CHAPTER 5 STATEMENT OF CHANGES IN EQUITY TECHNICAL KNOWLEDGE To understand the concept of equity. To know the preparation of the statement of change in equity. To identify ithe components of equity. To identify the items directly affecting retained earnings. 161EQUITY ; . r Equity is defined as the residual ine in the assets of an entity after deducting all of the liabt ; In other words, equity is the equivalent ol total assets minus total liabilities. ; as a residual, it may be f financial position. ie subclassifications may net assets, mebning Although equity is defined subclassified in the statement © In a corporate entity, the followin be shown separately: a. Share capital - funds contributed by shareholders equal to the par or stated value : b. Share premium - funds contributed by shareholders in excess of par or stated value ; c. Retained earnings which may be unappropriated and appropriated The holders of instruments classified as equity are simply known as "owners". Statement of changes in equity The statement of changes in equity is a formal statement that shows the movements in the elements or components of the shareholders’ equity. An entity shall present a statement of changes in equity showing: : 1. Comprehensive income for the period. 2. For each component of equity, the effects of changes in accounting policies and corrections of errors. 3. For each component of equity, a reconciliation between the. carrying amount at the beginning and end of the period, separately disclosing changes from: a. Profit or loss b. Each item of other comprehensive income. c. Transactions with owners in their capacity as owners shige Cntbutons by an lata 162Illustration - all amounts are assumed EXAMPLAR COMPANY Statement of Changes in Equity Year ended December 31, 2020 Share Retained capital Reserves earnings Balances ~ January 1 5,000,000 2,000,000 1,000,000 Correction of error resulting from prior year underdepreciation (100,000) Change in accounting policy from weighted average to FIFO — credit, 300,000 Issuance of 10,000 ordinary shares with P100 par at P150 per share 1,000,000 500,000 Issuance of 5,000 preference shares with P50 par at P100 per share 250,000 250,000 Comprehensive income: ‘Net income 1,550,000 Other comprehensive income 50,000 Dividends declared during the year ( 400,000) Current appropriation for contingencies 200,000 (200,000) Balances - December 31 6,250,000 3,000,000 2,150,000 Statement of retained earnings The statement of retained earnings shows the changes affecting directly the retained earnings of an entity. The statement of retained earnings is now a part of the statement of changes in equity. The important data affecting the retained earnings that should be clearly disclosed in the statement of retained earnings are: Net income or loss for the period + Prior period errors Dividends declared and paid to shareholders |. Effect of change in accounting policy . Appropriation of retained earnings 163 ope ep| earnings Items directly affecting retained Net income or loss for the period stained earnin Net income is added because it incre ae or eased retained and net loss is deducted because » earnings. Prior period errors : inient of th justm The prior period errors are shown a adjus e i ive beginning balance of retained earnings to arrive at the corrected beginning balance. If the net income of the prior period is underatated, the amount of error is added to retained earnings. i: ee income of the prior period is overstated, the amount of the error is deducted from retained éarnings. Dividends to shareholders - The dividends declared or paid during the year shall be deducted from the retained earnings, Effect of change in accounting policy This is shown as an adjustment of the beginning balance of retained earnings. j If the net income of prior period is understated because of change in accounting policy, the effect is added to the beginning retained earnings. 3 If the net. income of prior period is overstated because of change in accounting policy, the effect is deducted from the beginning retained earnings. , Some components of other comprehensive subsequently reclassified to retainéd earnings. Retirement of treasury shares income are If the cost of treasury shares is more th iginal i t f y an price, the difference is charged to retained cast “= Conversion of preference shares into ordinary shares Hf the total par or stated value of th i : than the original issue price of the preference 8 mare difference is charged to retained earnings. nce shares, the 164Retained earnings appropriated The amount of appropriation is deducted from the unappropriated balance of retained earnings. Conversely, if the appropriation is subsequently canceled, it is reverted or added back to the unappropriated balance. Retained earnings may be appropriated for the following reasons: a. Legal requirement, as in the case of treasury shares b. Contractual requirement, as in the case ofbond redemption c. Entity policy, as in the case of an appropriation for - contingencies Illustration - all amounts are assumed EXAMPLAR COMPANY Statement of Retained Earnings Year ended December 3: 1, 2020 Retained earnings, January 1 1,000,000 Correction of error — prior year underdepreciation (100,000) Change in accounting policy from weighted average to FIFO inventory valuation resulting in increase 300,000 Corrected beginning balance 1,200,000 Net income for the period 1,550,000 Dividends declared during the year (400,000) Appropriated for contingencies (_ 200,000) Retained earnings, December 31 2,150,000 165QUESTIONS 1. Explain the term equity. i ity. 2. Define a statement of changes irt ety" 3. What aré the items ptesented in the statement of changes in equity? 4, Define a statement of retained earnings. 5. What are the items directly affecting retained earnings? 166PROBLEMS Problem 5-1 (IAA) Reliable Company provided the following information for the year ended December 31, 2020: Retained earnings - unappropriated, January 1 200,000 Overdepreciation of 2019 due to prior period error 100,000 Net income for current year 1,300,000 Retained earnings appropriated for treasury shares, original balance is P500,000 and reduced by 200,000 by reagon of reissue of the treasury shares — 300,000 Retained earnings appropriated for contingencies, beginning balance P700,000 and increased by current appropriation of P100,000 800,000 Cash dividends paid to shareholders 500,000 Change from FIFO to weighted average - credit 150,000 Required: Prepare a statement of retained earnings for 2020. Problem 5-2 (IAA) Gondola Company showed the following charges and credits to retained earnings for 2020: Balance — January 1 2,600,000 Loss from fire 50,000 Goodwill impairment 250,000 » Stock dividend 700,000 Logs on sale of equipment 200,000 Compensation of prior period not accrued 500,000 Loss on retirement of preference share at more than issue price 350,000 Share premium 600,000 Gain on early retirement of bonds payable 100,000 Gain on life insurance settlement, 450,000 Correction of prior period error — credit 400,000 Net income for the year 3,000,000 Appropriated for treasury shares during the year 1,000,000 Required: Prepare a statement of retained earnings for 2020. 167Problem 5-3 (AA) d the following comparatiy, Angola Company reported | ings: statement of income and retained earn BF 2021 2020 6,000,000 4,500,009 ’ 3,200,000 2,100,009 Gross income (1,500,000) (1,800,000) Expenses e600 30 0,000 Net income 2,100,000 Reo : : 1,150,000 1,000,009 Retained cornings—Januasy 1 1'700,000 300,000 Dividends paid (00,000) (160,000) Retained earnings - December 31 2,350,000 1,150,000 In 2021, the entity-discovered that ending inventory for 2020 was understated by P100,000. In addition, the entity decided to change its method from double declining to straight line. The difference in the two depreciation methods are as follows: 2021 2020 Double declining 350,000 460,000 Straight line 340,000 400,000 Expenses in the income statements include depreciation based on double declining balance. i Required: Prepare comparative statements of income and retained earnings. 168problem 5-4 (PHILCPA Adapted) On January 1, 2020, Martha Company had 6,000,000 authorized ordinary shares of P5 par, of which 2,000,000 shares were issued and outstanding. The shareholders’ equity on same date showed the following balances: Ordinary share capital 10,000,000 Share premium 7,500,000 Retained earnings 3,250,000 On January 5, Martha issued at P54 per share, 100,000 shares of P50 par, 9% cumulative, convertible preference share capital. Martha had 250,000 authorized preference shares. On/February 1, Martha reacquired 20,000 ordinary shares for P16 per share. Martha uses the cost method. On April 30, Martha had completed an additional public offering of 500,000 ordinary shares with P5 par value. The shares were sold to the public at P12 per share. On June 17, Martha declared a cash dividend of P1 per ordinary share, payable on July 10 to shareholders of record on July 1. On November 6, Martha sold 10,000 shares of treasury for P21 per share. On December 7, Martha declared the yearly cash dividend on preference share, payable on January 7, 2021, to shareholders of record on December 31, 2020. On January 17, 2021, before the books were closed for 2020, Martha became aware that the ending inventory on December 31, 2019 was overstated by P200,000. The after-tax effect on 2019 net income was P140,000. The appropriate correcting entry was recorded. After correction of the beginning inventory, net income for 2020 was P2,250,000. Required: Prepare a statement of changes in equity for the year ended December 31, 2020. 169ed) g shareholders’ equity ‘ Problem 5-5 (PHILCPA Adapt Carr Company reported the followin on January 1, 2020. 1,800,009 Preference share capital 90,009 Share premium — preference 5,150,009 Ordinary share capital 3,500,009 Share premium - ordinary 4,000,009 Retained earnings 270,000 Treasury shares — ordinary 00,000 authorized shares of ference share capital ang r ordinary share capita) On January 1, 2020, Carr had 1 P100 par, 10% cumulative pre! 3,000,000 authorized shares of no pal with a stated value of P5 per share. On January 10, 2020, Carr formally retired all the 30,000 ordinary shares of treasury. The treasury shares had been acquired in the previous year and were originally issued at P10 per share. Carr owned 10,000 ordinary shares of Bush Company purchased several years ago for P600,000. On February 15, Carr declared and paid a dividend in kind of one share of Bush for every hundred ordinary shares of Carr held by a shareholder of record on February 28, 2020. The market price of Bush share was P75 on February 15, 2020. On December 12, 2020, Carr declared the yearly cash dividend on. preference share, payable on January 14, 2021, to shareholders of record on December 31, 2020. On January 15, 2021, before the accounting records were closed for 2020, Carr became aware that rent income for the year ended December 31, 2019 was overstated by P500,000. The after-tax effect on 2019 net income was P350,000. The appropriate correcting entry was recorded. ; After correcting the rent income, i 2,600,000. net income for 2020 was Required: Prepare a statement of changes in equity for 2020. 170problem 5-6 (AICPA Adapted) United Company reported the followin, unadjusted current assets and shareholders’ equity at act : : Cash i 600,000 Financial assets at fair value, including cost of 300,000 of United Company shares 1,000,000 qrade accounts receivable : 3,500,000 Inventory. 1,500,000 Share capital 5,000,000 Share premium 2,000,000 Retained earnings : 500,000 What amount should be reported as total shareholders’ equity at year-end? a. 7,200,000 b. 7,500,000 ce. 7,800,000 d. 5,200,000 Problem 5-7 (IAA) , Bronze Company provided the following information at year-end: Share capital 6,000,000 Share premium 3,500,000 Cumulative translation adjustment - debit 2,000,000 . Treasury shares, at cost 700,000 Retained earnings 1,500,000 Cumulative unrealized gain on option contract designated as cash flow hedge 600,000 What is the shareholders' equity at year-end? a. 9,500,000 b. 8,900,000 ¢. 7,400,000 d. 7,500,000 171Problem 5-8 (AA) = ; Silver Company provided the following information at year-end: 1,000,009 Share premium 1,100,099 Accounts payable 2,000,009 Preference share capital, at pat 3,000,009 Ordinary share capital, at par 10,000,009 Sales ‘ 7,800,009 Total expenses 500/000 Treasury shares — ordinary : 700,009 Dividends : 1 000/000 Retained earnings — beginning 1000, What is the shareholders’ equity at year-end? a. 8,000,000 b. 8,500,000 c. . 5,800,000 4. 8,700,000 Problem 5-9 (AICPA Adapted) Kalinga Company reported the following adjusted account balances at year-end: Share capital 15,000,000 Share premium 5,000,000 ‘Treasury shares, at cost . 2,000,000 ‘Actuarial loss on defined benefit plan 1,000,000 Retained earnings unappropriated 6,000,000 Retained earnings appropriated 3.000.000 Revaluation surplus 4.008.000 Cumulative translation adjustment - credit 1,500,000 What amount should be reported as shareholders’ equity at year-end? a. 31,500,000 b. 32,500,000 c. 28,500,000 d. 25,500,000Problem 5-10 Multiple choice (IFRS) 1, In the statement of changes in equity, the effect of a change in accounting policy is presented a. Separately for each component of equity. b. In aggregate for total equity. c. In total for the amount attributable to owners of the parent and the noncontrolling interest. d. Separately for the total amount attributable to owners of parent and the noncontrolling interest 2, In the statement of changes in equity, the effect of the correction of a prior period error is presented a. Separately for each component of equity. b. In aggregate for total equity. c. In total for the amount attributable to owners of the parent and the noncontrolling interest. d. Separately for the total amount attributable to owners of the parent and the noncontrolling interest. 3. Which of the following does not appear in the statement of retained earnings? a. Net loss b. Prior-period error c. Preference share dividend d. Other comprehensive income 4, Which of the following would appear first in a statement of retained earnings? a. Net income b. Prior period error ce. Cash dividend d. Share dividend 5. Corrections of errors in prior period are included in a. Retained earnings b. Other comprehensive income c. Net income d. Share premium 173