Deck 15: Shareholders Equity

Question 1

The preemptive right enables a shareholder to

A)share proportionately in any new issues of shares in the same class.
B)receive cash dividends before other classes of shares without the preemptive right.
C)sell shares back to the corporation at the option of the shareholder.
D)receive the same amount of dividends on a percentage basis as the preferred shareholders.

Answer 1

A

Question 2

The residual interest in a corporation belongs to the

A)management.
B)creditors.
C)common shareholders.
D)preferred shareholders.

Answer 2

C

Question 3

Subscriptions Receivable are reported as

A)a non-current asset.
B)a current asset.
C)a deduction from shareholders' equity.
D)either a current asset or a deduction from shareholders' equity.

Answer 3

D

Question 4

Aye Corp.sells common shares on a subscription basis.The Common Shares account should be credited when the

A)shares are subscribed for.
B)first payment is made.
C)last payment is made.
D)last payment is made and the shares are issued.

Question 5

Preferred shares are often issued instead of debt

A)to avoid paying dividends to the common shareholders.
B)because a corporation's debt-to-equity ratio has become too high.
C)to increase the market value of the shares.
D)to decrease the market value of the shares.

Question 6

Dividends on cumulative preferred shares

A)must be paid each year.
B)accumulate over the life of the shares and are paid on retirement.
C)must be paid before dividends may be paid on common shares.
D)if in arrears, must be calculated like compound interest.

Question 7

A possible result of the reacquisition and cancellation of shares by a corporation is that this may

A)directly increase but not decrease retained earnings.
B)increase net income if a gain is recognized.
C)directly decrease but not increase retained earnings.
D)decrease but not increase net income.

Question 8

Total shareholders' equity represents

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

Question 9

When shares are purchased or redeemed and cancelled, guidelines have been established for the sequence of accounts to adjust when allocating the cost.Which of the following is the first account to be adjusted?

A)a Contributed Surplus account created from a previous reacquisition of the same class of shares
B)the Share Capital account
C)Retained Earnings
D)Accumulated Other Comprehensive Income

Question 10

The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the classes of securities.One acceptable method of allocation is the

A)pro forma method.
B)relative fair value method.
C)direct method.
D)indirect method.

Question 11

According to the CBCA, when a company purchases its own shares on the market

A)they are recorded with a debit to Repurchased Shares.
B)the amount paid is deducted from the share class to which they belong.
C)they must be cancelled.
D)the excess of purchase price over cost is a loss.

Question 12

When shares are reacquired at a cost less than the average per share value, the difference is credited to

A)the appropriate share capital account.
B)Gain on Reacquisition of Shares.
C)Retained Earnings.
D)Contributed Surplus.

Question 13

The cumulative feature of preferred shares

A)limits the amount of cumulative dividends to the par value of the preferred shares.
B)requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
C)means that the shareholder can accumulate preferred shares until they are equal to the stated value of common shares, at which time they can be converted into common shares.
D)enables a preferred shareholder to accumulate dividends until they equal the stated value of the shares and receive the shares in place of the cash dividends.

Question 14

When all outstanding preferred shares are purchased and retired by the issuing corporation for less than the original issue price, accounting for the retirement increases

A)the amount of dividends available to common shareholders.
B)the contributed capital of the common shareholders.
C)reported income for the period.
D)Accumulated Other Comprehensive Income.

Question 15

In jurisdictions where par value shares are legally allowed, the only real significance of par value is

A)to enable the shares to be callable or convertible.
B)to require the corporation to pay dividends.
C)to establish the maximum responsibility of a shareholder in the event of insolvency.
D)to establish the maximum price at which the shares can be sold.

Question 16

Which statement is correct regarding real estate income or investment trusts?

A)They are often set up as unlimited purpose trust funds.
B)They are considered to be special purpose entities.
C)The unitholders (investors)do not pay tax on the cash received from the trust.
D)The unitholders have unlimited liability.

Question 17

Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as

A)a reduction of share capital.
B)an expense of the period in which the shares are issued.
C)an intangible asset.
D)a reduction of retained earnings.

Question 18

Callable preferred shares

A)may be redeemed at any time at the shareholder's option.
B)may be called or redeemed at the option of the issuing corporation.
C)usually have voting rights.
D)have rights to participate in any new share issuance.

Question 19

The liability of shareholders is

A)similar to the liability of the owners of a partnership.
B)similar to the liability of the owner of a proprietorship.
C)equal to an amount sufficient to satisfy all creditors.
D)limited to their property or service invested in the corporation.

Question 20

Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s)should be debited?

A)the share account for the total cost
B)the share account for the original issue price and contributed surplus for the additional amount
C)the share account for the average per share amount and retained earnings for the additional amount
D)the share account for the average per share amount and a loss account for the additional amount

Question 21

If a corporation wishes to "capitalize" part of their earnings, it may issue a

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

Question 22

The balance in the Common Stock Dividend Distributable account should be reported as a(n)

A)deduction from the Common Shares account.
B)addition to contributed capital.
C)current liability.
D)contra-asset.

Question 23

A feature common to both stock splits and stock dividends is

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

Question 24

Which of the following transactions would NOT result in an increase to retained earnings?

A)correction of an error in which expenses were overstated in a previous year
B)issuance of a 3-for-1 stock split
C)reacquisition of shares for less than the original issue price
D)earning of net income for the period

Question 25

Which type of dividends do NOT reduce total shareholders' equity?

A)cash dividends
B)stock dividends
C)property dividends
D)liquidating dividends

Question 26

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

A)Retained Earnings.
B)Contributed Capital.
C)Accumulated Other Comprehensive Income.
D)Dividend Payable.

Question 27

As a minimum, how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a large stock dividend instead of as a small stock dividend?

A)no less than 2% to 5%
B)no less than 10% to 15%
C)no less than 20% to 25%
D)no less than 45% to 50%

Question 28

Jesse Corp.owns 4,000,000 shares of James Corp.On December 31, 2017, Jesse distributed these shares as a dividend to its shareholders.This is an example of a

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

Question 29

The declaration and issuance of a stock dividend larger than 25% generally

A)increases common shares outstanding and increases total shareholders' equity.
B)increases retained earnings and increases total shareholders' equity.
C)may increase or decrease common shares but does not change total shareholders' equity.
D)decreases retained earnings but does not change total shareholders' equity.

Question 30

Which of the following statements about property dividends is FALSE?

A)A property dividend is a nonreciprocal transfer of nonmonetary assets.
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)The accounting for a property dividend should be based on the fair value of the nonmonetary assets transferred.

Question 31

Which of the following statements is NOT generally true about the legality of dividend distributions?

A)No amounts may be distributed unless the corporate capital is left intact.
B)The corporation must still be able to pay its liabilities when they become due.
C)A corporation may not pay dividends that are higher than their legally available retained earnings.
D)Dividends do not need to be formally approved by the Board of Directors.

Question 32

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

Question 33

Declaration and issuance of a stock dividend

A)has no effect on total assets, liabilities, or shareholders' equity.
B)decreases the amount of working capital.
C)decreases total shareholders' equity.
D)increases the current ratio.

Question 34

An entry for dividends is NOT made on the

A)date of declaration.
B)date of record.
C)date of payment (cash dividends).
D)date of distribution (stock dividends).

Question 35

Which of the following transactions would NOT result in a decrease to retained earnings?

A)declaration and issuance of a stock dividend
B)incurrence of a net loss for the period
C)reacquisition of shares for less than the original issue price
D)correction of an error in which depreciation expense was understated in a prior period

Question 36

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 37

Pryor Corporation issued a 2-for-1 common stock split.The shares had been originally issued at $10 per share.At what amount should retained earnings be capitalized for the additional shares issued?

A)There should be no capitalization of retained earnings.
B)$10 per share
C)market value on the declaration date
D)market value on the payment date

Question 38

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

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

Question 39

The fair value of a property dividend should NOT be determined by

A)estimated realizable values in cash transactions involving similar assets.
B)quoted market prices.
C)independent appraisals.
D)arbitrary values assigned by the Board of Directors.

Question 40

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

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

Question 41

How would the declaration of a 15% stock dividend affect each of the following?

Question 42

The rate of return on common shareholders' equity shows

A)the amount of leverage the corporation employs.
B)the amount that each common shareholder would receive if the company were liquidated.
C)how many dollars of net income were earned for each dollar invested by the owners.
D)how the market value of the shares relates to the current earnings per share.

Question 43

Aye Corp.was organized in January 2017 with authorized capital of 1,000,000 no par value common shares.On February 1, 2017, shares were issued at $10 per share.On March 1, 2017, the corporation's lawyer accepted 7,000 common shares with a fair value of $85,000 in settlement for legal services.Total shareholders' equity would increase on

Question 44

How would total shareholders' equity be affected by the declaration of each of the following?

Question 45

Dividends are NOT paid on

A)noncumulative preferred shares.
B)non-participating preferred shares.
C)treasury shares.
D)non-voting common shares.

Question 46

Under IFRS, the Statement of Changes in Shareholders' Equity must include

A)share capital and retained earnings only.
B)share capital and contributed surplus only.
C)share capital, accumulated other comprehensive income, contributed surplus, and retained earnings.
D)retained earnings, share capital, and accumulated other comprehensive income.

Question 47

On December 1, 2017, Dee Ltd.agreed to sell 40,000 of their no par common shares on a subscription basis.On that day, 25% of the subscription price was collected as a down payment, with the remaining 75% due in 2018.On the December 31, 2017 statement of financial position, the shareholders' equity section would report

A)common shares issued for 25% of the subscription price.
B)common shares issued for 100% of the subscription price less a subscription receivable for 75% of the subscription price.
C)common shares subscribed for 75% of the subscription price.
D)common shares subscribed for 100% of the subscription price less a subscription receivable for 100% of the subscription price.

Question 48

How should cumulative preferred dividends in arrears be shown on the balance sheet?

A)as an increase in shareholders' equity
B)as an increase in current liabilities
C)as an increase in current liabilities for the amount expected to be declared within the next year, and as an increase in long-term liabilities for the balance
D)by note disclosure only

Question 49

An investment in marketable securities was distributed to shareholders as a property dividend.The dividend should be recorded at the

A)fair value of the asset transferred or the book value of the asset transferred, whichever is higher.
B)fair value of the asset transferred or the book value of the asset transferred, whichever is lower.
C)fair value of the asset transferred.
D)book value of the asset transferred.

Question 50

A "gain" on the sale of treasury shares should be credited to

A)contributed surplus.
B)the share capital account.
C)retained earnings.
D)other income.

Question 51

The price earnings (P/E)ratio is calculated by

A)dividing dividends per share by earnings per share.
B)dividing the market price of the share by earnings per share.
C)dividing net income by cash dividends per share.
D)dividing cash dividends paid by the market price per share.

Question 52

Which of the following is NOT a valid reason for a stock split?

A)to increase the shareholder base by increasing the number of shares outstanding and making them more marketable
B)to reduce the market price of the shares so that more individuals can afford to invest in the shares
C)to increase the market price of the shares to make the stock more attractive
D)to reduce the market price of the shares to make the stock more attractive

Question 53

The dollar amount of a cash dividend to be paid is determined on the date of

A)record.
B)declaration.
C)declaration or date of record, whichever is earlier.
D)payment.

Question 54

Emily Corp.owned shares in Carr Ltd.On December 1, 2017, Emily declared and distributed a property dividend of Carr shares when their fair value exceeded the carrying amount.As a consequence of the dividend declaration and distribution, the accounting effects would be

Question 55

Hamilton Ltd.has both common shares and non-participating, noncumulative preferred shares outstanding.The book value per common share is NOT affected by

A)the declaration of a preferred stock dividend.
B)the declaration of a common stock dividend when the market price of the common is equal to its issue price.
C)a 2-for-1 split of the common shares.
D)the payment of a previously declared cash dividend on the common shares.

Question 56

A corporation declared a dividend, a portion of which was liquidating.How would this distribution affect each of the following?

Question 57

On May 1, 2017, when the market value of Jay Ltd.'s common shares was $15 per share, the corporation had 100,000 no par value common shares issued and outstanding.On this day, Jay declared and issued a 15% common stock dividend.As a result of this stock dividend, Jay's total shareholders' equity

A)increased by $225,000.
B)decreased by $225,000.
C)decreased by $15,000.
D)did not change.

Question 58

Shareholders' equity is generally classified into two major categories:

A)contributed capital and donated capital.
B)contributed surplus and retained earnings.
C)retained earnings and accumulated other comprehensive income.
D)earned capital and contributed capital.

Question 59

The payout ratio can be calculated by

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

Question 60

Noncumulative preferred dividends in arrears

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

Question 61

Scrooge Ltd.owns 100,000 shares of Marley Ltd.common shares, which are being accounting for by the equity method.On December 15, 2017, when Scrooge's "Investment in Common Shares of Marley Ltd." account has a carrying value of $5 per share, Scrooge declares all these shares to its shareholders as a property dividend, to be distributed on December 31, 2017.Scrooge had originally paid $8 for each share.Marley has 1,000,000 shares issued and outstanding, for which the quoted market price was $7 per share on the declaration date and $9 per share on the distribution date.Ignoring income taxes, what would be the reduction in Scrooge's shareholders' equity as a result of the above transactions?

A)$500,000
B)$700,000
C)$800,000
D)$900,000

Question 62

Common shares issued would exceed common shares outstanding as a result of the

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

Question 63

Use the following information to answer questions
Prague Corp.is authorized to issue 400,000 no par value common shares.Subscribers agree to purchase shares at $15 per share with a 30% down payment.
The journal entry to record the issuance of the shares upon receipt of the final instalment includes a

A)debit to Common Shares Subscribed for $750,000.
B)credit to Common Shares for $525,000.
C)credit to Common Shares for $225,000.
D)debit to Subscriptions Receivable for $525,000.

Question 64

Which of the following statements is correct?

A)IFRS gives specific guidance for reacquisition of shares.
B)IFRS does not give explicit guidance for accounting for financial reorganizations.
C)IFRS requires that changes in retained earnings are presented in a retained earnings statement, and that changes in capital accounts are given in the notes.
D)ASPE does not give guidelines for accounting for financial reorganizations.

Question 65

At its date of incorporation, Emm Inc.sold 100,000 of its $10 par common shares at $11 per share.During the current year, Emm acquired 20,000 of these common shares at $16 per share to hold as treasury shares.Subsequently, these shares were sold at $12 per share.Emm has had no other sales or acquisitions of its common shares.What effect does the sale of the treasury shares have on the following accounts?

Question 66

On June 30, 2017, when Vienna Inc.'s shares were selling at $65 per share, its capital accounts were as follows: If a 5% stock dividend were declared and distributed, the Common Shares account balance would be

A)$2,205,000.
B)$2,400,000.
C)$2,595,000.
D)$3,600,000.

Question 67

Which statement is FALSE regarding financial reorganizations?

A)The proposed reorganization should receive the approval of the corporation's shareholders before it is put into effect.
B)The new asset and liability valuations should be fair.
C)Subsequent to the financial reorganization, no disclosures are required in subsequent periods.
D)After the reorganization, the corporation must have a zero balance in the Retained Earnings account.

Question 68

Presented below is information related to Madrid Corporation: The total amount that will be added to the Common Shares account when the final subscriptions are received will be

A)$120,000.
B)$240,000.
C)$360,000.
D)cannot be determined from the information given.

Question 69

An acceptable method of reporting Treasury Shares in the balance sheet is

A)as a contra to contributed surplus.
B)as a contra to the share capital account.
C)as an account with a debit balance after retained earnings.
D)as a current asset.

Question 70

Gupta Corp.purchased its own shares on January 1, 2017 for $20,000 and debited Treasury Shares 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 debit to

A)Contributed Surplus to the extent that previous net "gains" from sales or retirements of the same class of shares are included therein; otherwise, to retained earnings.
B)Contributed Surplus regardless of whether there have been previous net "gains" from sales or retirements of the same class of shares included therein.
C)Retained Earnings.
D)Loss from Sale of Treasury Shares.

Question 71

Which of the following statements is FALSE concerning the requirements that must be fulfilled under a financial reorganization?

A)The corporation's shareholders must approve the financial reorganization.
B)Immediately after the financial reorganization, the corporation must have a credit balance in retained earnings.
C)New asset valuations should not deliberately over- or understate assets or liabilities.
D)The corporation may have additional contributed surplus arising from the financial reorganization.

Question 72

Berlin Corporation was organized on January 1, 2017, with 400,000 no par value common shares authorized.During 2017, the corporation had the following share transactions:
Jan 5 Issued 150,000 shares at $10 per share
Apr 6 Issued 50,000 shares at $12 per share
Jun 8 Issued 50,000 shares at $14 per share
Jul 28 Purchased 20,000 shares at $11 per share and cancelled them
Dec 31 Issued 20,000 shares at $18 per share
What is the total amount of contributed surplus at December 31, 2017?

A)$ 0
B)$ 4,000
C)$ 20,000
D)$220,000

Question 73

Use the following information to answer questions
Berne Ltd.was organized on January 1, 2017, with 300,000 no par value common shares authorized.During 2017, the corporation had the following share transactions:
The total amount of contributed surplus at December 31, 2017 is

A)$ 0.
B)$ 26,250.
C)$153,750.
D)$180,000.

Question 74

Immediately after a financial reorganization, the retained earnings account

A)has a zero balance.
B)remains the same as it was before the financial reorganization.
C)is frozen and dated, and subsequent transactions will be shown separately.
D)has a debit balance equal to the write down of the assets which were overstated.

Question 75

Use the following information to answer questions
Berne Ltd.was organized on January 1, 2017, with 300,000 no par value common shares authorized.During 2017, the corporation had the following share transactions:
The total amount in the Common Shares account at December 31, 2017 is

A)$2,170,000.
B)$2,016,250.
C)$2,007,250.
D)$1,990,000.

Question 76

The reacquisition of issued and outstanding shares will cause the number of shares outstanding to decrease if they are accounted for

Question 77

Rome Corp.was organized on January 1, 2017, with the following authorized share capital:
20,000 common shares, no par value
6,000, $.05, cumulative preferred shares, no par value
During 2017, the corporation issued 10,000 common shares for $350,000 and 5,000 preferred shares at $24 per share.On December 20, 2017, subscriptions for 1,000 preferred shares were taken at a purchase price of $30.These subscribed shares were paid for on January 2, 2018.What should Rome report as total contributed capital on its December 31, 2017, balance sheet?

A)$440,000
B)$450,000
C)$470,000
D)$500,000

Question 78

For a two-year period following a properly implemented financial reorganization, Grant Corporation operated profitably and paid dividends equal to 10% of its net income in each year.How could one determine that the financial reorganization had occurred?

A)could not unless comparative statements of financial position were presented
B)from the shareholders' equity section
C)by the conservative dividend policy
D)from the disclosure of the reorganization in the notes to the financial statements

Question 79

Lisbon Corp.has 1,000,000 no par common shares authorized, of which 800,000 shares are outstanding.The average carrying value of the shares is $5 per share.When the market value was $10 per share, Lisbon declared a 10% stock dividend.What entry, if any, should Lisbon make to record this dividend declaration?

Question 80

Use the following information to answer questions
Prague Corp.is authorized to issue 400,000 no par value common shares.Subscribers agree to purchase shares at $15 per share with a 30% down payment.
Assume that subscribers agree to purchase 50,000 shares and make the required down payment.The journal entry to record receipt of the subscriptions includes a

A)debit to Common Shares Subscribed for $750,000.
B)credit to Common Shares Subscribed for $750,000.
C)credit to Common Shares for $225,000.
D)credit to Subscriptions Receivable for $525,000.