CHAPTER 20

QUESTIONS

1. Define a corporation.

2. Explain the organization of a corporation.

3. What are the contents of Articles of Incorporation?

4. What are bylaws?

5.Distinguish between:

a Corporators and incorporators

b. Shareholders and members

6. Explain the following:

a. Minutes book
b. Stock and transfer book
c. Books of accounts
d. Subscription book
e. Shareholders' ledger
f. Subscribers' ledger
g. Share certificate book

7.What is the accounting treatment of organization cost?

8. What are the elements that constitute the shareholders' equity and their equivalent IFRS term?

9. What is the meaning of capital stock or share capital?

10. What are the basic rights of a shareholder?

11. Distinguish between:

a. Share capital and authorized share capital

b. Share certificate and a share
c. Par value share and no par value share

12. Explain the two classes of share capital.

13. How much is legal capital?

14. What is the trust fund doctrine?

15. Explain the accounting issuance of:

a. Par value share

b. No-par value share

16. Explain the accounting for share capital issued for noncash consideration.

17. Explain the treatment of share issuance costs?

18. Explain the treatment of costs of public offering of shares.

19. What is the meaning of watered share?

20. What is secret reserve?

21. What is the treatment of a delinquent subscription?

22. Who is the highest bidder?

23.What is a callable preference share?

24. Explain a redeemable preference share.

25. Explain a convertible preference share.

Problem 20-1 (ACP)

Ocean Company was organized at the beginning of the current year and was authorized to issue
share capital of

100,000 shares of P50 par value.

The following transactions occurred during the current year in connection with the share capital:

1. The incorporators subscribed for 25% of the authorized share capital at par value.

2. The incorporators paid 25% on their subscription.

3. Full payment was received on 15,000 shares originally subscribed.

4. Land with fair value of P600,000 was acquired upon issuance of 10,000 shares. The market
value of the share at this time is P55.

5. Cash subscription to 5,000 shares at P60 per share was received.

6. Issued 2,000 shares to the legal counsel in payment for his P100,000 bill for organization
services.

Required:

a. Prepare journal entries to record the transactions using the memorandum method.

b. Present the shareholders' equity in the statement of financial position.

Problem 20-2 (ACP)

Lake Company was organized at the beginning of the current year and was authorized to issue
share capital of 50,000 shares with par value of P100.

The following transactions occurred during the year:

1. Received subscriptions at par value from incorporators equal to 40% of the authorized share
capital.

2. Received a 25% down payment on the subscriptions from the incorporators.

3. Received full payment on 10,000 shares originally subscribed.

4. A patent was acquired by issuing 5,000 shares. The patent has no fair value.

5. Received cash subscriptions to 15,000 shares at P120 per share.

Required:

a. Prepare journal entries to record the transactions following the journal entry method.

b. Present the shareholders' equity in the statement of financial position.

Problem 20-3 (ACP)

A, B, C, D and E organized Bump Company at the beginning of the current year with an
authorized share capital of P5,000,000 consisting of 50,000 shares of P100 par value.

1. On January 1, subscriptions were taken from A for 12,000 shares, from B for 13,000 shares,
from C for 8,000 shares, from D for 4,000 shares and from E for 3,000 shares, all at par.
2. A transferred to the corporation in partial payment of the subscription the following assets and
liabilities:

Accounts receivable 350,000

Notes receivable 70,000

Inventory 680,000

Accounts payable 100,000

3. B transferred the following assets to the corporation in partial payment of the subscription:

Land 150,000

Building 850,000

4.The remaining incorporators paid 25% of their subscriptions.

5. The corporation received a bill on January 10 in the amount of P50,000 from the legal counsel
for organization services rendered. The counsel accepted 500 shares in full payment.

6. A subscription for 1,000 shares at P120 per share was received from F on January 11. F paid
P40 per share on his subscription.

7. On January 12, A, B, and C paid the remainder of their subscriptions.

Required:

a. Prepare journal entries to record the transactions.

b. Present the shareholders' equity.

Problem 20-4 (IAA)

Brook Company was organized at the beginning of current year. The entity provided the
following transactions affecting shareholder's equity:

1. The entity was authorized to issue share capital as follows:

Preference share capital, P100 par, 30,000 shares

Ordinary share capital, P50 par value, 100,000 shares

2. 40,000 ordinary shares of were issued for cash at P60 per share.

3. 10,000 preference shares were issued at P120 for cash.

4. 10,000 preference shares were subscribed at par value.

5. P400,000 was received on the above subscription to preference shares.

6. 1,000 preference shares were issued in payment of legal fees of P100,000 in connection with
organizing the corporations.

7. 20,000 ordinary shares were issued for property, plant and equipment which had a fair value
of P1,300,000.

8. 15,000 ordinary shares were subscribed for at par.

9. Forty percent of the ordinary share capital subscription was collected.

10. The balance owing on the subscription described in 4 and 5 was collected, and the preference
shares were issued.

11. The net income for the current year was P2,000,000.

Required:

a. Prepare journal entries to record the transactions using the memorandum method.

b. Present the shareholders' equity in the statement of financial position.

Problem 20-5 (IAA)

Lagoon Company was organized at the beginning of the current year.

The entity provided the following transactions affecting shareholders' equity:

1. The corporation was authorized to issue 100,000 ordinary shares with par value of P 100.

2. Twenty-five percent of the authorized ordinary capital was subscribed for at par value.

3. Collected twenty-five percent of the subscription.

4. Full collection was received on 10,000 shares originally subscribed.

5. Issued the share certificates on the fully paid 10,000 shares.

6. Land with fair value of P800,000 and a building thereon fairly valued at were acquired for
30,000 shares.

7. Issued 10,000 shares for an outstanding bank loan of P1,300,000 including accrued interest of
P200,000. On this date, shares are quoted at P 120 per share.

8. Net income for the year amounted to P3,000,000.

Required:

a. Prepare journal entries using journal entry method.

b. Present the shareholders' equity.

Problem 20-6 (IAA)

Timber Company presented a statement of financial position containing the following accounts
among others:

Subscriptions receivable — preference 120,000

Subscriptions receivable — ordinary 360,000

Preference share capital, P 100 par, authorized 100,000

shares, issued and outstanding 22,000 shares 2,200,000
Preference share capital subscribed, 2,000 shares 200,000

Ordinary share capital, P1O par value, authorized 200,000

shares, issued and outstanding24,000 shares 240,000

Ordinary share capital subscribed, 24,000 shares 240,000

Share premium — preference 80,000

Share premium — ordinary 950,000

The corporation was organized at the beginning of current year and immediately received
subscriptions to 20,000 preference shares. Subscriptions to ordinary shares were received on the
same date.

During the year, subscriptions were received for an additional 4,000 preference shares at a price
of P120 per share.

Cash payments were received from subscribers at frequent intervals for several months after
subscription. The entity followed a policy of issuing share certificates only when

subscribers had paid in full.

During the year, the entity issued 8,000 ordinary shares in exchange for a tract of land with a fair
value Of P230,000.

Required:

a. Prepare journal entries for all the transactions carried out during the year as, indicated by the
account balances.

b. Compute the amount of contributed capital for each class of share capital at year-end.

Problem 20-7 (IAA)

Fullhouse Company began operations on January 1, 2020. Authorized were 100,000 ordinary
Shares of P1OO par value and 50,000 convertible preference shares of 10% P1OO par value.

The following transactions involving shareholders' equity occurred during the first year of
operations:

Jan. 10 Issued 10,000 ordinary shares to the promoters in

exchange for land valued at and service valued
at P500,000.

The property had cost the promoters three years

before and was carried on the promoters' books
at P 1,500,000.

Feb. 20 Issued 15,000 preference shares for P 120 per share.

Each share can be converted to five ordinary shares.
 The entity paid P50,000 to an agent for selling the shares.

Mar. 10 Sold 25,000 ordinary shares for P260 per share. Issue costs
amounted to P200,000.

Apr. 1 Sold 20, 000 Ordinary shares under share subscriptions at P350 per share.

No share certificates are issued until a subscription contract is paid in full.

No cash was received.
.

July 15 Exchanged 12,000 ordinary shares and preference share for a building
with a fair of P7,000,000.

The building was originally purchased for P6,500,000 by the owner and
has a carrying amount of P4,800,000.

In addition, 10,000 ordinary shares were sold for P3,000,000 cash on

same date.

Aug. 1 Received payments in full for half of the share subscriptions and partial
payments on the rest the subscriptions. Total cash received was
P4,500,000.

Share certificates were issued for the subscription when paid in full.
 Aug. 31 Received notice from holders of share subscriptions for 5,000 shares that
they would not pay further on the subscriptions because the price of the
share had fallen to P 190 per share.

The amount still due on those contracts was P1,500,000.

Amounts previously paid on the contracts are forfeited according to the

agreement.

Dec. 31 Net income for the first year of operations was P3,000,000.

Instructions:

1. Prepare journal entries to record the transactions.

2. Present the shareholders' equity on December 31, 2020.

Problem 20-8 (IAA)

Sand Company provided the following data at current year end:

Preference share capital, P1OO par, 50,000 shares 5,000,000

Share premium — PS 500,000

Ordinary share capital, P50 par, 100,000 shares 5,000,000

Share premium — ordinary share 1,000,000

Retained earnings 2,000,000

Required:

1. Prepare journal entry assuming that 5,000 preference shares are converted:

a. Preference shares are convertible into ordinary shares on a share-for-share basis.

b. Each preference share is convertible into 4 ordinary shares.

2. Prepare journal entry assuming 5,000 preference shares are callable and called in for payment
at:

a. 120
b. 80

Problem 20-9 (IAA)

On January 1, 2020, Lilianne Company issued mandatorily redeemable preference shares in

exchange for cash equal to the total par value of the shares of P5,000,000

No dividends are to be paid on these shares but the shares must be redeemed on January 1, 2022
for P6,050,000.

The implicit interest rate is 10% which is compounded annually.

Required:

Prepare journal entries for 2020, 2021 and 2022 to record the issuance of preference shares,
interest expense and redemption of the shares.
Problem 20-10 (IAA)

Mara Company provided the following data at year-end.

Authorized share capital 5,000,000

Unissued share capital 2,000,000

Subscribed share capital 1,000,000

Subscription receivable 400,000

Share premium 500,000

Retained earnings unappropriated 600,000

Retained earnings appropriated 300,000

Revaluation surplus 200,000

What total amount should be reported as shareholder’s equity?

a. 5,200,000

b. 5,500,000

c. 4,900,000

d. 4,800,000

Problem 20—11 (IAA)

Bronze Company provided the following information at year-end:

Share capital 5,000,000

Subscribed share capital 3,000,000

Subscription receivable 2,000,000

Share premium 1,500,000

Cumulative translation loss 500,000

Treasury shares, at cost 700,000

Retained earnings 1,000,000

Cumulative unrealized gain on futures contract designated

as cash flow hedge 600,000

What is the contributed capital at year-end?

a. 9,500,000

b. 7,500,000

c. 8,500,000

d. 6,800,000

Problem 20-12 (IAA)

On January 1, 2020, Negros Company was incorporated with following authorized

capitalization:

Ordinary share capital, no par, P 100 stated value P20,000,000

preference share Capital, 10%, P50 par P10,000,000

During the year, the entity issued 150,000 ordinary shares for a total of P18,000,000 and 50,000
preference shares at 60 per share.
In addition, on December 15, 2020, subscriptions for 20,000 preference shares were taken at a
purchase price of P 100.

These subscribed shares were paid for on January 15, 2021.

Net income for 2020 was P5,000,000

What amount should be reported as total contributed capital on December 31, 2020?

a. 28,000,000

b. 21,000,000

c. 23,000,000

d. 26,000,000

Problem 20-13 (AICPA Adapted)

At the beginning of current year, Ashe Company was organized with authorized share capital of
100,000 shares of P200 par value.

During the year, the entity had the following transactions affecting shareholders' equity:

January 10 Issued 25,000 Share. at P220 share.

March 25 Issued 1,000 shares for legal services when the fair value was P240 a share.

September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a share.
What amount should be reported as share premium at year-end?

a. 840,000

b. 800,000

c. 540,000

d. 500,000