Chapter 2 - Shareholders' Equity

MULTIPLE CHOICE QUESTIONS

1. Which of the following is a characteristic of a corporation?

a. Unlimited liability of the owners
b. Right of succession
c. Limited life
d. Exempt from taxation.

2. What does the par value of share capital represent?

a. Liquidation value of the share capital.
b. Book value of the share capital.
c. Legal nominal value assigned to the share capital.
d. Amount received by the corporation when the share was originally issued.

Ownership of shares in the ordinary share capital of a corporation entitles the holders to the following
rights:
I. To elect the board of directors of the corporation.
II. To share in the profits of the corporation.
III. To purchase new shares when they are offered for sale.
IV. To participate in the daily operations of the corporation.
a. I, II, III and IV
b. II, III and IV
c. I, III and IV
d. I, II, and III

The entry to record the issuance of ordinary shares for fully paid subscription is
a. a memorandum entry.
b. Ordinary Share Subscribed
Ordinary Share Capital
Share Premium - Ordinary Share
c. Ordinary Share Subscribed
Subscription Receivable
d. Ordinary Share Subscribed
Ordinary Share Capital

Chapter 2 - Shareholders' Equity

MC5 Which feature of preference share makes it more of a liability than an equity account?
a. Callable
b. Convertible
c. Participating
d. Redeemable
MC6 Which of the following transaction costs relating to issue of share capital shall be charged to profit
or loss?
a. SEC registration fees for issue of new shares
b. underwriting costs
c. stock exchange listing fees
d. documentary stamp tax in public offerings of share

MC7 A holder of a redeemable preference share can

a. purchase treasury shares any time at the shareholder's option.
b. purchase additional shares offered in order to maintain the same fractional interest in the corporation.
c. turn in the preference shares for a specified cash price at a specified date or during a specified period
d. convert the preference shares for ordinary shares.

MC8 How would a share split affect each of the following?

Assets Total Shareholders' Equity Additional Paid-in Capital
a. Increase Increase No effect
b. No effect No effect No effect
c. No effect No effect Increase
d. Decrease Decrease Decrease

MC9 Treasury share is appropriately presented on the statement of financial position as a

a. financial asset at fair value.
b. deduction at cost from total shareholders' equity.
c. deduction at cost from total contingent liabilities.
d. deduction at par from total shareholders' equity.

MC10 Gains or losses on the purchase and resale of treasury share are
a. credited to capital accounts and retained earnings.
b. credited to capital accounts, and retained earnings.
c. contributed capital
d. profit or loss, contributed capital, and retained earnings.

MC11 At the date of the financial statements, ordinary shares issued would exceed ordinary shares
outstanding as a result of the
a. purchase of treasury shares.
b. declaration of a bonus issue.
c. decrease in the number of shares.
d. purchase of treasury shares.

MC12 On February 1, unsubscribed ordinary share capital was sold on a subscription basis at price in
excess of par value, and 20% of the subscription price was collected on May 1; the remaining 80% would
be collected on [unclear]. Additional remaining paid capital of the subscription price was collected on
[unclear].

MC13 A company declared a cash dividend on its ordinary shares in December 2020, payable in January
2021. Retained earnings
a. increase on the date of declaration.
b. increase on the date of payment.
c. decrease on the date of declaration.
d. not be affected on the date of payment.

MC14 Preference shares has a claim on any prior year dividends that may have passed is
a. cumulative
b. non-cumulative
c. participating
d. non-participating

MC15 How will retained earnings be affected by purchases of treasury shares?

Acquisition cost?
a. Increase Increase
b. No effect No effect
c. Decrease Increase
d. No effect Decrease

Sale of treasury shares at more than

the acquisition cost?
a. Increase
b. No effect
c. Increase
d. No effect

MC16 A company increased its right to existing shareholders to purchase ordinary share for P30 per
share. Additional unissued share capital will be credited to
a. share premium
b. additional paid in capital
c. retained earnings
d. ordinary share capital

MC17 A company issued rights to its existing shareholders to purchase ordinary shares. When the rights
are exercised, and shares
a. exceeded the par value.
b. was the same as the par value.
c. was the same as the par value, but less than the market value at the date of exercise.
d. was less than the par value.

MC18 A company issued rights to its existing shareholders to purchase.

Rights are issued
a. company paid par value.
b. no entry will be made.
c. additional paid in capital will be debited.
d. additional paid in capital will be credited.

Rights larger
than par
a. Yes
b. No
c. Yes
d. No

MC19 Non-participating preference share means that the

a. ordinary shareholders receive and exceed rate per share equal to the preference share dividend.
b. ordinary shareholders receive all excess dividends after preference shareholders and all excess
dividends go to the preference share holders.
Chapter 2 - Shareholders' Equity

c. ordinary shareholders receive a dividend rate per share equal to the preference share and all excess
dividends are shared proportionately between the two classes.
d. preference shareholders receive their full dividend and any excess is given to the ordinary
shareholders.

MC20 Assuming that the issuing company has only one class of share capital, a transfer from retained
earnings to contributed capital equal to the fair value of the shares issued is ordinarily a characteristic of
a. either a bonus issue or a share split.
b. neither a bonus issue nor a share split.
c. a share split but not a bonus issue.
d. a bonus issue but not a share split.

MC21 Dividends in arrears are shown on the financial statements as

a. current liabilities.
b. contra-equity accounts.
c. contra-assets accounts.
d. note disclosures only.

MC22 Select the statement that is incorrect concerning the appropriations of retained earnings.
a. Appropriations of retained earnings do not change the total amount of shareholders’ equity.
b. Appropriations of retained earnings reflect funds set aside for a designated purpose, such as plant
expansion.
c. Appropriations of retained earnings can be,made as a result of contractual requirements.
d. Appropriations of retained earnings can be made at the discretion of the board of directors.

MC23 Under IFRS 2 Share-Based Payment, what is the basis for measurement of share options?
a. Fair value at the date of grant
b. Fair value at each reporting date
c. Expected fair value at the date of exercise
d. Intrinsic value at each reporting date

Chapter 2 - Shareholders' Equity

MC24 Under IFRS 2, Share Based Payment, the value of the options that lapse after vesting shall
a. be credited to expense during the period the options lapse.
b. be credited to income during the period that the options lapse.
c. remain in equity.
d. be converted into a liability.

MC25 When should the compensation expense be recorded as a result of share options granted by the
enterprise to its employees?
a. During the year of grant
b. During the year that the options ultimately vest
c. During the years when services are required to be rendered by the employees
d. During the year when the option first becomes exercisable

MC26 In 2020, Inna Corporation acquired 6,000 shares of its P10 par value ordinary share capital at P36
per share. During the same year, Inna issued 3,000 of these shares at P50 per share. Inna uses the cost
method to account for its treasury share transactions.

What accounts and amounts should Inna credit in 2020 to record the issuance of the 3,000 shares?
Treasury Share Share Premium Retained Earnings Ordinary Share
a. - P102,000 P42,000 P6,000
b. - P144,000 - P6,000
c. P108,000 P42,000 - -
d. P108,000 - P42,000 -

MC27 The shareholders’ equity of May Company revealed the following on June 30, 2020:
Preference Share, P100 par value P230,000
Share Premium – Preference 80,500
Ordinary Share, P15 par value 525,000
Share Premium – Ordinary 275,000
Subscribed Ordinary Share 5,000
Retained Earnings 190,000
Notes Payable 400,000
Subscription Receivable – Ordinary 40,000

Chapter 2 - Shareholders' Equity

How much is the legal capital of the company?

a. P 755,000
b. P 760,000
c. P1,115,000
d. P1,305,500

MC28 On March 2, 2020, Nanette Corporation issued 4,000 shares of 6% cumulative P100 par value
preference share for P480,000. Each preference share carried one detachable share warrant which
entitles the holder to acquire at P35, one share of Nanette’s P10 par ordinary share capital. On March 2,
2020, the fair value of the preference share without the warrants was P110 per share and the fair value
of the share warrants was P10 per warrant.
What is the amount credited to Share Premium – Preference by Nanette on the issuance of the
securities?
a. P0
b. P40,000
c. P50,000
d. P80,000

MC29 The following accounts are shown on the statement of financial position of Pay Company:
Share Capital, P100 par, 1,000 shares P100,000
Share Premium 2,000
Share Premium - Treasury Shares 3,000
Retained Earnings 75,000
Treasury Shares, 200 shares at cost 25,000

All the 200 treasury shares were sold for P20,000. How would the resale of the treasury shares be
recorded?
a Cash
Treasury Shares

b. Cash
Share Premium
Share Premium - Treasury Shares
Treasury Shares

c. Cash
Retained Earnings
Treasury Shares

d. Cash 20,000
Share Premium - Treasury Shares 3,000
Retained Earnings 2,000 25,000

MC30 Queenie Corporation was incorporated on January 2, 2020. The following information pertains to
Queenie’s ordinary share transactions during the year.
January 1 Number of shares authorized 80,000
February 1 Number of shares issued 60,000
July 1 Number of shares reacquired but not canceled 5,000
December 1 Two-for-one share split

What is the number of Queenie Corporation’s ordinary share outstanding at December 31, 2020?
a. 150,000
b. 120,000
c. 115,000
d. 110,000

MC31 Of the 125,000 ordinary shares issued by Lay Company, 25,000 were held as treasury shares on
December 31, 2019. During 2020, transactions involving Lay’s ordinary shares were as follows:
January 1 through October 31 - 13,000 treasury shares were distributed to officers as part of share
compensation plan.
November 1 - A 3-for-1 share split took effect.
December 1 - Lay purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares
were not retired.

At December 31, 2020, how many shares of Lay’ Company’s ordinary share capital were issued?
a. 125,000 shares
b. 324,000 shares
c. 334,000 shares
d. 375,000 shares

Chapter 2 - Shareholders' Equity

MC32 Use the same information given in MC31. How many shares of Lay Company ordinary share capital
were outstanding?
a. 334,000 shares
b. 324,000 shares
c. 125,000 shares
d. 108,000 shares

MC33 On June 1, 2020, Pat Corporation declared a bonus issue entitling its shareholders to one
additional share for each share held. At the time the dividend was declared, the fair value was P10 per
share and the par value was P5 per share. On this date, Pat had 600,000 of ordinary shares outstanding.

What entry should Pat make to record this transaction?

a. Retained Earnings 6,000,000
Share Dividend Distributable 3,000,000
Share Premium 3,000,000

b. Share Dividends Payable 6,000,000

Share Dividend Distributable 3,000,000
Share Premium 3,000,000

c. Retained Earnings 3,000,000

Share Dividend Distributable 3,000,000

d. No entry

MC34 The Powerpoint Corporation has two classes of share capital outstanding: 9%, P20 par Preference
and P70 par Ordinary. During the fiscal year ending December 31, 2020, the company had the following
equity transactions in chronological order:

No. of shares Price per share

Issue of preference share 10,000 P28
Issue of ordinary share 10,000 70
Reacquisition and retirement of preference 35,000 20
Purchase of treasury ordinary share 5,000 30
Share split 2-for-1 80
Reissue of treasury ordinary share 5,000 52

Chapter 2 - Shareholders' Equity

Balances of the accounts in the shareholders’ equity section of the December 31, 2019 statement of
financial position were:

Preference Share Capital, 50,000 shares P1,000,000

Ordinary Share Capital, 100,000 shares 7,000,000
Share Premium - Preference 400,000
Share Premium - Ordinary 1,200,000
Retained Earnings 550,000

Dividends were paid at the end of the fiscal year on the ordinary share at P1.20 per share and on the
preference at the preference rate. Profit for the year was P850,000.

How much should be the amount of Preference Share Capital to be shown on the December 31, 2020
statement of financial position?
a. P1,220,000
b. P1,160,000
c. P1,140,000
d. P1,116,000

MC35 Use the same information given in MC34. How much should be the amount of Ordinary Share
Capital to be shown on the December 31, 2020 statement of financial position?
a. P9,450,000
b. P9,310,000
c. P9,130,000
d. P4,725,000

MC36 Use the same information given in MC34. The retirement of the 2,000 preference shares would
decrease Share Premium - Preference by
a. P0
b. P16,000
c. P20,000
d. P60,000

MC37 Use the same information given in MC34. After the split, the par value per share of the ordinary
share capital
a. remained at P70.
b. was increased by P70.
c. was reduced by P35.
d. was reduced by P14.

Chapter 2 - Shareholders' Equity

MC38 Use the same information given in MC34. What is the total cost of the remaining treasury shares?
a. P0
b. P200,000
c. P260,000
d. P400,000

MC39 On March 30, 2020, Mitz Co. declared a 30% bonus issue on its ordinary shares. Shares were
selling on the market on this date at P25 per share. The par value is P10 per share and 180,000 shares
are outstanding. In distributing the bonus issue, Mitz Co. issued fractional share warrants totaling 600
shares. Assuming that 60% of the warrants are exercised and the remaining warrants expire, the entry to
record the exercise and the expiration of the fractional share warrants is

a. Fractional Share Warrants Issued 15,000

Ordinary Share Capital 9,000
Share Premium-Forfeited Warrants 6,000

b. Fractional Share Warrants Issued 6,000

Ordinary Share Capital 3,600
Share Premium-Forfeited Warrants 2,400

c. Fractional Share Warrants Issued 15,000

Ordinary Share Capital 3,600
Share Premium-Forfeited Warrants 11,400

d. Fractional Share Warrants Issued 15,000

Share Premium-Forfeited Warrants 15,000
Ordinary Share Capital

MC40 Quebec Corporation, a calendar-year company, had sufficient amount of retained earnings in 2020
as a basis for dividends, but was temporarily short of cash. Quebec declared a dividend of P100,000 on
April 1, 2020, and issued promissory notes to its shareholders in lieu of cash. The notes, which were
dated April 1, 2020, had a maturity date of March 31, 2021, and a 10% interest rate.

How should Quebec account for the scrip dividend and related interest?
a. Debit Retained Earnings for P110,000 on April 1, 2020.
b. Debit Retained Earnings for P100,000 on March 31, 2021.
c. Debit Retained Earnings for P100,000 on April 1, 2020 and debit Interest Expense for P10,000 on
March 31, 2021.
d. Debit Retained Earnings for P100,000 on April 1, 2020 and debit Interest Expense for P7,500 on
December 31, 2020.

Chapter 2 - Shareholders' Equity

MC41 On May 1, 2020, Maine Company issued P2 million, 20-year, 10% bonds for P2,120,000. Each
P1,000 bond had a detachable warrant eligible for the purchase of one share of Maine’s P50 par ordinary
share for P60. Immediately after the bonds were issued, Maine’s securities had the following market
values: 10% bonds without warrants – P1,040; Warrants – P20; Ordinary Share P50 par – P56.
What amount should Maine record as part of equity as a result of the foregoing?
a. P120,000
b. P 80,000
c. P 40,000
d. P 0

MC42 The directors of Pete Corporation, whose P50 par value ordinary share is currently selling at P70
per share, have decided to declare a bonus issue. Pete has an authorization for 250,000 ordinary shares,
has issued 100,000 shares of which 10,000 shares are now held as treasury, and desires to capitalize
P945,000 of the Retained Earnings balance. To accomplish this, the percentage of bonus issue that the
directors should declare is
a. 18.9%.
b. 15.0%.
c. 12.0%.
d. 9.0%.

MC43 Sine Co. had outstanding 20,000 shares of P100 par value 8% cumulative preference share capital
and 30,000 shares of P50 par value ordinary share capital on December 31, 2019. At December 31, 2019,
dividends in arrears on the preference shares were P80,000. Cash dividends declared in 2020 totaled
P300,000. The amounts paid to preference shareholders and ordinary shareholders are
a. P 80,000 and P220,000.
b. P160,000 and P140,000.
c. P220,000 and P 80,000.
d. P240,000 and P 60,000.

MC44 At December 31, 2020, Paste Company had 30,000 shares of P100 par, 5% cumulative preference
share outstanding. No dividends were in arrears as of December 31, 2018. Paste did not declare a
dividend during 2019. During 2020, Paste paid a cash dividend of P100,000 on its preference share.

Chapter 2 - Shareholders' Equity

Paste should report dividends in arrears in its 2020 financial statements as a/an
a. accrued liability of P150,000.
b. disclosure of P150,000.
c. accrued liability of P200,000.
d. disclosure of P200,000.

MC45 Way Company reported the following in its statement of shareholders’ equity on January 1, 2020:

Ordinary Share Capital, P5 par value, 200,000 shares authorized; 100,000 shares issued P 500,000
Share Premium 1,500,000
Retained Earnings 516,000
Less Treasury Share, 5,000 shares at cost 40,000
Total shareholders’ equity P2,516,000
P2,476,000

The following events occurred in 2020:

May 1 1,000 treasury shares were sold for P10,000.
July 9 10,000 shares of previously unissued ordinary share were sold for P12 per share.
October 1 The distribution of a 2-for-1 share split resulted in the ordinary share’s par value being halved.

How many shares are issued and outstanding at December 31, 2020?
a. 220,000 and 216,000
b. 220,000 and 212,000
c. 110,000 and 106,000
d. 100,000 and 95,000

MC46 At December 31, 2019 and 2020, Eagle Company had outstanding 4,000 shares of P100 par value
12% cumulative, fully participating preference share and 20,000 of P10 par value ordinary share. At
December 31, 2019, dividends in arrears on the preference share were P24,000. Cash dividends declared
in 2020 totaled P108,000.

What are the amounts of dividend per share on the preference and ordinary shares, respectively?
a. P20.00 and P1.40
b. P20.00 and P1.80
c. P18.00 and P1.40
d. P18.00 and P1.80

Chapter 2 - Shareholders' Equity

MC47 The shareholders’ equity section of Doll Corporation as of December 31, 2020 before closing its
books and recording the 2019 dividends is as follows:

Ordinary Share Capital, 100,000 shares issued and outstanding P3,000,000

Share Premium 4,000,000
Retained Earnings 8,000,000

Doll’s board of directors declared a 10% bonus issue on December 31, 2020 when the fair value of each
share was P70. Accordingly, 10,000 new shares were issued. Doll’s share capital has a par value of P30
per share.

Assuming that Doll sustained a net loss of P1,200,000 for the year 2020, what amount should Doll report
as retained earnings as of December 31, 2020?
a. P6,100,000
b. P6,500,000
c. P8,500,000
d. P8,900,000

MC48 On December 10, Pia Company split its share capital 5-for-2 when the market value was P65 per
share. Prior to the split, Pia had 200,000 shares of P15 par value share capital.

What is the par value of each share after the split?

a. P 6.00
b. P15.00
c. P26.00
d. P37.50
MC49 The Board of Directors of Galleria Suites located in the heart of Ortigas Commercial Complex
wishes to declare a dividend whereby ordinary shareholders shall receive a total per share dividend of
P40. The shareholders’ equity section of the company has the following information:

Preference Share Capital (P1,000 par, 7%, participating up to 10%, non-cumulative; 10,000 shares
authorized, 2,500 shares issued and outstanding) P2,500,000
Ordinary Share Capital (P250 par; 25,000 shares authorized, issued, and outstanding) 6,250,000
Share Premium 1,250,000
Retained Earnings 5,000,000

Chapter 2 - Shareholders' Equity

MC45 Way Company reported the following in its statement of shareholders’ equity on January 1, 2020:

Ordinary Share Capital, P5 par value, 200,000 shares authorized; 100,000 shares issued P 500,000
Share Premium 1,500,000
Retained Earnings 516,000
Less Treasury Share, 5,000 shares at cost 40,000
Total shareholders’ equity P2,516,000
P2,476,000

The following events occurred in 2020:

May 1 1,000 treasury shares were sold for P10,000.
July 9 10,000 shares of previously unissued ordinary share were sold for P12 per share.
October 1 The distribution of a 2-for-1 share split resulted in the ordinary share’s par value being halved.

How many shares are issued and outstanding at December 31, 2020?
a. 220,000 and 216,000
b. 220,000 and 212,000
c. 110,000 and 106,000
d. 100,000 and 95,000

MC46 At December 31, 2019 and 2020, Eagle Company had outstanding 4,000 shares of P100 par value
12% cumulative, fully participating preference share and 20,000 of P10 par value ordinary share. At
December 31, 2019, dividends in arrears on the preference share were P24,000. Cash dividends declared
in 2020 totaled P108,000.

What are the amounts of dividend per share on the preference and ordinary shares, respectively?
a. P20.00 and P1.40
b. P20.00 and P1.80
c. P18.00 and P1.40
d. P18.00 and P1.80

Chapter 2 - Shareholders' Equity

MC47 The shareholders’ equity section of Doll Corporation as of December 31, 2020 before closing its
books and recording the 2019 dividends is as follows:
Ordinary Share Capital, 100,000 shares issued and outstanding P3,000,000
Share Premium 4,000,000
Retained Earnings 8,000,000

Doll’s board of directors declared a 10% bonus issue on December 31, 2020 when the fair value of each
share was P70. Accordingly, 10,000 new shares were issued. Doll’s share capital has a par value of P30
per share.

Assuming that Doll sustained a net loss of P1,200,000 for the year 2020, what amount should Doll report
as retained earnings as of December 31, 2020?
a. P6,100,000
b. P6,500,000
c. P8,500,000
d. P8,900,000

MC48 On December 10, Pia Company split its share capital 5-for-2 when the market value was P65 per
share. Prior to the split, Pia had 200,000 shares of P15 par value share capital.

What is the par value of each share after the split?

a. P 6.00
b. P15.00
c. P26.00
d. P37.50

MC49 The Board of Directors of Galleria Suites located in the heart of Ortigas Commercial Complex
wishes to declare a dividend whereby ordinary shareholders shall receive a total per share dividend of
P40. The shareholders’ equity section of the company has the following information:

Preference Share Capital (P1,000 par, 7%, participating up to 10%, non-cumulative; 10,000 shares
authorized, 2,500 shares issued and outstanding) P2,500,000
Ordinary Share Capital (P250 par; 25,000 shares authorized, issued, and outstanding) 6,250,000
Share Premium 1,250,000
Retained Earnings 5,000,000

Chapter 2 - Shareholders' Equity

How much should be the total amount of dividends to be declared to meet the goal of the directors of
P40 per share?
a. P1,400,000
b. P1,250,000
c. P1,175,000
d. P1,000,000

MC50 On December 29, 2019, Bay Company was registered at the Securities and Exchange Commission
with 100,000 authorized ordinary share of P100 par value. On the same date, 40,000 shares were sold
and issued at P105 per share. On May 14, 2020, the corporation purchased 600 shares of its ordinary
share capital at P110 per share. On September 15, 2020, 400 treasury shares were sold at P95. During
2020, the corporation realized a profit after tax of P830,000 and paid a cash dividend of P200,000.

What is the total shareholders’ equity of Bay on December 31, 2020?

a. P10,602,000
b. P 4,820,000
c. P 4,802,000
d. P 4,352,000

MC51 The capital accounts of Kay, Inc. on December 31, 2019 were as follows:

Preference Share Capital, P20 par, 20,000 shares P 400,000

Share Premium - Preference 160,000
Ordinary Share Capital, P80 par, 50,000 shares 4,000,000
Share Premium - Ordinary 600,000
Retained Earnings 360,000

During the year ending December 31, 2020, the following summarizes the transactions affecting the
shareholders’ equity:
April 30 1,000 preference shares were retired at P25 per share.
June 15 2,000 treasury shares were purchased at P85 per share.
June 30 A 2-for-1 share split of the company’s ordinary share was declared.
July 31 800 treasury shares were reissued at P50 per share.
Dec. 31 Profit for 2020 was P900,000.

Chapter 2 - Shareholders' Equity

What was the total shareholders’ equity on December 31, 2020?

a. P6,294,000
b. P6,270,000
c. P6,265,000
d. P5,520,000

MC52 Use the same information given in MC51. How much was the remaining cost of the treasury
shares on December 31, 2020?
a. P 51,000
b. P 96,000
c. P102,000
d. P136,000

MC53 On July 1, 2020, Tools Company granted share options to key employees for the purchase of
20,000 of the company’s ordinary share capital at P25 per share. Based on the option-pricing model used
by the company, the fair value of each share option on this date was P9.

The options are intended to compensate employees for the next two years. The options are exercisable
within a four-year period beginning July 1, 2022 by grantees still in the employ of the company. The
market price of Tools’ ordinary share was P33 per share at the date of grant. No share options were
terminated during the year.
How much should Tools charge to compensation expense for the year ended December 31, 2020?
a. P 45,000
b. P 80,000
c. P 90,000
d. P160,000

MC54 On January 1, 2020, Dan Corporation granted an employee an option to purchase 3,000 shares of
Dan’s P5 par value ordinary share at P20 each. The option became exercisable on December 31, 2022.
The option was exercised on January 10, 2023.

The market prices of Dan’s share capital were as follows: January 1, 2020 – P30; December 31, 2020 –
P50; January 10, 2023 – P45.

The company cannot reliably determine the fair value of the share option, so it decided to use the
intrinsic value method.

Chapter 2 - Shareholders' Equity

For the year 2020, how much should Dan recognize as compensation expense?
a. P10,000
b. P15,000
c. P25,000
d. P30,000

MC55 Melissa Corporation granted share options to its employees with a fair value of P4,500,000 on
January 1, 2020. The options vest in three years and the options are exercisable starting January 1, 2023
until December 31, 2023.

On December 31, 2020, it was estimated that 5% of employees will leave the entity during the vesting
period. This estimate was revised to 6% during the year 2021. On December 31, 2022, employees’ record
indicates that 90% of them remained in the employ of the company and became entitled to the options.

What would be the expense charged during the year ending December 31, 2020?
a. P1,350,000
b. P1,410,000
c. P1,425,000
d. P1,500,000

MC56 Use the same information given in MC55. What would be the expense charged during the year
ended December 31, 2021?
a. P1,350,000
b. P1,395,000
c. P1,410,000
d. P1,500,000

MC57 Jane Company has granted 200 share appreciation rights to each of its 300 employees on January
1, 2020. The rights are due to vest on December 31, 2021, with payment being made on December 31,
2022. During the year 2020, the company estimated that all options would vest; although only 90% of
the options actually vested.

Share prices are as follows:

January 1, 2020 P20
December 31, 2020 24
December 31, 2021 27
December 31, 2022 30

Chapter 2 - Shareholders' Equity

What liability will be recorded on December 31, 2020 as a result of the share appreciation rights?
a. P108,000
b. P120,000
c. P189,000
d. P270,000

MC58 Use the same information given in MC57. How much compensation expense should be recorded
for the year ended December 31, 2021?
a. P 96,000
b. P108,000
c. P120,000
d. P258,000

MC59 Rod Company had 50,000 shares of P50 par value ordinary share outstanding and 5,000 shares of
P100 par preference share outstanding. The current market value of the ordinary share is P120 and total
shareholders’ equity amount to P3,600,000. The preference share has a liquidation value of P140 per
share and no dividends are in arrears. What is the book value per ordinary share?
a. P 50.00
b. P 58.00
c. P 72.00
d. P120.00

MC60 The Mike Corporation’s statement of financial position shows total shareholders’ equity of
P3,150,000 as of December 31, 2020.

What is the book value per share, assuming that the company has only one class of share capital
outstanding consisting of 50,000, P10 par ordinary shares?
a. P10.00
b. P63.00
c. P70.20
d. P73.00

MC61 Use the same information given in MC57. Assume that the company has two classes of share
capital outstanding consisting of the following: 5,000, P100 par value preference shares with a
liquidation value of P120 per share and 50,000, P10 par value ordinary shares.

Chapter 2 - Shareholders' Equity

What is the book value per ordinary share?
a. P10.00
b. P51.00
c. P53.00
d. P63.00

MC62 The Meg Company began operations in January 2018 and reported the following results for each
of its three years of operations.

2018 – P520,000 loss

2019 – P80,000 loss
2020 – P1,600,000 profit

At December 31, 2020, Meg Company’s capital accounts were as follows:

8% Cumulative Preference Share Capital, P100 par; 50,000 shares authorized, issued and outstanding
P5,000,000
Ordinary Share Capital, P10 par; 1,000,000 shares authorized; 750,000 shares issued and outstanding
7,500,000

Meg Company has never paid a cash or bonus issue and there has been no change in its capital accounts
since it began operations in 2018. The corporation law permits dividends only from retained earnings.

What is the book value of the ordinary share at December 31, 2020?
a. P 9.73
b. P10.00
c. P10.80
d. P11.33

MC63 Use the same information given in MC62. What is the book value of the ordinary share at
December 31, 2020 assuming that the preference share has a liquidating value of P106 per share?
a. P10.80
b. P10.00
c. P 9.60
d. P 9.33

Chapter 2 - Shareholders' Equity

MC64 ABC Corporation’s performance during the last three years had not been favorable resulting to a
deficit of P950,000 at December 31, 2020. The company, with the approval of the shareholders, decided
to eliminate the deficit through a quasi-reorganization which would be effected as follows: The
company’s 200,000, P20 par ordinary share capital originally issued at an average price of P22 would be
reissued with par value of P15.

Immediately after quasi-reorganization, what would be the balance of share premium?

a. P1,400,000
b. P1,000,000
c. P 600,000
d. P 450,000

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