ACT1106

MIDTERM EXAM NO. 3

During the current year, Pau Company issued for Php110 per share, 15,000 convertible preference shares of
Php100 par value.

One preference share may be converted into three ordinary shares of Php25 par value at the option of the preference
shareholder.

At year-end, all of the preference shares were converted into ordinary shares. The market value of the ordinary share
at the conversion date was Php40.

1. What amount should be credited to ordinary share capital as a result of conversion? 1,125,000
2. What amount should be credited to share premium as a result of conversion? 525,000
Issuance of Convertible Preference Shares
Cash (15,000x 110) 1,650,000
Convertible Preference shares 1,500,000
Share premium-Preference 150,000

Conversion of Convertible Preference Shares

Convertible Preference Shares 1,500,000
Share premium-Preference 150,000
Ordinary Share Capital [(15,000 x 3) x Php25] 1,125,000
Share premium-ordinary 525,000

At the beginning of current year, Pau Company reported the following shareholders’ equity:

Share capital, Php10 par, outstanding 225,000 shares 2,250,000

Share premium 900,000
Retained earnings 2,190,000
During the current year, the entity had the following share transactions:
 Acquired 6,000 treasury shares for Php270,000.
 Sold 3,600 treasury shares at Php50 a share.
 Sold the remaining treasury shares at Php41 per share.

3. What is the total amount of share premium at year-end?

Treasury shares 270,000

Cash 270,000
270,000/6,000 = Php45.00

Cash (3,600 x Php50) 180,000

Treasury shares (3,600 x Php45) 162,000
Share premium- TS 18,000

Cash (2,400 x Php41) 98,400

Share premium-TS 9,600
Treasury Shares (2,400 x Php45) 108,000

Share Premium
----------------------------------------------------------------------------------------------------
: 900,000
: 18,000
9,600 :
-----------------------------------------------------------------------------------------------------
: 908,400
=======
During the current year, Pau Company received a donation of 2,000 shares with Php50 par value from a shareholder.
On that date, the share market value was Php350. The shares were originally issued for Php250 per share.

4. What is the decrease in shareholders’ equity as a result of the donation? 0

Donated shares not retired are recorded by means of a memorandum only and therefore do not affect the total
shareholders’ equity.

Donated shares not retired are actually treasury shares without acquisition cost. However, the reissuance of donated
shares is credited to share premium.
The Shareholders of Alexis Company approved a two-for-one share split and an increase in authorized shares from
100,000 shares with Php20 par value to 200,000 shares within Php10 par value.

The shareholders’ equity accounts immediately before the split shares were share capital Php1,000,000, share
premium Php150,000, and retained earnings Php1,350,000.
5. What is the balance of the share premium after the share split is effected? 150,000
6. What is the balance of the retained earnings after the share split is effected? 1,350,000
Share split does not affect the elements of shareholder’s’ equity. Only the number of shares and par value
are affected. Share split up increases the number of shares but decreases the par value.
On January 1, 2027, Pau Company had 125,000 shares issued which included 25,000 shares held s treasury.

January 1 to October 13 _ 13,000 treasury shares were distributed to officers as part of a share compensation plan.

November 1_ A 3 for 1 share split took effect.

December 1_ The entity purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were
not retired.

7. On December 31, 2027, how many shares were issued? 375,000

8. On December 31, 2027, how many shares were outstanding? 334,000

Issued shares after split (125,000x 3) 375,000

Old treasury shares (12,000 x 3) ( 36,000)
New treasury shares ( 5,000)
-----------
Outstanding shares 334,000
======

Pau Company issue 100,000 ordinary shares. Of these, 5,000 shares were held as treasury on January 1, 2027.

During the current year, the entity reported the following transactions:
May 1 1,000 shares of treasury were sold.

Aug 1 10,000 unissued shares were sold.

Nov 15 A 2-for-1 share split took effect.

9. On December 31, 2027, how many shares were issued? 220,000 shares
10. On December 31, 2027, how many shares were outstanding? 212,000 shares

Original shares issued 100,000

New shares issued 10,000
-----------
Total shares issued before split 110,000
======
Shares issued after split (110,000x2) 220,000
Treasury shares after split (4,000x2) ( 8,000)
----------
Outstanding ordinary shares 212,000
======

At the beginning of the current year, Alexis Company issued 10,000 ordinary shares of Php20 par value and 20,000
convertible preference shares of Php20 par value for a total of Php800,000.

At this date, the ordinary share was selling for Php36 and the convertible preference share was selling for Php27.

11. What amount of the proceeds should be allocated to the preference shares? 480,000 shares
12. What amount of the proceeds should be allocated to the ordinary shares? 320,000 shares
13. What is the share premium from the issuance of preference shares? 80,000 shares
14. What is the share premium from the issuance of ordinary shares? 120,000 shares
Market Value Fraction Allocated Proceeds
Ordinary shares (10,000 x 360 360,000 36/90 320,000
Preference shares (20,000 x 27) 540,000 54/90 480,000
900,000 800,000
Proceeds from preference shares 480,000
Par value of preference shares (20,000 x 20) 400,000
-----------
 Share premium-preference shares 80,000
=======

Proceeds from ordinary shares 320,000

Par value of ordinary shares (10,000 x 20) 200,000
-----------
Share premium-ordinary shares 120,000
======

At the beginning of the current year, Cam Company, a closely-held entity, issued 6% bonds with a maturity value of
Php6,000,000, together with 10,000 ordinary shares of Php50 par value; for a combined cash amount of
Php11,000,000.

If issued separately, the bonds would have sold for Php4,000,000 on an 8% yield to maturity basis.

15. What amount of the proceeds should be allocated to the ordinary shares? 7,000,000
16. What amount should be reported for share premium on the issuance of the ordinary shares? 6,500,000

Cash received 11,000,000

Market value of bonds payable ( 4,000,000)
---------------
Residual amount allocated to ordinary shares 7,000,000
Par value of ordinary shares (10,000 x 50) ( 500,000)
-----------------
Share premium 6,500,000
=========
Journal entry:
Cash 11,000,000
Discount on bonds payable 2,000,000
Bonds payable 6,000,000
Share capital 500,000
Share premium 6,500,000

During the current year, Pau Company issued for Php105 per share, 8,000 convertible preference shares of Php100
par value.

One preference share can be converted into three ordinary shares of Php25 par value at the option of the
preference shareholder.

At year-end, all of the preference shares were converted into ordinary shares. The market value of the ordinary
share at the conversion date was Php40.
17. What amount should be credited to ordinary share capital as a result of conversion? Php600,000
18. What amount should be credited to share premium as a result of conversion? Php240,000

To record the issuance of preference shares:

Cash (8,000 x 105) 840,000
Preference share capital (8,000 x 100) 800,000
Share premium-preference (8,000 x 5) 40,000

To record the conversion of preference shares into ordinary shares:

Preference shares capital 800,000
Share premium-preference 40,000
Ordinary share capital (24,000x25) 600,000
Share premium-Ordinary 240,000
(8,000 Preference shares x 3 = 24,000 ordinary shares)

Mari Company, a real estate developer , is owned by five (5) founding shareholders.

On December 1, 2027, the entity declared a property dividend of a “one-bedroom flat” for each shareholder. The
property dividend is payable on January 31, 2028.

On December 1, 2017, the carrying amount of a one-bedroom flat is 1,000,000 and the fair value is Php1,500,000.

However, the fair value is Php1,800,000 on December 31, 2027 and Php1,900,000 on January 31, 2028.

19. What is the dividend payable on December 1, 2027? 1,500,000 x 5 =7,500,000

Retained earnings 7,500,000
 Property dividends payable 7,500,000
20. What is the dividend payable on December 31, 2027? 1,800,000 x 5 = 9,000,000
Retained earnings 1,500,000
Property Dividends pyable 1,500,000
21. What amount of gain is included in profit or loss as a result of the settlement of the property dividend on
January 31, 2028? 4,500,000
Retained earnings 500,000
Property dividends payable 500,000

Property dividends payable 9,500,000

Inventory (1,000,000 x 5) 5,000,000
Gain on distribution of property
Dividends payable 4,500,000

Property Dividends Payable

------------------------------------------------------------------------------
: 7,500,000 Dec 1, 2027
: 1,500,000 Dec 31, 2027
: 500,000 Jan 31, 2028
Dist 9,500,000 :
======================================

At the beginning of the current year, Pau Company declared a 10% share dividend. The market price of the entity’s
30,000 outstanding shares of Php20 par value was Php90 per share on that date.

The share dividend was distributed on July 1 when the market price was Php100 per share.

22. What amount should be credited to share premium for the share dividend? 210,000

Market price on date of declaration

(10% x 30,000 = 3,000 share x Php90) 270,000
Par value of shares issued as share dividend
(3,000 x Php20) 60,000
-----------
Share premium 210,000
=======
To record the declaration of the share dividend on January 1:
Retained earnings 270,000
Share dividend payable 60,000
Share premium 210,000

To record the issuance of the stock dividend on July 1:

Share dividend payable 60,000
Share capital 60,000

If the share dividend is less than 20%, the market value of the share on the date of declaration is debited to retained
earnings.

However, if market value is lower than par or stated value, the par or stated value is charged to retained earnings.

At the current year-end, Pau Company issued 4,000 ordinary shares of Php100 par value in connection with a share
dividend. The market value per share on the date of declaration was Php150.

The shareholders’ equity accounts immediately before issuance of the share dividend were:

Ordinary share capital Php100 par, 50,000 shares

authorized, 20,000 shares outstanding 2,000,000
Share premium 3,000,000
Retained earnings 1,500,000
23. What amount should be reported as retained earnings immediately after the share dividend? 1,100,000

4,000 shares/20,000 = 20% share dividend

Retained earnings before share dividend Php 1,500,000

Share dividend (4,000 x 100) ( 400,000)
---------------------------
Retained earnings after share dividend Php 1,100,000
 ===============
If the share dividends is 20% or more, the par or stated value is debited to retained earnings.
To record the declaration of the share dividend:
Retained earnings 400,000
Share dividend payable 400,000

To record the issuance of the share dividend

Retained earnings 400,000
Ordinary share capital 400,000

Pau Company declared a 5% share dividend on 100,000 issued and outstanding shares of Php20 par value which
had a fair market value of Php50 per share before the share dividend was declared. This share dividend was
distributed 60 days after the declaration date.

24. What is the increase in current liabilities as a result of the share dividend declaration? O or none

Journal entry
Retained earnings (5,000 x 50) 250,000
Share dividend payable (5,000 x 20) 100,000
Share premium (5,000 x 30) 150,000

The share dividend payable is not a current liability but shown as an addition to share capital under
shareholders’ equity.

At the beginning of the current year, Pau Company had retained earnings of Php4,000,000. During the year, the
entity reported net income of Php2,000,000, sold treasury shares at a “gain” of Php720,000, declared cash dividends
of Php60,000 shares with Php10 par value when the market

Mari Company reported the following shareholders’ equity at the current year-end:

Share capital, par Php25, authorized 150,000 shares, 55,000

shares issued of which 5,000 shares are in treasury 1,375,000
Retained earnings 2,000,000
Treasury shares at cost 150,000
A 100% share dividend was declared and all of the treasury shares were issued as share dividend and the balance
from the unissued shares. The share has market value of Php40.

25. What amount of retained earnings should be capitalized? 1,275,000

Share issued 55,000

Treasury shares ( 5,000)
----------
Outstanding 50,000
=====

Share dividend (100% x 50,000) 50,000

=====

Treasury shares at cost Php 150,000

Unissued shares as share dividend at par
(45,000 x Php25) 1,125,000
------------------------
Retained earnings to be capitalized Php 1,275,000
==============
The treasury shares may be reissued as dividends, in which case the cost of the shares should be
charged to retained earnings.

Bulacan Company had the following shareholders’ equity on January 1, 2027:

Preference share capital, Php100 par, 10% cumulative 2,000,000

Ordinary share capital, no par, Php5 stated value 3,150,000
Share premium 3,500,000
Retained earnings 4,000,000
Treasury ordinary shares 400,000
 On January 15, 2027, the entity formally retired all the 30,000 treasury shares.

The treasury shares were originally issued at Php10 per share.

  The entity owned 10,000 shares of Marcos Company purchased for Php800,000. The Marcos shares
were included in noncurrent equity securities.

On December 31, 2027, the entity declared a dividend in kind of one share of Marcos for every hundred
ordinary shares held by a shareholder.

The fair value of the Marcos share is Php90 on December 31, 2027. The dividend in kind was
distributed on march 15, 2028 when the fair value of Marcos share is Php95.

 On December 31, 2027, the entity declared the yearly cash dividend on preference share, payable on
January 15, 2027.

 On January 15, 2028, before the accounting records were closed for 2027, the entity became aware
that rent income for the year ended December 31, 2026 was overstated by Php1,000,000.

The after-tax effect on 2026 net income was Php700,000.

 After correcting the rent income, net income for 2027 was Php3,000,000.

26. What amount should be charged to retained earnings for the retirement of treasury shares on January 15,
2027?
a. Php100,000
b. Php400,000
c. Php250,000
d. Php0
27. What amount should be charged to retained earnings for the property dividend on ordinary shares on
December 31, 2027?
a. Php950,000
b. Php900,000
c. Php800,000
d. Php400,000
28. What amount should be charged to retained earnings for the preference dividend declared on December 31,
2027?
a. Php100,000
b. Php150,000
c. Php200,000
d. Php300,000
29. What amount should be reported as retained earnings on December 31, 2027?
a. Php5,000,000
b. Php5,200,000
c. Php5,100,000
d. Php4,800,000

At the current year-end, Pau Company issued 4,000 ordinary shares of Php100 par value in connection with a share
dividend. The market value per share on the date of declaration was Php150.

The shareholders’ equity accounts immediately before issuance of the share dividend were:
Ordinary share capital Php100 par, 50,000 shares
Authorized, 20,000 shares outstanding 2,000,000
Share premium 3,000,000
Retained earnings 1,500,000
30. What amount should be reported as retained earnings immediately after the share dividend?
a. Php1,100,000
b. Php1,500,000
c. Php2,100,000
d. Php900,000
4,000 shares/20,000 = 20% share dividend