Equity

Question 1

1. A corporation is incorporated in only one country regardless of the number of countries in which it operates.

Answer 1

T

Question 2

2. The preemptive right allows shareholders the right to vote for directors of the company.

Answer 2

F

Question 3

3. Ordinary shares is the residual corporate interest that bears the ultimate risks of loss.

Answer 3

T

Question 4

4. Earned capital consists of contributed capital and retained earnings.

Answer 4

F

Question 5

5. True no-par shares should be carried in the accounts at issue price without any share premium reported.

Answer 5

T

Question 6

6. Companies allocate the proceeds received from a lump-sum sale of securities based on the securities’ par values.

Answer 6

F

Question 7

7. Companies should record shares issued for services or noncash property at either the fair value of the shares issued or the fair value of the consideration received.

Answer 7

T

Question 8

8. Treasury shares are a company’s own shares that have been reacquired and retired.

Answer 8

F

Question 9

9. The cost method records all transactions in treasury shares at their cost and reports the treasury shares as a deduction from ordinary shares.

Answer 9

F

Question 10

10. When a corporation sells treasury shares below its cost, it usually debits the difference between cost and selling price to Share Premium—Treasury.

Answer 10

T

Question 11

11. Participating preference shares require that if a company fails to pay a dividend in any year, it must make it up in a later year before paying any ordinary dividends.

Answer 11

F

Question 12

12. Callable preference shares permit the corporation at its option to redeem the outstanding preference shares at stipulated prices.

Answer 12

T

Question 13

13. The laws of some jurisdictions require that corporations restrict their contributed capital from distribution to shareholders.

Answer 13

T

Question 14

14. Many companies pay dividends in amounts equal to their legally available retained earnings.

Answer 14

F

Question 15

15. All dividends, except for liquidating dividends, reduce the total shareholders’ equity of a corporation.

Answer 15

F

Question 16

16. Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind.

Answer 16

T

Question 17

17. When a share dividend is declared on the ordinary shares outstanding, a company is required to transfer the par value of the shares issued from retained earnings.

Answer 17

T

Question 18

18. Share splits and share dividends have the same effect on a company’s retained earnings
    and total shareholders’ equity.

Answer 18

F

Question 19

19. The return on ordinary share equity is computed by dividing net income by the average ordinary equity.

Answer 19

F

Question 20

20. The payout ratio is determined by dividing cash dividends paid to ordinary shareholders by net income available to ordinary shareholders.

Answer 20

T

Question 21

21. The residual interest in a corporation belongs to the
    a. management.
    b. creditors.
    c. ordinary shareholders.
    d. preference shareholders.

Answer 21

C.

Question 22

22. The pre-emptive right of an ordinary shareholder is the right to

a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preference shareholders.
d. exclude preference shareholders from voting rights.

Answer 22

B.

Question 23

23. The pre-emptive right enables a shareholder to

a. share proportionately in any new issues of shares of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell ordinary shares back to the corporation at the option of the shareholder.
d. receive the same amount of dividends on a percentage basis as the preference
shareholders.

Answer 23

A

Question 24

24. Special characteristics of the corporate form that affect accounting include the

a. influence of corporate law.
b. use of the share system.
c. development of a variety of ownership interests.
d. All of these answer choices are correct.

Answer 24

D

Question 25

25. Hiro Corp. issues shares which bear the ultimate risks of loss and receive the benefit of success. These shares are not guaranteed dividends nor assets upon dissolution. These shares are considered

Ordinary Preference
a. Yes Yes
b. Yes No
c. No Yes
d.No No

Answer 25

B.

Question 26

26. Categories of equity include all of the following except

a. Non-controlling interest.
b. Accumulated other comprehensive income.
c. Liquidating dividends.
d. Treasury shares.

Answer 26

C

Question 27

27. Shareholders of a business enterprise are said to be the residual owners. The term residual owner means that shareholders

a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the enterprise.

Answer 27

C

Question 28

28. Total shareholders’ equity represents

a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.

Answer 28

C

Question 29

29. A primary source of shareholders’ equity is

a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by shareholders.
d. both income retained by the corporation and contributions by holders.

Answer 29

D

Question 30

30. A primary source of shareholders’ equity is

a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by shareholders.
d. both income retained by the corporation and contributions by holders.

Answer 30

D.

Question 31

31. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the

a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.

Answer 31

D

Question 32

32. When a corporation issues its ordinary shares in payment for services, the least appropriate basis for recording the transaction is the

a. fair value of the services received.
b. par value of the shares issued.
c. fair value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.

Answer 32

B

Question 33

33. Direct costs incurred to sell shares such as underwriting costs should be accounted for as
34. a reduction of share premium.
35. an expense of the period in which the shares are issued.
36. an intangible asset.
    A. 1
    B. 2
    C. 3
    D. 1 or 3
    .

Answer 33

A

Question 34

34. A “secret reserve” will be created if

A. inadequate depreciation is charged to income.
B. a capital expenditure is charged to expense.
C. liabilities are understated.
D. shareholders’ equity is overstated.

Answer 34

B

Question 35

35. Which of the following represents the total number of shares that a corporation may issue under the terms of its charter?

a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares

Answer 35

A.

Question 36

36. Shares that have a fixed per-share amount printed on each share certificate are called

a. stated value shares.
b. fixed value shares.
c. uniform value shares.
d. par value shares.

Answer 36

D

Question 37

37. Which of the following is not a legal restriction related to profit distributions by a corporation?

a. The amount distributed to owners must be in compliance with the laws governing corporations.
b. The amount distributed in any one year can never exceed the net income reported for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital contracts as to preferences and
participation.

Answer 37

B

Question 38

38. Ordinary no-par shares

a. Are considered illegal.
b. May be subject to high taxes.
c. May be sold at a premium.
d. All of these answer choices are correct.

Answer 38

B

Question 39

39. Dunn Trading Co. issued 2,500 ordinary shares, The shares have a ₤2 par value and sold for ₤12 per share. Dunn incurred ₤3,000 to sell the shares related to underwriting costs and legal fees. Dunn Trading Co. will record the ₤3,000 as

a. A debit to Share Premium—Ordinary.
b. A debit to Financing Expense.
c. A credit to Share Premium—Ordinary. d. A credit to Share Capital—Ordinary.

Answer 39

A

Question 40

40. In January 2015, Finley Corporation, a newly formed company, issued 10,000 shares of its $10 par ordinary shares for $15 per share. On July 1, 2015, Finley Corporation reacquired 1,000 shares of its outstanding shares for $12 per share. The acquisition of these treasury shares

a. decreased total shareholders’ equity.
b. increased total shareholders’ equity.
c. did not change total shareholders’ equity.
d. decreased the number of issued shares.

Answer 40

A

Question 41

41. Treasury shares are

a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.

Answer 41

D

Question 42

42. When treasury shares are purchased for more than the par value of the shares and the cost method is used to account for treasury shares, what account(s) should be debited?
    a. Treasury shares for the par value and share premium for the excess of the purchase
    price over the par value.
    b. share premium for the purchase price.
    c. Treasury shares for the purchase price.
    d. Treasury shares for the par value and retained earnings for the excess of the
    purchase price over the par value.

Answer 42

C.

Question 43

43. “Gains” on sales of treasury shares (using the cost method) should be credited to

a. share premium—treasury.
b. share capital.
c. retained earnings.
d. other income.

Answer 43

A

Question 44

44. Porter Corp. purchased its own par value shares on January 1, 2015 for $20,000 and debited the treasury shares account for the purchase price. The shares were subsequently sold for $12,000. The $8,000 difference between the cost and sales price should be recorded as a deduction from

a. share premium—treasury to the extent that previous net “gains” from sales of the same class of stock are included therein; otherwise, from retained earnings.
b. share premium—treasury without regard as to whether or not there have been previous net “gains” from sales of the same class of shares included therein.
c. retained earnings.
d. net income.

Answer 44

A

Question 45

45. How should a “gain” from the sale of treasury shares be reflected when using the cost method of recording treasury shares transactions?

a. As other income shown on the income statement.
b. As share premium from treasury share transactions.
c. As an increase in the amount shown for share capital.
d. As an increase in the retained earnings amount.

Answer 45

B

Question 46

46. Which of the following best describes a possible result of treasury share transactions by a corporation?

a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.

Answer 46

C

Question 47

47. Which of the following features of preference shares makes the security more like debt than an equity instrument?

a. Participating
b. Voting
c. Redeemable d. Noncumulative

Answer 47

C

Question 48

48. The cumulative feature of preference shares

a. limits the amount of cumulative dividends to the par value of the preference shares.
b. requires that preference dividends not paid in any year must be made up in a later
year before dividends are distributed to ordinary shareholders.
c. means that the shareholder can accumulate preference shares until it is equal to the
par value of ordinary shares at which time it can be converted into ordinary shares.
d. enables a preference shareholder to accumulate dividends until they equal the par
value of the shares and receive the shares in place of the cash dividends.

Answer 48

B

Question 49

49. According to IFRS, redeemable preference shares should be

a. included with ordinary shares.
b. included as a liability.
c. excluded from the statement of financial position.
d. included as a contra item in shareholders’ equity.

Answer 49

B

Question 50

50. Cumulative preference dividends in arrears should be shown in a corporation’s statement of financial position as

a. an increase in current liabilities.
b. an increase in equity.
c. a footnote.
d. an increase in current liabilities for the current portion and non-current liabilities for the
long-term portion.

Answer 50

C.

Question 51

51. The features most frequently associated with preference shares include all of the following
    except

a. Callable at the option of the shareholder.
b. Convertible into ordinary shares.
c. Non-voting.
d. Preference as to assets in the event of liquidation.

Answer 51

A

Question 52

52. When preference shares share ratably with the ordinary shareholders in any profit distributions beyond the prescribed rate this is known as the

a. Cumulative feature.
b. Participating feature.
c. Callable feature.
d. Redeemable feature.

Answer 52

B

Question 53

53. Liquidating dividends

a. Are prohibited under IFRS.
b. Require a credit to Share Capital—Ordinary. c. Reduce amounts paid-in by shareholders. d. All of these answer choices are correct.

Answer 53

C

Question 54

54. At the date of the financial statements, ordinary shares issued would exceed ordinary shares outstanding as a result of the

a. declaration of a share split.
b. declaration of a share dividend.
c. purchase of treasury shares.
d. payment in full of subscribed shares.

Answer 54

C

Question 55

55. An entry is not made on the

a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.

Answer 55

B

Question 56

56. Cash dividends are paid on the basis of the number of shares

a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.

Answer 56

C.

Question 57

57. Which of the following statements about property dividends is not true?

a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.

Answer 57

C.

Question 58

58. Houser Corporation owns 4,000,000 shares of Baha Corporation. On December 31, 2015, Houser distributed these shares as a dividend to its shareholders. This is an example of a

a. property dividend.
b. share dividend.
c. liquidating dividend.
d. cash dividend.

Answer 58

A.

Question 59

59. A dividend which is a return to shareholders of a portion of their original investments is a
    a. liquidating dividend.
    b. property dividend.
    c. liability dividend.
    d. participating dividend.

Answer 59

A

Question 60

60. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to

a. Retained Earnings.
b. Share Premium.
c. Accumulated Depletion.
d. Accumulated Depreciation.

Answer 60

B

Question 61

61. If management wishes to “capitalize” part of the earnings, it may issue a

a. cash dividend.
b. share dividend.
c. property dividend.
d. liquidating dividend.

Answer 61

B

Question 62

62. Which dividends do not reduce equity?

a. Cash dividends
b. Share dividends
c. Property dividends
d. Liquidating dividends

Answer 62

B

Question 63

63. The declaration and issuance of a share dividend

a. increases ordinary shares outstanding and increases total equity.
b. decreases retained earnings but does not change total equity.
c. may increase share premium but does not change total equity.
d. increases retained earnings and increases total equity.

Answer 63

B

Question 64

64. Quirk Corporation issued a 100% share dividend of its ordinary shares which had a par value of $10 before and after the dividend. At what amount should retained earnings be capitalized for the additional shares issued?

a. There should be no capitalization of retained earnings.
b. Par value
c. Fair value on the declaration date
d. Fair value on the payment date

Answer 64

B

Question 65

65. The issuer of an ordinary share dividend to ordinary shareholders should transfer from retained earnings to contributed capital an amount equal to the

a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

Answer 65

D.

Question 66

66. At the date of declaration of an ordinary share dividend, the entry should not include

a. a credit to Share Capital—Ordinary.
b. a credit to Ordinary Share Dividend Distributable.
c. a debit to Retained Earnings.
d. All of these are acceptable.

Answer 66

A

Question 67

67. The balance in Ordinary Share Dividend Distributable should be reported as a(n)

a. deduction from share capital—ordinary.
b. addition to share capital—ordinary.
c. current liability.
d. contra current asset.

Answer 67

B

Question 68

68. A feature common to both share splits and share dividends is

a. a transfer to earned capital of a corporation.
b. that there is no effect on total equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

Answer 68

B

Question 69

69. What effect does the issuance of a 2-for-1 share split have on each of the following?

Par Value per Share Retained Earnings

A. No effect No effect
B. Increase No effect
C. Decrease No effect
D. Decrease Decrease

Answer 69

C.

Question 70

70. Which one of the following disclosures should be made in the equity section of the statement of financial position, rather than in the notes to the financial statements?

a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices

Answer 70

B

Question 71

71. The return on ordinary share equity is calculated by dividing

a. net income less preference dividends by average ordinary shareholders’ equity.
b. net income by average ordinary shareholders’ equity.
c. net income less preference dividends by ending ordinary shareholders’ equity.
d. net income by ending ordinary shareholders’ equity.

Answer 71

A

Question 72

72. The payout ratio can be calculated by dividing
    a. dividends per share by earnings per share.
    b. cash dividends by net income less preference dividends.
    c. cash dividends by market price per share.
    d. dividends per share by earnings per share and dividing cash dividends by net income
    less preference dividends.

Answer 72

B

Question 73

73. Younger Company has outstanding both ordinary shares and nonparticipating, non- cumulative preference shares. The liquidation value of the preference shares is equal to its par value. The book value per share of the ordinary shares is unaffected by

a. the declaration of a share dividend on preference payable in preference shares when
the market price of the preference is equal to its par value.
b. the declaration of a share dividend on ordinary shares payable in ordinary shares
when the market price of the ordinary shares is equal to its par value.
c. the payment of a previously declared cash dividend on the ordinary shares.
d. a 2-for-1 split of the ordinary shares.

Answer 73

C

Question 74

74. Ordinary shareholders’ equity divided by the number of ordinary shares outstanding is called

a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.

Answer 74

A.

Question 75

75. Which of the following is a required statement under IFRS?

Statement of financial position Statement of changes in equity

a. Yes No
b. Yes Yes
c.No No
d. No Yes

Answer 75

b

Question 76

76. Trading on the equity is:

a. The ratio of the company’s cash dividends to net income.
b. A return on assets that is higher than the cost of financing these assets.
c. The amount each share would receive if the company were liquidated.
d. The “Revaluation Surplus” related to increases or decreases in items such as
property, plant, and equipment.

Answer 76

B.

Question 77

77. Dividends are not paid on

a. noncumulative preference shares.
b. nonparticipating preference shares.
c. treasury shares.
d. Dividends are paid on all of these.

Answer 77

C.

Question 78

78. Noncumulative preferred dividends in arrears

a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preference shareholders if sufficient funds remain after payment of the
current preference dividend.

Answer 78

A

Question 79

79. How should cumulative preference dividends in arrears be shown in a corporation’s statement of financial position?

a. Note disclosure
b. Increase in shareholders’ equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in non-current liabilities for the balance

Answer 79

A