Since 1977

FAR OCAMPO/OCAMPO
FAR.2938-Equity-Retained Earnings

DISCUSSION PROBLEMS
1. Despacito Corp. has completed its current year Batch has never paid cash or share dividend. The
financial statements which reveal, in part, the following capital accounts have not changed since Batch began
information. operations on January 1, 2016. If the maximum
• Opening equity balances—share capital P300,000, amount available for cash dividend is declared on
retained earnings P220,000, asset revaluation December 31, 2020, how much dividend is payable to
surplus P60,000 the ordinary shareholders?
• Total comprehensive income—P130,000 a. P2,100,000 c. P1,200,000
• Other comprehensive income—P20,000 b. P1,920,000 d. P4,500,000
• Dividends paid—P35,000
• No more share capital was issued during the 5. East Corp., a calendar-year company, had sufficient
reporting period retained earnings in 2020 as a basis for dividends, but
was temporarily short of cash. East declared a
The closing retained earnings is
dividend of P100,000 on April 1, 2020, and issued
a. P295,000 c. P355,000
promissory notes to its shareholders in lieu of cash.
b. P315,000 d. P375,000
The notes, which were dated April 1, 2020, had a
maturity date of March 31, 2021, and a 10% interest
2. Sugar Corp.’s retained earnings account as of
rate. How should East account for the scrip dividend
December 31, 2019 has a balance of P430,000. The
and related interest?
following information related to 2020:
a. Debit retained earnings for P110,000 on April 1,
Prior period adjustment: 2020.
understatement of 2018 depreciation b. Debit retained earnings for P110,000 on March 31,
expense (before taxes) P 40,000 2021.
Cumulative decrease in income from c. Debit retained earnings for P100,000 on April 1,
change in inventory methods (before 2020, and debit interest expense for P10,000 on
taxes) 70,000 March 31, 2021.
Income before income tax 480,000 d. Debit retained earnings for P 100,000 on April 1,
Dividends declared (of this amount, 2020, and debit interest expense for P7,500 on
P50,000 will be paid on January 15, December 31, 2020.
2021) 200,000
Effective tax rate 35% 6. Lett Corp. declared and issued a 15% share dividend.
Prior to this dividend, Lett had 100,000, P1 par value,
As at December 31, 2020, the retained earnings of
ordinary shares issued and outstanding. The fair value
Sugar Corp. is
of Lett's ordinary share was P20 per share on the date
a. P520,500 c. P430,000
of declaration. As a result of this share dividend, Lett's
b. P484,500 d. P470,500
retained earnings
a. increased by P300,000.
3. On December 31, 2020, the balance sheet of Legend
b. decreased by P300,000.
Corporation shows a total equity of P1,260,000.
c. decreased by P15,000.
During 2020, the shareholders’ equity was affected by:
d. did not change.
Adjustment to retained earnings for the
overstatement of 2019 net income P17,500 7. Which statement is incorrect regarding IFRIC 17
Cash dividend declared and paid in 2020 10% Distribution of Non-cash Assets to Owners?
Net income of 2020 P65,000 a. The liability to pay a dividend shall be recognized
The share capital of P1,000,000 remained unchanged when the dividend is appropriately authorized and
during the year. is no longer at the discretion of the entity.
b. An entity shall measure a liability to distribute non-
What is the balance of retained earnings on January 1, cash assets as a dividend to its owners at the fair
2020? value of the assets to be distributed.
a. P360,000 c. P295,000 c. At the end of each reporting period and at the date
b. P312,500 d. P260,000 of settlement, the entity shall review and adjust
the carrying amount of the dividend payable, with
4. At December 31, 2020, the equity accounts of Batch any changes in the carrying amount of the
Corporation were as follows: dividend payable recognized in equity as
Preference share capital (P100 par, adjustments to the amount of the distribution.
12% participating and cumulative, d. It addresses the accounting by shareholders who
100,000 shares) P10,000,000 receive such a distribution.
Preference share capital (P100 par,
10% nonparticipating, 8. In accordance with IFRIC 17, when an entity settles
noncumulative, 50,000 shares) 5,000,000 the dividend payable, it shall recognize the difference,
Ordinary share capital (P10 par, if any, between the carrying amount of the assets
1,000,000 shares) 10,000,000 distributed and the carrying amount of the dividend
Retained earnings 9,500,000 payable
a. As a separate line item in profit or loss.
b. As a separate component of OCI.

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EXCEL PROFESSIONAL SERVICES, INC.

c. As a separate line item in the statement of d. Restrict earnings available for dividends.
changes in equity.
d. As a separate line item in the statement of 16. The following information pertains to Imperial Corp.
retained earnings. • No dividend declaration or payment for 3 years on
its 2,000 shares of 6%, P30 par value cumulative
9. An entity declared property dividend to ordinary preference shares.
shareholders. The property had a carrying amount of • Gain on disposal of Imperial’s Cebu Division of
P910,000. Fair value on relevant dates: P90,000.
Date of declaration P950,000 • Treasury shares costing P100,000 reissued for
Date of record 930,000 P30,000.
Date of distribution 920,000 What amount of retained earnings should be restricted
How much should the entity recognize in profit or loss as a result of these items?
in relation to this property dividend? a. P70,000 c. P90,000
a. P10,000 c. P40,000 b. P10,000 d. P 0
b. P20,000 d. Nil
17. Adverse financial and operating circumstances warrant
10. In September 2019, West Corp. made a dividend that Hikahos Company undergo a quasi-reorganization
distribution of one right for each of its 120,000 at the end of the current year. The following
ordinary shares outstanding. Each right was information may be relevant in accounting for the
exercisable for the purchase of 1/100 of a share of quasi reorganization.
West's P50 variable rate preference shares at an • Inventory with a net realizable value of P5,000,000
exercise price of P80 per share. On March 20, 2020, is currently recorded in the accounts at its cost of
none of the rights had been exercised, and West P7,000,000.
redeemed them by paying each shareholder P0.10 per • Plant assets with a recoverable amount of
right. As a result of this redemption, West's P20,000,000 are currently recorded at
shareholders' equity was reduced by P24,000,000 net of accumulated depreciation.
a. P 120 c. P12,000 • Unrecorded accounts payable amount to
b. P2,400 d. P36,000 P3,000,000.
• Individual shareholders contribute P5,000,000 to
11. On January 2, 2020, Simpson Co.'s board of directors create share premium to facilitate the
declared a cash dividend of P400,000. Selected data reorganization. No new outstanding shares pass to
from Simpson's December 31, 2019 balance sheet are the company’s shareholders.
as follows: • The par value of the ordinary share is reduced
from P100 to P50.
Accumulated depletion P100,000 • Immediately before these events, the
Share capital 500,000 shareholders’ equity section appears as follows.
Share premium 150,000
Retained earnings 300,000 Share capital, P100 par value,
500,000 shares P50,000,000
The cash dividend includes a liquidating dividend of Share premium 5,000,000
a. P 0 c. P150,000 Retained earnings (deficit) (15,000,000)
b. P100,000 d. P300,000
Compute the balance of share premium after the
12. Which of the following does not affect retained quasi-reorganization.
earnings? a. P11,000,000 c. P5,000,000
a. Scrip dividend c. Large share dividend b. P 6,000,000 d. P 0
b. Small share dividend d. Liquidating dividend
18. At the recommendation of the newly hired president of
13. An entity shall present the amount of dividends Leyte Corporation, the board of directors voted to
recognized as distributions to owners during the period implement a quasi-reorganization. Immediately prior
and the related amount of dividends per share in to the restatement, on June 30, Leyte's balance sheet
a. The statement of changes in equity. was as follows:
b. The notes to the financial statements. Current assets P 550,000
c. The statement of profit or loss and OCI. Property, plant, and equipment (net) 1,350,000
d. Either a or b. Other assets 200,000
P2,100,000
14. An entity shall disclose in the notes to the financial Total liabilities P 600,000
statements Share capital 1,600,000
a. The amount of dividends proposed or declared Share premium 300,000
before the financial statements were authorized for Retained earnings (deficit) (400,000)
issue but not recognized as a distribution to P2,100,000
owners during the period and the related amount
per share. The shareholders approved the quasi-reorganization
b. The amount of any cumulative preference effective July 1, to be accomplished by a reduction in
dividends not recognized. other assets of P150,000; a reduction in property,
c. Both a and b plant, and equipment (net) of P350,000; and
d. Neither a nor b. appropriate adjustment to the capital structure. To
implement the quasi-reorganization, Leyte should
15. Retained earnings appropriation can be used to reduce the share capital account in the amount of
a. Absorb a fire loss when a company is self-insured. a. P 0 c. P400,000
b. Provide for a contingent loss that is probable and b. P100,000 d. P600,000
reasonably estimable.
c. Smooth periodic income. - now do the DIY drill -

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EXCEL PROFESSIONAL SERVICES, INC.

DO-IT-YOURSELF (DIY) DRILL

1. Selected information for the accounts of Bibbo Co. at 5. The following share dividends were declared and
December 31, 2020 follows: distributed by Sol Corp.:
Total income since incorporation P420,000 Percentage of ordinary
Total cash dividends paid 130,000 share outstanding at
Total value of property dividends declaration date Fair value Par value
distributed 30,000 10 P15,000 P10,000
Excess of proceeds over cost of treasury 28 40,000 30,800
stock sold 110,000
What aggregate amount should be debited to retained
In its December 31, 2020, financial statements, what earnings for these share dividends?
amount should Bibbo report as retained earnings? a. P40,800 c. P50,000
a. P260,000 c. P370,000 b. P45,800 d. P55,000
b. P290,000 d. P400,000

6. At December 31, 2019, Afro Corp. reported

2. On December 31, 2019, the shareholders' equity P1,750,000 of appropriated retained earnings for the
section of Bulilit, Inc. was as follows: construction of a new office building, which was
Share capital, par value of P10; P 900,000 completed in 2020 at a total cost of P1,500,000. In
authorized 30,000 shares; issued 2020, Afro appropriated P1,200,000 of retained
and outstanding 90,000 shares earnings for the construction of a new plant. Also,
Share premium 1,160,000 P2,000,000 of cash was restricted for the retirement of
Retained earnings 1,460,000 bonds due in 2022. In its 2020 balance sheet, Afro
Total shareholders’ equity P3,520,000 should report what amount of appropriated retained
earnings?
On March 31, 2020, Bulilit declared a 10% share a. P1,200,000 c. P2,950,000
dividend and accordingly 9,000 additional shares were b. P1,450,000 d. P3,200,000
issued, when the fair market value of the share was
P16 per share. For the three months ended March 31,
2020, Bulilit sustained a net loss of P320,000. The Use the following information for the next two questions.
balance of Bulilit's retained earnings as of March 31,
2020 should be The Bukidnon Company has sustained heavy losses over a
a. P1,114,000 c. P1,050,000 period of time and conditions warrant that Bukidnon
b. P1,086,000 d. P 996,000 undergo a quasi-organization at December 31, 2020.
Selected balance sheet items prior to the quasi-
reorganization are as follows:
3. Quadrant Corporation paid dividends of P2,000,000
• Inventory was recorded in the accounting records at
and P3,000,000 at the end of 2019 and 2020,
December 31, 2020, at its net realizable value of
respectively. The corporation has not paid any other
P6,000,000. Cost was P6,500,000.
dividends since its organization on January 1, 2019.
• Property, plant and equipment were recorded in the
The outstanding shares are 200,000, 12% preference
accounting records at December 31, 2020, at
shares, par P100 and 300,000 ordinary shares, par
P12,000,000, net of accumulated depreciation. The
P100. If the preference shares are cumulative but
fair value is P9,000,000 (cost to sell is P1,500,000).
nonparticipating, ordinary shareholders will receive in
The expected discounted net future cash inflows from
2020
the continued use and eventual disposal is P8,000,000.
a. P1,800,000 c. P200,000
• Shareholders’ equity on December 31, 2020, was as
b. P 600,000 d. P 0
follows:
Share capital, par value P10 per share;
4. At December 31, 2019 and 2020, Sloan Corp. had authorized, issued and outstanding,
outstanding 9,000 shares of P100 par value 8% 700,000 shares P7,000,000
cumulative preference shares and 30,000, P10 par Share premium 1,600,000
value, ordinary shares. At December 31, 2019, Retained earnings (deficit) (900,000)
dividends in arrears on the preference shares were P7,700,000
P36,000. Cash dividends declared in 2020 totaled
P135,000. What amounts were payable on each class Under the terms of the quasi-reorganization, the par value
of share? of the ordinary share is to be reduced from P10 per share
Preference Ordinary to P5 per share.
a. P 72,000 P63,000
b. P 99,000 P36,000 7. Immediately after the quasi-reorganization has been
c. P108,000 P27,000 accomplished, the total of shareholders’ equity should
d. P135,000 P 0 be
a. P3,300,000 c. P3,700,000
b. P3,500,000 d. P4,200,000

8. Immediately after the quasi-reorganization has been

accomplished, retained earnings (deficit) should be
a. P 0 c. P(4,400,000)
b. P(200,000) d. P(4,900,000)

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