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Financial Accounting and Reporting Review

Problems on R/E

Problem 1:
Lauretta Company reported the following shareholders’ equity on January 1, 2016:
Share Capital P 1,500,000
Share Premium 3,000,000
Retained Earnings 2,000,000
 The entity had 400,000 authorized shares of P 5 par value, of which 300,000 shares were issued and outstanding.
 On Mar 1, 2016, the entity acquired 50,000 shares for P10 per share to be held as treasury. The shares were originally at P 8
per share. The entity used the cost method to account for treasury shares.
 On December 31, 2016, the entity declared and distributed a property dividend of inventory. The inventory had a P 750,000
carrying amount and a P 1,000,000 fair value. The net income for 2016 was 2,500,000.

1. What amount should be reported as unappropriated retained earnings? [ 3,000,000]

Problem 2:
On November 1, 2016, Grande Company declared a property dividend of equipment payable on Mar 1, 2017.
The carrying amount of the equipment is P 3,000,000 and the fair value is P 2,500,000 on November 1, 2016.
However, the fair value less cost to distribute the equipment is P 2,200,000 on December 31, 2016, and P 2,000,000 on March 1,
2017.
1. What is the dividend payable on December 31, 2016? [2,200,000]
2. What is the measurement of the equipment on December 31, 2016? [2,200,000]
3. What amount of loss on distribution of property dividend is recognized on Mar 1, 2017? [200,000]

Problem 3:
On January 1, 2016, Easy Company had ordinary and preference shares outstanding. The incorporators or original shareholders own
ten ordinary shares but no preference shares.
On December 31, 2016, the entity declared dividends on the ordinary shares. The entity decided to give the ordinary shareholders a
choice between receiving cash dividend of P 500,000 per share or a property dividend in the form of a noncash asset.
The noncash asset is a standard model from the entity’s car fleet, each having a fair value of P 600,000 and carrying amount of
P450,000 at declaration date. The fair value of each car is P 700,00 on Dec 31, 2017.
The entity estimated that 80% of the ordinary shareholders will take the option of the cash dividend and 20% will elect for the
noncash asset.
1. What is the dividend payable that should be recognized on December 31, 2016? [5,200,000]
2. What is the gain on distribution of property dividend in 2017 if the shareholders elected to receive the noncash asset?
[2,500,000]
3. What is the journal entry needed on Dec 31, 2017 if the shareholders elected to receive the cash?

Problem 4:
At the current year-end, Grey Company issued 4,000 ordinary shares of P 100 par value in connection with a stock dividend. The
market value per share on the date of declaration was P 150.
The shareholders’ equity accounts immediately before issuance of the stock dividend shares were as follows:

Ordinary share capital P 100 par, 50,000 shares authorized, 20,000 shares outstanding 2,000,000
Share premium 3,000,000
Retained Earnings 1,500,000

1. What amount should be reported as retained earnings immediately after the stock dividend? [1,100,000]
2. Assume instead, that only 2,000 stock dividend were issued, how much retained earnings would be debited as a result of
the issuance? [300,000]
Financial Accounting and Reporting Review
Problems on R/E

Problem 5:
Zoe Company reported the following shareholders’ equity at the current year-end:

Share capital, par P 25, authorized 150,000 shares, 55,000 shares issued
of which 5,000 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 a market value of P 40.

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

Problem 6:
Cerritos Company began operations on January 1, 2013: During the first three years of operations, the entity reported net income
and declared dividends as follows:
Net Income Dividends
2013 800,000 0
2014 2,500,000 1,000,000
2015 3,000,000 1,000,000

The entity provided the following information for 2016:

Income before tax P 4,800,000


Prior period error – understatement of 2014 depreciation 400,000
Cumulative decrease in income from change in inventory method 700,000
Dividend declared (P500,000 will be paid on Jan 2017) 2,000,000
Income tax rate 30%

1. What amount should be reported as retained earnings on December 31, 2016? [4,890,000]