Equity – Retained Earnings

(FAR.2636)

R. R. Ocampo
Problem No. 1 Answer is letter A

Retained earnings, beg. P220,000

Profit (P130T – P20T) 110,000

Dividends paid ( 35,000)

Retained earnings, end. P295,000

Problem No. 2 Answer is letter D
RE, 1/1/18 P430,000
Prior period error
(P40,000 x .65) ( 26,000)
Change in policy effect
(P70,000 x .65) ( 45,500)
RE, 1/1/18 – as adjusted 358,500
Net income – 2018
(P480,000 x .65) 312,000
Dividends declared-2018 (200,000)
Retained earnings, 12/31/18 P470,500
Problem No. 3 Answer is letter B

Equity, 12/31 P1,260,000

Prior period error 17,500
Dividends declared
(P1M x .1) 100,000
Net income ( 65,000)
Equity, 1/1 1,312,500
Share capital, 1/1 (1,000,000)
Retained earnings, 1/1 P 312,500
Problem No. 4
 12%PS 10%PS OS Total
Basic 6M .5M 1.2M
Participation
Total

Basic Dividend:
12% PS: (P10M x .12 x 5) = P6M
10% PS: (P5M x .1) = P.5M
OS: (P10M x .12) = P1.2M
 12%PS 10%PS OS Total
Basic 6M .5M 1.2M 7.7M
Participation .9M
Total

Balance for participation

(P9.5M – P7.7M) P1.8M

Allocated to OS
(P1.8M x 1/2) P .9M
 Answer is letter A
12%PS 10%PS OS Total
Basic 6M .5M 1.2M 7.7M
Participation .9M
Total 2.1M

Balance for participation

(P9.5M – P7.7M) P1.8M

Allocated to OS
(P1.8M x 1/2) P .9M
Problem No. 5 Answer is letter D
Journal entry, 4/1/18
Retained earnings P100,000
Scrip dividends payable P100,000

Journal entry, 12/31/18

Interest exp. (P100T x .1 x 9/12) P7,500
Interest payable P7,500

Journal entry, 3/31/19

Scrip dividends payable P100,000
Interest payable 7,500
Interest expense 2,500
Cash P110,000
Share Dividends
• Capitalization of retained earnings

Large (at least 20%)

- Capitalized at par value

Small (less than 20%)

- Capitalized at fair value
- Except when FV<PV; capitalize at par value

Amount to be capitalized
(100,000 x .15 x P20) P300,000
Answer No. 6 is letter B
Journal entry:
Retained earnings P300,000
Share capital (15T x P1) P 15,000
Share premium 285,000
Problem No. 9 Answer is letter A
Journal entry, Declaration
Retained earnings P950,000
Property dividends payable P950,000

NCA-HFDTO P910,000
Property P910,000

Journal entry, Distribution

Property dividends payable P30,000
Retained earnings P30,000

Property dividends payable P920,000

NCA-HFDTO P910,000
Gain on disposal 10,000
Problem No. 10 Answer is letter C
Journal entry, Issuance
Memo

Journal entry, Expiration

Memo

Journal entry, Exercise

Cash Pxx
Share capital Pxx
Share premium xx

Journal entry, Redemption/Retirement

Retained earnings (120T x .1) P12,000
Cash P12,000
Problem No. 11 Answer is letter B

Dividends declared P400,000

Retained earnings (300,000)
Liquidating dividend P100,000

Journal entry

Retained earnings P300,000

Capital liquidated 100,000
Dividends payable P400,000
Appropriation of Retained Earnings

•Legal

•Contractual

•Voluntary/Discretionary

Item #1 – Dividends in arrears (Not required)

Item #2 – Discontinued operation (Not required)

Item #3 – Re-issuance of TS (Not required)

Answer No. 16 is letter D

Quasi-Reorganization
• Normally done when the entity is in financial
distress

• This will give the entity a “fresh start”

• The main purpose is to eliminate existing

deficit

• Should be properly authorized by the BOD,

shareholders and regulatory bodies

• May be done thru:

1) Revaluation; or
2) Recapitalization
Problem No. 17
 SC SP RE
Balances before reorg. P50M P5M (P15M)

Journal entry
Retained earnings P2M
Inventory P2M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)

Journal entry
Retained earnings P2M
P4M
Inventory
Accumulated dep. P2M
P4M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)

Journal entry
Retained earnings P4M
P3M
Accumulated
Accounts payable
dep. P4M
P3M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)

Journal entry
Cash
Retained earnings P3M P5M
Accounts
Share premium-donated
payable cap. P3M P5M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)
4) Donated capital 5M

Journal entry
Share capital
Cash P5M
P25M
Share premium-recapitalization
premium-donated cap. P5M
P25M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)
4) Donated capital 5M
5) Reduction of par ( 25M) 25M
(24M)
Journal entry
Share premium
capital P24M P25M
Share premium-recapitalization
Retained earnings P24M P25M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)
4) Donated capital 5M
5) Reduction of par ( 25M) 25M
6) Elimination of deficit (24M) 24M
Journal entry
Share premium P24M
Retained earnings P24M
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)
4) Donated capital 5M
5) Reduction of par ( 25M) 25M
6) Elimination of deficit (24M) 24M
Balances after reorg.
 SC SP RE
Balances before reorg. P50M P5M (P15M)
1) Inventory write down ( 2M)
2) Impairment of plant ( 4M)
3) Unrecorded AP ( 3M)
4) Donated capital 5M
5) Reduction of par ( 25M) 25M
6) Elimination of deficit (24M) 24M
Balances after reorg. P25M P11M -

Answer is letter A
Problem No. 18 Answer is letter D

Unadjusted retained earnings (P400,000)

Reduction in other assets ( 150,000)
Reduction in PPE ( 350,000)
Adjusted retained earnings ( 900,000)
Existing share premium 300,000
Minimum reduction of SC (P600,000)
DIY Drill Answers
1. A
2. D
3. C
4. C
5. B
6. A
7. C
8. A
 End 