Deck 3: Equities

Question 1

What does "priority" mean?

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

Answer 1

A

Question 2

If 1,000 preferred 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 may the preferred equity holders expect to receive?

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

Answer 2

B
Explanation: B) $50/share × 10% = $5/share × 1,000 shares = $5,000

Question 3

What is the primary difference between common and preferred shares?

Answer 3

The primary difference between common and preferred shares is that common shares represent the residual interest in the company while preferred shares do not.

Question 4

Outline the difference between cumulative and non-cumulative dividends.

Question 5

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

Question 6

Where is accumulated other comprehensive income reported and what does it represent?

Question 7

When is a corporation legally obligated (liable)to pay dividends?

Question 8

Golf Is for Nerds Inc.sells 20,000 no-par value common shares for $8.00 each on a subscription basis.Terms of the sale require the purchaser to pay $3.00 per share when the contract is signed and the balance in three months' time.
Required: Prepare the journal entries at (a)the date of signing the contract; (b)the date that the remaining payment is made; (c)the date the shares are transferred.

Question 9

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 10

Which of the following statements is correct?

A) Common shares have priority over preferred shares.
B) All issued shares are eligible to vote for the board of directors.
C) The number of shared issued > number outstanding > number authorized.
D) A share with cumulative dividends must be a preferred share.

Question 11

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

Question 12

Which statement about "common shares" is correct?

A) Common shares have the lowest claim to residual ownership interest 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 no claim to residual ownership interest of all shares.

Question 13

Briefly describe the difference between issued and outstanding shares.

Question 14

Briefly describe recycling as it pertains to other comprehensive income.

Question 15

Which of the following statements is correct?

A) Investors favor purchasing preferred shares.
B) All outstanding shares are eligible to vote for the board of directors.
C) The value of preferred shares can be higher or lower than that of common shares.
D) Common shares always have voting rights.

Question 16

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 17

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 18

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.

Question 19

Which statement is correct?

A) Dividends are never discretionary payments.
B) A corporation need only pay dividends when it declares them to be payable.
C) A company can avoid a cumulative dividend on preferred shares if it declares dividends on common shares.
D) Companies must pay the shareholders interest to compensate for the time value of money lost on the deferral of dividend payments.

Question 20

Supply Company Ltd.issues a $60 million bond due in 10 years,and the bond indenture specifies that the company must set aside $6 million per year in a sinking fund so that the company will have funds to repay the bondholders at the end of 10 years.Assuming that the company complies with the contractual requirements,what would the journal entry be for each of the next 10 years?

Question 21

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 22

Which is an example of "contributed capital"?

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

Question 23

If 700 preferred 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 may the preferred equity holders expect to receive?

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

Question 24

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 25

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 26

Briefly explain why equity is separated into contributed capital and accumulated income,and the latter is further separated into retained earnings and accumulated other comprehensive income (AOCI).

Question 27

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

Question 28

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 29

Which is an example of "contributed capital"?

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

If a company issues 2,000 shares for $55 and then repurchases 50 shares at $50,how much is in the account "contributed surplus on retirement of shares'?

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

Question 35

Practice Inc.issued a $10 million bond due in five years,and the bond indenture specifies that the company must set aside $2 million per year in a sinking fund so that the company will have funds to repay the bondholders at the end of 5 years.Assuming that the Practice Inc.complies with the contractual requirements,what would be the journal entries for each of the 5 years?

Question 36

Here is an extract of a trial balance for Masters Ltd.Indicate which item(s)are "assets."

Question 37

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 38

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.

Question 39

If a company issues 2,000 shares for $55 and then repurchases 50 shares at $50 and subsequently purchases another 50 shares at $60 each,how much is in the account "contributed surplus on retirement of shares"?

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

Question 40

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 41

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 42

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 43

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 44

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 45

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 46

Which statement about "share buyback" is correct?

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

Question 47

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 48

What is the economic 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 49

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 50

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 51

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 52

Which statement about a "share buyback" is correct?

A) The EPS of the company will decrease after a share buyback.
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 53

Which statement is correct respecting a company's repurchase of its own shares?

A) It can provide a tax advantage to the shareholder.
B) It provides a negative signal to the market.
C) It causes earnings per share to decrease.
D) Infers that corporate executives believe their company's shares to be overvalued.

Question 54

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 55

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 56

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 57

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 58

Which statement is correct respecting a company's repurchase of its own shares?

A) It provides a tax disadvantage to the shareholder.
B) It enables the company to acquire stock for distribution as compensation to employees.
C) It provides a negative signal to the market.
D) It causes earnings per share to decrease.

Question 59

Which statement about a "treasury shares" is correct?

A) No company is permitted to hold treasury shares.
B) Treasury shares have voting rights.
C) Treasury shares receive dividends.
D) There are two methods that can be used to account for treasury shares: the single-transaction method and the two-transaction method.

Question 60

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 61

Great-West Lifeco Inc.announced the following share issuances:
March 1,2017
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 9,2017
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 31,2017 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 62

Which statement is correct about the "two transaction method" for treasury shares resold for greater than their repurchase cost?

A) This method decreases the contributed surplus when the repurchased shares are later resold.
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 one cycle for accounting.
D) This method increases contributed surplus at the time of repurchase.

Question 63

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.1,2012: Company issues 1,500,000 no par common shares at $14 each.
• Jan.1,2018: 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 1,2018.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 1,2018 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 64

Elville Inc.was incorporated under provincial legislation with a December 31 year-end.The company has a single class of shares.As at December 31,2016,it had 900,000 shares issued and outstanding.These shares had a book value of $18,000,000 on the balance sheet.
During 2017,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.
Required:
Record the share transactions using the single-transaction method for treasury stock,which is the preferred accounting method.

Question 65

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 66

List and explain four reasons why a company might repurchase its own shares.

Question 67

Explain why accounting does not recognize gains on share repurchase transactions.

Question 68

Pixel Points Inc.has a single class of shares.As at its year ended December 31,2017,the company had 1,000,000 shares issued and outstanding.These shares have a book value of $5,000,000 on the balance sheet.
During 2018,Pixel Points repurchased 5% of the issued shares from one of the minority shareholders at a cost of $7 per share.The company held these shares in treasury and later found a buyer for half of these shares at $8 per share.The other shares were sold at $6 to another investor.
Required:
Assume the Pixel Points fallows the guidance in ASPE pertaining to accounting for equity transactions.Record the share transactions using the single-transaction method for treasury shares,which is the preferred accounting method.

Question 69

Dunst Company had the following shareholders' equity account balances on December 31,2017:
During 2018,the following transactions occurred:
Dunst uses the single transaction method for treasury shares.
Required:
a.Record the journal entries for the transactions in 2018 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 31,2018.

Question 70

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 repurchase.
C) This method treats the reacquisition and subsequent sale separately for accounting.
D) This method decreases contributed surplus at the time of repurchase.

Question 71

Pixel Points Inc.has a single class of shares.As at its year ended December 31,2017,the company had 1,000,000 shares issued and outstanding.These shares have a book value of $5,000,000 on the balance sheet.
During 2018,Pixel Points repurchased 5% of the issued shares from one of the minority shareholders at a cost of $7 per share.The company held these shares in treasury and later found a buyer for half of these shares at $8 per share.The other shares were sold at $6 to another investor.
Required:
Assume the Pixel Points fallows the guidance in ASPE pertaining to accounting for equity transactions.Record the share transactions using the two-transaction method for treasury shares.

Question 72

Which statement about a "treasury shares" is correct?

A) The "single transaction method" treats the reacquisition as the end of the initial share issuance transaction.
B) The "two transaction method" decreases the contributed surplus when the repurchased shares are later resold.
C) The "two transaction method" treats the reacquisition and subsequent sale as one cycle for accounting.
D) The "single transaction method" treats the reacquisition and subsequent sale as two parts of the same transaction.

Question 73

Briefly describe the primary reason why companies declare a stock split.

Question 74

Burlington Corp.has a single class of shares.As its year ended December 31,2017,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 15,2018,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.
Required:
Record the journal entries for the two share transactions in 2018.

Question 75

Ellwoods Bar and Grill Ltd.sells 1,000 packages of equity security consisting of one common share and one preferred share.Each package was sold for $100; total proceeds were $100,000.At time of sale,the market price of the common shares was $91.00 and the estimated fair value of the preferred shares was $10.00.Contrast the two alternative methods of accounting for this bundled purchase.(a)The company uses the relative fair value method and (b)the company uses the residual value method.Use the following table:

Question 76

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 77

What are three potential outcomes for defaults on share subscriptions?

Question 78

How should subscriptions receivable be reported on the balance sheet and why?

Question 79

Mountip Inc.was incorporated under provincial legislation with a December 31 year-end.The company has a single class of shares.As at December 31,2016,it had 150,000 shares issued and outstanding.These shares had a book value of $5,700,000 on the balance sheet.During 2017,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.
Required:
Record the share transactions using the alternative two-transaction method for treasury stock.

Question 80

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.