12-13: RE, Dividends and Creating a SCSE

Question 1

This pertains to the cumulative balance of profits and losses, distribution to owners, affected by the effects of retrospective application or restatement and other capital adjustments.

Answer 1

Retained Earnings

Question 2

a credit balance to Income Summary means that credits are greater than the debits, and that the results of the operation was a net _________.

Answer 2

income

Question 3

The journal entry in closing the Income Summary account if the corporation incurs a net income.

Answer 3

Dr: Income Summary
Cr: Retained Earnings

Question 4

_ The appropriation of retained earnings reduces the corporation’s total retained earnings and reduces the amount available for dividend distribution.

Answer 4

False. Appropriation of RE doesn’t reduce total retained earnings; it only decreases the amount available for dividend distribution.

Question 5

Give three sources of appropriations for retained earnings.

Answer 5

Appropriation for…
Treasury shares (legal requirement)
Retirement of bonds (contractual)
Acquisition of plant assets (voluntary)

Question 6

T/F. Even when the cause for restriction/appropriation no longer exists, the appropriation is not reversed.

Answer 6

F

Question 7

What is the journal entry for reversing the appropriation for:

a. treasury shares
b. retirement of bonds
c. plant expansion

Answer 7

for (a):
Dr: Retained Earnings - Appropriated for Treasury Shares
Cr: Retained Earnings - Unappropriated / Free

for (b):
Dr: Retained Earnings - Appropriated for Bond Retirement
Cr: Retained Earnings - Unappropriated / Free

for (c):
Retained Earnings - Appropriated for Plant Expansion
Retained Earnings - Unappropriated / Free

Question 8

T/F. Dividends are distributions of earnings or capital to shareholders in proportion to their shareholdings.

Answer 8

T

Question 9

This is the date when the corporation determines who are entitled to receive dividends.

Answer 9

Date of Record

Question 10

This is the date when the board of directors approved the resolution to distribute dividends.

Answer 10

Date of Declaration

Question 11

T/F. A journal entry is usually prepared on the date of declaration to recognize any liability related to the dividend distribution.

Answer 11

T

Question 12

If shares are sold after the date of declaration but before the date of record, shares are referred to as ________ __________.

Answer 12

selling dividend-on

Question 13

Which of the following shares are entitled to receive dividends?

a. issued and outstanding shares
b. subscribed par-value shares
c. subscribed no-par value shares
d. treasury shares

Answer 13

(a) issued and outstanding shares and (b) subscribed par-value shares.

Question 14

Dividends may either be __________ (also return on investment) or dividend out of capital (return of investment).

Answer 14

dividend out of earnings

Question 15

Also known as scrip dividend, this consists of a promise to pay at a future date.

Answer 15

Liability Dividend

Question 16

For this type of share dividend, the RE account is debited for the fair market value of the shares on the date of declaration.

Answer 16

Small Share Dividend

Question 17

For this type of share dividend, the RE account is debited for the par value of the shares on the date of declaration.

Answer 17

Large Share Dividend

Question 18

T/F. The date of distribution of cash dividends does not affect the corporation’s RE - Unappropriated account.

Answer 18

T. Only the total assets of the corp is reduced.

Question 19

T/F. A share premium arises from the declaration of a small share (and not a not a large share) dividend.

Answer 19

T

Question 20

Some guy declared a “1 share for every 4 shares held” share dividend to ordinary shareholders. What is the journal entry on the date of distribution if there were 8,000 outstanding shares and these had a par values of 80 per share and fair market values of 95 per share?

Answer 20

On the date of distribution:

Dr: Share Dividend Distributable - Ordinary for 160000
Cr: Ordinary Share Capital for 160,000

Question 21

On the date of declaration of cash dividends, Liabilities will [increase / decrease].

Answer 21

Increase. The account title affected is Share Dividends Distributable.

Question 22

T/F. A share dividend affects the shareholder’s proportionate interest in the corporation.

Answer 22

F. It does not affect the interest, which would remain the same before and after the declaration (p.219).