Deck 3: Equities

Question 1

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.

Answer 1

D

Question 2

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.

Answer 2

B

Question 3

Briefly describe recycling as it pertains to other comprehensive income.

Answer 3

Recycling of OCI refers to the process of recognizing amounts through OCI, accumulating that OCI in reserves, and later recognizing those amounts through net income and retained earnings.

Question 4

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 5

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 6

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 7

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

Question 8

What is the primary difference between common and preferred shares?

Question 9

Which is an example of "contributed capital"?

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

Question 10

Outline the difference between cumulative and non-cumulative dividends.

Question 11

Briefly describe the difference between issued and outstanding shares.

Question 12

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

Question 13

If 700 preferred shares with a benchmark 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 14

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.

Question 15

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

Question 16

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 17

If 1,000 preferred shares with a benchmark 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

Question 18

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

Question 19

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 20

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 21

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 22

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 23

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

Question 24

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 25

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 26

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 27

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 28

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 29

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 30

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 31

Which is an example of "contributed capital"?

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

Question 32

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 33

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 34

In which account would "transactions with non-owners" be reported?

A)Appropriated reserves.
B)Common shares.
C)Contributed surplus.
D)Preferred shares.

Question 35

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 36

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 37

What kind of transaction is "appropriated reserves"?

A)An example of preferred shares.
B)An example of a transaction with owners.
C)An example of "retained earnings."
D)An example of a"other comprehensive income."

Question 38

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 39

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 40

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 41

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 42

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 43

Which statement about cash dividends is correct?

A)The date of declaration is the date that determines which shareholders will receive the dividends.
B)The date of declaration is the date on which the Board of Directors declares a dividend and the company has an obligation to pay the dividend.
C)The date of record is the date when the funds for the dividend are transferred to shareholders.
D)The company must record a journal entry on the date of declaration, the date of record and the date of payment.

Question 44

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 45

Contrast the different treatment between IFRS and ASPE with respect to property dividends.

Question 46

What needs to be reconciled in each of the components of the statement of changes in equity?

Question 47

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

Question 48

When does a company record dividends payable?

A)On date of record.
B)On ex-dividend date.
C)On payment date.
D)On declaration date.

Question 49

Which of the following statements is correct?

A)Only a memo entry is needed for stock dividends transactions.
B)The date of record of cash dividends is the date when the funds for the dividend are transferred to shareholders
C)The ex-dividend date relates only to shares that are publicly traded.
D)A company will record dividends payable on the ex-dividend date.

Question 50

Which statement is correct concerning property dividends?

A)Issuing property dividends is a common method of distributing value to the shareholders.
B)A property dividend could be used to transfer assets from a subsidiary to a parent company.
C)Property dividends cannot be used by a parent company to distribute shares of an associate or subsidiary to its shareholders.
D)The historical value of the property is used for purposes of recording the value of the dividend.

Question 51

IAS 1, Presentation of Financial Statements, stipulates that a complete set of financial statements includes a statement of changes in equity for the period. The statement of changes in equity provides information about the changes that took place during the period in all equity accounts. List the four equity accounts.

Question 52

Which statement is correct regarding dividend entitlement?

A)Cumulative preferred shares do not have any rights to missed dividend payments.
B)Non-cumulative preferred shares must be paid all missed dividend payments when dividends are declared.
C)A corporation need only pay dividends when it declares them to be payable.
D)A company can avoid paying dividends in arrears on cumulative preferred shares if it is to pay dividends on common shares.

Question 53

What are three potential outcomes for defaults on share subscriptions?

Question 54

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

Question 55

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

Question 56

What is the "ex-dividend" date for the Toronto Stock Exchange?

A)2 business days after the declaration date.
B)2 business days after the date of record.
C)2 business days before the date of record.
D)2 business days before the declaration date.

Question 57

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

Question 58

Which statement about the "ex-dividend date" is correct?

A)The ex-dividend date relates only to shares that are publicly traded.
B)An investor who buys shares before the ex-dividend date does not have the right to receive a dividend that has been declared.
C)The ex-dividend date will occur after the record date.
D)An investor who buys shares on or after the ex-dividend date has the right to receive a dividend that has been declared.

Question 59

Burlington Corp. has a single class of shares. As its year ended December 31, 2020, 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, 2021, 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 2021.

Question 60

Which statement about "stock dividends" is correct?

A)Only a memo entry is needed for this transaction.
B)No entry is needed in the accounting records.
C)A journal entry is needed for this transaction.
D)This is the same as a stock split for accounting purposes.

Question 61

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 62

The following is an extract from the balance sheet as at December 31, 2020: The company did not declare dividends on preferred shares in 2019. Transactions in 2020 include the following:
i. March 15: Hewitt purchased 15,000 preferred shares on the stock exchange for $5.25 per share and held these in treasury.
ii. March 28: The company redeemed 5,000 preferred shares directly from shareholders.
iii. July 1: The market price of common shares shot up to $5 per share, so Hewitt decided to split the common shares two to one.
iv. August 1: Hewitt cancelled 14,000 preferred shares that were held in treasury.
v. December 31: The company declared dividends of $0.40 per common share.
Required:
Prepare the journal entries to record the above transactions. The company uses the single-transaction method to account for treasury shares.

Question 63

Pixel Points Inc. has a single class of shares. As at its year ended December 31, 2020, 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 2021, 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 64

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 65

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 66

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, 2019, it had 150,000 shares issued and outstanding. These shares had a book value of $5,700,000 on the balance sheet. During 2020, 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 67

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 68

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.

Question 69

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, 2019: Company issues 1,500,000 no par common shares at $14 each.
• Jan. 1, 2021: 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, 2021. 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, 2021 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 70

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 71

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 72

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 73

Dunst Company had the following shareholders' equity account balances on December 31, 2020: During 2021, the following transactions occurred:
i. May 1: Dunst resold 1,600 of the treasury shares at $52 per share.
ii. Dec. 30: The board of directors declared cash dividends of $2 per share.
iii. Dec. 31: Net income for the year ended December 31, 2021 was $150,000.
Dunst uses the single transaction method for treasury shares.
Required:
a. Record the journal entries for the transactions in 2021 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, 2021.

Question 74

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 75

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 76

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 77

Pixel Points Inc. has a single class of shares. As at its year ended December 31, 2020, 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 2021, 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 78

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, 2019, it had 900,000 shares issued and outstanding. These shares had a book value of $18,000,000 on the balance sheet.
During 2020, 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.