CHAPTER 5 STATEMENT OF CHANGES IN EQUITY TECHNICAL KNOWLEDGE To define equity. To know the preparation of the statement of changes in equity. To identif» the components of equity. To identify the items directly affecting retained earnings.| EQUITY Equity is defined as the residual entity after deducting all of the | abit in the assets of an Inother words, equity is the equi . total assets minus total labia of net assets, meaning Although equity is defined as a . es! subclassified in the statement of | idual, it may. be al position. In a corporate entity, the following subclassificatior ms may be shown separately: a. Share capital — funds contribu to the par or stated value ited by shareholders equal b. Share premium - funds contri excess of par or stated ‘ae et by shareholders in c. Retained earnings whi + ateronecnreh ngs which may be unappropriated and The holders of instruments classified as i i . e ity known as "owners". On, 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 comp: c. Transactions with owners showing separately contribu to owners rehensive income in their capacity as owners ~ tions by and distributions 151Illustration - all amounts are assumed EXAMPLAR COMPANY Statement of Changes in Equity Year ended December 31, 2021 Share capital 5,000,000 2,000,000 1,000,009 Retained Reserves earnings Balances - January 1 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 3I 6,250,008 3,000,000 2,150,000 Generally, reserves include share premium, retained earnings appropriated, revaluation surplus and other comprehensivs income. No objection if such reserves are shown separately. 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 no longer a Separate nges finangial statement but now a part of the statement of c in equity. The important data affecting the retained earnings that should be clearly disclosed in the statement of retained earnings are: a. Net income or loss for the period b. aes period errors ee c. Dividends declared and paid to shareh d. Effect of change in accounting policy eldere e. Appropriation of retained earnings 152t income is added because it in A creases retai i d net loss is deducted because it deceutca hips nings. ases retained ior period errors . re shown a: ginning balance of retained § adjustment of the . earnings rrected beginning balance. 8s to arrive at the the net income of the prior period is und e lerstated, the ount of error is added to retained earnings. If the net come of the prior period is overstated, ror is deducted from retained earnings. vidends to shareholders — The dividends declared luring the year shall be dedu eclared or paid icted from the retained earnings. ffect of change in accounting policy is shown as an \djustment of the beginning balance of retained earnings. if the net income of prior period is understated because of hange in accounting policy, the effect is added to the ginning retained earnings. f the net income of prior period is overstated because of change in accounting policy, the effect is deducted from the ginning retained earnings. her comprehensive income ome components of other comprehensive income are subsequently reclassified to retained earnings. Retirement of treasury shares If the cost of treasury shares is more than the original issue Price, the difference is charged to retained earnings. Conversion of preference shares into ordinary shares If the total tated value of the ordinary shares is more than the a = nae price of the preference shares, the ference is charged to retained earnings. 153Retained earnings appropriated The amount of appropriation is deducted from the unappropriated balance of retained earnings. Retained earnings Retained earnings appropriated m Conversely, if the appropriation is subsequently canceled, it is reverted or added back to the unappropriated balance, Retained earnings appropriated xx Retained earnings x Retained earnings may be appropriated for the following reasons: a. Legal requirement, as in the case of treasury shares b. Contractual requirement, asin the case of bond 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 81, 2021 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 2,160,000 =— 154UESTIONS 1, Explain the term equity, 2. Define a statement of changes in equity. 3. What are the items presented in the statement of changes in equity? 4, Define a statement of retained earnings. 5. What are the items directly affecting retained earnings? 155PROBLEMS Problem 5-1 (IAA) Reliable Company provided the following information for the year ended December 31, 2021: 200,000 Retained earnings - unappropriated, January 1 , Overdepreciation of 2020 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 P200,000 by reason 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 2021. Problem 5-2 (IAA) Gondola Company showed the following charges and credits to retained earnings for 2021: Balance - January 1 2,600,000 Loss from fire 50,000 Goodwill impairment 250,000 Share dividend 700,000 Loss 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 i 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 2021. 156problem 5-3 (LAA) ‘Angola Company reported the followi statement of income and retained earnin ee aretave igs: 2022 2021 sales 6,000,000 ,000, 4,500, Cost of goods sold (2,800,000) (2°400°000) Gross income 3,200,000 2, 200, 100,000 Expenses (2,500,060) (1800.00) Net income 1,700,000 Retained earnings - January 1 1,180,000 1,000,000 Net income 1,700,000 "300,000 Dividends paid (_500,000) (_ 150,000) Retained earnings — December 31 50,000 1,150,000 In 2022, the entity discovered that ending inventory for 2021 was understated by P100,000. In addition, the entity decided to change its method from double declining to siraight line. The difference in the two depreciation methods are: 2022 2021 Double declining 350,000 450,000 Straight line 340,000 400,000 Expenses in the income statements include depreciation based on double declining balance. Required: Prepare comparative statements of income and retained earnings. 157Problem 5-4 (PHILCPA Adapted) had 6,000, On January 1, 2021, Martha Company had 6,000, oq authorized ordinary shares of P5 par, of which 2,000, shares were issued and outstanding. The shareholders’ equity on same date showed the following balances: Ordinary share capital 10,000,009 Share premium 7,500,009 3,250,009 Retained earnings 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 P65 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, 2022, to shareholders of record on December 31, 2021. On January 17, 2022, before the books were closed for 2021, Martha became aware that the ending inventory 0” December 31, 2020 was overstated by P200,000. The after-tax effect on 2020 net income was P140,000. The appropriate correcting entry was recorded. After correction of the beginning inventory, net income for 2021 was P2,250,000. Required: Prepare a statement of changes in equity for the year ended December 31, 2021. 168problem 5-5 (PHILCPA Adapted) carr Company reported the foll ondanuary 1, 2021. owing shareholders’ equity preference share capital share premium ~ preference 1,800,000 Ordinary share capital 90,000 Share premium ~ ordinary 5,150,000 tained earnings £500,000 shares — ord: 000,000 Treasury rdinary 10000 On January 1, 2021, Carr had 100,000 authorized Pi00 par, i cumulative preference ahaPATeapr Tek 3,000,000 authorized shares of no par ordi with a stated value of P5 per share, ee On January 10, 2021, 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 di clared 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, 2021. BG market price of Bush share was P75 on February 15, 021. On December 12, 2021, Carr declared the yearly cash dividend on preference share, payable on January 14, 2022, to shareholders of record on December 31, 2021. On January 15, 2022, before the accounting records were closed for 2021, Carr became aware that rent income for the year ended December 31, 2020 was overstated by P500,000. The after-tax effect on 2020 net income was P350,000. The appropriate correcting entry was recorded. After correcting the rent income, net income for 2021 was 2,600,000. Required: Prepare a statement of changes in equity for 2021. 159Problem 5-6 (AICPA Adapted) United Company reported the following unadjusteg assets and shareholders’ equity at year-end: Ur, Cash Financial assets at fair value, including cost of “Mu P300,000 of United Company shares 1,000 Accounts receivable 3,500 Inventory 1,500, Share capital 5.000 Share premium 2,000 09) Retained earnings 500 What amount should be reported as total shareholders ety at year-end? : a. 7,200,000 b. 7,500,000 c. 7,800,000 d. 5,200,000 Problem 5-7 (IAA) Bronze Company provided the following information « year-end: Share capital 6,000,000 Share premium . 8,500,000 Cumulative translation adjustment - debit 2,000,000 Treasury shares, at cost 700,000 Retained earnings 1,500.00 Cumulative unrealized gain on option contract designated as cash flow hedge 600.0 What amount should be reported as shareholders’ equ!) year-end? 9,500,000 8,900,000 7,400,000 7,500,000 Be op 160problem 5-8 (LAA) silver Company provided the followin year-end following Share premium Accounts payable Preference share capital, at par Ordinary share capital, at par Sales Total expenses Treasury shares ~ ordinary Dividends Retained earnings — beginning What amount should be reported as shareholders’ equity at year-end? 2 8, | a 8,000,000 b. 8,500,000 c. 5,800,000 d. 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 unappropristed 6,000,000 Retained earnings appropriated 3,000,000 Revaluation surplus 7 4,000,000 Cumulative translation adjustment - credit 1,500,000 What amount should be reported as shareholders’ equity at year-end? a 31,500,900 b. 32,500,000 ©. 28,500,000 4. 25,500,000 161Problom 6-10 Multiple choice (IFRS) 1. In the statement of changes in equity, the offogg of 7 f change in accounting policy is presented 4 a. Separately for each component of equity. bo In agyrogate for total equity, ©. In total for the amount attributable to owners Of the arent and the noncontrolling intereat d. Separately for the total amount attributable of parent and the noncontrofling interest 10 OWnony In the statement of changes in equity, the effec correction of a prior period error i presented Of the a. Separately for each component of equity b. In aggregate for total equity ©. Tn total for the amount attributable to owners of the parent and the noncontrolling interost, d. Separately for the total amount attributable to owner of the parent and the noncontrolling interest, Which of the following does not appear in the statement of retained earnings? a. Net loss b. Prior period error ©. Preference share dividend d. Other comprehensive income: Which of the following would appear first in a statement of retained earnings’ Net income Prior period error Cash dividend Share dividend aces Corrections of errors in Prior period are included in a. Retained earnings b, Other comprehensive income ©. Net income d Share premium 162