Chapter 7
Statement of Changes in Equity
Problem 7-1
Reliable Company provided the following information for the year ended December 31,
2019:
Retained earnings – unapppropriated, January 1
Overdepreciation of 2018 due to prior period error
Net income for current year
Retained earnings appropriated for treasury shares,
Original balance is P500,000 and reduced by
P200,000 by reason of reissue of the treasury shares
Retained earnings appropriated for contingencies,
Beginning balance P700,000 and increased by
Current appropriation of P100,000
Cash dividends paid to shareholders
Change from FIFO to weighted average – credit
200,000
100,000
1,300,000
300,000
800,000
500,000
150,000
Required:
Prepare a statement of retained earnings for 2019.
Answer:
Reliable Company
Statement of Retained Earnings
December 31, 2019
Retained earnings – January 1
Prior period error – overdepreciation in 2018
Change in accounting policy from FIFO to weighted
Average method – credit adjustment
Corrected beginning balance
Net income for 2019
Decrease in appropriation for treasury share
Total
Cash dividends paid to shareholders
Current appropriation for contingencies
Retained earnings – December 31
200,000
100,000
150,000
450,000
1,300,000
200,000
1,950,000
( 500,000)
( 100,000)
1,350,000
Problem 7-2
Gondola Company showed the following charges and credits to retained earnings for
2019:
Balance – January 1
Loss from fire
Goodwill impairment
Stock dividend
Loss on sale of equipment
Compensation of prior period not accrued
Loss on retirement of preference share at more than
Issue price
Share premium
Gain on early retirement of bonds payable
Gain on life insurance settlement
Correction of prior period error – credit
Net income for the year
Appropriated for treasury shares during the year
2,600,000
50,000
250,000
700,000
200,000
500,000
350,000
600,000
100,000
450,000
400,000
3,000,000
1,000,000
Required:
Prepare a statement of retained earnings for 2019.
Answer:
Gondola Company
Statement of Retained Earnings
December 31, 2019
Balance – January 1
Compensation of prior period not accrued
Correction of prior period error – credit
Adjusted beginning balance
Net income – adjusted
Stock dividend
Loss on retirement of preference share
Appropriated for treasury share
Balance – December 31
2,600,000
( 500,000)
400,000
2,500,000
3,050,000
( 700,000)
( 350,000)
(1,000,000)
3,500,000
*computation of net income – adjusted
Net income
Loss from fire
Goodwill impairment
Loss on sale of equipment
3,000,000
( 50,000)
( 250,000)
( 200,000)
Gain on retirement of bonds payable
Gain on life insurance settlement
Adjusted net income
100,000
450,000
3,050,000
Problem 7-3
Angola Company reported the following comparative statement of income and retained
earnings:
2020
2019
Sales
Cost of goods sold
6,000,000
(2,800,000)
4,500,000
(2,400,000)
Gross income
Expenses
3,200,000
(1,500,000)
2,100,000
(1,800,000)
Net income
1,700,000
300,000
Retained earnings – January 1
Net income
Dividends paid
1,150,000
1,700,000
( 500,000)
1,000,000
300,000
( 150,000)
Retained earnings – December 31
2,350,000
1,150,000
In 2020, the entity discovered that ending inventory for 2019 was understated by
P100,000.
In addition, the entity decided to change its method from double declining to straight
line. The differences in the two depreciation methods are as follows:
Double declining
Straight line
2020
2019
350,000
340,000
450,000
400,000
Expenses in the income statements include depreciation based on double declining
balance.
Required:
Prepare comparative statement of income and retained earnings.
Answer:
Angola Company
Comparative Income statement
December 31, 2020 and 2019
2020
6,000,000
(2,900,000)
3,100,000
(1,490,000)
1,610,000
Sales
Cost of goods sold
Gross income
Expenses
Net income
2019
4,500,000
(2,300,000)
2,200,000
(1,800,000)
400,000
Angola Company
Comparative statement of Retained Earnings
December 31, 2020 and 2019
Retained earnings – January
1
Net income
Dividends paid
Retained earnings – December 31
2020
1,250,000
1,610,000
( 500,000)
2,360,000
2019
1,000,000
400,000
( 150,000)
1,250,000
Problem 7-4
On January 1, 2019, Martha Company had 6,000,000 authorized ordinary shares of P5
par, of which 2,000,000 shares were issued and outstanding. The shareholders’ equity
on same date showed the following balances:
Ordinary share capital
Share premium
Retained earnings
10,000,000
7,500,000
3,250,000
On January 5, Martha issued at P54 per share, 100,000 shares of P50 par 9%
cumulative, convertible preference share capital. Martha had 250,000 authorized
preference shares.
On February 1, Martha reacquired 20,000 ordinary shares for P16 per share. Martha
uses the cost method.
On April 30, Martha had completed an additional public offering of 500,000 ordinary
shares with P5 par value. The shares were sold to the public at P12 per share.
On June 17, Martha declared a cash dividend of P1 per ordinary share, payable on July
10 to shareholders of record on July 1. On November 6, Martha sold 10,000 shares of
treasury for P21 per share.
On December 7, Martha declared the yearly cash dividend on preferences share,
payable on January 7, 2020, to shareholders of record on December 31,2019.
On January 17, 2020, before the books were closed for 2019, Martha became aware
that the ending inventory on December 31, 2018 was overstated by P200,000.
The after-tax effect on 2018 net income was P140,000. The appropriate correcting entry
was recorded.
After correction of the beginning inventory, net income for 2019 was P2,250,000.
Required:
Prepare a statement of changes in equity for the year ended December 31, 2019.
Answer:
Martha Company
Statement of Changes in Equity
December 31, 2019
Ordinary
Balance –
January 1
Issuance of
preference
Purchase of
treasury –
ordinary
Issuance of
ordinary
Dividend to
ordinary
Reissuance of
TS
Dividend to
preference
Overstatemen
t of 2018
ending
inventory
Net income
Balances –
December 31
Preference
10,000,000
5,000,000
Share
premium
7,500,000
RE
TS
3,250,000
400,000
320,000
2,500,000
3,500,000
(2,480,000)
50,000
(160,000)
(450,000)
(140,000)
12,500,000
5,000,000
11,450,000
2,250,000
2,430,000
160,000
Problem 7-5
Carr Company reported the following shareholders’ equity on January 1, 2019.
Preference share capital
Share premium – preference
Ordinary share capital
Share premium – ordinary
Retained earnings
Treasury shares – ordinary
1,800,000
90,000
5,150,000
3,500,000
4,000,000
270,000
On January 1, 2019, Carr had 100,000 authorized shares of P100 par, 10% cumulative
preference share capital and 3,000,000 authorized shares of no par ordinary share
capital with a stated value of P5 per share.
On January 10, 2019, Carr formally retired all the 30,000 ordinary shares of treasury.
The treasury shares had been acquired in the previous year and were originally issued
at P10 per share.
Carr owned 10,000 ordinary shares of Bush Company purchased several years ago for
P600,000. On February 15, Carr declared and paid a dividend in kind of one share of
bush for every hundred ordinary shares of Carr held by a shareholder of record on
February 28, 2019. The market price of bush share was P75 on February 15, 2017.
On December 12, 2019, Carr declared the yearly cash dividend on preference share,
payable on January 14, 2020, to shareholders of record on December 31, 2019.
On January 15, 2020, before the accounting records were closed for 2019, Carr
became aware that rent income for the year ended December 31, 2018 was overstated
by P500,000.
The after-tax effect on 2018 net income was P350,000. The appropriate correcting entry
was recorded.
After correcting the rent income, net income for 2019 was P2,600,000.
Required:
Prepare a statement of changes in equity for 2019.
Answer:
Balances –
January 1
Retirement
of TS
Property
dividend
Dividend to
preference
Error
Net income
Balances December
31
Carr Company
Statement of Changes in Equity
December 31, 2019
Ordinary
Preference
Share
RE
premium
5,150,000
1,800,000
3,590,000
4,000,000
(150,000)
TS
270,000
(120,000)
(270,000)
(750,000)
(180,000)
5,000,000
1,800,000
3,470,000
(350,000)
2,600,000
5,320,000
-
Problem 7-6
United Company reported the following unadjusted current assets and shareholders’
equity at year-end:
Cash
Financial assets at fair value, including cost of
P300,000 of United Company shares
Trade accounts receivable
Inventory
Share capital
Share premium
Retained earnings
600,000
1,000,000
3,500,000
1,500,000
5,000,000
2,000,000
500,000
What amount should be reported as total shareholders’ equity at year-end?
a.
b.
c.
d.
7,200,000
7,500,000
7,800,000
5,200,000
Answer:
Problem 7-7
Bronze Company provided the following information at year-end:
Share capital
Share premium
Cumulative translation adjustment – debit
Treasury shares, at cost
Retained earnings
Cumulative unrealized gain on option contract
Designated as cash flow hedge
6,000,000
3,500,000
2,000,000
700,000
1,500,000
600,000
What is the shareholders’ equity at year-end?
a.
b.
c.
d.
9,500,000
8,900,000
7,400,000
7,500,000
Answer:
Share capital
Share premium
Retained earnings
Cumulative unrealized gain on option contract
Designated as cash flow hedge
Cumulative translation adjustment – debit
Treasury shares, at cost
Total shareholders’ equity
6,000,000
3,500,000
1,500,000
600,000
(2,000,000)
(700,000)
8,900,000
Problem 7-8
Silver Company provided the following information at year-end:
Share premium
Accounts payable
Preference share capital, at par
Ordinary share capital, at par
Sales
Total expenses
Treasury shares – ordinary
Dividends
Retained earnings – beginning
1,000,000
1,100,000
2,000,000
3,000,000
10,000,000
7,800,000
500,000
700,000
1,000,000
What is the shareholders’ equity at year-end?
a.
b.
c.
d.
8,000,000
8,500,000
5,800,000
8,700,000
Answer:
Sales
Total expenses
Net income
Retained earnings – beginning
Dividends
Retained earnings – Ending
Preference share capital
Ordinary share capital
Share premium
Retained earnings
Treasury shares
Total shareholders’ equity
10,000,000
( 7,800,000)
2,200,000
1,000,000
( 700,000)
2,500,000
2,000,000
3,000,000
1,000,000
2,500,000
( 500,000)
8,000,000
Problem 7-9
Kalinga Company reported the following adjusted accounts balances at year-end:
Share capital
Share premium
Treasury shares, at cost
Actuarial loss on defined benefit plan
Retained earnings appropriated
Retained earnings appropriated
Revaluation surplus
Cumulative translation adjustment – credit
What amount should be reported as shareholders’ equity at year-end?
a.
b.
c.
d.
31,500,000
32,500,000
28,500,000
25,500,000
15,000,000
5,000,000
2,000,000
1,000,000
6,000,000
3,000,000
4,000,000
1,500,000
Answer:
Share capital
Share premium
Retained earnings appropriated
Retained earnings appropriated
Revaluation surplus
Cumulative translation adjustment – credit
Treasury shares, at cost
Actuarial loss on defined benefit plan
Total shareholders’ equity
15,000,000
5,000,000
6,000,000
3,000,000
4,000,000
1,500,000
(2,000,000)
(1,000,000)
31,500,000
Problem 7-10
1. In the statement of changes in equity, the effect of a change in accounting policy is
presented
a. Separately for each component of equity
b. In aggregate for total equity.
c. In total for the amount attribute to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of parent and the
noncontrolling interest
2. In the statement of changes in equity, the effect of the correction of a prior period
error is presented
a. Separately for each component of equity
b. In aggregate for total equity
c. In total for the amount attributable to owners of the parent and the noncontrolling
interest.
d. Separately for the total amount attributable to owners of the parent and the
noncontrolling interest.
3. Which of the following does not appear in the statement of retained earnings?
a.
b.
c.
d.
Net loss
Prior period error
Preference share dividend
Other comprehensive income
4. Which of the following would appear first in a statement of retained earnings?
a.
b.
c.
d.
Net income
Prior period error
Chas dividend
Share dividend
5. Corrections of errors in prior period are included in
a. Retained earnings
b. Other comprehensive income
c. Net income
d. Share premium