Unit 1- Financial Statements

Topic 4- Statement of Changes in Equity

Activity 1

1. True
2. False
3. True
4. False
5. True
6. False
7. True
8. False
9. False
10. True
11. False
12. True
13. True
14. False
15. False
16. True
17. True
18. False
19. False
20. True

Activity 2

21. The residual interest in a corporation belongs to the

a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
 b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
24. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate over
its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
25. Stockholders of a business enterprise are said to be the residual owners. The term residual
owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
27. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28. Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29. The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.
30. When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
31. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1
b. 2
c. 3
d. 1 or 3
32. A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
33. Which of the following represents the total number of shares that a corporation may issue
under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
34. Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
35. Which of the following is not a legal restriction related to profit distributions by a
corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for
that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences
and participation.
36. In January 2010, Finley Corporation, a newly formed company, issued 10,000 shares of
its P10 par common stock for P15 per share. On July 1, 2010, Finley Corporation
reacquired 1,000 shares of its outstanding stock for P12 per share. The acquisition of
these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
37. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
 c. issued and outstanding shares.
d. issued but not outstanding shares.
38. When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.
39. “Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40. Porter Corp. purchased its own par value stock on January 1, 2010 for P20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for P12,000. The P8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41. How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
42. Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
43. Which of the following features of preferred stock makes the security more like debt than
an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
 b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value
of the stock and receive the stock in place of the cash dividends.
45. According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders' equity.
46. Cumulative preferred dividends in arrears should be shown in a corporation's balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the
long-term portion.
47. At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
48. An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.
49. Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50. Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.
51. Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were
purchased in 2016 for P90,000. On November 15, 2020, Pierson declared a property
dividend of one share of Hunter for every ten shares of Pierson held by a stockholder. On
that date, when the market price of Hunter was P14 per share, there were 90,000 shares of
 Pierson outstanding. What gain and net reduction in retained earnings would result from
this property dividend?
Gain Net Reduction in
Retained Earnings
a. P0 P 126,000
b. P0 P81,000
c. P45,000 P81,000
d. P45,000 P 36,000
52. Stinson Corporation owned 30,000 shares of Matile Corporation. These shares were
purchased in 2016 for P270,000. On November 15, 2020, Stinson declared a property
dividend of one share of Matile for every ten shares of Stinson held by a stockholder. On
that date, when the market price of Matile was P14 per share, there were 270,000 shares
of Stinson outstanding. What gain and net reduction in retained earnings would result
from this property dividend?
Gain Net Reduction in
Retained Earnings
a. P0 P243,000
b. P0 P378,000
c. P135,000 P108,000
d. P135,000 P243,000
53. Winger Corporation owned 900,000 shares of Fegan Corporation stock. On December
31, 2020, when Winger's account "Investment in Common Stock of Fegan Corporation"
had a carrying value of P5 per share, Winger distributed these shares to its stockholders
as a dividend. Winger originally paid P8 for each share. Fegan has 3,000,000 shares
issued and outstanding, which are traded on a national stock exchange. The quoted
market price for a Fegan share was P7 on the declaration date and P9 on the distribution
date. What would be the reduction in Winger's stockholders' equity as a result of the
above transactions?
a. P3,600,000.
b. P4,500,000.
c. P7,200,000.
d. P8,100,000.
54. Gibbs Corporation owned 20,000 shares of Oliver Corporation’s P5 par value common
stock. These shares were purchased in 2016 for P180,000. On September 15, 2020, Gibbs
declared a property dividend of one share of Oliver for every ten shares of Gibbs held by
a stockholder.
On that date, when the market price of Oliver was P14 per share, there were 180,000
shares of Gibbs outstanding. What NET reduction in retained earnings would result from
this property dividend?
a. P90,000
b. P252,000
c. P72,000
d. P162,000
55. Melvern’s Corporation has an investment in 5,000 shares of Wallace Company common
stock with a cost of P218,000. These shares are used in a property dividend to
 stockholders of Melvern’s. The property dividend is declared on May 25 and scheduled
to be distributed on July 31 to stockholders of record on June 15. The market value per
share of Wallace stock is P63 on May 25, P66 on June 15, and P68 on July 31. The net
effect of this property dividend on retained earnings is a reduction of
a. P340,000.
b. P330,000.
c. P315,000.
d. P218,000.
56. Hernandez Company has 350,000 shares of P10 par value common stock outstanding.
During the year, Hernandez declared a 10% stock dividend when the market price of the
stock was P30 per share. Four months later Hernandez declared a P.50 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by
a. P1,242,500.
b. P525,000.
c. P192,500.
d. P175,000.
57. On June 30, 2020, when Ermler Co.'s stock was selling at P65 per share, its capital
accounts were as follows:
Capital stock (par value P50; 60,000 shares issued) P3,000,000
Premium on capital stock 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
a. P3,000,000.
b. P3,600,000.
c. P6,000,000.
d. P7,800,000.
58. The stockholders' equity section of Gunkel Corporation as of December 31, 2020, was as
follows:

Common stock, par value P2; authorized 20,000 P 20,000

shares; issued and outstanding 10,000 shares
Paid-in capital in excess of par 30,000
Retained earnings 75,000
P125,000
On March 1, 2021, the board of directors declared a 15% stock dividend, and accordingly
1,500 additional shares were issued. On March 1, 2021, the fair market value of the stock
was
P6 per share. For the two months ended February 28, 2021, Gunkel sustained a net loss of
P10,000. What amount should Gunkel report as retained earnings as of March 1, 2021?
a. P56,000.
b. P62,000.
c. P66,000.
d. P72,000.
59. The stockholders' equity of Howell Company at July 31, 2020 is presented below:

Common stock, par value P20, authorized P3,200,000

400,000 shares; issued and outstanding 160,000
shares
Paid-in capital in excess of par 160,000
Retained earnings 650,000
P4,010,000
On August 1, 2020, the board of directors of Howell declared a 15% stock dividend on
common stock, to be distributed on September 15th. The market price of Howell's
common
stock was P35 on August 1, 2020, and P38 on September 15, 2020. What is the amount
of the
debit to retained earnings as a result of the declaration and distribution of this stock
dividend?
a. P800,000.
b. P840,000.
c. P912,000.
d. P600,000.
60. On January 1, 2020, Dodd, Inc., declared a 10% stock dividend on its common stock
when the market value of the common stock was P20 per share. Stockholders' equity
before the stock dividend was declared consisted of:

Common stock, P10 par value, authorized 200,000 P1,200,000

shares; issued and outstanding 120,000 shares
Additional paid-in capital on common stock 150,000
Retained earnings 700,000
Total stockholders' equity P2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
a. P120,000 decrease
b. P240,000 decrease
c. P400,000 decrease
d. P200,000 decrease
61. On January 1, 2020, Culver Corporation had 110,000 shares of its P5 par value common
stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held
in the treasury. On December 1, when the market price of the stock was P8, the
corporation declared a 10% stock dividend to be issued to stockholders of record on
December 16, 2020. What was the impact of the 10% stock dividend on the balance of
the retained earnings account?
a. P50,000 decrease
b. P80,000 decrease
c. P88,000 decrease
d. No effect
62. At the beginning of 2020, Flaherty Company had retained earnings of P200,000. During
the year Flaherty reported net income of P100,000, sold treasury stock at a “gain” of
 P36,000, declared a cash dividend of P60,000, and declared and issued a small stock
dividend of 3,000 shares (P10 par value) when the market value of the stock was P20 per
share. The amount of retained earnings available for dividends at the end of 2020 was
a. P180,000.
b. P210,000.
c. P216,000.
d. P246,000.
63. Masterson Company has 420,000 shares of P10 par value common stock outstanding.
During the year Masterson declared a 5% stock dividend when the market price of the
stock was P36 per share. Three months later Masterson declared a P.60 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by
a. P1,020,600
b. P756,000
c. P264,600
d. P252,000
64. On December 31, 2019, the stockholders' equity section of Arndt, Inc., was as follows:

Common stock, par value P10; authorized 30,000 P 90,000

shares; issued and outstanding 9,000 shares
Additional paid-in capital 116,000
Retained earnings 174,000
Total stockholders' equity P380,000

On March 31, 2020, Arndt declared a 10% stock dividend, and accordingly 900
additional shares were issued, when the fair market value of the stock was P18 per share.
For the three months ended March 31, 2020, Arndt sustained a net loss of P32,000. The
balance of Arndt’s retained earnings as of March 31, 2020, should be
a. P125,800.
b. P133,000.
c. P134,800.
d. P142,000.
Activity 3

1. The items of equity and transactions that changed in its items were shown in Jollibee Food
Corporation's statement of changes in equity for the year ended 2019. In 2019, additional share
capital will be released, as well as some adjustments to the equity reserves.

2. The net gain or loss for the year is measured in the declaration of retained earnings. It's
included because it boosts the amount of money kept in the bank. The appropriation of retained
earnings is subtracted from the remaining unappropriated retained earnings balance.

3. The company's Statement of Changes in Equity is included in the company's full financial
report.