Deck 3: Equities

Question 1

What is the meaning of "shares authorized," "shares issued," and "shares outstanding"?

Answer 1

shares authorized: The number of shares that are allowed to be issued by a company's articles of incorporation. shares issued: The number of shares issued by the corporation,whether held by outsiders or by the corporation itself. shares outstanding: Those shares held by outsiders.

Question 2

Which statement about dividends is correct?

A)Dividends on cumulative preferred shares are not discretionary payments.
B)Dividends are mandatory payments required for both common and preferred shares.
C)Dividends are discretionary payments that can be made for common and preferred shares.
D)Dividends must be paid on common shares before dividends can be paid on preferred shares.

Answer 2

C

Question 3

Which statement is correct?

A)Equity holders are concerned more about the debt accounts in the financial statements.
B)Equity holders are concerned about the debt and equity accounts in the financial statements.
C)Debt holders are concerned about the debt and equity accounts in the financial statements.
D)Debt holders are concerned more about the equity accounts in the financial statements.

Answer 3

B

Question 4

If 1,000 shares with a par value of $50/share,a dividend rate of 10% and redeemable for $80/share,are sold for $75/share how much dividend will the equity holders be entitled to?

A)$3,000
B)$5,000
C)$7,500
D)$8,000

Question 5

What is the meaning of "contributed capital"?

A)This is the amount received from the debt holders of the company.
B)This is the repayment of capital to owners of the company.
C)This is the dividends received from the owners of the company.
D)This is the amount received from the equity holders of the company.

Question 6

Explain the meaning of "contributed capital" and "common share." What distinguishes a common share from a preferred share?

Question 7

Which statement about "common shares" is correct?

A)Common shares have the lowest claim to residual profit of all shares.
B)Common shares have the lowest priority of all shares issued by a company.
C)Common shares have the highest priority of all shares issued by a company.
D)Common shares have the highest claim to residual profit of all shares.

Question 8

Which statement is correct about "par value"?

A)Par value refers to the price at which a common share is sold to the equity holders.
B)The dividend rate can be specified as a percentage of the par value for common shares.
C)The dividend rate can be specified as a percentage of the par value for preferred shares.
D)Par value refers to the price at which a preferred share is sold to the equity holders.

Question 9

Which statement about shares is not correct?

A)Common shares represent the ownership interest of the company.
B)Any share that is not a common share is a preferred share.
C)A company can have as many classes of common shares as it wishes.
D)Preferred shares represent the residual interest of the company.

Question 10

In which account would "transactions with owners" be reported?

A)Appropriated reserves.
B)Unappropriated retained earnings.
C)Contributed surplus.
D)Accumulated other comprehensive income.

Question 11

If a company issues 2,000 shares for $55 and then repurchases 50 shares at $55,how much is the contributed capital?

A)$0
B)$2,750
C)$107,250
D)$110,000

Question 12

If 700 shares with a par value of $35/share,a dividend rate of 5% and redeemable for $50/share,are sold for $45/share how much dividend will the equity holders be entitled to?

A)$525
B)$1,225
C)$1,575
D)$1,750

Question 13

Who uses information about "equity" and what information about equity is useful to financial statement users?

Question 14

Which is not a component of "equity"?

A)Other comprehensive income.
B)Contributed capital.
C)Accumulated other comprehensive income.
D)Retained earnings.

Question 15

Which statement about "equity" is not correct?

A)Equity is the ownership interest in the company.
B)Equity is the residual interest in the company.
C)It is not necessary to provide information about the equity.
D)Equity is the difference between assets and liabilities.

Question 16

Explain the meaning of "par value," "contributed surplus," and "preferred shares."

Question 17

What does "priority" mean?

A)Higher priority means preferential payout before lower priority claimants.
B)Refers to the amount of payment that will be made upon bankruptcy.
C)Lower priority means preferential payout before higher priority claimants.
D)Debtors will be paid after the equity holders if there is a bankruptcy.

Question 18

Which is an example of "contributed capital"?

A)Retained earnings.
B)Preferred shares.
C)Other comprehensive income.
D)Accumulated other comprehensive income.

Question 19

Which statement about "common shares" is not correct?

A)They have the most upside potential if a company performs well.
B)A corporation does not need to issue any class of common shares.
C)Common shares represent the ownership interest of the equity holders.
D)They have the most downside risk if a company does not perform well.

Question 20

Which is an example of "contributed capital"?

A)Appropriated reserves.
B)Unappropriated retained earnings.
C)Common shares.
D)Accumulated other comprehensive income.

Question 21

Burlington Corp. has a single class of shares. As at its year ended December 31,2012,the company had 5,000,000 shares issued and outstanding. On the stock exchange,these shares were trading at around $7. In the company's accounts,these shares had a value of $50,000,000. The equity accounts also show $650,000 of contributed surplus from previous repurchases of shares.
On January 15,2013,Burlington repurchased and cancelled 250,000 shares at a cost of $7 per share. Later in the year,on August 20,the company repurchased and cancelled a further 475,000 shares at a cost of $14 per share.
Requirement:
Record the journal entries for the two share transactions in 2013.

Question 22

Great-West Lifeco Inc. announced the following share issuances:
March 1,2008
10,000,000 2% non-cumulative five-year rate reset first preferred shares (series J)for par value of $12 each. After five years the dividend rate will be reset to the five-year Canada bond rate plus 3.35%. Dividends are payable as declared by the board of directors.
April 9,2008
28,350,000 common shares for $19.25 per share. This represents approximately 4.6% of Lifeco's total outstanding common shares.
The CEO of the company stated the following regarding these share issuances:
For many years,Great-West Life and its subsidiaries have pursued a risk-averse strategy with respect to both liabilities and assets. Consequently,today the company's balance sheet is one of the strongest in its industry. With this issue,the company will move forward with an enhanced capability to take advantage of market opportunities.
Required:
a. Prepare the journal entries to record the share issuances.
b. Explain how the share issuances result in a "risk-averse strategy with respect to both liabilities and assets," and how this results in a strong balance sheet that allows the company to take advantage of market opportunities,such as profitable investments.
c. Assume the board of directors declares dividends on December 31,2008 in the amount of $15,000,000. Calculate the amount of dividends to be paid to preferred shareholders and common shareholders (assume the company only has the above stated series of preferred shares outstanding).

Question 23

When a corporation engages in a capital transaction (those relating to its contributed capital),the journal entry may involve either a debit or a credit to contributed surplus. While not permitted by accounting standards,if these debits or credits were to be recognized through income,a debit would be called a "loss" and a credit would be called a "gain."
Consider the following sequence of transactions:
• Jan. 1,2007: Company issues 1,500,000 no par common shares at $14 each.
• Jan. 1,2013: Company reacquires 150,000 common shares in the open market at $9 each,and cancels them immediately.
There were no other capital transactions and the company had not paid any dividends.
Required:
a. Prepare the journal entries for the two transactions.
b. Review the journal entry for January 1,2013. How much was credited other than cash? Does this credit reflect good or bad management? As a shareholder,would you be happy or unhappy about this credit entry?
c. What would have been the journal entry for January 1,2013 had the repurchase price been $24?
d. In the journal entry for part (c),explain why the debit goes to reduce retained earnings. How would a shareholder interpret the reduction in retained earnings?

Question 24

Here is an extract of a trial balance for Soorya Inc. Indicate which accounts would be reported under the "equity" section of the balance sheet of Soorya Inc.

Question 25

What kind of transaction is "appropriated reserves"?

A)An example of "contributed surplus."
B)An example of a transaction with owners.
C)An example of a "contributed capital."
D)An example of a transaction with non-owners.

Question 26

Mountip Inc. was incorporated under provincial legislation with a December 31 year-end. The company has a single class of shares. As at December 31,2011,it had 150,000 shares issued and outstanding. These shares had a book value of $5,700,000 on the balance sheet. During 2012,Mountip repurchased 5% of the issued shares from one of the minority shareholders at a cost of $48 per share. The company held these in treasury and later found a buyer for half of these shares at $52. The other half were sold at $46 to another investor.
Requirement:
Record the share transactions using the alternative two-transaction method for treasury stock.

Question 27

Here is an extract of a trial balance for Zoe and Zia Inc. Indicate which accounts would be under the "contributed capital" section of the balance sheet.

Question 28

When shares are repurchased at an amount different from their original issue price,then held in treasury or cancelled,will the journal entry affect the following components?
Share capital
Contributed surplus
Treasury stock
Loss/gain on share retirement
Accumulated other comprehensive income
Appropriated reserves
Unappropriated retained earnings

Question 29

In which account would "transactions with non-owners" be reported?

A)Appropriated reserves.
B)Common shares.
C)Contributed surplus.
D)Par value of preferred shares.

Question 30

What kind of transaction is "appropriated reserves"?

A)An example of "par value" preferred shares.
B)An example of a transaction with owners.
C)An example of a "retained earnings."
D)An example of a "other comprehensive income."

Question 31

If 10,000 shares with par value of $15/share are issued for $20/share,how much will be presented as "contributed capital" for financial statement purposes?

A)$10,000
B)$50,000
C)$150,000
D)$200,000

Question 32

Elville Inc. was incorporated under provincial legislation with a December 31 year-end. The company has a single class of shares. As at December 31,2011,it had 900,000 shares issued and outstanding. These shares had a book value of $18,000,000 on the balance sheet.
During 2012,Elville repurchased 10% of the issued shares from one of the minority shareholders at a cost of $25 per share. The company held these in treasury and later found a buyer for half of these shares at $30. The other half were sold at $21 to another investor.
Requirement:
Record the share transactions using the single-transaction method for treasury stock,which is the preferred accounting method.

Question 33

What is the significance of "par value" for accounting purposes?

A)The par value determines the amount of contributed surplus.
B)Par value has no economic significance for accounting purposes.
C)Par values determines the amount of cash received from investors.
D)Par value shares are not permitted under IFRS or ASPE.

Question 34

Which statement about a "stock split" is correct?

A)The economic position of the investors is diluted after a stock split.
B)The economic position of the investors is increased after a stock split.
C)The economic position of the investors is decreased after a stock split.
D)The economic position of the investors is unaffected after a stock split.

Question 35

Which transaction would not affect retained earnings?

Question 36

Here is an extract of a trial balance for Masterious Ltd. Indicate which are examples of transactions with non-owners.

Question 37

What is a "stock split"?

A)It is an increase in the number of shares issued for which book value consideration is received from investors.
B)It is an increase in the number of shares issued for which no consideration is received from investors.
C)It is an increase in the number of shares issued for which par value consideration is received from investors.
D)It is an increase in the number of shares issued for which market value consideration is received from investors.

Question 38

Dunst Company had the following shareholders' equity account balances on December 31,2011:
During 2012,the following transactions occurred:
i. May 1: Dunst resold 1,600 of the treasury shares at $52 per share.
ii. Dec. 30: The board of directors declared cash dividends of $2 per share.
iii. Dec. 31: Net income for the year ended December 31,2012 was $150,000.
Dunst uses the single transaction method for treasury shares.
Requirements:
a. Record the journal entries for the transactions in 2012 and make all the necessary year-end entries relating to shareholders' equity accounts.
b. Prepare the presentation of the shareholders' equity section of Dunst's balance sheet as at December 31,2012.

Question 39

Here is an extract of a trial balance for Masters Ltd. Indicate which are "non-contributed capital."

Question 40

Here is an extract of a trial balance for Lipika Inc. Indicate which accounts would be reported under the "retained earnings" section of the balance sheet.

Question 41

If 10,000 shares with par value of $15/share are issued for $20/share,how much will be presented as "common shares" for financial statement purposes?

A)$10,000
B)$50,000
C)$150,000
D)$200,000

Question 42

Which statement does not explain the "two transaction method" for treasury shares?

A)This method treats the reacquisition as the end of the initial share issuance transaction.
B)This method treats the subsequent sale as the start of another transaction.
C)This method treats the reacquisition and subsequent sale separately for accounting.
D)This method treats the reacquisition and subsequent sale as two parts of the same transaction.

Question 43

Assume that a company issued 10,000 shares for $30/share and a par value of $5/share. 1,000 shares were repurchased back at $22/share. Which statement about share repurchases and cancellation is correct?

A)Contributed surplus from the share repurchase can be netted against the contributed surplus from share issuance.
B)Contributed surplus from the share repurchase must be separated from the contributed surplus on share issuance.
C)Contributed surplus arising from share repurchase must be debited in this transaction.
D)Contributed surplus from the initial share issuance must now be credited in this transaction.

Question 44

Assume that a company issued 10,000 shares for $30 and a par value of $2/share. What entry would be required to record the repurchase and cancellation of 1,000 shares at $28/share?

A)Debit to common shares for $2,000
B)Debit to common shares for $28,000
C)Debit to contributed surplus for $1,000
D)Credit to contributed surplus for $1,000

Question 45

Which statement about a "reverse stock split" is correct?

A)The economic position of the investors is diluted after a stock split.
B)The economic position of the investors is increased after a stock split.
C)The economic position of the investors is decreased after a stock split.
D)The economic position of the investors is unaffected after a stock split.

Question 46

Which statement is correct about the "two transaction method" for treasury shares?

A)This method decreases the contributed surplus when the repurchased shares are later re-sold.
B)This method has the same effect on contributed surplus to that of the two transaction method.
C)This method treats the reacquisition and subsequent sale as once cycle for accounting.
D)This method increases contributed surplus at the time of re-purchase.

Question 47

Which statement about a "share buy-backs" is correct?

A)The EPS of the company will decrease after a share buy-back.
B)Share buy-back decreases the information asymmetry for investors.
C)It is an administratively cumbersome way to award stock compensation.
D)Accounting is the same whether repurchased shares are cancelled or not.

Question 48

Which statement best describes the accounting when a company cancels its own shares at an amount lower than the average share value?

A)Contributed surplus and retained earnings will be credited.
B)Contributed surplus and retained earnings will be debited.
C)Contributed surplus will be credited,thereby increasing equity.
D)Contributed surplus will be debited,thereby decreasing equity.

Question 49

Assume that a company issued 10,000 shares for $30 and a par value of $1/share. What entry would be required to record the repurchase and cancellation of 1,000 shares at $28/share?

A)Debit to common shares for $28,000
B)Debit to common shares for $1,000
C)Credit to contributed surplus for $29,000
D)Credit to contributed surplus for $1,000

Question 50

Which statement is correct about the "single transaction method" for treasury shares?

A)This method increases the contributed surplus when the repurchased shares are later re-sold.
B)This method has the same effect on contributed surplus to that of the two transaction method.
C)This method treats the reacquisition and subsequent sale separately for accounting.
D)This method increases contributed surplus at the time of re-purchase.

Question 51

Which statement is correct about the "single transaction method" for treasury shares?

A)This method has the same effect on contributed surplus to that of the two transaction method.
B)This method uses a separate "treasury shares" account upon re-purchase.
C)This method treats the reacquisition and subsequent sale separately for accounting.
D)This method decreases contributed surplus at the time of re-purchase.

Question 52

Assume that a company issued 10,000 shares for $30/share. What entry would be required to record the repurchase and cancellation of 1,000 shares at $28/share?

A)Debit to common shares for $28,000
B)Debit to common shares for $30,000
C)Credit to contributed surplus for $29,000
D)Credit to contributed surplus for $1,000

Question 53

Which statement about "share buy-back" is correct?

A)If the repurchase price if below the issue price,an accounting "gain" results.
B)If the repurchase price if below the issue price,the difference goes to "common shares."
C)If the repurchase price if below the issue price,the difference goes to "contributed surplus."
D)If the repurchase price if below the issue price,an accounting "loss" results.

Question 54

If 10,000 shares with par value of $15/share are issued for $20/share,how much will be presented as "contributed surplus" for financial statement purposes?

A)$10,000
B)$50,000
C)$150,000
D)$200,000

Question 55

Which statement best describes the accounting when a company cancels its own shares at an amount higher than the average share value?

A)Contributed surplus and retained earnings will be credited.
B)Contributed surplus and retained earnings will be debited.
C)Contributed surplus will be credited,thereby increasing equity.
D)Contributed surplus will be debited,thereby decreasing equity.

Question 56

Which statement about a "treasury shares" is correct?

A)The company does not pay dividends on these shares.
B)These shares must be cancelled upon re-purchase.
C)These shares are disclosed as issued and outstanding.
D)These shares continue to have voting rights.

Question 57

Which statement about contributed surplus is correct?

A)Contributed surplus can only arise from the issuance of shares.
B)Contributed surplus can arise from the issuance of stock options.
C)Contributed surplus arising from share repurchase gives rise to a debit journal entry.
D)Contributed surplus arising from share issuance gives rise to a debit journal entry.

Question 58

Which statement best describes the accounting when a company cancels its own shares at an amount greater than their par value?

A)Retained earnings will be debited at an amount equal to the par value of the shares.
B)Retained earnings will be credited at an amount equal to the par value of the shares.
C)Contributed surplus will be debited at an amount equal to the par value of the shares.
D)Share capital will be debited at an amount equal to the par value of the shares.

Question 59

Assume that a company issued 10,000 shares for $30/share. What entry would be required to record the repurchase and cancellation of 1,000 shares at $28/share?

A)Credit to common shares for $28,000
B)Credit to common shares for $30,000
C)Credit to contributed surplus for $29,000
D)Credit to contributed surplus for $2,000

Question 60

Which statement best explains the "single transaction method" for treasury shares?

A)This method treats the reacquisition as the end of the initial share issuance transaction.
B)This method treats the subsequent sale as the start of another transaction.
C)This method treats the reacquisition and subsequent sale separately for accounting.
D)This method treats the reacquisition and subsequent sale as two parts of the same transaction.

Question 61

As of January I,2014,the equity section of LD Food Co.'s balance sheet contained the following:
outstanding
common shares
30,000 issued and outstanding

• On May 1,2014,the company spent $802,500 to repurchase 300,000 common shares. These shares were cancelled immediately.
• On July 15,2014,the company repurchased and cancelled 4,000 preferred shares at $15/sh.
• On November I,2014,the company declared and paid the annual cash dividends on the preferred shares. On the same day,the company issued a 5% stock dividend on common shares. LD Food's stock traded at $7/share after the dividend.
Requirement:
Record the journal entries for the above transactions occurring in 2014.

Question 62

When does a company record dividends payable?

A)On date of record.
B)On ex-dividend date.
C)On payment date.
D)On declaration date.

Question 63

Explain what a "property dividend" is and why it not common. Under what circumstances would a property dividend be advisable?

Question 64

What is the "ex-dividend" date for the Toronto Stock Exchange?

A)2 business days after the declaration date.
B)2 business days after the date of record.
C)2 business days before the date of record.
D)2 business days before the declaration date.

Question 65

Below are details relating to balances for the equity accounts of Paras Company,and changes to those balances. Note that AOCI is accumulated other comprehensive income.
Requirement:
Prepare a statement of changes in equity for the years ended December 31,2012.

Question 66

As of January I,2014,the equity section of LD Food Co.'s balance sheet contained the following:

• On November 1,2014,the company declared and paid the annual cash dividends on the preferred shares. On the same day,the company issued a 5% stock dividend on common shares. LD Food's stock traded at $7/share after the dividend.
Requirement:
Record the journal entries for the above transactions occurring in 2014.

Question 67

Below are details relating to balances for the equity accounts of Cauvet Company,and changes to those balances. Note that AOCI is accumulated other comprehensive income.
Requirement:
Prepare a statement of changes in equity for the years ended December 31,2011 and 2012.

Question 68

Below are details relating to balances for the equity accounts of Isha Company,and changes to those balances. Note that AOCI is accumulated other comprehensive income.
Requirement:
Prepare a statement of changes in equity for the years ended December 31,2011.

Question 69

The following is an extract from the balance sheet as at December 31,1011:
at $6 per share,250,000 authorized,25,000 issued and outstanding
The company did not declare dividends on preferred shares in 2011. Transactions in 2012 include the following:
i. March 15: Hewitt purchased 15,000 preferred shares on the stock exchange for $5.25 per share and held these in treasury.
ii. March 28: The company redeemed 5,000 preferred shares directly from shareholders.
iii. July 1: The market price of common shares shot up to $5 per share,so Hewitt decided to split the common shares two to one.
iv. August 1: Hewitt cancelled 14,000 preferred shares that were held in treasury.
v. December 31: The company declared dividends of $0.40 per common share.
Requirement:
Prepare the journal entries to record the above transactions. The company uses the single-transaction method to account for treasury shares.

Question 70

Milton Corporation declared and distributed a 8% stock dividend. Milton had 440,000 common shares outstanding and 940,000 common shares authorized before the stock dividend. The board of directors determined the appropriate market value per share as $10.
Requirement:
How much should be recorded for the stock dividend? Record the journal entry (if any)for the shares distributed.

Question 71

Key Corp has a October 31 year end. On October 2,2011,the board of directors decided a cash dividend of $1.50 per common share,payable on November 24,2012. The date of record for this dividend is November 17,and the ex-dividend date is November 15,2012. Additional information relating to the shares follows:
Requirements:
a. Determine the dollar amount of dividends to be paid as a result of the dividend declaration on October 2,2011.
b. Record all the journal entries related to this dividend in 2011 and 2012.

Question 72

Nala Company has two classes of shares that were both issued on January 1,2010:
Class A,$10 par value,8% preferred shares,275,000 shares issued and outstanding;
Class B,no par value common shares issued at $30/share,1,300,000 shares issued and outstanding.
Due to challenging start-up problems in 2010 and 2011 there were no dividends paid; in 2012 dividends of $8,000,000 were paid; and,for 2013,dividends paid totaled $16,000,000.
Requirement:
How much was the amount of dividends paid to preferred and common shares in 2010 to 2013? First assume that the preferred shares are non-cumulative,then assume that they are cumulative.

Question 73

The following is an extract from the balance sheet as at December 31,1011:
The company did not declare dividends on preferred shares in 2011. Transactions in 2012 include the following:
i. March 15: Hewitt purchased 15,000 preferred shares on the stock exchange for $15.25 per share and held these in treasury.
ii. March 28: The company redeemed 5,000 preferred shares directly from shareholders.
iii. July 1: The market price of common shares shot up to $5 per share,so Hewitt decided to split the common shares two to one.
iv. August 1: Hewitt cancelled 14,000 preferred shares that were held in treasury.
v. December 31: The company declared dividends of $0.50 per common share.
Requirement:
Prepare the journal entries to record the above transactions. The company uses the single-transaction method to account for treasury shares.

Question 74

Which statement about "stock dividends" is correct?

A)Only a memo entry is needed for this transaction.
B)No entry is needed in the accounting records.
C)A journal entry is needed for this transaction.
D)This is the same as a stock split for accounting purposes.

Question 75

Cardiff Corporation is a public company traded on a major exchange. Cardiff's common shares are currently trading at $21 per share. The board of directors is debating whether to issue a 200% stock dividend. The board is wondering how shareholders' equity would be affected,and whether the value of the typical shareholder's investment will change.
Details of Cardiff's equity section of the balance sheet is as follows:
Required:
a. At what price would you expect the shares to trade after either transaction? Explain with calculations.
b. Show what the equity section of the balance sheet for Cardiff would look like after the stock dividend or stock split.
c. Assume that an investor has 6,000 common shares before the stock dividend or stock split. What would be the value of the investor's holdings before and after the stock dividend or stock split?
d. What is your recommendation to the board of directors?