Deck 15: Equity

Question 1

When a corporation sells treasury shares below its cost, it usually debits the difference between cost and selling price to Share Premium-Treasury.

Answer 1

True

Question 2

All dividends, except for liquidating dividends, reduce the total shareholders' equity of a corporation.

Answer 2

False

Question 3

Treasury shares are a company's own shares that have been reacquired and retired.

Answer 3

False

Question 4

Ordinary shares is the residual corporate interest that bears the ultimate risks of loss.

Question 5

Share splits and large share dividends have the same effect on a company's retained earnings and total shareholders' equity.

Question 6

Companies should record shares issued for services or noncash property at either the fair value of the shares issued or the fair value of the consideration received.

Question 7

When a share dividend is less than 20-25 percent of the ordinary shares outstanding, a company is required to transfer the fair value of the shares issued from retained earnings.

Question 8

The preemptive right allows shareholders the right to vote for directors of the company.

Question 9

Many companies pay dividends in amounts equal to their legally available retained earnings.

Question 10

Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind.

Question 11

The laws of some jurisdictions require that corporations restrict their contributed capital from distribution to shareholders.

Question 12

A corporation is incorporated in only one country regardless of the number of countries in which it operates.

Question 13

Callable preference shares permit the corporation at its option to redeem the outstanding preference shares at stipulated prices.

Question 14

True no-par shares should be carried in the accounts at issue price without any share premium reported.

Question 15

Participating preference shares require that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any ordinary dividends.

Question 16

The payout ratio is determined by dividing cash dividends paid to ordinary shareholders by net income available to ordinary shareholders.

Question 17

Companies allocate the proceeds received from a lump-sum sale of securities based on the securities' par values.

Question 18

The rate of return on ordinary share equity is computed by dividing net income by the average ordinary equity.

Question 19

Earned capital consists of contributed capital and retained earnings.

Question 20

The cost method records all transactions in treasury shares at their cost and reports the treasury shares as a deduction from ordinary shares.

Question 21

"Gains" on sales of treasury (using the cost method) should be credited to

A)share premium-treasury.
B)share capital.
C)retained earnings.
D)other income.

Question 22

The pre-emptive right of an ordinary shareholder is the right to

A)share proportionately in corporate assets upon liquidation.
B)share proportionately in any new issues of stock of the same class.
C)receive cash dividends before they are distributed to preference shareholders.
D)exclude preference shareholders from voting rights.

Question 23

An entry is not made on the

A)date of declaration.
B)date of record.
C)date of payment.
D)An entry is made on all of these dates.

Question 24

The residual interest in a corporation belongs to the

A)management.
B)creditors.
C)ordinary shareholders.
D)preference shareholders.

Question 25

Porter Corp.purchased its own par value shares on January 1, 2010 for $20,000 and debited the treasury shares account for the purchase price.The shares were subsequently sold for $12,000.The $8,000 difference between the cost and sales price should be recorded as a deduction from

A)share premium-treasury to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.
B)share premium-treasury without regard as to whether or not there have been previous net "gains" from sales of the same class of shares included therein.
C)retained earnings.
D)net income.

Question 26

The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities.An acceptable method of allocation is the

A)pro forma method.
B)proportional method.
C)incremental method.
D)either the proportional method or the incremental method.

Question 27

The features most frequently associated with preference shares include all of the following except

A)Callable at the option of the shareholder.
B)Convertible into ordinary shares.
C)Non-voting.
D)Preference as to assets in the event of liquidation.

Question 28

Hiro Corp.issues shares which bear the ultimate risks of loss and receive the benefit of success.These shares are not guaranteed dividends nor assets upon dissolution.These shares are considered

Question 29

Total shareholders' equity represents

A)a claim to specific assets contributed by the owners.
B)the maximum amount that can be borrowed by the enterprise.
C)a claim against a portion of the total assets of an enterprise.
D)only the amount of earnings that have been retained in the business.

Question 30

Liquidating dividends

A)Are prohibited under IFRS.
B)Require a credit to Share Capital-Ordinary.
C)Reduce amounts paid-in by shareholders.
D)All of the choices are correct.

Question 31

When preference shares share ratably with the ordinary shareholders in any profit distributions beyond the prescribed rate this is known as the

A)Cumulative feature.
B)Participating feature.
C)Callable feature.
D)Redeemable feature.

Question 32

Which of the following best describes a possible result of treasury share transactions by a corporation?

A)May increase but not decrease retained earnings.
B)May increase net income if the cost method is used.
C)May decrease but not increase retained earnings.
D)May decrease but not increase net income.

Question 33

At the date of the financial statements, ordinary shares issued would exceed ordinary shares outstanding as a result of the

A)declaration of a share split.
B)declaration of a share dividend.
C)purchase of treasury shares.
D)payment in full of subscribed shares.

Question 34

When treasury shares are purchased for more than the par value of the shares and the cost method is used to account for treasury shares, what account(s) should be debited?

A)Treasury shares for the par value and share premium for the excess of the purchase price over the par value.
B)have premium for the purchase price.
C)Treasury shares for the purchase price.
D)Treasury shares for the par value and retained earnings for the excess of the purchase price over the par value.

Question 35

Ordinary no-par shares

A)Are considered illegal.
B)Are subject to high taxes.
C)Are always sold at a premium.
D)All of the choices are correct.

Question 36

A primary source of shareholders' equity is

A)income retained by the corporation.
B)appropriated retained earnings.
C)contributions by shareholders.
D)both income retained by the corporation and contributions by holders.

Question 37

How should a "gain" from the sale of treasury shares be reflected when using the cost method of recording treasury shares transactions?

A)As other income shown on the income statement.
B)As share premium from treasury share transactions.
C)As an increase in the amount shown for share capital.
D)As an increase in the retained earnings amount.

Question 38

When a corporation issues its ordinary shares in payment for services, the least appropriate basis for recording the transaction is the

A)fair value of the services received.
B)par value of the shares issued.
C)fair value of the shares issued.
D)Any of these provides an appropriate basis for recording the transaction.

Question 39

Equity is generally classified into two major categories:

A)contributed capital and appropriated capital.
B)appropriated capital and retained earnings.
C)retained earnings and unearned capital.
D)earned capital and contributed capital.

Question 40

Which of the following features of preference shares makes the security more like debt than an equity instrument?

A)Participating
B)Voting
C)Redeemable
D)Noncumulative

Question 41

A feature common to both share splits and share dividends is

A)a transfer to earned capital of a corporation.
B)that there is no effect on total equity.
C)an increase in total liabilities of a corporation.
D)a reduction in the contributed capital of a corporation.

Question 42

What effect does the issuance of a 2-for-1 share split have on each of the following?

Question 43

The balance in Ordinary Share Dividend Distributable should be reported as a(n)

A)deduction from share capital-ordinary.
B)addition to share capital-ordinary.
C)current liability.
D)contra current asset.

Question 44

The rate of return on ordinary share is calculated by dividing

A)net income less preference dividends by average ordinary shareholders' equity.
B)net income by average ordinary shareholders' equity.
C)net income less preference dividends by ending ordinary shareholders' equity.
D)net income by ending ordinary shareholders' equity.

Question 45

A mining company declared a liquidating dividend.The journal entry to record the declaration must include a debit to

A)Retained Earnings.
B)Share Premium.
C)Accumulated Depletion.
D)Accumulated Depreciation.

Question 46

If management wishes to "capitalize" part of the earnings, it may issue a

A)cash dividend.
B)share dividend.
C)property dividend.
D)liquidating dividend.

Question 47

Dividends are not paid on

A)noncumulative preference shares.
B)nonparticipating preference shares.
C)treasury shares.
D)Dividends are paid on all of these.

Question 48

Houser Corporation owns 4,000,000 shares of Baha Corporation.On December 31, 2012, Houser distributed these shares as a dividend to its shareholders.This is an example of a

A)property dividend.
B)share dividend.
C)liquidating dividend.
D)cash dividend.

Question 49

Trading on the equity is:

A)The ratio of the company's cash dividends to net income.
B)A return on assets that is higher than the cost of financing these assets.
C)The amount each share would receive if the company were liquidated.
D)The "Revaluation Surplus" related to increases or decreases in items such as property, plant, and equipment.

Question 50

At the date of declaration of a small ordinary share dividend, the entry should not include

A)a credit to Ordinary Share Dividend Payable.
B)a credit to Share Premium-Ordinary.
C)a debit to Retained Earnings.
D)All of these are acceptable.

Question 51

Which of the following statements about property dividends is not true?

A)A property dividend is usually in the form of securities of other companies.
B)A property dividend is also called a dividend in kind.
C)The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.
D)All of these statements are true.

Question 52

Cash dividends are paid on the basis of the number of shares

A)authorized.
B)issued.
C)outstanding.
D)outstanding less the number of treasury shares.

Question 53

The issuer of a 5% ordinary share dividend to ordinary shareholders preferably should transfer from retained earnings to contributed capital an amount equal to the

A)fair value of the shares issued.
B)book value of the shares issued.
C)minimum legal requirements.
D)par or stated value of the shares issued.

Question 54

Quirk Corporation issued a 100% share dividend of its ordinary shares which had a par value of $10 before and after the dividend.At what amount should retained earnings be capitalized for the additional shares issued?

A)There should be no capitalization of retained earnings.
B)Par value
C)Fair value on the declaration date
D)Fair value on the payment date

Question 55

Which dividends do not reduce equity?

A)Cash dividends
B)Share dividends
C)Property dividends
D)Liquidating dividends

Question 56

A dividend which is a return to shareholders of a portion of their original investments is a

A)liquidating dividend.
B)property dividend.
C)liability dividend.
D)participating dividend.

Question 57

Which of the following is a required statement under IFRS?

Question 58

The payout ratio can be calculated by dividing

A)dividends per share by earnings per share.
B)cash dividends by net income less preference dividends.
C)cash dividends by market price per share.
D)dividends per share by earnings per share and dividing cash dividends by net income less preference dividends.

Question 59

The declaration and issuance of a share dividend larger than 25% of the shares previously outstanding

A)increases ordinary shares outstanding and increases total equity.
B)decreases retained earnings but does not change total equity.
C)may increase or decrease share premium but does not change total equity.
D)increases retained earnings and increases total equity.

Question 60

Which one of the following disclosures should be made in the equity section of the statement of financial position, rather than in the notes to the financial statements?

A)Dividend preferences
B)Liquidation preferences
C)Call prices
D)Conversion or exercise prices

Question 61

Gannon Company acquired 6,000 shares of its own ordinary shares at $20 per share on February 5, 2010, and sold 3,000 of these shares at $27 per share on August 9, 2011.The fair value of Gannon's ordinary shares was $24 per share at December 31, 2010, and $25 per share at December 31, 2011.The cost method is used to record treasury shares transactions.What account(s) should Gannon credit in 2011 to record the sale of 3,000 shares?

A)Treasury Shares for $81,000.
B)Treasury Shares for $60,000 and Share Premium-Treasury for $21,000.
C)Treasury Shares for $60,000 and Retained Earnings for $21,000.
D)Treasury Shares for $72,000 and Retained Earnings for $9,000.

Question 62

Norton Company issues 4,000 shares of its $5 par value ordinary shares having a fair value of $25 per share and 6,000 shares of its $15 par value preference shares having a fair value of $20 per share for a lump sum of $192,000.What amount of the proceeds should be allocated to the preference shares?

A)$172,000
B)$120,000
C)$104,727
D)$90,000

Question 63

Noncumulative preferred dividends in arrears

A)are not paid or disclosed.
B)must be paid before any other cash dividends can be distributed.
C)are disclosed as a liability until paid.
D)are paid to preference shareholders if sufficient funds remain after payment of the current preference dividend.

Question 64

Sosa Co.'s equity at January 1, 2012 is as follows:
Share capital-ordinary, $10 par value; authorized 300,000 shares;

During 2012, Sosa had the following share transactions:
Acquired 6,000 shares of its shares for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other share transactions occurred during 2012.Assuming Sosa uses the cost method to record treasury share transactions, the total amount of all share premium accounts at December 31, 2012 is

A)$891,600.
B)$870,000.
C)$908,400.
D)$927,600.

Question 65

Luther Inc., has 2,000 shares of 6%, $50 par value, cumulative preference shares and 100,000 shares of $1 par value ordinary shares outstanding at December 31, 2011, and December 31, 2010.The board of directors declared and paid a $5,000 dividend in 2010.In 2011, $24,000 of dividends are declared and paid.What are the dividends received by the preference shareholders in 2011?

A)$17,000
B)$12,000
C)$ 7,000
D)$ 6,000

Question 66

Hiro Corp.issues 1,000 €5 par value ordinary shares and 1,000 €20 par value preference shares for a lump sum of €60,000.At the issue date, the ordinary shares were selling for €36 and the preference shares were selling for €28.The Share Premium-Ordinary account will be credited for

A)€31,000
B)€36,000
C)€26,250
D)€28,750

Question 67

Wheeler Company issued 5,000 shares of its $5 par value ordinary shares having a market value of $25 per share and 7,500 shares of its $15 par value preference shares having a market value of $20 per share for a lump sum of $240,000.The proceeds allocated to the preference shares is

A)$215,000
B)$150,000
C)$130,909
D)$109,091

Question 68

On September 1, 2012, Valdez Company reacquired 12,000 shares of its $10 par value ordinary shares for $15 per share.Valdez uses the cost method to account for treasury shares.The journal entry to record the reacquisition of the shares should debit

A)Treasury Shares for $120,000.
B)Share Capital-Ordinary for $120,000.
C)Share Capital-Ordinary for $120,000 and Share Premium-Ordinary for $60,000.
D)Treasury Shares for $180,000.

Question 69

An analysis of equity of Hahn Corporation as of January 1, 2012, is as follows:

Hahn uses the cost method of accounting for treasury shares and during 2010 entered into the following transactions:
Acquired 2,500 of its shares for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2012, what should Hahn report at December 31, 2012, as total share premium?

A)$895,000
B)$900,000
C)$905,000
D)$915,000

Question 70

Manning Company issued 10,000 shares of its $5 par value ordinary shares having a fair value of $25 per share and 15,000 shares of its $15 par value preference shares having a fair value of $20 per share for a lump sum of $480,000.How much of the proceeds would be allocated to the ordinary shares?

A)$50,000
B)$218,182
C)$250,000
D)$255,000

Question 71

On December 1, 2012, Abel Corporation exchanged 20,000 shares of its $10 par value ordinary shares held in treasury for a used machine.The treasury shares were acquired by Abel at a cost of $40 per share, and are accounted for under the cost method.On the date of the exchange, the ordinary shares had a fair value of $55 per share (the shares were originally issued at $30 per share).As a result of this exchange, Abel's total equity will increase by

A)$200,000.
B)$800,000.
C)$1,100,000.
D)$900,000.

Question 72

Glavine Company issues 6,000 shares of its $5 par value ordinary shares having a market value of $25 per share and 9,000 shares of its $15 par value preference shares having a fair value of $20 per share for a lump sum of $288,000.The proceeds allocated to the ordinary shares is

A)$30,000
B)$130,909
C)$150,000
D)$157,091

Question 73

Long Co.issued 100,000 shares of $10 par ordinary shares for $1,200,000.Long acquired 8,000 shares of its own shares at $15 per share.Three months later Long sold 4,000 of these shares at $19 per share.If the cost method is used to record treasury shares transactions, to record the sale of the 4,000 treasury shares, Long should credit

A)Treasury Shares for $76,000.
B)Treasury Shares for $40,000 and Share Premium-Treasury for $36,000.
C)Treasury Shares for $60,000 and Share Premium-Treasury Stock for $16,000.
D)Treasury Shares for $60,000 and Share Premium-Ordinary for $16,000.

Question 74

On January 1 Hiro Corp.issues 1,000 no-par ordinary shares for €15 per share.The shares have a stated value of €5 per share.When Hiro prepares the journal entry to record the issuance of the shares which of the following will be recorded?

A)Debit Share Capital-Ordinary €5,000.
B)Credit Share Capital-Ordinary €15,000.
C)Debit Share Premium-Ordinary €15,000.
D)Credit Share Premium-Ordinary €10,000

Question 75

Berry Corporation has 50,000 shares of $10 par ordinary shares authorized.The following transactions took place during 2010, the first year of the corporation's existence:
Sold 5,000 ordinary shares for $18 per share.
Issued 5,000 ordinary shares in exchange for a patent valued at $100,000.
At the end of the Berry's first year, total contributed capital amounted to

A)$40,000.
B)$90,000.
C)$100,000.
D)$190,000.

Question 76

Five years ago, Dunn Trading Co.issued 2,500 ordinary shares.The shares have a ₤2 par value and sold at that time for ₤12 per share.On January 1, 2012, Dunn Trading Co.Purchased 1,000 of these shares for ₤24 per share.On September 30, 2012, Dunn reissued 500 of the shares for ₤28 per share.The journal entry to record the reissuance will include

A)A debit to Treasury Shares ₤12,000.
B)A credit to Share Premium-Treasury ₤2,000.
C)A credit to Treasury Shares ₤14,000.
D)A credit to cash ₤14,000.

Question 77

Pember Corporation started business in 2005 by issuing 200,000 shares of $20 par ordinary shares for $36 each.In 2010, 20,000 of these shares were purchased for $52 per share by Pember Corporation and held as treasury shares.On June 15, 2011, these 20,000 shares were exchanged for a piece of property that had an assessed value of $810,000.Perber's shares are actively traded and had a fair price of $60 on June 15, 2011.The cost method is used to account for treasury shares.The amount of share premium-treasury resulting from the above events would be

A)$800,000.
B)$480,000.
C)$390,000.
D)$160,000.

Question 78

Presented below is the equity section of Oaks Corporation at December 31, 2010:

For the year ended December 31, 2011, Oaks reported net income of $450,000.Assuming Oaks accounts for treasury under the cost method, what should it report as total equity on its December 31, 2011, statement of financial position?

A)$1,965,000.
B)$1,961,400.
C)$1,957,800.
D)$1,515,000.

Question 79

Percy Corporation was organized on January 1, 2012, with an authorization of 1,200,000 ordinary shares with a par value of $6 per share.During 2012, the corporation had the following capital transactions:
January 5 issued 675,000 shares @ $10 per share
July 28 purchased 90,000 shares @ $11 per share
December 31 sold the 90,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares.What is the total amount of share premium as of December 31, 2012?

A)$-0-.
B)$2,070,000.
C)$2,700,000.
D)$3,330,000.

Question 80

Hiro Corp.issues 1,000 €5 par value ordinary shares and 1,000 €20 par value preference shares for a lump sum of €60,000.At the issue date, the ordinary shares were selling for €36 and the preference shares were selling for €28.How much is recorded in Hiro's statement of financial position for the preference shares?

A)€31,000
B)€36,000
C)€26,250
D)€28,750