Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

Intermediate Accounting 11th Canadian Edition Volume 2 by Donald E. Kieso -Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

CHAPTER 15

 

SHAREHOLDERS’ EQUITY

 

CHAPTER STUDY OBJECTIVES

 

 

1. Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares. The three main forms of organization are the proprietorship, partnership, and corporation. Incorporation gives shareholders protection against claims on their personal assets and allows greater access to capital markets.

If there are no restrictive provisions, each share carries the following rights: (1) to share proportionately in profits and losses, (2) to share proportionately in management (the right to vote for directors), and (3) to share proportionately in corporate assets upon liquidation. An additional right to share proportionately in any new issues of shares of the same class (called the preemptive right) may also be attached to the share.

Preferred shares are a special class of share that possess certain preferences or features that common shares do not have. Most often, these features are a preference over dividends and a preference over assets in the event of liquidation. Many other preferences may be attached to specific shares. Preferred shareholders give up some or all of the rights normally attached to common shares.

 

 

2. Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution. Shares are recognized and measured at net cost when issued. Shares may be issued on a subscription basis, in which case they are not considered legally issued until they are paid up. Shares may also be issued as a bundle with other securities, in which case the cost must be allocated between the securities. The residual or relative fair value methods (sometimes called the incremental or proportional methods) may be used to allocate the cost.

If the reacquisition cost of the shares is greater than the original cost, the acquisition cost is allocated to share capital, then contributed surplus, and then retained earnings. If the cost is less, the cost is allocated to share capital (to stated or assigned cost) and to contributed surplus.

Dividends paid to shareholders are affected by the dividend preferences of the preferred shares. Preferred shares can be cumulative or noncumulative, and fully participating, partially participating, or non-participating.

A stock dividend is a capitalization of retained earnings that generally results in a reduction in retained earnings and a corresponding increase in certain contributed capital accounts. The total shareholders’ equity remains unchanged with a stock dividend. A stock split results in an increase or decrease in the number of shares outstanding. However, no accounting entry is required.

 

 

3. Understand the components of shareholders’ equity and how they are presented. Contributed surplus is additional surplus coming from shareholder transactions. Accumulated other comprehensive income is accumulated non-shareholder income that has not been booked through net income. ASPE does not discuss this concept. The shareholders’ equity section of a balance sheet includes share capital, contributed surplus, retained earnings, and accumulated other comprehensive income. A statement of changes in shareholders’ equity is required under IFRS.

 

 

4. Understand capital disclosure requirements. Basic disclosure requirements include authorized and issued share capital and changes during the period. Rights attached to shares should be presented, and where dividends are in arrears, this should also be disclosed. Where there are restrictions on retained earnings or dividends, this should be disclosed. Under IFRS, companies must also disclose information about their objectives, policies, and processes for managing capital and show summary quantitative information regarding what the company considers its capital.

 

 

5. Calculate and interpret key ratios relating to equity. Common ratios used in this area are the rate of return on common shareholders’ equity, payout ratio, price earnings ratio, and book value per share.

 

 

6. Identify the major differences in accounting between ASPE and IFRS, and what changes are expected in the near future. In several cases, ASPE provides more guidance, as noted in the comparison chart in Illustration 15-12. IFRS requires a statement of changes in shareholders’ equity, whereas ASPE requires a statement of changes in retained earnings (with additional note disclosure regarding the changes in equity). The IASB is continuing to work on a financial statements project as well as a liability and equity project.

 

 

7. Explain how to account for par value and treasury shares. These shares may only be valued at par value in the common or preferred share accounts. The excess goes to contributed surplus. On a repurchase or cancellation, the par value is removed from the common or preferred share accounts and any excess or deficit is booked to contributed surplus or retained earnings, as was discussed for no par shares.

Treasury shares are created when a company repurchases its own shares and does not cancel or retire them at the same time; that is, they remain outstanding. The single-transaction method is used when treasury shares are purchased. This method treats the purchase and subsequent resale or cancellation as part of the same transaction.

 

 

8. Explain how to account for a financial reorganization. A corporation that has accumulated a large debit balance (deficit) in retained earnings may enter into a process known as a financial reorganization. During a reorganization, creditors and shareholders negotiate a deal to put the company on a new footing. This generally involves a change in control and a comprehensive revaluation of assets and liabilities. The procedure consists of the following steps: (1) The deficit is reclassified so that the ending balance in Retained Earnings is zero. (2) The change in control is recorded. (3) All assets and liabilities are comprehensively revalued at current values so that the company will not be burdened with having to complete inventory or fixed asset valuations in following years.

 

 

Multiple Choice—Conceptual

 

Answer          No.      Description

c                  1.      Residual interest

b                 2.      REITs

a                 3.      Preemptive right

d                 4.      Shareholders’ liability

b                 5.      Features of cumulative preferred shares

c                  6.      Cumulative preferred shares dividend provisions

b                 7.      Callable preferred shares

c                  8.      Total shareholders’ equity

b                 9.      Reasons for issuing preferred shares

c                10.      Significance of par value

d               11.      Common shares subscribed

d               12.      Classification of subscriptions receivable

b               13.      Allocation methods for a lump sum issuance

a               14.      Direct costs of issuing shares

c                15.      Reacquisition of shares

d               16.      Reacquisition of shares at less than average share value

c                17.      Reacquisition of shares at greater than original issue price

b               18.      Retirement of shares

c                19.      Retirement of shares

b               20.      Retirement of preferred shares

c                21.      Transactions causing a decrease in retained earnings

b               22.      Transactions causing an increase in retained earnings

d               23.      Legality of dividend distributions

b               24.      Timing of entry to record dividends

c                25.      Shares entitled to receive a cash dividend

a               26.      Definition of a property dividend

c                27.      Determine false statement regarding property dividends

d               28.      Fair value of a property dividend

a               29.      Effect of a stock dividend

b               30.      Knowledge of dividend declarations

b               31.      Knowledge of dividend declarations

d               32.      Effect of large stock dividend

a               33.      Accounting for stock split

b               34.      Accounting for stock dividend

c                35.      Large stock dividend

b               36.      Reporting of Common Stock Dividend Distributable

a               37.      Liquidating dividend

b               38.      Entry to record a liquidating dividend

b               39.      Effects of stock dividends and stock splits

a               40.      Effects of a stock split

c                41.      Valid reasons for stock splits

c                42.      Knowledge of what shares receive dividends

b               43.      Noncumulative preferred dividends in arrears

b               44.      Common shares issued in payment of services

d               45.      Accounting for share subscriptions

a               46.      Cash dividend dates

c                47.      Valuation of a property dividend

Multiple Choice—Conceptual (cont’d)

 

Answer          No.      Description

a               48.      Accounting effects of property dividends

b               49.      Effect of a liquidating dividend on equity accounts

c                50.      Effect of a stock dividend on equity accounts

d               51.      Effect of a stock dividend on total equity

d               52.      Effect of stock dividend and stock split

d               53.      Classification of shareholders’ equity

d               54.      Cumulative preferred dividends in arrears

c                55.      Statement of Changes in Shareholders’ Equity (IFRS)

b               56.      Calculation of payout ratio

c                57.      Rate of return on common shareholders’ equity

b               58.      Calculation of price earnings ratio

d               59.      Book value per common shares

a              *60.      Sale of treasury shares

a              *61.      Reissuance of treasury shares at less than acquisition cost

c              *62.      Reporting treasury shares in the balance sheet

c              *63.      Common shares issued vs. outstanding

a              *64.      Effect of reissuance of treasury shares

c              *65.      Effect of treasury shares on number of shares outstanding

d              *66.      Determining occurrence of financial reorganization

a              *67.      Balance of retained earnings after a financial reorganization

b              *68.      Financial reorganization requirements

b              *69.      IFRS vs. ASPE guidance

c              *70.      Determine false statement regarding financial reorganizations.

 

*This topic is dealt with in an Appendix to the chapter.

 

 

Multiple Choice—Computational

 

Answer          No.      Description

b               71.      Calculation of contributed surplus

c                72.      Calculation of contributed capital

b               73.      Calculation of share account balance

a               74.      Calculation of contributed surplus

b               75.      Entry to record share subscriptions

a               76.      Entry to record share subscriptions

b               77.      Share subscriptions

a               78.      Property dividend

c                79.      Entry to record stock dividend

c                80.      Calculation of share account after stock dividend

a               81.      Calculation of retained earnings after stock dividend

c                82.      Effect on equity accounts after dividend declarations

b               83.      Effect of stock dividend on retained earnings

a               84.      Effect of stock dividend on retained earnings

b               85.      Effect of share cancellation on equity accounts

d               86.      Effect of share cancellation on equity accounts

d               87.      Calculation of cash dividend allocation

Multiple Choice—Computational (cont’d)

 

Answer          No.      Description

b               88.      Calculation of cash dividend allocation

d               89.      Calculation of cash dividend allocation

b               90.      Calculation of cash dividend allocation

c                91.      Calculation of cash dividend allocation

b               92.      Calculation of cash dividend allocation

b               93.      Calculation of cash dividend allocation

b               94.      Calculation of cash dividend allocation

b               95.      Determine entry to incorporate a proprietorship.

c                96.      Calculate amount to credit preferred shares in lump sum issue.

c                97.      Calculate contributed surplus from retirement of shares.

c                98.      Allocation of cash dividend to common and preferred shares

d               99.      Entry to record declaration of property dividend

a             100.      Calculation of total equity

a             101.      Calculation of cash dividends paid (given payout ratio)

a             102.      Calculation of price earnings ratio

b             103.      Calculation of rate of return on common shareholders’ equity

c              104.      Calculation of rate of return on common shareholders’ equity

b             105.      Calculation of price earnings ratio

d             106.      Calculation of book value

a            *107.      Effect on income statement of sale of treasury shares

c            *108.      Recording par value shares

d            *109.      Retirement of par value shares

c            *110.      Sale of treasury shares

a            *111.      Cancellation of treasury shares

c            *112.      Effect of treasury shares on equity

d            *113.      Total equity with treasury shares exchange

c            *114.      Calculation of contributed surplus with treasury shares transactions

d            *115.      Recording retirement of shares

b            *116.      Retained earnings balance with treasury shares transactions

a            *117.      Retained earnings balance with cancelled shares

b            *118.      Retained earnings balance with treasury shares transactions

c            *119.      Effect of stock dividend on retained earnings (with treasury shares)

a            *120.      Calculate balance in retained earnings

b            *121.      Effect of reissuance of treasury shares

a            *122.      Adjustment of common shares in a financial reorganization

b            *123.      Effect on deficit from revaluation of assets in a financial reorganization

d            *124.      Effect of financial reorganization on retained earnings

 

*This topic is dealt with in an Appendix to the chapter.

 

 

 

Exercises

 

     Item            Description

E15-125       Lump sum issuance of shares

E15-126       Shareholders’ equity

E15-127       Share subscriptions

E15-128       Shares issued in noncash transactions

E15-129       Reacquisition of shares

E15-130       Reacquisition of shares

E15-131       Determination of dividend amount

E15-132       Items affecting retained earnings

E15-133       Stock dividends

E15-134       Stock dividends and stock splits

E15-135       Dividends on preferred shares

E15-136       Dividends on preferred shares

E15-137       Dividends on preferred shares

E15-138       Dividends on preferred shares

E15-139       Lump sum issuance of par value shares

E15-140       True or false questions

* E15-141       Calculation of selected financial ratios

*E15-142       Treasury shares

*E15-143       Treasury shares

*E15-144       Financial reorganization

*E15-145       Financial reorganization

 

*This topic is dealt with in an Appendix to the chapter.

 

 

PROBLEMS

 

     Item            Description

P15-146       Issuance of shares for cash, noncash consideration, and by subscription

P15-147       Issuance of shares for cash, noncash consideration, and by subscription

P15-148       Allocation of cash dividends

P15-149       Share retirement and stock dividends

P15-150       Dividend distribution

P15-151       Equity transactions

P15-152       Statement of Shareholders’ Equity

P15-153       Shareholders’ Equity Section

P15-154       Capital Disclosures

*P15-155       Treasury share transactions

 

*This topic is dealt with in an Appendix to the chapter.

 

MULTIPLE CHOICE—Conceptual

 

 

1. The residual interest in a corporation belongs to the
2. a) management.
3. b) creditors.
4. c) common shareholders.
5. d) preferred shareholders.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

2. Which statement is correct regarding real estate income or investment trusts?
3. a) They are often set up as unlimited purpose trust funds.
4. b) They are considered to be special purpose entities.
5. c) The unitholders (investors) do not pay tax on the cash received from the trust.
6. d) The unitholders have unlimited liability.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

3. The preemptive right enables a shareholder to
4. a) share proportionately in any new issues of shares in the same class.
5. b) receive cash dividends before other classes of shares without the preemptive right.
6. c) sell shares back to the corporation at the option of the shareholder.
7. d) receive the same amount of dividends on a percentage basis as the preferred shareholders.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

4. The liability of shareholders is
5. a) similar to the liability of the owners of a partnership.
6. b) similar to the liability of the owner of a proprietorship.
7. c) equal to an amount sufficient to satisfy all creditors.
8. d) limited to their property or service invested in the corporation.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

5. The cumulative feature of preferred shares
6. a) limits the amount of cumulative dividends to the par value of the preferred shares.
7. b) requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.
8. c) means that the shareholder can accumulate preferred shares until they are equal to the stated value of common shares, at which time they can be converted into common shares.
9. d) enables a preferred shareholder to accumulate dividends until they equal the stated value of the shares and receive the shares in place of the cash dividends.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

6. Dividends on cumulative preferred shares
7. a) must be paid each year.
8. b) accumulate over the life of the shares and are paid on retirement.
9. c) must be paid before dividends may be paid on common shares.
10. d) if in arrears, must be calculated like compound interest.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

7. Callable preferred shares
8. a) may be redeemed at any time at the shareholder’s option.
9. b) may be called or redeemed at the option of the issuing corporation.
10. c) usually have voting rights.
11. d) have rights to participate in any new share issuance.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

8. Total shareholders’ equity represents
9. a) a claim to specific assets contributed by the owners.
10. b) the maximum amount that can be borrowed by the corporation.
11. c) a claim against a portion of the total assets of the corporation.
12. d) only the amount of earnings that have been retained in the corporation.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

9. Preferred shares are often issued instead of debt
10. a) to avoid paying dividends to the common shareholders.
11. b) because a corporation’s debt-to-equity ratio has become too high.
12. c) to increase the market value of the shares.
13. d) to decrease the market value of the shares.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

10. In jurisdictions where par value shares are legally allowed, the only real significance of par value is
11. a) to enable the shares to be callable or convertible.
12. b) to require the corporation to pay dividends.
13. c) to establish the maximum responsibility of a shareholder in the event of insolvency.
14. d) to establish the maximum price at which the shares can be sold.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Discuss the characteristics of the corporate form of organization, rights of shareholders, and different types of shares.

Section Reference: Understanding the Corporate Form, Share Capital, and Profit Distribution

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

11. Aye Corp. sells common shares on a subscription basis. The Common Shares account should be credited when the
12. a) shares are subscribed for.
13. b) first payment is made.
14. c) last payment is made.
15. d) last payment is made and the shares are issued.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

12. Subscriptions Receivable are reported as
13. a) a non-current asset.
14. b) a current asset.
15. c) a deduction from shareholders’ equity.
16. d) either a current asset or a deduction from shareholders’ equity.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

13. The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the classes of securities. One acceptable method of allocation is the
14. a) pro forma method.
15. b) relative fair value method.
16. c) direct method.
17. d) indirect method.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

14. Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as
15. a) a reduction of share capital.
16. b) an expense of the period in which the shares are issued.
17. c) an intangible asset.
18. d) a reduction of retained earnings.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

15. According to the CBCA, when a company purchases its own shares on the market
16. a) they are recorded with a debit to Repurchased Shares.
17. b) the amount paid is deducted from the share class to which they belong.
18. c) they must be cancelled.
19. d) the excess of purchase price over cost is a loss.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

16. When shares are reacquired at a cost less than the average per share value, the difference is credited to
17. a) the appropriate share capital account.
18. b) Gain on Reacquisition of Shares.
19. c) Retained Earnings.
20. d) Contributed Surplus.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

17. Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s) should be debited?
18. a) the share account for the total cost
19. b) the share account for the original issue price and contributed surplus for the additional amount
20. c) the share account for the average per share amount and retained earnings for the additional amount
21. d) the share account for the average per share amount and a loss account for the additional amount

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

18. When shares are purchased or redeemed and cancelled, guidelines have been established for the sequence of accounts to adjust when allocating the cost. Which of the following is the first account to be adjusted?
19. a) a Contributed Surplus account created from a previous reacquisition of the same class of shares
20. b) the Share Capital account
21. c) Retained Earnings
22. d) Accumulated Other Comprehensive Income

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

19. A possible result of the reacquisition and cancellation of shares by a corporation is that this may
20. a) directly increase but not decrease retained earnings.
21. b) increase net income if a gain is recognized.
22. c) directly decrease but not increase retained earnings.
23. d) decrease but not increase net income.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

20. When all outstanding preferred shares are purchased and retired by the issuing corporation for less than the original issue price, accounting for the retirement increases
21. a) the amount of dividends available to common shareholders.
22. b) the contributed capital of the common shareholders.
23. c) reported income for the period.
24. d) Accumulated Other Comprehensive Income.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

21. Which of the following transactions would NOT result in a decrease to retained earnings?
22. a) declaration and issuance of a stock dividend
23. b) incurrence of a net loss for the period
24. c) reacquisition of shares for less than the original issue price
25. d) correction of an error in which depreciation expense was understated in a prior period

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

22. Which of the following transactions would NOT result in an increase to retained earnings?
23. a) correction of an error in which expenses were overstated in a previous year
24. b) issuance of a 3-for-1 stock split
25. c) reacquisition of shares for less than the original issue price
26. d) earning of net income for the period

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

23. Which of the following statements is NOT generally true about the legality of dividend distributions?
24. a) No amounts may be distributed unless the corporate capital is left intact.
25. b) The corporation must still be able to pay its liabilities when they become due.
26. c) A corporation may not pay dividends that are higher than their legally available retained earnings.
27. d) Dividends do not need to be formally approved by the Board of Directors.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

24. An entry for dividends is NOT made on the
25. a) date of declaration.
26. b) date of record.
27. c) date of payment (cash dividends).
28. d) date of distribution (stock dividends).

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

25. Cash dividends are paid on the basis of the number of shares
26. a) authorized.
27. b) issued.
28. c) outstanding.
29. d) outstanding less the number of treasury shares.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

26. Jesse Corp. owns 4,000,000 shares of James Corp. On December 31, 2017, Jesse distributed these shares as a dividend to its shareholders. This is an example of a
27. a) property dividend.
28. b) stock dividend.
29. c) liquidating dividend.
30. d) cash dividend.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

27. Which of the following statements about property dividends is FALSE?
28. a) A property dividend is a nonreciprocal transfer of nonmonetary assets.
29. b) A property dividend is also called a dividend in kind.
30. c) The accounting for a property dividend should be based on the carrying value (book value) of the nonmonetary assets transferred.
31. d) The accounting for a property dividend should be based on the fair value of the nonmonetary assets transferred.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

28. The fair value of a property dividend should NOT be determined by
29. a) estimated realizable values in cash transactions involving similar assets.
30. b) quoted market prices.
31. c) independent appraisals.
32. d) arbitrary values assigned by the Board of Directors.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

29. Declaration and issuance of a stock dividend
30. a) has no effect on total assets, liabilities, or shareholders’ equity.
31. b) decreases the amount of working capital.
32. c) decreases total shareholders’ equity.
33. d) increases the current ratio.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

30. If a corporation wishes to “capitalize” part of their earnings, it may issue a
31. a) cash dividend.
32. b) stock dividend.
33. c) property dividend.
34. d) liquidating dividend.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

31. Which type of dividends do NOT reduce total shareholders’ equity?
32. a) cash dividends
33. b) stock dividends
34. c) property dividends
35. d) liquidating dividends

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

32. The declaration and issuance of a stock dividend larger than 25% generally
33. a) increases common shares outstanding and increases total shareholders’ equity.
34. b) increases retained earnings and increases total shareholders’ equity.
35. c) may increase or decrease common shares but does not change total shareholders’ equity.
36. d) decreases retained earnings but does not change total shareholders’ equity.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

33. Pryor Corporation issued a 2-for-1 common stock split. The shares had been originally issued at $10 per share. At what amount should retained earnings be capitalized for the additional shares issued?
34. a) There should be no capitalization of retained earnings.
35. b) $10 per share
36. c) market value on the declaration date
37. d) market value on the payment date

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

34. The issuer of a 5% common stock dividend to common shareholders should transfer from retained earnings to contributed capital an amount equal to the
35. a) book value of the shares issued.
36. b) market value of the shares issued.
37. c) minimum legal requirements.
38. d) par or stated value of the shares issued.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

35. As a minimum, how large in relation to total outstanding shares may a stock distribution be before it should be accounted for as a large stock dividend instead of as a small stock dividend?
36. a) no less than 2% to 5%
37. b) no less than 10% to 15%
38. c) no less than 20% to 25%
39. d) no less than 45% to 50%

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

36. The balance in the Common Stock Dividend Distributable account should be reported as a(n)
37. a) deduction from the Common Shares account.
38. b) addition to contributed capital.
39. c) current liability.
40. d) contra-asset.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

37. A dividend which is a return to shareholders of a portion of their original capital investments is known as a
38. a) liquidating dividend.
39. b) property dividend.
40. c) cash dividend.
41. d) participating dividend.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

38. A mining company declared a liquidating dividend. The journal entry to record the declaration must include a debit to
39. a) Retained Earnings.
40. b) Contributed Capital.
41. c) Accumulated Other Comprehensive Income.
42. d) Dividend Payable.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

39. A feature common to both stock splits and stock dividends is
40. a) a transfer to earned capital of a corporation.
41. b) that there is no effect on total shareholders’ equity.
42. c) an increase in total liabilities of a corporation.
43. d) a reduction in the contributed capital of a corporation.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

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

Common Shares    Retained Earnings

1. a) no effect no effect
2. b) increase no effect
3. c) decrease no effect
4. d) decrease decrease

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

41. Which of the following is NOT a valid reason for a stock split?
42. a) to increase the shareholder base by increasing the number of shares outstanding and making them more marketable
43. b) to reduce the market price of the shares so that more individuals can afford to invest in the shares
44. c) to increase the market price of the shares to make the stock more attractive
45. d) to reduce the market price of the shares to make the stock more attractive

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

42. Dividends are NOT paid on
43. a) noncumulative preferred shares.
44. b) non-participating preferred shares.
45. c) treasury shares.
46. d) non-voting common shares.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

43. Noncumulative preferred dividends in arrears
44. a) must be paid before any other cash dividends can be distributed.
45. b) are not paid or disclosed.
46. c) are disclosed as a liability until paid.
47. d) are paid to preferred shareholders if sufficient funds remain after payment of the current preferred

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

44. Aye Corp. was organized in January 2017 with authorized capital of 1,000,000 no par value common shares. On February 1, 2017, shares were issued at $10 per share. On March 1, 2017, the corporation’s lawyer accepted 7,000 common shares with a fair value of $85,000 in settlement for legal services. Total shareholders’ equity would increase on

February 1, 2017        March 1, 2017

1. a) yes no
2. b) yes yes
3. c) no no
4. d) no yes

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

45. On December 1, 2017, Dee Ltd. agreed to sell 40,000 of their no par common shares on a subscription basis. On that day, 25% of the subscription price was collected as a down payment, with the remaining 75% due in 2018. On the December 31, 2017 statement of financial position, the shareholders’ equity section would report
46. a) common shares issued for 25% of the subscription price.
47. b) common shares issued for 100% of the subscription price less a subscription receivable for 75% of the subscription price.
48. c) common shares subscribed for 75% of the subscription price.
49. d) common shares subscribed for 100% of the subscription price less a subscription receivable for 100% of the subscription price.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

46. The dollar amount of a cash dividend to be paid is determined on the date of
47. a) record.
48. b) declaration.
49. c) declaration or date of record, whichever is earlier.
50. d) payment.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

47. An investment in marketable securities was distributed to shareholders as a property dividend. The dividend should be recorded at the
48. a) fair value of the asset transferred or the book value of the asset transferred, whichever is higher.
49. b) fair value of the asset transferred or the book value of the asset transferred, whichever is lower.
50. c) fair value of the asset transferred.
51. d) book value of the asset transferred.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

48. Emily Corp. owned shares in Carr Ltd. On December 1, 2017, Emily declared and distributed a property dividend of Carr shares when their fair value exceeded the carrying amount. As a consequence of the dividend declaration and distribution, the accounting effects would be

Property Dividends

  Recorded At       Retained Earnings

1. a) fair value decreased
2. b) fair value increased
3. c) cost increased
4. d) cost decreased

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

49. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?

Contributed

Surplus            Retained Earnings

1. a) decrease no effect
2. b) decrease decrease
3. c) no effect decrease
4. d) no effect no effect

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

50. How would the declaration of a 15% stock dividend affect each of the following?

Total

Retained Earnings      Shareholders’ Equity

1. a) no effect no effect
2. b) no effect decrease
3. c) decrease no effect
4. d) decrease decrease

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

51. On May 1, 2017, when the market value of Jay Ltd.’s common shares was $15 per share, the corporation had 100,000 no par value common shares issued and outstanding. On this day, Jay declared and issued a 15% common stock dividend. As a result of this stock dividend, Jay’s total shareholders’ equity
52. a) increased by $225,000.
53. b) decreased by $225,000.
54. c) decreased by $15,000.
55. d) did not change.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

52. How would total shareholders’ equity be affected by the declaration of each of the following?

Stock dividend             Stock split

1. a) no effect increase
2. b) decrease decrease
3. c) decrease no effect
4. d) no effect no effect

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

53. Shareholders’ equity is generally classified into two major categories:
54. a) contributed capital and donated capital.
55. b) contributed surplus and retained earnings.
56. c) retained earnings and accumulated other comprehensive income.
57. d) earned capital and contributed capital.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

54. How should cumulative preferred dividends in arrears be shown on the balance sheet?
55. a) as an increase in shareholders’ equity
56. b) as an increase in current liabilities
57. c) as an increase in current liabilities for the amount expected to be declared within the next year, and as an increase in long-term liabilities for the balance
58. d) by note disclosure only

 

Answer: d

 

Difficulty: Medium

Learning Objective: Understand capital disclosure requirements.

Section Reference: Capital Disclosures

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

55. Under IFRS, the Statement of Changes in Shareholders’ Equity must include
56. a) share capital and retained earnings only.
57. b) share capital and contributed surplus only.
58. c) share capital, accumulated other comprehensive income, contributed surplus, and retained earnings.
59. d) retained earnings, share capital, and accumulated other comprehensive income.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Understand capital disclosure requirements.

Section Reference: Capital Disclosures

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

56. The payout ratio can be calculated by
57. a) dividing cash dividends per share by earnings per share.
58. b) dividing cash dividends by net income less preferred dividends.
59. c) dividing cash dividends by market price per share.
60. d) dividing net income by cash dividends per share.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

57. The rate of return on common shareholders’ equity shows
58. a) the amount of leverage the corporation employs.
59. b) the amount that each common shareholder would receive if the company were liquidated.
60. c) how many dollars of net income were earned for each dollar invested by the owners.
61. d) how the market value of the shares relates to the current earnings per share.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

58. The price earnings (P/E) ratio is calculated by
59. a) dividing dividends per share by earnings per share.
60. b) dividing the market price of the share by earnings per share.
61. c) dividing net income by cash dividends per share.
62. d) dividing cash dividends paid by the market price per share.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

59. Hamilton Ltd. has both common shares and non-participating, noncumulative preferred shares outstanding. The book value per common share is NOT affected by
60. a) the declaration of a preferred stock dividend.
61. b) the declaration of a common stock dividend when the market price of the common is equal to its issue price.
62. c) a 2-for-1 split of the common shares.
63. d) the payment of a previously declared cash dividend on the common shares.

 

Answer: d

 

Difficulty: Hard

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*60. A “gain” on the sale of treasury shares should be credited to

1. a) contributed surplus.
2. b) the share capital account.
3. c) retained earnings.
4. d) other income.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*61. Gupta Corp. purchased its own shares on January 1, 2017 for $20,000 and debited Treasury Shares 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 debit to

1. a) Contributed Surplus to the extent that previous net “gains” from sales or retirements of the same class of shares are included therein; otherwise, to retained earnings.
2. b) Contributed Surplus regardless of whether there have been previous net “gains” from sales or retirements of the same class of shares included therein.
3. c) Retained Earnings.
4. d) Loss from Sale of Treasury Shares.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*62. An acceptable method of reporting Treasury Shares in the balance sheet is

1. a) as a contra to contributed surplus.
2. b) as a contra to the share capital account.
3. c) as an account with a debit balance after retained earnings.
4. d) as a current asset.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*63. Common shares issued would exceed common shares outstanding as a result of the

1. a) declaration of a cash dividend.
2. b) declaration of a stock dividend.
3. c) purchase of treasury shares.
4. d) payment in full of subscribed shares.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*64. At its date of incorporation, Emm Inc. sold 100,000 of its $10 par common shares at $11 per share. During the current year, Emm acquired 20,000 of these common shares at $16 per share to hold as treasury shares. Subsequently, these shares were sold at $12 per share. Emm has had no other sales or acquisitions of its common shares. What effect does the sale of the treasury shares have on the following accounts?

Retained Earnings       Contributed Surplus

1. a) decrease decrease
2. b) no effect decrease
3. c) decrease no effect
4. d) no effect no effect

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*65. The reacquisition of issued and outstanding shares will cause the number of shares outstanding to decrease if they are accounted for

As Treasury Shares        By Retirement

1. a) yes no
2. b) no                              no
3. c) yes                             yes
4. d) no                             yes

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*66. For a two-year period following a properly implemented financial reorganization, Grant Corporation operated profitably and paid dividends equal to 10% of its net income in each year. How could one determine that the financial reorganization had occurred?

1. a) could not unless comparative statements of financial position were presented
2. b) from the shareholders’ equity section
3. c) by the conservative dividend policy
4. d) from the disclosure of the reorganization in the notes to the financial statements

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*67. Immediately after a financial reorganization, the retained earnings account

1. a) has a zero balance.
2. b) remains the same as it was before the financial reorganization.
3. c) is frozen and dated, and subsequent transactions will be shown separately.
4. d) has a debit balance equal to the write down of the assets which were overstated.

 

Answer: a

 

Difficulty: Hard

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*68. Which of the following statements is FALSE concerning the requirements that must be fulfilled under a financial reorganization?

1. a) The corporation’s shareholders must approve the financial reorganization.
2. b) Immediately after the financial reorganization, the corporation must have a credit balance in retained earnings.
3. c) New asset valuations should not deliberately over- or understate assets or liabilities.
4. d) The corporation may have additional contributed surplus arising from the financial reorganization.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*69. Which of the following statements is correct?

1. a) IFRS gives specific guidance for reacquisition of shares.
2. b) IFRS does not give explicit guidance for accounting for financial reorganizations.
3. c) IFRS requires that changes in retained earnings are presented in a retained earnings statement, and that changes in capital accounts are given in the notes.
4. d) ASPE does not give guidelines for accounting for financial reorganizations.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*70. Which statement is FALSE regarding financial reorganizations?

1. a) The proposed reorganization should receive the approval of the corporation’s shareholders before it is put into effect.
2. b) The new asset and liability valuations should be fair.
3. c) Subsequent to the financial reorganization, no disclosures are required in subsequent periods.
4. d) After the reorganization, the corporation must have a zero balance in the Retained Earnings account.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Multiple Choice—Computational

 

 

71. Berlin Corporation was organized on January 1, 2017, with 400,000 no par value common shares authorized. During 2017, the corporation had the following share transactions:

Jan 5        Issued 150,000 shares at $10 per share

Apr 6        Issued 50,000 shares at $12 per share

Jun 8        Issued 50,000 shares at $14 per share

Jul 28       Purchased 20,000 shares at $11 per share and cancelled them

Dec 31     Issued 20,000 shares at $18 per share

What is the total amount of contributed surplus at December 31, 2017?

1. a) $ 0
2. b) $ 4,000
3. c) $ 20,000
4. d) $220,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: (150,000 × $10) + (50,000 × $12) + (50,000 × $14) = $2,800,000
$2,800,000 ÷ 250,000 = $11.20; $11.20 × 20,000 = $224,000
$11.00 × 20,000 = $220,000; $224,000 – $220,000 = $4,000.

 

 

72. Rome Corp. was organized on January 1, 2017, with the following authorized share capital:

20,000 common shares, no par value

6,000, $.05, cumulative preferred shares, no par value

During 2017, the corporation issued 10,000 common shares for $350,000 and 5,000 preferred shares at $24 per share. On December 20, 2017, subscriptions for 1,000 preferred shares were taken at a purchase price of $30. These subscribed shares were paid for on January 2, 2018. What should Rome report as total contributed capital on its December 31, 2017, balance sheet?

1. a) $440,000
2. b) $450,000
3. c) $470,000
4. d) $500,000

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $350,000 + (5,000 × $24) = $470,000. (The Subscriptions Receivable and Common Shares Subscribed accounts should preferably both be in contributed capital, so they would cancel each other out.)

 

 

Use the following information to answer questions 73–74.

 

Berne Ltd. was organized on January 1, 2017, with 300,000 no par value common shares authorized. During 2017, the corporation had the following share transactions:

Jan    4     Issued 120,000 shares at $10 per share

Mar    8     Issued 40,000 shares at $11 per share

May 17     Purchased 15,000 shares at $12 per share and cancelled them

Jul     6     Issued 30,000 shares at $13 per share

Aug  27     Issued 10,000 shares at $14 per share

 

 

73. The total amount in the Common Shares account at December 31, 2017 is
74. a) $2,170,000.
75. b) $2,016,250.
76. c) $2,007,250.
77. d) $1,990,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: [(120,000 × $10) + (40,000 × $11)] ÷ 160,000 = $10.25
(120,000 × $10) + (40,000 ×$11) – (15,000 × $10.25) + (30,000 × $13) +(10,000 ×$14) = $2,016,250

 

 

74. The total amount of contributed surplus at December 31, 2017 is
75. a) $
76. b) $ 26,250.
77. c) $153,750.
78. d) $180,000.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $-0. Paid more than carrying value of the shares, therefore difference Dr. to Retained Earnings

 

 

Use the following information to answer questions 75–76.

 

Prague Corp. is authorized to issue 400,000 no par value common shares. Subscribers agree to purchase shares at $15 per share with a 30% down payment.

 

 

75. Assume that subscribers agree to purchase 50,000 shares and make the required down payment. The journal entry to record receipt of the subscriptions includes a
76. a) debit to Common Shares Subscribed for $750,000.
77. b) credit to Common Shares Subscribed for $750,000.
78. c) credit to Common Shares for $225,000.
79. d) credit to Subscriptions Receivable for $525,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 50,000 × $15 = $750,000

 

 

76. The journal entry to record the issuance of the shares upon receipt of the final instalment includes a
77. a) debit to Common Shares Subscribed for $750,000.
78. b) credit to Common Shares for $525,000.
79. c) credit to Common Shares for $225,000.
80. d) debit to Subscriptions Receivable for $525,000.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 50,000 × $15 = $750,000

 

 

77. Presented below is information related to Madrid Corporation:

Subscriptions Receivable, Common Shares…………….   $  120,000

Common Shares, no par value……………………………….    3,810,000

Common Shares Subscribed………………………………….       240,000

$4 Preferred Shares, no par value…………………………..    1,440,000

Retained Earnings…………………………………………………       900,000

The total amount that will be added to the Common Shares account when the final subscriptions are received will be

1. a) $120,000.
2. b) $240,000.
3. c) $360,000.
4. d) cannot be determined from the information given.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $240,000, the subscription price

 

 

78. Scrooge Ltd. owns 100,000 shares of Marley Ltd. common shares, which are being accounting for by the equity method. On December 15, 2017, when Scrooge’s “Investment in Common Shares of Marley Ltd.” account has a carrying value of $5 per share, Scrooge declares all these shares to its shareholders as a property dividend, to be distributed on December 31, 2017. Scrooge had originally paid $8 for each share. Marley has 1,000,000 shares issued and outstanding, for which the quoted market price was $7 per share on the declaration date and $9 per share on the distribution date. Ignoring income taxes, what would be the reduction in Scrooge’s shareholders’ equity as a result of the above transactions?
79. a) $500,000
80. b) $700,000
81. c) $800,000
82. d) $900,000

 

Answer: a

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: (100,000 × $7) value of dividend – [100,000 x ($7 – $5)] gain on appreciation = $500,000

 

 

79. Lisbon Corp. has 1,000,000 no par common shares authorized, of which 800,000 shares are outstanding. The average carrying value of the shares is $5 per share. When the market value was $10 per share, Lisbon declared a 10% stock dividend. What entry, if any, should Lisbon make to record this dividend declaration?
80. a) No entry
81. b) Retained Earnings…………………………………………………………………… 400,000

Common Stock Dividend Distributable……………………………….                          400,000

1. c) Retained Earnings…………………………………………………………………… 800,000

Common Stock Dividend Distributable……………………………….                          800,000

1. d) Stock Dividend Payable……………………………………………………………. 800,000

Common Stock Dividend Distributable……………………………….                          800,000

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 800,000 × $10 x 10% = $800,000

 

 

80. On June 30, 2017, when Vienna Inc.’s shares were selling at $65 per share, its capital accounts were as follows:

Common Shares, no par, 60,000 shares issued

and outstanding…………………………………………………………..       $2,400,000

Retained Earnings……………………………………………………………..        3,600,000

If a 5% stock dividend were declared and distributed, the Common Shares account balance would be

1. a) $2,205,000.
2. b) $2,400,000.
3. c) $2,595,000.
4. d) $3,600,000.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $2,400,000 + (60,000 x 5% x $65) = $2,595,000

 

 

81. The shareholders’ equity section of Zagreb Corp. at December 31, 2016 was:

Common shares, no par value; authorized 20,000 shares;

issued and outstanding 10,000 shares……………………………….      $ 50,000

Retained earnings………………………………………………………………….      200,000

$250,000

On February 28, 2017, when the market value of Zagreb’s shares was $12 per share, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. For the two months ended February 28, 2017, Zagreb reported a net loss of $20,000.

What amount should Zagreb report as retained earnings at February 28, 2017?

1. a) $162,000
2. b) $180,000
3. c) $182,000
4. d) $198,000

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $200,000 – $20,000 – (1,500 × $12) = $162,000

 

 

82. Cash dividends declared on the no par value common shares of Athens Corp. were as follows:

1st quarter of 2017……………………….     $330,000

2nd quarter of 2017………………………       350,000

3rd quarter of 2017………………………       420,000

4th quarter of 2017……………………….       450,000

The 4th quarter cash dividend was declared on December 20, 2017, to shareholders of record on December 31, 2017, to be paid on January 9, 2018. In addition, Athens declared a 10% common stock dividend on December 1, 2017, when there were 400,000 shares issued and outstanding, and the market value of the common shares was $16 per share. The shares were issued on December 21, 2017.

What was the effect on Athens’ shareholders’ equity accounts during 2017 as a result of the above transactions?

Common Shares               Retained Earnings

1. a) $ -0-                         $1,550,000 debit
2. b) $540,000 credit $1,740,000 debit
3. c) $640,000 credit $2,190,000 debit
4. d) $300,000 credit $1,950,000 debit

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 400,000 x 10% x $16 = $640,000 Cr. (common shares, i.e. stock dividend)
$330,000 + $350,000 + $420,000 + $450,000 + $640,000
= $2,190,000 Dr. (retained earnings)

 

 

83. The shareholders’ equity of Tirana Ltd. at July 31, 2017 is presented below:

Common shares, no par value, authorized 400,000 shares,

issued and outstanding 200,000 shares…………………………….. $4,160,000

Retained earnings………………………………………………………………….  2,650,000

Total shareholders’ equity………………………………………………………. $6,810,000

On August 1, 2017, the board of directors declared a 10% stock dividend, to be distributed on September 15. The market price of Tirana’s common shares was $35 on August 1 and $38 on September 15. What is the debit to retained earnings as a result of the declaration and distribution of this stock dividend?

1. a) $ 400,000
2. b) $ 700,000
3. c) $ 760,000
4. d) $1,400,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 200,000 × 10% × $35 = $700,000

 

 

84. On January 1, 2017, when the market value of their common shares was $20 per share, Belgrade Inc. declared a 10% common stock dividend. Shareholders’ equity before the stock dividend was declared was:

Common shares, no par value, authorized 200,000 shares,

issued and outstanding 120,000 shares…………………………….. $1,350,000

Retained earnings………………………………………………………………….  1,700,000

Total shareholders’ equity………………………………………………………. $3,050,000

What was the effect on Belgrade’s retained earnings as a result of the stock dividend?

1. a) $240,000 decrease
2. b) $400,000 decrease
3. c) $480,000 decrease
4. d) $800,000 decrease

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 120,000 × 10% × $20 = $240,000 decrease

 

 

85. Warsaw Ltd. has 100,000 no par value common shares authorized, issued, and outstanding. All 100,000 shares were issued at $8 per share. Retained earnings are $120,000. If 10,000 common shares were reacquired at $6 and cancelled,
86. a) shareholders’ equity would decrease $80,000.
87. b) contributed surplus would increase $20,000.
88. c) contributed surplus would decrease $20,000.
89. d) retained earnings would decrease $10,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 10,000 × ($8 – $6) = $20,000

 

 

86. Vilnius Corporation has 100,000 no par value common shares authorized, issued and outstanding. All 100,000 shares were issued at $90 per share. Retained earnings are $250,000. If 2,000 shares were reacquired at $98 and cancelled, shareholders’ equity would decrease by
87. a) $
88. b) $ 16,000.
89. c) $180,000.
90. d) $196,000.

 

Answer: d

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 2,000 × $98 = $196,000

 

 

87. On December 31, 2017, Monaco Ltd. had outstanding 2,000 no par value, $6, cumulative preferred shares and 30,000 no par value common shares. At this time, dividends in arrears on the preferred shares were $6,000. Cash dividends declared in 2018 totalled $30,000. The amounts paid to each class of shares were

Preferred Shares          Common Shares

1. a) $6,000 $24,000
2. b) $12,000 $18,000
3. c) $24,000 $6,000
4. d) $18,000 $12,000

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $6,000 + (2,000 × $6) = $18,000 (preferred shares)
$30,000 – $18,000 = $12,000 (common shares)

 

 

Use the following information for questions 88–90.

 

Riga Ltd. has outstanding 100,000 no par common shares and 20,000 no par, $0.40, preferred shares issued at $5 each. The preferred shares are cumulative and non-participating. Dividends have been paid every year except the past two years and the current year.

 

 

88. Assuming that $50,000 will be distributed as a dividend in the current year, how much will the common shareholders receive?
89. a) $24,000
90. b) $26,000
91. c) $34,000
92. d) $42,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $50,000 – (20,000 × $0.40 × 3) = $26,000

 

 

89. Assuming that $21,000 will be distributed as a dividend in the current year, how much will the preferred shareholders receive?
90. a) $ 0
91. b) $ 8,000
92. c) $16,000
93. d) $21,000

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 20,000 × $0.40 × 3 = $24,000 > $21,000

 

 

90. The Common Shares account currently shows a balance of $200,000. Assuming that $61,000 will be distributed as a dividend in the current year, and the preferred shares are also fully participating, how much will the common shareholders receive?
91. a) $37,000
92. b) $30,000
93. c) $31,000
94. d) $16,000

 

Answer: b

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 8% × $200,000 = $16,000 (equivalent dividend)
*2 ÷ 3 × $21,000 =      14,000_           (participation)
$30,000
*20,000 × $0.40 × 3 = $24,000 (preferred dividends)
$0.40 ÷ $5 = 8% dividend
$200,000 × 8% = $16,000 (equivalent common dividend)
Balance left = $61,000 – $24,000 – $16,000 = $21,000
Shared $200,000: $100,000 C:P i.e., 2:1

 

 

91. Sarajevo Ltd. currently has outstanding 20,000 no par value common shares with a carrying value of $200,000, and 10,000 no par value, $0.60, cumulative, fully participating preferred shares with a carrying value of $100,000. Dividends on the preferred shares are one year in arrears. Assuming that Sarajevo wishes to distribute $54,000 in dividends, the common shareholders will receive
92. a) $12,000.
93. b) $22,000.
94. c) $32,000.
95. d) $42,000.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback:

Common Shares
$200,000 × 6%           =          $12,000           (current year)
$200,000 × 10%*        =          20,000            (participating)
$32,000
*$54,000 – $12,000 – (10,000 × $0.60 × 2) = $30,000
 $30,000
$300,000 = 10%

 

 

Use the following information for questions 92–94.

 

Instanbul Corp. has outstanding 20,000 no par value, $0.80, preferred shares and 100,000 no par value common shares. Dividends have been paid every year except last year and the current year. The carrying value of the preferred shares is $200,000 and of the common shares is $300,000.

 

 

92. If the preferred shares are cumulative and non-participating and $100,000 is distributed as a dividend, the common shareholders will receive
93. a) $0.
94. b) $68,000.
95. c) $84,000.
96. d) $100,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $100,000 – (20,000 × $0.80 × 2) = $68,000

 

 

93. If the preferred shares are noncumulative and fully participating and $70,000 is distributed as a dividend, the common shareholders will receive
94. a) $0.
95. b) $42,000.
96. c) $46,000.
97. d) $54,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback:

Common Shares
$300,000 × 8%           =          $24,000           (current year)
$300,000 × 6%*          =          18,000            (participating)
$42,000
*$70,000 – $24,000 – (20,000 × $0.80) = $30,000
$30,000
$500,000 = 6%

 

 

94. If the preferred shares are cumulative and fully participating and $101,000 is distributed as a dividend, the common shareholders will receive
95. a) $0.
96. b) $51,000.
97. c) $61,000.
98. d) $69,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback:

Common Shares
$300,000 × 8%           =          $24,000           (current year)
$300,000 × 9%*          =          27,000            (participating)
$51,000
*$101,000 – $24,000 – (20,000 ×.8 × 2) = $45,000
$45,000 ÷ $500,000 = 9%

 

 

95. The December 31, 2017 condensed balance sheet of Bee Services, a proprietorship, follows:

Current assets………………………………………………………     $140,000

Property, plant and equipment (net)………………………..      130,000

$270,000

 

Liabilities………………………………………………………………      $ 70,000

Betty Bee, Capital…………………………………………………      200,000

$270,000

Fair values at December 31, 2017, are as follows:

Current assets………………………………………………………     $160,000

Equipment……………………………………………………………       210,000

Liabilities………………………………………………………………         70,000

 

On January 1, 2018, Bee Services was incorporated as Bee-Line Ltd., with 10,000 no par value common shares issued. How much should be credited to Common Shares?

1. a) $370,000
2. b) $300,000
3. c) $270,000
4. d) $200,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $160,000 + $210,000 – $70,000 = $300,000

 

 

96. On July 1, 2017, Cee Corp. issued 1,000 of its no par common shares and 2,000 of its no par preferred shares for a lump sum of $100,000. At this date Cee’s common shares were selling for $48 per share and the preferred shares for $36 per share. Using the relative fair value method, the amount of the proceeds allocated to the preferred shares account should be
97. a) $50,000.
98. b) $55,000.
99. c) $60,000.
100. d) $72,000.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: ($48 × 1,000) + ($36 × 2,000) = $120,000
$72,000
$120,000 × $100,000 = $60,000

 

 

97. Eff Ltd. was organized on January 2, 2017, with 100,000 no par value common shares authorized. During 2017, Eff had the following capital transactions:

Jan 5        Issued 75,000 shares at $14 per share

Jul 27       Purchased and retired 5,000 shares at $10 per share

Nov 25     Issued 4,000 shares at $13 per share

What would be the balance in the Contributed Surplus account at December 31, 2017?

1. a) $ 0
2. b) $10,000
3. c) $20,000
4. d) $50,000

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: 5,000 × 4 = $20,000

 

 

98. At December 31, 2016 and 2017, Gee Corp. had outstanding 3,000 no par value, $8, cumulative preferred shares and 10,000 no par value common shares. At December 31, 2016, dividends in arrears on the preferred shares were $12,000. Cash dividends declared in 2017 totalled $45,000. What amounts were payable on each class of shares?

Preferred Shares     Common Shares

1. a) $24,000 $21,000
2. b) $33,000 $12,000
3. c) $36,000 $9,000
4. d) $45,000 $0

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: (3,000 × $8) + $12,000 = $36,000
$45,000 – $36,000 = $9,000

 

 

99. Eye Corp. owned 20,000 shares of Lash Corp., which had been purchased in 2013 for $300,000. On December 15, 2017, Eye declared a property dividend of all of its Lash Corp. shares. The property dividend was distributed on January 15, 2018. On the declaration date, the fair value of Eye’s investment in Lash was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of
100. a) $
101. b) $100,000.
102. c) $300,000.
103. d) $400,000.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

Feedback: $400,000 (market value)

 

 

100. Presented below is information related to Madrid Corporation:

Subscriptions Receivable, Common Shares……………………………..   $  120,000

Common Shares, no par value………………………………………………..    3,810,000

Common Shares Subscribed…………………………………………………..       240,000

$4 Preferred Shares, no par value……………………………………………    1,440,000

Retained Earnings………………………………………………………………….       900,000

The total shareholders’ equity of Madrid Corporation is

1. a) $6,270,000.
2. b) $6,300,000.
3. c) $6,390,000.
4. d) $6,510,000.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback: $3,810,000 + $240,000 + $1,440,000 + $900,000 – $120,000 = $6,270,000

 

 

101. Sofia Ltd. reported net income of $5,300,000 for 2017, and earnings per share of $5.00. Included in the net income was $750,000 of bond interest expense related to its long-term debt. The income tax rate for 2017 was 30%. Dividends paid on preferred shares were $1,000,000. The payout ratio on common shares was 25%. What were the dividends paid on common shares in 2017?
102. a) $1,075,000
103. b) $1,325,000
104. c) $1,206,250
105. d) $1,612,500

 

Answer: a

 

Difficulty: Medium

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback:           =.25; X = $1,075,000

 

 

102. For calendar 2017, Budapest Corp. reported net income of $29,280 and earnings per share of $2.46. There were 12,000 common shares outstanding during 2017. On Dec 31, 2017, the market price for Budapest’s common shares was $32. To the nearest whole number, what is Budapest’s price earnings ratio at Dec 31, 2017?
103. a) 13
104. b) 32
105. c) 375
106. d) 915

 

Answer: a

 

Difficulty: Medium

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback: $32 ÷ $2.46 = 13

 

 

103. Presented below is information reported by Kiev Ltd. for their last two fiscal years:

Dec 31, 2018       Dec 31, 2017

Common shares……………………………………………………………      $ 75,000               $ 60,000

6% preferred shares, no par value, cumulative…………………       350,000                350,000

Retained earnings (post closing)……………………………………..         90,000                  75,000

Net income for year……………………………………………………….         60,000                  32,000

What is Kiev’s rate of return on common shareholders’ equity for 2018?

48. a) 48.8%
49. b) 26%
50. c) 25%
51. d) 22.4%

 

Answer: b

 

Difficulty: Hard

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback:  = 26%
Note: preferred shares are not included in denominator

 

 

Use the following information for questions 104–106.

 

The following data are provided for Croatia Corp.’s last two fiscal years:

Dec 31, 2018       Dec 31, 2017

Cumulative preferred shares, $5, no par value,

4,000 shares outstanding…………………………………………     $200,000              $200,000

Common shares, no par, 24,000 shares outstanding…………       400,000                310,000

Retained earnings (post closing)……………………………………..       480,000                430,000

Net income…………………………………………………………………..       180,000

Additional information:

On May 1, 2018, 6,000 common shares were issued. Although dividends had been declared regularly up to December 31, 2017, preferred dividends were NOT declared during 2018. The market price of the common shares was $100 at December 31, 2018.

 

 

104. To the nearest percent, the rate of return on common shareholders’ equity for 2018 is
105. a) 23%.
106. b) 22%.
107. c) 20%.
108. d) 18%.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback:          $180,000 – (4,000 x $5)                              = 20%
($400,000 + $480,000 + $310,000 + $430,000) ÷ 2
Note: preferred shares are not included in denominator

 

 

105. The price earnings ratio for 2018 is
106. a) 12.22.
107. b) 13.76.
108. c) 14.99.
109. d) 15.55.

 

Answer: b

 

Difficulty: Hard

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback:  = 13.76

 

 

106. The book value per common share at December 31, 2018 is
107. a) $16.67.
108. b) $18.18.
109. c) $27.50.
110. d) $35.83.

 

Answer: d

 

Difficulty: Hard

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

CPA: Financial Reporting

Bloomcode: Application

Feedback: ($400,000 + $480,000 – $20,000 pfd div in arrears) ÷ 24,000 = $35.83

 

 

*107. Minsk Corporation’s shareholders’ equity section at December 31, 2016 was:

Common shares, $5 par value, authorized 1,200,000 shares;

issued 900,000 shares; outstanding 800,000 shares;………       $4,500,000

Contributed surplus……………………………………………………………         3,250,000

Retained earnings……………………………………………………………..        5,240,000

12,990,000

Less treasury shares, at cost, 100,000 shares………………………           800,000

Total shareholders’ equity…………………………………………………..     $12,190,000

During 2017, Minsk sold 30,000 treasury shares at $10 per share. No other similar transactions occurred during 2017. What amount should be reported for this transaction on the 2017 income statement?

1. a) $0
2. b) $60,000 gain from sale
3. c) $60,000 comprehensive income
4. d) $20,000 gain from sale and $40,000 contributed surplus

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: 30,000 × $2 = $60,000, recorded as contributed surplus (not an income statement item)

 

 

*108. Stockholm Corp. was organized on January 1, 2017, with 100,000 common shares authorized, par value $10. On January 2, 2017, the corporation issued 15,000 of these shares for $190,000 cash. The entry to record this sale would be

1. a) Cash………………………………………………………………………………………. 190,000

Common Shares……………………………………………………………..                          190,000

1. b) Cash………………………………………………………………………………………. 190,000

Common Shares……………………………………………………………..                          150,000

Retained Earnings…………………………………………………………..                           40,000

1. c) Cash………………………………………………………………………………………. 190,000

Common Shares……………………………………………………………..                          150,000

Contributed Surplus…………………………………………………………                           40,000

1. d) Cash………………………………………………………………………………………. 100,000

Contributed Surplus………………………………………………………………….         90,000

Common Shares……………………………………………………………..                          190,000

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: Common shares 15,000 x $10 par = $150,000, bal to contributed surplus

 

 

*109. Nicosia Corp. was organized on January 1, 2017, with 50,000 common shares authorized, par value $15, and immediately sold 10,000 shares for $20 each. Later, Nicosia bought back 1,000 of these shares at $23 each and cancelled them. The entry to record the purchase would be

1. a) Common Shares……………………………………………………………………… 23,000

Cash………………………………………………………………………………                            23,000

1. b) Common Shares……………………………………………………………………… 15,000

Retained Earnings……………………………………………………………………           8,000

Cash………………………………………………………………………………                            23,000

1. c) Common Shares……………………………………………………………………… 20,000

Contributed Surplus………………………………………………………………….           3,000

Cash………………………………………………………………………………                            23,000

1. d) Common Shares……………………………………………………………………… 15,000

Contributed Surplus………………………………………………………………….           8,000

Cash………………………………………………………………………………                            23,000

 

Answer: d

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: Common shares 1,000 × $15 par = $15,000; bal to contributed surplus

 

 

Use the following information for questions *110–*111.

 

When Oslo Ltd. was organized last year, they issued 100,000 no par value common shares for $1,200,000. Earlier this year, the corporation purchased 4,000 of these shares at $15 per share, to be held in the treasury, and three months later, sold 2,000 treasury shares at $19 per share. There were no other treasury share transactions.

 

 

*110. To record the sale of the 2,000 treasury shares, Oslo should credit

1. a) Treasury Shares for $38,000.
2. b) Treasury Shares for $20,000 and Contributed Surplus for $18,000.
3. c) Treasury Shares for $30,000 and Contributed Surplus for $8,000.
4. d) Treasury Shares for $30,000 and Retained Earnings for $8,000.

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: 2000 × $15 = $30,000; 2,000 × $4 = $8,000

 

 

*111. If, instead of holding the 4,000 shares as treasury shares, Oslo had decided to cancel them, Oslo should debit

1. a) Common Shares for $48,000 and Retained Earnings for $12,000.
2. b) Contributed Surplus for $48,000 and Retained Earnings for $12,000.
3. c) Contributed Surplus for $60,000.
4. d) Common Shares for $60,000.

 

Answer: a

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: Common shares 4,000 × $12 (average issue price)= $48,000; R/E 4,000 × $3 = $12,000

 

 

*112. London Corporation has 50,000 no par value common shares authorized, issued and outstanding. All 50,000 shares were issued at $40 per share. Retained earnings are $40,000. If 3,000 of these shares were reacquired at $50 and were held as treasury shares,

1. a) shareholders’ equity would increase by $150,000.
2. b) contributed surplus would decrease by at least $30,000.
3. c) shareholders’ equity would decrease by $150,000.
4. d) common shares would increase by $150,000.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: 3,000 × $50 = $150,000 (cost of treasury shares)

 

 

*113. On December 1, 2017, Dublin Ltd. exchanged 10,000 of its no par value common shares (being held in the treasury) for a used machine. The treasury shares were acquired by Dublin for $35 per share. On the date of the exchange, the common shares, which had originally been issued at $30 per share, had a market value of $55 per share. As a result of this exchange, Dublin’s total shareholders’ equity will increase by

1. a) $300,000.
2. b) $350,000.
3. c) $400,000.
4. d) $550,000.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: 10,000 × $55 = $550,000

 

 

Use the following information for questions *114–*115.

 

Galba Corp.’s shareholders’ equity at January 1, 2017 was:

Common shares, no par value; authorized 200,000 shares;

outstanding 75,000 shares……………………………………………      $ 1,050,000

Retained earnings……………………………………………………………..            730,000

Total  …………………………………………………………………………       $1,780,000

During 2017, Galba had the following share transactions:

Acquired 2,000 treasury shares for $90,000

Sold 1,200 treasury shares at $50 a share

Retired the remaining treasury shares

No other share transactions occurred during 2017.

 

 

*114. The total contributed surplus at December 31, 2017 is

800. a) $24,800.
801. b) $11,200.
802. c) $ 6,000.
803. d) $ 0.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: 1,200 × $5 = $6,000

 

 

*115. Instead, assume Galba cancelled the 2,000 shares when it acquired them for $90,000. The journal entry to record the retirement would be

1. a) Dr. Common Shares, $90,000; Cr. Cash, $90,000.
2. b) Dr. Treasury Shares, $90,000; Cr. Cash, $90,000.
3. c) Dr. Common Shares, $28,000; Dr. Contributed Surplus, $62,000; Cr. Cash, $90,000.
4. d) Dr. Common Shares, $28,000; Dr. Retained Earnings, $62,000; Cr. Cash, $90,000.

 

Answer: d

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: avg issue price $1,050,000 ÷ 75,000 = $14, Dr C/S 2,000 x $14 = $28,000

 

 

Use the following information for questions *116–*117.

 

At December 31, 2016, the balance in Helsinki Ltd.’s retained earnings account was $420,000. During 2017, Helsinki had the following transactions:

Acquired 5,000 treasury shares at $27 a share. The shares are no par and had originally been issued for $24 per share. There had been no previous treasury shares transactions.

Sold the 5,000 treasury shares at $32 a share.

Reported net income of $150,000.

 

 

*116. The balance in retained earnings at December 31, 2017 would be

1. a) $555,000.
2. b) $570,000.
3. c) $585,000.
4. d) $610,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $420,000 + $150,000 = $570,000

 

 

*117. Instead, assume Helsinki cancelled the 5,000 shares when it acquired them. The balance in retained earnings at December 31, 2017 would then be

1. a) $555,000.
2. b) $570,000.
3. c) $585,000.
4. d) $610,000.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $420,000 – (5,000 × $3) + $150,000 = $555,000

 

 

*118. At December 31, 2016, the balance of Glasgow Ltd.’s retained earnings account was $450,000. During 2017, the company had the following transactions:

Acquired 5,000 treasury shares at $75 per share. The shares are no par value and had originally been issued for $65 per share. There had been no previous treasury share transactions.

Net income for 2017 was $400,000.

Sold the 5,000 treasury shares at $80 per share.

What is the balance in retained earnings at December 31, 2017?

1. a) $900,000
2. b) $850,000
3. c) $775,000
4. d) $762,500

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $450,000 + $400,000 = $850,000. Sale of treasury shares above cost has no effect on R/E.

 

 

*119. On January 1, 2017, Bratislava Corporation had 110,000 no par value common shares outstanding, which had been issued at $5 each. On June 1, the corporation acquired 10,000 shares to be held in the treasury. On December 1, when the market price of the shares was $4, the corporation declared a 10% stock dividend to be issued to shareholders of record on December 16. What was the impact of the 10% stock dividend on the retained earnings account?

1. a) $50,000 decrease
2. b) $44,000 decrease
3. c) $40,000 decrease
4. d) no effect

 

Answer: c

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: (110,000 – 10,000) x 10% x $4 = $40,000 decrease

 

 

*120. On December 31, 2016, the shareholders’ equity section of Kay Inc. was as follows:

Common shares, no par value: authorized 30,000 shares;

issued and outstanding 9,000 shares…………………………………     $206,000

Retained earnings………………………………………………………………….      261,000

Total shareholders’ equity……………………………………………………….     $467,000

On March 31, 2017, when the market value of Kay’s shares was $27 per share, the corporation declared a 20% stock dividend, and accordingly 1,800 additional shares were issued. For the three months ended March 31, 2017, Kay reported a net loss of $48,000. The balance of Kay’s retained earnings at March 31, 2017, should be

400. a) $164,400.
401. b) $213,000.
402. c) $216,600.
403. d) $261,600.

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $261,000 – $48,000 – 1,800 × $27) = $164,400

 

 

*121. In 2017, Elle Corp. acquired 9,000 of its own no par value common shares at $18 per share, to be held in the treasury. In 2018, Elle sold 6,000 of these shares at $25 per share. What accounts and what amounts should Elle credit in 2018 to record this sale?

Treasury       Contributed              Retained           Common

  Shares           Surplus                Earnings             Shares

1. a) $108,000                                             $42,000
2. b) $108,000 $ 42,000
3. c) $108,000 $42,000
4. d)                $42,000           $108,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

Feedback: (6,000 × $18) = $108,000; (6,000 × $7) = $42,000

 

 

Use the following information for questions *122–*124.

 

The balances in Belfast Inc.’s shareholders’ equity accounts at December 31, 2017 are:

Common shares, no par, 50,000 authorized, 40,000 outstanding….. .. $1,300,000

Retained earnings (deficit)……………………………………………………….. ….. (364,000)

At this, time, a financial reorganization was approved. Equipment was written down $101,800, and inventory increased $5,800.

 

 

*122. As the first step of the reorganization, how much should the Common Shares account be adjusted by?

1. a) $364,000
2. b) $400,000
3. c) $460,000
4. d) $1,000,000

 

Answer: a

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $364,000, the amount of the deficit

 

 

*123. What is the net increase in the deficit from revaluation of assets?

1. a) $ 0
2. b) $96,000
3. c) $101,800
4. d) $107,600

 

Answer: b

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Application

Feedback: $101,800 – $5,800 = $96,000

 

 

*124. What will the balance in retained earnings be after the reorganization?

1. a) $936,000
2. b) $(460,000)
3. c) $(268,000)
4. d) $ 0

 

Answer: d

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Application

Feedback: RE should always have a $0 balance after reorganization

 

 

Exercises

 

 

Ex. 15-125 Lump sum issuance of shares

Bertram Corp. is authorized to issue 15,000 no par value common shares and 5,000 no par value preferred shares. On January 16, 2017, the corporation sold 50 common shares and 75 preferred shares for a lump sum of $18,000. The common were selling at $50 and the preferred at $100.

 

Instructions

Using the relative fair value method, prepare the entry to record the sale for cash. Show calculations.

 

Solution 15-125

Cash…………………………………………………………………………………………..         18,000

Common Shares……………………………………………………………………                              4,500

Preferred Shares……………………………………………………………………                            13,500

 

Calculations:

Common ($2,500 ÷ $10,000) × $18,000 = $4,500

Preferred ($7,500 ÷ $10,000) × $18,000 = $13,500

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Analysis

 

 

Ex. 15-126 Shareholders’ equity

Indicate the effect of each of the following transactions on total shareholders’ equity by placing an “X” in the appropriate column.

Increase         Decrease          No Effect

 

1. Declaration of a cash dividend. _________       _________       _________

 

2. Operating loss for the period. _________       _________       _________

 

3. Retirement of bonds at more than

carrying value.                                                      _________       _________       _________

 

4. Declaration of a stock dividend. _________       _________       _________

 

5. Exchanging common shares for machinery. _________       _________       _________

 

6. Conversion of bonds into common shares. _________       _________       _________

 

7. Not declaring a dividend on cumulative

preferred shares.                                                   _________       _________       _________

 

8. Payment of a cash dividend. _________       _________       _________

 

Solution 15-126

Increase         Decrease          No Effect

1. Declaration of a cash dividend.                             X                                   

 

2. Operating loss for the period.                             X                                   

 

3. Retirement of bonds at more than

carrying value.                                                                                  X                                   

 

4. Declaration of a stock dividend.                                                     X           

 

5. Exchanging common shares for machinery.     X                                                           

 

6. Conversion of bonds into common shares.     X                                                           

 

7. Not declaring a dividend on cumulative

preferred shares.                                                                                                       X           

 

8. Payment of a cash dividend.                                                     X           

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 15-127 Share subscriptions

On April 28, 2017, Sweden Inc. accepted subscriptions for 10,000 of its no par value common shares. At this time, the shares were selling for $45 each. A 40% down payment was received with the remainder due in six months. On October 28, 2017 the balance of the subscription price was received and the shares were issued.

 

Instructions

2017. a) Prepare the journal entries required on April 28, 2017.
2018. b) Prepare the journal entries required on October 28, 2017.

 

Solution 15-127

1. a) Subscriptions Receivable (10,000 x $45)…………………………………. 450,000

Common Shares Subscribed…………………………………………….                          450,000

 

Cash   ($450,000 x 40%)…………………………………………………………       180,000

Subscriptions Receivable…………………………………………………                          180,000

 

1. b) Cash……………………………………………………………………………………. 270,000

Subscriptions Receivable…………………………………………………                          270,000

 

Common Shares Subscribed…………………………………………………..       450,000

Common Shares……………………………………………………………..                          450,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-128 Shares issued in noncash transactions

What are the different bases for share valuation when assets other than cash are received for issued shares?

 

Solution 15-128

The general rule to be applied when shares are issued for services or assets other than cash is that the shares be recorded at either their fair value or the fair value of the services or assets, whichever is more clearly determinable. If neither is readily determinable, the value to be assigned is generally established by the board of directors.

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

Ex. 15-129 Reacquisition of shares

Norway Corp. originally sold 1,000,000 of its no par common shares at $13 a share. Later, Norway bought back 6,000 shares of these shares at $17 a share. Norway is incorporated under the CBCA and therefore retired these shares.

 

Instructions

Record the retirement of the shares.

 

Solution 15-129

Common Shares (6,000 x $13)………………………………………………………         78,000

Retained Earnings………………………………………………………………………..         24,000

Cash (6,000 x $17)…………………………………………………………………                          102,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-130 Reacquisition of shares

For numerous reasons, a corporation may reacquire its own shares. When a corporation does this, the CBCA requires that the purchased shares be cancelled.

 

Instructions

Explain how a corporation would account for each of the following:

1. a) Purchase of shares at a price less than the carrying value of the shares
2. b) Purchase of shares at a price greater than the carrying value of the shares
3. c) The effect on net income

 

Solution 15-130

1. a) If the acquisition cost is less than the carrying value of the shares, the acquisition cost should be allocated as follows:
2. To share capital, in an amount equal to the par, stated, or average value of the shares;
3. The difference to contributed surplus.

 

1. b) If the acquisition cost is greater than the carrying value of the shares, the acquisition cost should be allocated as follows:
2. To share capital, in an amount equal to the par, stated, or average value of the shares;
3. Any excess, to contributed surplus, to the extent that contributed surplus was created by any excess of proceeds over cost on cancellation or resale of shares of the same class;

iii.    Any excess, to contributed surplus in an amount equal to the pro rata share of the portion of contributed surplus that arose from transactions, other than those in b) above, in the same class of shares;

1. Any excess to retained earnings.

 

1. c) There is no effect on net income as a result of the reacquisition and cancellation of shares.

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

Ex. 15-131 Determination of dividend amount

Describe some of the factors that a board of directors may consider when determining the amount of cash dividends to declare.

 

Solution 15-131

Some factors are:

1. agreements (bond and loan covenants) with creditors that require the retention of retained earnings
2. desire to use profits to reinvest in and expand the business
3. desire to have a smooth dividend stream even if income stream is not smooth
4. desire to build up a safety margin for losses or errors
5. availability of cash to pay the dividend (liquidity)

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

Ex. 15-132 Items affecting retained earnings

What are the items that increase or decrease retained earnings?

 

Solution 15-132

Items that increase retained earnings are net incomes, prior period adjustments (error corrections), financial reorganization, and certain changes in accounting principle.

 

Items that decrease retained earnings are net losses, cash, property and most stock dividends, some treasury shares transactions, prior period adjustments (error corrections), and certain changes in accounting principle.

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

Ex. 15-133 Stock dividends

Describe the accounting treatment for the declaration of a common stock dividend.

 

Solution 15-133

If the issuing corporation is incorporated under the CBCA, the declaration would result in the transfer from retained earnings to contributed capital of an amount equal to the market value of each new share issued. Retained Earnings is debited for the total amount transferred; Common Stock Dividend Distributable is credited for the same amount.

 

If the dividend is less than 20–25%, it is considered a small stock dividend, and would be treated this way. If, however, the stock dividend is greater than 20–25%, it is called a large stock dividend, and if the issuing corporation is not incorporated under the CBCA, it can choose to account for it like a small stock dividend, but measure at either the market value or the par or stated value of the shares, OR it can treat it as a stock split (memo entry only). In the U.S., the SEC supports treating a large stock dividend as a split. In Canada, there is no specific guidance, thus professional judgement must be used, although there may be legal constraints to consider.

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

Ex. 15-134 Stock dividends and stock splits

Indicate the principal effects of a stock dividend versus a stock split as they affect the issuing corporation. Respond in the spaces as follows: “C” for change; “NC” for no change.

Stock dividend         Stock split

Legal capital                                                                      _________             _________

Number of shares outstanding                                          _________             _________

Total shareholders’ equity                                                _________             _________

Retained earnings                                                             _________             _________

Composition of shareholders’ equity                                _________             _________

 

Solution 15-134

Stock dividend         Stock split

Legal capital                                                                          C                          NC         

Number of shares outstanding                                              C                           C          

Total shareholders’ equity                                                    NC                        NC         

Retained earnings                                                                 C                          NC         

Composition of shareholders’ equity                                    C                          NC         

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

Ex. 15-135 Dividends on preferred shares

On December 31, 2017, the shareholders’ equity of Finland Corporation shows the following:

Preferred shares—$6, no par, 8,000 shares outstanding…………….   $  400,000

Common shares—no par, 60,000 shares outstanding………………..       800,000

Retained earnings………………………………………………………………….       240,000

Total shareholders’ equity………………………………………………………. $1,440,000

 

Assume that preferred dividends were last paid on December 31, 2015, and that all of the company’s retained earnings are to be paid out in dividends on December 31, 2017.

 

Instructions

If the preferred shares are cumulative and fully participating, how much should each class of shares receive?

 

Solution 15-135

Preferred       Common          Total   

Dividends in arrears ($6 × 8,000)                       $48,000           $  —                $ 48,000

Current year’s dividends (1:2)                              48,000             96,000           144,000

Participating dividend (1:2)                                  16,000            32,000             48,000

$112,000         $128,000         $240,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-136 Dividends on preferred shares

In each of the following independent cases, it is assumed that the corporation has outstanding 20,000, $0.80, preferred shares, with a carrying value of $200,000, and 80,000 common shares, with a carrying value of $800,000. Although dividends have been paid regularly up to 2011, no dividends were declared in 2012 or 2016.

1. At December 31, 2017, the board of directors wants to distribute $125,000 in dividends. How much will the preferred shareholders receive if their shares are cumulative and non-participating?
2. At December 31, 2017, the board of directors wants to distribute $200,000 in dividends. How much will the preferred shareholders receive if their shares are cumulative and participating up to 15% in total?
3. On December 31, 2017, the preferred shareholders received an $80,000 dividend on their shares, which are cumulative and fully participating. How much money was distributed in total for dividends?

Solution 15-136

1. $48,000 (0.80 x 20,000 x 2) + (0.80 x 20,000 x1)

 

2. $62,000

Preferred         Common            Total  

Dividends in arrears                                                     $32,000           $                     $  32,000

Current year’s dividends                                                16,000             64,000             80,000

Participating dividend 1:4                                              14,000             74,000             88,000

$62,000         $136,000         $200,000

 

3. $272,000 ($192,000 to common and $80,000 to preferred)

Preferred         Common            Total  

Dividends in arrears                                                     $32,000           $                     $  32,000

Current year’s dividends                                                16,000             64,000             80,000

Participating dividend 1:4                                              32,000           128,000           160,000

$80,000         $192,000         $272,000

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-137 Dividends on preferred shares

At December 31, 2017, Russia Inc. has outstanding the following shares:

5,000, $3.20, no par value preferred shares with a carrying value of $200,000, and 40,000 no par value common shares with a carrying value of $600,000.

No dividends have been paid since December 31, 2014. The corporation now desires to distribute $120,000 in dividends.

 

Instructions

Calculate how much the preferred and common shareholders will receive if the preferred shares are cumulative and fully participating.

 

Solution 15-137

Preferred         Common          Total  

Dividends in arrears (5,000 × $3.20 × 2)                    $32,000           $  —                $ 32,000

Current year’s dividends (5,000 × $3.20) 1:3 ratio       16,000             48,000             64,000

Participating dividend (1:3)                                             6,000            18,000             24,000

$54,000           $66,000         $120,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-138 Dividends on preferred shares

Lithuania Corp. has been authorized to issue 20,000 no par value, $6, cumulative and fully participating preferred shares and 100,000 no par value common shares. The account balances at December 31, 2017 are:

$6 Preferred shares, 4,000 shares outstanding………………………….   $  400,000

Common shares, 60,000 shares outstanding…………………………….    1,600,000

 

No dividends have been paid since December 31, 2013. The corporation now desires to pay $280,000 in dividends.

 

Instructions

Calculate how much the preferred and common shareholders will receive.

 

Solution 15-138

Preferred       Common          Total    

Dividends in arrears (4,000 × $6 x 3)                          $72,000         $  —                 $ 72,000

Current year’s dividends (1:4)                                       24,000             96,000           120,000

Participating dividend (1:4)                                           17,600            70,400            88,000

$113,600         $166,400         $280,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-139 Lump sum issuance of par value shares

Chile Corp. issued 2,000 common shares and 400 preferred shares to an investor for $72,000 cash.

 

Instructions

50. a) Prepare the journal entry for the issuance, assuming the par value of the common shares was $5 and the market value was $30, and the par value of the preferred shares was $40 and the market value was $50.
51. b) Prepare the journal entry for the issuance, assuming the same facts as a), except the preferred shares have no ready market and the common shares have a market value of $24.

 

Solution 15-139

1. a) Use relative fair value method.

 

Cash…………………………………………………………………………………….         72,000

Common shares (2,000 x $5)……………………………………………                            10,000

Contributed surplus—common ($54,000 – $10,000)……………                            44,000

Preferred shares (400 x $40)…………………………………………….                            16,000

Contributed surplus—preferred ($18,000 – $16,000)…………..                              2,000

 

common $30 × 2,000 =                  $60,000

preferred $50 × 400 =                     20,000

$80,000     market value

 

60 ÷ 80 × $72,000 =                             $54,000     common

20 ÷ 80 × $72,000 =                               18,000     preferred

$72,000

 

1. b) Use residual method.

Cash…………………………………………………………………………………….         72,000

Common shares (2,000 x $5)……………………………………………                            10,000

Contributed surplus—common ($48,000 – $10,000)……………                            38,000

Preferred shares (400 x $40)…………………………………………….                            16,000

Contributed surplus—preferred (balance)…………………………..                              8,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Ex. 15-140 True or false questions

Indicate True or False by writing T or F in the space provided.

 

____    a)   Common Shares Subscribed is a current asset.

 

____    b)   A stock split does not require a formal journal entry.

 

____    c)   Bad debt expense is recognized on defaulted subscriptions.

 

____    d)   The date of declaration for a dividend precedes the date of payment, but follows the date of record.

 

____    e).  Retained earnings is part of contributed capital.

 

____    f)    Stock dividends distributable should be classified as a current liability.

 

____    g)   Stock dividends always involve the transfer of some per share amount of retained earnings to share capital.

 

____    h)   At one time a nationally known distillery annually distributed a bottle of “its finest” to its shareholders for every 10 shares outstanding; this was a property dividend.

 

Solution 15-140

1. a) F

 

1. b) T

 

1. c) F

 

1. d) F

 

1. e) F

 

1. f) F

 

1. g) T

 

1. h) T

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*Ex. 15-141 Calculation of selected financial ratios

Cuba Corp. provides the following information for 2017:

Preferred shares, 8%, par value $100, cumulative, callable:

Call price per share………………………………………………………….            $105

Shares outstanding………………………………………………………….           5,000

Dividends in arrears…………………………………………………………            none

Common shares, no par value:

Shares issued………………………………………………………………….         60,000

Dividends paid per share………………………………………………….           $1.60

Market price per share……………………………………………………..         $36.00

Carrying value…………………………………………………………………     $800,000

Retained earnings (after closing)……………………………………………..     $175,000

Treasury shares (common)…………………………………………………….     $125,000

Number of treasury shares held………………………………………..           5,000

Net income for 2017……………………………………………………………….     $260,000

 

Instructions

Calculate the following (assume no changes in share account balances during 2017):

1. a) Total amount of shareholders’ equity on the December 31, 2017 statement of financial position
2. b) Earnings per share
3. c) Price earnings ratio of common shares
4. Payout ratio of common shares
5. e) Book value per common share

*Solution 15-141

1. a) (5,000 × $100) + $800,000 + $175,000 – $125,000 = $1,350,000

 

4. b) [$260,000 – (5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = $220,000 ÷ 55,000 = $4.00

 

1. c) $36 ÷ $4 = 9

 

1. d) [($1.60 × 55,000) ÷ ($260,000 – $40,000)] = 40% OR dividend per share divided by EPS

$1.60 ÷ $4 = 40%

 

1. e) [($1,350,000 – (5,000 x $105) ÷ (60,000 – 5,000)] = $825,000 ÷ 55,000 = $15

 

Difficulty: Hard

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

Learning Objective: Calculate and interpret key ratios relating to equity.

Section Reference: Analysis

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

 

 

*Ex. 15-142 Treasury shares

At December 31, 2016, Ukraine Ltd.’s statement of financial position reported the following:

Common shares, no par value, 5,000 shares outstanding…………..     $115,000

Retained earnings………………………………………………………………….       200,000

 

The following transactions occurred during 2017:

1. Purchased 140 common shares at $30 per share, to be held as treasury shares
2. Sold 120 treasury shares at $32 per share
3. Retired the remaining treasury shares

 

Instructions

Prepare journal entries for these transactions.

 

*Solution 15-142

1. Treasury shares (140 x $30)…………………………………………………… 4,200

Cash………………………………………………………………………………                              4,200

 

2. Cash (120 x $32)…………………………………………………………………… 3,840

Treasury shares (120 x $30)…………………………………………….                              3,600

Contributed surplus………………………………………………………….                                 240

 

3. Common shares 20 x ($115,000 ÷ 5,000)………………………………… 460

Contributed surplus………………………………………………………………..              140

Treasury shares (20 x $30)………………………………………………                                 600

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

 

 

*Ex. 15-143 Treasury shares

Zambia Ltd. currently has 150,000 no par value common shares outstanding, with a carrying value of $3,900,000.

 

Instructions

Record the following transactions:

1. a) Purchased 1,500 common shares at $29 per share, to be held as treasury shares
2. b) Sold 800 treasury shares at $30 a share
3. c) Retired the rest of the treasury shares

 

*Solution 15-143

1. a) Treasury shares (1,500 x $29)………………………………………………… 43,500

Cash………………………………………………………………………………                            43,500

 

1. b) Cash (800 x $30)…………………………………………………………………… 24,000

Treasury shares (800 x $29)…………………………………………….                            23,200

Contributed surplus………………………………………………………….                                 800

 

1. c) Common shares [(700 x ($3,900,000 ÷ 150,000)………………………. 18,200

Contributed surplus (maximum)……………………………………………….             800

Retained earnings (difference)………………………………………………..           1,300

Treasury shares (700 x $29)…………………………………………….                            20,300

 

Difficulty: Hard

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

 

 

*Ex. 15-144 Financial reorganization

The following shareholders’ equity accounts were reported by India Inc. at December 31, 2017.

Common shares, no par value, 10,000 shares outstanding…………     $720,000

Retained earnings (deficit)………………………………………………………    (247,000)

 

A financial reorganization was approved. Equipment is to be written down by $68,000, and inventory increased by $5,200.

 

Instructions

Prepare the required journal entries for the financial reorganization.

 

*Solution 15-144

Common shares…………………………………………………………………………..         62,800

Inventory…………………………………………………………………………………….           5,200

Equipment…………………………………………………………………………….                            68,000

 

Common shares…………………………………………………………………………..       247,000

Retained earnings (deficit)………………………………………………………                          247,000

 

Difficulty: Medium

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Application

 

 

*Ex. 15-145 Financial reorganization

Describe the accounting steps involved in a financial reorganization.

 

*Solution 15-145

A financial reorganization consists of the following steps:

1. Any asset writedowns or impairments that existed prior to the reorganization should be recorded first.

 

2. The changes in debt and equity as negotiated are recorded. Often debt is exchanged for equity, resulting in a change in control.

 

3. The assets and liabilities are comprehensively revalued. This step assigns appropriate fair values to all assets and liabilities as per the negotiations. The difference between the carrying values prior to the reorganization and the new values after is known as a revaluation adjustment. The revaluation adjustment and any costs incurred to carry out the financial reorganization are accounted for as capital transactions and are closed to Share Capital, Contributed Surplus or a separately identified account within Shareholders’ Equity. The new costs of the identifiable assets and liabilities must not exceed the fair value of the entity if known.

 

4. The deficit balance (retained earnings) is brought to zero. The deficit is reclassified to Common Shares, Contributed Surplus or a separately identified account within Shareholders’ Equity.

 

Difficulty: Hard

Learning Objective: Explain how to account for a financial reorganization.

Section Reference: Financial Reorganization (Appendix 15B)

CPA: Financial Reporting

Bloomcode: Comprehension

 

 

PROBLEMS

 

 

Pr. 15-146 Issuance of shares for cash, noncash consideration, and by subscription

Presented below is information related to Rhodesia Corp.:

1. Rhodesia is granted a charter that authorizes issuance of 100,000 no par value preferred shares and an unlimited number of no par value common shares.
2. 10,000 common shares are issued for land with a fair value of $400,000.
3. 3,000 preferred shares are sold for cash at $110 per share.
4. Rhodesia issues 100 common shares to its lawyer for costs associated with starting the company. At this time, the common shares are selling at $60 per share.
5. Rhodesia issues shares on a subscription basis, giving each subscriber the right to purchase 300 common shares at a price of $65 per share. Fifty individuals accept the company’s offer and agree to pay 10% down and the remainder in three equal instalments.
6. The final instalment payment (for the subscriptions) is received and the shares are issued.

 

Instructions

Prepare the required general journal entries to record these transactions.

 

Solution 15-146

1. No entry necessary.

 

2. Land……………………………………………………………………………………. 400,000

Common Shares……………………………………………………………..                          400,000

 

3. Cash (3,000 x $110)……………………………………………………………… 330,000

Preferred Shares……………………………………………………………..                          330,000

 

4. Organization Expense (100 x $60)………………………………………….. 6,000

Common Shares……………………………………………………………..                              6,000

 

5. Subscriptions Receivable (50 x 300 x $65)………………………………. 975,000

Common Shares Subscribed…………………………………………….                          975,000

Cash (10% x $975,000)………………………………………………………….         97,500

Subscriptions Receivable…………………………………………………                            97,500

 

Cash ($975,000 – 97,500)/ 3…………………………………………………..       292,500

Subscriptions Receivable…………………………………………………                          292,500

First instalment

 

Cash ($975,000 – 97,500)/ 3…………………………………………………..       292,500

Subscriptions Receivable…………………………………………………                          292,500

Second instalment

 

6. Cash [($975,000 – $97,500) x 1 ÷ 3]……………………………………….. 292,500

Subscriptions Receivable…………………………………………………                          292,500

Third and final instalment

 

Common Shares Subscribed…………………………………………………..       975,000

Common Shares……………………………………………………………..                          975,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-147 Issuance of shares for cash, noncash consideration, and by subscription

Dahomey Corp. is authorized to issue an unlimited number of no par common shares. Prepare the journal entries for the following transactions:

1. Sold 600,000 shares for $10 cash each, which was the fair market value of the shares.
2. Issued 80,000 shares and paid $140,000 cash in total payment for a piece of land. The market value of the shares had not changed.
3. Received subscriptions for 40,000 shares at $18 per share; received 60% of the subscription price in cash.
4. Received the balance of the subscriptions receivable.

 

Solution 15-147

1. Cash (600,000 x $10)…………………………………………………………….. 6,000,000

Common Shares………………………………………………………………                       6,000,000

 

2. Land…………………………………………………………………………………….. 940,000

Cash……………………………………………………………………………….                          140,000

Common Shares (80,000 x $10)………………………………………..                          800,000

 

3. Subscriptions Receivable (40,000 x $18)…………………………………. 720,000

Common Shares Subscribed……………………………………………..                          720,000

 

Cash ($720,000 x 60%)………………………………………………………….       432,000

Subscriptions Receivable………………………………………………….                          432,000

 

4. Cash ($720,000 x 40%)…………………………………………………………. 268,000

Subscriptions Receivable………………………………………………….                          268,000

 

Common Shares Subscribed…………………………………………………..       720,000

Common Shares………………………………………………………………                          720,000

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-148 Allocation of cash dividends

Togo Inc. has the following shares outstanding:

40,000, $0.80, no par value preferred shares     $400,000

60,000 no par value common shares                  $600,000

 

All shares were sold for $100 each.

No dividends have been declared since December 31, 2011. It is now December 31, 2017, and the board of directors wants to distribute $204,000 in dividends.

 

Instructions

Calculate how much the preferred and common shareholders will receive under each of the following assumptions:

1. a) The preferred is noncumulative and non-participating.
2. b) The preferred is cumulative and non-participating.
3. c) The preferred is cumulative and fully participating.
4. d) The preferred is cumulative and participating to 12% total.

 

Solution 15-148

1. a) Preferred Common          Total    

Current year’s dividend $.80 × 40,000                           $32,000        $  —                 $ 32,000

Remainder to common                                                                        172,000          172,000

$32,000       $172,000         $204,000

 

1. b) Preferred Common         Total    

Dividends in arrears, $.80 × 40,000 x 2                           $64,000        $  —                $ 64,000

Current year’s dividend                                                      32,000           —                    32,000

Remainder to common                                                                          108,000         108,000

$96,000       $108,000        $204,000

 

1. c) Preferred Common          Total    

Dividends in arrears, $.80 × 40,000 x 2                          $ 64,000         $  —               $ 64,000

Current year’s dividend 2:3 ratio                                        32,000           48,000            80,000

Participating dividend 6% ($60,000 ÷ $1,000,000)           24,000          36,000            60,000

$120,000         $84,000        $204,000

 

1. d) Preferred Common          Total    

Dividends in arrears, $.80 × 40,000 x 2                          $ 64,000         $  —              $ 64,000

Current year’s dividend 2:3 ratio                                        32,000           48,000            80,000

*Participating dividend (additional 4% – max)                   16,000           24,000            40,000

Remainder to common                                                     —                  20,000            20,000

$112,000         $92,000        $204,000

 

* basic PFD dividend is $.80 ÷ $100 = 8%

 

Difficulty: Medium

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

Bloomcode: Application

 

 

Pr. 15-149 Share retirement and stock dividends

Sudan Enterprises Inc. reported the following shareholder’s equity at December 31, 2016:

Contributed Capital

Preferred shares, $1, no par value, 100,000 shares authorized, cumulative,

callable at $107 plus dividends in arrears;

issued and outstanding, 20,000 shares………………………………………………. $2,040,000

Common shares, no par, 100,000 shares authorized,

80,000 issued and outstanding………………………………………………………….. ….. 640,000

Contributed surplus (retirement of common shares)…………………………………… ….. 120,000

Retained earnings………………………………………………………………………………….. .. 1,600,000

 

The following transactions took place in 2017:

Jan 20.. Redeemed 1,000 preferred shares at the call price. There were no dividends in arrears.

Jan 28.. Declared $100,000 in dividends. Use separate accounts for each class of dividends.

Feb 28.. Retired 8,000 common shares at $12 per share.

Mar 2…. Declared and distributed a 3% common stock dividend. The market value of the shares at that time was $11.50.

 

Instructions

Prepare journal entries for the 2017 transactions.

 

Solution 15-149

Jan 20:

Preferred shares ($2,040,000 ÷ 20,000) × 1,000……………………….       102,000

Retained earnings………………………………………………………………….           5,000

Cash ($107 × 1,000)………………………………………………………..                          107,000

 

Jan 28:

Retained earnings………………………………………………………………….       100,000

Preferred dividends payable (19,000 × $1)…………………………                            19,000

Common dividends payable ($100,000 – $19,000)……………..                            81,000

 

Feb 28:

Common shares (8,000 × ($640,000 ÷ 80,000))………………………..         64,000

Contributed surplus (retirement of common shares)…………………..         32,000

Cash (8,000 × $12)………………………………………………………….                            96,000

 

Mar 2:

       Retained earnings (72,000 × 3% × $11.50)……………………………….         24,840

Common shares………………………………………………………………                            24,840

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-150 Dividend distribution

You have recently been appointed CEO of Dumbledore Ltd., a wholesale distributor of magic supplies. One day your CFO reminds you that next week you will have to make recommendations to the board of directors regarding this year’s annual dividend. This catches you totally by surprise. Luckily, the CFO was kind enough to provide you with some additional information. He shows you the projected income statement and balance sheet, without the effect of any dividend declaration.

Income Statement:

Sales………………………………………………………………………………..       44,000,000

COGS………………………………………………………………………………       29,400,000

Gross profit……………………………………………………………………….       14,600,000

Operating expenses…………………………………………………………..        6,000,000

Operating income before interest…………………………………………        8,600,000

Interest expense………………………………………………………………..        1,000,000

Income before tax……………………………………………………………..        7,600,000

Income tax (30%)………………………………………………………………        2,300,000

Net income……………………………………………………………………….        5,300,000

 

Statement of Financial Position:

Current Assets

Cash………………………………………………………………………………..        4,000,000

Accounts receivable…………………………………………………………..        5,000,000

Inventory…………………………………………………………………………..        2,000,000

Other………………………………………………………………………………..        3,700,000

Total Current Assets…………………………………………………………..       14,700,000

 

Long-term investments……………………………………………………….        7,000,000

 

Property, plant and equipment (net)…………………………………….       17,000,000

Total Assets………………………………………………………………………       38,700,000

 

Current Liabilities

Accounts payable………………………………………………………………        2,000,000

Accrued liabilities……………………………………………………………….        3,000,000

Other………………………………………………………………………………..        4,000,000

Total Current Liabilities……………………………………………………….        9,000,000

 

Non-current liabilities………………………………………………………….       16,000,000

 

Shareholders’ Equity

Common shares………………………………………………………………..        1,000,000

Contributed surplus……………………………………………………………        4,900,000

Retained earnings (includes this year’s net income)………………        7,800,000

Total Shareholders’ Equity………………………………………………….       13,700,000

 

Total Liabilities and Equity………………………………………………………..       38,700,000

 

Other information:

1)    Last year, the net income was $3,500,000, and $3,300,000 cash dividends were paid.

2)    Dumbledore has two debt agreements that call for the corporation to maintain at least $2,500,000 in retained earnings, as well as maintain a debt-to-total-assets ratio of no more than 70%.

3)    There has been no change in the number of shares outstanding during the year.

 

You start to think about the recommendations you are going to make. It is the end of November, and historically the corporation has declared dividends five days before the end of the year.

 

Instructions

1. a) What factors will limit the amount to be distributed as dividends?
2. b) What are important considerations in your decision? What would you recommend? Provide any journal entry that is related to your decision.

 

Solution 15-150

1. a) You need to ascertain how much can be distributed in dividends. Look at all your constraints.
2. i) Retained earnings constraint. The debt covenant requires that Dumbledore must maintain $2,500,000 in retained earnings. The balance in retained earnings is currently $7,800,000, so the maximum dividend is $5,300,000.

 

1. ii) Cash on hand constraint. As long as you do not decide to borrow additional cash, theoretically you could distribute all your cash on hand, so the dividend would be a maximum of $4,000,000. However, for practical purposes, the firm must maintain a certain level of cash for its day-to-day operations, so the actual dividend you can pay is lower.

 

iii) Debt-to-total assets constraint. You can distribute dividends only to the point that this ratio does not exceed 70%. Currently, the ratio is 64.6% as total debt is $25,000,000 and total assets are $38,700,000. You are limited to distributing at most $3,000,000. This will bring the ratio to 70% = 25 ÷ 35.7.

 

1. b) There are many considerations involved in this decision, and there is no single correct answer. Some of the main considerations are:
2. i) Since Dumbledore distributed $3,300,000 in dividends last year, a dividend of “only” $3,000,000 will imply a dividend reduction. Firms are usually reluctant to lower dividends, so distributing $3,000,000 may not be good for shareholder relations or your image in the marketplace.

 

1. ii) Even if you are not constrained, you might not want to make the dividend too large. True, this year the firm fared well, but if you distribute all the income as a dividend, and next year’s income is lower, you would have to lower your dividend, which again is not desirable.

 

iii)    Another reason to not distribute a high dividend is that it might suggest the firm does not have future growth opportunities. A business should limit dividends, if the retained capital can be invested in projects with high returns. If the business does not have such projects, it is better off to distribute the earnings. If the business still has good investment opportunities, then you do not want to send the wrong message.

 

94. iv) Last year’s payout ratio was very high – 94.3% (3.3 ÷ 3.5). However, maintaining a high payout ratio might create the problems already mentioned.

 

1. v) You need to make sure that after you distribute cash dividends, enough resources are available to pay current liabilities. Current ratio excluding cash = 10,700,000 ÷ 9,000,000 = 1.19, so the firm does seem to be able to meet its short-term obligations even if it distributes all its cash.

 

1. vi) Another solution would be to distribute a cash dividend of $3,000,000 and then a stock dividend (e.g. for $1,000,000). This will allow Dumbledore to increase the overall dividends and not violate any of the constraints. However, since the stock dividend does not give cash to the shareholders, they might not appreciate it.

 

vii)   To be able to pay more cash dividends, you need to take some action. You could sell some non-current assets and use some of the proceeds to pay down on debt, and some to distribute as dividends. Suppose you sell a $4,000,000 asset at no gain and use $2,000,000 of the proceeds to reduce debt. The change to the balance sheet amounts is:

Cash                         plus        $2,000,000

Non-current assets   minus    $4,000,000

Liabilities                   minus    $2,000,000

 

Debt is down to $23,000,000, total assets are down to $36,700,000, and cash is increased to $6,000,000. The-debt-to-total-assets constraint allows you to distribute dividends of up to $3,840,000 and you will have plenty of cash to do so. So if you declare a cash dividend of $3,800,000, you are able to increase the dividend but still satisfy all constraints.

 

viii)  Since Dumbledore has $7,000,000 in investments, given other constraints are satisfied, another consideration is a property dividend.

 

1. ix) If time allows, the corporation could issue more shares, which will relax the debt-to-total- assets ratio and the cash constraint.

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

CPA: Financial Reporting

Bloomcode: Analysis

 

 

Pr. 15-151 Equity transactions

Congo Corp. has the following capital structure at the beginning of this year:

Preferred shares, $3, no par value, cumulative, 20,000 shares authorized,

6,000 shares issued and outstanding…………………………………………….. …… $  300,000

Common shares, no par value, 60,000 shares authorized,

40,000 shares issued and outstanding…………………………………………… ………. 510,000

Total contributed capital……………………………………………………………………… ………. 810,000

Retained earnings……………………………………………………………………………… ……..   340,000

Total shareholders’ equity…………………………………………………………………… ….. $1,150,000

 

Instructions

1. a) Record the following transactions which occurred consecutively this year. Show all calculations.
2. There are no dividends in arrears. A total cash dividend of $90,000 was declared. The preferred shares are participating to a maximum of 10%. Record dividends payable to common and preferred shares in separate accounts.
3. A 10% common stock dividend was declared. The current market value of the common shares is $16 a share.

iii.  Net income for the year was $180,000. Record the closing entry.

1. b) Incorporating all the above information, construct the shareholders’ equity.

 

Solution 15-151

1. a) Preferred Common         Total    
2. Current year’s dividend, $3 × 6,000*                   $18,000        $30,600**           $48,600

Participating dividend 4%                                       12,000             20,400             32,400

Remainder to common                                                                    9,000              9,000

$30,000           $60,000           $90,000

 

*basic div is $3 ÷ $50 = 6%

**6% x $510,000

 

Retained Earnings………………………………………………………………….         90,000

Dividends Payable—Common…………………………………………..                            60,000

Dividends Payable—Preferred………………………………………….                            30,000

 

1. 40,000 x 10% x $16 =          $64,000

 

Retained Earnings…………………………………………………………..         64,000

Common Stock Dividend Distributable………………………                            64,000

 

iii.    Income Summary…………………………………………………………….       180,000

Retained Earnings…………………………………………………..                          180,000

 

1. b) Shareholders’ equity

Preferred shares, $3, no par value, cumulative, 20,000 shares authorized,

6,000 shares issued and outstanding…………………………………………………… $  300,000

Common shares, no par value, 60,000 shares authorized,

40,000 shares issued and outstanding…………………………………………………….. 510,000

Common stock dividend distributable…………………………………………………………….    64,000

Total contributed capital………………………………………………………………………… 874,000

Retained earnings***…………………………………………………………………………………    366,000

Total shareholders’ equity………………………………………………………………………… $1,240,000

 

***$340,000 – $90,000 – $64,000 + $180,000 = $366,000

 

Difficulty: Hard

Learning Objective: Explain how to account for the issuance, reacquisition, and retirement of shares, stock splits, and dividend distribution.

Section Reference: Recognition, Derecognition, and Measurement

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-152 Statement of Shareholders’ Equity

Following is information provided by Timbuktu Inc. for their last two year ends:

 

	Balances at Dec 31, 2016	Balances at Dec 31, 2017
Common Shares, no par value	$300,000	??
Common shares sold during year		$50,000
Accumulated Other Comprehensive Income	60,000	??
Other Comprehensive Income for year (unrealized holding gain, after tax)		30,000
Retained Earnings	50,000	??
Net income for year		110,000

 

Instructions

In good format, prepare a Statement of Shareholder’s Equity for the year ended December 31, 2017.

 

Solution 15-152

TIMBUKTU INC.

Statement of Shareholders’ Equity

For the year ended December 31, 2017

 

	Common Shares	Comprehensive Income	Retained Earnings	Accumulated Other Comprehensive Income	Total Shareholders’ Equity
Beginning balances	$300,000		$50,000	$60,000	$410,000
Common shares sold	50,000				50,000
Net income		110,000	110,000		110,000
Other compre.income		30,000		30,000	30,000
Compre. income		140,000
Ending balances	$350,000		$160,000	$90,000	$600,000

 

Difficulty: Medium

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-153 Shareholders’ Equity Section

Mackenzie Corporation’s post-closing trial balance at December 31, 2017 was as follows:

 

MACKENZIE LIMITED
Post-Closing Trial Balance
December 31, 2017
	Dr.		Cr.
Buildings	$   2,175,000
Accounts receivable	720,000
Land	600,000
Inventories	540,000
FV-NI investments	300,000
Cash	285,000
Treasury shares (15,000 common shares)	255,000
Prepaid expenses	60,000
Contributed surplus – common			$   2,190,000
Preferred shares			750,000
Accounts payable			465,000
Bonds payable			450,000
Retained earnings			301,500
Common shares			300,000
Accumulated depreciation – buildings			277,500
Accumulated other comprehensive income			150,000
Allowance for doubtful accounts			45,000
Dividends payable on preferred shares			6,000
Totals	$   4,935,000		$   4,935,000

 

At December 31, 2017, Mackenzie had the following numbers for its common and preferred shares:

	Common		Preferred
Authorized	900,000		90,000
Issued	300,000		15,000
Outstanding	285,000		15,000

 

The dividends on preferred shares are $5 cumulative and participating.

 

Instructions

Prepare the shareholders’ equity section of Mackenzie’s statement of financial position at December 31, 2017. The company follows IFRS.

 

Solution 15-153

Shareholders’ equity:
Common shares, no par value, authorized 900,000 shares; issued 300,000 shares, of which 15,000 are in treasury	$ 300,000
Preferred shares, no par value, $7.50, cumulative and participating, authorized,90,000 shares; issued and outstanding 15,000 shares	750,000
Contributed surplus – common	2,190,000
Retained earnings	301,500
Accumulated other comprehensive income	150,000
	3,691,500
Less: Cost of treasury shares	(255,000)
Total shareholders’ equity	$3,436,500

 

Difficulty: Medium

Learning Objective: Understand the components of shareholders’ equity and how they are presented.

Section Reference: Presentation, Disclosure, and Analysis

CPA: Financial Reporting

Bloomcode: Application

 

 

Pr. 15-154 Capital disclosures

Numerous disclosures are required under ASPE regarding capital. List five details that would normally be disclosed on the face of the statement of financial position, in the statement of changes in shareholders’ equity, or in the notes.

 

Solution 15-154

Any five of the eight responses would be correct:

1. The authorized number of shares or a statement noting that this is unlimited.

 

2. The existence of unique rights (such as dividend preferences and the amounts of such dividends, redemption and/or retroaction privileges, conversation rights, and whether or not the dividends are cumulative).

 

3. The number of shares issued and amount received including those held by the entity or its subsidiaries or associates.

 

4. Whether the shares are par value or no par value.

 

5. The amount of any dividends in arrears for cumulative preferred shares.

 

6. Details of changes during the year.

 

7. Restrictions on retained earnings.

 

8. Any shares reserved for future issue including terms and amounts.

 

Difficulty: Easy

Learning Objective: Understand capital disclosure requirements.

Section Reference: Capital Disclosures

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

*Pr. 15-155 Treasury share transactions

Algeria Corp. currently has 5,000 no par value common shares outstanding, with a book value of $150,000.

 

Instructions

Record the share transactions given below:

1. a) Bought 300 common shares at $31 each, to be held as treasury shares
2. b) Sold 80 treasury shares at $30
3. c) Sold 40 treasury shares at $34
4. d) Retired the rest of the treasury shares

 

*Solution 15-155

1. a) Treasury Shares (300 x $31)…………………………………. 9,300

Cash……………………………………………………………..                              9,300

 

1. b) Cash (80 x $30)……………………………………………………. 2,400

Retained Earnings…………………………………………………               80

Treasury Shares (80 x $31)……………………………..                              2,480

 

1. c) Cash (40 x $34)……………………………………………………. 1,360

Treasury Shares (40 x $31)……………………………..                              1,240

Contributed Surplus………………………………………..                                 120

 

1. d) Common Shares [($150,000 ÷ 5,000) x (300 – 80 – 40)] 5,400

Contributed Surplus (maximum)…………………………….              120

Retained Earnings (balance)………………………………….               60

Treasury Shares (180 x $31)……………………………                              5,580

 

Difficulty: Medium

Learning Objective: Explain how to account for par value and treasury shares.

Section Reference: Par Value and Treasury Shares (Appendix 15A)

CPA: Financial Reporting

Bloomcode: Application

 

 

 

 

 

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