Shareholders Equity

Review
SHAREHOLDERS EQUITY PART 1 A

1. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances:
Ordinary shares, 3 par 600,000
Share premium 800,000
Treasury stock, at cost 50,000
Accumulated other comprehensive income (Debit) 20,000
Retained earnings appropriated for uninsured earthquake losses 150,000
Retained earnings unappropriated 200,000

What amount should Zinc report as total stockholders' equity in its December 31, 20x1, balance sheet?
a. 1,680,000 b. 1,720,000 c. 1,780,000 d. 1,820,000
(AICPA)

2. On April 1, 20x9, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
Ordinary shares, 1 par value, 20,000 shares originally issued for 30 per share.
Preference shares, 10 par value, 6,000 shares originally issued for 50 per share.

Hydes April 1, 20x9, statement of shareholders equity should report

Ordinary shares Preference shares Share premium
a. 20,000 60,000 820,000
b. 20,000 300,000 580,000
c. 600,000 300,000 0
d. 600,000 60,000 240,000
(AICPA)

3. On March 1, 20x1, Rya Corp. issued 1,000 shares of its 20 par value ordinary shares and 2,000 shares of its
20 par value convertible preference shares for a total of 80,000. At this date, Ryas ordinary share was selling
for 36 per share, and the convertible preference share was selling for 27 per share. What amount of the
proceeds should be allocated to Ryas convertible preference share?
a. 60,000 b. 54,000 c. 48,000 d. 44,000
(AICPA)
4. The stockholders' equity section of Peter Corporation's balance sheet at December 31, 20X2, was as follows:
Ordinary shares (10 par value, authorized 1,000,000
shares, issued and outstanding 900,000 shares) 9,000,000
Share premium 2,700,000
Retained earnings 1,300,000

On January 2, 20X3, Peter purchased and retired 100,000 shares of its stock for 1,800,000. Immediately after
retirement of these 100,000 shares, the balances in the share premium and retained earnings accounts should be
Share premium Retained earnings
a. 900,000 1,300,000
b. 1,400,000 800,000
c. 1,900,000 1,300,000
d. 2,400,000 800,000
(AICPA)

5. Asp Co. was organized on January 2, 20x1, with 30,000 authorized shares of 10 par ordinary shares. During
20x1 the corporation had the following capital transactions:
Jan. 5 Issued 20,000 shares at 15 per share.
July 14 Purchased 5,000 shares at 17 per share.
Dec. 27 Reissued the 5,000 shares held in treasury at 20 per share.

Asp used the cost method to record the purchase and reissuance of the treasury shares. In its December 31, 20x1,
balance sheet, what amount should Asp report as additional paid-in capital in excess of par?
a. 100,000 b. 125,000 c. 140,000 d. 115,000
(AICPA)

6. In 20x0, Newt Corp. acquired 6,000 shares of its own 1 par value ordinary share at 18 per share. In 20x1,
Newt issued 3,000 of these shares at 25 per share. Newt uses the cost method to account for its treasury stock
transactions. What accounts and amounts should Newt credit in 20x1 to record the issuance of the 3,000
shares?
Treasury sh. Sh. premium Retained earnings Ordinary sh.
a. 54,000 21,000
b. 54,000 21,000
c. 72,000 3,000
d. 51,000 21,000 3,000
(AICPA)

7. On December 1, 20x1, Line Corp. received a donation of 2,000 shares of its 5 par value ordinary shares from a
shareholder. On that date, the stocks market value was 35 per share. The stock was originally issued for 25
per share. By what amount would this donation cause total stockholders equity to decrease?
a. 70,000 b. 50,000 c. 20,000 d. 0
(AICPA)
8. On July 1, 20x1, Vail Corp. issued rights to stockholders to subscribe to additional share of its common stock.
One right was issued for each share owned. A stockholder could purchase one additional share for 10 rights plus
15 cash. The rights expired on September 30, 20x1. On July 1, 20x1, the market price of a share with the right
attached was 40, while the market price of one right alone was 2. Vails stockholders equity on June 30,
20x1, comprised the following:
Ordinary shares, 25 par value, 4,000 shares issued and outstanding100,000
Share premium.60,000
Retained earnings....80,000

By what amount should Vails retained earnings decrease as a result of issuance of the stock rights on July 1, 20x1?
a. 0 b. 5,000 c. 8,000 d. 10,000

9. On September 20x1, West Corp. made a dividend distribution of one right for each of its 120,000 shares of
outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of West's 50
variable rate preference share at an exercise price of 80 per share. On March 20, 20x3, none of the rights had
been exercised, and West redeemed them by paying each stockholder 0.10 per right. As a result of this
redemption, West's stockholders' equity was reduced by
a. 120 b. 2,400 c. 12,000 d. 36,000

Use the following information for the next three questions:

The following trial balance of Shaw Corp. at December 31, 20x1, has been adjusted except for income tax expense.
Dr. Cr.
Cash 675,000
Accounts receivable (net) 2,695,000
Inventory 2,185,000
Property, plant and equipment (net) 7,366,000
Accounts payable and accrued liabilities 1,801,000
Income tax payable 654,000
Deferred income tax liability 85,000
Ordinary shares 2,300,000
Share premium 3,680,000
Retained earnings, 1/1/x1 3,350,000
Net sales and other revenues 13,360,000
Costs and expenses 11,180,000
Income tax expense 1,129,000
Totals 25,230,000 25,230,000

Other financial data for the year ended December 31, 20x1:
Included in accounts receivable is 1,000,000 due from a customer and payable in quarterly installments of
125,000. The last payment is due December 30, 20x3.
The balance in the deferred income tax liability account pertains to a temporary difference not related to a
balance sheet account that arose in a prior year, of which 15,000 is expected to be paid in 20x2.
During the year, estimated tax payments of 475,000 were charged to income tax expense. The current and
future tax rate on all types of income is 30%. In Shaw's December 31, 20x1, balance sheet,

10. The working capital and the total shareholders equity as of December 31, 20x1 are
Working capital Total Shareholders Equity
a. 2,600,000 10,856,000
b. 2,881,000 10,856,000
c. 3,075,000 9,330,000
d. 3,075,000 10,856,000
Answer:

1. A 6. B
2. A 7. D
3. C 8. A
4. D 9. C
5. D 10. D

SHAREHOLDERS EQUITY PART 1 B

Journal entries: Memorandum method vs. Journal entry method
Use the following information for the next four questions:
On January 1, 20x1, DECRY BELITTLE Co. received authorization from the SEC to issue share capital of
4,000,0000 divided into 10,000 shares with par value per share of 400. Of the total authorized share capital, 25%
was subscribed at par value and 25% of the total subscription was paid at subscription date. On February 1, 20x1,
DECRY received full payment for 2,000 subscribed shares and issued the related share certificates.

1. Under the memorandum method, the authorized capitalization is recorded

a. by a debit to unissued capital c. by a credit to unissued share capital
b. by a debit to authorized share capital d. through a memo entry

2. Under the journal entry method, the authorized capitalization is recorded

a. by a debit to unissued capital c. by a credit to unissued share capital

2
b. by a debit to authorized share capital d. through a memo entry

3. Under the memorandum method, the entry on February 1, 20x1 includes a

a. credit to unissued share capital for 600,000
b. credit to share capital for 800,000
c. credit to unissued share capital for 800,000
d. credit to authorized share capital for 600,000

4. Under the journal entry method, the entry on February 1, 20x1 includes a
a. credit to unissued share capital for 600,000
b. credit to share capital for 800,000
c. credit to unissued share capital for 800,000
d. credit to authorized share capital for 600,000

Journal entries: Subscriptions

Use the following information for the next two questions:
MUSTY STALE Co. started operations on January 1, 20x1. Its authorized capitalization is 4,000,000 divided into
10,000 shares with par value per share of 400. On January 1, 20x1, MUSTY Co. receives cash subscriptions for
5,000 shares at 480 per share. On January 31, 20x1, MUSTY receives subscription for 2,000 shares at 640 per
share.

5. The entry to record the subscription on January 1, 20x1 includes

a. a debit to subscription receivable for 2,400,000
b. a credit to subscribed capital for 2,400,000
c. a credit to subscribed capital for 2,000,000
d. a credit to share premium for 400,000

6. The entry to record the subscription on January 31, 20x1 includes

a. a credit to subscription receivable for 1,280,000
b. a credit to subscribed capital for 1,280,000
c. a credit to share capital for 800,000
d. a credit to share premium for 480,000

Legal capital
Use the following information for the next two questions:
The equity section of ROUSE AWAKEN Co.s statement of financial position showed the following information:
6% Preference share capital, 400 par value 800,000
Share premium preference share capital 200,000
Ordinary share capital 3,200,000
Share premium ordinary share capital 1,200,000
Subscribed share capital ordinary 400,000
Subscription receivable ordinary share capital (200,000)
Retained earnings 1,600,000

7. How much is the legal capital assuming the ordinary shares have par value of 200 per share?
a. 5,600,000 b. 4,200,000 c. 4,400,000 d. 5,400,000

8. How much is the legal capital assuming the ordinary shares are no-par value shares with stated value of 200 per
share?
a. 5,600,000 b. 4,200,000 c. 4,400,000 d. 5,400,000

Share issuance costs

9. On January 1, 20x1, RISIBLE FUNNY Co. issued 1,000 shares with par value of 400 for 480 per share.
Issuance costs incurred that are directly attributable to the equity transaction amounted to 20 per share. How
much is the net credit to share premium?
a. 80,000 c. 20,000 c. 60,000 d. 0

Shares issued at a discount

10. An entity issues 1,000 shares with par value of 400 for 320, the entry to record the transaction includes a
a. credit to share capital for 320,000
b. debit to share capital for 80,000
c. credit to discount on share capital for 80,000
d. debit to discount on share capital for 80,000

Watered stocks
11. An entity issues 1,000 shares with par value of 400 for land with fair value of 320,000, the entry to record the
transaction includes a
a. a debit to land for 400,000
b. credit to share capital for 320,000
c. credit to discount on share capital for 80,000
d. debit to discount on share capital for 80,000

Cost method of accounting for treasury shares

Use the following information for the next four questions:
On January 1, 20x1, the statement of financial position of GENESIS BEGINNING Co. shows the following
information:

3
Share capital (authorized 10,000 shares with par value of 400) 3,200,000
Share premium 640,000
Retained earnings 2,160,000
Total shareholders equity 6,000,000

12. On July 1, 20x1, GENESIS reacquires 1,000 shares at 360. The entry to record the transaction includes a
a. debit to treasury shares for 360,000
b. credit to treasury shares for 360,000
c. debit to treasury shares for 400,000
d. memo entry

Case #1 Reissuance at cost

13. On September 1, 20x1, GENESIS reissues the 1,000 treasury shares at 360. The entry to record the
transaction includes a
a. debit to treasury shares for 360,000
b. credit to treasury shares for 360,000
c. credit to treasury shares for 400,000
d. memo entry

Case #2 Reissuance at more than cost

14. On September 1, 20x1, GENESIS reissues the 1,000 treasury shares at 560. The entry to record the
transaction includes a
a. credit to treasury shares for 560,000
b. credit to share premium for 360,000
c. credit to share premium for 200,000
d. credit to retained earnings for 200,000

Case #3 Reissuance at below cost

15. On September 1, 20x1, GENESIS reissues the 1,000 treasury shares at 240. The entry to record the
transaction includes a
a. credit to share premium for 120,000
b. debit to share premium for 120,000
c. debit to retained earnings for 120,000
d. b or c

Retirement of shares
On January 1, 20x1, the statement of financial position of PROFUSE EXTRAVAGANT Co. shows the following
information:
Share capital (authorized 10,000 shares with par value of 400) 3,200,000
Share premium 640,000
Share premium treasury shares 20,000
Retained earnings 2,140,000
Total shareholders equity 6,000,000

Case #1 Retirement at a gain

16. On July 1, 20x1, PROFUSE reacquires 1,000 shares at 320. On September 1, 20x1, PROFUSE retires the
1,000 treasury shares. The entry on September 1, 20x1 includes a
a. credit to share premium retirement for 80,000
b. debit to share premium original issuance for 80,000
c. credit to share premium retirement for 160,000
d. b and c

Case #2 Retirement at a loss

17. On July 1, 20x1, PROFUSE reacquires 1,000 shares at 560 and immediately retires them. The entry on July 1,
20x1 includes a
a. debit to retained earnings for 60,000
b. credit to share premium original issuance for 80,000
c. credit to share premium retirement for 560,000
d. b and c
Answer:

1. D 11. D
2. A 12. A
3. B 13. B
4. C 14. C
5. D 15. C
6. D 16. D
7. C 17. A
8. A

4
 SHAREHOLDERS EQUITY PART 2
1. Cyan Corp. issued 20,000 shares of 5 par ordinary share at 10 per share. On December 31, 20x1, Cyan's
retained earnings were 300,000. In March 20x2, Cyan reacquired 5,000 shares of its common stock at 20 per
share. In June 20x2, Cyan sold 1,000 of these shares to its corporate officers for 25 per share. Cyan uses the
cost method to record treasury stock. Profit for the year ended December 31, 20x2, was 60,000. At December
31, 20x2, what amount should Cyan report as retained earnings?
a. 360,000 b. 365,000 c. 375,000 d. 380,000

2. Selected information from the accounts of Row Co. at December 31, 20x1, follows:
Total profit since incorporation ..420,000
Total cash dividends paid .....130,000
Total value of property dividends distributed ..30,000
Excess of proceeds over cost of treasury stock sold,
accounted for using the cost method .110,000

In its December 31, 20x1, financial statements, what amount should Row report as retained earnings?
a. 260,000 b. 290,000 c. 370,000 d. 400,000

3. Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31,
20x1. During 20x2, transactions involving Nest's common stock were as follows:
May 3 - 1,000 shares of treasury stock were sold.
August 6 - 10,000 shares of previously unissued stock were sold.
November 18 - a 2-for-1 stock split took effect.

Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, 20x2, how many shares of
Nest's common stock were issued and outstanding?
Shares Issued Outstanding Shares Issued Outstanding
a. 220,000 212,000 c. 222,000 214,000
b. 220,000 216,000 d. 222,000 218,000

4. Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31,
20x1. The following events occurred during 20x2:
January 31Declared 10% stock dividend
June 30 .Purchased 100,000 shares
August 1.....Reissued 50,000 shares
November 30Declared 2-for-1 stock split

At December 31, 20x2, how many shares of common stock did Rudd have outstanding?
a. 560,000 b. 600,000 c. 630,000 d. 660,000

5. Long Co. had 100,000 ordinary shares issued and outstanding at January 1, 20x1. During 20x1, Long took the
following actions:
March 15 Declared a 2-for-1 stock split, when the fair value of the stock was 80 per share.
December 15 Declared a .50 per share cash dividend.

What amount should Long report as dividends in its 20x1 financial statements?
a. 50,000 b. 100,000 c. 850,000 d. 950,000

6. At December 31, 20x0 and 20x1, Carr Corp. had outstanding 4,000 shares of 100 par value 6% cumulative
preferred stock and 20,000 shares of 10 par value common stock. At December 31, 20x0, dividends in arrears
on the preferred stock were 12,000. Cash dividends declared in 20x1 totaled 44,000. Of the 44,000, what
amounts were payable on each class of stock?
Preference shares Ordinary shares
a. 44,000 0
b. 36,000 8,000
c. 32,000 12,000
d. 24,000 20,000

7. Arp Corp.s outstanding capital stock at December 15, 20x1, consisted of the following:
30,000, 5% cumulative preference shares, par value 10 per share, fully participating as to dividends. No
dividends were in arrears.
200,000 ordinary shares, par value 1 per share.

On December 15, 20x1, Arp declared dividends of 100,000. What was the amount of dividends payable to Arps
common stockholders?
a. 10,000 b. 34,000 c. 40,000 d. 47,500

8. In 20x1, Elm Corp. bought 10,000 shares of Oil Corp. at a cost of 20,000. On January 15, 20x2, Elm declared a
property dividend of the Oil stock to shareholders of record on February 1, 20x2, payable on February 15, 20x2.
During 20x2, the Oil stock had the following market values:
January 15..25,000
February 1 26,000
February 15 ..24,000

The net effect of the foregoing transactions on retained earnings during 20x2 should be a reduction of
a. 20,000 b. 24,000 c. 25,000 d. 26,000

5
9. On June 27, 20x1, Brite Co. distributed to its ordinary shareholders 100,000 outstanding ordinary shares of its
investment in Quik, Inc., an unrelated party. The carrying amount on Brites books of Quiks 1 par ordinary
share was 2 per share. Immediately after the distribution, the market price of Quiks stock was 2.50 per share.
In its income statement for the year ended June 30, 20x1, what amount should Brite report as gain relating to the
disposal of the stock?
a. 250,000 b. 200,000 c. 50,000 d. 0

10. The following stock dividends were declared and distributed by Sol Corp.:
Percentage of ordinary shares
outstanding at declaration date Fair value Par value
10 15,000 10,000
28 40,000 30,800

What aggregate amount should be debited to retained earnings for these stock dividends?
a. 40,800 b. 45,800 c. 50,000 d. 55,000

11. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of 2 par value common
stock, which had a fair value of 5 per share before the stock dividend was declared. This stock dividend was
distributed 60 days after the declaration date. By what amount did Rays current liabilities increase as a result of
the stock dividend declaration?
a. 0 b. 500 c. 1,000 d. 2,500

12. Effective April 27, 20x1, the stockholders of Bennett Corporation approved a two-for-one split of the company's
common stock, and an increase in authorized common shares from 100,000 shares (par value 20 per share) to
200,000 shares (par value 10 per share). Bennett's stockholders' equity accounts immediately before issuance
of the stock split shares were as follows:

Common stock, par value 20; 100,000 shares authorized;

50,000 shares outstanding 1,000,000
Share premium (3 per share on issuance of ordinary shares) 150,000
Retained earnings 1,350,000

What should be the balances in Bennett's additional paid-in capital and retained earnings accounts immediately after
the stock split is effected?
Share premium Retained earnings
a. 0 500,000
b. 150,000 350,000
c. 150,000 1,350,000
d. 1,150,000 350,000

13. On July 1, 1999, Bart Corporation has 200,000 shares of 10 par ordinary share outstanding and the market
price of the stock is 12 per share. On the same date, Bart declared a 1-for-2 reverse stock split. The par of the
stock was increased from 10 to 20 and one new 20 par share was issued for each two 10 par shares
outstanding. Immediately before the 1-for-2 reverse stock split, Bart's share premium was 450,000. What
should be the balance in Bart's share premium account immediately after the reverse stock split is effected?
a. 0 b. 450,000 c. 650,000 d. 850,000

14. The stockholders' equity section of Brown Co.'s December 31, 20x1, balance sheet consisted of the following:
Ordinary shares, 30 par, 10,000 shares authorized and outstanding 300,000
Share premium 150,000
Retained earnings (deficit) (210,000)

On January 2, 20x2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of
the stock to 5 and eliminating the deficit against share premium. Immediately after the quasi-reorganization, what
amount should Brown report as share premium?
a. (60,000) b. 150,000 c. 190,000 d. 400,000

1. A 6. B 11. A
2. A 7. C 12. C
3. A 8. A 13. B
4. A 9. C 14. C
5. B 10. B

DIVIDENDS
1. On April 1, 20x1, the board of directors of SQUELCH SILENCE Co. declared 200 dividends per share to
shareholders of record as of April 15, 20x1 for distribution on May 1, 20x1. The shareholders equity of
SQUELCH as of April 1, 20x1 is as follows:
Share capital, authorized capital 10,000 shares, 400 par 3,200,000
Subscribed share capital 880,000
Share premium 400,000
Retained earnings 1,816,000
Treasury shares (at cost of 480 per share) (576,000)

6
Other components of equity 280,000
Total shareholders equity 6,000,000

How much is the cash dividends payable?

a. 1,800,000 b. 1,360,000 c. 2,200,000 d. 1,760,000

Liability dividends
2. On April 1, 20x1, the board of directors of LEEWAY TOLERANCE Co. declared 50% scrip dividends to
shareholders of record as of April 15, 20x1 for distribution on September 30, 20x1. The scrip dividends bear 10%
interest per annum. The shareholders equity of LEEWAY as of April 1, 20x1 is as follows:
Share capital, authorized capital 10,000 shares, 400 par 3,200,000
Subscribed share capital 880,000
Share premium 400,000
Retained earnings 1,816,000
Treasury shares (at cost of 480 per share) (576,000)
Other components of equity 280,000
Total shareholders equity 6,000,000

How much is the scrip dividends payable?

a. 1,800,000 b. 1,360,000 c. 2,200,000 d. 1,760,000

Non-current asset declared as property dividends

Use the following information for the next four questions:
On July 1, 20x1, COLTISH UNDISCIPLINED Co. declared as property dividends 10,000 shares held as investment in
associate with carrying amount of 4,000,000. Information on fair values is shown below:
Date Fair value*
July 1, 20x1 3,200,000
Dec. 31, 20x1 4,400,000
Feb. 1, 20x2 3,800,000
*Assume costs to distribute are immaterial.

3. The entries on July 1, 20x1 include all of the following except

a. a debit to retained earnings for 3,200,000
b. a debit to impairment loss for 800,000
c. a debit to non-current asset held for distribution to owners for 4,000,000
d. a credit to property dividends payable for 3,200,000

4. On December 31, 20x1, the property dividends are yet to be distributed to owners. The entries on December 31,
20x1 include all of the following except
a. a debit to retained earnings for 1,200,000
b. a credit to gain on impairment recovery for 1,200,000
c. a credit to property dividends payable for 1,200,000
d. none of these

5. On Feb. 1, 20x2, the property dividends payable is settled. The entries on February 1, 20x1 include all of the
following except
a. a debit to loss for 200,000
b. a debit to property dividends payable for 600,000
c. a debit to retained earnings for 200,000
d. a credit to non-current asset held for distribution to owners for 4,000,000

6. The net effect of property dividends declaration and settlement to the retained earnings is
a. 4,000,000 decrease c. 3,200,000 decrease
b. 4,000,000 increase d. 3,200,000 increase

Current asset declared as property dividends

Use the following information for the next two questions:
On July 1, 20x1, DEROGATORY DEGRADING Co. declared as property dividends inventory with carrying amount of
4,000,000. Information on fair values is shown below.
Fair value*
July 1, 20x1 3,200,000
July 31, 20x1 4,400,000
*Assume fair value is not materially different from net realizable value.

7. How much is the debit to retained earnings on July 1, 20x1?

a. 4,000,000 b. 3,200,000 c. 800,000 d. 4,400,000

8. On July 31, 20x1, the property dividends payable is settled. How much is the gain (loss) on settlement
recognized in profit or loss?
a. 0 b. 1,200,000 c. (800,000) d. (400,000)

Current asset declared as property dividends

On July 1, 20x1, SOIREE EVENING PARTY Co. declared as property dividends inventory with carrying amount of
4,000,000. Information on fair values is shown below.
Fair value*
July 1, 20x1 4,400,000

7
 July 31, 20x1 4,800,000
*Assume fair value is not materially different from net realizable value.
9. How much is the debit to retained earnings on July 1, 20x1?
a. 4,000,000 b. 4,800,000 c. 800,000 d. 4,400,000

10. On July 31, 20x1, the property dividends payable is settled. How much is the gain (loss) on settlement
recognized in profit or loss?
a. 0 b. (800,000) c. 800,000 d. 400,000

Choice between property and cash dividends

Use the following information for the next two questions:
On April 1, 20x1, BRACKISH Co. declared 4,000,000 cash dividends. However, the shareholders were given the
option of receiving property dividends in the form of shares held by BRACKISH as investment in held for trading
securities of SALTY, Inc. The investment in held for trading securities has a carrying amount of 4,000,000 as of April
1, 20x1. Information on fair values of the held for trading securities is shown below:
Fair value
April 1, 20x1 3,200,000
April 30, 20x1 4,400,000

BRACKISH estimates on April 1, 20x1 that the probability that the shareholders will opt to receive cash dividends is
60% while the probability that they will opt to received property dividends is 40%.

11. How much is the cash dividends payable on April 1, 20x1?

a. 0 b. 2,400,000 c. 800,000 d. 4,000,000

12. On April 30, 20x1, the dividends are settled as follows: 30% opted to receive cash while 70% opted to receive
property dividends. How much is the gain (loss) on settlement of the dividends on April 30, 20x1?
a. 0 b. (840,000) c. 840,000 d. 480,000

Accounting for small share dividends

Use the following information for the next two questions:
On April 1, 20x1, SURLY BAD TEMPERED Co. declared share dividends on a 1 share dividend for every 10 shares
held basis to shareholders of record as of April 15, 20x1 for distribution on May 1, 20x1. The market price per share
on declaration date is 480. SURLYs shareholders equity immediately before dividend declaration is shown below:
Share capital, authorized capital 10,000 shares, 400 par 3,200,000
Subscribed share capital 880,000
Share premium 400,000
Retained earnings 1,816,000
Treasury shares (at cost of 120 per share) (576,000)
Other components of equity 280,000
Total shareholders equity 6,000,000

13. How much is the debit to retained earnings on April 1, 20x1?

a. 360,000 b. 432,000 c. 4,320,000 d. 3,600,000

14. How much is the credit to share premium on April 1, 20x1?

a. 0 b. 72,000 c. 720,000 d. 420,000
Accounting for large share dividends
Use the following information for the next two questions:
On April 1, 20x1, PRENTIC LEARNER Co. declared share dividends on a 1 share dividend for every 5 shares held
basis to shareholders of record as of April 15, 20x1 for distribution on May 1, 20x1. The market price per share on
declaration date is 480. The total outstanding shares as of April 1, 20x1 is 9,000.

15. How much is the debit to retained earnings on April 1, 20x1?

a. 720,000 b. 864,000 c. 360,000 d. 432,000

16. How much is the credit to share premium on April 1, 20x1?

a. 0 b. 144,000 c. 72,000 d. 720,000

Treasury shares declared as dividends

17. On April 1, 20x1, WASHY PALE Co. declared dividends from its treasury shares on a 1 share for every 10
shares held to shareholders of record as of April 15, 20x1 for distribution on May 1, 20x1. The market price of
the shares on date of declaration is 150. WASHYs shareholders equity immediately before the dividend
declaration is as follows:
Share capital, authorized capital 10,000 shares, 400 par 3,200,000
Subscribed share capital 880,000
Share premium 400,000
Other components of equity 280,000
Retained earnings 1,816,000
Treasury shares (at cost of 480 per share) (576,000)
Total shareholders equity 6,000,000

How much is the debit to retained earnings on April 1, 20x1?

a. 280,000 b. 432,000 c. 135,000 d. 297,000

Share dividends of different class

8
18. On April 1, 20x1, CALLOW IMMATURE Co. declared 1,000 share dividends in the form of preference shares to
its ordinary shareholders of record as of April 15, 20x1 for distribution on May 1, 20x1. The market price of the
preference shares on date of declaration is 600. CALLOW Co. has 10,000 ordinary shares outstanding. The
par value of preference shares is 400. How much is the debit to retained earnings on April 1, 20x1?
a. 600,000 b. 400,000 c. 200,000 d. 0

Dividends on preference shares

Use the following information for the next five questions:
GUILE DECEITFULNESS Co. declared 7,200,000 cash dividends to its preference and ordinary shareholders out of
its profits in 20x3. No dividends have been declared since 20x1. GUILEs shareholders equity immediately before
dividend declaration is as follows:
10% Preference share capital, 800 par 8,000,000
Ordinary share capital, 400 par 32,000,000
Retained earnings 20,000,000
Total shareholders equity 60,000,000
Case #1 Preference share is noncumulative
19. How much is the dividend to ordinary shareholders if the preference shares are noncumulative?
a. 7,200,000 b. 5,080,000 c. 6,400,000 d. 6,000,000

Case #2 Preference share is cumulative

20. How much is the dividend to ordinary shareholders if the preference shares are cumulative?
a. 2,400,000 b. 4,800,000 c. 5,600,000 d. 6,400,000

Case #3 Preference share is noncumulative and fully participating

21. How much is the dividend to ordinary shareholders if the preference shares are noncumulative and fully
participating?
a. 7,560,000 b. 6,400,000 c. 5,120,000 d. 5,760,000

Case #4 Preference share is cumulative and fully participating

22. How much is the dividend to ordinary shareholders if the preference shares are cumulative and fully
participating?
a. 4,480,000 b. 5,120,000 c. 5,760,000 d. 6,400,000

Case #5 Preference share is cumulative and participating up to 16%

23. How much is the dividend to ordinary shareholders if the preference shares are cumulative and participating up
to 16%?
a. 5,120,000 b. 4,480,000 c. 4,480,000 d. 4,320,000

More than one class of preference shares

24. SHOAL SHALLOW Co. declared 16,000,000 cash dividends to its preference and ordinary shareholders out of
its profits in 20x3. No dividends have been declared since 20x1. SHOALs shareholders equity immediately
before dividend declaration is as follows:
10% Preference share capital, 800 par, cumulative
and participating 8,000,000
12% Preference share capital, 300 par, noncumulative 24,000,000
and participating
Ordinary share capital, 100 par 32,000,000
Retained earnings 16,000,000
Total shareholders equity 80,000,000

How much is the dividend to ordinary shareholders?

a. 6,690,000 b. 6,640,000 c. 7,350,000 d. 6,960,000

Total dividend
25. SCUM REFUSE Co. is contemplating on declaring cash dividends to its preference and ordinary shareholders
out of its profits in 20x3. Dividends are in arrears for three years. SCUMs shareholders equity immediately
before dividend declaration is as follows:
10% Preference share capital, 800 par, cumulative
and fully participating 8,000,000
Ordinary share capital, 80,000 shares issued and
outstanding, 400 par 32,000,000
Retained earnings 20,000,000
Total shareholders equity 60,000,000
If SCUM would like to pay dividends of 56 per share to ordinary shareholders, how much total dividend should be
declared?
a. 7,200,000 b. 16,000,000 c. 6,800,000 d. 12,800,000

Dividends on redeemable preference shares

26. EQUIVOCAL UNCERTAIN Co. declared one-year cash dividends on its outstanding 6% redeemable preference
shares with aggregate par value of 4,000,000. The declaration of the dividends resulted to a
a. debit to retained earnings for 240,000
b. debit to loss for 240,000
c. debit to interest expense for 240,000
d. none of these

Liquidating dividends

9
27. On December 31, 20x1, BRUTISH BEASTLIKE Co. declares 4,000,000 cash dividends to shareholders of
record as of January 15, 20x2 for distribution on January 31, 20x2. Since BRUTISH is undergoing liquidation,
80% of the dividends declared are liquidating dividends. The entry to record the dividend declaration includes
a. debit to retained earnings for 4,000,000
b. debit to retained earnings for 3,200,000
c. debit to share capital for 3,200,000
d. debit to capital liquidated for 3,200,000
1. A 11. B 21. D
2. A 12. C 22. A
3. C 13. B 23. D
4. B 14. B 24. D
5. C 15. A 25. A
6. A 16. A 26. C
7. B 17. B 27. D
8. B 18. A
9. D 19. C
10. C 20. B

BOOK VALUE PER SHARE

1. Georgia, Inc. has an authorized capital of 1,000, 100 par, 8% cumulative preference shares and 100,000, 10
par, ordinary shares. The equity account balances at December 31, 20x1, are as follows:
Cumulative preference share 50,000
Ordinary share 90,000
Share premium 9,000
Retained earnings 13,000
Treasury shares, ordinary 100 shares at cost (2,000)
Total 160,000

Dividends on preferred stock are in arrears for the year 20x1. The book value per ordinary share at December 31,
20x1, should be
a. 11.78 b. 11.91 c. 12.22 d. 12.36
(AICPA)

2. Hoyt Corp.s current balance sheet reports the following stockholders equity:
5% cumulative preference shares, 100 par value 250,000
Ordinary share, par value 3.50 per share 350,000
Share premium on ordinary shares 125,000
Retained earnings 300,000

Dividends in arrears on the preference share amount to 25,000. If Hoyt were to be liquidated, the preference
stockholders would receive par value plus a premium of 50,000. The book value per ordinary share is
a. 7.75 b. 7.50 c. 7.25 d. 7.00
(AICPA)

3. Maga Corp.'s shareholders' equity at December 31, 20x1, comprised the following:
6% cumulative preference share, 100 par; liquidating value 110
per share; authorized, issued, and outstanding 50,000 shares 5,000,000
Ordinary share, 5 par; 1,000,000 shares authorized; issued
and outstanding 400,000 shares 2,000,000
Retained earnings 1,000,000

Dividends on preferred stock have been paid through 20x0 but have not been declared for 20x1. At December 31,
20x1, Maga's book value per ordinary share was
a. 5.50 b. 6.25 c. 6.75 d. 7.50

1. B
2. D
3. A

EARNINGS AND DILUTED EARNINGS PER SHARE

1. At December 31, 20x2 and 20x1, Gow Corp. had 100,000 ordinary shares and 10,000, 5%, 100 par value
cumulative preference shares outstanding. No dividends were declared on either the preference or ordinary
shares in 20x2 or 20x1. Profit for 20x2 was 1,000,000. For 20x2, basic earnings per common share amounted
to
a. 10.00 b. 9.50 c. 9.00 d. 5.00

2. Fay Corporation's capital structure at December 31, 20x6, was as follows:

Shares issued and outstanding
Ordinary shares 200,000
Nonconvertible preference shares 50,000

10
On October 1, 20x7, Fay issued a 10% share dividend on its ordinary shares, and paid 100,000 cash dividends on
the preference shares. Profit for the year ended December 31, 20x7 was 960,000. Fay's 20x7 basic earnings per
ordinary share should be
a. 3.91 b. 4.10 c. 4.36 d. 4.68

3. The following information pertains to Jet Corp.s outstanding stock for 20x1:
Ordinary shares, 5 par value, shares outstanding, 1/1/x1 20,000
2-for-1 stock split, 4/1/x1 20,000
Shares issued, 7/1/x1 10,000
Preference shares, 10 par value, 5% cumulative
shares outstanding, 1/1/x1 4,000

What is the number of shares Jet should use to calculate 20x1 basic earnings per share?
a. 40,000 b. 45,000 c. 50,000 d. 54,000

4. Timp, Inc., had the following ordinary share balances and transactions during 20x8:
1/1/x8 Ordinary shares outstanding 30,000
2/1/x8 Issued a 10% ordinary share dividend 3,000
3/1/x8 Issued ordinary shares in a business combination 9,000
7/1/x8 Issued ordinary shares for cash 8,000
12/31/x8 Ordinary shares outstanding 50,000

What was Timps 20x8 weighted average shares outstanding?

a. 40,000 b. 44,250 c. 44,500 d. 46,000

5. Rand, Inc., had 20,000 ordinary shares outstanding at January 1, 20x3. On May 1, 20x3, it issued 10,500
ordinary shares. Outstanding all year were 10,000 shares of nonconvertible preference shares on which a
dividend of 4 per share was paid in December 20x3. Profit for 20x3 was 96,700. Rand's basic earnings per
share for 20x3 are
a. 1.86 b. 2.10 c. 2.84 d. 3.58

6. During 20x4, Moore Corp. had the following two classes of stock issued and outstanding for the entire year.
100,000 shares of common stock, 1 par.
1,000 shares of 4% preferred stock, 100 par, convertible share for share into common stock.

Moore's 20x4 net income was 900,000, and its income tax rate for the year was 30%. In the computation of diluted
earnings per share for 1994, the amount to be used in the numerator is
a. 896,000 b. 898,800 c. 900,000 d. 901,200

7. At December 31, 20x2, Lex, Inc. had 600,000 ordinary shares outstanding. On April 1, 20x3, an additional
180,000 ordinary shares were issued for cash. Lex also had 5,000,000 of 8% convertible bonds outstanding
throughout the year, which are convertible into 150,000 ordinary shares. No bonds were issued or converted
during 20x3. What is the number of shares that should be used in computing diluted earnings per share for
20x3?
a. 735,000 b. 780,000 c. 885,000 d. 930,000

8. Dunn, Inc., had 200,000 shares of 20 par common stock and 20,000 shares of 100 par, 6%, cumulative,
convertible preferred stock outstanding for the entire year ended December 31, 20x1. Each share is convertible
into five shares of common stock. Dunn's net income for 20x1 was 840,000. For the year ended December 31,
20x1, the diluted earnings per share is
a. 2.40 b. 2.80 c. 3.60 d. 4.20

9. On January 2, 20x1, Lang Co. issued at par 10,000 of 4% bonds convertible in total into 1,000 ordinary shares.
No bonds were converted during 20x1. Throughout 20x1, Lang had 1,000 ordinary shares outstanding. Lang's
20x1 profit was 1,000. Lang's income tax rate is 50%. No potentially dilutive securities other than the
convertible bonds were outstanding during 20x1. Lang's diluted earnings per share for 20x1 would be
a. 1.00 b. 0.50 c. 0.70 d. 0.60

10. On June 30, 20x7, Lomond, Inc., issued twenty, 10,000, 7% bonds at par. Each bond was convertible into 200
ordinary shares. On January 1, 20x8, 10,000 ordinary shares were outstanding. The bondholders converted all
the bonds on July 1, 20x8. On the bonds issuance date, the average Aa corporate bond yield was 12%. During
20x8, the average Aa corporate bond yield was 9%. The following amounts were reported in Lomonds income
statement for the year ended December 31, 20x8:
Revenues 977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Profit 35,000

What amount should Lomond report as its 20x8 diluted earnings per share?
a. 2.50 b. 2.85 c. 2.92 d. 3.50
1. B 6. C
2. A 7. C

11
3. B 8. B
4. C 9. D
5. B 10. B

12