Understanding Book Value and Preference Shares in Equity Analysis
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Fr. Saturnino Urios University**We aren't endorsed by this school
Course
ACCOUNTING 101
Subject
Accounting
Date
Dec 10, 2024
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11
Uploaded by CoachAtom15402
CHAPTER 30 BOOK VALUE AND PREFERENCE DIVIDENDg Problem 30-1 (IAA) Tarr Company report vear-end: ed the following shareholders’ equity | - 12%. P50 par, 20,000 shares 1,000,009 Preference share capita Y Ordinary share capital, P25 par, 100,000 shares 2‘;38'«» 000 Share premium Retained earnings 400,000 Retained earnings appropriated 100,099 Revaluation surplus 300,00 Dividends on preference share have not been paid for three years T preference sharc hasa liquidating value of P55 and a call price of 5§, What iss the bobk value per preference share?_. % v % / o 45 C d. 58 he? Solution 30-1 Answer a Preference share capital Liquidation premium - excess of liquidating value over par value of preference share (20,000 x 5) 100,000 Preference dividend for current year (1,000,000 x 12%) 120000 1,00000 Total preference shareholders’ equity 1,200 Book value per preference share (1,220,000 / 20,000) 2 ’I:, 't’lzz :'bicr_cevf?ycomrys@_temem, the preference shfl‘;‘: -nonicumulative and nonparticipating.Th entitled to current ywdi[:lidendl():l‘x’\l;'g us,rl.hc i The liguidating value of the preference share i instead of % call price becay p e e iy Gt e s minion 16 oo the prsce L problem 30-2(A LCPA Adapted) Hoyt Company reported the following shareholders” equity at It cnl’“"d:~ cumulative preference share capital, par value 5% P100 per share; 25,000 shares issued and i Ordinary share Capftal. par value P35 p:r s::::('a"dms i 100,000 shares issued and outstanding : 3,500,000 spare premiuin 1,250,000 Retained carnings 3’000‘000 ,000, pividends in arrears on the preference share amounted to P250,000. [fthe entity were to be liquidated, the preference sharchold receive par value plus a premium of P5S00,000, olders would What is the book value per ordinary share? a 77.50 b. 75.00 c. 72.50 d. 70.00 T ——— Solution 30-2 Answer d Total shareholders’ equity Preference sharcholders” equity: iy Preference share capital 2,500,000 Preference dividends in arrears 250,000 Liquidation premium 500,000 3,250,000 Ordjnary shareholders’ equity 7,000,000 Divide by ordinary shares outstanding 100,000 Book value per ordinary share - 70 [fthe preference share is cumulative, all dividendsin arrcars should besatisfied, :
Problem 30-3 (AICPA Adapted) ‘Dix Company reported the following shareholders” equiy, & December 31,2021: 8% cumulative preference share capital, P50 par; liquidating value PS5 per share: authorized, issued and outstanding 20,000 shares h l,ooo_nm Ordinary share capital, P25 par; 200,000 shares authorized; 100.000 shares issued and outstanding 2,500‘%) Retaingd eamnings 400,009 Dividends on preference sharcs have not been declared for 2020 4 2021. On December 31,2021, what isthe book value per ordinary share) a. 25.00 b. 27.20 c. 2640 d. 29.00 Solution 30-3 Answer¢ Total equity 3,900,000 Preference shareholders’ equity: Preference share capital 1,000,000 Liguidating premium (20,000 x 5) 100,000 Preference dividend in arrears (1,000,000 x 8% x2) 160,000 1.260080 2,640000 Ordinary shareholders” equity Divide by ordinary shares 10008 Book value per ordinary share . fi The preference shares are entitled to all dividends in agrears for? years becasuse the preference is cumulative. problem 30-4 (AICPAAdapted) goe Company reported the following shareholders' equity on Decernber 31,2021, - noncumulative preference sh . s 6% 1 vidation value of P10S shars cnphel, P100 pai 6 Ordinary share capital, P100 par ;,ooo,om Relained ecarnings 'g(s)gg% preference dividends have been paid up to December 31,2021 1. Whatis the book value per ordinary share? ,2021. o 13170 130.00 c. 12970 d. 12800 2. What i5“‘“"?“’k/"“’“‘l’tfl‘lflrltfctv:ncesha.rz:? Y G0 T et b. 105 ¢ 11 d. 106 Solution 30-4 Question 1 Answer b Total shareholders’ equity Preference shareholders’ equity: Preference share capitai 1,000,000 Liquidation premium (10,000 x 5) 50:000 Ofdinmy shareholders' equity Divide by ordinary shares 4,950,000 1 .0.50,000 3,900,000 30,000 Book value per ordinary share 0 Question 2 Answer b Book value per preference share (1,050,000 10,000 shares) 103 ;“ole that there are no preference dividends in arrears because Teference dividends are paid up December 31,2021
Problem 30-5 (AICPA Adapted) Nova Company provided the following sharcholders’ equity o December 31, 2021: Cumulative preference share capital, P100 par, 8% 500,009 Ordinary share capital, P100 par * 1,100,009 Share premium 200009 Retained earnings 260,000 Treasury ordinary shares — 1,000 at cost (150,000 Total shareholders’ equity Dividends on preference sharcs are in arrears for 2020 and 2021 1. What is the book value per ordinary share? a. 125 b. 191 c 133 d. 141 2. Whatis the book value per preference share? a. 100 b. 1i6 c. 108 d. 124 Solution 30-5 Question 1 Answer ¢ Question 2 Answer b Total sharcholders’ equity 1,910,000 Preference shareholders’ cquity: Preference share capital 500,000 Preference dividends for 2020 and 2021 (500,000 x 8% x 2) 80,000 580,000 Ordinary shareholders’ equity 1,330,000 Ordinary shares issued (1,100,0007 100) 11,000 Treasury ordinary shares (ax. Ordinary shares outstanding 10000 Book value per ordinary share (1,330,000 /10,000) 1;” Book value per preference share (580,000/ 5,000 shares) 8 = problem 30-6 (AICPA Adapted) {he beginning of current year, Troj s ":.:m the followirg capital sm{qm; rojan Company was organized 10% cumulative preference share capital, par value P10, liquidation jue P12, authorized, issued 4 , liq $1,000,000. and outstanding 100,000 shares, Ordinary share capital, par value P100, authori ) issued and outstanding 30,000 shares, lfl;, :]000’735340'000 shares, e net income for the current & gi):idcnds were declared. ent year was P6,000,000 and no 1. What is the book value per odinary share? a. 290 b. 293 ¢ 300 d. 333 2, What s the book value per preference share? a.. 100 b. 130 c. 110 d. 120 Solution 30-6 Question ] Answera Question 2 Answer b Preference share capital Ordinary share capital ;,g%'ggg Retained earnings ~ equal to net income 6,000,000 Total shareholders’ equity 10,000,000 Preference shareholders® equity: Preference share capital 1,000,000 Efoqrcng:e dividend (1,000,000 x 10%) 100,000 : iquidation premium (100,000x2) ~._200,000 _1,300,000 0{3,‘;‘"}’ shareholders’ equity 8,700,000 & ide by ordinary shares 30.000 B""k value per ordinary share 2% 00k value per preference share 130 (1,300,000 / 100,000 shares) I
Problem 30-7 (IAA) Karen Company provided following data at year-end: 2022 10% cumulative preference shares, PSO par 2,000,000 Ordinary shares, P10 par 2,500,000 Share premium 1,500,000 Retained eamings 4,800,000 1,800,000 Net income for the year On July 1,2022, 50,000 ordinary shares were issued. The preference dividends were paid in 2021 but nor declared during 2022. The market price of the ordinary share was P50 on December 3], 2022. 1. Whatis the book value per preference share for 2022? . 50 b. 55 c. 60 d. 45 2. Whatis the book value per ordinary share for 20227 34.40 35.20 38.22 39.11 o op Solution 30-7 Qurslion 1 Answer b preference slhx?res prefercnce dividend for 2022 (10% x 2,000,000) preference shareholders® equity Number of preference shares (2,000,000 / 50 par) Book value per preference share (2.200,000/40,000) Question 2 Answera preference shares Ordinary shares Share premium Retained earnings Total shareholders’ equity Preference shareholders® equity Ordinary shareholders’ equity Divide by ordinary shares outstanding (2,500,000 10 par valuc) Boeok value per ordinary share
Problem 30-8 (ACP) Retro Company provided the followin: y s i 12% Preference share capital. 20,000 s:m!t:. :z‘gg :::; :’:]l: 14% Preference share capital, 10,000 ¢ |;r|\i'(.) st Ordinary share capital, 50,000 shares, P Retained carnings Share premium p The 12% preference share is cumulati preference share is noncu in arrears for 3 years. What is the book value per ordinary share? ¢ dataat year-end: 2,000, 300000 5.000,00 2,240,009 1,500,009 ve and participating. The 14, mulative and participating. Dw,d%“ a. 132 b. 126 c. 100 d 112 Solution 30-8 Answer a Excess 12%PS 14%PS Ordinary Balances 3,740,000 2,000,000 3,000,000 5,000,000 12%x2,000,000x3 ( 720,000) 720,000 14% x 3,000,000 x 1 ( 420,000) 420,000 12%x 5,000,000 1 (_600,000) 600,000 Balance ~ prorata 2,000,000 400,000 600,000 1,000,000 Total 3,120,000 4,020,000 6,600,000 Divide by shares outstanding 20,000 _ 10,000 __ 5000 Book value per share 156 402 m Before participation, the current year dividend should be givent® ordinary share using the lower preference rate Share capital Fraction 12% Preference share 2,000,000 210 14% Preference share 3,000,000 3/10 Ordinary share 5,000,000 5/10 10,000,000 Allocatio® 400,000 600,00 L0 problem 30-9 (ACP) gimplex Company provided the following dataat year-end: ceference share capital, 10% cumulative and P nonparticipating, P100 par, dividends are in arrears for 3 years Ordinary share capital, P100 par, 40,000 shares 3-83%8% subscribed ordinary share capital, 20,000 shares 2,000,000 Subscription receivable 00000 iy 1,000,000 R;mincd carnings 2'»100'000 Treasury ordinary shares, 10,000 at cost .800.000 What is the book value per ordinary share? a 172 b. 200 c. 160 d. 150 Solution 30-9 Answer ¢ preference share capital Ordinary share capital igggggg Subscribed ordinary share capital 21000000 Share premium 1'000.000 Retained earnings 21400.000 Treasury shares ( '800:000) Total sharcholders’ equity 10,600,000 Preference shareholders’ equity: Preference share capital Preference dividend for three years (2,000,000x 10% x 3) Ordinary shareholders’ equity 2,000,000 600,000 2,600,000 8,000,000 The preference dividends in arrears for 3 years already include the current year. For book value the subscription receivable is not deducted from subscribed share capital. 8l’dinary shares issued 40,000 dinary shares subscribed 20000 Total 60,000 e (10.000) Ordinary shares outstanding 20 Book value per ordinary share (8,000,000 /50,000) 1ot
Problem 30-10 (AICPA Adapted) . On December 31,2021 and 2022, Carr Company had outstang; 40,000 6% cumulative preference shares of P100 par valye ang 200,000 ordinary shares of P10 par value. ividends in arrears am On December 31,2021, preference d{\'ldcfl Ourteq, P120,000. Cash dividends declared in 2022 totaled P440,00¢, 1. What amount should be reported as dividend payable to prefren., shares in 20227 440,000 360,000 320,000 240,000 aoop 2. What amount should be reported as dividend payablé to ordinary shares in 2022? a. 200,000 b. 120.000 c. 80,000 d. 0 Solution 30-10 Question | Answer b In arrears on December 31, 2021 120,000 Preference dividend for 2022 (6% x 4,000,000) M Total preference dividends fl Question 2 Answer ¢ Total dividends declared in 2022 440% Preference dividends (360.55 Bal i 50000 alance to ordinary shares B ot problem 30-11 (1AA) : had outstanding 50,000 8% i Marie Company g 50,000 8% preference shares with p100 par value and 125,000 P30 par value ordinary shares. Dividends pave been paid every year exceptlast year and the current year. shares are ¢ lati ipati The preference s umulative and nonparticipating. The entity distributed P2,500,000 as dividend in the cuncp nt yt':,ur. ! What atnount should be reported as dividend payable to the ordinary Mholdcxs'? 2,100,000 1,700,000 2,500,000 0 ot i Solution 30-11 Answer b Total dividend distributed in the current year ' 2,500,000 preference dividend (8% x 5,000,000 x 2) « '500,000) Dividend payable to ordinary sharcholders 1,700,000 Problem 30-12 (IAA) Wendy Company had outstanding 300,000 ordinary shares of P20 par and 60,000 preference shares no-par 8% with a stated value of P50, The preference shares aré cumulative and nonparticipating. Dividends have been paid in every year except the past two years and the current year. The entity paid dividend of P500,000 in the current year. What amount should be reported as dividend payable to the preference sharcholders in the current year? 2. 500,000 b. 480,000 <. 240,000 d. 720,000 Solution 30-12 Answer a The dividend is pai ference only because the P of P500,000 is paid to prefe y ;’lal preference dividends amount 10 8% X PJ,OOO.(_)OO x 3 or 720,000, There is still a balance of P220.000. ;
Problem 30-13 (AICPA Adapted) On December 31,2021, Arp Company had outstanding 30,099 g, cumulative and fully participating preference shares, P100 PRr, ang 200,000 ordinary shares, P10 par. cember 31,2020. On chmbu No dividends were in arrears on cdofl’l.OC0.000. 31,2021, the entity declared dividen 1. What amount should be reported as dividend payable ¢, preference sharcholders? a. 600,000 b. 300,000 c. 150,000 d. 100,000 What amount should be reported as dividend payable to the ordinary sharcholders? a. 100,000 b. 340,000 c. 400,000 d. 475,000 Solution 30-13 Question 1 Answera Question 2 Answer ¢ Preference share capital (30,000 x 100) 3,000000 Ordinary share capital (200,000 x 10) 2,000000 Total w Preference dividends (3/5 x 1,000,000) 600000 Ordinary dividends (2/5x 1.000,000) 40000 Total dividends declared on December 31, 2020 Lo Since there were no dividends in arrears on December 31, 203'7f and the prcflcrem:c share is fully participating, the dividend® P1,000,000 is simply allocated on a prorata basis. problem 30-14 (IAA) yodel Company had 50,000 ordinary shares of P100 0 preference sh: . pac value and fi;‘?i(lipzling ares ofP100 par value, 6% cumuttive and pividendson the preference shares $ i k m’c current year. aretwo years in arrears including ‘e entity distributed P1,350,000 s divideads inthe current year. tamount should be g :’:;hol der? reported as dividend payable to the ordinary a 1,050,000 b. 1,200,000 . 800,000 4. 550,000 Solution 30-14 Answer ¢ Dividend Preference Ordinary P%x2,500,00 e %x 2,500,000 x 2 (300,000 6%x 5,000,000 e 300,000 Balance prorata 750,000, 250,000 500.000 Total dividend 550,000 800‘000 Totalpar Fraction Participation aredt_'crcnce (25,000 100) 2,500,000 2515 250,000 inary (50,000 100) 5000000 50773 500,000 7500000 750000 The preference share is participating. Eucf"" participation, the ordinary share is paid an amount equal to the "Tentyear dividend using the preference rate.
Problem 30-15 (PHILCPA Adapted) Culture Company provided the following on December 31,202]. i i ¢ shares 4 Ordinary share capital, P20 par value, 200,000 ‘ 000, Preference share capital, 6% P100 par value, cufnul_mwc 009 and fully participating, 10,000 shares outstanding 1,000,00q Preference dividends have been in arears for 2019 and 2020, On December 31,2021, cash dividend of P900,000 was declared, 1. What amount should be recorded as dividend payable 1 prefercnccsharchuldcrs? a. 324,000 b. 220,000 c. 276,000 d. 180,000 What amount should be recorded as dividend payable to ordinary shareholders? a. 576,000 b. 672,000 e 624,000 d 720,000 S ‘ution 30-15 w Question | Answer ¢ Question 2 Answer ¢ Dividend Preference Ordinan Amount 900,000 6% x 1,000,000 x 3 (180,000) 180,000 6% x 4,000,000- (240,000) 240000 Balance prorata 480,000 96,000 ELLL Total divi 3 4,00 otal dividends 276,000 ,6’2:_; Preference Fraction Allocatio® Preference shares 1,000,000 /5 96,000 C dinary shares 4,000,000 4/5 300 5,000,000 8 problem 30-16 (AICPA Adapted) on December 31, 2020 and 2021 Apex Com ; " , pany had 30,000 p100 par value 5% cumulative preference shares ou{slanding No dividends were in arrears on December 31, 2019, ; The entity did not declare a dividend during 2 i e entit ecl €2020. During 2021, entity paid a cash dividend of 100,000 on the pml'cr:ngci shlar::}s‘e How should the preference dividend in arrears be reported in 20217 o Accrued liability of P150,000 p. Disclosurc of P150,000 c. Accrued liability of P200,000 d. Disclosure of P200,000 Soiution 30-16 Answer d preference share capital (30,000 x 100) preference dividend in 2020 (3,000,000 x 5¢ Preference dividend in 2021 k) 150,000 Total preference dividend 0 Preference dividend paid in 2021 [{ ?ggggg) Preference dividend in arrears - December 31, 2021 E(‘)&B Adividend is not a liability until itis legally declared. Dividends in arrears ul - on cumulative preference shares are only Accordingly. the preference dividend in arrears of P200,000 on December 31,2021 shall be disclosed only.
Problem 30-17 (IAA) The directors of Lora Company wisht0 declare a dividend ordinary sharcholders arc to receive a total per Shax:e divideng y P4. The entity revealed the following shareholders’ equity at an.q:[ Preference share capital, P100 par, 7% pmicipatipg up to 10%, noncumnulative, 100,000 shares authorized, 25,000 shares issued Ordinary share capital, P25 par, 250,000 shares authorized and issued . 6,250,009 Share premium 1,250,009 Retained earnings 5,000,000 2,500,099 What total amount of dividend must be declared to meet the per shay goal of the board of directors? 1,175,000 1,700,000 1,000,000 1,250.000 aoop Solution 30-17 Answerd Ordinary dividend (250,000 x 4) 1,000,000 Preference dividend (2,500,000 x 10%) 250,000 Total dividend 1,250,000 The preference dividend rate is 7% but the preference share capitt participates no to 10% each year. problem 30-18 (PHILCPA Adapted) uan Company reported 5 ;3;? " he following balances o 2% ponparticipating, noncu 5 :api!nl, par value of Pi 0&;',| ?::g;; :’h:ismu share 10% fully participating, cumulati capital, par value of P10, 2;"&&";;‘:;“ share Ordinary share capital, par value of P100, 75, 000 shares The entity plans to declare ivi cash or a share dividend bel‘:ra:_ s There has been no change in the ¢ started operations five years ago. The entity reported the followin, i five years of operations: Wing net income and loss for the n December 31, 1,000,000 2,500,000 7,500,000 idends. It has not paida apital balances since the entity ;g:g 1,500,000 loss 2019 1,000,000 loss it 500,000 Toss ; st 1,750,000 income 6,250,000 income Ifthe maximum amount available for dividend cn Decem isdeclared and paid, what amount should be diutoue e 202! 1. 12% Preference shareholders? a. 600,000 b. 120,000 ¢. 300,000 d. 150,000 2. 10% Preference shareholders? 2. 1,970,000 ; b. 1,250,000 ¢ 250,000 500,000 % Ordinary shareholders? 2. 3,750,000 5. 2,910,000 c. 500’000 4. 750,000
Solution 30-18 Question 1 Answer b Question 2 Answer @ Question 3 Answer b Total income 2020 and 202 8.000‘0«1 7 3 Total loss 2017, 2 e ( %' Retained earnings - maximum ividen fl)& Retained 12% 10% carnings Preference Preference 0““"" Dividend 5,000,000 12% x 1.000,000 ( 120,000) 120,000 10% x 2.500,000 x 5 (1,250,000) 1,250,000 10% x 7,500,000 (_750.000) Balance prorata 2,880,000 - Total dividend 120,000 750,000 720,000 2,160,000 1,970,000 2,910,000 Before participation, one year dividend is paid to ordinary share capital using the participating preference rate. The balance for participation is distributed on a prorata basis. Amount Fraction Allocation 10% Prefercnce shares 2,500,000 251100 720000 Ordinary shares 7,500,000 75/100 fl@l@ 2,880,000 \ problem 30-19 (TAA) pBonanza Company provided December 31, 2021: e following sharcholders® equityon preference share capital, P|g par, 80, 12% cumulative and fully pargic; 000 shares issued, . i tin, Ordinary share capital, PSO par. 200 o T8 8,000,000 Share premium Par 200,000 shares issued 10,000,009 Retained earnings 5,000,000 7,000,000 OnDecember 31,2021, the entity i - pershare 10 the ordinary sharcholgery T 21 ividendof P10 What total amount of dividends shox Id i ordinary shareholdecy? uld be declared for the preference a 4,560,000 b. 3,920,000 ¢ 3,600,000 d 5,520,000
Solution 30-19 Answera Ordinary dividend (200,000 x 10) Preference dividend: 2020 (12% x 8.000,000) 2021 (20% x 8,000,000) Total amount of dividends to be declared dividend is P2,000,000 divided;,y The percentage of ordinary 2,000,09q 960,000 1,600,000 2,560,000 4,560,000 L0 P10,000,000 ordinary share capital or 20%. Since the ordinary sharcholders receive 29% inthe current year, fhe preference shareholders shall receive also in 2021 20% of preference share capital outstanding because the preference shares are fully participating. Proof 2020 dividend 2021 dividend: 12% x 8,000,000 12% x10,000,000 Balance for participation Total dividend Total dividend Preference dividend: 2020 2021 Ordinary dividend Balance for participation Outstanding 8,000,000 10,000,000 18,000,000 Preference Ordinary Preference Ordinary 960,000 960,000 640,000 2,560,000 (960,000) ( 960,000) (1,200,000 144000 Fraction Allocation 8/18 640,000 1018 800000 0 CHAFTER 371 BASIC EARNINGS PER SHARE gimple probiems Problem 31-1 (AICPA Adapted) On 0, 00 December 31, Gow Yy ber 31, 2021 and 2020, mpany had 100,000 ,000 cumulative preference shares of 5 %,P1 Solution 31-1 Answera Preference share capital (10,000 x P100) Net income Preference dividend (1,000,000 x 5%) Net income to ordinary shares Basic earnings per share (850,000 / 100,000 ordinary shares) 8.50 ;Yh'tllm.cumulative or noncumulative, only one year preference Widend is deducted from netincome. It CUmulative, the preference dividend is deducted regardless of laration, If "oncumulative, the preference dividend is deducted only when declar!d' %