Deck 15: Companies: Effects on Retained Earnings, Share Splits and Buy-Backs, and the Income Statement

Question 1

If a company's share price is getting so high that the company thinks it might inhibit some investors from buying share, it should consider doing a share split.

Answer 1

True

Question 2

Which of the following would be included in the entry to record a 2- for- 1 share split?

A)Retained earnings would be credited.
B)Retained earnings would be debited.
C)Ordinary share capital would be credited.
D)There is no journal entry to record a share split.

Answer 2

D

Question 3

Cash dividends affect only shareholders' equity accounts.

Answer 3

False

Question 4

Preferred Products started business on 1 March 2013, and issued 100 000 ordinary shares at a price of $2 per share. One year later, the share price had soared to $12. If Preferred Products does a
3- for- 1 share split, the balance sheet will show that there are 200 000 shares issued.

Question 5

Preferred Products started business on 1 March 2013, and issued 100 000 ordinary shares at a price of $2 per share. One year later, the share price had soared to $12. If Preferred Products does a
3- for- 1 share split, the balance sheet will show ordinary shares with a book value of $0.67 per share.

Question 6

Which of the following occurs when a company distributes a share dividend?

A)Shareholders' equity increases.
B)Total assets decrease.
C)Shareholders' equity remains unchanged.
D)Total liabilities increase.

Question 7

On 1 March 2014, Parkinson Company originally issued 10 000 ordinary shares at $4.00 per share. On 1 March 2013, Parkinson distributed a 12% share dividend; the market price at that time had dropped to $3.75 per share. Parkinson must record a loss of $300.

Question 8

Which of the following occurs due to a 4- for- 1 share split?

A)The value of each ordinary share remains the same as before the split.
B)The value of each ordinary share is 25% of the value before the split.
C)The value of each ordinary share is 400% of the value before the split.
D)The value of each ordinary share is 200% of the value before the split.

Question 9

A share split is fundamentally the same transaction as a share dividend.

Question 10

Which of the following is NOT true of share dividends?

A)Share dividends increase dividends payable and reduce cash.
B)Share dividends affect only shareholder's equity accounts.
C)Share dividends have no effect on assets or liabilities.
D)Share dividends have no effect on total shareholders' equity.

Question 11

Which of the following will happen to a shareholder's percentage ownership in the share of a company when the company declares a share dividend?

A)The shareholder's percentage ownership increases.
B)The shareholder's percentage ownership stays the same.
C)The shareholder's percentage ownership can increase or decrease.
D)The shareholder's percentage ownership decreases.

Question 12

Which of the following is a reason why a company would do a share split?

A)To provide the shareholders with something of value, when the company cannot afford a cash dividend
B)To generate additional sales revenues
C)To defend against a hostile takeover
D)To reduce the market price at which the share is trading

Question 13

Which of the following statements is TRUE?

A)Neither a share dividend nor a share split will result in net gains or losses.
B)Both a share dividend and a share split reduce retained earnings.
C)A share split increases the market value of the share.
D)Both a share dividend and a share split increase the balance in the ordinary share account.

Question 14

The account to be debited when a share dividend is declared and distributed on the same date would be:

A)Retained earnings.
B)Cash.
C)Dividends.
D)Ordinary share capital.

Question 15

Share dividends are declared by the:

A)board of directors of the company.
B)chief executive officer of the company.
C)shareholders of the company.
D)chief financial officer of the company.

Question 16

A share split is an increase in the number of issued shares, coupled with a proportionate reduction in the market value of the shares.

Question 17

Share dividends are distributed to shareholders in proportion to the number of shares each shareholder already owns.

Question 18

The declaration of a share dividend creates a liability for the company.

Question 19

Share dividends have no effect on assets or liabilities.

Question 20

Which of the following would have the same effect on the number of shares issued and issued as a 2- for- 1 share split?

A)A 100% share dividend
B)A 200% share dividend
C)A 120% share dividend
D)A 20% share dividend

Question 21

Which of the following occurs when the board of directors declares a 2- for- 1 share split on 20 000 issued shares of $15 ordinary shares?

A)The market value of the share remains the same.
B)Issued shares decrease to 10 000.
C)The market value of the share increases to $30 per share.
D)Issued shares increase to 40 000.

Question 22

On 1 January 2013, Parquet Sales issued 40 000 ordinary shares at $1.00 per share. In mid- 2014, the board of directors approved a 2- for- 1 share split. After the share split, what will the balance sheet show as the number of shares issued?

A)60 000
B)40 000
C)80 000
D)44 000

Question 23

Which of the following does NOT require a formal journal entry?

A)Share split
B)Share dividend
C)Issue of new shares
D)Cash dividend

Question 24

A share buy- back requires a credit to the Ordinary share capital account.

Question 25

ABC has 45 000 shares of $10 ordinary shares issued. They offer a share split of 4- for- 1. The effect of the split will be:

A)market price goes to $40; total shares go to 180 000.
B)market price drops to $5; total shares stay at 45 000.
C)market price stays at $10; total shares go to 11 250.
D)market price drops to $2.50; total shares go to 180 000.

Question 26

Petra Sales Company has issued 200 000 ordinary shares for $4 per share. The directors decide to undertake a share buy- back of 10 000 shares at $5 per share. This will cause the number of shares issued to decrease by 10 000.

Question 27

Which of the following actions will increase the balance in the Ordinary share capital account?

A)Share dividend
B)Share buy- back
C)Share split
D)Cash dividend

Question 28

Petra Sales Company has issued 200 000 ordinary shares for $4 per share. The directors decide to undertake a share buy- back of 10 000 shares at $5 per share. This will have no overall effect on total Shareholders' equity

Question 29

Which of the following will decrease the amount of Total shareholders' equity?

A)Share split
B)Repayment of debenture principal
C)Share dividend
D)Cash dividend

Question 30

One of the reasons for a share buy- back is to avoid a hostile takeover by an outside party.

Question 31

Which of the following will decrease the balance in Retained earnings?

A)Purchase of non- current assets
B)Cash dividend
C)Share issue
D)Share split

Question 32

Apira has 2 ,000 shares of ordinary share issued. A shareholder has 100 shares. If Apira distributes a 20% share dividend, how many shares of Apira will the shareholder have?

A)20
B)100
C)105
D)120

Question 33

On 1 January 2013, Parquet Sales issued 40 000 ordinary shares at $1.00 per share. In mid- 2014, due to dramatic increases in profits, the share reached a market value of $20 per share. The board of directors approved a 2- for- 1 share split. After the share split, what will the market value of the share be?

A)$19.00 per share
B)$40.00 per share
C)$10.00 per share
D)$0.50 per share

Question 34

Which of the following will decrease the balance in Retained earnings?

A)Share issue
B)Repayment of debenture principal
C)Share split
D)Share dividend

Question 35

A 3- for- 1 share split will:

A)cut the market price by one- third and triple the number of issued shares.
B)triple the market price and drop the number of issued shares by one- third.
C)have no effect on the number of issued shares, but will affect market price.
D)have no effect on the market price, but will affect the number of issued shares.

Question 36

On 1 January 2013, Parquet Sales issued 40 000 ordinary shares at $1.00 per share. In mid- 2014, the board of directors approved a 2- for- 1 share split. After the share split, what will the balance sheet show as the new value of ordinary shares?

A)$0.50
B)$1.00
C)$1.50
D)$2.00

Question 37

Petra Sales Company has issued 200 000 ordinary shares for $4 per share. The directors decide to undertake a share buy- back of 10 000 shares at $5 per share. This will cause the Ordinary share capital to decrease by $40 000.

Question 38

Which of the following occurs when a 2- for- 1 share split is declared?

A)The balance in ordinary share capital is reduced to half the original amount.
B)The balance in ordinary share capital remains the same.
C)The balance in ordinary share capital doubles.
D)The balance in retained earnings doubles.

Question 39

Which of the following is a TRUE statement?

A)A share split will increase total assets, but a share dividend will not.
B)Neither a share split nor a share dividend will affect total assets or total liabilities.
C)Both a share split and a share dividend will decrease total assets.
D)Both a share split and a share dividend will increase total liabilities.

Question 40

Which of the following is a TRUE statement?

A)A share dividend will increase total shareholders' equity, but a share split will not.
B)A share split will increase total shareholders' equity, but a share dividend will not.
C)Neither a share split nor a share dividend will increase total shareholders' equity.
D)A share split will decrease retained earnings, but a share dividend will not.

Question 41

The entry to record an appropriation of retained earnings requires a debit to Retained earnings and a credit to Cash.

Question 42

Which of the following is a common reason for companies to buy back shares?

A)To make a profit on the retirement of shares.
B)To increase shareholders' equity.
C)To return surplus cash to shareholders when few profitable investment opportunities exist.
D)To reward the shareholders.

Question 43

Which of the following would be included in the entry to record a company's repurchase of 10 000 ordinary shares for $7.50 per share?

A)Retained earnings would be debited for $75 000.
B)Ordinary share capital would be debited for $75 000.
C)Cash would be debited for $75 000.
D)Ordinary share capital would be credited for $75 000.

Question 44

Which of the following BEST describes profit from continuing operations?

A)The gains and losses from transactions that are not part of the normal operations of the business
B)The profit or loss generated from the normal operations of the business
C)The profit or loss from segments of the business that have been sold or terminated
D)The profit or loss generated from unusual or infrequent events

Question 45

Certain types of transactions, other than dividend payments, that are NOT included in the income statement, but have an effect on retained earnings would be treated as part of comprehensive income.

Question 46

Prior period adjustments are shown as an adjustment to the beginning balance of Retained earnings.

Question 47

Which of the following BEST describes the appropriation of retained earnings?

A)Limiting company transactions in order to boost earnings and profits
B)Designating certain amounts of retained earnings for cash dividends to be paid out to shareholders
C)Earmarking certain amounts for specific business purposes, such as for growth or expansion projects
D)Restricting cash dividends or share buy- backs so that the company maintains adequate levels of equity

Question 48

If a company buys back shares, which of the following is TRUE?

A)The company can record a gain or loss on the buy- back.
B)Total equity will decrease.
C)Total equity will increase.
D)The number of issued shares will go up.

Question 49

Companies are NOT allowed to combine the income statement and the statement of comprehensive income, but must show them as two separate reports.

Question 50

Which of the following best describes discontinued operations on the income statement?

A)The gains and losses from transactions that are not part of the normal operations of the business
B)The profit or loss generated from unusual or infrequent events
C)The profit or loss from segments of the business that have been sold or terminated
D)The profit or loss generated from the normal operations of the business

Question 51

When an appropriation is no longer needed, the amount can be returned to Retained earnings.

Question 52

Which of the following statements is TRUE?

A)A share buy- back increases assets and decreases shareholders' equity.
B)A share buy- back decreases assets and decreases shareholders' equity.
C)A share buy- back increases assets and increases shareholders' equity.
D)A share buy- back decreases assets and increases shareholders' equity.

Question 53

Comprehensive income is equal to the profit for the period, excluding the effects of discontinued operations and extraordinary items.

Question 54

Comprehensive income is the company's change in total shareholders' equity from all sources other than its owners, and sometimes includes items not found on the income statement.

Question 55

An appropriation guarantees that cash will be available either for a specific or a general purpose in the future.

Question 56

Which of the following would be a reason for a company to appropriate a portion of retained earnings?

A)To limit the amount of retained earnings available for dividends, in order to retain sufficient funds for growth
B)To help the company control levels of operating expenses
C)To ensure that the business does not take on too much debt
D)To increase the amount of earnings available for dividends

Question 57

If a company wanted to put a limit on cash dividends to ensure they would have enough retained earnings for a specific project intended to expand and grow the company, the appropriation of a portion of retained earnings would be a good strategy.

Question 58

RT Company shows a loss from flooding of $235 000 for the year. This loss will be included in profit for the period.

Question 59

Public companies are required to publish financial statements, but partnerships are generally not required to do so.

Question 60

An appropriation decreases Retained earnings.

Question 61

Unrealised gains or losses on certain investments, foreign currency translation adjustments, gains and losses from superannuation, and deferred gains and losses from derivatives are subject to specialised accounting treatment. These items would normally be found on the:

A)statement of net cash flow.
B)balance sheet under liabilities.
C)statement of comprehensive income.
D)income statement, included with extraordinary items.

Question 62

Alexander Company reported the ending balance of Retained earnings as $400 000 on 31 December 2013. During the first month of 2014, they discovered an error in the ledger which had the effect of overstating profit in 2013 by $45 000. At the end of 2014, they included this item as a prior period adjustment. Year 2014 results included $52 000 of profit and $15 000 of dividends paid. What amount would be shown as the ending balance of Retained earnings on the 31 December 2014 financial statements?

A)$347 000
B)$437 000
C)$392 000
D)$430 000

Question 63

A company has net profit of $365 000 for the current year. It paid its required preference dividend of $17 500 and had no other share transactions during the year. The average number of ordinary shares issued during the year was 69 500. What is the earnings per share?

A)$5.25
B)$1.00
C)$4.37
D)$5.00

Question 64

A company closes a facility and moves to a new location. How would a loss on the disposal of the equipment at the closed facility be reported on an income statement?

A)As a component of discontinued operations
B)As a contra revenue from continuing operations
C)As an operating expense in net profit from continuing operations
D)As an extraordinary loss

Question 65

Which of the following items is NOT included in comprehensive income?

A)Foreign- currency conversion adjustments
B)Unrealised gains or losses on superannuation plans
C)Contingent liabilities
D)Net profit