Arlene P.

Orua

BSA-401

CHAPTER 23 : RETAINED EARNINGS : APPROPRIATION AND QUASI-

REORGANIZATION

QUESTIONS

1. Explain unappropriated retained earnings.

2. Explain appropriation of retained earnings.

3. Explain the three kinds of appropriation of retained earnings.

4. What us a statement of retained earnings?

5. What are the usual items that affect directly retained earnings?

6. Explain the meaning of the term reserves.

7. What are the items that may be included in the caption "nondistributable reserves".

8. What is the statement of changes in equity?

9. What items are disclosed in the statement of changes in equity?

10. What are the components of comprehensive income?

11. Explain other comprehensive income.

12. What is a quiasi-reorganization?

13. What are the two ways of accomplishing a quasi- reorganizations?

14. What are the circumstances that would justify quasi-reorganizations?

15. What are the SEC requirements for a quasi-reorganization?

Problem 23-1(IAA)

As a result of an agreement with the bondholders, Malice company is required to

appropriate earnings of 200,000 at the end of each calendar year for the years 2016 to
2020.
At the beginninh of 2021 , upon liquidation of the bonded indebtedbess of 1,000,000 the
retained earnings appropriation is canceled.

This followed by the declaration and the issue of 30% stock dividend on 250,000
outstanding shares eith 10 par value. the market value is 15 per share.

Required:

Problem 23-2 (IAA)

The board of directors of Mazda Company decided to embark on a substantial plant

expansion.

To demonstrate the need to.retain assets in the entity, the board agreed on dec 31,
2020 to authorize an appropriation of retained earnings in the amount of P5,000,000,
the anticipated cost of plant expansion.

The plant was partially constructed on December 31, 2021, and the board decided to
reduce the appropriation by P3,000,000 the cost incurred to date.

Finally, in July 2022, the plant was completed and the remaininh porrion of the
appropriation was removed.

Required:

Prepare Journal enrries to record, reduce and finally remove the appropriation.

Problem 23-3 (IAA)

On january 1, 2020, Susan company disclosed the following shareholders equity:

Share capital, P100 par , 100,000 shares authorized, 50,000 shares issued 5000000

Share premium 400,000

Retained earnings 1,500,000

During the current year, the entity had the following transactions:

1. In February, the entity reacquired 6,000 shares for P90 per share.

2. In June, the entity sold 3,000 shares of its treasury for P120 per share.

3. In September each shareholder was issued for each share held one stock right to
purchase two additional shares for P140 per share. The rights expire on December 31,
2020.
4. In Octobee, 10,000 stock eights were exercised when the market value was P150 per
share.

5. On December 15, 2020, the entity declared the first cash dividend to shareholders of
P20 per share, payable om January 10, 2021

6. On December 21,2020, the entity formally retired 2,000 treasury shares.

7. Net income for the current year was 540,000

8. Appropriated retained earnings equal to the cost of treasury shares.

Required:

a. Prepare journal entries to record the transactions.

b. Prepare a statement of changes in equity for the year ended December 31,2020.

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

Problem 23-4 (IAA)

On january 1, 2020, Marimar Company reported the following shareholders equity:

Share Capital, P100 par 6,000,000

Share premium 500,000

Retained Earnings 1,800,000

Transactions during the year amd other information relating to shareholders' equity
accounts were as follows:

1. On January 26, the entity reacquired for cash 5,000 shares for P110 per share.

2. On April 4, the entity sold for cash 3,000 shares of treasury for P140 per share.

3. On June 1, the entity declared a cash dividend of P20 per share, payable July 5, to
shareholders of record on July 1.

4. On November 1, the entity declared a 2 for 1 split and changed the par value from
P100 to P50. On November 20, shares were issued for the share split.

5. On December 5, 4,000 shares were issued in exchange for a second hand

equipment. The equipment originally cost P400,000, was carried by the previous owner
at P260,000

6. Net income for the current year was P1,730,000

7. Appropriated retained eaenings equal to the cost of treasuty shares

Required:

a. Prepare journal enteies to record the transactions.

b. Prepare a statement of cha ges im equity for the year emded December 31, 2020.

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

Problem 23-5 (IAA)

On January 1, 2020, Nissan.Company had an ordinary share capital of 4,000,000

authorized shares with P20 par value, of which 1,000,000 shares were issued and
outstanding.

The shareholders' equity on January 1, 2020 revealed the following balances:

Ordinary share capital 20,000,000

Share premium 6,000,000

Retained Earnings 5,000,000

Transactions during the year and other information relating to shareholders' equity
accounts were:

1. On January 5, the entity issued at P54 per share, 100,000 preference shares with
P50 par value and 9% cumulative. Each preference share is convertible, at the option of
the holder, inti two ordinary shares. The entitu had 400,000 authorized pteference
shares.

2. On February 1, the entity reacquired 10,000 ordinary shares at P32 per share.

3. On April 30, the entity sold 250,000 ordinary shares at P34 per share.

4. On June 18, the entity declared a cash dividend of P2 per ordinary share, payable om
July 12, to shareholders of record on July 1.

5. On November 19, the entity sold 5,000 shares of treasury for P42 per share.

6. On December 15, the entity declared the yearly cash dividend on preferemce share
capital, payable on January 14, 2021 to shareholders of record on December 31,2020.

7. The net income for the current year was P3,500,000

8. Appropriated retained earnings equal to the cost of treasury shares.

Required:

a. Prepare journal entries to record the transactions.

b. Prepare a statement of changes in equity for 2020.

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

Problem 23-6 (AICPA Adapted)

Current conditions warrant that the Peach Company should undergo a quasi-
reorganization at year end.

Selected items prior to the quasi-reorganization are:

1. Inventory was recorded at cost of P3,250,000. The fair value of the inventory was
P3,000,000.

2. Proprety, plant , and equipment were recorded at P6,000,000 net of the accumulated
depreciation. The fair value of the property was P5,000,000.

3. The par value of the share capital is to be reduced from P10 at P5 per share.

Shareholders' equity consisted of:

Share Capital, par value P10 per share, authorized, issued amd outstanding 350,000
shares 3,500,000

Share Preimum 800,000

Retained Earnings(deficit) (450,000)

= 3,850,000

4. The resulting deficit balance is to be offset against the share premium.

Required:

a. Prepare journal entries to give effect to the reorganizations.

b. Present the shareholders' equity after reorganization.

Problem 23-7 (IAA)

Subic Company has suffered substantial operating losses for several years.

The entity's ability to service debts and pay operating expenses has been impaired.
Comsequently, the owners, and creditors have decided to execute a quasi-
reorganization.

The statement of financial position of Subic Company prior to the reorganization is as

follows:

ASSETS

Cash 200,000

Accounts receivable 300,000

Inventory 500,000

Property, plant, and equipment 9,900,000

Accumulated depreciation (3,100,000)

Goodwill 1,200,000

Total assets 9,000,000

LIABILITIES AND SGAREHOLDERS' EQUITY

Accounts payable 1,100,000

Notes Payable 500,000

Mortgage Payable 4,200,000

Ordinary share capital, P100 par, 50,000 shares 5,000,000

Share Premium 1,000,000

Retained Earnings (2,800,000)

Total Liablities and shareholders equity 9,000,000

The entity provided the following information in relation to the quasi-reorganization:

1. An independent appraisal of the entity's inventory reveals goods with carrying amount
of P150,000 to be obsolete and wortless.

2. Equipment costing P2,000,000 and with accumulated depreciation of P1,200,000 is

expected to be sold for P300,000.

3. The goodwill is to be written off as loss.

4. The mortgage holder agrees to accept 40,000 new preference shares with P100 par
value in satisfaction of the liability.

5. The par value of the ordinary share is reduced to P20.

6. The resulting deficit is offset against the share premium.

Required:

a. Prepare journal entries to give effect to the quasi-reorganization

b. Prepare a statement of financial position immediately after the reorganization.

Problem 23-8 (IAA)

Bacolod company approved the following reorganization at year-end:

1. The preference share capital is to be exchanged for P2,000,000 of 10% debenture

bonds.

2. Goodwill is to be written off.

3. The property, plant, equipment are appraised by imdependent expert at a

replacement cost of P12,000,000. The SEC approved the revaluation of the property,
plant, equipment to give effect to the reorganization.

4. The resulting deficit is to be offset against the revaluation surplus.

STATEMENT OF FINANCIAL POSITION AT YEAR-END

ASSETS

Cash 425,000

Other current assets 1,325,000

Property, plant, and equipment 8,000,000

Less accumulated depreciation 2,000,000 6,000,000

Goodwill 500,000

Total assets 8,250,000

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities 2,000,000

Preference share capital, 12% cumulative, P100 par 1,500,000

Ordinary share capital, 50,000 shares, P100 par 5,000,000

Share premium 750,000

Retained earnings (1,000,000)

Total liabilities and shareholders' equity 8,250,000

Required:

a. Prepare journal entries to give effect to the reorganization.

b. Prepare a statement of financial position after the reorganization.

Problem 23-9(AICPA Adapted)

Mega Company provided the following information:

Dividends on 10,000 cumulative preference shares of 6% P100 par value have not been
declared or paid for 3 years.

Treasury shares were acquired at a cost of P1, 500,000. The treasury shares had not
be reissued as of year-end.

What amount of retained earnings should be appropriated?

a.1,500,000

b.1,680,000

c.180,000

d.0

Problem 23-10 (AICPA Adapted)

On January 1, 2020, Rama Company had 20,000 treasury shares of P5 par value that
had been acquired in 2015 at P12 per share.

In May 2020, the entity reissued 15,000 of these treasury shares at P10 per share. The
cost method is used to record treasury transactions.

On December 31, 2020, what amount should be reported in the notes to financial
statements as a restriction of retained earnings as a result of the treasury share
transactions?

a.5,000
b.10,000

c.60,000

d.90,000

Problem 23-11 (AICPA Adapted)

On January 1, 2020, Eagle Company reported P1, 750,000 of appropriated retained

earnings for the construction of a new office building which was completed in 2020 at a
total cost of P1, 500,000.

In 2020, the entity appropriated P1, 200,000 of retained earnings for the construction of
a new plant.

Also, P2, 000,000 of cash was restricted for the retirement of bonds payable due in
2021.

On December 31, 2020, what amount should be reported as appropriated retained

earnings?

a.1,200,000

b.1,450,000

c.2,950,000

d.3,200,000

Problem 23-12 (IAA)

Elvis Company reported the following shareholders’ equity on January 1, 2020:

Share capital, P5 par, 600,000 shares authorized,200,000 shares issued and

outstanding 1,000,000

Share premium 6,000,000

Retained Earnings 2,800,000

On January 31, 2020, the entity reacquired 10,000 shares at P30 per share to be held
as treasury. On July1, 2020, the entity declared and issued a 30% stock dividend.

On December 31, 2020, the entity declared and paid cash dividend of P10 per share.
The net income for the current year was P3, 000,000.
What is the unappropriated balance of retained earnings on December 31, 2020?

a. 2,745,000

b. 3,045,000

c. 2,700,000

d. 2,600,000

Problem 23-13 ( AICPA Adapted)

Cyan Corp. issued 20,000 shares of P5 par common stock at P10 per share. On
January 1, 2020, the retained earnings were P300,000.

In March 2020, the entity reacquired 5,000 shares at P20 per share. In June 2020, the
entity sold 1,000 of these shares to corporate officers for P25 per share.

The cost method is used to record treasury stock. Net income for 2020 was P60,000.

On December 31 2020, what amount should be reported as unappropriated retained

earnings?

a.280,000

b.365,000

c.375,000

d.360,000

Problem 23-14 (AICPA Adapted)

Cerritos Corporation began operations on January 1, 2017.

During its first three years of operations, Cerritos company reported net income of P
800,000 for 2017, P2,500,000 for 2018, and P3,000,000 for 2019.

The entity also declared and paid dividends of P1,000,000 for 2018 and P1,000,000 for
2019.

The following information related to 2020:

Income before income tax P4,800,000

Prior period adjustment-understatement of 2018 depreciation before tax 400,000

Cumulative decrease in income from change in inventory methods before tax 700,000
Dividends declared (of this amount, P500,000 will be paid on January 15,
2021)2,000,000

Income tax rate 30%

What amount should be reported as retained earnings on December 31, 2020?

a. 4,890,000

c. 5,450,000

b. 6,000,000

d. 5,660,000

Problem 23-15 (IAA)

On January 1 ,2020, Nam company reported the following amounts in the shareholder's
equity:

Preference share capital, P150 par value , 20,000 shares 3,000,000

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

Share premium 6,000,000

Retained Earnings 4,500,000

On January 1, 2020, the entity sold 20,000 additional ordinary shares for P90 per share.

Late in 2020, it was learned that because of mathematical error, an overstatement of

depreciation expense by P500,000 had occured in 2019.

The entity reported net income of P4,000,000 for 2020.

The entity declared cash dividend of P1,000,000 on preference shares and P2,000,000
on ordinary shares during 2020.

The income tax rate is 30%.

What amount should be reported as retained earnings on December 31, 2020?

a. 5,850,000

b. 6,000,000

c. 5,150,000

d. 4,450,000
Problem 23-16 (AICPA Adapted)

Brown company reported the following shareholder’s equity at year-end:

Share capital, P30 par, 100,000 shares outstanding 3,000,000

Share premium 1,500,000

Retained earnings (deficit) (2,100,000)

The shareholders approved a quasi-reorganization by reducing the par to P5 and

eliminating the deficit against share premium.

Immediately after quasi-reorganization, what amount should be reported as share

premium?

a.1, 500,000

b.1,900,000

c.4,000,000

d.600,000

Problem 23-17

Gaston company has sustained heavy losses over a period of time and conditions
warrant that the enity should be undergo a quasi-reorganization at year-end

*Inventory with cost of 6,500,000 was recorded at the market value of P6,000,000

*Property, plant and equipment were recorded at P12,000,000, net of accumulated

depreciation. The sound value was P8,000,000.

*The share capital is 7,000,00 consisting of 700,000 shares with par value of P10, the
share premium is P1,600,00 and the deficit in retained earnings is 900,000.

* The par value of share is to be reduced from P10 to P5.

Immediately after the quasi-reorganization, what is the shareholder’s equity?

a.3,300,000

b.3,500,000

c.3,700,000

d.4,200,000
Problem 23-18 (IAA)

Adverse financial and operating circumstances warrant that Solid company should
undergo a quasi-reorganization at year end.

The following information may be relevant in accounting for quasi- organization:

*Inventory with fair value of 2,000,000 is currently recorded in the account at cost of
2,500,000

*Plant assets with fair value of 7,000,000 are currently recorded at 8,500,000, net
accumulated depreciation.

*Individual shareholders contribute 4,000,000 to create additional capital to facilitate the

reorganization. No new shares are issued.

* Par value of the share is reduced from 25 to 5.

Immediately before these events, the shareholder’s equity appear as follows:

Share capital, P25 par, 100,000 shares outstanding 2,500,000

Share premium 1,750,000

Retained earnings (3,000,000)

After the quasi-organization, what amount should be reported as share premium?

a.2,750,000

b.3,250,000

c.3,750,000

d.1,750,000

Problem 23-19 (IAA)

Christelle Company has incurred heavy losses since the inception of operations.

The board ofdirectors voted to implement a quasi-reorganization, subject to approval of

shareholders.

Immediately prior to the restatement, the shareholders’ equity was as follows:

Share capital, P100 par,500 shares 50,000,000Share premium5,000,000

Retained earnings (deficit) (8,000,000)

The shareholders approved the quasi-reorganization to be accomplished by :

Reduction of inventory 2,000,000

Reduction of property, plant and equipment P4,000,000

Writeoff of goodwill of P1,000,000

Appropriate adjustment to the capital structure against share premium first and any
remaining deficit against the share capital account.

To implement the quasi-reorganization, the share capital account should be reduced by

what amount?

a. 10,000,000

b. 15,000,000

c. 20,000,000

d. 3,000,000

Problem 23-20 (AICPA Adapted)

At the beginning of current year, Jade Company showed the following shareholders’
equity :

Share capital, 1,500,000 shares 1,500,000

Share premium 15,000,000

Retained earnings 8,100,000

Treasury shares, 100,000 at cost (900,000)

All of the outstanding and treasury shares were originally issued for P11 per share. The
treasury shares are reacquired in the previous share.

During the current year , the following events or transactions occurred relating to
shareholders’ equity:

a. February 15-Issued 400,000 sahres for P12.50 per share.

b. June 15- Declared a cash dividend of 0.20 per share.

c. September 15- The president retired. The entity purchased from the retiring president
100,000 shares for P13.00 per share which wss equal to market value on this date.
These shares were cancelled.
d. December 15- Declared a cash dividentld of 0.20 per share to shareholders payable
in early part of.next year.

e. Om december 31, the entity is being sued by two separate parties for patient
infringement. The management amd legal counsel share the following opinion regarding
these suits:

Suit Likelihood of losing the suit Estimated Loss

#1 Reasonably possible 600,000

#2 Probable 400,000

1. What is the increase in share premium arising from the issuance of 400,000 shares
on February 15?

a. 4,000,000

b. 5,000,000

c. 4,600,000

d. 400,000

2. What is the decrease in share premium arising from the retirement of 100,000 shares
on September 15?

a. 1,300,000

b. 1,200,000

c. 1,000,000

d. 100,000

3. The entity decided to appropriate retained earnings for all loss contingencies that are
not properly accruable by a charge to expense. How much of loss contingencies should
be appropriated by a chsrge to unappropriated retained earnings?

a. 1,000,000

b. 600,000

c. 400,000

d. 500,000
4. What amount of cash dividend should be charged against unappropriated retained
earnings in the current year?

a. 700,000

b. 680,000

c. 360,000

d. 340,000

5. What amount should be reported in the notes to.financial statements as restriction on

retained earnings because of acquisition of treasury shares?

a. 200,000

b. 900,000

c. 1,200,000

d. 1,300,000

Problem 23-21 Multiple Choices (IAA)

1. A retained earnings appropriation can be used to:

A. Absorb a fire loss when a company is self-insured.

B. Provide for a contingent loss that is probable and reasonable.

C. Smooth periodic income.

D. Restrict earnings available for dividends.

2. . An appropriation of retained earnings by the board of directors of a corporation for

future plant expansion will result in

A. The establishment of a fund to help finance future plant expansion.

B. The setting aside of cash to be used for future plant expansions.

C. A decrease in cash on the balance sheet with an equal increase in the investment in
fund.

D.The disclosure that management does not intend to distribute, in the form of
dividends, assets equal to the amount of the appropriation.
3. The retained earnings appropriated account is created for the purpose of

a. Earmarking cash to be used for particular purposes

b. Insuring the payment of dividends

c. Protecting the working capital position

d. Preventing losses from contingencies

4. A restriction of retained earnings is most likely to be required by the

a. Incurring a net loss in the current year.

b. Incurring a net loss in the prior year.

c. Purchasing treasury shares.

d. Reissuing treasury shares.

5. Which of the following is most likely to be found in corporate laws regarding payment
of dividends?

a. Dividends may be paid from legal capital.

b. Retained Earnings are available for dividends unless restricted by contract or by

statute.

c. Unrealized capital is available for any type of dividend.

d.Capital from donated assets is available for dividends.

6. For which of the following purposes should an appropriation for possible loss
contimgencies be established?

a. To match applicable cost with current revenue

b. To reduce fluctuations in net income in order to lend stability of the entity

c. To charge operations in periods arising prices for the losses which may otherwise be
absorbed in periods of failing prices.

d. To inform shareholders that a portion of retained earnings should be set aside from
amounts available for dividends because of such contingencies.

7. Which statement is incorrect concerning the appropriations of retained earnings?

a.Appropriations of retained earnings do not change the total amount of stockholders'
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.

8. Which of the following statements is incorrect concerning retained earnings?

a. Appropriations of retained earnings do not change the total retained earnings.

b. The only proper way to eliminate an appropriation of retained earnings after it has
serve its purpose is to revert to the unappropriation of retained earnings.

c. An appropriation of retained earnings does not mean that assets are segregated for
specific purpose.

d. When treasury shares are purchased, retained earnings must be appropraited equal
to the par or stated value of the treasury shares.

9. Which of the following is not a legal restriction related to profit distributions ?

a.The amount distributed must be in compliance with the laws governing corporations.

b.The amount distributed can never exceed the net income for the current yeat.

c.Profit distributions must be formally approved by the board of directors.

d.Dividends must be in full agreement with the capital contracts as to preferences.

10. The use of equity reserves under international accounting standards

a. Is strictly voluntary on the part of the management of an entity.

b. Is based on whether a reserve is part of distributable or nondistributable equity.

c. Is primarily for the benefit of shareholders rather than cresitors.

d. Results in the elimination of retained earnings from the total shareholders' equity.

Problem 23-22 Multiple choice (AICPA Adapted)

1. The primary purpose of a quasi-reorganization is to give an entity the opportunity to

a.Obtain relief from creditors.

b.Revalue understated assets to fair value.

c.Eliminate a deficit in retained earnings.

d.Distribute the shares of a newly created subsidiary to shareholders.

2.When an entity goes through a quasi-reorganization, the carrying amounts are stated
at

a. Original Cost

b. Replacement Cost

c. Fair Value

d. Original.Carrying amount

3. Immediately after the quasi-reorganization, the retained earnings account

a. Has a zero balance

b. Remains the same

c. Is frozen and dated,

d. Has a debit balance

4. The accounting for a quasi-reorganization usually includes

a. Write up of assets and writedown of retained earnings.

b. Writedown of both assets and retained earnings.

c. Writedown of assets a.d elimination of a deficit.

d. Writeup of assets amd elimination of a deficit

5. An entity with a substantial deficit undertakes a quasi-reorganization. Certain assets

will be written down to their present fair value. Liabilities will remain the same. How
would the entries to record the quasi-reorganization affect share capital and retained
earnings, respectively?

a. Increase and Decrease

b. Decrease and No effect

c. Decrease and Increase

d. No effect and Increase