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DLSU-Dasmarinas Lecture Series
FINANCIAL ACCOUNTING & REPORTING
C. ESPENILLA  J. BINALUYO
SHAREHOLDERS’ EQUITY
THEORIES
1.
Total shareholders’ equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
2. A primary source of shareholders’ equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by shareholders.
d. both income retained by the corporation and contributions by holders.
3. Which of the following represents the total number of shares that a corporation may issue under the terms of its
charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
4. When treasury shares are purchased for more than the par value of the shares and the cost method is used to
account for treasury shares, what account(s) should be debited?
a. Treasury shares for the par value and share premium for the excess of the purchase price over the par
value.
b. share premium for the purchase price.
c. Treasury shares for the purchase price.
d. Treasury shares for the par value and retained earnings for the excess of the purchase price over the par
value.
5. In January 2021, Foler Corporation, a newly formed company, issued 10,000 shares of its P10 par ordinary shares
for P15 per share. On July 1, 2021, Foler Corporation reacquired 1,000 shares of its outstanding shares for P12 per
share. The acquisition of these treasury shares
a. decreased total shareholders’ equity.
b. increased total shareholders’ equity.
c. did not change total shareholders’ equity.
d. decreased the number of issued shares.
6. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
7. When treasury shares are purchased for more than the par value of the shares and the cost method is used to
account for treasury shares, what account(s) should be debited?
a. Treasury shares for the par value and share premium for the excess of the purchase price over the par
value.
b. share premium for the purchase price.
c. Treasury shares for the purchase price.
d. Treasury shares for the par value and retained earnings for the excess of the purchase price over the par
value.
8. At its date of incorporation, Solid, Inc. issued 100,000 shares of its P10 par ordinary shares at P11 per share. During
the current year, Solid acquired 20,000 ordinary shares at a price of P16 per share and accounted for them by the
cost method. Subsequently, these shares were reissued at a price of P12 per share. There have been no other
issuances or acquisitions of its own ordinary shares. What effect does the reissuance of the shares have on the
following accounts?
Retained Earnings
Share Premium
a.
Decrease
Decrease
b.
No effect
Decrease
c.
Decrease
No effect
d.
No effect
No effect
9. Contributed capital consists of the following major components?
a. legal and stated capital
b. retained earnings and legal capital
c. legal capital and additional paid-in capital
d. additional paid in capital and retained earnings
10. How should the excess of subscription price over the value of ordinary shares subscribed be recorded?
a. as share premium when the share capital is issued
b. as share premium when the subscription is received
c. as share premium when the subscription is collected
d. as retained earnings when the subscription is received
11. Treasury share was acquired for cash at a price in excess of its par value. The treasury share was subsequently
sold for cash at a price in excess of its acquisition price. Assuming that the cost method of accounting for treasury
share transactions is used, what is the effect on total shareholders’ equity?
Purchase of treasury share
Sale of treasury share
a.
Increase
Decrease
b.
Decrease
No effect
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c.
d.
Decrease
No effect
Increase
No effect
PROBLEMS
PROBLEM 1: (SFP PRESENTATION; SHARE ISSUE)
Determine the adjusted balance of the following based on the balances as of December 31, 2020 below:
1. Total additional paid-in capital
2. Total contributed capital
3. Total stockholders’ equity
Ordinary shares (see audit note a)
Preference shares (see audit note a)
Subscribed ordinary shares (see audit note b)
Subscribed preference shares (see audit note b)
Subscriptions receivable – Ordinary shares (see audit note b)
Subscriptions receivable – Preference shares (see audit note b)
Share premium – Ordinary shares
Share premium – Preference shares
Bonds payable, Due December 31, 2025
Premium on bonds payable
Share premium - Treasury share transactions
Additional paid-in capital - bond conversion option
Donated capital
Ordinary share options outstanding
Ordinary share warrants outstanding
Accumulated unrealized holding loss on financial asset at fair value
through other comprehensive income/losses
Accumulated revaluation surplus/reserves
Accumulated net remeasurement gain on accumulated benefits
obligation and plan assets
Accumulated foreign exchange translation reserves, credit
Accumulated hedging reserves, debit
Treasury shares (see audit note c)
Accumulated profits – appropriated for treasury shares
Ordinary share dividends payable (see audit note c)
Accumulated profits – appropriated for plant expansion
Accumulated profits - unappropriated
Accumulated profits – bonds payable repayment
?
?
?
?
?
?
?
?
2,000,000
200,000
240,000
120,000
150,000
180,000
25,000
130,000
600,000
90,000
300,000
265,000
?
?
290,000
800,000
1,650,000
500,000
Audit notes:
A. India Corporation issued 100,000 ordinary shares (no par value but with a P10 stated value) and
40,000 preference shares (P20 par value) for a lump-sum amount P2.8M. The prevailing fair values of
ordinary shares and preference shares on the date of issuance was at P15 per share and P25 per share,
respectively.
B. Additional 50,000 ordinary shares and 20,000 preference shares were subscribed at P18 per share and
P30 per share, respectively. 25% of the subscriptions price for both ordinary and preference shares
remained outstanding as of December 31, 2020. The receivable balance from ordinary shares were
collectible within the next 12 months, while the receivable balance from preference shares are noncurrent. None of the subscribed shares were fully paid by the end of the year.
C. There were no other transactions affecting the company’s issued and subscribed shares during the year
other than a reacquisition of 5,000 ordinary shares (as treasury shares) at P16 per share and the
declaration of 20% stock dividends on ordinary shares.
PROBLEM 2: (SHARE ISSUE; TREASURY SHARES; CONVERTIBLE PREFERENCE SHARES)
You were assigned to audit the shareholders’ equity of America Corp. for the year ended December 31, 2020.
America Corp. was incorporated in early 2019 when it was authorized by SEC to issue 1,000,000 ordinary
shares (P20 par) and 500,000 preference shares (P100 par). The following schedule reflects the company’s
capital balances as of December 31, 2019:
Ordinary shares, 120,000 shares issued at inception of operations in lieu of a
Land and Building with a total fair market value of P3M (40% attributed to the
Land.)
Preference shares, 40,000 shares issued in June 30, 2019 at P120 per share.
One preference share can be convertible to four ordinary shares
Retained earnings, which is the company’s net income in 2019
Total shareholders’ equity
P2,400,000
4,800,000
1,158,000
?
Your inquiries and investigation revealed the following transactions which occurred in 2020:
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a.
On January 5, the company reacquired 20,000 ordinary shares at P600,000 and held them as treasury
share.
b.
On March 1, the company issued 45,000 additional ordinary shares with P1M, 12% face value bonds for
a lump sum consideration amounting to P2,250,000. The bonds which pay interest every December 31
and shall mature on December 31, 2025, were currently quoted in the market at 110 (excluding
accrued interest) while each ordinary share is selling currently in the market at P30.
c.
On April 5, the company reissued 6,000 of the treasury shares reacquired on January 5 at P35 per
share.
d.
On July 20, the company reissued 9,000 of the treasury shares reacquired on January 5 in lieu of
professional services received from lawyers. The fair value of the services received was at P250,000
which is believed to be reflective of the prevailing fair value of the shares on that date.
e.
On August 1, the company retired and reverted to unissued basis 3,000 of the treasury shares
reacquired on January 5.
f.
On October 31, 8,000 of the preference shares were converted to ordinary shares.
g.
The company registered an adjusted net income in 2020 at P2,798,000.
Based on the information above, determine the adjusted balance of the following as of Dec. 31, 2020:
1. Ordinary Shares
2. Preference Shares
3. Share premium – Ordinary shares
4. Share premium – Preference shares
5. Share premium – Treasury shares
6. Additional Paid-in Capital
7. Contributed Capital
8. Stockholders’ Equity
PROBLEM 3: (SHARE ISSUE; SHARE WARRANTS AND SHARE RIGHTS)
You were assigned to audit the shareholders’ equity of Indonesia Inc. for the year ended December 31, 2020.
Indonesia Inc. was incorporated in early 2019 when it was authorized by SEC to issue 500,000 ordinary shares
(P50 par) and 1,000,000 preference shares (P20 par). The following schedule reflects the company’s capital
balances as of December 31, 2019:
Ordinary shares, 100,000 shares issued
Preference shares, 300,000 shares issued
Share premium – Ordinary shares
Share premium – Preference shares
Retained earnings, which is the company’s net income in 2019
Total shareholders’ equity
5,000,000
6,000,000
500,000
1,200,000
2,980,000
?
Your inquiries and investigation revealed the following transactions, which occurred in 2020:
a.
On March 1, the company received subscriptions for 50,000 ordinary shares at P70 per share from five
subscribers (10,000 shares each). The subscribers were required to pay 25% of the subscriptions price
in cash as down payment with balance to be settled after 3 months.
b.
June 1, the company received the balance from four subscribers on March 1. Shares were therefore
issued. The remaining subscriber defaulted on the balance. As per agreement, the company auctioned
out the defaulted shares and incurred P20,000 in auction expenses.
c.
On September 1, the highest bidder on the defaulted shares was selected and the amount due was
collected. The amount due includes a 12% annual interest on the subscriptions’ receivable balance
defaulted.
d.
On September 15, the company issued 20,000 preference shares for P840,000. Each preference share
was issued with five warrants. Two warrants can be exercised to purchase one ordinary share at P56
per share up to 2 years from date of issue. The preferences shares were currently selling in the market
at P34 per share while each warrant can be sold separately at P1.20 per warrant.
e.
On October 12, 60% of the warrants issued with preference shares were exercised.
f.
On October 31, the company issued at 12%, P2M bonds payable for a total lump sum of P2,380,000.
Attached to each P1,000 bonds are 20 warrants. The bonds, which pay interests annually every
December 31, are currently quoted at 104 (excluding accrued interest) without the warrant while the
warrant has a market value of P1.25 per warrant. One warrant can be exercised to purchase two
ordinary shares at P52 per share up to 2 years from date of issue.
g.
On November 4, 75% of the warrants issued with bonds were exercised.
h. On December 5, a debt restructuring agreement was entered with a debtor for an overdue loans
payable outstanding amounting to P800,000 with unpaid interest of P96,000. The debtor agreed as a
concession to accept 10,000 ordinary shares in full settlement of the loan. This agreement is outside the
normal/original credit term. Ordinary shares are currently selling at this time at P78 per share.
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i.
On December 20, the company reacquired 30,000 ordinary shares for a lump sum of P1,560,000 and
placed them as treasury.
j.
On December 30, the company issued stock rights to its ordinary shareholders. Ten share rights plus
P55 shall entitle the holder to acquire 1 ordinary share. Share rights are exercisable one year from date
of issuance.
k.
The company registered an adjusted net income in 2020 at P1,390,000.
Requirements:
1. What is the credit to the share premium account as a result of the share subscription in transaction a?
2. How much is the total amount collected from the highest bidder in transaction c?
3. What is the amount allocated to the warrants issued with preference shares in transaction d?
4. What is the credit to the share premium account as a result of the share issuance in transaction e?
5. What is the amount allocated to the warrants issued with bonds in transaction f?
6. What is the net effect to total APIC as a result of the share issuance in transaction g?
7. What is the gain or loss to be reported in the profit or loss as a result of the transaction h?
8. Assuming that all but 20,000 share rights issued in transaction i were exercised the following year, what is
the credit to share premium as a result of the share issuance?
PROBLEM 4: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)
On January 1, 2020 Pakistan Co. issued 1,000 share options to each of its 24 executive officers. The options
vest at the end of a three-year period. On the date of the grant, each share option had a fair value of P13.
Pakistan Co. initially estimates that all employees will stay until the end of the vesting period, thus all share
options shall become exercisable.
Four options together with P102 per share shall entitle to holder to acquire an ordinary share (P100 par value).
Options shall expire by the end of 2024.
Requirements:
1. The salaries expense for 2020 assuming that no change in estimate occurs by the end of the year:
2. The salaries expense in 2021 assuming that 2 officers actually left 2021 and that one more officer is
expected to leave by the end of the vesting period:
3. The salaries expenses in 2022 assuming that 3 more employees actually left in 2022:
4. The credit to the share premium account as a result of the exercise of 80% of the options in 2023:
PROBLEM 5: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)
On January 1, 2020, Brazil Corporation granted 100 share options each to its employees that will vest once its
share price (fair market value of shares) reaches P90. The actual share price is currently P56 on this date. The
company has currently 120 employees.
The employee is required to be employed with the company at the time the condition is met in order to receive
the options. Two options together with P75 per share entitles the holder to acquire 1 ordinary share (P50 par
value). The share options will expire in 5 years. On the date of grant, it is expected that the condition will be
satisfied in four years (estimated vesting period)
The company applies a binomial options pricing model, which takes into account the possibility that the share
price will equal/exceed P90 in four years (hence the share options become exercisable) and the possibility that
the share price will not equal/exceed P90 in four years (hence the option will be forfeited, that is reverted back
to equity). The company estimates that the market value of the stock option on the date of grant with this market
condition is P16 per option.
The following information are deemed relevant:
Dec.
Dec.
Dec.
Dec.
Date
31, 2020
31, 2021
31, 2022
31, 2023
Estimated total number of
employees who will leave the
company by the end of 2023
None
8
12
15(Actual)
Actual Share
Price at the end
of each year
65
78
82
90
Requirements:
1. What is the compensation expense to be recognized in 2020?
2. What is the compensation expense to be recognized in 2021?
3. What is the compensation expense to be recognized in 2022?
4. What is the compensation expense to be recognized in 2023?
5. Assuming that the actual share price amounted to P89 at end of 2023, what is the compensation expense to
be recognized in 2023?
6. Assuming that the actual share price amounted to P90 at the end of 2022, what is the compensation expense
in 2022?
PROBLEM 6: (OPTIONS/EQUITY-SETTLED SHARE BASED PAYMENTS)
On January 1, 2020, Nigeria Company granted 20,000 share options to 80 employees entitling them to acquire
P100 par value shares of the company at an exercise rate of two options plus P115 per share conditional upon
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the employees’ remaining in the company’s employ during the vesting period. The share options (250 options
per employee) shall vest at the end of 2020 if the company’s 2020 revenues reach P90M ; or at the end of 2021
if the company’s 2021 revenues reach P100M; or at the end of 2022 if the 2022 revenues reach P110M.
The market value of the option on the date of grant is P18. The company has a steady pattern of 25% increase
in revenues every year over the last 5 years and expects the same pattern during the vesting period.
The following information are deemed relevant:
Year
2020
2021
2022
Estimated total number of employees
who will stay by the end of the vesting period
70
74
76(Actual)
Actual
Revenue
P80M
90M
110M
Requirements:
1. What is the salaries expense to be recognized in 2020?
2. What is the salaries expense to be recognized in 2021?
3. What is the salaries expense to be recognized in 2022?
4. Assuming that the employees exercised all their options in 2023, what is the net increase in total
APIC as a result of the exercise?
PROBLEM 7: (STOCK APPRECIATION RIGHTS/CASH-SETTLED SHARE BASED PAYMENTS)
On January 1, 2020, Bangladesh Co. issued share appreciation rights (SARs) to its 50 employees. The SARs
will vest at the end of 3 years, provided the employees remain with the company and provided that production
on the third year (in 2022) increase by 100% (based on actual production in 2019 which was 100,000 units).
The number of share appreciation rights entitlement of each employee depending upon the actual increase in
production in 2022 is:
Increase in production in 2022
(based on 2019 production)
100% - 120%
121% - 150%
>150%
No. of SARs per
Employee
1,500
2,000
2,500
The company is projecting a 30% increase in annual production over the next five years considering its current
and planned production capacity.
The following information are deemed relevant:
Estimated total number of employees who
Year
Actual Production
will leave the company by the end of 2022
12/31/2020
130,000 units
0
12/31/2021
180,000 units
5
12/31/2022
255,000 units
15(Actual)
Fair market
value of SAR
P25
P30
P34
Requirements:
1. Salaries expense in 2020:
2. SAR payable balance as of December 31, 2021:
3. Salaries expense in 2022:
4. Entry to record the exercise of 60% of SARs in 2023 assuming that the fair value of SAR on the exercise date
is at P38:
5. Entry to record the remeasurement of the remaining SARS by the end of 2023 assuming that the fair value
of SARs at the end of 2023 is at P32 per SAR?
PROBLEM 8: (SHARE-BASED PAYMENTS WITH CASH ALTERNATIVE)
On January 1, 2020, Hotel Corp. grants its COO the right to choose either 10,000 ordinary shares or to receive
cash payment equal to 7,500 shares. These are to vest after rendition of two years of service. Par value of the
company’s share of stock is P100. The COO exercised his rights on September 30, 2022. The fair value
information follow:
FMV
Compound Instrument: 1/1/20
P120
Share of Stock: 1/1/20
130
12/31/20
136
12/31/21
144
9/30/22
150
Requirements:
1. What is the balance of SAR payable as of December 31, 2020 and 2021?
2. What is the balance of the ordinary share option outstanding as of December 31, 2020 and 2021?
3. What is the total salaries expense related to the share-based payments in 2020 and 2021?
4. Entry to record the exercise assuming the employee opted settlement in cash on September 30, 2022.
5. Entry to record the exercise assuming the employee opted to receive shares on September 30, 2022.
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