31, 2010.
understatement of 2007 depreciation d. Debit retained earnings for P 100,000 on April 1,
expense (before taxes) 40,000 2009, and debit interest expense for P7,500 on
Cumulative decrease in income from December 31, 2009.
change in inventory methods (before P26 M13 pp. 532 Wiley07-08
taxes) 70,000
Dividends declared (of this amount, 5. On May 1, 2009 Lett Corp. declared and issued a 15%
P50,000 will be paid on January 15, share dividend. Prior to this dividend, Lett had
2010) 200,000 100,000, P1 par value, ordinary shares issued and
Effective tax rate 35% outstanding. The fair value of Lett's ordinary share
As at December 31, 2009, the retained earnings of was P20 per share on May 1, 2009. As a result of this
Cerritos Corporation is share dividend, Lett's retained earnings
a. P520,500 c. P430,000 a. increased by P300,000.
b. P484,500 d. P470,500 b. decreased by P300,000.
RPCPA 1097 c. decreased by P15,000.
2. On December 31, 2009, the balance sheet of Legend d. did not change.
Corporation shows a total equity of P1,260,000.
During 2009, the shareholders’ equity was affected by: 6. The directors of Reno Corp., whose P50 par value
ordinary share is currently selling at P70 per share,
Adjustment to retained earnings for the
have decided to issue a share dividend. Reno has an
overstatement of 2008 net income P17,500
authorization for 250,000 ordinary shares, has issued
Cash dividend declared and paid in 2009 10%
100,000 shares of which 10,000 shares are now held
Net income of 2009 P65,000
in treasury, and desires to capitalize P630,000 of the
The share capital of P1,000,000 remained unchanged Retained Earnings balance. To accomplish this, the
during the year. percentage of share dividend that the directors should
declare is
What is the balance of retained earnings on January 1, a. 14%. c. 8%.
2009? b. 10%. d. 6%.
a. P360,000 c. P295,000 K, W & W
b. P312,500 d. P260,000 7. On June 27, 2009, Allentown Company distributed to
RPCPA 1087 its ordinary shareholders 100,000 outstanding ordinary
3. At December 31, 2009, the equity accounts of Batch shares of its investment in Ocean, Inc., an unrelated
Corporation were as follows: party. The carrying amount in Allentown’s books of
Ocean’s P2 par ordinary share was P4 per share.
Preference share capital (P100 par,
Immediately after the distribution, the market price of
12% participating and cumulative,
Ocean’s share was P5 per share.
100,000 shares) P10,000,00
0 In its income statement for the year ended June 30,
Preference share capital (P100 par, 2009, what amount should Allentown report as gain
10% nonparticipating, before income taxes on disposal of the shares?
noncumulative, 50,000 shares) 5,000,000 a. P500,000 c. P400,000
Ordinary share capital (P10 par, b. P100,000 d. P 0
1,000,000 shares) 10,000,000 RPCPA 1096
Retained earnings 9,500,000
Batch has never paid cash or share dividend. The
capital accounts have not changed since Batch began
operations on January 1, 2005. If the maximum
amount available for cash dividend is declared on
December 31, 2009, how much dividend is payable to 8. In September 2007, West Corp. made a dividend
the ordinary shareholders? distribution of one right for each of its 120,000
a. P2,100,000 c. P1,200,000 ordinary shares outstanding. Each right was
b. P1,920,000 d. P4,500,000 exercisable for the purchase of 1/100 of a share of
West's P50 variable rate preference shares at an
exercise price of P80 per share. On March 20, 2009,
4. East Corp., a calendar-year company, had sufficient none of the rights had been exercised, and West
retained earnings in 2009 as a basis for dividends, but redeemed them by paying each shareholder P0.10 per
was temporarily short of cash. East declared a

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right. As a result of this redemption, West's 10. The following information pertains to Imperial Corp.
shareholders' equity was reduced by  No dividends declaration or payment for 3 years on
a. P 120 c. P12,000 its 2,000 shares of 6%, P30 par value cumulative
b. P2,400 d. P36,000 preference shares.
P79 M13 pp. 538 Wiley07-08  Gain on disposal of Imperial’s Cebu Division of
9. On January 2, 2009, Simpson Co.'s board of directors P90,000.
declared a cash dividend of P400,000 to shareholders  Treasury shares costing P100,000 reissued for
of record on January 18, 2009, payable on February P30,000.
10, 2009. Selected data from Simpson's December What amount of retained earnings should be restricted
31, 2008 balance sheet are as follows: as a result of these items?
Accumulated depletion P100,000 a. P70,000 c. P90,000
Share capital 500,000 b. P10,000 d. P 0
Share premium 150,000
Retained earnings 300,000 11. At December 31, 2008, Afro Corp. reported
P1,750,000 of appropriated retained earnings for the
The P400,000 dividend includes a liquidating dividend construction of a new office building, which was
of completed in 2009 at a total cost of P1,500,000. In
a. P 0 c. P150,000 2009, Afro appropriated P1,200,000 of retained
b. P100,000 d. P300,000 earnings for the construction of a new plant. Also,
AICPA 0594 F-32 P2,000,000 of cash was restricted for the retirement of
bonds due in 2010. In its 2009 balance sheet, Afro
should report what amount of appropriated retained
earnings?
a. P1,200,000 c. P2,950,000
b. P1,450,000 d. P3,200,000
AICPA 0593 II-5

PROBLEM
1. Selected information for the accounts of Bibbo Co. at The outstanding shares are 200,000, 12% preference
December 31, 2009, follows: shares, par P100 and 300,000 ordinary shares, par
Total income since incorporation P420,000 P100. If the preference shares are cumulative but
Total cash dividends paid 130,000 nonparticipating, ordinary shareholders will receive in
Total value of property dividends 2009
distributed 30,000 a. P1,800,000 c. P200,000
Excess of proceeds over cost of treasury b. P 600,000 d. P 0
stock sold 110,000 - rpcpa 10/82 (P533 Kimwell)
4. At December 31, 2008 and 2009, Sloan Corp. had
In its December 31, 2009, financial statements, what outstanding 9,000 shares of P100 par value 8%
amount should Bibbo report as retained earnings? cumulative preference shares and 30,000, P10 par
a. P260,000 c. P370,000 value, ordinary shares. At December 31, 2008,
b. P290,000 d. P400,000 dividends in arrears on the preference shares were
AICPA R96 #1 P36,000. Cash dividends declared in 2009 totaled
2. On December 31, 2008, the shareholders' equity P135,000. What amounts were payable on each class
section of Bulilit, Inc. was as follows: of share?
Share capital, par value of P10; P 900,000 Preference Ordinary
authorized 30,000 shares; issued a. P 72,000 P63,000
and outstanding 90,000 shares b. P 99,000 P36,000
Share premium 1,160,000 c. P108,000 P27,000
Retained earnings 1,460,000 d. P135,000 P 0
Total shareholders’ equity P3,520,000
5. The following share dividends were declared and
On March 31, 2009, Bulilit declared a 10% share distributed by Sol Corp.:
dividend and accordingly 9,000 additional shares were
Percentage of ordinary
issued, when the fair market value of the share was
share outstanding at
P16 per share. For the three months ended March 31,
declaration date Fair value Par value
2009, Bulilit sustained a net loss of P320,000. The
10 P15,000 P10,000
balance of Bulilit's retained earnings as of March 31,
28 40,000 30,800
2009 should be
a. P1,114,000 c. P1,050,000 What aggregate amount should be debited to retained
b. P1,086,000 d. P 996,000 earnings for these share dividends?
aicpa 5/85 (P545 Kimwell) a. P40,800 c. P50,000
b. P45,800 d. P55,000
3. Quadrant Corporation paid dividends of P2,000,000 P34 M13 pp. 532 Wiley07-08
and P3,000,000 at the end of 2008 and 2009,
respectively. The corporation has not paid any other
dividends since its organization on January 1, 2008.

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