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QUIZ – APPLIED AUDIT Problem 1.
While preparing its 2016 financial statements, Dek Company discovered computational errors in its 2015 and 2014 depreciation expense. These errors resulted in overstatement of each year’s income by P100,000, net of income tax. The following amounts were reported in the previously issued financial statements: 2015 2014 Retained earnings, 1/1 2,800,000 2,000,000 Net income 600,000 800,000 Retained earnings, 12/31 3,400,000 2,800,000 Dek’s net income for 2016 is correctly reported at P700,000. The statement of retained earnings for the year ended December 31, 2016 should report an ending balance at a. 3,900,000 b. 4,100,000 c. 4,300,000 d. 4,000,000
2.
The balance of retained earnings of Atlas Company at the beginning of the year was P650,000. During the year, Atlas earned revenue of P4,500,000 and incurred expenses of P3,800,000, dividends of P500,000 were declared and paid, and the balance of the cash account increased by P220,000. The company's net income and the year-end balance in the retained earnings accounts, respectively, are Net Income a. 700,000 b. 200,000 c. 700,000 d. 200,000
3.
Retained earnings 850,000 850,000 1,070,000 1,070,000
Cyan Company issued 200,000 shares of P5 par common stock at P10 per share. On December 31, 2009, Cyan's retained earnings were P3,000,000. In March 2010, Cyan reacquired 50,000 shares of its common stock at P20 per share. In June 2010, Cyan sold 10,000 of these shares to its corporate officers for P25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31, 2010 was P600,000. At December 31, 2010 what amount should Cyan report as retained earnings? a. 3,600,000 b. 3,650,000 c. 3,750,000 d. 3,800,000
4.
Lind Company declared a cash dividend of P500,000 on March 1, to stockholders of record March 31, payable on April 30. As a result of this cash dividend, working capital a. Decreased on March 1 by P500,000 b. Decreased on March 31 by P500,000 c. Decreased on April 30 by P500,000 d. Did not change
5. Long Company had 10,000 shares of common stock issued and outstanding at January 1, 2016. During 2016, Long took the following actions: March 15 Declared a 2-for-1 stock split, when the fair value of the stock was P80 per share. December 15 Declared a P5 per share cash dividend. In Long's statement of stockholders' equity for 2016, what amount should Long report as dividends? a. 50,000 b. 100,000 c. 850,000 d. 950,000 6.
In 2015, Elm Company bought 100,000 shares of Oil Company at a cost of P2,000,000. On January 15, 2016, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, payable on February 15. During 2016, the Oil stock had the following market value: January 15 2,500,000 February 1 2,600,000 February 15 2,400,000 The net effect of the foregoing transactions on retained earnings during 2016 should be reduction of a. 2,000,000 b. 2,400,000 c. 2,500,000 d. 2,600,000
7.
On May 1, 2016, Sol Company's board of directors declared a 10% stock dividend. The market price of Sol's 30,000 outstanding shares of P20 par value common stock was P90 per share on that date. The stock dividend was distributed on July 1, 2016, when the stock's market price was P100 per share. What amount should Sol credit to additional paid in capital for this stock dividend? a. 210,000 b. 240,000 c. 270,000 d. 300,000
8.
Galzburg Company's stockholders' equity comprised of 8,000 shares of P200 par common stock, P400,000 of additional paid in capital and retained earnings of P900,000. Stock dividend of 6% was declared when the stock is selling for P500 per share. What amount should be transferred from Galzburg's retained earnings account? a. 1,920,000 b. 4,800,000 c. 240,000 d. 96,000
9.
Monte Company's stockholders' equity is comprised of 100,000 shares of P20 par common stock, P4,000,000 of additional paid in capital on common stock, and retained earnings of P6,000,000. If a 40% stock dividend is declared when the stock is selling for P50 per share. What amount should be transferred from the retained earnings account to additional paid in capital account? a. 2,000,000 b. 1,200,000 c. 800,000 d. 0
10.
On September 30, 2016, Grey Company issued 4,000 shares of its P100 par common stock in connection with a stock dividend. The market value per share on the date of declaration was P150. Grey's stockholders' equity accounts immediately before issuance of the stock dividend shares were as follows: Common stock P100, 50,000 shares authorized,
20,000 shares outstanding 2,000,000 3,000,000 1,500,000
Additional paid in capital Retained earnings What should be the retained earnings balance immediately after the stock dividend? a. 1,100,000 b. 1,500,000 c. 2,100,000 d. 900,000 11.
The following stock dividends were declared and distribution by Sol Company: Percentage of common shares outstanding Fair value at declaration date 10 25
1,500,000 4,000,000
Par value 1,000,000 3,500,000
What aggregate amount should be debited to retained earnings for these stock dividends? a. 4,500,000 b. 3,500,000 c. 5,000,000 d. 5,500,000 12.
On December 31, 2016, Rhud Company declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000 shares of P1 par value common stock issued and outstanding. The fair value of the common stock was P30 per share on December 31, 2016. As a result of this stock dividend, the total stockholders equity a. Increased by P300,000 b. Decreased by P300,000 c. Decreased by P10,000 d. Did not change
13.
On January 1, 2016, the board of directors of Blake Mining Company declared a cash dividend of P800,000 to stockholders of record on January 15, and payable on February 15. Selected data from Blake's December 31, 2015 balance sheet are as follows: Accumulated depletion 200,000 Capital stock 1,000,000 Additional paid-in capital 300,000 Retained earnings 600,000 The P800,000 dividends includes a liquidating dividends of a. 600,000 b. 300,000
c. d.
200,000 50,000
14.
The following information pertains to Meg Company. Dividends on its 10,000 shares of 6%, P100 par value cumulative preferred stock have not been declared or paid for 3 years Treasury stock was acquired at a cost of P1,500,000. The treasury stock had not been reissued as of year-end. What amount of retained earnings should be appropriated as a result of these items? a. 1,500,000 b. 1,680,000 c. 180,000 d. 0
15.
At December 31, 2015, Eagle Company reported P1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 2016 at a total cost of P1,500,000. In 2016, Eagle appropriated P1,200,000 retained earnings for the construction of a new plant. Also, P2,000,000 of cash was restricted for the retirement of bonds due in 2017. In its December 31, 2016 balance sheet, Eagle should report what amount of appropriated retained earnings? a. 1,200,000 b. 1,450,000 c. 2,950,000 d. 3,200,000
16.
Ireland Company had an agreement with its bondholders that required the company to make payments to a sinking fund and to maintain a related appropriation of retained earnings to retire the bonds. The company has been required to make sinking fund contributions of P500,000 for each of the last five years. At the beginning of 2016, the bonds are repaid, the retained earnings appropriation is canceled, and a 40% common stock dividend is declared and distributed. Immediately before the declaration of the dividend, the company had 1,250,000 shares of P10 par value common stock outstanding with a per share market value of P12. Immediately before repaying the bonds at their carrying amount, the company's unappropriated retained earnings balance was P4,000,000. 21. a. b. c. d.
17.
The unappropriated retained earnings balance on December 31, 2016 should be 1,500,000 4,000,000 6,500,000 500,000
Nam Company reported the following amounts in the stockholders' equity section of its balance sheet dated December 31, 2015: Preferred stock (P150 par value, 20,000 shares) 3,000,000 Common stock (P50 par value, 100,000 shares) 5,000,000 Additional paid in capital 6,000,000 Retained earnings 4,500,000 On January 1, 2016, Nam sold 20,000 additional shares of common stock for P90 per share. Late in 2016, it was learned that because of mathematical error, an overstatement of depreciation expense by P500,000 had occurred in 2015. Nam reported net income of P4,000,000 for 2016. Nam declared cash dividend of P1,000,000 on preferred stock and P2,000,000 on the common stock during 2016. The income tax rate is 35%. What should be the retained earnings balance on December 31, 2016? a. 5,825,000 b. 6,000,000 c. 5,175,000 d. 4,425,000
18.
The directors of Ontario Company whose P50 par value common stock is currently selling at P60 per share have decided to issue a stock dividend. The selling price is not expected to be affected by the stock dividend. Ontario, which has an authorization for 1,000,000 shares of common, had issued 500,000 shares, of which 100,000 shares are now held as treasury stock. In order to capitalize P2,400,000 of the retained earnings balance, What percentage should be declared as a stock dividend by the directors? a. 10% b. 8% c. 6% d. 4%
19.
The stockholders’ equity section of Glenn Company revealed the following information on December 31, 2016. Preferred stock, P100 par 2,300,000 Additional paid in capital – preferred 805,000 Common stock, P10 par 5,250,000 Additional paid in capital – common 2,750,000 Subscribed common stock 50,000 Retained earnings 1,900,000 Note payable 4,000,000 Subscription receivable – common 400,000 How much is the legal capital? a. 7,550,000 b. 7,600,000
c. d. 20.
13,055,000 11,150,000
Munn Corporation’s records included the following stockholders’ equity accounts: Preferred stock, par value P15, authorized 200,000 shares Additional paid capital, preferred stock Common stock, no par, P50 stated value, 100,000 shares authorized
2,550,000 150,000
3,000,000 In Munn’s statement of stockholders’ equity, the number of issued and outstanding shares for each class of stock is Common stock Preferred stock a. 60,000 170,000 b. 60,000 180,000 c. 63,000 170,000 d. 63,000 180,000
21.
On October 1, 2016, Ames Company issued 20,000 shares of its P100 par common stock to Clark for a tract of land. The stock had a fair market value of P180 per share on this date. On Clark’s last property tax bill, the land was assessed at P2,400,000. Ames should record an increase in additional paid in capital of a. 1,600,000 b. 1,000,000 c. 400,000 d. 0
22.
East Company issued 1,000 shares of its P5 par common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills P160 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at P140 per share. By what amount should the additional paid in capital account increase as a result of this transaction? a. 135,000 b. 140,000 c. 155,000 d. 160,000
23.
Ashe Company was organized on January 1, 2016, with authorized capital of 100,00 shares of P200 par value common stock. During 2016 Ashe had the following transactions affecting stockholders’ equity: January 10 Issued 25,000 shares at P220 a share March 25 Issued 1,000 shares for legal services when the fair value was P240 a share September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a share What amount should Ashe report for additional paid-in capital at December 31, 2016? a. 840,000 b. 800,000 c. 540,000 d. 500,000
24.
The December 31, 2016 condensed balances sheet of Wurzburg Services, an individual proprietorship, follows: Current assets 280,000 Equipment (net) 260,000 540,000 Liabilities Tony Wurzburg, Capital
140,000 400,000 540,000
Fair values at December 31, 2016 are as follows: Current assets 320,000 Equipment 420,000 Liabilities 140,000 On January 2, 2016, Wurzburg Services was incorporated with 5,000 shares of P20 par value common stock issued. How much should be credited to additional paid-in capital? a. 460,000 b. 640,000 c. 500,000 d. 400,000 25.
On July 1, 2016, Cove Company, a closely-held corporation, issued 6% bonds with a maturity value of P6,000,000, together with 10,000 shares of its P50 par value common stock, for a combined cash amount of P11,000,000. If the bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock? a. 7,500,000 b. 6,500,000 c. 5,500,000
d. 4,500,000 26.
On December 1, 2016, Line Company received a donation of 2,000 shares of its P50 par value common stock from a stockholder. On that date, the stock’s market value was P350 per share. The stock was originally issued for P250 per share. By what amount would this donation cause total stockholders’ equity to decrease? a. 700,000 b. 500,000 c. 200,000 d. 0
27.
Day Corporation holds 10,000 shares of its P10 par value common stock as treasury stock reacquired in 2014 for P120,000. On December 31, 2016, Day issued all 10,000 shares for P190,000. Under the cost method of accounting for treasury stock, the reissuance would result in a credit to a. Capital stock of P100,000 b. Retained earnings of P70,000 c. Gain on sale of investments of P70,000 d. Additional paid-in capital of P70,000
28.
Beck Company issued 200,000 shares of common stock when it began operations in 2014 and issued an additional 100,000 shares in 2016. Beck also issued preferred stock convertible to 100,000 shares of common stock. In 2016, Beck purchased 75,000 shares of its common stock and held it in treasury. At December 31, 2016, how many shares of Beck’s common stock were outstanding? a. 400,000 b. 325,000 c. 300,000 d. 225,000
29.
Seco Corporation was incorporated on January 1, 2016. The following information pertains to Seco’s common stock transactions: Jan. 2 Number of shares authorized 80,000 Feb. 1 Number of shares issued 60,000 July 1 Number of shares reacquired but not canceled 5,000 Dec. 1 Two-for-one stock split At December 31, 2016, the number of shares of Seco’s common stock outstanding is a. 150,000 b. 120,000 c. 115,000 d. 110,000
30.
Of the 125,000 shares of common stock issued by Vey Company, 25,000 shares were held as treasury stock at December 31, 2015. During 2016, transactions involving Vey’s common stock were as follows: January 1 through October 31 – 13,000 treasury shares were distributed to officers as part of a stock compensation plan. November 1 – A 3 – for – 1 stock split took effect. December 1 – Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired. At December 31, 2016, how many shares of Vey’s common stock were issued and outstanding? Issued Outstanding a 375,000 334,000 b 375,000 324,000 c 334,000 334,000 d 324,000 324,000
31.
Nest Company issued 100,000 shares of common stock. Of these, 5,000 shares were held as treasury stock at December 31, 2015. During 2016, transactions involving Nest’s common stock were as follows: May 3 1,000 shares of treasury stock were sold. Aug. 6 10,000 shares of previously unissued stock were sold. Nov. 18 A 2-for-1 stock split took effect. At December 31, 2016, how many shares of Nest’s common stock were issued and outstanding? a b c d
32.
Issued 220,000 220,000 222,000 222,000
Outstanding 212,000 216,000 214,000 218,000
In 2015, Rona Corporation issued 50,000 shares of P10 par value common stock for P100 per share. In 2016, Rona acquired 2,000 of its shares at P150 per share and immediately canceled these 2,000 shares. In connection with the retirement of these 2,000 shares, Rona should debit Additional paid in capital Retained earnings a 20,000 280,000 b 100,000 180,000
c d
180,000 280,000
100,000 0
33.
On December 31, 2016, Pack Company’s board of directors canceled 5,000 shares of P25 par value common stock held in treasury at an average cost of P130 per share. Before recording the cancellation of the treasury stock, Pack had the following balances in its stockholders’ equity accounts: Common stock 625,000 Additional paid-in capital 750,000 Retained earnings 900,000 Treasury stock, at cost 650,000 In its balance sheet at December 31, 2016, Pack should report common stock outstanding of a. 0 b. 250,000 c. 500,000 d. 625,000
34.
Vicar Company was organized on January 1, 2016 with 100,000 authorized shares of P100 par value common stock. On January 5, Vicar issued 75,000 shares at P140 per share and on December 27, Vicar purchased 5,000 shares at P110 per share. Vicar used the par value method to record the purchase of the treasury shares.
What would the balance in the additional paid in capital from treasury stock account on December 31, 2016? a. 200,000 b. 150,000 c. 50,000 d. 0 35.
Rudd Corporation had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31, 2015. The following events occurred during 2016. January 31 Declared 10% stock dividends June 30 Purchased 100,000 shares August 1 Reissued 50,000 shares November 30 Declared 2-for-1 stock split At December 31, 2016, how many shares of common stock are outstanding? a. 560,000 b. 600,000 c. 630,000 d. 660,000
QUIZ Answer Section PROBLEM 1.
ANS: A Retained earnings – 1/17/2016 Prior period error: Underdepreciation in 2014 and 2015 Corrected beginning balance Net income for 2017 Retained earnings
2.
PTS: ANS: A
Retained earnings - beginning Net income Total Dividends declares and paid Retained earnings
PTS: ANS: A
( 200,000) 3,200,000 700,000 3,900,000
1
Revenue Expenses Net income
3.
3,400,000
4,500,000 3,800,000 700,000 ======= 650,000 700,000 1,350,000 (500,000) 850,000 =======
1
Retained earnings - December 31, 2015 Net income of 2016 - December 31, 2016 Total retained earnings - December 31, 2016
3,000,000 600,000 3,600,000
The retained earnings must be appropriated to the extent of the remaining cost of the treasury shares of P800,000 (40,000 x P20). Thus, the unappropriated balance should be P2,800,000 PTS: ANS: xx
1
4.
PTS: ANS: B
1
5.
Shares issued on January 1 Share split on March 15 2-for-1 Total shares issue and outstanding Dividends (20,000 x 5)
6.
PTS: ANS: A
10,000 2 20,000 ===== 100,000 ======
1
The standard provides that dividends payable in noncash assets should be charged to retained earnings at cost or net book value of the noncash assets distributed.
7.
PTS: ANS: A
1
Market value on date of declaration (10% x 30,000 = 3,000 share x 90)
270,000
Par value of shares issued as stock dividend(3,000 x 20) Share premium
60,000 210,000 ======
To record the declaration of the stock dividend on May 1: Retained earning Stock dividend payable Share premium
270,000 60,000 210,000
To record the issuance of the stock dividend on July 1: Stock dividend Share capital
60,000 60,000
If the stock dividend is less than 20%, the market value of the share on the date of declaration is debited to retained earnings unless such market value is lower than par or stated value in which case, the par or stated value is capitalized. PTS: ANS: C
1
8.
1
9.
PTS: ANS: D
If the stock dividend is 20% or more, the par value or stated value is debited to retained earnings. Accordingly, the entry to record the declaration of the 40% stock dividend is: Retained earnings 800,000 Stock dividend payable (40% x 100,000 x P20)
10.
800,000
PTS: 1 ANS: Answer is A 4,000 shares/20,000 = 20% stock dividend Retained earnings before stock dividend 1,500,000 Less: Stock dividend (4,000 x 100) 400,000 Retained earnings after stock dividend 1,100,000 To record the declaration of the stock dividend: Retained earnings 400,000 Stock dividend payable
400,000
To record the issuance of the stock dividend: Stock dividend payable Ordinary share capital
11.
PTS: ANS: C
400,000 400,000
1
10% stock dividend at fair value 25% stock dividend at par value total amount debited to retained earnings PTS: ANS: D
1
12.
PTS: ANS: C
1
13.
Dividend declared Retained earnings balance Liquidating dividend
1,500,000 3,500,000 5,000,000
800,000 600,000 200,000
Any amount paid in excess of the retained earnings balance is a liquidating dividend or return of capital. This is legally allowed under the wasting asset doctrine as long as the excess does not exceed the accumulated depletion balance.
14.
PTS: ANS: A
1
The preference dividends in arrears do not necessarily require appropriation of retained earnings. Legally, retained earnings must be appropriated to the extent of the cost of treasury shares.
15.
PTS: ANS: A
1
Only the retained earnings appropriated for the construction of new plant should be reported. The retained earnings appropriated for the construction office building should be reverted to unappropriated retained earnings because the building is already completed. The cash restriction for the retirement of bonds payable does not necessarily require an appropriation of retained earnings.
16.
PTS: ANS: A
1
Unappropraited retained earnings Cancellation of appropriation for sinking fund (500,000 x 5) Total Stock dividend (1,250,000 x 40% x P10) Adjusted balance
17.
PTS: ANS: A
1
Retained earnings - 1/1/2016 Prior period error - overdepreciation (500,000 x 65%) Net income for 2016 Cash dividend - preference Cash dividend - ordinary Retained earnings - 12/31/2016
18.
PTS: ANS: A
4,000,000 2,500,000 6,500,000 (5,000,000) 1,500,000 ========
4,500,000 325,000 4,000,000 (1,000,000) (2,000,000) 5,825,000 ========
1
Shares to be issued as stock dividend(P2,400,000 / P60 market value) Outstanding shares (500,000 - 100,000) Percentage of stock dividend (40,000 / 400,000)
19.
PTS: ANS: B
40,000 400,000 10%
1
Preference share capital Ordinary share capital Subscribed ordinary share capital Total legal capital
2,300,000 5,250,000 50,000 7,600,000
In case of par value share capital, legal capital is the aggregate par value of all shares issued and subscribed. In the case of no-par value share capital, legal capital is the aggregate stated value of shares issued and subscribed plus any excess over stated value.
20.
PTS: ANS: A
1
Ordinary shares (3,000,000/50) Preference shares (32,550,000/15) PTS: ANS: XX
1
21.
PTS: ANS: A
1
22.
60,000 170,000
When shares are issued for services, the measure should be the fair value of such services. However, in this case, the fair value of the services is not available. Thus, the measure is the fair value of the shares. Legal expense (1,000 x 140) Share capital (1,000 x 5) Share premium
140,000 5,000 135,000
The normal billing rate is not necessarily the fair value of the service because this amount is likely to be negotiable.
23.
PTS: ANS: A
1
January 10 (25,000 x 20) March 25 (1,000 x 40) September 30 (5,000 x 60) Total share premium 1
24.
PTS: ANS: C PTS: ANS: B
1
25.
500,000 40,000 300,000 840,000
Cash received Less: Market value of bonds payable Residual amount allocated to ordinary shares Less: Par value of ordinary shares (10,000 x 50) Share premium
26.
PTS: ANS: D
11,000,000 4,000,000 7,000,000 500,000 6,500,000
1
Donated shares not retired are recorded by means of a memorandum only and therefore do not affect the total shareholder’s equity. Donated share not retired are actually treasury shares without acquisition cost. However, the reissuance of donated shares is credited to share premium
27.
PTS: ANS: D
1
Cash
190,000 Treasury shares Share premium
28.
PTS: ANS: D
1
Total ordinary share issued (200,000 +100,000) Less: Treasury shares Ordinary share outstanding
29.
PTS: ANS:
120,000 70,000
1
300,000 75,000 225,000
D Issued share after split (60,000 x 2) Treasury share after split (5,000 x 2) Outstanding shares
120,000 ( 10,000) 110,000
The treasury share are included in the share split.
30.
PTS: ANS: A
1
Issued shares after split (125,000 x 3) Less: Old treasury shares (12,000 balance x 3) New treasury shares Outstanding shares
31.
32.
PTS: ANS: A
375,000 36,000 5,000
41,000 334,000
1
Original shares issued New shares issued Total share issued before split
100,000 10,000 110,000
Shares issued after split (110,00 x 2) Less: Treasury share after split (4,000 x 2) Outstanding ordinary shares
220,000 8,000 212,000
PTS: ANS: C
1
Share capital (2,000 x 10) Share premium (2,000 x 90) Retained earnings (balancing) Cash
20,000 180,000 100,000 300,000
If an entity’s share capital is retired, the share capital reduced by its par value. If the retirement in a loss (cost exceeds par value), such loss is debited to the following in the order given: 1. 2. 3.
33.
Share premium from original issuance Share premium from previous treasury share transaction Retained earnings.
PTS: ANS: C
1
Share capital Less: Par value of treasury shares retired (5,000 x 25) Share capital outstanding
34.
PTS: ANS: B
625,000 125,000 500,000
1
The par value method of recording treasury share is accounted for as retirement of share capital. Accordingly, the treasury share account is debited at par and any share premium from original issuance is canceled. Treasury shares (5,000 x 100) Share premium – issuance (5,000 x 40) Cash (5,000 x 110) Share premium – treasury (balancing)
35.
PTS: ANS: A
1
500,000 200,000 550,000 150,000
Original shares Stock dividend (10% x 300,000) Total shares issued before split Less: Remaining treasury shares Outstanding shares before split
300,000 30,000 330,000 50,000 280,000
Share issued after split (330,000 x 2) Less: Treasury shares after split (50,000 x 2) Outstanding shares after split
660,000 100,000 560,000
PTS:
1
While preparing its 2016 financial statements, Dek Company discovered computational errors in its 2015 and 2014 depreciation expense. These errors resulted in overstatement of each year’s income by P100,000, net of income tax. The following amounts were reported in the previously issued financial statements: 2015 2014 Retained earnings, 1/1 2,800,000 2,000,000 Net income 600,000 800,000 Retained earnings, 12/31 3,400,000 2,800,000 Dek’s net income for 2016 is correctly reported at P700,000. The statement of retained earnings for the year ended December 31, 2016 should report an ending balance at a. 3,900,000 b. 4,100,000 c. 4,300,000 d. 4,000,000
2.
The balance of retained earnings of Atlas Company at the beginning of the year was P650,000. During the year, Atlas earned revenue of P4,500,000 and incurred expenses of P3,800,000, dividends of P500,000 were declared and paid, and the balance of the cash account increased by P220,000. The company's net income and the year-end balance in the retained earnings accounts, respectively, are Net Income a. 700,000 b. 200,000 c. 700,000 d. 200,000
3.
Retained earnings 850,000 850,000 1,070,000 1,070,000
Cyan Company issued 200,000 shares of P5 par common stock at P10 per share. On December 31, 2009, Cyan's retained earnings were P3,000,000. In March 2010, Cyan reacquired 50,000 shares of its common stock at P20 per share. In June 2010, Cyan sold 10,000 of these shares to its corporate officers for P25 per share. Cyan uses the cost method to record treasury stock. Net income for the year ended December 31, 2010 was P600,000. At December 31, 2010 what amount should Cyan report as retained earnings? a. 3,600,000 b. 3,650,000 c. 3,750,000 d. 3,800,000
4.
Lind Company declared a cash dividend of P500,000 on March 1, to stockholders of record March 31, payable on April 30. As a result of this cash dividend, working capital a. Decreased on March 1 by P500,000 b. Decreased on March 31 by P500,000 c. Decreased on April 30 by P500,000 d. Did not change
5. Long Company had 10,000 shares of common stock issued and outstanding at January 1, 2016. During 2016, Long took the following actions: March 15 Declared a 2-for-1 stock split, when the fair value of the stock was P80 per share. December 15 Declared a P5 per share cash dividend. In Long's statement of stockholders' equity for 2016, what amount should Long report as dividends? a. 50,000 b. 100,000 c. 850,000 d. 950,000 6.
In 2015, Elm Company bought 100,000 shares of Oil Company at a cost of P2,000,000. On January 15, 2016, Elm declared a property dividend of the Oil stock to shareholders of record on February 1, payable on February 15. During 2016, the Oil stock had the following market value: January 15 2,500,000 February 1 2,600,000 February 15 2,400,000 The net effect of the foregoing transactions on retained earnings during 2016 should be reduction of a. 2,000,000 b. 2,400,000 c. 2,500,000 d. 2,600,000
7.
On May 1, 2016, Sol Company's board of directors declared a 10% stock dividend. The market price of Sol's 30,000 outstanding shares of P20 par value common stock was P90 per share on that date. The stock dividend was distributed on July 1, 2016, when the stock's market price was P100 per share. What amount should Sol credit to additional paid in capital for this stock dividend? a. 210,000 b. 240,000 c. 270,000 d. 300,000
8.
Galzburg Company's stockholders' equity comprised of 8,000 shares of P200 par common stock, P400,000 of additional paid in capital and retained earnings of P900,000. Stock dividend of 6% was declared when the stock is selling for P500 per share. What amount should be transferred from Galzburg's retained earnings account? a. 1,920,000 b. 4,800,000 c. 240,000 d. 96,000
9.
Monte Company's stockholders' equity is comprised of 100,000 shares of P20 par common stock, P4,000,000 of additional paid in capital on common stock, and retained earnings of P6,000,000. If a 40% stock dividend is declared when the stock is selling for P50 per share. What amount should be transferred from the retained earnings account to additional paid in capital account? a. 2,000,000 b. 1,200,000 c. 800,000 d. 0
10.
On September 30, 2016, Grey Company issued 4,000 shares of its P100 par common stock in connection with a stock dividend. The market value per share on the date of declaration was P150. Grey's stockholders' equity accounts immediately before issuance of the stock dividend shares were as follows: Common stock P100, 50,000 shares authorized,
20,000 shares outstanding 2,000,000 3,000,000 1,500,000
Additional paid in capital Retained earnings What should be the retained earnings balance immediately after the stock dividend? a. 1,100,000 b. 1,500,000 c. 2,100,000 d. 900,000 11.
The following stock dividends were declared and distribution by Sol Company: Percentage of common shares outstanding Fair value at declaration date 10 25
1,500,000 4,000,000
Par value 1,000,000 3,500,000
What aggregate amount should be debited to retained earnings for these stock dividends? a. 4,500,000 b. 3,500,000 c. 5,000,000 d. 5,500,000 12.
On December 31, 2016, Rhud Company declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000 shares of P1 par value common stock issued and outstanding. The fair value of the common stock was P30 per share on December 31, 2016. As a result of this stock dividend, the total stockholders equity a. Increased by P300,000 b. Decreased by P300,000 c. Decreased by P10,000 d. Did not change
13.
On January 1, 2016, the board of directors of Blake Mining Company declared a cash dividend of P800,000 to stockholders of record on January 15, and payable on February 15. Selected data from Blake's December 31, 2015 balance sheet are as follows: Accumulated depletion 200,000 Capital stock 1,000,000 Additional paid-in capital 300,000 Retained earnings 600,000 The P800,000 dividends includes a liquidating dividends of a. 600,000 b. 300,000
c. d.
200,000 50,000
14.
The following information pertains to Meg Company. Dividends on its 10,000 shares of 6%, P100 par value cumulative preferred stock have not been declared or paid for 3 years Treasury stock was acquired at a cost of P1,500,000. The treasury stock had not been reissued as of year-end. What amount of retained earnings should be appropriated as a result of these items? a. 1,500,000 b. 1,680,000 c. 180,000 d. 0
15.
At December 31, 2015, Eagle Company reported P1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in 2016 at a total cost of P1,500,000. In 2016, Eagle appropriated P1,200,000 retained earnings for the construction of a new plant. Also, P2,000,000 of cash was restricted for the retirement of bonds due in 2017. In its December 31, 2016 balance sheet, Eagle should report what amount of appropriated retained earnings? a. 1,200,000 b. 1,450,000 c. 2,950,000 d. 3,200,000
16.
Ireland Company had an agreement with its bondholders that required the company to make payments to a sinking fund and to maintain a related appropriation of retained earnings to retire the bonds. The company has been required to make sinking fund contributions of P500,000 for each of the last five years. At the beginning of 2016, the bonds are repaid, the retained earnings appropriation is canceled, and a 40% common stock dividend is declared and distributed. Immediately before the declaration of the dividend, the company had 1,250,000 shares of P10 par value common stock outstanding with a per share market value of P12. Immediately before repaying the bonds at their carrying amount, the company's unappropriated retained earnings balance was P4,000,000. 21. a. b. c. d.
17.
The unappropriated retained earnings balance on December 31, 2016 should be 1,500,000 4,000,000 6,500,000 500,000
Nam Company reported the following amounts in the stockholders' equity section of its balance sheet dated December 31, 2015: Preferred stock (P150 par value, 20,000 shares) 3,000,000 Common stock (P50 par value, 100,000 shares) 5,000,000 Additional paid in capital 6,000,000 Retained earnings 4,500,000 On January 1, 2016, Nam sold 20,000 additional shares of common stock for P90 per share. Late in 2016, it was learned that because of mathematical error, an overstatement of depreciation expense by P500,000 had occurred in 2015. Nam reported net income of P4,000,000 for 2016. Nam declared cash dividend of P1,000,000 on preferred stock and P2,000,000 on the common stock during 2016. The income tax rate is 35%. What should be the retained earnings balance on December 31, 2016? a. 5,825,000 b. 6,000,000 c. 5,175,000 d. 4,425,000
18.
The directors of Ontario Company whose P50 par value common stock is currently selling at P60 per share have decided to issue a stock dividend. The selling price is not expected to be affected by the stock dividend. Ontario, which has an authorization for 1,000,000 shares of common, had issued 500,000 shares, of which 100,000 shares are now held as treasury stock. In order to capitalize P2,400,000 of the retained earnings balance, What percentage should be declared as a stock dividend by the directors? a. 10% b. 8% c. 6% d. 4%
19.
The stockholders’ equity section of Glenn Company revealed the following information on December 31, 2016. Preferred stock, P100 par 2,300,000 Additional paid in capital – preferred 805,000 Common stock, P10 par 5,250,000 Additional paid in capital – common 2,750,000 Subscribed common stock 50,000 Retained earnings 1,900,000 Note payable 4,000,000 Subscription receivable – common 400,000 How much is the legal capital? a. 7,550,000 b. 7,600,000
c. d. 20.
13,055,000 11,150,000
Munn Corporation’s records included the following stockholders’ equity accounts: Preferred stock, par value P15, authorized 200,000 shares Additional paid capital, preferred stock Common stock, no par, P50 stated value, 100,000 shares authorized
2,550,000 150,000
3,000,000 In Munn’s statement of stockholders’ equity, the number of issued and outstanding shares for each class of stock is Common stock Preferred stock a. 60,000 170,000 b. 60,000 180,000 c. 63,000 170,000 d. 63,000 180,000
21.
On October 1, 2016, Ames Company issued 20,000 shares of its P100 par common stock to Clark for a tract of land. The stock had a fair market value of P180 per share on this date. On Clark’s last property tax bill, the land was assessed at P2,400,000. Ames should record an increase in additional paid in capital of a. 1,600,000 b. 1,000,000 c. 400,000 d. 0
22.
East Company issued 1,000 shares of its P5 par common stock to Howe as compensation for 1,000 hours of legal services performed. Howe usually bills P160 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at P140 per share. By what amount should the additional paid in capital account increase as a result of this transaction? a. 135,000 b. 140,000 c. 155,000 d. 160,000
23.
Ashe Company was organized on January 1, 2016, with authorized capital of 100,00 shares of P200 par value common stock. During 2016 Ashe had the following transactions affecting stockholders’ equity: January 10 Issued 25,000 shares at P220 a share March 25 Issued 1,000 shares for legal services when the fair value was P240 a share September 30 Issued 5,000 shares for a tract of land when the fair value was P260 a share What amount should Ashe report for additional paid-in capital at December 31, 2016? a. 840,000 b. 800,000 c. 540,000 d. 500,000
24.
The December 31, 2016 condensed balances sheet of Wurzburg Services, an individual proprietorship, follows: Current assets 280,000 Equipment (net) 260,000 540,000 Liabilities Tony Wurzburg, Capital
140,000 400,000 540,000
Fair values at December 31, 2016 are as follows: Current assets 320,000 Equipment 420,000 Liabilities 140,000 On January 2, 2016, Wurzburg Services was incorporated with 5,000 shares of P20 par value common stock issued. How much should be credited to additional paid-in capital? a. 460,000 b. 640,000 c. 500,000 d. 400,000 25.
On July 1, 2016, Cove Company, a closely-held corporation, issued 6% bonds with a maturity value of P6,000,000, together with 10,000 shares of its P50 par value common stock, for a combined cash amount of P11,000,000. If the bonds were issued separately, they would have sold for P4,000,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock? a. 7,500,000 b. 6,500,000 c. 5,500,000
d. 4,500,000 26.
On December 1, 2016, Line Company received a donation of 2,000 shares of its P50 par value common stock from a stockholder. On that date, the stock’s market value was P350 per share. The stock was originally issued for P250 per share. By what amount would this donation cause total stockholders’ equity to decrease? a. 700,000 b. 500,000 c. 200,000 d. 0
27.
Day Corporation holds 10,000 shares of its P10 par value common stock as treasury stock reacquired in 2014 for P120,000. On December 31, 2016, Day issued all 10,000 shares for P190,000. Under the cost method of accounting for treasury stock, the reissuance would result in a credit to a. Capital stock of P100,000 b. Retained earnings of P70,000 c. Gain on sale of investments of P70,000 d. Additional paid-in capital of P70,000
28.
Beck Company issued 200,000 shares of common stock when it began operations in 2014 and issued an additional 100,000 shares in 2016. Beck also issued preferred stock convertible to 100,000 shares of common stock. In 2016, Beck purchased 75,000 shares of its common stock and held it in treasury. At December 31, 2016, how many shares of Beck’s common stock were outstanding? a. 400,000 b. 325,000 c. 300,000 d. 225,000
29.
Seco Corporation was incorporated on January 1, 2016. The following information pertains to Seco’s common stock transactions: Jan. 2 Number of shares authorized 80,000 Feb. 1 Number of shares issued 60,000 July 1 Number of shares reacquired but not canceled 5,000 Dec. 1 Two-for-one stock split At December 31, 2016, the number of shares of Seco’s common stock outstanding is a. 150,000 b. 120,000 c. 115,000 d. 110,000
30.
Of the 125,000 shares of common stock issued by Vey Company, 25,000 shares were held as treasury stock at December 31, 2015. During 2016, transactions involving Vey’s common stock were as follows: January 1 through October 31 – 13,000 treasury shares were distributed to officers as part of a stock compensation plan. November 1 – A 3 – for – 1 stock split took effect. December 1 – Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired. At December 31, 2016, how many shares of Vey’s common stock were issued and outstanding? Issued Outstanding a 375,000 334,000 b 375,000 324,000 c 334,000 334,000 d 324,000 324,000
31.
Nest Company issued 100,000 shares of common stock. Of these, 5,000 shares were held as treasury stock at December 31, 2015. During 2016, transactions involving Nest’s common stock were as follows: May 3 1,000 shares of treasury stock were sold. Aug. 6 10,000 shares of previously unissued stock were sold. Nov. 18 A 2-for-1 stock split took effect. At December 31, 2016, how many shares of Nest’s common stock were issued and outstanding? a b c d
32.
Issued 220,000 220,000 222,000 222,000
Outstanding 212,000 216,000 214,000 218,000
In 2015, Rona Corporation issued 50,000 shares of P10 par value common stock for P100 per share. In 2016, Rona acquired 2,000 of its shares at P150 per share and immediately canceled these 2,000 shares. In connection with the retirement of these 2,000 shares, Rona should debit Additional paid in capital Retained earnings a 20,000 280,000 b 100,000 180,000
c d
180,000 280,000
100,000 0
33.
On December 31, 2016, Pack Company’s board of directors canceled 5,000 shares of P25 par value common stock held in treasury at an average cost of P130 per share. Before recording the cancellation of the treasury stock, Pack had the following balances in its stockholders’ equity accounts: Common stock 625,000 Additional paid-in capital 750,000 Retained earnings 900,000 Treasury stock, at cost 650,000 In its balance sheet at December 31, 2016, Pack should report common stock outstanding of a. 0 b. 250,000 c. 500,000 d. 625,000
34.
Vicar Company was organized on January 1, 2016 with 100,000 authorized shares of P100 par value common stock. On January 5, Vicar issued 75,000 shares at P140 per share and on December 27, Vicar purchased 5,000 shares at P110 per share. Vicar used the par value method to record the purchase of the treasury shares.
What would the balance in the additional paid in capital from treasury stock account on December 31, 2016? a. 200,000 b. 150,000 c. 50,000 d. 0 35.
Rudd Corporation had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31, 2015. The following events occurred during 2016. January 31 Declared 10% stock dividends June 30 Purchased 100,000 shares August 1 Reissued 50,000 shares November 30 Declared 2-for-1 stock split At December 31, 2016, how many shares of common stock are outstanding? a. 560,000 b. 600,000 c. 630,000 d. 660,000
QUIZ Answer Section PROBLEM 1.
ANS: A Retained earnings – 1/17/2016 Prior period error: Underdepreciation in 2014 and 2015 Corrected beginning balance Net income for 2017 Retained earnings
2.
PTS: ANS: A
Retained earnings - beginning Net income Total Dividends declares and paid Retained earnings
PTS: ANS: A
( 200,000) 3,200,000 700,000 3,900,000
1
Revenue Expenses Net income
3.
3,400,000
4,500,000 3,800,000 700,000 ======= 650,000 700,000 1,350,000 (500,000) 850,000 =======
1
Retained earnings - December 31, 2015 Net income of 2016 - December 31, 2016 Total retained earnings - December 31, 2016
3,000,000 600,000 3,600,000
The retained earnings must be appropriated to the extent of the remaining cost of the treasury shares of P800,000 (40,000 x P20). Thus, the unappropriated balance should be P2,800,000 PTS: ANS: xx
1
4.
PTS: ANS: B
1
5.
Shares issued on January 1 Share split on March 15 2-for-1 Total shares issue and outstanding Dividends (20,000 x 5)
6.
PTS: ANS: A
10,000 2 20,000 ===== 100,000 ======
1
The standard provides that dividends payable in noncash assets should be charged to retained earnings at cost or net book value of the noncash assets distributed.
7.
PTS: ANS: A
1
Market value on date of declaration (10% x 30,000 = 3,000 share x 90)
270,000
Par value of shares issued as stock dividend(3,000 x 20) Share premium
60,000 210,000 ======
To record the declaration of the stock dividend on May 1: Retained earning Stock dividend payable Share premium
270,000 60,000 210,000
To record the issuance of the stock dividend on July 1: Stock dividend Share capital
60,000 60,000
If the stock dividend is less than 20%, the market value of the share on the date of declaration is debited to retained earnings unless such market value is lower than par or stated value in which case, the par or stated value is capitalized. PTS: ANS: C
1
8.
1
9.
PTS: ANS: D
If the stock dividend is 20% or more, the par value or stated value is debited to retained earnings. Accordingly, the entry to record the declaration of the 40% stock dividend is: Retained earnings 800,000 Stock dividend payable (40% x 100,000 x P20)
10.
800,000
PTS: 1 ANS: Answer is A 4,000 shares/20,000 = 20% stock dividend Retained earnings before stock dividend 1,500,000 Less: Stock dividend (4,000 x 100) 400,000 Retained earnings after stock dividend 1,100,000 To record the declaration of the stock dividend: Retained earnings 400,000 Stock dividend payable
400,000
To record the issuance of the stock dividend: Stock dividend payable Ordinary share capital
11.
PTS: ANS: C
400,000 400,000
1
10% stock dividend at fair value 25% stock dividend at par value total amount debited to retained earnings PTS: ANS: D
1
12.
PTS: ANS: C
1
13.
Dividend declared Retained earnings balance Liquidating dividend
1,500,000 3,500,000 5,000,000
800,000 600,000 200,000
Any amount paid in excess of the retained earnings balance is a liquidating dividend or return of capital. This is legally allowed under the wasting asset doctrine as long as the excess does not exceed the accumulated depletion balance.
14.
PTS: ANS: A
1
The preference dividends in arrears do not necessarily require appropriation of retained earnings. Legally, retained earnings must be appropriated to the extent of the cost of treasury shares.
15.
PTS: ANS: A
1
Only the retained earnings appropriated for the construction of new plant should be reported. The retained earnings appropriated for the construction office building should be reverted to unappropriated retained earnings because the building is already completed. The cash restriction for the retirement of bonds payable does not necessarily require an appropriation of retained earnings.
16.
PTS: ANS: A
1
Unappropraited retained earnings Cancellation of appropriation for sinking fund (500,000 x 5) Total Stock dividend (1,250,000 x 40% x P10) Adjusted balance
17.
PTS: ANS: A
1
Retained earnings - 1/1/2016 Prior period error - overdepreciation (500,000 x 65%) Net income for 2016 Cash dividend - preference Cash dividend - ordinary Retained earnings - 12/31/2016
18.
PTS: ANS: A
4,000,000 2,500,000 6,500,000 (5,000,000) 1,500,000 ========
4,500,000 325,000 4,000,000 (1,000,000) (2,000,000) 5,825,000 ========
1
Shares to be issued as stock dividend(P2,400,000 / P60 market value) Outstanding shares (500,000 - 100,000) Percentage of stock dividend (40,000 / 400,000)
19.
PTS: ANS: B
40,000 400,000 10%
1
Preference share capital Ordinary share capital Subscribed ordinary share capital Total legal capital
2,300,000 5,250,000 50,000 7,600,000
In case of par value share capital, legal capital is the aggregate par value of all shares issued and subscribed. In the case of no-par value share capital, legal capital is the aggregate stated value of shares issued and subscribed plus any excess over stated value.
20.
PTS: ANS: A
1
Ordinary shares (3,000,000/50) Preference shares (32,550,000/15) PTS: ANS: XX
1
21.
PTS: ANS: A
1
22.
60,000 170,000
When shares are issued for services, the measure should be the fair value of such services. However, in this case, the fair value of the services is not available. Thus, the measure is the fair value of the shares. Legal expense (1,000 x 140) Share capital (1,000 x 5) Share premium
140,000 5,000 135,000
The normal billing rate is not necessarily the fair value of the service because this amount is likely to be negotiable.
23.
PTS: ANS: A
1
January 10 (25,000 x 20) March 25 (1,000 x 40) September 30 (5,000 x 60) Total share premium 1
24.
PTS: ANS: C PTS: ANS: B
1
25.
500,000 40,000 300,000 840,000
Cash received Less: Market value of bonds payable Residual amount allocated to ordinary shares Less: Par value of ordinary shares (10,000 x 50) Share premium
26.
PTS: ANS: D
11,000,000 4,000,000 7,000,000 500,000 6,500,000
1
Donated shares not retired are recorded by means of a memorandum only and therefore do not affect the total shareholder’s equity. Donated share not retired are actually treasury shares without acquisition cost. However, the reissuance of donated shares is credited to share premium
27.
PTS: ANS: D
1
Cash
190,000 Treasury shares Share premium
28.
PTS: ANS: D
1
Total ordinary share issued (200,000 +100,000) Less: Treasury shares Ordinary share outstanding
29.
PTS: ANS:
120,000 70,000
1
300,000 75,000 225,000
D Issued share after split (60,000 x 2) Treasury share after split (5,000 x 2) Outstanding shares
120,000 ( 10,000) 110,000
The treasury share are included in the share split.
30.
PTS: ANS: A
1
Issued shares after split (125,000 x 3) Less: Old treasury shares (12,000 balance x 3) New treasury shares Outstanding shares
31.
32.
PTS: ANS: A
375,000 36,000 5,000
41,000 334,000
1
Original shares issued New shares issued Total share issued before split
100,000 10,000 110,000
Shares issued after split (110,00 x 2) Less: Treasury share after split (4,000 x 2) Outstanding ordinary shares
220,000 8,000 212,000
PTS: ANS: C
1
Share capital (2,000 x 10) Share premium (2,000 x 90) Retained earnings (balancing) Cash
20,000 180,000 100,000 300,000
If an entity’s share capital is retired, the share capital reduced by its par value. If the retirement in a loss (cost exceeds par value), such loss is debited to the following in the order given: 1. 2. 3.
33.
Share premium from original issuance Share premium from previous treasury share transaction Retained earnings.
PTS: ANS: C
1
Share capital Less: Par value of treasury shares retired (5,000 x 25) Share capital outstanding
34.
PTS: ANS: B
625,000 125,000 500,000
1
The par value method of recording treasury share is accounted for as retirement of share capital. Accordingly, the treasury share account is debited at par and any share premium from original issuance is canceled. Treasury shares (5,000 x 100) Share premium – issuance (5,000 x 40) Cash (5,000 x 110) Share premium – treasury (balancing)
35.
PTS: ANS: A
1
500,000 200,000 550,000 150,000
Original shares Stock dividend (10% x 300,000) Total shares issued before split Less: Remaining treasury shares Outstanding shares before split
300,000 30,000 330,000 50,000 280,000
Share issued after split (330,000 x 2) Less: Treasury shares after split (50,000 x 2) Outstanding shares after split
660,000 100,000 560,000
PTS:
1
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