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FAR by: John Bo S. Cayetano, CPA, MBA Page 1 of 32Far Eastern University – Silang CaviteTheory of Accounts September, 2020 Shareholders’ Equity and Liabilities Instructor: John Bo S. Cayetano Which of the following is a characteristic of a corporation? A. Salaries given to owners is a mean of distri...

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Far Eastern University – Silang Cavite Theory of Accounts Shareholders’ Equity and Liabilities

September, 2020 Instructor: John Bo S. Cayetano

1) Which of the following is a characteristic of a corporation? A. Salaries given to owners is a mean of distributing income B. Separate legal entity C. Unlimited liability D. Limited life 2) Total Shareholders’ equity represents A. A claim to specific assets contributed by the owners. B. The maximum amount that can be borrowed by the entity. C. A claim against a portion of the total assets of an entity. D. Only the amount of earnings that have been retained in the business. 3) Equity is generally classified into two major categories, namely A. Contributed capital and appropriated capital C. B. Appropriated capital and retained earnings D.

Retained Earnings and unearned capital Earned capital and contributed capital

4) The issuer should charge retained earnings for the fair value of shares issued in a A. 1 for 5 share dividend B. 1 for 8 share dividend C. 4 for 1 share split

D.

5) The term residual interest means that ordinary shareholders A. are entitled to a dividend every year in which the entity earns a profit B. have the right to specific assets of the entity C. bear the ultimate risks and uncertainties and receive the benefits of ownership D. can negotiate individual contracts on behalf of the entity 6) Which is not a basic right of a shareholder? A. The right to participate in earnings B. The right to vote in the election of directors and in the determination of corporate policies. C. The right to share in the net assets of the corporation upon liquidation D. The right to inspect the accounting records of the corporation. 7) Ownership of share capital entitles the holders to all of the following rights except: A. To elect the board of directors of the corporation B. To share in the profits of the corporation C. To purchase new shares of stock when they are offered for sale D. To participate in the daily operations of the corporation 8) The preemptive right of an ordinary shareholder is the right to A. Share proportionately in corporate assets upon liquidation B. Share proportionately in any new issue of shares of the same class C. Receive cash dividends before they are distributed to preference shareholders D. Exclude preference shareholders from voting rights 9) Which of the following is not an equity component? A. Par value of share capital B. Dividends distributed to owners

C. D.

Accumulated profits/losses Share premium

10) The par value of ordinary share capital represents A. The liquidation value of the share capital B. The book value of the share capital C. The legal nominal value assigned to the share capital D. The amount received by the corporation when the share was originally issued. 11) Which of the following will not require journal entry under the memo entry method? A. Authorization of shares to be issued C. Shares issued

2 for 1 share split

FAR by: John Bo S. Cayetano, CPA, MBA

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12) Using the journal entry method, what is the appropriate entry when there is an issuance of share capital? A. Credit to unissued share capital C. Credit to share capital B. Credit to authorized share capital D. Debit to authorized share capital 13) What do you call that body that is regarded as the supreme authority in matters of management of the regular and business affairs of a corporation? A. Board of directors C. Majority stockholders B. Minority stockholders D. None of the above 14) What is the accounting treatment for the excess of issue price over par value of stocks issued? A. Debited to share premium C. Credited to extra ordinary gain B. Credited to accumulated profits D. Credited to share premium 15) What is the accounting treatment of the direct issue costs of shares of stocks? A. Debit to the related share premium during organization stage and operating stage B. Debit to organizational cost during the organization stage C. Debit to revenue expenditure during the operating stage D. Debit to accumulated expenses during the operating stage 16) What is the total number of shares that a corporation may issue under its charter? A. Authorized shares B. Issued shares C. Unissued shares

D.

Treasury shares

17) Choose the situation which illustrate the minimum requirement of the law for corporate formation Authorized Capital Subscr Subscribed ibed Capital Paid In Capi Capital tal A. P100,000 P 5,000 P5,000 B. P100,000 P15,000 P5,000 C. P 50,000 P10,000 P5,000 D. P 15,000 P12,500 P5,000 18) In case shares are issued for outstanding liabilities, what is the measure of recording share capital and share premium? A. Par value of the shares issued C. Fair value of the shares issued B. Amount of liabilities set-off D. Book value of the shares issued 19) When ordinary shares are issued in payment for services, the least appropriate basis for recording the transactions is A. Fair value of the services received B. Par value of the shares issued C. Fair value of the shares issued D. Any of these provides an appropriate basis for recording the transaction. 20) When should the share premium be recorded for shares issued at higher than par? A. Date of subscription C. Date of issuance of certificate B. Date of full payment D. Date of re-acquisition of shares 21) The entry to record the issuance of ordinary shares for fully paid subscription is A. Ordinary Share Subscribed C. Ordinary Share Subscribed Ordinary Share Ordinary Share B. Share Premium – Ordinary Share Ordinary Share Subscribed D. A memorandum entry Subscription Receivable 22) On February 1, authorized ordinary share capital was sold on a subscription basis at a price in excess of par value, and 20% of the subscription price was collected. On May 1, the remaining 80% of subscription price was collected. Share premium would increase on A. February 1 B. May 1 C. Both A and B D. Neither A nor B 23) Organization costs are incurred before actual operation, and as such these are treated as A. Outright expense charged to the first year of operation B. Other tangible assets amortized over 5 years C. Other intangible assets amortized over a period not exceeding 5 years D. Deferred expenses to be amortized based on actual revenue earned for the period

24) Which of the following describes legal capital? A. Total stockholder’s equity B. Paid-up capital and subscribed capital

C. D.

25) The purchase of treasury shares would have the following effects:

Stated value of capital stock and share premium Par value of capital stock issued and share premium

TOA by: John Bo S. Cayetano, CPA, MBA

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A. B. C. D.

Increase Decrease Decrease Decrease

Decrease Increase Decrease Decrease

No effect Decrease Decrease No effect

26) Treasury stocks are recorded at A. Acquisition cost B. Fair value at date of acquisition

Decrease Decrease Decrease Decrease

C. D.

Par value Not recorded at the date of acquisition

27) The cost of treasury stocks acquired for non-cash consideration is measured by A. Fair value of non-cash consideration given up B. Prevailing market price of the shares acquired as treasury stock C. Carrying cost of the non-cash asset surrendered D. Par value of shares acquired as treasury stock 28) Gains on the sale of treasury stock should be credited to A. Paid in capital from treasury stock B. Share capital

C. D.

Majority stockholders None of the above

29) Which statement is incorrect concerning treasury stock? A. Treasury stock shall be recorded at cost irrespective of whether acquired below or above par value. B. The total cost of treasury stock shall be deducted from equity. C. Treasury stock may be recognized as a financial asset. D. Gains or losses on sales of treasury stock shall not be included in profit or loss. 30) Treasury share is appropriately presented on the statement of financial position as a A. Trading security or available for sale security C. Deduction at cost from total shareholders’ equity B. Deduction at cost from total contingent liabilities D. Deduction at par from total shareholders’ equity 31) Gains or losses on the purchased and resale of treasury share is reflected in A. Share premium accounts only B. Share premium and accumulated profits accounts C. Income, paid-in capital accounts, and accumulated profits accounts. D. Income and paid-in capital accounts 32) Treasury shares (TS) were acquired for cash at a price in excess of its par value. The treasury shares were subsequently reissued for cash at a price in excess of its acquisition price. What is the effect on accumulated profits of the acquisition of treasury shares and of the reissuance of treasury shares? Acquisition of TS Reissuance of TS A. No effect Increase B. Increase No effect C. No effect No effect D. Increase Decrease 33) Which of the following best describes a possible result of treasury share transactions? A. May increase but not decrease retained earnings C. May decrease but not increase retained earnings B. May increase net income if the cost method is used D. May decrease but not increase net income 34) Which of the following statements pertaining to share capital transaction is not correct? A. The total stockholder’s equity is increased by the amount of cash received B. The excess of par value over the fair value of noncash item received increases the share premium C. The noncash item received is recorded at its fair value D. The total stockholder’s equity is increased by the value of liability set off 35) Which of the following will not affect the number of outstanding shares? A. Retirement of treasury stock C. Subscription received B. Cash sale of stock at par value D. Authorization of additional shares 36) At the date of financial statements, ordinary shares issued would exceed ordinary shares outstanding as a result of the A. Declaration of a share split C. Purchase of treasury shares B. Declaration of a bonus issue D. Payment in full of subscribed shares 37) How would a share split affect each of the following? Asset SHE APIC A. Increase Increase No effect B. No effect No effect No effect C. No effect No effect Increase

D.

Decrease Decrease Decrease TOA by: John Bo S. Cayetano, CPA, MBA

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38) Deposits on subscription to a proposed increase in capital stock should be shown as A. Part of liabilities C. Part of stockholders’ equity B. Part of accumulated profits D. Memorandum entry only 39) The stockholder’s equity account representing the earnings of the corporation available for distribution is known as A. Accumulated profits B. Share premium C. Share capital D. Treasury shares 40) If management wishes to capitalize part of the retained earnings, it may issue a A. Cash dividend B. Share dividend C. Property dividend

D.

Liquidating dividend

41) A company declared a cash dividend on its ordinary shares in December 2009, payable in January 2010. accumulated profits would A. Increase on the date of declaration C. Not be affected on the date of payment B. Not be affected on the date of declaration D. Decrease on the date of payment 42) Preference share that has a claim on any prior year dividends that may have passed is A. Cumulative B. Non-cumulative C. Participating

D.

Non-participating

43) Fully participating preference share means that A. The ordinary shareholders receive a dividend rate per share equal to the preference share and all excess dividends are given to the ordinary shareholders B. The ordinary shareholders receive a dividend rate per share equal to the preference share and all excess dividends go to the preference shareholders C. The ordinary shareholders receive a dividend rate per share equal to the preference share and all excess dividends are shared proportionately between the two classes D. The preference shareholders receive their full dividend and any excess is given to the ordinary shareholders 44) Select the statement that is incorrect concerning the appropriation of accumulated profits A. Appropriations of accumulated profits do not change the total amount of shareholders’ equity B. Appropriations of accumulated profits reflect funds set aside for a designated purpose, such as plant expansion C. Appropriations of accumulated profits can be made as a result of contractual requirements D. Appropriations of accumulated profits can be made at the discretion of the board of directors 45) Non-stock dividends shall be recognized as liabilities on the A. Date of declaration B. Date of payment

C. D.

Date of record Date of issuance of check

46) When shareholders may elect receive cash in lieu of stock dividend, the amount to be charged to retained earnings is equal to the A. Optional cash dividends C. Fair value of the shares B. Par value of the shares D. Book value of the shares 47) Dividends in arrears are shown on the financial statements as A. Current liabilities C. B. Contra-equity accounts D.

Contra-equity accounts Note disclosures only

48) Noncumulative preference dividends in arrears A. Are not paid and not disclosed B. Must be paid before any other cash dividend can be distributed C. Are disclosed as a liability until paid D. Are paid to preference shareholders if sufficient funds are available 49) The declaration and issuance of a share dividend A. Increases ordinary shares outstanding and total equity B. Decreases retained earnings but does not change total equity C. May increase or decrease share premium but does not change total equity D. Increases retained earnings and total equity 50) A company issued rights to its existing shareholders to purchase, for P30 per share, unissued shares of P15 par value ordinary share capital. Share premium will be credited during Issuance of Rights Exercise of Rights Expiration of Rights A. Yes No No B. No No Yes C. No Yes No D. Yes Yes Yes

TOA by: John Bo S. Cayetano, CPA, MBA

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51) A company issued rights to its existing shareholders to purchase ordinary shares. When the rights are exercised, share premium would be credited if the purchase price A. Exceeded the par value B. Was the same as the par value C. Was the same as the par value, but less than the market value at the date of exercise D. Was less than the par value 52) A company issued rights to its existing shareholders to purchase, for P30 per share, unissued ordinary shares of P15 par value. When the rights lapse A. No entry will be made C. Additional paid-in will be credited B. Share premium will be debited D. Stocks rights outstanding will be debited 53) Assuming that the issuing company has only one class of share capital, a transfer from accumulated profits to contributed capital equal to the market value of the shares issued is ordinarily a characteristic of A. Either a bonus issue or a share split C. A share split but not a bonus issue B. Neither a bonus issue nor a share split D. A bonus issue but not a share split 54) Which is incorrect in relation to appropriations of retained earnings A. Appropriations do not reduce total retained earnings B. The only proper way to eliminate an appropriation of retained earnings after it has served its purpose is to credit the unappropriated retained earnings account C. An appropriation of retained earnings does not mean the assets are segregated D. When treasury shares are purchased, retained earnings must be appropriated equal to the par or stated value of such shares. 55) Earnings per share shall be computed on the basis of A. Average ordinary shares outstanding during the year. B. Ordinary shares outstanding at the end of the year. C. Ordinary shares outstanding at the beginning of the year. D. Average ordinary and preference shares outstanding during the year. 56) For an entity having several different issues of convertible securities, and share options and warrants, the standard requires selection of the combination of securities producing A. The lowest possible earnings per share B. The highest possible earnings per share C. The EPS figure midway between the lowest possible and highest possible EPS. D. Any EPS figure between the lowest possible and the highest possible EPS. 57) Earnings per share should always be shown separately for A. Net Income and gross profit C. B. Net Income and pretax income D.

Income from continuing operations Discontinued operations and prior period adjustments

58) Options and warrants are dilutive if A. The exercise price is higher than the average market price. B. The exercise price is lower than the average market price. C. The exercise price is equal to the average market price. D. The option shares represent 20% of the common shares actually outstanding. 59) Under the treasury share method, the number of potential ordinary shares is equal to A. Option shares C. Assumed treasury shares acquired B. Option shares minus assumed treasury shares acquired D. Option shares actually issued during the year. 60) A written put option A. A contract that requires an entity to repurchases its own ordinary shares B. A contract that gives the holder the right to sell ordinary shares at a specified price for a given period. C. A financial instrument that gives the holder the right to purchase ordinary shares. D. An agreement to issue ordinary shares that is dependent on the satisfaction of specified conditions. 61) Which statement is incorrect concerning earnings per share? A. An entity shall present on the face of the income statement basic and diluted earnings per share for income or loss from continuing operations. B. An entity that reports a discontinued operation is not required to disclose the basic and diluted earnings per share for the discontinued operation either on the face of the income statement or in the notes. C. Earnings per share of common stock as reported on the income statement should be computed on the basis of a weighted average of the number of shares outstanding during the year except that minor fluctuations in the number of shares may be disregarded. D. A company with a simple capital structure for purposes of computing earnings per share would include dividends on

nonconvertible cumulative preferred stock. TOA by: John Bo S. Cayetano, CPA, MBA

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62) What will be the effect on earnings per share and stockholder’s equity with the reacquisition by an entity of its own stock? A. Decrease in EPS and stockholders’ equity C. Increase in EPS and decrease in stockholders’ equity B. No effect on EPS and increase in stockholders’ equity D. Decrease in EPS and increase in stockholders’ equity 63) As of January 1, 2021 there are 2 years of dividends in arrears on an issue of cumulative nonconvertible preference share. No dividends on preference share were declared in 2021. Therefore, in the 12/31/21 financial statements, the firm issuing the preference share: A. reports a liability equal to 3 years of dividends on preference share. B. reports a liability equal to 2 years of dividends on preference share. C. subtracts 3 years of dividends on preference share from earnings when computing earnings per share for 2021. D. discloses in a footnote to 2021’s statement of financial position that there are 3 years of dividends on preference share in arrears. E. discloses in a footnote to 2021’s statement of financial position that there are 2 years of dividend on preference share in arrears. 64) The order in which dividends are allocated to ordinary and preference share depends upon the provisions in the respective share contracts. Choose the correct statement regarding this allocation. A. When noncumulative preference share is fully participating, the rate of dividends allocated to preference share is the ratio of total par of preference share outstanding to total par of both classes of shares outstanding. B. When noncumulative preference s...