RETAINED EARNINGS

RETAINED EARNINGS, UNAPPROPRIATED

AUDIT OF BEG.
Retrospective

STOCKHOLDERS’
Prior Period Errors Prior Period Errors
Adjustments
Change in Policies Change in Policies

EQUITY Cash
Share/Stock Dividends DECLARATION
BEG., as RESTATED

(Part 2)
Property
POSSIBLE Capital Losses
Script
Appropriations Reversals of appropriations

- TS transactions
- PS conversion Net Loss Net Income
Christopher T. Espenilla - Recap.
Quasi-reorganizaton Quasi-reorganizaton
Legal
Voluntary END
Contractual

1 2

CASH DIVIDENDS SHARE DIVIDENDS

-Non-cumm or cumm SMALL <20%
of the Dividend rights
-Non-part. or part
LARGE =>20% Outstanding (Issued less Treasury)
ENTRIES: Distribution between: Subscribed

DECLARATION DATE: Preference shares Share Dividends Declared

Ordinary shares
ENTRIES:
Retained Earnings XXX
DECLARATION DATE:
Cash Dividends Payable XXX
Retained Earnings @FMV /@PAR XXX
As a lump Sum
As an amount per Share Share Dividends Payable (always at PAR) XXX
As a rate/percentage Outstanding (Issued less Treasury) Share Premium (if Small Div.) XXX
Subscribed
(%*Par*Dividend right)
Share Dividends Declared
DISTRIBUTION DATE:

Share Dividends Payable (@PAR) XXX

DISTRIBUTION/PAYMENT DATE
Ordinary Shares (@PAR) XXX
Cash Dividends Payable XXX

Cash XXX

3 4
 PROBLEM 11: Dividends PROBLEM 11: Dividends
Assume the stockholders’ equity of Dark Company on January 1, 2018 to be as follows:
Requirements: Ordinary Shares, P10 par, 100,000 shares issued
Share premium – Ordinary shares
P1,000,000
1,100,000
1. What is the correct debit to retained Retained earnings 750,000

earnings as a result of the 10% stock Treasury shares, 10,000 shares at cost (250,000)

dividend declaration on August 1? On August 1, the company declared a 10% stock dividend issuable on September 30. The stock is
selling on market on this date at P14.

Subsequently after the issuance of the above dividend, on October 10, the company declared a 25%
2. What is the correct debit to retained stock dividend issuable in November 5. The stock is selling on the market on this date at P17.

earnings as a result of the 25% stock The entries prepared by the accountant for the above transactions were:
dividend declaration on October 10? At the date of declaration:
Aug. 1 Retained earnings 100,000
Stock dividend distributable 100,000
3. What is the correct balance of the Oct. 10 Retained earnings 425,000
ordinary shares account as of December Stock dividend distributable 250,000
31, 2018? Paid in capital in excess of par 175,000

No entry has been made to record the issuance of the share dividends.

5 6

PROBLEM 11: Solutions/Answers PROBLEM 11: Solutions/Answers

1. Ans. 2. Ans.

Retained earnings Retained earnings

126,000 247,500
(10%*90,000sh)*P14 (25%*99,000sh)*P10

Share dividends payable (9,000sh*P10) 90,000 Share dividends payable (24,750sh*P10) 247,500

Share premium 36,000

Share dividends payable 247,500

Share dividends payable 90,000 Ordinary shares 247,500

Ordinary shares 90,000

7 8
 PROBLEM 11: Solutions/Answers SHARE DIVIDENDS
SMALL <20%
of the Dividend rights
3. Ans. P1,337,500. LARGE =>20% Outstanding (Issued less Treasury)
Subscribed
Share Dividends Declared
Ordinary shares, beg. balance 1,000,000 ENTRIES:
DECLARATION DATE:
10% share dividends
90,000 Retained Earnings @FMV /@PAR
(90,000sh*10%)*P10 XXX

Share Dividends Payable (always at PAR) XXX

25% share dividends Share Premium (if Small Div.) XXX
247,500
(99,000sh*25%)*P10
DISTRIBUTION DATE:

Ordinary shares, end balance 1,337,500 Share Dividends Payable (@PAR) XXX

Fractional Share Warrants Outstanding XXX

(@PAR) (APIC)

9 10

FRACTIONAL SHARE PROBLEM 12: Share Dividends

WARRANTS OUTSTANDING Requirements:

DISTRIBUTION DATE:
1. What is the entry to record the declaration of 10% stock
dividends?
Share Dividends Payable (@PAR) XXX
2. What is the entry to record the distribution of share dividends
Fractional Share Warrants Outstanding
(@PAR)
XXX
and the fractional warrants?
(APIC)

3. What is the entry to record the surrender and exercise of the

REDEMPTION EXPIRATION 90% fractional warrants?
FSWO XXX FSWO XXX 4. Assuming that the remaining fractional warrants expire, what
@PAR is the entry to record their expiration?
OS XXX APIC FROM
XXX 5. How much is the credit to retained earnings as a result of the
EXPIRED FW
declaration of the cash dividends at the end of the year?

11 12
 PROBLEM 12: Share Dividends PROBLEM 12: Solutions/Answers
Chris Company has 500,000 shares of P10 par value 1. Ans.
ordinary shares outstanding. In declaring and
distributing 10% stock dividend, Chris Company issued
only 46,000 new shares, the other share dividend were Retained earnings
1,250,000
not issued because some investors did not own Chris (10%*500,000)*P25
Company’s shares in even multiples of ten. To these
stockholders, Chris Company issued fractional warrants. Stock dividends payable
500,000
Chris Company’s ordinary shares were selling at P25 per (50,000sh*P10)
share when the stock dividend were declared.
Ultimately, only 90% of the fractional share warrants Share premium 750,000
were finally turned-in in exchange of full shares.
At the end of the year Chris Company declared a cash
dividend and a liquidating dividend of P2 and P1 per
share, respectively.

13 14

PROBLEM 12: Solutions/Answers PROBLEM 12: Solutions/Answers

2. Ans.

3. Ans.
Stock dividends payable 500,000

Ordinary shares
460,000 Fractional warrants
(46,000sh*P10) 36,000
outstanding
Fractional warrants
40,000 Ordinary shares
outstanding (4,000*P10) 36,000
(3,600sh*P10)

15 16
 PROBLEM 12: Solutions/Answers PROBLEM 12: Solutions/Answers
5. Ans. P1,099,200.
Oustanding shares, beginning 500,000
Ordinary share dividends
4. Ans. 46,000
distributed
Shares issued from fractional
3,600
Fractional warrants warrants
4,000
outstanding Total outstanding shares 549,600
Multiply by: Cash dividends 2
Share premium - Expired
4,000 Dividends from earnings 1,099,200
fractional warrants
Entry:
Retained earnings 1,099,200
Capital liquidated (549,600*P1) 549,600
Dividends payable 1,648,800

Note that the Capital liquidated accounts is a contra-

capital account, that is, deducted from total SHE.

17 18

PROPERTY DIVIDENDS PROPERTY DIVIDENDS

(IFRIC 17, Non-cash assets distribution to owners) PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:
Measurement:@FMV = @FMV of the asset decl. as dividends
PPE, Intangibles, Associate, IP
ENTRIES: - final value on settlement date
(Under PFRS 5: NCAHFD)
DECLARATION: ENTRIES:
Retained Earnings @FMV XXX DECLARATION: NCAHFD XXX
Property Dividends Payable XXX Retained Earnings @FMV XXX Loss XXX
Property Dividends Payable XXX PPE/Intang./Assoc./IP @CV XXX
BALANCE SHEET DATE:
@Lower of CV(reclass date) or FMVLCTS
Remeasurement of property dividends payable @ prevailing FMV BALANCE SHEET DATE:
1. IF FMVLCTS is Lower Loss is recogn.
Increase or decrease charged to RE Remeasurement of property dividends payable
@ prevailing FMV 2. IF FMVLCTS is Higher Gain is ignored.
PAYMENT: Increase or decrease charged to RE
1. Final Valuation: Increase or decrease charged to RE PAYMENT:
2. Settlement: 1. Final Valuation:Increase or decrease charged to RE
Property Dividends Payable XXX 2. Settlement:
@final FMV
Property Dividends Payable XXX
Loss / Gain XXX / XXX
Loss / Gain XXX / XXX
Non-cash asset XXX @CV of the asset
Non-cash asset XXX

19 20
 PROPERTY DIVIDENDS PROPERTY DIVIDENDS
PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS: PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:

PPE, Intangibles, Associate, IP PPE, Intangibles, Associate, IP

Example 1: If PPE CV is 10; (Under PFRS 5: NCAHFD) (Under PFRS 5: NCAHFD)
FMVLCTS is 6 ENTRIES:
DECLARATION: NCAHFD XXX
ENTRIES: Retained Earnings @FMV XXX Loss XXX
DECLARATION: NCAHFD 6 Property Dividends Payable XXX PPE/Intang./Assoc./IP @CV XXX
Retained Earnings @FMV 6 Loss 4
@Lower of CV(reclass date) or FMVLCTS
Property Dividends Payable 6 PPE/Intang./Assoc./IP 10 BALANCE SHEET DATE:
1. IF FMVLCTS is Lower Loss is recogn.
@Lower of CV(reclass date) or FMVLCTS Remeasurement of property dividends payable
2. IF FMVLCTS is Higher Gain is ignored.
@ prevailing FMV
1. IF FMVLCTS is Lower Loss is recogn.
Example 2: If PPE CV is 10; Increase or decrease charged to RE
FMVLCTS is 14 PAYMENT:
1. Final Valuation:Increase or decrease charged to RE
DECLARATION: NCAHFD 10
2. Settlement:
Retained Earnings @FMV 14 PPE/Intang./Assoc./IP @CV 10
Property Dividends Payable XXX
Property Dividends Payable 14 @Lower of CV(reclass date) or FMVLCTS
Loss / Gain XXX / XXX No necessary entry for the
asset declared as dividends
2. IF FMVLCTS is Higher Gain is ignored. Non-cash asset XXX under PFRS 5

21 22

PROPERTY DIVIDENDS PROPERTY DIVIDENDS

PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS: PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:

PPE, Intangibles, Associate, IP PPE, Intangibles, Associate, IP

(Under PFRS 5: NCAHFD) Example 1: If PPE CV is 10; (Under PFRS 5: NCAHFD)
ENTRIES: FMVLCTS is 6
DECLARATION: NCAHFD XXX
Retained Earnings @FMV XXX Loss XXX ENTRIES:
Property Dividends Payable XXX PPE/Intang./Assoc./IP @CV XXX DECLARATION: NCAHFD 6
Retained Earnings @FMV 6 Loss 4
@Lower of CV(reclass date) or FMVLCTS
BALANCE SHEET DATE: Property Dividends Payable 6 PPE/Intang./Assoc./IP 10
1. IF FMVLCTS is Lower Loss is recogn.
Remeasurement of property dividends payable @Lower of CV(reclass date) or FMVLCTS
@ prevailing FMV 2. IF FMVLCTS is Higher Gain is ignored.
1. IF FMVLCTS is Lower Loss is recogn.
Increase or decrease charged to RE
PAYMENT:
Assume FMVlCTS at BS date is 15
BS Date: NCAHFD 4
1. Final Valuation:Increase or decrease charged to RE NCAHFD is remeasured at:
2. Settlement: @Lower of CV(reclass date) or FMVLCTS Retained Earnings (Inc) 9 Loss/Gain 4
Property Dividends Payable XXX (constant) (may change)
Property Dividends Payable 9 1. IF FMVLCTS Increases
Loss / Gain XXX / XXX 1. IF FMVLCTS Increases
- only the reversal of the previous
2. IF FMVLCTS Decreases loss shall be recognized.
Non-cash asset XXX
Property Dividends Payable 12/31 15 NCAHFD 12/31 10

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 PROPERTY DIVIDENDS PROPERTY DIVIDENDS
PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS: PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:

PPE, Intangibles, Associate, IP PPE, Intangibles, Associate, IP

Example 2: If PPE CV is 10; (Under PFRS 5: NCAHFD) (Under PFRS 5: NCAHFD)
FMVLCTS is 14 ENTRIES:
DECLARATION: NCAHFD XXX
DECLARATION: NCAHFD 10
Retained Earnings @FMV XXX Loss XXX
Retained Earnings @FMV 14 PPE/Intang./Assoc./IP @CV 10
Property Dividends Payable XXX PPE/Intang./Assoc./IP @CV XXX
Property Dividends Payable 14 @Lower of CV(reclass date) or FMVLCTS
@Lower of CV(reclass date) or FMVLCTS
BALANCE SHEET DATE:
2. IF FMVLCTS is Higher Gain is ignored. 1. IF FMVLCTS is Lower Loss is recogn.
Remeasurement of property dividends payable
2. IF FMVLCTS is Higher Gain is ignored.
Assume FMVlCTS at BS date is 15 @ prevailing FMV
Increase or decrease charged to RE
BS Date: PAYMENT:
Retained Earnings (Inc) 1 NO ENTRY 1. Final Valuation:Increase or decrease charged to RE NCAHFD is remeasured at:
Property Dividends Payable 1 1. IF FMVLCTS Increases 2. Settlement: @Lower of CV(reclass date) or FMVLCTS
Property Dividends Payable XXX (constant) (may change)
- only the reversal of the previous
loss shall be recognized. Loss / Gain XXX / XXX 1. IF FMVLCTS Increases
2. IF FMVLCTS Decreases
Property Dividends Payable 12/31 15 NCAHFD 12/31 10 Non-cash asset XXX

25 26

PROPERTY DIVIDENDS PROPERTY DIVIDENDS

PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS: PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:

PPE, Intangibles, Associate, IP PPE, Intangibles, Associate, IP

Example 1: If PPE CV is 10; (Under PFRS 5: NCAHFD) Example 2: If PPE CV is 10; (Under PFRS 5: NCAHFD)
FMVLCTS is 6 FMVLCTS is 14
DECLARATION: NCAHFD 10
ENTRIES:
Retained Earnings @FMV 14 PPE/Intang./Assoc./IP @CV 10
DECLARATION: NCAHFD 6
Loss 4 Property Dividends Payable 14 @Lower of CV(reclass date) or FMVLCTS
Retained Earnings @FMV 6
Property Dividends Payable 6 PPE/Intang./Assoc./IP 10
2. IF FMVLCTS is Higher Gain is ignored.
@Lower of CV(reclass date) or FMVLCTS
1. IF FMVLCTS is Lower Loss is recogn. Assume FMVlCTS at BS date is 4
Assume FMVlCTS at BS date is 4 BS Date:
Loss 6
BS Date: Loss 2 Property Dividends Payable 10 NCAHFD 6
Property Dividends Payable 2 NCAHFD 2 Retained Earnings (Dec.) 10
2. IF FMVLCTS Decreases
Retained Earnings (Dec.) 2 2. IF FMVLCTS Decreases
- Loss is further recognized.
- loss is further recognized
Property Dividends Payable 12/31 4 NCAHFD 12/31 4 Property Dividends Payable 12/31 4 NCAHFD 12/31 4

27 28
 PROPERTY DIVIDENDS PROBLEM 13: Property Dividends
PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS: Requirements:
PPE, Intangibles, Associate, IP
Example 2: If PPE CV is 10; (Under PFRS 5: NCAHFD) 1. The entry to record the declaration of the property dividends
FMVLCTS is 14 would include a debit to retained earnings of:
DECLARATION: NCAHFD 10
Retained Earnings @FMV 14 PPE/Intang./Assoc./IP @CV 10 2. How much property dividends payable should be reported in
Property Dividends Payable 14 @Lower of CV(reclass date) or FMVLCTS
the statement of financial position as of December 31?
2. IF FMVLCTS is Higher Gain is ignored.
3. How much should be charged to the profit or loss as a result
Assume FMVlCTS at BS date is 11
BS Date:
of the remeasurement of the property dividends payable by
Property Dividends Payable 3 NO ENTRY December 31, 2018?
Retained Earnings (Dec.) 3
2. IF FMVLCTS Decreases
- NO Loss is recognized since
4. What is the gain or loss to be recognized in the profit or
CV is still lower than FMVLCTS losses as a result of the distribution of the property dividends
Property Dividends Payable 12/31 11 NCAHFD 12/31 10 on January 31?

29 30

PROBLEM 13: Property Dividends PROBLEM 13: Solutions/Answers

On October 31, 2018, ABC Inc. declared a building
1. Ans. P900,000.
held as owner-occupied property with an original
life of 10 years as dividend distributable to Declaration:

stockholders on January 31 of the following year. Retained earnings 900,000

This was acquired at P800,000 on October 31, Property dividends payable 900,000

2017. The property had fair market value

P900,000 on October 31, 2018. On December 31, Noncurrent asset held for disposal 720,000
2018 the value of the property declined to Accum. depr (P800,000*1/10) 80,000
P700,000. Building (PPE) 800,000

The property was transferred to shareholders on

January 31 when the prevailing fair value was at
P800,000.

31 32
 PROBLEM 13: Solutions/Answers PROBLEM 13: Solutions/Answers
2. Ans. P700,000.
Balance sheet date: December 31, 2018
Property dividends payable 200,000 3. Ans. None.
Retained earnings 200,000
FMV at 12/31/18 700,000 Note that the increase or decrease
Dividends payable, CV 900,000 in the property dividends payable
Adjustment to RE (200,000) is charged to RE.

Loss 20,000
Noncurrent asset held for disposal 20,000
FMV less cost to sell, NCAHFD 700,000
CV, upon reclass 720,000
Loss on remeasurement - P&L (20,000)

33 34

PROBLEM 13: Solutions/Answers PROPERTY DIVIDENDS

4. Ans. P100,000.
PROPERTY DIVIDENDS PAYABLE: ASSET DECLARED AS DIVIDENDS:
Distribution:
Inventories, FA@FMV (P/L)
Retained earnings 100,000
(Current Assets – not covered by PFRS 5)
Property dividends payable 100,000 ENTRIES:
DECLARATION:
Final FMV, 1/31/2019 800,000 No entry necessary. Continue accounting
Retained Earnings @FMV XXX
for the assets under their designated standards
Dividends payable, CV (FMV Property Dividends Payable XXX
700,000 e.g. PAS 2, Inventories; PFRS 9, Fin. Instr.
12/2014)
BALANCE SHEET DATE:
Adjustment to RE 100,000
Remeasurement of property dividends payable
@ prevailing FMV PAS 2, INVENTORY: LCorNRV
Increase or decrease charged to RE
Property dividends payable 800,000 PFRS 9, Fin. Instr: FMV
PAYMENT:
Noncurrent asset held for disposal 700,000
1. Final Valuation:Increase or decrease charged to RE
Gain on settlement of property 2. Settlement:
dividends - P&L 100,000
Property Dividends Payable XXX
Loss / Gain XXX / XXX
Inventory/FA@FMV XXX

35 36
 SCRIPT DIVIDENDS SCRIPT DIVIDENDS
ENTRIES: ENTRIES:
Where cash div. was originally declared Where financial liability is issued on the declaration date:
DECLARATION: DECLARATION:
Retained Earnings XX Retained Earnings XX
Cash Dividends Payable XX Notes/Bonds Payable XX

DISTRIBUTION:
Cash Dividends Payable XX SETTLEMENT OF THE FIN. LIAB.
Notes/Bonds Payable XX Notes/Bonds Payable XX
Interest Expense XX
SETTLEMENT OF THE FIN. LIAB. Cash XX
Notes/Bonds Payable XX
Interest Expense XX
Cash XX

37 38

RECAPITALIZATION Treasury Shares

PROBLEM 14: Comprehensive
Requirements:
1. Share Splits Inc. in # of Sh; Dec. in Cost/Sh
1.What is the effect to stockholders’ equity as a result of the
1. 1) SPLIT-UP: Inc. in # of Sh; Dec. in Par/St Value per Share share split in item c?
Issued;
Subscribed; 2.What is the amount debited to accumulated profits as a
Share Dividends Declared
1. 2) SPLIT-DOWN/
result of the declaration of the 10% stock dividend in item f?
REVERSE SPLIT: Dec. in # of Sh; Inc. in Par/St Value per Share
3.What is the amount debited to accumulated profits as a
Treasury Shares
Memorandum Entry only Dec. in # of Sh; Inc. in Cost/Sh result of the 2018 cash dividend declaration?

2. Dec. /Inc. in par or stated value 4.What is the correct balance of the accumulated profits-
unappropriated account as of December 31, 2018?
w/o Inc./Dec. in # of Shares
2. 1) OS;OS Subs. XX 2. 2) Share Premium XX 5.Assuming that the share dividends declared in item f was
Share Premium XX Retained Earnings XX 20%, what is the amount debited to retained earnings as a
OS;OS Subs. XX result of the declaration of stock dividends?

39 40
 PROBLEM 14: Comprehensive PROBLEM 14: Solutions/Answers
Summary: Accum. Prof
JKL Corp. reported the following amounts in the shareholders’ equity section of its December 31,
2017, statement of financial position: January 1, 2018 balances 1,200,000
(a) Retroactive adjustment, 2017 dividends (50,000)
Preference shares, P10 par (100,000 shares authorized, 40,000 shares
(b) Treasury shares reacquisition
issued) P400,000 Requirement 1: (c) Share split - No Effect
Ordinary shares, P5 par (50,000 shares authorized, 20,000 sh. issued) 100,000
Share premium – Ordinary shares 192,000 (d) Treasury shares reissue
Accumulated profits 1,200,000 (e) Preference shares issue
The following transactions occurred during 2018: (f) 10% stock dividends (20,880) Requirement 2:
(g) 2018 cash dividends (59,570) Requirement 3:
a. At the beginning of 2018, the company paid the annual 2017 P1 per share dividend on preference shares
(h) 2018 net income 940,000
and P0.50 per share dividend on Ordinary shares. These dividends had been declared on December 1, 2017.
Further investigations revealed that no entry has been made to account for the declaration of the said -- Appropriation for treasury (52,000)
dividends. December 31, 2018 balances 1,957,550
b. On February 17, the company purchased 4,000 shares of its own outstanding ordinary shares for P80,000.
c. On March 30, the company declared and issued ordinary shares split-up (1 is to 2). Requirement 4:
d. On June 19, the company reissued 2,800 treasury shares for an equipment with a fair value at P50,000.
Accumulated profits 17,400
e. On August 1, the company issued 10,000 shares of preference shares at P15 per share.
f. On September 30, the company declared a 10% stock dividend on the outstanding ordinary shares when the Share dividends payable 17,400
stock is selling for P6 per share. The share dividends were subsequently issued on October 11. Computed as: (34,800*20%*P2.50)
g. December 1, the company declared the annual 2018 P1 dividend on preference shares and the P0.25 per
Requirement 5:
share dividend on ordinary shares. These dividends are payable at the beginning of 2019.
h. The company registered a net income for 2018 at P940,000.

41 42

QUASI-REORGANIZATION PROBLEM 15: QUASI-REORG.

TYPES:
1. DEFICIT RECLASSIFICATION
Case 1:
- write-off deficit/(RE), against APIC, w/0 revaluation of net assets
- if APIC is not enough: Recap. to decrease Par/Stated Value
Requirements:
1. What is the total asset after the quasi-reorganization?
2. ACCOUNTING REORGANIZATION
2. What is the total stockholders’ equity after the quasi-
General Cases Rare Cases reorganization?
1. Revalue Net Assets - Downward - Upward (PPE/Intang.)
- Additional losses -Appraisal Model 3. What is the balance of share premium (additional paid
charged to RE FMV in capital) after the quasi-reorganization?
2. Recapitalize to decrease Par/Stated Value (CV)
RS-OCI 4. What is the correct balance of the retained earnings
3. W/0ff deficit/(RE), against RS-OCI
account as of December 31, 2018?

43 44
 PROBLEM 15: QUASI-REORG. PROBLEM 15: QUASI-REORG.
Trust Corporation has suffered operating losses for some time, but is now operating profitably Case 1:
and expects to continue to do so. Current and projected income, however, will not be
sufficient to eliminate the deficit in the near term. It also appears that plant assets are Assuming that the quasi reorganization shall be
overstated considering current prices and economic conditions. After receiving permission
accomplished as follows:
from government authorities and approval from the shareholders, the board of directors of
Trust Corporation decides to restate the company assets and paid-in capital balances in order
a) Property, plant and equipment are to be reduced to
to remove the deficit and make possible the declaration of dividends from profitable their present fair market value of P800,000.
operations. A balance sheet for the company just prior to this action is presented below: b) Inventories are to be written down by P50,000.
Trust Corporation c) Unaccrued obligation shall be recognized at
Balance Sheet P150,000.
December 31, 2018 d) Ordinary Shares are to reduced to a par value of P5.
Current assets P250,000 Liabilities P300,000
Property, plant and equipment 1,500,000 Ordinary Shares, 10 par,
Accumulated Depreciation (600,000) 100,000 shares 1,000,000
Share premium 100,000
________ Deficit (250,000)
Total assets P1,150,000 Total P1,150,000

45 46

PROBLEM 15: SOLUTIONS/ANS. PROBLEM 15: QUASI-REORG.

SUMMARY:
Case 1: Case 2:
Assets Liabilities SHE Ordinary Sh. Share Prem. RE
Balances, before quasi-
1,150,000 300,000 850,000 1,000,000 100,000 (250,000) Requirements:
reorganization
1. What is the total asset after the quasi-reorganizatoin?
a) Write-down of PPE (100,000) (100,000) (100,000)
b) Write-down of Inventory (50,000) (50,000) (50,000) 2. What is the total stockholders’ equity after the quasi-
c) Accrual of additional Liability 150,000 (150,000) (150,000) reorganization?
d) Recapitalization - (500,000) 500,000
e) Write-off of deficit - (550,000) 550,000
3. What is the balance of share premium (additional paid in capital)
Balances, after quasi- after the quasi-reaorganization?
1,000,000 450,000 550,000 500,000 50,000 -
reorganization
1. Ans. 2. Ans. 3. Ans. 4. Ans. 4. What is the balance of any revaluation surplus after the quasi-
reorganization?
5. What is the correct balance of the retained earnings account as of
December 31, 2018?

47 48
 PROBLEM 15: QUASI-REORG. PROBLEM 15: SOLUTIONS/ANS.
Case 2: Case 2:
SUMMARY:
Assuming that the quasi reorganization shall Assets Liabilities SHE OS Sh. Prem. Rev. Surp. RE

be accomplished as follows: Balances, before QR 1,150,000 300,000 850,000 1,000,000 100,000 (250,000)
a) Appraisal of PPE 600,000 600,000 600,000
a) Property, plant and equipment are b) Write-down of Inventory (75,000) (75,000) (75,000)
appraised at a replacement cost of c) Accrual of additional Liability 175,000 (175,000) (175,000)

P2,500,000. d) Write-off of deficit - (500,000) 500,000

Balances, after QR 1,675,000 475,000 1,200,000 1,000,000 100,000 100,000 -
b) Inventories are to be written down by 1. Ans. 2. Ans. 3. Ans. 4. Ans. 5. Ans.
P75,000.
c) Unaccrued obligation shall be recognized
at P175,000.

49 50

AUDIT OF
STOCKHOLDERS’
EQUITY (Part 2)

END

51