8 PROBLEMS

Problem 8-1
Analysis of Various Equity Transactions
Burma Company is authorized to issue 300,000 of $2 par value ordinary shares. The company has
the following transactions:

a. Issued 60,000 shares at $30 per share, received cash.

b. Issued 750 shares, selling at $35 per share, to lawyers for services in connection with the
organization of the corporation. The fair value of the legal service was $27,000.
c. Issued 900 shares, valued objectively at $30,000, to the employees instead of paying them
cash wages.
d. Issued 37,500 shares in exchange for a building valued at $885,000 and land valued at $240,000
The building was originally acquired by the investor for $750,000 and has $300,000 of
accumulated depreciation; land was originally acquired for $90,000.
e. Received cash for 19,500 shares issued at $38 per share.
f. Issued 12,000 shares at $45 per share; cash received.

Required:
Compute for the amount of share premium that should be reported in the statement of financial
position.
1 Cash (60,000 x 30) $ 1,800,000
Ordinary shares (60,000 x 2) $ 120,000
Shares Premium (1,800,000 - 120,000) $ 1,680,000
2 Legal Fees $ 27,000
Ordinary shares (750 x 2) $ 1,500
Shares Premium $ 25,500
3 Salaries and wages $ 30,000
Ordinary shares (900 x 2) $ 1,800
Shares Premium $ 28,200
4 Building $ 885,000
Land $ 240,000
Ordinary shares (37,500 x 2) $ 75,000
Shares Premium $ 1,050,000
5 Cash (19,500 x 38) $ 741,000
Ordinary shares (19,500 x 2) $ 39,000
Shares Premium $ 702,000
6 Cash (12,000 x 45) $ 540,000
Ordinary shares (12,000 x 2) $ 24,000
Shares Premium $ 516,000
TOTAL SHARE PREMIUM $ 4,001,700

Problem 8-2
Computation of Total Shareholders' Equity
Israel Company is authorized to issue 200,000 of $10 par value ordinary shares and 60,000 of 6%
cumulative and nonparticipating preference shares, par value $100 per share. The company
engaged in the following share capital transactions through December 31, 2019:

a. 50,000 ordinary shares were issued for $650,000 and 20,000 preference shares for machinery
valued at $2,600,000.

b. Subscription for 900 ordinary shares have been taken, and 40% of the subscription price of $18
per share has been collected. The shares will be issued upon collection of the subscription
price in full.

c. 2,000 treasury ordinary shares have been purchased for $12 and accounted for under the cost
method.

The post-closing retained earnings balance at December 31, 2019 is $420,000.

Required:
Prepare the shareholders' equity section of the statement of financial position per December
31, 2019.
a. Cash 650,000
Ordinary share capital (10 x 50,000) 500,000
Share premium - ordinary shares 150,000

Machinery 2,600,000
Preference share capital (100 x 20,000) 2,000,000
Share premium - preference shares 600,000

b. Cash (18 x 900 x 40%) 6,480

Subscription receivable (18 x 900 x 60%) 9,720
Subscribed ordinary shares (10 x 900) 9,000
Share premium - ordinary shares 7,200

c. Treasury shares (2,000 x 12) 24,000

Cash 24,000

Ordinary share capital 500,000

Share premium - ordinary shares (150,000 + 7,200) 157,200
Preference share capital 2,000,000
Share premium - preference shares 600,000
Subscribed ordinary shares 9,000
Subscription receivable (9,720)
Treasury shares (24,000)
Retained Earnings 420,000
Total shareholders' equity 2010 3,652,480

Problem 8-3
Treasury Shares

The shareholders' equity of Norway Company as of December 31, 2018 was as follows:
 Ordinary shares, $10 par, authorized 300,000 shares; 250,000
shares issued and outstanding $ 2,500,000
Share premium-issuance 3,500,000
Retained earnings 1,740,000

On June 1, 2019, Norway Company reacquired 40,000 ordinary shares at $40. The following
transactions occurred in 2019 with regard to these shares.

July 1. Sold 15,000 shares at $48.

Aug. 1. Sold 19,000 shares at $27.
Sept. 1. Retired 1,000 shares.

The following entries were made by the company's accountant to record the preceding transactions:

2019

June 1. Treasury shares 1,600,000

Cash 1,600,000

July 1. Cash 720,000

Treasury shares 720,000

Aug. 1. Cash 513,000

Treasury shares 513,000

Sept. 1. Ordinary shares 10,000

Treasury shares 10,000

Norway Company's net income for 2019 was $135,000.

Required:
Based on the preceding information, determine the correct balances of the following accounts
per your audit:
Treasury shares 120,000
Share premium - treasury shares 120,000

Share premium - treasury shares 120,000

Retained earnings 127,000
Treasury shares (760,000 - 513,000) 247,000

Share premium - issuance (1,000/250,000 x 3,500,000) 14,000

Retained earnings 16,000
Treasury shares (40,000 - 10,000) 30,000

1. Treasury shares
Balance per book (1,600,000 - 720,000 - 513,000 - 10,000) $ 357,000
AJE no 1 $ 120,000
AJE no 2 $ (247,000)
AJE no 3 $ (30,000)
Balance per audit dec 2019 $ 200,000
2. Ordinary shares
Balance per book (2,500,000 - 10,000) $ 2,490,000

3. Share premium-issuance
Balance per book dec 2019 $ 3,500,000
AJE no 3 $ (14,000)
Balance per audit dec 2019 $ 3,486,000

4. Share premium-treasury
Balance per book dec 2019 $ -
AJE no 1 $ 120,000
AJE no 2 $ (120,000)
Balance per audit dec 2019 $ -

5. Retained earnings (before appropriation for treasury shares)

Balance per book dec 2019 (1,740,000 + 135,000) $ 1,875,000
AJE no 2 $ (127,000)
AJE no 3 $ (16,000)
Balance per audit dec 2019 $ 1,732,000

Problem 8-4
Share Warrants

Libya Company wants to raise its working capital. After analysis of the available options, the company
decides to issue 6,000 shares of $30 par preference shares with detachable warrants. The
package of the shares and the warrants sells for $120. The warrants enable the holder to purchase
6,000 shares of $10 par ordinary shares at $40 per share. Immediately following the issuance of
the shares, the share warrants are selling at $10 per share. The market value of the preference
shares without the warrants is $90.

Required:
1. What amount should be assigned to the share warrant issued:
Marker value Fraction Allocated value
Shares (90 x 6,000) 540,000 54/60 648,000
Warrant (10 x 6,000) 60,000 6/60 72,000
600,000 720,000

720,000 = 120 x 6,000

2. Assuming that only 80% of the warrants are exercised, what is the entry to record the
exercise of the warrants?
Share warrant outstanding (72,000 x 80%) 57,600
Cash (40 x 1,200) 48,000
Ordinary shares capital (10 x 1,200) 12,000
Share premium 93,600

Problem 8-5
 Analyzing Various Shareholders' Equity Transactions

You have been assigned to the audit of Maryland Company, a manufacturing company. You have
been asked to summarize the transactions for the year ended December 31, 2019, affecting
shareholders' equity and other related accounts. The shareholders' equity section of Maryland
Company' December 31, 2018 statement of financial position follows:

Ordinary share capital, $2 par value, 1,000,000 shares

authorized, 180,000 shares issued, 177,580 shares
outstanding $ 360,000
Share premium-issuance 3,640,000
Share premium-treasury shares 45,000
Retained earnings 649,378
Treasury shares, 2,420 shares at cost (145,000)
Total shareholders' equity $ 4,549,378

You have extracted the following information from the accounting records and audit working papers.

2019
Jan. 15. Maryland Company reissued 1,300 treasury shares for $40 per share. The 2,420
treasury shares on hand at December 31, 2018 were purchased in one block in 2017.

Feb. 1. Sold 180, $1,000, 9% bonds due February 1, 2029, at 103 with one detachable share
warrant attached to each bond. Interest is payable annually on February 1. The fair
market value of the bonds without the share warrants is 95. The detachable warrants
have a fair value of $50 each and expire on February 1, 2020. Each warrant entitles
the holder to purchase 10 ordinary shares at $40 per share.

Mar. 6. 2,800 ordinary shares were subscribed for at $44 per share. 40% of the subscription was
collected.

20. The balance due on 2,400 shares were received and those shares were issued.

Nov. 1. There were 110 shares warrants detached from the bonds and exercised.

Maryland Company's net income for 2019 is $950,000.

Required:
Based on the preceding information:
1. Prepare journal entries to record the transactions above.
15-Jan Cash (40 x 1,300) $52,000
Share premium - treasury shares $25,892.56
Treasury shares (59.92* x 1,300) $77,892.56
* 145,000/2,420 = 59.92

1-Feb Cash 185,400

Bond discount (180,000 -171,000) 9,000
Share warrant outstanding 14,400
Bonds payable 180,000

Issue price (180,000 x 103%) 185,400

Market value without warrant (180,000 x 95%) 171,000
 Share warrants 14,400

6-Mar Cash (44 x 2,800 x 40%) 49,280

Subscription receivable (44 x 2,800 x 60%) 73,920
Subscribed ordinary shares (P2 x 2,800) 5,600
Share premium issuance 117,600
20 Cash (44 x 2,400 x 60%) 63,360
Subscription receivable 63,360
20 Subscribed ordinary shares 4,800
Ordinary share capital (P2 x 2,400) 4,800

1-Nov Cash (P40 x 10 x 110) 44,000

Share warrants outstanding (110/180 x P14,400) 8,800
Ordinary share capital (P2 x 1,100) 2,200
Share premium issuance 50,600

31-Dec Income summary 950,000

Retained earnings 950,000

2. Determine the correct balances of each of the following per your audit report:
a. Ordinary share capital
Balance, January 1 360,000
20-Mar 4,800
1-Nov 2,200
Balance Dec. 31 367,000

b. Share premium-issuance
Balance, January 1 3,640,000
6-Mar 117,600
1-Nov 50,600
Balance Dec. 31 3,808,200

c. Share premium-treasury shares

Balance, January 1 45,000
15-Jan (25,892.56)
Balance Dec. 31 19,107

d. Retained earnings (before appropriation for treasury shares)

Balance, January 1 649,378
Net income 950,000
Balance Dec. 31 1,599,378

e. Treasury shares
Balance, January 1 145,000
15-Jan (77,893)
Balance Dec. 31 67,107

f. Total shareholders' equity

Ordinary share capital (see no.1) 367,000
Share premium- issuances (see no.2) 3,808,200
Share premium – treasury shares (see no.3) 19,107
Retained earnings (see no. 4) 1,599,378
Treasury share (see no.5) (67,107)
 Share warrants outstanding (P14,400 – P8,800) 5,600
Subscribed ordinary shares (P5,600 – P4,800) 800
Subscriptions Receivable (P73,920 – P63,360) (10,560.00)
Total 5,722,418

Problem 8-6
Retained Earnings

The following information has been taken from the ledger accounts of Chile Company:

Total net income since incorporation $ 3,200,000

Total cash dividends paid 150,000
Carrying value of the company's investment in Yemen Company
declared as property dividend 600,000
Proceeds from sale of donated shares 150,500
Total value of stock dividends distributed 420,000
Gains on treasury share transactions 375,000
Unamortized premium on bonds payable 413,200
Appropriated for contingencies 700,000

Required:
Compute the current balance of unappropriated retained earnings.
Total net income since incorporation $ 3,200,000
Total cash dividends paid (150,000)
Carrying value of investment declared as property dividend (600,000)
Total value of stock dividends distributed (420,000)
Appropriated for contingencies (700,000)
Current balance of unappropriated retained earnings $ 1,330,000

Problem 8-7
Cash dividend

The following selected accounts were taken from the December 31, 2019 trial balance of Indiana
Company:

Subscribed share capital $ 1,250,000

Treasury shares, 600 shares at cost 90,000
Unissued share capital 6,000,000
Share premium 180,000
Appropriation for plant expansion 500,000
Retained earnings 1,200,000
Authorized share capital-100,000 shares 10,000,000
Subscription receivable 320,000

The minutes of meetings of the board of directors reveal that on December 5, 2019, the company's
board declared a 10% cash dividend payable to the shareholders and subscribers of record on
December 20, 2019. The dividend checks are to be distributed on January 10, 2020. The
company's accountant has not recorded this dividend declaration.
Required:
What is the amount of unrecorded dividend payable?
Authorized share capital $ 10,000,000
Unissued share capital $ (6,000,000)
Issued share capital $ 4,000,000
Treasury shares (100 x 600) $ (60,000)
Issued and outstanding $ 3,940,000
Subscribed share capital $ 1,250,000 +
Basis for dividend $ 5,190,000.00
Dividend rate 10% x
Unrecorded dividend payable $ 519,000.00

Problem 8-8
Share Dividend and Share Splits

The capital accounts of Bahrain Company on June 30, 2019, are a follows:

Ordinary shares, $10 par, 50,000 shares issued and outstanding $ 500,000
Share premium 250,000
Retained earnings 3,135,000

The company's ordinary shares are selling at this time at $20.

Required:
What entries would you make in each of the following cases?
a. A 10% share dividend is declares and issued.
Retained earnings (P20 x 5,000) 100,000
Stock dividends payable (P10 x 5,000*) 50,000
Share premium 50,000
*50,000 x 10% = 5,000 additional shares

Stock dividends payable 50,000

Ordinary shares 50,000

b. A 30% share dividend is declared and issued.

Retained earnings 150,000
Stock dividends payable 150,000
(50,000 x 30% = 15,000 additional shares x P10 par value = P150,000)

Stock dividends payable 150,000

Ordinary shares 150,000

c. A 4-for-1 share split is declared and issued.

Only memorandum entry is required to disclose the decrease in par value
(from $10 to$2.50) and the increase in outstanding shares (from 50,000
to 200,000).

Problem 8-9
 Computation of Book Value Per Share

Poland Company began operations in January 2017, and reported the following results for each
of its three years operations:

2017 300,000 net loss

2018 30,000 net loss
;2019 3,950,000 net income

At December 31, 2019, the company's capital accounts were as follows:

5% cumulative preference shares, par value $100; authorized,

100,000 shares; issued and outstanding, 60,000 $ 6,000,000
Ordinary shares, par value $10; authorized, 1,000,000 shares;
issued and outstanding, 800,000 shares 8,000,000

Poland Company has never paid a cash or share dividend and there has been no change in the
capital accounts since it began operations.

Required:
1. What is the book value of the preference shares on December 31, 2019?
The book value of the preferences shares is $115

2. What is the book value of the ordinary shares on December 31, 2019?
the book value of the ordinary shares $13.40

Excess Over Par Preference Ordinary

Balance 3,620,000 6,000,000 8,000,000

Dividend on preference shares
(5% x 6,000,000 x 3 yrs) (900,000) 900,000
Balance to ordinary shares 2,720,000
Total Shareholder's equity 6,900,000 10,720,000
Shares outstanding / 60,000 / 800,000
Book value per share 115 13.4

Assume that the preference shares have a liquidation value of $105 per share:
3. What is the book value of the preference shares on December 31, 2019?
The book value of the preferences shares is $120

4. What is the book value of the ordinary shares on December 31, 2019?
the book value of the ordinary shares $13.02

Excess Over Par Preference Ordinary

Balances 3,620,000 6,000,000 8,000,000

Liquidation
premium (5 x 60,000) (300,000) 300,000
Preference dividend
(5% x 6,000,000 x 3yrs) (900,000) 900,000
Balance to ordinary shares 2,420,000 2,420,000
Total shareholder's equity 7,200,000 10,420,000
Shares outstanding / 60,000 / 800,000
Book value per share 120 13.02