SAN CARLOS COLLEGE

COLLEGE OF ACCOUNTANCY
ACCOUNTING ENHANCEMENT
Shareholders’ Equity

10.1 Share Transaction (Authorization, Subscription, Issuance, Reacquisition and Reissuance, Retirement)

N1
Authorization of Shares
- Here, we can determine the amount of authorized share
capital or the maximum amount of shares that the company
can issue approved by the SEC.

- The company can use two accounting (2) method in

accounting for authorization:
 Memorandum method
 Journal entry method

Authorization of Shares

Memorandum Method Journal Entry Method

- No Journal Entry - Dr. Authorized share capital
Cr. Unissued Share Capital
- In this method, the company will not recognize - In this method, the company will not
the following account: recognize:
 Authorized share capital; and  Share capital account
 Unissued share capital account

Issuance: Issuance:
Dr. Cash Dr. Cash
Cr. Share Capital Cr. Unissued Share Capital

N2
Subscription of Shares
- The process of “reserving” the shares.

- Journal Entry:
(without down payment)
Dr. Subscription receivable
Cr. Subscribed share capital
Cr. Share premium – excess over par

(with down payment)

Dr. Subscription receivable (Subscription price less down payment)
Dr. Cash (if any)
Cr. Subscribed share capital (Par value of the shares subscribed)
Cr. Share premium – excess over par (Subscription price less par
value)

N3
Cancellation of subscription
- Journal Entry:
(if refundable)
Dr. Subscribed share capital (Par value of shares subscribed)
 J. S. CAYETANO
Dr. Share premium – excess over par (Amount of SP that was credited on subscription
Cr. Accounts payable (Down payment to be refunded)
Cr. Subscription receivable (Subscription price less amount paid)

- Journal Entry:
(if not refundable)
Dr. Subscribed share capital (Par value of shares subscribed)
Dr. Share premium – excess over par (Amount of SP that was credited on subscription
Cr. Share premium – forfeited subscription (down payment)
Cr. Subscription receivable (Subscription price less amount paid)

N4
Issuance of Shares
- Shares can be sold or exchange for the following:
(1) Cash;
(2) Non-cash asset (e.g., inventory, PPE);
(3) Services rendered;
(4) Extinguishment of obligation;
(5) Conversion of preference share;
(6) Conversion of debt instrument;
(7) Exercise of share warrants attached to preference share; (8)
Exercise of share warrants attached to debt instrument.

N5
Cash consideration:
- Dr. Cash
Cr. Share capital (Par value)
Cr. Share premium – excess over par (Par value less cash received)

N6
Non Cash consideration
- Dr. Non-Cash asset (1) fair value of non cash; (2) fair value of shares; (3) par value of
shares
Cr. Share capital (Par value)
Cr. Share premium – excess over par (Par value less amount debited)

N7
Service consideration:
- Dr. Service expense (1) fair value of non cash; (2) fair value of shares; (3) par value of
shares
Cr. Share capital (Par value)
Cr. Share premium – excess over par (Par value less amount debited)

Chapter 10 ‒ Shareholders’ Equity Transactions Page 2 of 19

 J. S. CAYETANO

N8
Extinguishment of obligation:
- Dr. Carrying amount of total liability
Cr. Gain (CAof total liability less level of priority )
Cr. Share capital (Par value)
Cr. Share premium– excess over par Level ( of priority less par value)

Priority (see chapter8.4 – Debt Restructuring)

(1) Fair value of shares
(2) Fair value of liability
(3) CA of liability

N9
Share issuance cost:
- Is a “cost to sell” which normally includes:
 Legal fees  CPA fees 
Underwriting fees
 Commission fees
 Cost of printing
certificates  Documentary
stamps  Filing fees with
SEC

-
Accounting treatment:
 Direct, charge to (1) share premium – excess (if any); (2) retained earnings);
 Indirect, charge to expense.

N10
Issuance of two class of shares (Ordinary and Preference) at a price of one (basket price):

Allocation basis of the issue price:

(1) Relative fair value method;
(2) Residual value method

N11
Issuance below par value:
- Dr. Cash
- Dr. Share capital discount (Par value less cash receipt.) contra equity
account Cr. Share capital (Par value)

Chapter 10 ‒ Shareholders’ Equity Transactions Page 3 of 19

 J. S. CAYETANO

N12
Reacquisition:
- Dr. Treasury shares (at cost)
Cr. Cash

- Measurement of cost (cost of reacquisition)

(1) Cash consideration, amount cash
(2) Non cash consideration, carrying amount of non cash given up

N13
Reissuance of treasury shares:

Gain
 Reissuance price is greater than the cost
 Gain is the excess of Selling Price over the Cost of Treasury
 Credited to “Share Premium – Treasury”

Entry:
- Dr. Cash
Cr. Treasury shares
Cr. Share premium – treasury

Loss
 Reissuance price is lesser than the cost
 Loss is the excess of Cost of Treasury over the Selling Price
 Debited to: (1) Share Premium – Treasury (if any)
(2) Retained earnings (remaining loss not absorb by SP - Treasury)

Entry:
- Dr. Cash
Dr. Share premium – treasury (if any)
Dr. Retained earnings
Cr. Treasury shares

N14
Retirement of treasury shares:

Step 1: Derecognize (debit) the Share Capital of shares to be retired;

Step 2: Derecognize (debit) the Share Premium from original issuance (SP – excess) of shares to be
retired; Step 3: Derecognize the Treasury Shares to be retired; and Step 4: Recognize the gain or loss
from retirement.

Gain
 Original issue price (par value + share premium – excess) is greater than the cost of reacquisition.
N11
 Excess of original issue price over the cost of reacquisition.
 Credited to “Share Premium – retirement”

Entry:

Chapter 10 ‒ Shareholders’ Equity Transactions Page 4 of 19

 J. S. CAYETANO
- Dr. Share capital (par value)
Dr. Share premium – excess (SP from original issuance)
Cr. Treasury share (cost)
Cr. Share premium – retirement (original issue price less cost of TS)

Loss
 Cost of reacquisition cost is greater than the original issue price.
 Excess of reacquisition cost over the original issue price
 Debited to: (1) Share Premium – Treasury (if any)
(2) Retained Earnings (remaining loss not absorb by Share Premium – Treasury

Entry:
- Dr. Share capital (par value)
Dr. Share premium – excess (SP from original issuance)
Dr. Share premium – treasury (if any)
Dr. Retained earnings
Cr. Treasury share (cost)

N15
Conversion of preference share:
(issuance of preference with conversion option)
- Dr. Cash
Cr. Preference share capital (Par value)
Cr. Share premium – preference (Cash less par value)

(issuance of preference with conversion option)

- Dr. Preference share capital (par value of converted PS)
Dr. Share premium – preference (SP from original issue)
Dr. Retained earnings (when loss)
Cr. Ordinary share capital (Par value)
Cr. Share premium – ordinary (when gain)

N16
Conversion of debt instrument:
- Dr. Carrying amount of total liability
Cr. Share capital (Par value)
Cr. Share premium (CA of total liability – Par value)

(see chapter 8 – Compound Instrument)

Chapter 10 ‒ Shareholders’ Equity Transactions Page 5 of 19

 J. S. CAYETANO

N17
Exercise of share warrants attached to preference shares:
(issuance of preference with conversion option) -
Dr. Cash
Cr. Preference share capital (Par value)
Cr. Share premium – preference (allocated amount to PS less par value)
Cr. Share premium – share warrants (allocated amount to warrants)

Allocation method level of priority:

(1) Relative fair value method
(2) Residual value method
(3) Intrinsic value method

(issuance of preference with conversion option)

- Dr. Cash (purchase price using the warrants)
- Dr. Share premium – warrants (allocated amounts to warrants)
Cr. Share capital (par value)
Cr. Share premium – excess over par (total consideration less par value)

N18
Exercise of warrants attached to debt instrument:
- Dr. Cash (purchase price using the warrants)
- Dr. Share premium – warrants (allocated amounts to warrants)
Cr. Share capital (par value)
Cr. Share premium – excess over par (total consideration less par value)

(see chapter 8 – Compound Instrument)

Donation from shareholders: N19

Cash donation:
- Dr. Cash
Cr. Share premium – donated capital

Non cash donation:

- Dr. Non cash asset (e.g., PPE) at fair value
Cr. Share premium – donated capital

Own share (1):

- Memo entry:

Reissuance of donated shares (2):

- Dr. Cash
Cr. Share premium – donated capital

Chapter 10 ‒ Shareholders’ Equity Transactions Page 6 of 19

 J. S. CAYETANO

N20
Share split

Split up
The number of shares increase, the par value of shares decrease

Split down
The number of shares increase, the par value of shares decrease

The shares affected by split are 

Issued (Outstanding + Treasury)
 Unissued

N21
Share Status
(1) Issued – share that was issued by the company, whether in the hands of investor (outstanding)
or in the hands of the company (treasury shares) and not retired.
(2) Outstanding – shares that was issued by the company and in the hands of investor.
(3) Treasury – shares that was issued by the company and in the hands of company but not retired.

1) Captain America had the following issuance of P100 par value shares of stock:
• Issued 2,500 shares of stock for machinery. The machinery has a fair value of P280,000 while the stock is selling at
P105 per share.
• Issued 1,000 shares of stock for patent. The stock is selling at P105 per share.
• Issued 500 shares of stock in full payment of organization services rendered from the legal counsel. The fair value
of such services is P60,000.

What is the balance of total share premium after recording the above transactions?
A. 45,000 B. 30,000 C. 10,000 D. 5,000

2) The company issued 2,000, P100 par ordinary shares for an outstanding bank loan of P250,000. On this date, shares
are quoted at P140 per share. What amount should be credited to share premium?
A. 80,000 B. 50,000 C. 30,000 D. 0

3) On January 1, 2021, Damage Control Company issued 1,000 shares with par value of P400 for P480 per share. Issuance
costs incurred that are directly attributable to the equity transaction amounted to P20 per share. How much is the net
credit to share premium?
A. 80,000 B. 60,000 C. 20,000 D. 0

4) An entity issues 1,000 shares with par value of P400 for 320, the entry to recorded the transaction includes a
A. Credit to share capital for P320,000 C. Credit to discount on share capital for P80,000
B. Debit to share capital for P80,000 D. Debit to discount on share capital for P80,000

5) The company issued for P1,000,000 cash, 1,000 shares of P200 par value Preference share and 2,000 shares of P100
par ordinary share. The preference and ordinary shares have fair values of P240 and P180 per share, respectively on
the date of sale. Upon issuance of the sale, the journal entry will include a credit to share premium – ordinary share of
A. 160,000 B. 400,000 C. 200,000 D. 560,000

6) The company issued for P1,000,000 cash, 1,000 shares of P200 par value Preference share and 2,000 shares of P100
par ordinary share. The preference has a fair value of P240 on the date of sale. No fair value available for the ordinary
share. Upon issuance of the sale, the journal entry will include a credit to share premium – ordinary share:
A. 160,000 B. 200,000 C. 400,000 D. 560,000

Use the following information for the next two (2) questions:
On January 1, 2021, the statement of financial position of Captain Cross Company shows the following information:

Share capital (authorized 10,000 share with par value of P400) 3,200,000
Share premium in excess of par 640,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 7 of 19

 J. S. CAYETANO
Retained earnings 2,160,000
Total shareholders’ equity 6,000,000

7) Assume instead on September 1, 2021, Captain Cross reissues the 1,000 treasury shares at P560. The entry to record
the transaction includes a
A. Credit to treasury shares for P560,000 C. Credit to share premium – treasury for P200,000 B.
Credit to share premium for P360,000 D. Credit to retained earnings for P200,000

8) Assume instead on September 1, 2021, Captain Cross reissues the 1,000 treasury shares at P240. The entry to record
the transaction includes a
A. Credit to share premium for P120,000 C. Debit to retained earnings for P120,000
B. Debit to share premium for P120,000 D. Credit to retained earnings for P120,000

Use the following information for the next two (2) questions:
On January 1, 2021, the statement of financial position of Cardiac Company shows the following information:
Share capital (authorized 10,000 shares with par value of P400) P 3,200,000
Share premium in excess of par 640,000
Share premium – treasury shares 20,000
Retained earnings 2,140,000
Total shareholders’ equity 6,000,000

9) On July 1, 2021, Cardiac reacquires 1,000 shares at P320. On September 1, 2021, Cardiac retires the 1,000 treasury
shares. The entry on September 1, 2011 includes a
A. CR to share premium – retirement for P80,000 C. DR to share premium – original issuance for
P80,000 B. CR to share premium – retirement for P160,000 D. B and C

10) Assume instead on July 1, 2021, Cardiac reacquires 1,000 shares at P560 and immediately retires them. The entry on
July 1, 2021 includes a
A. DR to retained earnings for P60,000 C. CR to share premium – original issuance for P80,000
B. C and D D. CR to share premium – retirement for P560,000

Use the following information for the next two (2) questions:
The stockholders’ equity for Power Company on December 31 was:
Preference share, P20 par, 60,000 shares issued and outstanding 1,200,000
Share premium in excess of par – preference share 300,000
Ordinary share, P10 par, 300,000 shares issued and outstanding 3,000,000
Share premium in excess of par – ordinary share 600,000
Accumulated profit 2,500,000

Each share of preference is convertible into 1 ordinary share. In June, Power converted 4,000 of preference shares into
ordinary shares.

11) The entry to take up the conversion includes a credit to:

A. Preference share for P80,000 C. Share premium for P60,000
B. Ordinary share for P80,000 D. Accumulated profit for P60,000

12) Assuming that each share of preference is convertible into 4 ordinary shares and Power converted 4,000 preference
shares into ordinary, the entry to take up conversion includes a debit to
A. Preference share for P160,000 C. Accumulated profit for P60,000
B. Ordinary share for P160,000 D. Accumulated profit for P80,000

Use the following information for the next two (2) questions:
Cayseye Company issued 1,000 preference shares with par value of P400 for P540,000. The preference shares included
1,000 share warrants that entitle the holder to acquire 500 ordinary shares with par value of P200 for P280 per share. The
fair value of preference shares ex-warrant are P440 while the fair value of the warrants is P40.

13) The issue price allocated to the share warrants is

A. 45,000 B. 40,000 C. 100,000 D. 0

14) Subsequently, all of the warrants were exercised. The entry includes a
A. Debit to share premium – warrants outstanding for P40,000
B. Debit to share premium – warrants outstanding for P100,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 8 of 19

 J. S. CAYETANO
C. Debit to share premium – warrants outstanding for P45,000
D. No entry

15) Celestial Company issued 1,000 preference shares with par value of P400 for P540,000. The preference shares included
1,000 share warrants that entitle the holder to acquire 500 ordinary shares with par value of P200 for P280 per share.
The fair value of the preference shares and share warrants are not available. However, the ordinary shares have a fair
value of P400 per share. The issue price allocated to the share warrants is
A. 120,000 B. 40,000 C. 60,000 D. 0

Use the following information for the next two (2) questions:
Cerebro Co. received 1,000 shares with par value of P400 and fair value of P480 per share from a shareholder as donation

16) The entry to record the receipt of the share include

A. Debit to treasury shares P480,000 C. Credit to share premium – treasury P480,000 B. Debit
to treasury shares P400,000 D. No entry

17) Subsequently, Cerebro reissues the 1,000 donated shares at P520 pre share. The entry to record the reissuance
includes
A. Credit to share premium for P520,000 C. Credit to retained earnings for P520,000
B. Credit to income for P520,000 D. No entry

18) The following donations were received by Cyber Company during 2019:

• Cash of 100,000 was received from a shareholder.

• Land with fair value of P1,000,000 and historical cost of P600,000 from the government. No conditions are attached
to the donation.

• Received 1,000 shares of Cyborg Corporation with a par value of P100 and fair value of P120 per share from
shareholder as donation.

• Received 1,000 Cyber’s own share with par value of P100 fair value of 120 per share from a shareholder as donation.
Subsequently, Cyber reissues the 1,000 donated shares at P130 per share.

What is the total share premium – donated capital from the above transactions?
A. 980,000 B. 380,000 C. 350,000 D. 280,00

19) Tonight Company was incorporated on January 1, 2022 and provided the following information:
Jan. 1 Number of shares authorized 100,000
Feb. 1 Number of shares issued 80,000
July 1 Number of shares reacquired but not canceled 10,000
Dec. 1 Two for one share split

On December 31, 2022, what is the number of ordinary shares outstanding?

A. 140,000 B. 160,000 C. 150,000 D. 180,000

20) Of the 125,000 ordinary shares issued by Hen Company, 25,000 were held as treasury shares on December 31, 2019.
During 2020, transactions involving Hen’s ordinary shares were as follows:
January 1 to October 31 13,000 treasury shares were distributed to officers as part of share compensation plan
November 1 A 3 for 1 share split took effect
December 1 Hen purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not
retired.

At December 31, 2020, how many shares of Hen Company’s ordinary share capital were issued?
A. 125,000 B. 324,000 C. 334,000 D. 375,000

10.2 Shareholders’ Equity Composition

Chapter 10 ‒ Shareholders’ Equity Transactions Page 9 of 19

 J. S. CAYETANO
N22
Total shareholders’ equity
Share capital accounts:
(a) Share capital (authorized – issued)
(b) Subscribed share capital
(c) Share dividend payable X
Share premium:
(a) Share premium – excess over par / stated
(b) Share premium – forfeited subscription
(c) Share premium – treasury shares
(d) Share premium – retirement
(e) Share premium – conversion option
(f) Share premium – share warrants
(g) Share premium – donated capital / assessment X
OCI items:
(a) Revaluation surplus
(b) Remeasurement of employee benefits
(c) Loss on credit risk of financial liability measured at fair value
(d) Unrealized gain or loss on equity investment measured at FVOCI
(e) Unrealized gain or loss on debt investment measured at FVOCI
(f) Unrealized gain on loss on cash flow hedge
(g) Unrealized gain on loss on foreign currency translation X
Retained earnings:
(a) Unappropriated retained earnings
(b) Reserve for treasury shares
(c) Reserve for bond sinking fund
(d) Reserve for plant expansion
(e) Reserve for contingency X
Contra:
(a) Discount on share capital
(b) Capital liquidated
(c) Subscription receivable (if collectible beyond 12 months or silent)
(d) Treasury shares X
Total shareholders’ equity X

N23
Legal Capital
- Par value of ordinary & preference issued X
- Par value of ordinary & preference subscribed X
- Par value of ordinary & preference dividend payable X
- Share premium – excess over stated X
Total legal capital X

Contributed capital: N24

(1) Legal Capital
(a) Par value of ordinary & preference issued
(b) Par value of ordinary & preference subscribed

(c) Par value of ordinary & preference dividend payable X

(2) Share premium items:

(a) Share premium – excess over par / stated
(b) Share premium – forfeited subscription
(c) Share premium – treasury shares
(d) Share premium – retirement
(e) Share premium – conversion option
(f) Share premium – share warrants

(g) Share premium – donated capital / assessment X

Chapter 10 ‒ Shareholders’ Equity Transactions Page 10 of 19

 J. S. CAYETANO

(3) Subscription receivable (if collectible beyond 12 months or silent) (X)

Total contributed capital X

Use the following information for the next five (5) questions:
The following data were complied prior to preparing the statement of financial position of Arms Corporation.
Authorized share capital, P100 par value 4,000,000
Unissued share capital 800,000
Subscribed share capital 480,000
Subscription receivable 120,000
Premium on share capital 320,000
Premium on bonds payable 240,000
Gain on sale of treasury shares 80,000
Donated capital 800,000
Share warrants outstanding 200,000
Reserve for bond sinking fund 400,000
Reserve for treasury shares 144,000
Reserve for depreciation 600,000
Treasury shares, at cost 144,000
Retained earnings, unappropriated 576,000
Cash dividends payable 160,000
Revaluation increment on property 800,000
Net unrealized loss on available for sale securities 96,000

21) What is the legal capital of Arms Company?

A. 5,080,000 B. 3,680,000 C. 3,200,000 D. 3,080,000

22) What is the contributed capital of the Arms Company?

A. 5,080,000 B. 4,960,000 C. 4,816,000 D. 4,736,000

23) What is the total share premium of Arms Company?

A. 1,640,000 B. 1,560,000 C. 1,440,000 D. 1,400,000

24) What is the appropriated retained earnings of Arms Company?

A. 1,944,000 B. 1,144,000 C. 1,120,000 D. 544,000

25) What is the total shareholders’ equity?

A. 6,640,000 B. 6,500,000 C. 6,000,000 D. 5,080,000

26) The shareholders’ equity of Cat Company revealed the following on June 30, 2019:

Preference shares, P100 par value 230,000

Share premium – preference 80,500
Ordinary share, P15 par value 525,000
Share premium ordinary 275,000
Subscribed ordinary share 5,000
Accumulated profits 190,000
Notes payable 400,000
Subscription receivable – ordinary 40,000

How much is the legal capital of the company?

A. 1,305,500 B. 1,115,000 C. 760,000 D. 755,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 11 of 19

 J. S. CAYETANO
27) Dagger Company’s adjusted balance at December 31, 2019, includes the following account balances:
Ordinary shares, P10 par 1,200,000
10% Preference shares, P100 par 1,600,000
Subscribed ordinary shares 600,000
Subscription receivable 120,000
Share premium – ordinary 240,000
Share premium – preference shares 500,000
Retained earnings – unrestricted 400,000
Retained earnings – restricted for treasury shares 100,000
Retained earnings – restricted for plant acquisition 200,000
Treasury shares at cost 100,000
Net unrealized gain on equity securities – FVPL 100,000
Net unrealized loss on equity securities – FVOCI 40,000
Net unrealized loss on foreign currency transaction 35,000
Net unrealized gain on translation adjustment of foreign operations 30,000
Revaluation surplus 160,000

What amount that Dagger should report as total stockholders’ equity in its December 31, 2019 balance sheet?
A. 4,770,000 B. 4,870,000 C. 4,970,000 D. 5,035,000

28) The Sidra is authorized to issue 100,000 ordinary shares, P17 par value. At the beginning of the year, 18,000 ordinary
shares were issued and outstanding. These shares had been issued at P24. During the year, the company entered
into the following transactions:
January 16 Issued 1,300 ordinary shares at P25 per share.
March 21 Exchanged 12,000 ordinary shares for a building. The ordinary shares were selling at P27 per share.
May 7 Reacquired 500 ordinary shares at P26 per share to be held in treasury
July 1 Accepted subscriptions to 1,000 ordinary shares at P28 per share. The contract called for 10% down
payment with the balance due on June 30 next year. September 20 Sold 500 treasury shares at P29 per share.

Total contributed capital at December 31, is

A. 818,000 B. 816,500 C. 615,000 D. 613,500

Chapter 10 ‒ Shareholders’ Equity Transactions Page 12 of 19

 J. S. CAYETANO

10.3 Retained Earnings Transactions

N25
Transactions affecting Retained Earnings
Unappropriated Retained Earnings
- Loss X X - Beginning Balance
- Loss on share transaction X X - Profit
- Correction of error X X - Correction of error
- Change in policy X X - Change in policy
- Realized OCI loss X X - Realized OCI gain
- Dividends paid X X - Quasi reorganization
- Appropriation of RE X X - Reversal of appropriation
X Ending Balance

N26
Who is entitled to the dividends
- Outstanding shares (issued and subscribed less treasury)

29) On April 1, 2021, the board of directors of Cyclops Company declared P200 dividends per share to shareholders of
record as of April 15, 2021 for distribution on May 1, 2021. The shareholders’ equity of Cyclops as of April 1, 2021 is
as follows
Share capital, authorized capital 12,000 shares, P400 par 3,200,000
Subscribed share capital 880,000
Share premium capital 400,000
Retained earnings 1,816,000
Treasury shares (at cost of P480 per share) 576,000
Other components of equity 280,000
Total shareholders’ equity 6,000,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 13 of 19

 N28
Scenario 2 – Preference share is participating
Steps: Ordinary Preference Total SHE
J. S. CAYETANO
1) Total dividend declared X
2) Distribute dividend entitlement X X (X)
3) Compute remaining SHE X
4) Allocate the remaining dividend (relative par value basis) X X

5) Total dividend allocation X X

Dividend entitlement for preference: (1) If cumulative, basic x
years in-arrears
(2) If non cumulative, one basic dividend
Dividend entitlement for ordinary:
• One basic dividend, using the lowest dividend rate of Preference share

How much is the cash dividends payable?

A. 1,800,000 B. 1,360,000 C. 2,200,000 D. 1,760,000
Use the following information for the next five (5) questions:
Captain Marvel Company declared P7,200,000 cash dividends to its preference and ordinary shareholders out of its profit
in 2023. No dividends have been, declared since 2021. Captain Marvel shareholders’ equity immediately before dividend
declaration is as follows:
10% Preference share capital, P800 par P 8,000,000
Ordinary share capital, P400 par 32,000,000
Retained earnings 20,000,000
Total shareholders’ equity 60,000,000

30) How much is the dividend to ordinary shareholders if the preference shares are noncumulative?
A. 7,200,000 B. 5,080,000 C. 6,400,000 D. 6,000,000

31) How much is the dividend to ordinary shareholders if the preference shares are cumulative?
A. 2,400,000 B. 4,800,000 C. 5,600,000 D. 6,400,000

32) How much is the dividend to ordinary shareholders if the preference shares are noncumulative and fully participating?
A. 7,560,000 B. 6,400,000 C. 5,120,000 D. 5,760,000

33) How much is the dividend to ordinary shareholders if the preference shares are cumulative and fully participating?
A. 4,480,000 B. 5,1250,000 C. 5,760,000 D. 6,400,000

34) The dividend to ordinary shareholders if the preference shares are cumulative and participating up to 16% is
A. 5,120,000 B. 4,480,000 C. 5,480,000 D. 4,320,000

35) The board of directors of Aurora Company wishes to declare a dividend whereby ordinary shareholders are to receive
a total per share dividend of P4. The equity on December 31, 2017 appears as follows:

Preference share capital, P100 par, 7% fully-participating, non cumulative, 25,000 shares issued 2,500,000
Ordinary share capital, P25 par, 250,000 shares authorized and issued 6,250,000
Share premium 1,250,000
Retained earnings 5,000,000

The total dividend that must be declared to meet the per share goal of the board of directors is
A. 2,012,500 B. 1,575,000 C. 1,400,000 D. 1,175,000

36) On December 31, 2024 and 2023, Nipsy Company had 30,000 10% cumulative preference shares of P100 par value
outstanding. No dividends were in arrears on December 31, 2022. The entity did not declare a dividend during 2023.
During 2024, the entity paid a cash dividend of P200,000 on the preference shares. How should the dividend in arrears
on preference shares be reported in the 2024 financial statements?
A. Accrued liability of P300,000 C. Accrued liability of P400,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 14 of 19

 J. S. CAYETANO

37) Aha Company declared and distributed 10% share dividend with fair value of P1,500,000 and par value of P1,000,000,
and 25% share dividend with fair value of P4,000,000 and par value of P3,500,000. What aggregate amount should
be debited to retained earnings for the share dividends?
A. 4,500,000 B. 3,500,000 C. 5,000,000 D. 5,500,000

Use the following information for the next two (2) questions:
Over Company showed the following balances:
Share capital authorized P100 par, 50,000 shares 5,000,000
Share capital unissued, 20,000 shares 2,000,000
Subscribed share capital, 10,000 shares 1,000,000
Treasury shares (5,000 at cost) 600,000
Share premium 500,000 Retained earnings 1,500,000 Market value of shares:
On declaration 140
On issuance date 150

38) What amount is deducted/debited to retained earnings account assuming the Board of Directors declared a share
dividend from unissued share capital of one share for each ten shares outstanding?
A. 350,000 B. 525,000 C. 560,000 D. 490,000

39) What amount is deducted/debited to retained earnings account assuming the Board of Directors declared a share
dividend from treasury shares for each ten shares outstanding?
A. 420,000 B. 480,000 C. 300,000 D. 360,000

40) The directors of Kelly Company whose P50 par value share capital is currently selling at P60 per share have decided
to issue a share dividend. The selling price is not expected to be affected by the share dividend. The entity, which has
an authorization for 1,000,000 shares, had issued 500,000 shares, of which 100,000 shares are now held as treasury.
The entity capitalized P2,400,000 of the retained earnings balance. What percentage was declared as a share dividend
by the directors?
A. 10% B. 8% C. 6% D. 4%

N30
Date of declaration Year-end Date of settlement

Chapter 10 ‒ Shareholders’ Equity Transactions Page 15 of 19

 J. S. CAYETANO

Property
dividend payable:

 Recognize dividend payable  Remeasure the  Remeasure the

measured at fair value of the non dividend payable dividend
cash asset at declaration. at the current fair value of payable at the
the non cash asset at current fair
year end. value of the
 non cash asset
Increase in FV, at date of
decrease in RE settlement.

Decrease in FV,  Increase in FV,
increase in RE decrease in RE
 Decrease in
FV,
increase in RE
Non cash asset declared as
dividend:
ü Reclassify non cash to NCA held for  Remeasure the NCA held  No remeasurement at
sale under PFRS 5. for sale to its year-end the date of settlement;
measurement, lower of
ü Recognize impairment loss. (1) fair value less cost of  Recognize gain or loss
disposal; on extinguishment.
ü Impairment loss is equal to (2) initial measurement
Carrying amount of NCA held for sale CA of NCA held for sale
Less: FVCOD (FVCOD Less: CA of liability
Impairment at date of reclassification); Gain or loss
loss 
Recognize impairment
loss or reversal of
impairment;

Use the following information for the next four (4) questions:
On October 31, Persecution Inc. declared a building as property dividend distributable to shareholders on January 31 of
the following year. The building had a carrying amount of P1,500,000 on October 31. The building had a fair value of
P1,400,000 on the same date. On December 31 the value of the building deteriorated and latest estimates placed the fair
value of the building at P1,200,000.

The building was transferred to shareholders on January 31 when the prevailing fair value of the building was at
P1,300,000.

41) The entry to record the declaration of the property dividends would include a debit to retained earnings of
A. 1,500,000 B. 1,400,000 C. 1,200,000 D. 0

42) How much property dividends payable should be reported in the statement of financial position as of December 31?
A. 1,500,000 B. 1,400,000 C. 1,200,000 D. 0

43) How much loss should be recognized in the income statement on the reclassification of the building to asset held for
disposal on the declaration date?
A. 300,000 B. 200,000 C. 100,000 D. 0

44) What is the gain or loss to be recognized in the profit or losses as a result of the distribution of the property dividends
on January 31?

Chapter 10 ‒ Shareholders’ Equity Transactions Page 16 of 19

 J. S. CAYETANO
A. 300,000 B. 200,000 C. 100,000 D. 0

Use the following information for the next three (3) questions:
Dragonic Defense Company declared on December 1, 2021 its 10 brand new fleet of cars costing P500,000 each as
property dividends to be distributed on February 1, 2022 to its ten shareholders. The following fair value less cost to
distribute of the cars was determined to be:

December 1, 2021 ................. ................. ................. ................. ................. ................. ....................4,800,000

December 31, 2021 ................. ................. ................. ................. ................. ................. ....................4,500,000
February 1, 2022 ................. ................. ................. ................. ................. ................. ....................4,000,000

45) What is the total amount deducted from retained earnings in 2021?
A. 5,000,000 B. 4,000,000 C. 4,500,000 D. 4,000,000

46) What is the carrying amount of the asset held for distribution on December 31, 2021?
A. 4,500,000 B. 4,000,000 C. 5,000,000 D. 4,800,000

47) What is the loss on distribution of property dividend to be recognized on February 1, 2022?
A. 800,000 B. 200,000 C. 500,000 D. 0

Use the following information for the next three (3) questions:
On November 1, 2020, Jessie Company declared a property dividend of equipment payable on March 1, 2021. The carrying
amount of the equipment is P3,000,000 and the fair value is P2,500,000 on November 1, 2020. However, the fair value
less cost to distribute the equipment is P2,200,000 on December 31, 2020 and P2,000,000 on March 1, 2021.

48) What is the dividend payable on December 31, 2020?

A. 2,500,000 B. 2,200,000 C. 3,000,000 D. 0

49) What is the measurement of the equipment on December 31, 2020?

A. 2,500,000 B. 2,200,000 C. 3,000,000 D. 2,200,000

50) What is the amount of loss recognized in profit or loss on March 1, 2021?
A. 300,000 B. 200,000 C. 500,000 D. 0

N31
Appropriation:  Retained earnings is appropriated to limit the declaration of dividend;  The
purpose of limiting the dividend are;
(a) Legal requirement (e.g., appropriation for treasury shares)
(b) Contractual requirement (e.g., appropriation for bond retirement)
(c) Voluntarily (e.g., appropriation for plant expansion or for contingencies)

 Appropriation of cash is not appropriation of retained earnings;  No required appropriation for

dividends in arrears;  When the purposes of appropriation is met, the appropriated RE will revert back
to unappropriated RE.

51) The following information pertains to Ox Company:

• Dividends on its 50,000 shares of 10%, P100 par value cumulative preference share capital have not been declared
or paid for 3 years.

• Treasury ordinary shares were acquired at a cost of P1,000,000 during the year. The treasury shares had not been
reissued as of year end.

• At the year, Ox appropriated P3,000,000 of retained earnings for the construction of a new plant.

• Also, P2,000,000 of cash was restricted for the retirement of bonds payable due in the next year.

What amount of retained earnings should be appropriated as a result of these items?

A. 4,000,000 B. 5,500,000 C. 6,000,000 D. 7,500,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 17 of 19

 J. S. CAYETANO
52) The December 31, 2019 financial statements of Wakanda Forever show appropriated retained earnings for
construction of a new building of P5,250,000. The building costs P4,500,000 when completed in 2020. The following
information pertains to 2020 operations:
• An appropriation of retained earnings of P3,600,000 for the construction of a new plant was made by Wakanda
Forever in 2020. In addition, cash of P6,000,000 was restricted for the retirement of bonds due in 2021.
• Wakanda Forever acquires its own 10,000 shares of stock at a total cost of P1,000,000; 3,500 of these shares
were subsequently issued for P360,000.
• Dividends have not been declared for 3 years on its 20,000 shares of 6%, P30 par value cumulative preference
shares.
• Dividends have been declared on its 10,000 shares of 8%, P50 par value noncumulative preference shares.

The amount of appropriated retained earnings that Wakanda Forever should report in its 2020 balance sheet is
A. 4,250,000 B. 4,610,000 C. 9,860,000 D. 5,000,000

N32
Quasi Re-organization
Share Share Retained
Step-by-Step: Capital Premium Earnings
1) Remeasure asset and liabilities
 Increase in asset and decrease in liabilities +
 Decrease in asset and increase in liabilities –
2) Assessment +
3) Recapitalization – +
4) Elimination of deficit – +

53) Adverse financial and operating circumstances warrant that Salt Bae Company should undergo a quasi-reorganization
on December 31, 2022. The following information may be relevant in accounting for the quasi-reorganization:
• Inventory with a fair value of P2,000,000 is currently recorded in the account at a cost of P2,500,000.
• Plant asset with a fair value of P7,000,000 are currently recorded at P8,500,000, net of accumulated depreciation.
• Individual shareholders contribute P4,000,000 to create additional capital to facilitate the reorganization. No new
shares are issued.
• The par value of the share is reduced from P25 to P5.
• Immediately before these events, the shareholders’ equity appear as follows:
Share capital, P25 par, 100,000 shares outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
Total 1,250,000

After the quasi-reorganization, what amount should be reported as share premium?

A. 2,750,000 B. 3,250,000 C. 3,750,000 D. 1,750,000

54) Undying Company had incurred heavy losses since inception. The board of directors voted to implement a
quasireorganization. Prior to the process, the entity reported the following:

Share capital, 500,000, P100 50,000,000

Share premium 5,000,000
Retained earnings (deficit) (8,000,000)

The shareholders approved the quasi-reorganization to be accomplished by reducing inventory by P2,000,000,

reducing property, plant and equipment by P4,000,000, writing off goodwill amounting to P1,000,000, reduction in the
total par value of share capital by a certain amount and eliminating the deficit against the share premium. What is the
total shareholders’ equity after implementing the quasi-reorganization?
A. 50,000,000 B. 45,000,000 C. 40,000,000 D. 35,000,000

55) Champions Company declared one-year cash dividends on its outstanding 6% redeemable preference shares with
aggregate par value of P4,000,000. The declaration of the dividends resulted to a
A. Debit to retained earnings for P240,000 C. Debit to interest expense for P240,000 B.
Debit to loss for P240,000 D. Debit to share premium for P240,000

56) On December 31, 2021, Changeling Company declares P4,000,000 cash dividends to shareholders of record as of
January 15, 2022 for distribution on January 31, 2022. Since Changeling Company is undergoing liquidation, 80% of
the dividend declared are liquidating dividends. The entry to record the dividend declaration includes
A. Debit to retained earnings for P4,000,000 C. Debit to share capital for P3,200,000

Chapter 10 ‒ Shareholders’ Equity Transactions Page 18 of 19

 J. S. CAYETANO
B. Debit to retained earnings for P3,200,000 D. Debit to share liquidated for P3,200,000

Use the following information for the next four (4) questions:
Steam Company has the following capital structure at the beginning of 2016.
6% Cumulative, fully-participating, preferred stock, P50 par value, 50,000 shares authorized, 12,000 shares 600,000
issued and outstanding
Common stock, P10 par value, 200,000 authorized; 147,500 issued and outstanding 1,475,000
Additional paid-in capital in excess of par – preferred 180,000
Additional paid-in capital in excess of par – ordinary 1,180,000
Retained earnings (P2,500,000 appropriated for plant expansion) 4,500,000
7,935,000

During 2016, the following transactions occurred:

February 11 Steam Company acquired 6,000 preferred shares at P70 each and 40,000 common shares at P22 each.
Steam Company using the cost-method in recording treasury shares.
March 31 Issued 2,000 preferred treasury shares at P73 per share.
April 7 Issued 15,000 common shares at P25 per share.
July 1 Issued 1,500 preferred treasury shares at P68 each and 20,000 common treasury shares at P19 each.
August 15 Retired the remaining preferred and common treasury shares.
September 1 Plant expansion was completed.
November 22 Board of directors appropriated P2,000,000 for plan expansion in Venus. Likewise, the Board issued 3
year, 10% P1,500,000 face value bonds to partially fund the construction. A sinking fund was set up for
the extinguishment of the bonds at their maturity.
December 31 Net income for the period P1,400,000. Total cash dividend declared and paid P500,000. No dividends
have been declared in 2015. A property dividend was likewise declared, the distribution of which is on
January 6, 2017. The carrying amount of the property declared as dividend was P800,000; the fair value
of which was P1,000,000.

57) Upon the retirement of the preferred shares, retained earnings shall be debited by
A. 12,500 B. 9,500 C. 6,500 D. 0

58) Upon the retirement of the common shares, retained earnings shall be debited by
A. 80,000 B. 17,000 C. 14,000 D. 0

59) The retained earnings – appropriated at the end of 2016 is

A. 6,000,000 B. 3,500,000 C. 2,000,000 D. 1,500,000

60) The total stockholders’ equity at December 31, 2016 is

A. 8,038,000 B. 7,738,000 C. 7,538,000 D. 7,118,000

END

Chapter 10 ‒ Shareholders’ Equity Transactions Page 19 of 19