Question 1

Peterson Company is issuing 4 000 ordinary shares, payable by instalments. Investors must pay $10 per share on application, $5 per share on allotment, and there will be a final call of $2 payable at a later date to be determined by directors. The journal entry to record the final call by directors will include:

Accepted Answer

A) a credit to Cash. 
B) a debit to Application. 
C) a debit to Trust bank account. 
D) a credit to Ordinary share capital.

Question 2

Deferred tax can either be an asset or a liability.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following types of shares are considered to be LEAST risky for investors?

Accepted Answer

A) Ordinary shares 
B) Par value shares 
C) Preference shares 
D) No par shares

Question 4

On 1 November 2014, Oster Company declared a dividend of $3.00 per share. Oster Company has 20 000 ordinary shares outstanding and no preference shares. Which of the following is the journal entry needed to record the declaration of dividends?

Accepted Answer

A) Debit Retained earnings $60 000 and credit Dividends payable $60 000. 
B) Debit Cash $60 000 and credit Dividends payable $60 000. 
C) Debit Retained earnings $60 000 and credit Cash $60 000. 
D) Debit Dividends payable $60 000 and credit Retained earnings $60 000.

Question 5

Osbourne Company issued 50 000 shares of ordinary shares in exchange for manufacturing equipment. The equipment was valued at $1 000 000. The shares have a value of $18 per share. The entry to record this transaction would include which of the following line items?

Accepted Answer

A) Credit Ordinary share capital $1 000 000 
B) Credit Gain on sale of ordinary shares $100 000 
C) Debit Cash $100 000 
D) Credit Ordinary share capital $900 000

Question 6

Onyx Company's income statement shows net profit before income tax of $38 000. The company's tax return shows taxable income of $34 000. Company's tax rate is 30%. Which of the following entries would be used to record tax expense and tax payable?

Accepted Answer

A) Debit Income tax expense $11 400, credit Deferred tax liability $1 200 and credit Income tax payable $10 200. 
B) Debit Deferred tax liability $10 200 and credit Income tax payable $10 200. 
C) Debit Deferred tax liability $1 200, debit Income tax expense $10 200 and credit Income tax payable $11 400. 
D) Debit Income tax expense $10 200 and credit Cash $10 200.

Question 7

Which of the following shows the relationship between net profit available to ordinary shareholders and average ordinary equity?

Accepted Answer

A) Inventory turnover 
B) The rate of return on ordinary shareholders' equity 
C) The rate of return on total assets 
D) Profit

Question 8

Retained earnings represents:

Accepted Answer

A) the accumulated profits of the company less dividends paid out. 
B) a liability on the company balance sheet. 
C) the assets of the company less the liabilities. 
D) capital contributed by the shareholders of a company.

Question 9

Which of the following occurs when a shareholder invests cash in a company in exchange for shares?

Accepted Answer

A) Both assets and liabilities are increased. 
B) Both assets and shareholders' equity are increased. 
C) One asset is increased and another asset is decreased. 
D) Both liabilities and shareholders' equity are increased.

Question 10

Which of the following is an advantage of preference shares?

Accepted Answer

A) In the event of liquidation, preference shareholders have first claim on remaining company assets. 
B) In the event of liquidation, preference shareholders may retain their proportionate share of voting rights. 
C) In the event of liquidation, preference shareholders may sell their shares for higher amounts than ordinary shares. 
D) In the event of liquidation, preference shareholders are guaranteed to get their investment back in full.

Question 11

Normally, a company's book profit and taxable income should be the same.

Accepted Answer

A) True 
 B)False

Question 12

On 1 November 2014, Oster Company declared a dividend of $3.00 per share. Oster Company has 20 000 shares of ordinary shares outstanding and no preference shares. The date of record is 15 November, and the payment date is 30 November 2014. Which of the following is the journal entry needed on 30 November?

Accepted Answer

A) Debit Dividends payable $60 000 and credit Cash $60 000. 
B) Debit Cash $60 000 and credit Dividends payable $60 000. 
C) Debit Retained earnings $60 000 and credit Cash $60 000. 
D) Debit Retained earnings $60 000 and credit Dividends payable $60 000.

Question 13

Occidental Produce Company has 40 000 shares of ordinary shares outstanding and 2 000 shares of preference shares outstanding. The preference shares pay annual dividends of $4 each. On 15 October 2014, the company declares a total dividend payment of $40 000. What is the amount of dividend which will be paid for each share of ordinary shares?

Accepted Answer

A) $4.00 
B) $1.00 
C) $0.80 
D) $400.00

Question 14

Which of the following is an advantage of preference shares?

Accepted Answer

A) Preference shareholders are guaranteed that they will not take a loss on their investment. 
B) Preference shareholders generally receive a fixed amount of dividends before ordinary shareholders do. 
C) Preference shareholders have higher voting rights than ordinary shareholders. 
D) Preference shareholders may sell their shares for a price higher than that of ordinary shares.

Question 15

A company has 15 000 cumulative preference shares outstanding and 25 000 shares of ordinary shares outstanding. The preference shares pay an annual dividend of $5 each. Dividends of $37 500 are in arrears. At the end of the current year, the company declares a dividend of $120 000. How is the dividend allocated between preference and ordinary shareholders?

Accepted Answer

A) The dividend is allocated $112 500 to preference shareholders and $7 500 to ordinary shareholders. 
B) The dividend is allocated $75 000 to preference shareholders and $45 000 to ordinary shareholders. 
C) The dividend is allocated $7 500 to preference shareholders and $112 500 to ordinary shareholders. 
D) The dividend is allocated $120 000 to preference shareholders and $0 to ordinary shareholders.

Question 16

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. The second of the year- end closing entries should include which of the following line items?

Accepted Answer

A) Debit Income summary $125 000. 
B) Debit Retained earnings $125 000. 
C) Credit Income summary $125 000. 
D) Credit Retained earnings $125 000.

Question 17

A disadvantage of the company is the separation between the owners of the company (the shareholders)and the managers of the company, which can sometimes result in a conflict of interests.

Accepted Answer

A) True 
 B)False

Question 18

Hot Tamale Company had $120 000 of revenues and $113 000 of expenses. No dividends were paid. These factors will result in which of the following?

Accepted Answer

A) Share capital will go up. 
B) Retained earnings will go down. 
C) Share capital will go down. 
D) Retained earnings will go up.

Question 19

Which of the following statements describes the company characteristic termed limited liability?

Accepted Answer

A) Companies pay income tax on company earnings, and shareholders pay personal income tax on company dividends and gains from sale of shares. 
B) The liabilities of the company cannot be extended to the personal assets of the shareholder. 
C) Shareholders are not authorised to sign contracts or make business commitments on behalf of the company. 
D) Company shares can be readily bought and sold by investors on the open market.

Question 20

Companies must issue ordinary shares, but may or may not decide to issue preference shares.

Accepted Answer

A) True 
 B)False

Exam 24: Appendix

Deferred tax can either be an asset or a liability.

Which of the following types of shares are considered to be LEAST risky for investors?

On 1 November 2014, Oster Company declared a dividend of $3.00 per share. Oster Company has 20 000 ordinary shares outstanding and no preference shares. Which of the following is the journal entry needed to record the declaration of dividends?

Osbourne Company issued 50 000 shares of ordinary shares in exchange for manufacturing equipment. The equipment was valued at $1 000 000. The shares have a value of $18 per share. The entry to record this transaction would include which of the following line items?

Onyx Company's income statement shows net profit before income tax of $38 000. The company's tax return shows taxable income of $34 000. Company's tax rate is 30%. Which of the following entries would be used to record tax expense and tax payable?

Which of the following shows the relationship between net profit available to ordinary shareholders and average ordinary equity?

Retained earnings represents:

Which of the following occurs when a shareholder invests cash in a company in exchange for shares?

Which of the following is an advantage of preference shares?

Normally, a company's book profit and taxable income should be the same.

Which of the following is an advantage of preference shares?

Hot Tamale Company had $120 000 of revenues and $125 000 of expenses. No dividends were paid. The second of the year- end closing entries should include which of the following line items?

A disadvantage of the company is the separation between the owners of the company (the shareholders)and the managers of the company, which can sometimes result in a conflict of interests.

Hot Tamale Company had $120 000 of revenues and $113 000 of expenses. No dividends were paid. These factors will result in which of the following?

Which of the following statements describes the company characteristic termed limited liability?

Companies must issue ordinary shares, but may or may not decide to issue preference shares.