APPLIED AUDITING

Handout 04: Contributed Capital

LEARNING OBJECTIVES:
1. Issuance of shares
2. Subscription of shares
3. Authorization of shares
4. Reacquisition of shares
5. Retirement of shares
6. Donation from shareholders
7. Conversion of preference shares
8. Share split
9. Number of outstanding shares

REVIEW NOTES:

The shareholders equity is divided into two major components:

1. Contributed Capital – This is the portion of shareholders’ equity coming from the investment made by the
shareholders. The value of consideration invested by the shareholder is sub-divided into:

a. Share Capital – the value invested equal to the par value of shares given-up.
b. Share Premium – the excess of the value of consideration invested over the par value of shares given-
up. Share premium is the “unrecognized gain” from transaction with shareholders, the gain earned from
selling shares.

2. Earned Capital – This is the portion of shareholders’ equity coming from the cumulative earnings of the entity
less any distribution of the earnings to the shareholders. Earned capital is divided into:

a. Retained Earnings – Earnings recognized in the statement of profit or loss and available for distribution
to shareholders.
b. Other Comprehensive Income – Earnings recognized in the statement of other comprehensive income
but not available for distribution to shareholders since the said income are not yet realized.

Shares
Are document that proves the ownership of a person over a corporation. There are two types of shares, ordinary
and preference shares.

Area of comparison Ordinary shares Preference shares

As to distribution of income Residual income Fixed income
As to return of investment during
Least priority Priority
liquidation of the company
As to par value Par value is not required Par value is required

As to voting rights With voting rights Without voting rights

- Convertible
As to other feature No other feature - Redeemable
- Attachable with warrants

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ISSUANCE OF SHARES:
Shares are issued once sold to shareholders and the full consideration are received. On the first issuance of
shares, it is not allowed to sold the shares below the par value. There are three (3) steps to account for this
transaction:

1. Measure the value to the consideration received – Shares can be sold in exchange for the following:

a. Cash – measured at face amount

b. Noncash asset – measured using the following level of priority:
1st Fair value of noncash asset received
2nd Fair value of shares given up
3rd Part value of shares given up
c. Service – measured using the following level of priority:
1st Fair value of service received
2nd Fair value of shares given up
3rd Par value of shares given up
d. Extinguishment of debt – discussed in “Debt Restructuring” topic

2. Account for the gain – Gain arises if the consideration received is higher than the initial value (par value) of
shares sold. It is not allowed to recognize gain from transaction to shareholders, thus, the gain is recognize
as Share Premium instead of an income. If the share premium arose from original issuance, it is labelled
“Excess over par”.

Consideration received P XX
Less: Par value of shares issued ( XX)
Share premium – excess over par P XX

3. Account for the share issue cost – Share issue cost can be classified as:

a. Direct share issue cost – Are accounted as a deduction to share premium from the transaction the share
issue cost is incurred.

If there are no share premium, it can either be expensed, deducted to retained earnings or treated as
contra-equity account. This gray area are not commonly encountered in the problem.

Direct share issue cost includes:

- Documentary stamp tax
- Other percentage tax
- Underwriting cost
- Newspaper publication
- SEC registration fees

b. Indirect share issue cost – Are expensed as incurred. This includes:

- Public relations consultant’s fee
- Road show presentation
- Stock exchange listing fees

4. Lump Sum Issuance – The company may issue two class of shares (group of shares) for a consideration of
one, it can also issue shares together with other instrument like bonds. The consideration received is allocated
to the different instrument issued using the following allocation methods:

a. Relative fair value method – all the fair value of shares (or securities) issued are available. Allocation:

Total fair value of

one class of shares
Issue price of the Group x = Amount allocated to one class of shares
Total fair value of
the group

b. Residual value method – fair value of one class of share is not available. The consideration received
allocated to the shares with available fair value will its fair value, the residual of the consideration received
will be allocated to the shares without fair value.

Issue price of the whole group P XX

Fair value of the class of shares with available fair value ( XX)
Issue price allocated to the class of shares without fair value P XX

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 c. Relative par value method – no fair value available for all the shares issued. Allocation:

Total par value of

one class of shares
Issue price of the Group x = Amount allocated to one class of shares
Total par value of
the group

SUBSCRIPTION OF SHARES:
Corporation code do not allow issuance of share unless the full consideration is received. If an investor is intended
to buy (invest) shares but do not have the capacity (money) yet to do so, the investor may “reserve” certain number
of shares that the investor intended to buy. The said reserved shares are being subscribed. The company may
ask for a down payment to ensure the purchase will push through.

a. Subscribed share capital – Par value of shares subscribed.

Par value per share P XX

Times: Number of shares subscribed XX
Subscribed share capital P XX

b. Subscription receivable – The unpaid balance of the subscription price. If collectible beyond 12 months,
subscription receivable is a contra-equity account. If collectible within 12 months, subscription receivable is
a current asset. In absence of the collection period, it is classified as contra-equity.

Subscription price P XX
Less: Down payment ( XX)
Subscription receivable P XX

c. Share premium, excess over par – Arises from the point subscription and no additional share premium on
issuance.

Subscription price P XX
Less: Par value of shares subscribed ( XX)
Subscription receivable P XX

d. Journal entry on subscription:

Dr. Cash (Down payment) XX

Dr. Subscription receivable XX
Cr. Subscribed share capital XX
Cr. Share premium – excess over par XX

e. Journal entry on subsequent collection and issuance:

Dr. Cash XX
Cr. Subscription receivable XX

Dr. Subscribed share capital XX

Cr. Share capital XX

f. Journal entry on cancellation of subscription:

Dr. Subscribed share capital XX

Dr. Share premium – excess over par XX
Cr. Subscription receivable XX
Cr. Share premium – excess over par XX

AUTHORIZATION OF SHARES:
The company may choose to account this transaction using the following method:

a. Journal entry method – Under this method, a journal entry is required to set-up a principal account (Authorized
share capital) and a contra-equity account (Unissued share capital) will be used.
• Authorized share capital – is equal to the par value of shares authorized to be issued. This account
will not change unless the number of authorized shares will change.
• Unissued share capital – is equal to the par value of shares unissued. This account will decrease every
time the company issue shares, in effect the carrying amount of equity will increase.

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 Entry on authorization:
Dr. Unissued share capital XX
Cr. Authorized share capital XX

Entry on issuance:
Dr. Cash XX
Cr. Unissued share capital XX

b. Memo entry method – This method will not require a journal entry on authorization. No contra-equity account
is set up. The account “share capital” will increase every time there is an issuance of shares.

Entry on issuance:
Dr. Cash XX
Cr. Share capital XX

REACQUISITION OF SHARES:
Common reason for reacquisition:
1. Minimize the cost of capital (dividends)
2. Increase earnings per share
3. Prevent unfriendly take-over of the company

Treasury shares (TS)

Treasury shares are shares previously issued and subsequently reacquired. “Treasury shares” account is a
contra-equity account and measured at cost. The cost of treasury shares will depend on the consideration
given-up to reacquire the treasury shares:

a. Cash – measured at face amount

b. Noncash asset – measured at carrying amount of noncash asset
c. Donated – zero

REISSUANCE OF SHARES:
The term “reissue” pertains to treasury shares sold. There are two main issue in accounting for this transaction:

a. Valuation of treasury sold – If a company reacquire a treasury shares with the same acquisition cost there is
no accounting issue since all the cost of each treasury shares are the same. But if there are multiple
acquisition during the year and the cost of each treasury shares are not the same, the problem will arise in
determining the unit cost of treasury shares sold. For board exam purposes, cost flow method may be used
by the company:

• Specific identification – The problem will state the unit cost of treasury shares sold
• FIFO – The unit cost of treasury shares first sold is the equal to the unit cost of the earliest
purchased treasury shares.
• Average method – The unit of treasury shares sold is equal to the average unit cost computed by
dividing the total peso amount of treasury shares available for sale by total number of units of
treasury shares available for sale.

b. Gains and losses on reissuance – A gain will arise if the selling price exceeds the cost of treasury shares sold.
While loss arises when the selling price is below the cost of treasury shares sold.

Selling price P XX
Less: Cost of treasury shares ( XX)
Gain (loss) P XX

• Gain is recorded as “Share premium – treasury shares”.

• Loss is recorded as deduction to Share premium – treasury shares. If there is no Share premium –
treasury shares or it can no longer absorb the loss, the excess will deducted to Retained earnings.

c. Journal entry on gain:

Dr. Cash (selling price) XX

Cr. Treasury shares (cost) XX
Cr. Share premium – treasury shares XX

d. Journal entry on loss:

Dr. Cash (selling price) XX

Dr. Share premium – treasury shares XX
Dr. Retained earnings XX
Cr. Treasury shares (cost) XX

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RETIREMENT OF SHARES:
Retirement of shares reacquires cancellation of the share certificate so it can no longer reissued.

a. Advantage of retirement - When the company have treasury shares, appropriation of retained earnings is
required. If the treasury shares were retired, TS will die and appropriation of retained earnings will no longer
necessary
b. Disadvantage of retirement - The company can avoid share issuance cost if the treasury shares were reissued
rather than retired and issue from unissued shares.

Four (4) steps in accounting the retirement of shares:

a. Derecognition of share capital account – share capital is derecognized equal to the par value of shares
retired.

b. Derecognition of share premium, excess allocated to the shares retired – the share premium, excess over
par arise from the original issuance should be retired computed as follows:

Total share premium, excess over par P XX

Divide: Number of shares issued XX
Share premium, excess per share P XX
Times: Shares retired XX
Share premium, excess of treasury shares retired P XX

c. Derecognize the treasury shares – equal to the cost of treasury shares retired.

d. Gains or loss on retirement – A gain will arise if the original issue price of TS exceeds the cost of treasury
shares retired. While loss arises when the original issue price is below the cost of treasury shares retired.

Par value of TS retired P XX

Add: Share premium, excess of TS retired XX
Original issue price P XX
Less: Cost of treasury shares ( XX)
Gain (loss) P XX

• Gain is recorded as “Share premium – retirement”.

• Loss is recorded as deduction to Share premium – treasury shares. If there is no Share premium –
treasury shares or it can no longer absorb the loss, the excess will deducted to Retained earnings.

e. Journal entry on gain:

Dr. Share capital (Par) XX

Dr. Share premium – excess over par XX
Cr. Treasury shares (cost) XX
Cr. Share premium – retirement XX

f. Journal entry on loss:

Dr. Share capital XX

Dr. Share premium – excess over par XX
Dr. Share premium – treasury shares XX
Dr. Retained earnings XX
Cr. Treasury shares (cost) XX

CONVERSION OF PREFERENCE SHARE

Convertible preference shares holds a privilege in which if exercised, the holder will send back the preference
share to the company in exchange for ordinary shares.

Four (4) steps in accounting the retirement of shares:

a. Record the retirement of Preference shares returned – This includes the derecognition of share capital and
derecognition of share premium – excess over par.

b. Record the issuance of Ordinary shares – The share capital – ordinary is recorded equal to the par value of
ordinary shares issued in exchange of Preference shares returned.

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c. Gain or loss on conversion – A gain will arise if the original issue price of Preference shares returned exceeds
the par value of Ordinary shares issued. While loss arises when the original issue price is below the par value
of Ordinary shares issued.
Par value of Preference shares converted P XX
Add: Share premium, excess of Preference shares converted XX
Original issue price P XX
Less: Par value of Ordinary shares issued ( XX)
Gain (loss) P XX
• Gain is recorded as “Share premium”.
• Loss is recorded as deduction to Retained earnings.

d. Journal entry on gain:

Dr. Share capital – Preference XX
Dr. Share premium, excess over par – Preference XX
Cr. Share capital – Ordinary XX
Cr. Share premium, excess over par – Ordinary XX

e. Journal entry on loss:

Dr. Share capital – Preference XX
Dr. Share premium, excess over par Preference XX
Dr. Retained earnings XX
Cr. Treasury shares (cost) XX

REDEEMABLE OF PREFERENCE SHARE

This are Preference shares issued in which the issuing company has the right to reacquire the Preference share
at a fixed price on a specific date. It is accounted in its substance rather than its form. The substance is the
Preference share sold is only a collateral from a loan made by the entity and the price paid by the company to
reacquire the share is really a loan repayment rather than a reacquisition. Thus, Redeemable preference share
are recognize a long-term liability instead of equity and dividends distributed is recognize as interest expense.
a. Entry on issuance:
Dr. Cash XX
Cr. Loans payable XX

b. Entry on dividend distribution:

Dr. Interest expense XX
Cr. Cash XX

c. Entry on reacquisition:
Dr. Loans payable XX
Cr. Cash XX

DONATION:
The consideration received from donation is measured at:
1. Cash – face amount
2. Noncash asset – fair value
3. Entity’s own share (treasury shares) – zero

Corresponding credit:
• Donation from shareholders – “Share premium – donated capital” since it is not allowed to recognize
income
• Donation from non-shareholder – “Other income”

a. Entry on donation from shareholder of cash and noncash asset:

Dr. Cash or noncash asset XX
Cr. Share premium – donated capital XX

b. Entry on donation from shareholder of treasury shares:

No entry (memo entry only)

c. Entry on subsequent reissuance of donated treasury shares:

Dr. Cash XX
Cr. Share premium – donated capital XX

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 It is assumed that the shareholder sold the share to another party and the cash proceeds from such sale is
donated to the company. Thus, share premium is labeled “donated capital” instead “treasury shares”.
Remember that SP – treasury share will absorb losses while SP – donated capital don’t.

SHARE CLASSIFICATION AS TO POSSESSION:

a. Unissued share – shares authorized but never been sold

Authorized shares XX
Less: Issued shares ( XX)
Unissued shares XX

b. Issued share – shares that were sold at least once, regardless of the possession. Whether
in the hands of the shareholder or in the hands of the company, it is considered as issued
shares.

Outstanding shares XX
Add: Treasury shares XX
Issued shares XX

c. Outstanding shares – shares that were sold and in the possession of the shareholders.

Issued shares XX
Less: Treasury shares ( XX)
Outstanding shares XX

d. Treasury shares – shares that were sold and in the possession of the company (was reacquired).

Issued shares XX
Less: Outstanding shares ( XX)
Treasury shares XX

SHARE SPLIT:
is defined as the issuance by an enterprise of its own ordinary shares to its ordinary shareholders without
consideration. Important points:
• Number of issued shares (outstanding & treasury) increased.
• Par value of issued share and cost of treasury shares decreased.
• Share capital and treasury share accounts remain the same

Reason for share split:

• Reduction in their unit market price (become more affordable).
• Obtain wider distribution.

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MULTIPLE CHOICE:
1. Captain America had the following issuance of P100 par value shares of stock:
• Issued 2,500 shares of stock for machinery. The machinery has a fair value of P280,000 while the
stock is selling at P105 per share.
• Issued 1,000 shares of stock for patent. The stock is selling at P105 per share.
• Issued 500 shares of stock in full payment of organization services rendered from the legal
counsel. The fair value of such services is P60,000.

What is the balance of total share premium after recording the above transactions?
A. 45,000 C. 10,000
B. 30,000 D. 5,000

2. On January 1, 2021, Damage Control Company issued 1,000 shares with par value of P400 for P480
per share. Issuance costs incurred that are directly attributable to the equity transaction amounted to
P20 per share. How much is the net credit to share premium?
A. 80,000 C. 20,000
B. 60,000 D. 0

3. During the current year, Roselle Company issued 10,000 ordinary shares with P200 par value and
20,000 convertible preference shares with P200 par value for a total consideration of P8,000,000. On
the date of issuance, the ordinary shares are selling at P360 and the preference shares is selling at
P270. What amount of the proceeds should be allocated to the convertible preference shares?
A. 6,000,000 C. 4,800,000
B. 5,400,000 D. 4,400,000

4. The company issued for P1,000,000 cash, 1,000 shares of P200 par value Preference share and 2,000
shares of P100 par value ordinary share. The preference has a fair value of P240 on the date of sale.
No fair value available for the ordinary share. Upon issuance of the sale, the journal entry will include
a credit to share premium – ordinary share:
A. 160,000 C. 400,000
B. 200,000 D. 560,000

5. Lovely Company was organized on January 1, 2022 with an authorization of 1,200,000 ordinary shares
with a par value of P6 per share. during the year, the entity had the following capital transaction:

January 5 Issued 675,000 shares at P10 per share.

July 28 Purchased 90,000 treasury shares at P11 per share
December 31 Sold the 90,000 shares held in treasury at P18 per share.
The entity used the cost method to record the purchase and reissuance of the treasury shares. What
is the total amount of share premium on December 31, 2022?
A. 3,330,000 C. 2,700,000
B. 2,070,000 D. 630,000

6. The following are shown on the statement of financial position of Fox Company:

Share capital, P100 par, 1,000 shares 100,000

Share premium 2,000
Paid-in capital from treasury shares 3,000
Accumulated profits 75,000
Treasury shares, 200 shares at cost 25,000

All of treasury shares were sold at P20,000. How would the resale of the treasury shares be recorded?
A. Cash 20,000
Treasury shares 20,000

B. Cash 20,000
Share premium 2,000
Paid in capital from treasury 3,000
Treasury shares 25,000

C. Cash 20,000
Accumulated profits 5,000
Treasury shares 25,000

D. Cash 20,000
Paid in capital from treasury 3,000
Accumulated profits 2,000
Treasury shares 25,000

Page 8 of 12
Numbers 7 & 8:
On January 1, 2021, the statement of financial position of Cardiac Company shows the following
information:
Share capital (authorized 10,000 shares with par value of P400) P 3,200,000
Share premium in excess of par 640,000
Share premium – treasury shares 20,000
Retained earnings 2,140,000
Total shareholders’ equity 6,000,000
7. If on July 1, 2021, Cardiac reacquires 1,000 shares at P320. On September 1, 2021, Cardiac retires
the 1,000 treasury shares. The entry on September 1, 2021 includes a
A. CR to share premium – retirement for P80,000
B. CR to share premium – retirement for P160,000
C. DR to share premium – original issuance for P80,000
D. B and C

8. If on July 1, 2021, Cardiac reacquires 1,000 shares at P560 and immediately retires them. The entry
includes
A. DR to retained earnings for P60,000
B. C and D
C. CR to share premium – original issuance for P80,000
D. CR to share premium – retirement for P560,000

Numbers 9 & 10:

The stockholders’ equity for Power Company on December 31 was:

Preference share, P20 par, 60,000 shares issued and outstanding 1,200,000
Share premium in excess of par – preference share 300,000
Ordinary share, P10 par, 300,000 shares issued and outstanding 3,000,000
Share premium in excess of par – ordinary share 600,000
Accumulated profit 2,500,000

Each share of preference is convertible into 1 ordinary share. In June, Power converted 4,000 of preference
shares into ordinary shares.

9. The entry to take up the conversion includes a credit to:

A. Preference share for P80,000
B. Ordinary share for P80,000
C. Share premium for P60,000
D. Accumulated profit for P60,000

10. Assuming that each share of preference is convertible into 4 ordinary shares and Power converted
4,000 preference shares into ordinary, the entry to take up conversion includes a debit to
A. Preference share for P160,000
B. Ordinary share for P160,000
C. Accumulated profit for P60,000
D. Accumulated profit for P80,000

11. Redeemable preference share should be

A. Included with ordinary shares
B. Included as liability
C. Excluded from the statement of financial position
D. Included as a contra item in shareholders’ equity

Numbers 12 & 13:

Cerebro Co. received 1,000 shares with par value of P400 and fair value of P480 per share from a
shareholder as donation

12. The entry to record the receipt of the share include

A. Debit to treasury shares P480,000
B. Debit to treasury shares P400,000
C. Credit to share premium – treasury P480,000
D. No entry

13. Subsequently, Cerebro reissues the 1,000 donated shares at P520 pre share. The entry to record the
reissuance includes
A. Credit to share premium for P520,000
B. Credit to income for P520,000
C. Credit to retained earnings for P520,000
D. No entry

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14. Derulo Company issued 200,000 ordinary shares when it began operations in 2020 and issued an
additional 100,000 ordinary shares in 2021. In 2022, the entity purchased 75,000 ordinary shares and
held as treasury. On December 31, 2022, how many ordinary shares were outstanding?
A. 325,000
B. 400,000
C. 300,000
D. 225,000

15. Dunn Company issued 2,500 ordinary shares. The shares have a P2 par value and sold them for P12
per share. During the current year, Dunn reacquired 1,000 of these shares for P24 per share to be held
as treasury, effected a 2-for-1 split, and reissued 500 of treasury shares for P28 per share. Dunn is
using the cost method. What is included in the entry to reissue the treasury shares?
A. A credit to share premium – treasury of P2,000
B. A credit to share premium – treasury of P8,000
C. A debit to treasury shares of P24,000
D. A credit to share capital of P6,000

16. The following were lifted from the equity section of an entity’s statement of financial position showed
the following information:

Ordinary shares, P200 par value 3,200,000

6% Preference shares, P400 par value 800,000
Share premium – ordinary shares 1,200,000
Share premium – preference shares 200,000
Subscribed ordinary shares 400,000
Subscription receivable 200,000
Retained earnings 1,600,000

How much is the legal capital of the entity?

A. 5,600,000 C. 4,400,000
B. 5,200,000 D. 4,200,000

Numbers 17 & 18:

Shokt Company’s adjusted balance at December 31, 2021, includes the following account balances:

8% Preference stock (preference shares), P100 par 900,000

Common stock (ordinary shares), P3 par 500,000
Subscribed common stock (subscribed ordinary shares) 400,000
Subscription receivable (on ordinary shares) 150,000
Additional paid-in capital (share premium) – common stocks 300,000
Additional paid-in capital (share premium) – preferred stock 250,000
Retained earnings: appropriated for uninsured earthquake losses 100,000
Retained earnings: unappropriated 200,000
Treasury stock at cost 70,000
Net unrealized loss on investment measured at fair value through other
comprehensive income 40,000
Net unrealized gain on foreign currency translation adjustment 25,000
Revaluation surplus 280,000

17. The amount that Shokt Company should report as total stockholders’ equity in its December 31, 2021
balance sheet is
A. 2,695,000 C. 2,995,000
B. 2,775,000 D. 2,970,000

18. What is Shokt Company’s contributed capital?

A. 2,200,000 C. 2,350,000
B. 2,130,000 D. 2,280,000

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SELF-TEST MODULE:

1) Regine Company was organized at the beginning of current year with authorized capital of 100,000
shares of P200 par value. During the year, the entity had the following transactions affecting
shareholders’ equity:
• Issued 25,000 shares at P220 per share.
• Issued 1,000 shares for legal services when the fair value was P240 a share.
• Issued 5,000 shares for a tract of land when the fair value was P260 a share.
What amount should be reported for share premium at year-end?
A. 840,000 B. 800,000 C. 540,000 D. 500,000

2) Liquir Corporation was organized on January 1, with an authorization of 1,000,000 ordinary shares with
a par value of P5 per share. During the year, the corporation had the following equity transactions:
January 4 Issued 200,000 shares @ P5 per share.
April 8 Issued 100,000 shares @ P7 per share.
June 9 Issued 30,000 shares @ P10 per share.
July 29 Purchased 50,000 shares @ P4 per share
December 31 Sold 50,000 shares held in treasury @ P8 per share
What should be the total share premium as of December 31?
A. 550,000 B. 500,000 C. 450,000 D. 400,000

3) Basic company reported the following shareholders’ equity at the beginning of current year:
Share capital, P10 par, outstanding 225,000 shares 2,250,000
Share premium 900,000
Retained earnings 2,190,000
During the year, the entity had the following transactions:
• Acquired 6,000 treasury shares for P270,000.
• Sold 3,600 treasury shares at P50 a share.
• Sold the remaining treasury shares at P41 per share.
What is the total amount of share premium at year-end?
A. 891,600 B. 870,000 C. 908,400 D. 927,600

4) Eel Company holds 5,000 ordinary shares with P100 par value as treasury reacquired in 2019 for
P700,000. On December 1, 2023, Eel reissued all 5,000 shares for P1,000,000. Under the cost method,
the reissue would result in a credit to:
A. Share capital of P500,000 C. Share premium of P300,000
B. Accumulated profits of P300,000 D. Share premium of P500,000

5) Cape Company disclosed the following shareholders’ equity at the beginning of current year:
Share capital, par value P20 authorized 50,000 shares; issued and outstanding, 600,000
30,000 shares
Share premium 150,000
Retained earnings 230,000
During the year, the following transactions occurred relating to shareholders’ equity:
• 1,000 shares were reacquired at P28 per share.
• 900 shares were reacquired at P30 per share.
• 1,500 shares of treasury were sold at P32 per share.
What amount should be reported as shareholders’ equity at year-end?
A. 1,071,000 B. 1,078,000 C. 1,083,000 D. 973,000

6) The shareholders’ equity section of Lakad Corporation’s baance sheet at December 31, 2020, was as
follows:
Ordinary shares (P10 par value, authorized 1,000,000 shares, issued 900,000 shares) P
9,000,000
Share premium
2,700,000

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 Retained earnings
1,300,000
On January 1, 2021, Lakad purchase and retire 100,000 shares of its shares for P1,800,000.
Immediately after retirement of these 100,000 shares, the balances in the share premium and retained
earnings accounts should be
Share premium Retained earnings
A. 900,000 1,300,000
B. 1,400,000 800,000
C. 1,900,000 1,300,000
D. 2,400,000 800,000

7) During 2019, Malolos Company issued 50,000, P100 par value convertible preference shares for P120
per share. One preference share can be converted into three ordinary shares at P50 par value. On
December 31, 2019, when the market value of the ordinary shares was P60, all of the preference shares
were converted. What amount should be debited to retained earnings as a result of the conversion?
A. 3,000,000 B. 1,500,000 C. 2,500,000 D. 0

Use the following information for the next three (3) questions:
Lightning Company is authorized to issue 600,000 shares of P10 par value ordinary shares and 200,000 of
P50 par preference shares. The following transactions occurred in 2021, the company’s first year of
operations.
• Issued for a total of P1,100,000, 20,000 ordinary shares and 5,000 shares of preference shares. On this
date each ordinary shares are selling at P30 per share while each preference is selling at P80 per share.
• Issued 2,500 preference shares to lawyers for services rendered in securing the corporate charter and
for preliminary legal costs of organizing the corporation. The fair value of the services is P150,000.
• Issued 3,000 ordinary shares, valued objectively at P96,000 to employee instead of paying them cash
for their wages.
• Issued 125,000 ordinary shares in exchange for a building value at P2,950,000 and land valued at
P800,000.
8) The ordinary share balance on December 31, 2021:
A. 1,480,000 B. 3,978,000 C. 1,478,000 D. 1,543,000
9) The preference share balance on December 31, 2021:
A. 300,000 B. 375,000 C. 425,000 D. 450,000
10) The amount of share premium in excess of par at December 31, 2021:
A. 2,965,000 B. 2,972,000 C. 3,026,000 D. 3,241,000

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