Chapter 15: Stockholders' Equity

Equity is subclassified on the FPS into the following categories:

1. Share capital (Ordinary & Preference) .
2. Share premium (Ordinary & Preference).
3. Retained earnings.
4. Accumulated other comprehensive income.
5. Treasury shares. (subtracted)
6. Non-controlling interest (minority interest).

Issuing Shares
Transaction Journal Entry
Issuance of shares
Issued at par value. Cash xx (Issue price)
(Issue price = Par value) Share Capital xx (par value)
Issued at premium. Cash xx (Issue price)
(Issue price > Par value) Share Capital xx (par value)
Share Premium xx complementary

Issuing Shares for a Single lump Sum

Allocate lump sum price using 2 methods:
1) Proportional method: Allocate the lump sum price using the Fair Value (Market
Value) of the 2 types of shares (MV %).
2) Incremental method: Here, we know the M.V of one type of shares only and the
second is unknown. We consider the market value of the given type equals to its
issuance price and the remaining amount of the lump sum will be allocated as the
issuance price of the second type.

Page 1 of 25
 Exercise
Use the given information to answer the following 2 separate cases:
Cairo Co. issued 1,000 ordinary shares and 200 preference shares for a lump sum of
$36,000 cash.

1. Using Proportional Method, the issuance entry assuming the par value of the ordinary
shares was $5 and the fair value $30, and the par value of the preference shares was
$40 and the fair value $50, includes the following:
a. Credit Share Capital—Ordinary $27,000
b. Credit Share Premium—Ordinary $22,000
c. Credit Share Capital—Preference $36,000
d. Credit Share Premium—Preference $8,000
2. Using Incremental Method, the entry to record the issuance assuming the same facts
as (1) above except the preference shares have no ready market and the ordinary
shares have a fair value of $25 per share, includes the following:
a. Credit Share Capital—Ordinary $36,000
b. Credit Share Premium—Ordinary $5,000
c. Credit Share Capital—Preference $11,000
d. Credit Share Premium—Preference $3,000
Solution

M.V M.V % Issuance price

Ordinary Shares $30 × 1,000 = 30,000 30/40 = 75% 27,000

Preference Shares $50 × 400 = 10,000 10/40 = 25% 9,000
Total 40,000 100% 36,000
(1) The Entry..……..answer (b)
Cash 36,000
Share Capital—Ordinary (5× 1,000) 5,000
Share Premium—Ordinary (27,000 – 5,000) 22,000
Share Capital—Preference (40× 200) 8,000
Share Premium—Preference (9,000 – 8,000) 1,000

(2) Ordinary shares have MV= $25 / share, 25 x 1,000 = 25,000 (issue price)
Therefore, Preference Shares issue price = 36,000 – 25,000 = 11,000
Page 2 of 25
The Entry……….answer (d)
Cash .................................................................... 36,000
Share Capital—Ordinary….…..(5× 1,000)……… 5,000
Share Premium—Ordinary....(25,000 – 5,000) ..... 20,000
Share Capital—Preference …….(40× 200)…….. 8,000
Share Premium—Preference ..(11,000 – 8,000) 3,000

Issuing Shares for Non-cash Assets

 Companies should record shares issued for services or property other than cash at the
fair value of the goods or services received.
 If the market value of the asset is unknown but, the market value of the shares is
known, so the asset should be recorded by the M.V. of the shares.
 If the market value of the asset is unknown and the market value of the shares is
unknown also, we estimate the market value of the asset (by an independent
consultant).
Accounting for Treasury Shares
 The co. uses the cost method to account for treasury shares.
 Treasury shares reduce shareholders’ equity in FPS (Issued shares – Treasury
shares = Outstanding shares).

Transaction Journal Entry

Reacquisition of Treasury Shares xx (cost)
Shares/ Purchase of Cash xx
Treasury Shares
Selling of Treasury
Shares
SP > the Cost Cash xx (selling price)
Share Premium- Treasury shares xx (cost)
Treasury (Credit) Share Premium-Treasury xx
SP < the Cost Cash xx (selling price)
Share-premium- Share Premium-Treasury xx (within balance)
Treasury (Debit) Retained Earnings xx (remainder)
If there is no balance in Treasury shares xx (cost)
(Share-premium-
Treasury), decrease the
"R/E".

Page 3 of 25
 Exercises
Micro Corporation’s statement of financial position reported the following:
Share capital—ordinary outstanding, 10,000 shares, par $30 per share $300,000
Share premium—ordinary 160,000
Retained earnings 200,000
The following transactions occurred this year:
 Purchased 240 ordinary shares of to be held as treasury shares, for $60/share.
 Sold 180 of the treasury shares at $65 per share.
 Sold the remaining treasury shares at $50 per share.
1. The journal entry to record the reacquisition of the shares should debit
a. Treasury Shares for $14,400.
b. Share Capital—Ordinary for $14,400.
c. Share Capital—Ordinary for $14,400 and Share Premium—Ord. for $20,000.
d. Treasury Shares for $15,600.
2. What account(s) should Micro credit to record the sale of 180 shares?
a. Treasury Shares for $11,700.
b. Treasury Shares for $10,800 and Share Premium—Treasury for $900.
c. Treasury Shares for $10,800 and Retained Earnings for $900.
d. Treasury Shares for $11,700 and Retained Earnings for $900.
3. Micro should record the sale of the remaining treasury shares by
a. Debiting Retained Earnings for $600.
b. Crediting Share Premium—Treasury for $600.
c. Debiting Share Premium—Treasury for $600.
d. Crediting Retained Earnings for $600.
Solution
1 a
2 b
3 c
(a) Treasury Shares .................................................................. 14,400
Cash ............................................................................ 14,400

(b) Cash ................................................................................... 11,700

Treasury Shares .......................................................... 10,800
Share Premium—Treasury ......................................... 900

(c) Cash .................................................................................... 3,000

Share Premium—Treasury ................................................. 600
Treasury Shares .......................................................... 3,600
Page 4 of 25
 Previous Exams

First: Wheeler Company issued 5,000 shares of its $5 par value ordinary shares having
a market value of $25 per share and 7,500 shares of its $15 par value preference shares
having a market value of $20 per share for a lump sum of $550,000.
Required:
Prepare the issuance entry using the proportional method .
Solution

M.V M.V % Issuance price

Ordinary Shares 25 × 5,000 = 125,000 250,000

125/275
Preference Shares 20 × 7,500 = 150,000 150/275 300,000
Total 275,000 100% 550,000
(a) The Entry:
Cash ......................................................................................... 550,000
Share Capital—Ordinary ….…..(5× 5,000) .......... 25,000
Share Premium—Ordinary ....(250,000 – 25,000) 225,000
Share Capital—Preference ..... (15× 7,500)…….. 112,500
Share Premium—Preference ..(300,000 – 112,500).. 187,500

Second: Wyrick Company issued 20,000 ordinary shares to the founders of the
corporation for land valued by the board of directors at $250,000. The board
establishes a stated value of $10 a share for the ordinary shares.
Required:
Prepare the issuance entry to record the transaction.
Solution
Land .................................................................. 250,000
Share Capital—Ordinary ....................................... 200,000
Share Premium—Ordinary .................................... 50,000

Previous Exams

An analysis of equity of Hahn Corporation as of January 1, 2020, is as follows:

Share capital—ordinary, par value $20; authorized 100,000 shares;
issued and outstanding 90,000 shares $1,800,000
Page 5 of 25
Hahn uses the cost method of accounting for treasury shares and during 2020 entered
into the following transactions:
1) January 15, Acquired 2,500 of its shares for $75,000.
2) January 27, Sold 2,000 treasury shares at $25 per share.
3) March 1, Sold the remaining treasury shares at $40 per share.
Required:
Prepare the entries to record the transactions.
Solution
Cost = 75,000 / 2,500 = 30
(a) Treasury Shares .................................................................. 75,000
Cash ............................................................................ 75,000

(b) Cash ................................................................................... 50,000

Retained Earnings ……………………………………….. 10,000
Treasury Shares .......................................................... 60,000

(c) Cash .................................................................................... 20,000

Treasury Shares ...................................................... 15,000
Share Premium—Treasury………………………. 5,000

Dividends
First: Cash Dividends

Declaration date Dr Retained earnings xx

Cr Dividends payable* xx

Record date No entry

Payment date Dr Dividends payable* xx
Cr Cash xx

Second: Share Dividends

Declaration Dr Retained earnings xx

date Cr Ordinary Share Dividend Distributable* xx

Record date No entry

Page 6 of 25
 Payment date Dr Ordinary Share Dividend Distributable* xx
Cr Share Capital—Ordinary xx
*Share dividends = # shares x par value

Share Splits
 Dividing a share into a no. of smaller shares, (i.e. one share will be divided
into 2 or more), this leads to:
 Increasing the number of shares. (multiply by 2)
 Decreasing the par value per share. (divide by 2)
 No entry for stock split.

The Types of Preference Shares

Cumulative preference share Non- cumulative preference share

Any dividends not paid in previous The shareholders take the dividends
year(s) to preference share, must be in the year of distribution only & no
paid in the year of distribution first previous years’ dividends.
before distributing any dividends to the
ordinary share.
Dividends in arrears. NO dividends in arrears.
Participative preference share Non-participative preference share

The preference shareholders will The remainder of dividends will be to

participate the ordinary shareholders in the ordinary shareholders only.
the excessive dividends over the rate of
preference shares dividends.
2 kinds of participation:
 Full participation.
 Limited participation (with
maximum %).

Page 7 of 25
 MCQ

1. Colson Inc. declared a $160,000 cash dividend. It currently has 6,000 shares of 7%,
$100 par value cumulative preference shares outstanding. It is one year in arrears on its
preference shares. How much cash will Colson distribute to the ordinary shareholders?
a. $76,000. b. $84,000. c. $118,000. d. None

a. 6,000  $100  .07 = $42,000

$160,000 – ($42,000  2) = $76,000.

2. On June 30, 2012, when Ermler Co.'s stock was selling at $65 per share, its equity
accounts were as follows:
Share capital—ordinary (par value $50; 60,000 shares issued) $3,000,000
Share premium—ordinary 600,000
Retained earnings 4,200,000
If a 100% share dividend were declared and distributed, share capital—ordinary would
be?
a. $3,000,000. b. $3,600,000. c. $6,000,000. d. $7,800,000.

c (60,000  $50) + $3,000,000 = $6,000,000.

3. The equity section of Gunkel Corporation as of December 31, 2010, was as follows:
Share capital—ordinary, par value $2; authorized 20,000 shares; issued and outstanding
10,000 shares $ 20,000
Share premium—ordinary 30,000
Retained earnings 75,000
$125,000
On March 1, 2011, the board of directors declared a 15% share dividend, and
accordingly 1,500 additional shares were issued. On March 1, 2011, the fair value of the
share was $6 per share. For the two months ended February 28, 2011, Gunkel sustained
a net loss of $10,000. What amount should Gunkel report as retained earnings as of
March 1, 2011?
a.$62,000. b. $65,000. c. $69,000. d. $72,000.
a $75,000 – $10,000 – (1,500 $2) = $62,000.

Page 8 of 25
4. The equity of Howell Company at July 31, 2016 is presented below:
Share capital—ordinary, par value $20, authorized 400,000 shares;
issued and outstanding 160,000 shares $3,200,000
Share premium—ordinary 160,000
Retained earnings 650,000
$4,010,000
On August 1, 2016, the board of directors of Howell declared a 15% share dividend on
ordinary shares, to be distributed on September 15th. The market price of Howell’s
ordinary shares was $35 on August 1, 2016, and $38 on September 15, 2016. What is the
amount of the debit to retained earnings as a result of the declaration and distribution of
this share dividend?
a. $480,000. b. $840,000. c. $912,000. d. $600,000.

a 160,000 x .15 x $20 = $480,000.

5. On January 1, 2016, Dodd, Inc., declared a 10% ordinary share dividend when the fair
value of the ordinary shares was $20 per share. Equity before the share dividend was
declared consisted of:
Share capital—ordinary, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares $1,200,000
Share premium—ordinary 150,000
Retained earnings 700,000
Total equity $2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
a. $120,000 decrease b. $240,000 decrease
c. $400,000 decrease d. $200,000 decrease

a 120,000 x .10 x $10 = $120,000.

6. On January 1, 2016, Culver Corporation had 110,000 shares of its $5 par value
ordinary shares outstanding. On June 1, the corporation acquired 10,000 shares to be
held in the treasury. On December 1, when the market price of the shares was $8, the
corporation declared a 10% share dividend to be issued to shareholders of record on
December 16, 2016. What was the impact of the 10% share dividend on the balance of
the retained earnings account?
a. $50,000 decrease b. $80,000 decrease
c. $88,000 decrease d. No effect
Page 9 of 25
 a (110,000 – 10,000) x .10 x $5 = $50,000.

7. Masterson Company has 420,000 shares of $10 par value ordinary shares outstanding.
During the year Masterson declared a 5% share dividend when the market price of the
shares was $36 per share. Three months later Masterson declared a $.60 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by
a. $474,600 b. $756,000 c. $264,600 d. $252,000
a Share dividends = 420,000 x .05 x $10 = 210,000
Cash dividends = 420,000 x 1.05 x $.60 = 264,600
Total decrease in RE $474,600.

8. Mingenback Company has 560,000 shares of $10 par value ordinary shares
outstanding. During the year Mingenback declared a 5% share dividend when the
market price of the shares was $48 per share. Two months later Mingenback declared a
$.60 per share cash dividend. As a result of the dividends declared during the year,
retained earnings decreased by:
a. $336,000. b. $352,800. c. $1,344,000. d. $632,800.

d (560,000 x .05 x $10) + (560,000 x 1.05 x $.60) = $632,800.

9. Janae Corporation has outstanding 10,000 shares of £10 par value ordinary shares and
retained earnings of £500,000. If Janae declares a 10 percent share dividend when the
fair value of the shares is £85 per share, the entry includes:
a. A debit to Retained Earnings for £10,000.
b. A credit to Share Premium—Ordinary for £75,000.
c. A debit to cash for £85,000.
d. No entry is required for a share dividend.

a (10,000 x .10) x ₤10 = ₤10,000.

Page 10 of 25
10. Janae Corporation has outstanding 10,000 shares of £10 par value ordinary shares
and retained earnings of £500,000. If Janae declares a 2-for-1 share split when the fair
value of the shares is £85 per share, the entry includes:
a. A debit to Retained Earnings for £10,000.
b. A credit to Share Premium—Ordinary for £75,000.
c. A debit to cash for £85,000.
d. No entry is required for a share split.

d No entry required.

Use the following information for questions 11 through 13:

Written, Inc. has outstanding 300,000 shares of $2 par ordinary shares and 60,000 shares
of $5 par 8% preference shares. The preference shares are cumulative and
nonparticipating. Dividends have been paid every year except the past two years and the
current year.
11. Assuming that $150,000 will be distributed as a dividend in the current year, how
much will the ordinary shareholders receive?
a. Zero. b. $78,000. c. $102,000. d. $126,000.

b $150,000 – (60,000 x $5 x .08 x 3) = $78,000.

12. Assuming that $150,000 will be distributed as a dividend in the current year, how
much will the preference shareholders receive?
a. $21,000. b. $24,000. c. $48,000. d. $72,000.

d 60,000 x $5 x .08 x 3 = $72,000

13. Assuming that $183,000 will be distributed, and the preference shares are also
participating, how much will the ordinary shareholders receive?
a. $111,000. b. $90,000. c. $93,000. d. $48,000.

b 8% x $600,000 = $48,000 (current year ordinary div)

7%* x $600,000 = 42,000 (participating ordinary div)
$90,000

Page 11 of 25
 *$300,000 x 8% x 3 = 72,000 (preference dividends)
$600,000 x 8% = 48,000 (ordinary current dividends)
$120,000

Remaining dividends = $183,000 – $120,000

—————————— = 7%.
Total par value = $600,000 + $300,000

14. Yoder, Inc. has 50,000 shares of $10 par value ordinary shares and 25,000 shares of
$10 par value, 6%, cumulative, participating preference shares outstanding. Dividends
on the preference shares are one year in arrears. Assuming that Yoder wishes to
distribute $135,000 as dividends, the ordinary shareholders will receive
a. $30,000. b. $55,000. c. $80,000. d. $105,000.

c Ordinary Shares
$500,000 x 6% = $30,000 (current year)
$500,000 x 10%* = 50,000 (participating)
$80,000
*$135,000 – $30,000 (ord shares) – ($250,000 x 6% × 2) (pref shares) = $75,000

$75,000
———— = 10%.
$750,000

15. Mann Co. has outstanding 50,000 shares of 8% preference shares with a $10 par
value and 125,000 shares of $3 par value ordinary shares. Dividends have been paid
every year except last year and the current year. If the preference shares are cumulative
and nonparticipating and $250,000 is distributed, the ordinary shareholders will receive
a. $0. b. $170,000. c. $210,000. d. $250,000.

b $250,000 – ($500,000 x 8% × 2) = $170,000.

Page 12 of 25
 Chapter 16:
Dilutive Securities and Earnings Per Share
First: Convertible Bonds
Recording the issuance:
Dr Cash (1)
Cr Bonds Payable (2)
Share Premium—Conversion Equity (3)
(1) The proceeds received from issuance of the bonds.
(2) The present value of bonds at issuing date.
(3) = (1) – (2)

Conversion of Bonds at Maturity:

Dr Bonds Payable (2)

Share Premium—Conversion (3)
Cr Equity Share Capital—Ordinary (4)
Share Premium—Ordinary (5)
(2) The present value of bonds at issuing date.
(3) = (1) – (2)
(4) # convertible bonds x # ordinary shares x par value
(5) Complementary

Conversion of Bonds Before Maturity:

Dr Bonds Payable (*)
Share Premium—Conversion (3)
Cr Equity Share Capital—Ordinary (4)
Share Premium—Ordinary (5)
(*) The Carrying value of bonds at conversion date.

Induced Conversion
Issuer offers additional consideration, a “sweetener,” to induce prompt conversion.
Dr Conversion Expense
Cr Cash

Page 13 of 25
 Second: Convertible Preference Shares
Recording the issuance:
Dr Cash (Issue Price)
Cr Share Capital—Preference (par value)
Share Premium—Conversion Equity (complementary)

Conversion of preference shares:

Dr Share Capital—Preference
Share Premium—Conversion Equity
Cr Share Capital—Ordinary (# Pref. x # Ord. x PV)
Share Premium—Ordinary (complementary)

Third: Earnings Per Share

Earnings Per Share—Simple Capital Structure:

Earnings Per Share—Complex Capital Structure:

Page 14 of 25
 MCQ

1. Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible

into 2,000 ordinary shares (par value $40). At the time of the conversion, the
unamortized premium is $2,000, the market value of the bonds is $110,000, and the
shares are quoted on the market at $60 per share. If the bonds are converted into
ordinary shares, what is the amount of share premium to be recorded on the
conversion of the bonds?
a. $25,000 b. $22,000 c. $32,000 d. $40,000

b $100,000 + $2,000 – (2,000 × $40) = $22,000.

Dr Bonds Payable 100,000

Share Premium—Conversion 2,000
Cr Equity Share Capital—Ordinary 80,000
Share Premium—Ordinary 22,000

2. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds
have a four-year term with a stated rate of interest of 6 percent, and are issued at par
with a face value of €1,000 per bond. Interest is payable annually at December 31.
Each bond is convertible into 250 ordinary shares with a par value of €1. The market
rate of interest on similar non-convertible debt is 9 percent. Assume that at the
issuance date, €97,187 was credited to Share Premium—Conversion Equity and that
the bonds were not converted until maturity. What amount will Mae Jong credit to
Share Premium—Ordinary at the maturity date?
a. €750,000 b. €652,813 c. €847,187 d. €347,187

c (€1,000,000 + €97,187) – (1,000 × 250 × €1) = €847,187.

Dr Bonds Payable 1,000,000

Share Premium—Conversion 97,187
Cr Equity Share Capital—Ordinary 250,000
Share Premium—Ordinary 847,187

Page 15 of 25
3. In 2015, Eklund, Inc., issued for $103 per share, 60,000 shares of $100 par value
convertible preference shares. One share of preference shares can be converted into
three shares of Eklund's $25 par value ordinary shares at the option of the preference
shareholder. In August 2016, all of the preference shares were converted. The fair value
of the ordinary shares at the date of the conversion was $30 per share. What total
amount should be credited to share premium—ordinary as a result of the conversion of
the preference shares into ordinary shares?
a. $1,020,000. b. $780,000. c. $1,500,000. d. $1,680,000.

d ($6,000,000 + 180,000) – (60,000 × 3 × $25) = $1,680,000.

Dr Share Capital—Preference 6,000,000

Share Premium—Conversion Equity 180,000
Cr Share Capital—Ordinary 4,500,000
Share Premium—Ordinary 1,680,000.

4. Hill Corp. had 600,000 ordinary shares outstanding on January 1, issued 900,000
shares on July 1, and had income applicable to common stock of $1,050,000 for the year
ending December 31, 2016. Earnings per share for 2016 would be
a. $1.75. b. $.83. c. $1.00. d. $1.17.

$1,050,000
C ———————————— = $1.00
600,000 + (900,000 × 6/12)*
Date No. of shares (1) Period (2) W/A (1x2)
Jan.1- July.1 600,000 6/12 300,000
July 1- Dec.31 1,500,000 6/12 750,000
1year 1,050,000

5. At December 31, 2016, Hancock Company had 500,000 ordinary shares issued and
outstanding, 400,000 of which had been issued and outstanding throughout the year and
100,000 of which were issued on October 1, 2016. Net income for the year ended
December 31, 2016, was $1,020,000. What should be Hancock's 2016 earnings per
share, rounded to the nearest penny?
a. $2.02 b. $2.55 c. $2.40 d. $2.27

Page 16 of 25
 $1,020,000
C ———————————— = $2.40.
400,000 + (100,000 × 3/12 ) *
Date No. of shares (1) Period (2) W/A (1x2)
Jan.1- Oct.1 400,000 9/12 300,000
Oct 1- Dec.31 500,000 3/12 125,000
1year 425,000

6. Milo Co. had 600,000 ordinary shares outstanding on January 1, issued 126,000
shares on May 1, purchased 63,000 shares of treasury shares on September 1, and issued
54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 651,000. b. 672,000. c. 693,000. d. 714,000.

b 600,000 + (126,000 × 8/12) – (63,000 × 4/12) + (54,000 × 2/12) = 672,000.

Or

Date No. of shares (1) Period (2) W/A (1x2)

Jan.1- May 1 600,000 4/12 200,000
May 1- Sept 1 726,000 4/12 242,000
Sept 1 – Nov 1 663,000 2/12 110,500
Nov 1 – Dec 31 717,000 2/12 119,500
1year 672,000

7. The following information is available for Barone Corporation:

January 1, 2016 Shares outstanding 1,250,000
April 1, 2016 Shares issued 200,000
July 1, 2016 Treasury shares purchased 75,000
October 1, 2016 Shares issued in a 100% stock dividend 1,375,000
The number of shares to be used in computing earnings per ordinary share for 2016 is
a. 2,825,500. b. 2,737,500. c. 2,725,000. d. 1,706,250.

C [(1,250,000 × 3 × 2) + (1,450,000 × 3 × 2) + (1,375,000 × 3 × 2)

+ (2,750,000 × 3)] ÷ 12 = 2,725,000.
Date No. of shares (1) Period (2) Restatement (3) W/A (1x2x3)

Page 17 of 25
Jan.1- April 1 1,250,000 3/12 200% 625,000
April 1- July 1 1,450,000 3/12 200% 725,000
July 1 – Oct 1 1,375,000 3/12 200% 687,500
Oct 1 – Dec 31 2,750,000 3/12 - 687,500
1 year 2,725,000

8. At December 31, 2015 Rice Company had 300,000 ordinary shares and 10,000 shares
of 5%, $100 par value cumulative preference shares outstanding. No dividends were
declared on either the preference or ordinary shares in 2015 or 2016. On January 30,
2017, prior to the issuance of its financial statements for the year ended December 31,
2016, Rice declared a 100% share dividend on its ordinary shares. Net income for 2016
was $950,000. In its 2016 financial statements, Rice's 2016 earnings per share should be
a. $1.50. b. $1.58. c. $3.00. d. $3.17.

a [$950,000 – (10,000 × $100 × .05)] ÷ (300,000 × 2) = $1.50.

9. Fultz Company had 300,000 ordinary shares issued and outstanding at December 31,
2015. During 2016, no additional ordinary shares were issued. On January 1, 2016, Fultz
issued 400,000 shares of nonconvertible preference shares. During 2016, Fultz declared
and paid $180,000 cash dividends on the ordinary shares and $150,000 on the non-
convertible preference shares. Net income for the year ended December 31, 2016, was
$960,000. What should be Fultz's 2016 earnings per share, rounded to the nearest
penny?
a. $1.16 b. $2.10 c. $2.70 d. $3.20

$960,000 – $150,000
C —————————— = $2.70.
300,000

Page 18 of 25
 10. At December 31, 2015 Pine Company had 200,000 ordinary shares and 10,000
shares of 4%, $100 par value cumulative preference shares outstanding. No dividends
were declared on either the preference or ordinary shares in 2015 or 2016. On February
10, 2017, prior to the issuance of its financial statements for the year ended December
31, 2016, Pine declared a 100% stock split on its ordinary shares. Net income for 2016
was $720,000. In its 2016 financial statements, Pine’s 2016 earnings per share should be
a. $3.40. b. $3.20. c. $1.70. d. $1.00.

c [$720,000 – (10,000 x $100 x .04)] / (200,000 x 2) = $1.70.

Use the following information for questions 11 and 12.

Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares,
and $1,000,000 of 10% convertible bonds outstanding during 2016. The preference
shares are convertible into 40,000 ordinary shares. During 2016, Hanson paid dividends
of $1.20 per share on the ordinary shares and $4 per share on the preference shares. Each
$1,000 bond is convertible into 45 ordinary shares. The net income for 2016 was
$800,000 and the income tax rate was 30%.

11. Basic earnings per share for 2016 is (rounded to the nearest penny)
a. $2.94. b. $3.22. c. $3.35. d. $3.60.
d [$800,000 – (20,000 x $4] / 200,000 = $3.60.

12. Diluted earnings per share for 2016 is (rounded to the nearest penny)
a. $2.77. b. $2.81. c. $3.05. d. $3.33.
c [$800,000 + ($1,000,000 x .10 x .7)] / [200,000 + 40,000 + (1,000 x 45)] = $3.05.

14. Shipley Corporation had net income for the year of $480,000 and a weighted average
number of ordinary shares outstanding during the period of 200,000 shares. The
company has a convertible bond issue outstanding. The bonds were issued four years
ago at par ($2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares.
The company has a 40% tax rate. Diluted earnings per share are
a. $1.65 b. $2.23. c. $2.35. d. $2.58.
c [$480,000 + ($2,000,000 × .07 × .60)] ÷ (200,000 + 40,000) = $2.35.
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 Chapter 17: Investments
First: Held-for-Collection Investment (Held for Maturity)

Recording the purchase entry (at the purchase date):

Dr Debt Investments (acquisition cost)
Cr Cash

Recording the interest revenue: ……… from amortization table like ch.14
Dr Cash
Debt Investments (discount)
Cr Interest Revenue or
Debt Investments (premium)

The entry at maturity date:

Dr Cash
Cr Debt Investments (face value)

Second: Held-for-Collection and Selling Investment

Recording the purchase entry (at the purchase date):
Dr Debt Investments (acquisition cost)
Cr Cash

Recording the interest revenue: ……… from amortization table like ch.14
Dr Cash
Debt Investments (discount)
Cr Interest Revenue or
Debt Investments (premium)

Revaluation of the Investments Using Fair Value:

Compare the Fair Value (given) and C.V. of bonds (from the table).

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 F.V (given)
(-) C.V of bonds (table)
Gain/Loss (New F.V. adjustment bal.)…..Acc. Other Comp. Inc/Equity/ B.Sh
(-) Previous bal. of F.V. adj. if Dr ( Add if previous balance is Cr)
The change in the F.V. adjustment bal. (amount of adj entry)*…… Comp I. St
 The adjusting entry in case of Gain (FV > CV):
Dr Fair Value Adjustment*
Cr Unrealized Holding Gain or Loss—Equity*
 The adjusting entry in case of Loss (FV < CV):
Dr Unrealized Holding Gain or Loss—Equity*
Cr Fair Value Adjustment*

The entry of selling the investment:

Dr Cash (Selling price)
Gain on Sale of Debt Investments
or Cr Debt Investments C.V at the date of sale (table)
Gain on Sale of Debt Investments

Third: Accounting for Trading Investment

1. The entries would be the same except the adjusting entry:

Unrealized Holding Gain or Loss—Income.
is used instead of
Unrealized Holding Gain or Loss—Equity.
2. The unrealized holding gain/loss will be reported in income statement.

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 MCQ

Use the following information for questions 1 and 2.

Patton Company purchased $400,000 of 10% bonds of Scott Co. on January 1, 2016,
paying $376,100. The bonds mature January 1, 2026; interest is payable each July 1 and
January 1. The discount of $23,900 provides an effective yield of 11%. Patton Company
uses the effective-interest method and holds these bonds for collection.
1. On July 1, 2016, Patton Company should increase its Debt Investments account for
the Scott Co. bonds by
a. $2,392. b. $1,371. c. $1,196. d. $686.

d ($376,100 × .055) – ($400,000 × .05) = $686.

2. For the year ended December 31, 2016, Patton Company should report interest
revenue from the Scott Co. bonds of:
a. $42,392. b. $41,409. c. $41,368. d. $40,000.

b $376,100 × .055 = $20,686

($376,100 + $686) × .055 = $20,723;
$20,686 + $20,723 = $41,409.

3. On January 3, 2016, Moss Co. acquires $100,000 of Adam Company’s 10-year, 10%
bonds at a price of $106,418 to yield 9%. Interest is payable each December 31.
The bonds are classified as held-for-collection. Assuming that Moss Co. uses the
effective-interest method, what is the amount of interest revenue that would be
recognized in 2016 related to these bonds?
a. $10,000 b. $10,642 c. $9,578 d. $9,540

c ($106,418 x .09) = $9,578.

4. Sycamore, Inc. purchased €100,000 of 8 percent bonds of Alvarado Industries on
January 1, 2015, at a discount, paying €92,278. The bonds mature January 1,
2020, and yield 10 percent; interest is payable each July 1 and January 1.
Sycamore has a business model whose objective is to hold assets in order to
collect contractual cash flows and the contractual terms of the financial asset
provides specified dates with regard to cash flows that are solely payments of
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 principal and interest. On December 31, 2015, when the market rate of interest is
12%, and the fair value of the bonds is €89,934, Sycamore will record interest
revenue of
a. €5,396 b. €4,645 c. €4,497 d. €4,614

b (€92,278 x .05) – (€100,000 x .04) = €614

(€92,278 + €614) x .05 = €4,645.

5. Sycamore, Inc. purchased €100,000 of 8 percent bonds of Alvarado Industries on

January 1, 2015, at a discount, paying €92,278. The bonds mature January 1,
2020, and yield 10 percent; interest is payable each July 1 and January 1.
Sycamore manages and evaluates investment performance on a documented risk-
management or investment strategy based on fair value information. On
December 31, 2015, when the market rate of interest is 12%, and the fair value of
the bonds is €89,934, Sycamore will record an unrealized gain/loss of
a. €2,344 loss b. €2,958 loss c. €3,603 loss d. €2,958 gain

(€92,278 x .05) – (€100,000 x .04) = €614

[(€92,278 + €614) x .05] – (€100,000 x .04) = €645
(€92,278 + €614 + €645) – €89,934 = €3,603 loss.

Questions 6 and 7 are based on the following information:

Richman Co. purchased $300,000 of 8%, 5-year bonds from Carlin, Inc. on January 1,
2015, with interest payable on July 1 and January 1. The bonds sold for $312,474 at an
effective interest rate of 7%. Using the effective interest method, Richman Co.
decreased the non-trading Debt Investments account for the Carlin, Inc. bonds on July 1,
2015 and December 31, 2015 by the amortized premiums of $1,062 and $1,098,
respectively.
6. At December 31, 2015, the fair value of the Carlin, Inc. bonds was $318,000. What
should Richman Co. report as other comprehensive income and as a separate
component of equity?
a. $0 b. $2,160 c. $5,526 d. $7,686

d $318,000 – ($312,474 – $1,062 – $1,098) = $7,686.

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7. At February 1, 2016, Richman Co. sold the Carlin bonds for $309,000. After accruing
for interest, the carrying value of the Carlin bonds on February 1, 2016 was $310,125.
Assuming Richman Co. has a portfolio of non-trading debt securities, what should
Richman Co. report as a gain (or loss) on the bonds?
a. $0. b. ($1,125). c. ($6,561). d. ($8,811).

B $310,125 – $309,000 = $1,125.

Use the following information for questions 8 and 9.

On its December 31, 2015 statement of financial position, Calhoun Company
appropriately reported a $10,000 debit balance in its Fair Value Adjustment
account. There was no change during 2016 in the composition of Calhoun’s
portfolio of equity securities held as non-trading securities. The following
information pertains to that portfolio:
Security Cost Fair value at 12/31/16
X $125,000 $160,000
Y 100,000 95,000
Z 175,000 125,000
$400,000 $380,000
8. What amount of unrealized loss on these securities should be included in
Calhoun's equity section of the statement of financial position at December 31,
2016?
a. $30,000. b. $20,000. c. $10,000. d. $0.

b ($400,000 – $380,000) = $20,000.

9. The amount of unrealized loss to appear as a component of comprehensive

income for the year ending December 31, 2016 is
a. $30,000. b. $20,000. c. $10,000. d. $0.

a $10,000 + $20,000 = $30,000.

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10. At December 31, 2016, Atlanta Co. has a share portfolio valued at $40,000. Its
cost was $33,000. If the Fair Value Adjustment account has a debit balance of
$2,000, which of the following journal entries is required at December 31, 2016?
a. Fair Value Adjustment 7,000
Unrealized Holding Gain or Loss-Equity 7,000
b. Fair Value Adjustment 5,000
Unrealized Holding Gain or Loss-Equity 5,000
c. Unrealized Holding Gain or Loss-Equity 7,000
Fair Value Adjustment 7,000
d. Unrealized Holding Gain or Loss-Equity 5,000
Fair Value Adjustment 5,000

b ($40,000 – $33,000) – $2,000 = $5,000 unrealized gain.

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