BA 99.2
4 May 2020
Answer the following Exercises, Problems, and Short Case. Write your answers in
your SOLUTION NOTEBOOK. Refer to Item No. 1 of the Revised Policy for
guidelines.
Textbook: Financial Accounting IFRS edition (2nd ed.), 2018 by Stice et al.
E 12-6
Recording and Reporting Treasury Stock Transactions
P 12-4
Dividend calculations under different preferred stock scenarios
P 12-6
Dividend pay-out ratio
P 12-7
Dividends, stock splits, and equity section
P 12-8
Stock transactions and analysis - Comprehensive
P 12-10
Stock transactions and equity section - Comprehensive
P 12-15
Equity Calculations from comparative balances & list of transactions
CASE No. 1
LaChance Corporation is a Philippine corporation engaged in the business of
selling fishing equipment and paraphernalia. The corporation started its operations
in 2017. As of December 31, 2019, the equity section of its Statement of Financial
Position shows the following information:
Share Capital-Ordinary, P 15 par, 1,000,000 shares
authorized, 800,000 shares issued and outstanding
Share Capital-Preference, 10% P 50 par, 500,000 shares
authorized, 350,000 shares issued and outstanding
Share Premium-Ordinary
Share Premium-Preference
Retained Earnings
Total Stockholders’ Equity
P 12,000,000
17,500,000
5,000,000
7,500,000
11,150,000
P 53,150,000
At present, all operations are focused on catering the demands of the local fishing
industry; though in the next three years, LaChance Corporation has an existing
plan to set up a sales distribution center in Taiwan, and to further diversify its
product offerings by upgrading its manufacturing facilities. In the next 10-15 years,
LaChance aims to establish satellite offices and sales distribution centers in at least
five countries within the Asian region.
On March 31, 2020, LaChance Corporation informed all of its existing shareholders
of its plan to issue 10,000 additional ordinary shares to help finance its short-run
development programs. As of March 31, 2020, LaChance Corporation’s ordinary
shares are selling at P 45, while the preferred shares are selling at P 75.
Mr. Chris Gordie is a shareholder of LaChance Corporation and currently owns
96,000 ordinary shares, and 35,000 preferred shares of the corporation.
Questions:
a. Assuming all the 800,000 ordinary shares were issued on the same date
sometime in 2017, how much is the issue price per ordinary share?
b. From date of issue up to March 31, 2020, compute the percentage change
(increase or decrease) in the trading price of an ordinary share. Given the
nature of LaChance Corporation and the recent socio-economic conditions
in the Philippines (2017-2020), discuss what may have caused the changes
in the price of the corporation’s share of stock.
c. What is pre-emptive right? If the corporation will issue 100,000 additional
shares, how many shares will be initially offered to Mr. Chris Gordie?
d. Is it possible for LaChance Corporation to issue 50,000 more ordinary
shares in the next 10-15 years to finance its long-term expansion plans?
Discuss.
e. If you are a risk-averse investor (reluctant to take risks), which class of stock
will you prefer to buy—common or preferred? Why?
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