Answers - Chapter 3 Vol 2 Rvsed

CHAPTER 3
SHAREHOLDERS’ 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 1,000,000
Building 2,950,000
Ordinary Share (12,500 x 300) 3,750,000
 Cash (6,500 x 380) 2,470,000

Ordinary Share (6,500 x 300) 1,950,000
3-2.
a. Cash (10,000 x 200) 2,000,000
Ordinary Share (10,000 x 150) 1,500,000
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
Share Premium – Preference 2,000,000
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 450,000

Cash 150,000
Subscribed Ordinary Share 500,000
Share Premium – Ordinary 100,000
e. Land 5,000,000
Cash 40,000
Chapter 3 – Shareholders’ Equity
Donated Capital 4,960,000

3-3. (Blazing Red Corporation)
Shareholders’ Equity
Contributed 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 P1,853,800
Retained 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 350,000

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 350,000
Total 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 65,000

Paid in Capital from Treasury Share 4,000
Retained Earnings 1,000
(4) Ordinary Share 10,000

Share Premium 3,000
(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
23
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
Total 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
Cash (4,000 x 22) 88,000
(b) Preference Share (4,000 x 20) 80,000

Cash (4,000 x 26) 104,000
(c) Preference Share (4,000 x 20) 80,000

Cash (4,000 x 20.50) 82,000
PIC from Retirement of Preference 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) 60,000
Ordinary Share (3,000 x 30) 90,000
(b) Preference Share (3,000 x 20) 60,000

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
09/30/07 Retained Earnings (80,000 x 5% x 110) 440,000

Share Dividends Distributable (4,000 x 100) 400,000
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
24
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
10/31/08 Cash (80,000 x 125) 10,000,000

Ordinary Share (80,000 x 100) 8,000,000
12/10/08 Retained Earnings 962,500

Dividends Payable (192,500 x 5) 962,500
12/20/08 Ordinary Share (1,000 x 100) 100,000

Share Premium – Ordinary (1,000 x 10)* 10,000
*Share premium per share
300,000/30,000 = 10
12/31/08 Income Summary 1,200,000

(b)
Shareholders’ Equity
Contributed Capital
Ordinary Share, P100 par, 300,000 shares authorized, 193,000 shares
issued, 192,500 shares outstanding P19,300,000
Share Premium –Ordinary 4,080,000
Total contributed capital P23,432,500
Retained 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 P24,807,500
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 Price

Preference 90 147,000 x 90/100 132,300
Warrant 10 147,000 x 10/100 14,700
Entry Cash 147,000
Preference Share (1,500 x 30) 45,000
25
Share Premium – Preference 87,300

Share Warrants Outstanding 14,700
(b) Cash (600 x 40) 24,000

Share Warrants Outstanding 11,760
3-9. (Red Hot Company)

(a) Value of each option P8
Number of shares granted x 30,000
Total value assigned to share options P240,000
Required service period  3years
Annual compensation expense P 80,000
(b) Share Options Outstanding 240,000
Cash (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
(40,000 x 80)  4 years
01/01/09 Memo: 6,000 share options were cancelled.
Total accrued compensation expense
(34,000 x 80) x 3/4 2,040,000
Less: previously accrued 1,600,000
Compensation expense-2009 440,000
(34,000 x 80) / 4
06/30/11 Cash (34,000 x 430) 14,620,000

Share Options Outstanding (34,000 x 80) 2,720,000
Ordinary Shares (34,000 x 100) 3,400,000
3-11. (Red Fox Corporation)

(a)
2007 200 – 10 – 15 = 175 employees x 100 options=17,500
17,500 x 32 = 560,000; 560,000 x 1/3 186,667
26
2008 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
2009 200-10-12-8=170 employees x 100 options=17,000

17,000 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.


2010 Cash (140 x 100 x 220) 3,080,000

Share Options Outstanding (14,000 x 32) 448,000
Ordinary Share (14,000 x 200) 2,800,000
2011 Cash (10 x 100 x 220) 220,000

Ordinary Share (1,000 x 200) 200,000

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.

(10,000 x 20) / 3 years

(10,000 x 20) - 66,667
2009 Cash (10,000 x 120) 1,200,000

Ordinary Shares (10,000 x 100) 1,000,000
(b)
27
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.
(10,000 x 20) / 3 years


2010 Cash (8,000 x 120) 960,000

Share Options Outstanding (80% x 200,000) 160,000
Ordinary Shares (8,000 x 100) 800,000
Share Options Outstanding (20% x 200,000) 40,000

(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
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.

400 x 80 x 22 = 704,000
704,000/2 = 352,000

2009 Cash (32,000 x 140) 4,480,000

Ordinary Share (32,000 x 100) 3,200,000
(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
28
and expire on December 31, 2011. The number of share options will be based
on the level of sales for 2009.

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

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.
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)
Share Appreciation Rights Payable 66,667
10,000 x (140 -120) x 1/3

10,000 x (150 - 120) x 2/3 = 200,000
200,000 – 66,667 = 133,333

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
29
(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 450,000
Cash 10,000 x (172-120) 520,000
3-16. (Red Bull Corporation)

10,000 x 26.80 x 1/3

10,000 x 31.20 x 2/3 = 208,000
208,000 – 83,333 = 118,667

10,000 x 39.40 = 394,000
394,000 –200,000 = 194,000
2010 Share Appreciation Rights Payable 394,000

Cash 10,000 x (165-120) 450,000
3-17. (Emerald Company)

(a) Fair value of the equity alternative
4,000 shares x 150 600,000
Fair value of debt component
3,600 shares x 158 568,800
Fair 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
2009: 3,600 x 168 = 604,800

604,800 – 396,000 208,800
31,200/3 10,400
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.
30




Cash 151,200
PIC from Unexercised Share Options 7,800
31,200 / 4 = 7,800
604,800 / 4 =151,200

Ordinary Share (3,000 x 100) 300,000
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

Ordinary Shares 100,000
(b) Retained Earnings (30,000 x 10) 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 Ordinary
Number of shares outstanding 20,000 250,000
Total par value P2,000,000 P2,500,000
(a) Preference share is non-cumulative and non-participating

2006 Preference Ordinary
Current preference dividends (9% x 2,000,000) P 180,000
Excess (1,500,000 – 180,000) P1,320,000
31
Dividend per share P9.00 P5.28

Excess (2,400,000 – 180,000) P2,220,000

Excess (5,600,000 – 180,000) P5,420,000
(b) Preference share is cumulative and non-participating.

Dividends in arrears (9% x 2,000,000 x 3) P 540,000
Excess (1,500,000 – 540,000) P 960,000
Excess (2,400,000 – 180,000) P2,220,000

Excess (5,600,000 – 180,000) P5,420,000
(c) Preference share is cumulative and fully participating

Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
1,095,000 x 2.0/4.5 486,667
1,095,000 x 2.5/4.5 608,333
Total dividends P 666,667 P 833,333

Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
1,995,000 x 2.0/4.5 886,667
1,995,000 x 2.5/4.5 1,108,333
Total dividends P1,066,667 P1,333,333
Dividend per share P53.33 P 5.33

Current dividends:
9% x 2,000,000 P 180,000
9% x 2,500,000 P 225,000
Excess:
32
5,195,000 x 2.0/4.5 2,308,889

5,195,000 x 2.5/4.5 2,886,111
Total P2,488,889 3,111,111
Dividend per share P124.44 P 12.44
3-20. (Mama Mia Company)

50% x 100,000 x 10 = 500,000
Fractional Share Warrants Outstanding 100,000
Fractional Share Warrants Outstanding 100,000
PIC from Unexercised Fractional Share Warrants 20,000
3-21. (Buenas Aires Corporation)

Preference Ordinary Treasury Share
Shares Shares
Total SHE Issued Issued Shares Cost
12/31/07Balances P16,500,000 30,000 100,000
2008 transactions:
a) 4,000 x 280 (1,120,000) (4,000)
b) 8,000 x 75 (600,000) 8,000 P600,000
c) 2:1 share split 100,000 8,000
d) 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 1,850,000
12/31/08 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 3,060,000
Total 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 60,000 800,000
Book value per share P 127 P 11.80
(b) Preference Ordinary

Liquidation value (60,000 shares x P105) P6,300,000
33
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 60,000 800,000
Book value per share P132 P11.425
3-23. (Los Angeles Company)

(a) Retained Earnings 400,000
Accumulated Depreciation 75,000
Current Assets 100,000
Building 375,000

Share Premium 2,000,000
Share Premium 1,400,000
(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.)

Inventory 300,000
Land 1,500,000
Buildings 1,875,000
Machinery 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

34

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CHAPTER 3

3-1. (Budomo Company)

 Legal Expense/Professional Fees 90,000

 Cash (6,500 x 380) 2,470,000

Share Premium-Ordinary 60,000

b. Land (3,500 x 560) 1,960,000

d. Subscription Receivable 450,000

Donated Capital 4,960,000

Issue of 30,000 ordinary shares P 350,000

3-4. (Millennium Company)

(2) Cash 60,000

(3) Cash 65,000

(4) Ordinary Share 10,000

(b) Total shareholders’ equity, December 31, 2006 P2,200,000

Dividends declared (200,000)

3-5. (Consuelo Enterprises, Inc.)

(b) Preference Share (4,000 x 20) 80,000

(c) Preference Share (4,000 x 20) 80,000

Average preference share premium per share

3-6. (Concepcion Enterprises, Inc.)

(b) Preference Share (3,000 x 20) 60,000

3-7. (Red Heart Corporation)

09/30/07 Retained Earnings (80,000 x 5% x 110) 440,000

11/10/07 Share Dividends Distributable 400,000

12/31/07 Income Summary 1,175,000

03/31/08 Treasury Share (3,000 x 95) 285,000

08/10/08 Issued 82,500 rights to shareholders

09/15/08 Cash (30,000 x 125) 3,750,000

10/31/08 Cash (80,000 x 125) 10,000,000

12/10/08 Retained Earnings 962,500

12/20/08 Ordinary Share (1,000 x 100) 100,000

12/31/08 Income Summary 1,200,000

3-8. (Red Carpet Company)

Securities Market value Allocation Allocated Price

Share Premium – Preference 87,300

(b) Cash (600 x 40) 24,000

3-9. (Red Hot Company)

3-10. (Fire Red Company)

06/30/11 Cash (34,000 x 430) 14,620,000

3-11. (Red Fox Corporation)

2008 200–10–12–5=173 employees x 100 options=17,300

2009 200-10-12-8=170 employees x 100 options=17,000

12/31/07 Compensation Expense 186,667

12/31/09 Compensation Expense 174,933

2010 Cash (140 x 100 x 220) 3,080,000

2011 Cash (10 x 100 x 220) 220,000

Share Options Outstanding (2,000 x 32) 64,000

3-12. (Cherry Company)

12/31/07 Compensation Expense 66,667

12/31/08 Compensation Expense 133,333

2009 Cash (10,000 x 120) 1,200,000

12/31/08 Compensation Expense 66,667

12/31/09 Compensation Expense 66,666

2010 Cash (8,000 x 120) 960,000

Share Options Outstanding (20% x 200,000) 40,000

3-13. (Panda Company)

12/31/07 Compensation Expense 352,000

12/31/08 Compensation Expense 352,000

2009 Cash (32,000 x 140) 4,480,000

(b) The full amount of P704,000 is recognized as

3-14. (Paul Company)

12/31/07 Compensation Expense 100,000

12/31/08 Compensation Expense 200,000