LEMONADE Flashcards
A corporation is incorporated in only one country, regardless of the number of countries in which it operates
TRUE
The preemptive right allows shareholders the right to vote for directors of the company.
FALSE
Ordinary shares is the residual corporate interest that bears the ultimate risks of loss
TRUE
Earned capital consists of contributed capital and retained earnings.
FALSE
True no-par shares should be carried in the accounts at issue price without any share premium reported
TRUE
Companies allocate the proceeds received from a lump-sum sale of securities based on the securities’ par value
FALSE
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
TRUE
Treasury shares are a company’s own shares that have been reacquired and retired.
FALSE
The cost method records all transactions in treasury shares at their cost and reports the treasury shares as a deduction from ordinary shares.
FALSE
When a corporation sells treasury shares below its cost, it usually debits the difference between cost and selling price to Share Premium-Treasury
TRUE
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.
FALSE
Callable preference shares permit the corporation at its option to redeem the outstanding preference shares at stipulated prices.
TRUE
The laws of some jurisdictions require that corporations restrict their contributed capital from distribution to shareholders.
TRUE
Many companies pay dividends in amounts equal to their legally available retained earnings
FALSE
All dividends, except for liquidating dividends, reduce the total shareholders’ equity of a corporation.
FALSE
Dividends payable in assets of the corporation other than cash are called property dividends or dividends in kind.
TRUE
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.
TRUE
Share splits and share dividends have the same effect on a company’s retained earnings and total shareholders’ equity.
FALSE
The return on ordinary share equity is computed by dividing net income by the average ordinary equity
FALSE
The payout ratio is determined by dividing cash dividends paid to ordinary shareholders by net income available to ordinary shareholders.
TRUE
The residual interest in a corporation belongs to the
ORDINARY SHAREHOLDERS
The preemptive right of an ordinary shareholder is the right to
Share proportionately in any new issues of stock of the same class
Special characteristics of the corporate form that affect accounting include:
a. influence of corporate law
b. use of the share system
c. development of a variety of ownership interests
d. all of the above
a. influence of corporate law
b. use of the share system
c. development of a variety of ownership interests
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________
Ordinary shares, not preference shares
Categories of equity include all of the following except
a. non-controlling interest
b. accumulated other comprehensive income
c. liquidating dividends
d. treasury shares
LIQUIDATING DIVIDENDS (debt instrument)
Shareholders of a business enterprise are said to be the residual owners. The term residual owners means that shareholders:
Bear the ultimate risks and uncertainties and receive the benefits of enterprise ownership
Total shareholders’ equity is:
Both income retained by the corporation and contributions by holders
The accounting problem in a lump sum issuance is the allocation proceeds between the classes of securities. An acceptable method of allocation is the:
PROPORTIONAL METHOD or the INCREMENTAL METHOD
When a corporation issues its ordinary shares in payment for services, the least appropriate basis for recording the transaction is
PAR VALUE OF SHARES ISSUED
In the case of noncash assets, distributed as dividends, the noncurrent asset classified for distribution is measured at:
THE LOWER OF CARRYING AMOUNT and FAIR VALUE LESS COSTS TO SELL/COSTS TO COMPLETE
A change in the fair value less cost of noncash assets to be distributed as dividends causes an adjustment to the asset, if and only if, the amount is less than the fair value of the asset. This change is only recorded at the end of the reporting period and is not adjusted at the date of settlement
TRUE
If the updated fair value of noncash assets is greater than its carrying amount, the carrying amount of the noncash asset is increased accordingly.
FALSE
The dividends payable account is adjusted for any changes recognized in equity at the end of each reporting period and at the date of settlement.
TRUE
If the noncash asset is less than the dividends payable on the settlement date, there is a loss on distribution of property dividends.
FALSE
If the noncash asset is greater than the dividends payable on the settlement date, there is a loss on distribution of property dividends.
TRUE
Direct costs incurred to sell shares such as underwriting costs should be accounted for as:
REDUCTION OF SHARE PREMIUM
Start up costs such as legal and secretarial costs should be accounted for as:
EXPENSE WHEN INCURRED
A “secret reserve” will be created if:
A capital expenditure is charged to expense
What represents the total number of shares that a corporation may issue under the terms of its charter
AUTHORIZED SHARES
Shares that have a fixed per-share amount printed on each share certificate are called:
PAR VALUE SHARES
What is the pro-forma journal entry for recording the payment of dividends payable when there is no indication when the dividends were declared?
Retained earnings
Cash/Non-cash asset
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. divdends must be in full agreement with the capital contracts as to preferences and participation
The amount distributed in any one year can never exceed the net income reported for that year
Ordinary no-par shares can be sold at a premium.
FALSE
Ordinary no-par shares may be subject to high taxes
TRUE
Dunn Trading Co. issued 2,500 ordinary shares. The shares have a $2 par value and are sold for $12 per share. Dunn incurred $3,000 to sell the shares relating to underwriting costs and legal fees. Dunn Trading Co. will record the $3,000 as:
DEBIT to SHARE PREMIUM-ORDINARY
Because share issuance costs are charged to Share Premium.
In January 2015, Finley Corporation, a newly formed company, issed 10,000 shares of its $10 par ordinary shares for $15 per share. On July 1, 2015, Finley Corporation reacquired 1,000 shares of outstanding shares for $12 per share. The acquisition of these treasury shares
DECREASED TOTAL SHAREHOLDERS’ EQUITY
Treasury shares are:
ISSUED BUT NOT OUTSTANDING SHARES
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 accounts should be debited?
TREASURY SHARES FOR THE PURCHASE PRICE
“Gains” on sales of treasury shares (using the cost method) should be credited to
SHARE PREMIUM-TREASURY
The amount credited to share premium-treasury is equal to:
THE EXCESS OF ISSUE PRICE OVER THE COST OF THE TREASURY SHARES
Potter 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:
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
How should “gain” from the sale of treasury shares be reflected using the cost method of recording treasury shares transactions?
As share premium from treasury share transactions
What is the effect of treasury share transactions on retained earnings?
May decrease but not increase retained earnings.
This is because the law requires that an amount of retained earnings is appropriated for treasury shares.
What characteristic makes a preference share more like a debt instrument than an equity instrument?
REDEEMABLE
This is a preference share that can be called in for redemption at a specified price at the option of the corporation.
CALLABLE PREFERENCE SHARE
Why is a redeemable preference share considered to be a financial liability?
Redemption by the issuer is mandatory for a fixed amount at a future date. Neither the issuer or the holder has a choice in the redemption.
This feature of preference shares requires that preference dividends not paid in any year must be made up in a later year before dividends are distributed to ordinary shareholders.
CUMULATIVE FEATURE
What amount should be used as a basis for computing the preference share dividends in arrears?
The amount of preference shares outstanding
What amount should be used as a basis for computing ordinary share dividends?
The residual amount of dividends declared after deducting the amount allocated to preference dividend shares
According to IFRS, redeemable preference shares should be included as a:
LIABILITY
Cumulative preference dividends in arrears should be shown in a corporation’s statement of financial position as:
A FOOTNOTE
The features most frequently associated with preference shares include all 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
CALLABLE AT THE OPTION OF THE SHAREHOLDER
When preference shares share ratably with ordinary shareholders in a profit distributions beyond the prescribed rate, this is known as:
PARTICIPATING FEATURE
Liquidating dividends:
Reduce amounts paid-in by shareholders
At the date of financial statements, ordinary shares issued would exceed ordinary shares outstanding as a result of:
PURCHASE OF TREASURY SHARES
An entry is not made on the:
DATE OF RECORD
Cash dividends are paid on the basis of the number of shares ____________
OUTSTANDING
A property dividend is usually in the form of securities of other companies.
TRUE
The accounting for a property dividend should be based on the carrying value of the nonmonetary assets transferred.
FALSE
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:
PROPERTY DIVIDEND
A dividend which is a return to shareholders of a portion of their original investments.
LIQUIDATING DIVIDEND
A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to
SHARE PREMIUM
If management wishes to “capitalize” part of the earnings, it may issue a:
SHARE DIVIDEND
Which dividends do not reduce equity
SHARE DIVIDENDS
The declaration and issuance of a share dividend
Decreases retained earnings but does not change total equity because it causes an equivalent increase in share capital.
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 the retained earnings should be capitalized for the additional shares issued:
PAR VALUE OF SHARES
The issuer of an ordinary share dividend to ordinary shareholders should transfer from retained earnings to contributed capital an amount equal to the:
PAR or STATED VALUE OF THE SHARES ISSUED
At the date of declaration of an ordinary share divident, the entry should not include:
A credit to Share Capital-Ordinary
It should instead include a credit to Share Dividends Payable
The balance in Share Dividends Payable should be reported as:
Addition to Share Capital-Ordinary
A feature that is common to both share splits and share dividends is:
That there is no effect on total equity
What effect does the issuance of a 2-for-1 split have on the par value of each share?
DECREASES THE PAR VALUE OF EACH SHARE
Which 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 preference
b. liquidation preferences
c. call prices
d. conversion or exercise prices
LIQUIDATION PREFERENCE
The return on ordinary share equity is calculated by:
DIVIDING NET INCOME less PREFERENCE DIVIDENDS by the AVERAGE ORDINARY SHAREHOLDER’S EQUITY
The payout ratio can be calculated by:
DIVIDING CASH DIVIDENDS by NET INCOME less PREFERENCE DIVIDENDS
Ordinary shareholder’s equity divided by the number of ordinary shares outstanding is called
BOOK VALUE PER SHARE
The Statement of Financial Position and the Statement of Changes in Equity are both required statements under IFRS.
TRUE
Trading on the equity is:
A RETURN ON ASSETS THAT IS HIGHER THAN THE COST OF FIANNCING THESE ASSETS
Dividends are paid on treasury shares
FALSE
Noncumulative preferred dividends in arrears are not paid but disclosed
FALSE.
Noncumulative preferred dividends in arrears are not paid or disclosed.
How should cumulative preference dividends in arrears be shown in a corporation’s statement of financial position?
NOTE DISCLOSURE
What is the impact on total equity of treasury shares resold at more than cost?
INCREASE TOTAL EQUITY
What is the impact on total equity of operating loss for the period?
DECREASE TOTAL EQUITY
What is the impact on total equity of retirement of bonds payable at more than book value?
DECREASE TOTAL EQUITY
What is the impact on total equity of declaration of a share dividend?
NO EFFECT ON TOTAL EQUITY
What is the impact on total equity of the acquisition of machinery for ordinary shares?
INCREASE TOTAL EQUITY
What is the impact on total equity of conversion of bonds payable into ordinary shares?
INCREASE TOTAL EQUITY
What is the impact on total equity of not declaring a dividend on cumulative preference shares?
NO EFFECT ON TOTAL EQUITY
What is the impact on total equity of declaring a cash dividend?
DECREASE TOTAL EQUITY
What is the impact on total equity of a payment of cash dividend?
NO EFFECT ON TOTAL EQUITY
