CHAPTER 3 SHAREHOLDERS’ EQUITY PROBLEMS 3-1.
(Budomo Company) Cash (20,000 x 300) •
6,000,000
Ordinary Share •
Legal Expense/Professional Fees
6,000,000 90,000
Ordinary Share (250 x 300) Share Premium - Ordinary •
•
75,000 15,000
Land
1,000,000
Building Ordinary Share (12,500 x 300) Share Premium - Ordinary
2,950,000
Cash (6,500 x 380)
2,470,000
Ordinary Share (6,500 x 300) Share Premium - Ordinary 3-2.
a.
Cash (10,000 x 200) Ordinary Share (10,000 x 150) Share Premium - Ordinary Share Premium-Ordinary Cash
b.
Land (3,500 x 560) Ordinary Share (3,500 x 200) Share Premium – Ordinary
c.
Cash Preference Share Ordinary Share Share Premium – Preference Share Premium – Ordinary 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 Cash Subscribed Ordinary Share
3,750,000 200,000
1,950,000 520,000 2,000,000 1,500,000 500,000 60,000 60,000 1,960,000
18,000,000
700,000 1,260,000 2,500,000 10,000,000 2,000,000 3,500,000
450,000 150,000 500,000
Chapter 3 – Shareholders’ Equity
Share Premium – Ordinary e.
3-3.
Land Cash Donated Capital (Blazing Red Corporation) Shareholders’ Equity
100,000 5,000,000 40,000 4,960,000
Contributed Capital 10% Preference Share, cumulative and non-participating, P100 par 30,000 shares authorized; 12,000 shares issued and outstanding Ordinary Share, P10 par, 100,000 shares authorized, 30,000 shares issued, 29,000 shares outstanding Subscribed Ordinary Share, 4,500 shares Subscription Receivable – Ordinary Share Premium – Preference Share Premium –Ordinary Total contributed capital Retained Earnings Appropriated for Treasury Share P 15,000 Unappropriated 335,000 Treasury Shares, 1,000 ordinary shares, at cost Total Shareholders’ Equity
P1,200,000
300,000 45,000 (43,200) 275,000 77,000 P1,853,800
350,000 ( 15,000) 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 Issue of preference shares in exchange of equipment 1,475,000 Subscriptions for 4,500 ordinary shares at 16 72,000 Subscriptions receivable (60%) (43,200) Purchase of 1,000 treasury shares at 15 (15,000) Retained earnings Total shareholders’ equity, December 31, 2007 2,188,800 3-4.
(Millennium Company) (a) (1) Treasury Share Cash (2)
(3)
P
350,000 P
140,000
Cash Treasury Share Paid in Capital from Treasury Share
60,000
Cash Paid in Capital from Treasury Share
65,000 4,000
23
350,000
140,000 56,000 4,000
Chapter 3 – Shareholders’ Equity
(4)
Retained Earnings Treasury Share
1,000
Ordinary Share Share Premium Retained Earnings Treasury Share
10,000 3,000 1,000
70,000
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) 65,000 Net income for the year 180,000 Dividends 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 297,000 Retained Earnings 878,000 Total shareholders’ equity P2,165,000 3-5.
(Consuelo Enterprises, Inc.) (a) Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Retained Earnings Cash (4,000 x 22) (b)
(c)
80,000 6,400 1,600
Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Retained Earnings Cash (4,000 x 26)
80,000 6,400
Preference Share (4,000 x 20) Share Premium – Preference (4,000 x 1.60) Cash (4,000 x 20.50) PIC from Retirement of Preference
80,000 6,400
17,600
88,000
104,000
82,000 4,400
Average preference share premium per share 160,000 / 100,000 shares = 1.60 3-6.
(Concepcion Enterprises, Inc.) (a) Preference Share (3,000 x 20) Share Premium – Preference (3,000 x 1.60) Retained Earnings Ordinary Share (3,000 x 30) (b)
Preference Share (3,000 x 20) Share Premium – Preference (3,000 x
24
60,000 4,800 25,200 60,000 4,800
90,000
Chapter 3 – Shareholders’ Equity
1.60) Ordinary Share (1,500 x 30) PIC from Conversion of Preference 3-7.
(Red Heart Corporation) 06/15/07 Cash Ordinary Share Share Premium – Ordinary 09/30/07
Retained Earnings (80,000 x 5% x 110)
45,000 19,800 6,000,000
440,000 400,000
Share Dividends Distributable (4,000 x 100)
Share Premium – Ordinary 11/10/07
Share Dividends Distributable Ordinary Share
12/31/07
Income Summary Retained Earnings
03/31/08
Treasury Share (3,000 x 95) Cash Cash (1,500 x 120) Treasury Share (1,500 x 95) Paid in Capital from Treasury Shares
05/01/08
40,000 400,000 1,175,000 285,000 180,000
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) Ordinary Share (30,000 x 100) Share Premium – Ordinary
3,750,000
Cash (80,000 x 125)
10,000,00 0
10/31/08
Ordinary Share (80,000 x 100) Share Premium – Ordinary Retained Earnings Dividends Payable (192,500 x 5)
962,500
12/20/08
Ordinary Share (1,000 x 100) Share Premium – Ordinary (1,000 x 10)* Paid in Capital from Treasury Shares Treasury Share *Share premium per share 300,000/30,000 = 10
100,000 10,000
Income Summary Retained Earnings
1,175,000 285,000 142,500 37,500
8,000,000 2,000,000 962,500
15,000 95,000
1,200,000
25
400,000
3,000,000 750,000
12/10/08
12/31/08
5,000,000 1,000,000
1,200,000
Chapter 3 – Shareholders’ Equity
(b) Shareholders’ Equity
Contributed Capital Ordinary Share, P100 par, 300,000 shares authorized, 193,000 shares issued, 192,500 shares outstanding Share Premium –Ordinary Paid in Capital from Treasury Shares Total contributed capital
P19,300,00 0 4,080,000 52,500 P23,432,50 0
Retained Earnings Appropriated P
for
Treasury
Share
47,500 Unappropriated
1,375,000 Treasury Shares, 1,000 ordinary shares, at cost Total Shareholders’ Equity
3-8.
(47,500) P24,807,50 0
(Red Carpet Company) (a) Total lump sum price is P147,000 (1,500 x 98), allocated as follows: Securities Preference Warrant
3-9.
1,422,500
Market value 90 10
Allocation 147,000 x 90/100 147,000 x 10/100
Entry
Cash Preference Share (1,500 x 30) Share Premium – Preference Share Warrants Outstanding
(b)
Cash (600 x 40) Share Warrants Outstanding Ordinary Share Share Premium – Ordinary
Allocated Price 132,300 14,700 147,000
24,000 11,760
(Red Hot Company) (a) Value of each option Number of shares granted Total value assigned to share options Required service period Annual compensation expense (b)
Share Options Outstanding Cash (30,000 x 50) Ordinary Share (30,000 x 20) Share Premium - Ordinary
45,000 87,300 14,700
6,000 29,760 P8 x 30,000 P240,000 ÷ 3years P 80,000
240,000 1,500,000 600,000 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
12/31/08
Compensation Expense Share Options Outstanding (40,000 x 80) ÷ 4 years
800,000
Compensation Expense
800,000
26
800,000
Chapter 3 – Shareholders’ Equity
Share Options Outstanding (40,000 x 80) ÷ 4 years 01/01/09
Memo: 6,000 cancelled.
share
12/31/09
Compensation Expense
options
800,000 were 440,00 0
Share Options Outstanding Total accrued compensation expense (34,000 x 80) x 3/4 2,040,00 0 Less: previously accrued 1,600,00 0 Compensation expense440,000
440,000
2009
12/31/10
Compensation Expense Share Options Outstanding (34,000 x 80) / 4
06/30/11
Cash (34,000 x 430) Share Options Outstanding (34,000 x 80) Ordinary Shares (34,000 x 100) Share Premium – Ordinary
680,000
14,620,000 2,720,000 3,400,000 13,940,000
3-11. (Red Fox Corporation) (a) 2007 200 – 10 – 15 = 175 employees options=17,500 17,500 x 32 = 560,000; 560,000 x 1/3 2008
2009
(b) 01/01/07
12/31/07
12/31/09 2010
680,000
x
100 186,667
200–10–12–5=173 employees x 100 options=17,300 17,300 x 32 x 2/3 = 369,067; 369,067 – 186,667
182,400
200-10-12-8=170 employees x options=17,000 17,000 x 32 = 544,000; 544,000 – 369,067
174,933
100
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. Compensation Expense Share Options Outstanding Share Options Outstanding
186,667
Compensation Expense Share Options Outstanding
174,933
Cash (140 x 100 x 220)
27
186,667 182,400 174,933 3,080,000
Chapter 3 – Shareholders’ Equity
2011
Share Options Outstanding (14,000 x 32) Ordinary Share (14,000 x 200) Share Premium – Ordinary
448,000
Cash (10 x 100 x 220) Share Options Outstanding (1,000 x 32) Ordinary Share (1,000 x 200) Share Premium – Ordinary
220,000 32,000
Share Options Outstanding (2,000 x 32) PIC from Forfeited Share Options
64,000
2,800,000 728,000
200,000 10,400
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 Share Options Outstanding (10,000 x 20) / 3 years
66,667
12/31/08
Compensation Expense Share Options Outstanding (10,000 x 20) - 66,667
133,333
2009
Cash (10,000 x 120) Share Options Outstanding Ordinary Shares (10,000 x 100)
(b) 01/01/07
12/31/07
133,333
1,200,000 200,000 1,000,00 0 400,000
Share Premium-Ordinary
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. Compensation Expense 66,667 Share Options Outstanding 66,667 (10,000 x 20) / 3 years
12/31/08
Compensation Expense Share Options Outstanding
66,667
12/31/09
Compensation Expense Share Options Outstanding
66,666
2010
66,667
Cash (8,000 x 120) Share Options Outstanding (80% 200,000) Ordinary Shares (8,000 x 100) Share Premium-Ordinary
28
66,667 66,666
x
960,000 160,000 800,000 320,000
Chapter 3 – Shareholders’ Equity
Share Options Outstanding (20% 200,000) PIC from Forfeited Share Options (c)
x
40,000 40,000
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 PIC from Forfeited Share Options
200,000 200,000
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
12/31/08 2009
Compensation Expense Share Options Outstanding 400 x 80 x 22 = 704,000 704,000/2 = 352,000
352,000
Compensation Expense Share Options Outstanding
352,000
Cash (32,000 x 140) Share Options Outstanding Ordinary Share (32,000 x 100)
352,000
352,000 4,480,00 0 704,000 3,200,00 0 1,984,00 0
Share Premium – Ordinary (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 Share Options Outstanding 10,000 sh x 30 x 1/3
100,000
Compensation Expense Share Options Outstanding 15,000 sh x 30 x 2/3 300,000 Less: previously accrued 100,000 Compensation expense
200,000
12/31/08
29
100,000
200,000
Chapter 3 – Shareholders’ Equity
200,000
12/31/09
(b)
Compensation Expense Share Options Outstanding 18,000 sh x 30 x 3/3 540,000 Less: previously accrued 300,000 Compensation expense 240,000
240,000 240,000
Assuming that the chief executive officer resigned in 2008.
12/31/08
Share Options Outstanding Compensation Expense
100,000
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 Share Appreciation Rights Payable
66,667 66,667
10,000 x (140 -120) x 1/3
12/31/08
Compensation Expense Share Appreciation Rights Payable
133,333
Compensation Expense Share Appreciation Rights Payable 10,000 x (165 - 120) = 450,000 450,000 –200,000 = 250,000
250,000
10,000 x (150 - 120) x 2/3 = 200,000 200,000 – 66,667 = 133,333
12/31/09
133,333
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 Cash
450,000 450,000
(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 Compensation Expense Cash 10,000 x (172-120)
3-16. (Red Bull Corporation) 12/31/07 Compensation Expense Share Appreciation Rights Payable
30
450,000 70,000
89,333
520,000
89,333
Chapter 3 – Shareholders’ Equity
10,000 x 26.80 x 1/3 12/31/08
Compensation Expense Share Appreciation Rights Payable
118,667
Compensation Expense Share Appreciation Rights Payable
194,000
Share Appreciation Rights Payable Compensation Expense Cash 10,000 x (165-120)
394,000 56,000
116,667
10,000 x 31.20 x 2/3 = 208,000 208,000 – 83,333 = 118,667
12/31/09
10,000 x 39.40 = 394,000 394,000 –200,000 = 194,000
2010
3-17. (Emerald Company) (a) Fair value of the equity alternative 4,000 shares x 150 Fair value of debt component 3,600 shares x 158 Fair value of equity component (b)
568,800 31,200
2007: 3,600 x 160=576,000/3 31,200/3 Total compensation expense
192,000 10,400 202,400
2008: 3,600 x 165 x 2/3 = 396,000 396,000 – 192,000 31,200/3 Total compensation expense
204,000 10,400 214,400
2009: 3,600 x 168 = 604,800 604,800 – 396,000 31,200/3 Total compensation expense
208,800 10,400 219,200 18,900
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 Share Options Outstanding Share Appreciation Rights Payable
202,400
12/31/08
Compensation Expense Share Options Outstanding Share Appreciation Rights Payable
214,400
Compensation Expense Share Options Outstanding Share Appreciation Rights Payable
219,200
12/31/09
450,000
600,000
2010: 2,700 x (172-165) (c) 01/01/07
194,000
31
10,400 192,000 10,400 204,000 10,400 208,800
Chapter 3 – Shareholders’ Equity
12/31/09
12/31/10 12/31/10
Share Options Outstanding Share Appreciation Rights Payable Cash PIC from Unexercised Share Options 31,200 / 4 = 7,800 604,800 / 4 =151,200 Compensation Expense Share Appreciation Rights Payable
7,800 151,200
Share Options Outstanding Share Appreciation Rights Payable Ordinary Share (3,000 x 100) Share Premium – Ordinary 7,800 x 3 = 23,400 151,200 x 3 = 453,600 + 18,900
23,400 472,500
18,900
3-18. (Red Stone Company) (a) Retained Earnings ( 10,000 shares x P20) Share Dividends Distributable Share Premium
(b)
(c)
151,200 7,800
18,900
300,000 195,900
200,000
Share Dividends Distributable Ordinary Shares
100,000
Retained Earnings (30,000 x 10) Share Dividends Distributable
300,000
Share Dividends Distributable Ordinary Shares
300,000
100,000 100,000 100,000 300,000 300,000
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 20,000 P2,000,000
Number of shares outstanding Total par value (a)
Ordinary 250,000 P2,500,000
Preference share is non-cumulative and non-participating
2006 Current preference dividends (9% x 2,000,000) Excess (1,500,000 – 180,000) Dividend per share
Preference P 180,000
2007 Current preference dividends (9% x 2,000,000) Excess (2,400,000 – 180,000) Dividend per share
Preference P 180,000
2008 Current preference dividends (9% x 2,000,000) Excess (5,600,000 – 180,000) Dividend per share
Preference P 180,000
32
P9.00
P9.00
P9.00
Ordinary P1,320,000 P5.28 Ordinary
P2,220,000 P8.88 Ordinary P5,420,000 P21.68
Chapter 3 – Shareholders’ Equity
(b)
Preference share is cumulative and non-participating.
2006 Dividends in arrears (9% x 2,000,000 x 3) Excess (1,500,000 – 540,000) Dividend per share 2007 Current preference dividends (9% x 2,000,000) Excess (2,400,000 – 180,000) Dividend per share
Preference P 540,000
2008 Current preference dividends (9% x 2,000,000) Excess (5,600,000 – 180,000) Dividend per share
Preference P 180,000
Ordinary P
960,000 P3.84 Ordinary
P2.70 Preference P 180,000
P2,220,000 P8.88
P9.00
P9.00
(c) Preference share is cumulative and fully participating 2006 Preference Current dividends: 9% x 2,000,000 P 180,000 9% x 2,500,000 Excess: 1,095,000 x 2.0/4.5 486,667 1,095,000 x 2.5/4.5 Total dividends P 666,667 Dividend per share P33.33 2007 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: 1,995,000 x 2.0/4.5 1,995,000 x 2.5/4.5 Total dividends Dividend per share
Preference
2008 Current dividends: 9% x 2,000,000 9% x 2,500,000 Excess: 5,195,000 x 2.0/4.5 5,195,000 x 2.5/4.5 Total Dividend per share
Preference
P
Ordinary P5,420,000 P21.68
Ordinary P
608,333 P 833,333 P3.33 Ordinary
180,000 P 886,667
P1,066,667 P53.33
P
Ordinary
180,000
2,308,889 P2,488,889 P124.44
33
225,000
1,108,333 P1,333,333 P 5.33
P
3-20. (Mama Mia Company) Retained Earnings Share Dividends Distributable 50% x 100,000 x 10 = 500,000 Share Dividends Distributable Ordinary Shares Fractional Share Warrants Outstanding Fractional Share Warrants Outstanding
225,000
225,000 2,886,111 3,111,111 P 12.44
500,000 500,000 500,000 100,000
400,000 100,000
Chapter 3 – Shareholders’ Equity
Ordinary Share PIC from Unexercised Fractional Share Warrants
80,000 20,000
3-21. (Buenas Aires Corporation) Total SHE
Preferenc e Shares Issued
12/31/07Balances P16,500,000 2008 transactions: a) 4,000 x 280 (1,120,000) b) 8,000 x 75 (600,000) c) 2:1 share split d) 6,000 x 45 270,000 e) 4,000 x 46 f) 2,000 x 48 96,000 g) Net income 1,850,000 12/31/08 balances P16,996,000 *P600,000 x 6,000/16,000 = 225,000
(a) (b) (c) (d)
30,000
Ordinary Sha res Issu ed 100,000
Treasury Share Shares
Cost
(4,000) 100,000
26,000
8,000 8,000 (6,000) 4,000 (2,000)
(225,000)*
12,000
P375,000
200,000
P600,000
Total shareholders’ equity P16,996,000 Number of preference shares issued and outstanding 26,000 Number of ordinary shares issued 200,000 Number of ordinary shares outstanding(200,000 – 12,000) 188,000 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 Total shareholders’ equity as of December 31, 2008 6,000,000 + 8,000,000 + 3,060,000 (a) Par value of preference share Dividends in arrears (6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,620,000) Total equity Divide by the number of shares outstanding Book value per share (b) Liquidation value
(60,000 shares x P105)
Dividends in arrears (P6,000,000 x 9% x 3 yrs.) Excess to ordinary (17,060,000 – 7,920,000) Total equity
Preferenc e P6,000,00 0 1,620,000
P7,620,00 0 60,000 P 127 Preferenc e P6,300,00 0 1,620,000
P7,920,00
34
P 3,060,000 P17,060,000 Ordinary
P9,440,00 0 P9,440,00 0 800,000 P 11.80 Ordinary
P9,140,00 0 P9,140,00
Chapter 3 – Shareholders’ Equity
0 60,000 P132
Divide by the number of shares outstanding Book value per share 3-23. (Los Angeles Company) (a) Retained Earnings Accumulated Depreciation Current Assets Building Ordinary Share Ordinary Share
400,000 75,000 100,000 375,000 6,000,000
Share Premium Share Premium Retained Earnings
0 800,000 P11.425
4,000,00 0 2,000,00 0
1,400,000 1,400,00 0
(b) Current Assets P 400,000 Liabilities P1,000,000 Land 1,500,000 Ordinary Share Building 4,625,000 Share Premium Accumulated Depreciation ( 925,000) Total Assets P5,600,000 Total Equities
3-24. (Las Vegas, Inc.) Retained Earnings Inventory
4,000,000 600,000 P5,600,000
300,000 300,000
Land Buildings Machinery and Equipment Accum. Depreciation – Buildings Accum. Depreciation – Machinery & Equipment Revaluation Surplus
1,500,000 1,875,000 350,000
Revaluation Surplus Retained Earnings
2,300,000
875,000 150,000 3,700,00 0 2,300,00 0
35
