Multiple Choice
1) The residual interest in a company belongs
to the
a. management.
b. creditors.
c. ordinary shareholders.
d. preference shareholders.
ANS: c
Feedback:
Ordinary shares represent the basic ownership interest and bear the ultimate
risks (residual)
2) An ordinary shareholder has the pre-emptive
right to
a. share proportionately in company assets upon
liquidation.
b. share proportionately in any new issues of
shares of the same class.
c. receive cash dividends before they are
distributed to preference shareholders.
d. exclude preference shareholders from voting
rights.
ANS: b
Feedback:
Ordinary shares do not guarantee anything on liquidation. Preference shareholders have prior rights.
3) The pre-emptive right enables a shareholder
to
a. share proportionately in any new issues of
shares of the same class.
b. receive cash dividends before other classes
of shares without the pre- emptive
right.
c. sell shares back to the company at the option
of the shareholder.
d. receive the
same amount of dividends on a percentage basis as the preference shareholders.
ANS: a
Feedback:
The pre-emptive right protects an existing shareholder from involuntary
dilution of ownership interest.
4) Total 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 proportion of the total
assets of an enterprise.
d. only the amount of earnings that have been
retained in the business.
ANS: c
Feedback:
Equity is not a claim to specific assets.
5) A primary source of equity is
a. income retained by the company.
b. appropriated retained earnings.
c. contributions by shareholders.
d. both income retained by the company and contributions by shareholders.
ANS: d
Feedback:
Equity represents the cumulative net contributions by shareholders plus
earnings that have been retained.
6) 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.
ANS: d
Feedback:
Appropriation applies only to Retained Earnings.
7) The
accounting problem in a lump sum issue 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.
ANS: d
Feedback:
These two methods of allocation acceptable and use of either depends on the
determinability or not of fair values.
8) When
a company issues its shares in payment for services, the least appropriate basis for recording the transaction is the
a. market
value of the services received.
b. fair
value of the shares issued.
c. market
value of the shares issued.
d. Any
of these provides an appropriate basis for recording the transaction.
ANS: b
Feedback:
Shares should be recorded at the fair value of goods or services received.
9.) Direct
costs Incurred to sell shares such as underwriting costs should be accounted
for as a(n):
a.
reduction of capital.
b. expense of the
period in which the shares is issued.
c. intangible
asset.
d. a
or c
ANS: a
Feedback:
Underwriting costs should be reported as a reduction of the amounts paid in to
the company on a share issue.
10) When
treasury shares are purchased for more than the issue price of the shares and
the cost method is used to account for treasury shares, what account(s) should
be debited?
a. Treasury shares for the issue price and
Paid-in Capital for the excess of purchase price over the issue price.
b. Paid-in
capital in excess of the issue price for the purchase price.
c. Treasury
shares for the purchase price.
d. Treasury shares for the issue price and
retained earnings for the excess of the purchase price over the issue price.
ANS: c
Feedback:
This item is treated as a reduction of the total equity on the balance sheet.
11) “Gains” on sales of treasury shares (using
the cost method) should be credited to
a. share capital from sale of treasury shares.
b. share capital.
c. retained earnings.
d. other income.
ANS: a
Feedback:
Treasury shares are not assets and a company cannot gain from share
transactions with its own shareholders.
12) Wilson Ltd purchased its own shares on 1
January 2007 for $20,000 and debited the treasury shares account for the
purchase price. The shares were subsequently sold for $12,000. The $8,000 difference between the cost and
sales price should be recorded as a deduction from
a. additional paid-in capital to the extent that
previous net gains from sales of the same class of shares 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 shares included therein.
c. retained earnings.
d. net income.
ANS: a
Feedback:
When the credit balance in Share Capital from Sale of Treasury Shares is
eliminated, any additional excess of cost over selling price is debited to
Retained Earnings.
13.) A
"gain" from the sale of treasury shares should be reflected when
using the cost method of recording treasury shares transactions as
a. ordinary earnings shown on the Income
statement.
b. paid-in capital from treasury share
transactions.
c. an increase in the amount shown for ordinary
shares.
d. a reserve in shareholders equity.
ANS: d
Feedback:
If the selling price of treasury shares is greater than cost, the difference is
credited to the reserve account Share Capital from Sale of Treasury Shares.
14) Which of the following best describes a
possible result of treasury share transactions by a company?
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.
ANS: c
Feedback:
Decreases retained earnings when the credit balance of sale of Treasury shares
account is eliminated
15) Which of the following features of
preference shares make the security more like debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
ANS: c
Feedback:
Redeemable preference shares can be called at specified future dates and at
stipulated prices the same as liabilities.
16) The cumulative feature of preference shares
a. limits the
amount of cumulative dividends to the issue price of the preference shares.
b. requires that
dividends not paid in any year must be made up in a later year before dividends
are distributed to ordinary shareholders.
c. means that the
shareholder can accumulate preference shares until it is equal to the issue
price of ordinary shares at which time it can be converted into ordinary
shares.
d. enables a
preference shareholder to accumulate dividends until they equal the issue price
of the shares and receive the shares in place of the cash dividends.
ANS: b
Feedback: If directors fail to declare a dividend at
the normal date, the dividend is said to have been ‘passed’ and hence
constitutes ‘dividends in arrears’. This
must be paid before ordinary shareholders dividends.
.
17) 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.
ANS: b
Feedback:
If the date of declaration precedes balance date the dividend is recognized as
a liability. An entry for payment of the
dividend is made on the date of payment.
18) 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 non-monetary assets transferred.
d. All
of these statements are true.
ANS: c
Feedback:
The company restates at fair value the property to be distributed.
19) Farmer Ltd owns 4,000,000 shares in Baha Ltd
On 31 December 2007, Farmer distributed these shares as a dividend to its shareholders.
This is an example of a
a. property
dividend.
b. shares
dividend.
c. liquidating
dividend.
d. cash
dividend.
ANS: a
Feedback:
Dividends are paid from assets of the company.
20) A
dividend which is a return to shareholders of a portion of their original investments is a
a. liquidating
dividend.
b. property
dividend.
c. liability
dividend.
d. participating
dividend.
ANS: a
Feedback:
A dividend not based on earnings is considered to be a return of shareholders
capital.
21) A
mining company declared a liquidating dividend.
The journal entry to record the declaration must Include a debit to
a. Retained
Earnings.
b. a
paid-in capital account.
c. Accumulated
Depletion.
d. Accumulated
Depreciation.
ANS: b
Feedback: A liquidating dividend is
considered to be a return of the contributed capital to the shareholders.
22) If
management wishes to capitalise part of the earnings, it may issue a
a. cash
dividend.
b. share
dividend.
c. property
dividend.
d. liquidating
dividend.
ANS: b
Feedback:
This constitutes a reclassification of amounts from retained earnings to
contributed capital.
23) Which
dividends do not reduce equity?
a. Cash
dividends
b. Share
dividends
c. Property
dividends
d. Liquidating
dividends
ANS: b
Feedback:
Share dividends are not a distribution of assets but a reclassification of
equity items.
24) The declaration and issue of a share
dividend
a. Increases
ordinary shares outstanding and increases total equity.
b. decreases
retained earnings but does not change total equity.
c. may increase
or decrease paid-in capital in excess of issue price but does not change total
equity.
d. increases retained earnings and increases
total equity.
ANS: b
Feedback:
Only a reclassification of equity items.
25) Pryor Ltd issued a 2-for-1 share split of
its ordinary shares which had an issue price of $10 before and after the
split. At what amount should retained
earnings be capitalised for the additional shares issued?
a. There should be no capitalisation of retained
earnings
b. Issue
price
c. Market
value on the declaration date
d. Market
value on the payment date
ANS: b
Feedback:
If issue price remains the same after the split then in effect a share dividend
has been distributed.
26). The issuer of a 5% ordinary shares dividend
to ordinary shareholders preferably should transfer from retained earnings to contributed
capital an amount equal to the
a. market
value of the shares issued.
b. book
value of the shares issued.
c. minimum
legal requirements.
d. issue
price of the shares issued.
ANS: d
Feedback:
A share dividend is issued on a pro rata basis at whatever the issue price is
at that time.
27) At the date of declaration of an ordinary
shares dividend, the entry should not
include
a. a
credit to Ordinary Shares Dividend Payable.
b. a
credit to Paid-in Capital in excess of issue price.
c. a
debit to Retained Earnings.
d. All
of these are acceptable.
ANS: a
Feedback:
The account Ordinary Share Dividend Distributable should be credited; this is
not a liability account.
28). The
balance in Ordinary Shares Dividend Distributable should be reported as a. deduction from ordinary shares issued.
b. addition
to share capital.
c. current liability.
d. contra
current asset.
ANS: b
Feedback:
The balance represents an issue of additional shares to current shareholders.
29) A
feature common to both share splits and share dividends is
a. a
transfer to earned capital of a company.
b. that
there is no effect on total equity.
c. an
Increase in total liabilities of a company.
d. a reduction in the contributed capital of a company.
ANS: b
Feedback:
They are both reclassifications of equity items.
30) What
effect does the issue of a 2-for-1 shares split have on each of the following?
Issue price per Share Retained Earnings
a. No
effect No
effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease
ANS: c
Feedback:
The company uses a share split to reduce the market value of shares.
31). Preference
dividends in arrears
a. are
not paid or disclosed.
b. must
be paid before any other cash dividends can be distributed.
c. are
disclosed as a liability until paid.
d. are paid to
preference shareholders if sufficient funds remain after payment of the current
preference dividend.
ANS: b
Feedback:
Dividends not paid in any year must be made up in a later year before any
profits can be distributed to ordinary shareholders.
32). How should cumulative preference dividends
in arrears be shown in a company's balance sheet?
a. Note
disclosure
b. Increase
in equity
c. Increase
in current liabilities
d. Increase in
current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
ANS: a
Feedback:
Not recorded as a liability until approved by shareholders.
33) The
payout ratio can be calculated by
a. dividing
dividends per share by earnings per share.
b. dividing
cash dividends by net income less preference dividends.
c. dividing
cash dividends by market price per share.
d. dividing cash
dividends by net income less preference dividends and dividing cash dividends
by earnings per share.
ANS: b
Feedback:
This is the ratio of cash dividends to profit after preference shareholders
dividends.
Use the
following information for questions 34 and 35
Presented
below is information related to Getty Ltd:
Ordinary Shares, $1 issue price $3,930,000 Preference 8 1/2% Shares, $50 par 1,440,000
Retained Earnings 900,000
Treasury Ordinary Shares (at cost) 90,000
34) The
total equity of Getty Ltd is
a. $6,180,000.
b. $6,270,000.
c. $6,300,000.
d. $6,510,000.
ANS: a
Feedback:
The Treasury Shares are deducted from equity.
35) Garrett Ltd acquired 12,000 of its own
ordinary shares at $20 per share on 5 February 2007, and sold 6,000 of these
shares at $27 per share on 9 August 2007.
The market value of Garrett's ordinary shares was $24 per share at 31
December 2007, and $25 per share at 31 December 2007. The cost method is used
to record treasury shares transactions. What account(s) should Garrett credit
in 2007 to record the sale of 6,000 shares?
a. Treasury Shares for $162,000
b. Treasury Shares for $120,000 and Share
Capital from Sale
c. Treasury Shares for $120,000 and Retained
Earnings for $42,000
d. Treasury Shares for $144,000 and Retained
Earnings for $18,000.
ANS: b
Feedback:
The gain is recorded as a Reserve account because a company cannot realise a
gain by transacting with its own shareholders.
36) Kline Ltd issued 100,000 ordinary shares of
$10 issue price for $1,200,000. Kline acquired 4,000 shares of its own ordinary
shares at $15 per share. Three months later Kline sold 2,000 of these shares at
$19 per share. If the cost method is used, to record the sale of the 2,000
treasury shares, Kline should credit
a. Treasury Shares for $38,000.
b. Treasury Shares for $20,000 and Share Capital
from sale of Treasury Shares for $18,000.
c. Treasury Shares for $30,000 and Share Capital
from sale of Treasury Shares for $8,000.
d. Treasury Shares for $30,000 and Share Capital
from sale of Treasury Shares for $8,000.
ANS: c
Feedback:
Treasury shares were originally recorded at $15 per share. Under the cost method, the gain is treated as
a reserve account.
37). An analysis of equity of Miles Ltd as of 1
January 2007, is as follows:
Ordinary shares, $20 value, 90,000 shares
issued $1,800,000
Reserves 900,000
Retained earnings 760,000
Total $3,460,000
Miles uses the cost method of accounting
for treasury shares and during 2007 enters into the following transactions:
Acquired 2,500 of its shares
for $75,000
Sold 2,000 treasury shares at
$35 per share
Sold the remaining treasury
shares at $20 per share
Assuming
no other equity transactions occurred during 2007, what should Miles report at
31 December 2007, as total Reserves?
a. $895,000
b. $900,000
c. $905,000
d. $915,000
ANS: c
Feedback:
Purchase price was $30. Miles made a
gain of $5 per share on the first 2000 shares sold and made a loss of $10 per
share on the 500 remainder sold.
$10,000 - $5,000 = $5,000 gain which is than added to the Reserves on
the balance sheet.
38) Renn Ltd was organised on 1 January 2007,
to issue 400,000 ordinary shares. During 2007, the company had the following
capital transactions:
5 January Issued 150,000 shares @ $10 per
share
28
July Purchased 20,000
shares @ $11 per share
31
December Sold the 20,000 shares
held in treasury @ $18 per share
Renn used the cost method to record the
purchase and reissue of the treasury shares.
What is the total amount of Reserves at 31 December 2007?
a. $-0-
b. $460,000
c. $600,000
d. $140,000
ANS: d
Feedback:
Gain of $7 per share.
39) Trent Ltd’s equity at 1 January 2007 is as
follows:
Ordinary
shares, $10 issue price, 75,000 shares issued $ 750,000
Reserves 300,000
Retained
earnings 730,000
Total $1,780,000
During
2007, Trent
Acquired
2,000 of its shares for $90,000
Sold
1,200 treasury shares at $50 a share
Sold
the remaining treasury shares at $41 per share
No other shares transactions
occurred during 2007. Assuming Trent
a. $297,200.
b. $290,000.
c. $302,800.
d. $309,200.
ANS: c
Feedback:
Purchase price =$45 per share. Gain on
sale of 1200 = $6,000 and loss on sale of 800 = $3,200. Difference = gain of $2,800 this is added to
the Reserve account.
40) Presented below is the equity section of Kidd Ltd at 31 December 2007:
Ordinary shares, issue price
$20, 45,000 shares issued $ 900,000
Reserves 250,000
Retained earnings 500,000
$1,650,000
During 2007,
the following transactions occurred relating to equity:
2,000
shares were reacquired at $28 per share
2,000
shares were reacquired at $35 per share
1,200
shares of treasury shares were sold at $30 per share
For the
year ended 31 December 2007, Kidd reported net income of $450,000. Assuming Kidd accounts for treasury shares
under the cost method, what should it report as total equity on its 31 December
2007 balance sheet?
a. $2,010,000
b. $2,007,600
c. $2,044,000
d. $1,560,000
ANS: a
Feedback:
Add on the net income and deduct the loss on sale of treasury shares.
41) On 1 December 2007, Judson Ltd exchanged
10,000 ordinary shares held in treasury for a used machine. The treasury shares
were acquired by Judson at a cost of $40 per share, and are accounted for under
the cost method. On the date of the
exchange, the ordinary shares had a fair value of $55 per share (the shares
were originally issued at $30 per share). As a result of this exchange,
Judson's total equity will increase by
a. $100,000.
b. $400,000.
c. $150,000.
d. $550,000.
ANS: d
Feedback: 10,000 x $55 = $550,000
42) Younger Ltd owned 300,000 of Marley Ltd
shares. On 31 December 2007, when Younger's account Investment in Ordinary
Shares of Marley Ltd had a carrying value of $5 per share, Younger distributed
these shares to its shareholders as a dividend.
Younger originally paid $8 for each share. Marley has 1,000,000 shares issued, which are
traded on a national shares exchange.
The quoted market price for a Marley share was $7 on the declaration
date and $9 on the distribution date.
What
would be the reduction in Younger’s equity as a result of the above
transactions?
a. $1,200,000
b. $1,500,000
c. $2,400,000
d. $2,700,000
ANS: b
Feedback:
Loss between purchase date and 2007 carrying amount equals $3 per share =
$900,000. The loss between 2007 carrying
amount and date of declaration equals $2 per share = $600,000. Both of these add to $1,500,000
43) On 30 June 2007, when Vietti Ltd’s shares
were selling at $65 per share, its equity accounts were as follows:
Share
Capital (issue price $50; 40,000 shares
issued) $2,000,000
Reserves 600,000
Retained
earnings 4,200,000
If
a 100% shares dividend was declared and distributed, share capital would be
a. $2,000,000.
b. $2,400,000.
c. $4,000,000.
d. $5,200,000.
ANS: c
Feedback:
100% of shares issued equals $2,000,000.
Add this to the existing share capital to get $4,000,000
44) The equity section of Milroy Ltd as of 31
December 2007 was as follows:
Ordinary
shares, issue price $2, 10,000 shares issued $ 20,000
Reserves 30,000
Retained
earnings 90,000
$140,000
On 1
March 2008, the board of directors declared a 15% shares dividend, and accordingly
1,500 additional shares were issued. On
1 March 2008, the fair market value of the shares was $6 per share. For the two month period ending 28 February 2008,
Milroy sustained a net loss of $10,000.
What
amount should Milroy report as retained earnings as of 1 March 2008?
a. $71,000
b. $77,000
c. $81,000
d. $87,000
ANS: a
Feedback:
Reduction of retained earnings due to share dividend is 1500 multiplied by $6 =
$9,000 plus the $10,000 net loss = $19,000
45) The equity of Bello
Ordinary
shares, issue price $20, 200,000 shares issued $4,000,000
Reserves 160,000
Retained
earnings 650,000
$4,810,000
On 1 August 2007, the board of directors
of Bello Bello
a. $600,000
b. $1,050,000
c. $1,140,000
d. $750,000
ANS: b
Feedback:
The price at declaration date is the amount to be recorded for the share
dividend. 200,000 x .15 x $35 = $1,050,000
46). On 1 January 2007, Ewing Ltd declared a 10%
shares dividend on its ordinary shares when the market value of the ordinary
shares was $20 per share. Equity before
the shares dividend was declared consisted of:
Ordinary
shares, $10 issue price, 120,000 shares issued $1,200,000
Reserves 150,000
Retained
earnings 700,000
Total
equity $2,050,000
What
was the effect on Ewing ’s retained earnings as
a result of the above transaction?
a. $120,000 decrease
b. $240,000 decrease
c. $400,000 decrease
d. $200,000 decrease
ANS: b
Feedback:
Any declaration of dividends decreases retained earnings.
49). On 1 January 2007, Golden Ltd had 110,000
shares of its $5 issue price ordinary shares on issue. On June 1, the company acquired 10,000 shares
to be held in the treasury. On December
1, when the market price of the shares was $8, the company declared a 10%
shares dividend to be issued to shareholders of record on 16 December 2007.
What was the impact of the 10% shares dividend on the balance of the retained
earnings account?
a. $50,000 decrease
b. $80,000 decrease
c. $88,000 decrease
d. No effect
ANS: b
Feedback:
Shareholders of record in December was 110,000-10,000. 10% of 100,000 equals
the 10,000 treasury shares held.
50) Presented below is information related to
Milson Ltd:
31
December
2007 2008
Ordinary shares $ 75,000 $ 60,000
6% Preference shares 350,000 350,000
Retained earnings (includes net income
for current year) 90,000 75,000
Net income for year 60,000 32,000
What is Milson’s rate of return on ordinary share equity
for 2008 assuming preference dividends were declared?
a. 48.8%
b. 26%
c. 25%
d. 22.4%
ANS: b
Feedback:
Rate of return on ordinary shares is net income – preference dividends divided
by average ordinary equity
$60,000
– (.06 × $350,000)
——————————————————————
= .26 = 26%.
[($60,000
+ $75,000) + ($75,000 + $90,000)] ÷ 2
51) On 1 July 2007, Alou Ltd issued 1,000 of
its $10 issue price ordinary shares and 2,000 of its $10 issue price convertible
preference shares for a lump sum of $50,000. At this date Alou's ordinary
shares were selling for $24 per share and the convertible preference shares for
$18 per share. The amount of the
proceeds allocated to Alou's preference shares should be
a. $25,000.
b. $30,000.
c. $36,000.
d. $27,500.
ANS: b
Feedback: ($24 ×
1,000) + ($18 × 2,000) = $60,000.
$36,000
———— × $50,000 = $30,000.
$60,000
.
52) Nelsen Ltd was organised on 2 January 2007,
with 100,000 $10 issue price ordinary shares.
During 2007, Nelsen had the following capital transactions:
Issued
75,000 shares at $14 per share.
Purchased
5,000 shares at $11 per share.
Sold
4,000 shares of treasury shares at $13 per share.
Nelsen
used the cost method to record the purchase of the treasury shares. What would
be the balance in the Share Capital from Sale of Treasury Shares account at 31
December 2007?
a. $0
b. $4,000
c. $8,000
d. $12,000
ANS: c
Feedback:
Treasury shares sold at a gain of $2 per share.
53) In 2007, Collins Ltd acquired 9,000 shares
of its own $1 issue price ordinary shares at $18 per share. In 2007, Collins
issued 6,000 of these shares at $25 per share. Collins uses the cost method to
account for its treasury shares transactions. What accounts and what amounts
should Collins credit in 2008 to record the issue of the 6,000 shares?
Treasury
Share Capital Retained Ordinary
Shares from sale Earnings
Shares
a. $108,000 $42,000
b. $108,000 $ 42,000
c. $144,000 $6,000
d. $102,000 $42,000 $6,000
ANS: b
Feedback:
A gain on sale of Treasury shares is recorded in a reserve account – Share
Capital from Sale of Treasury shares.
54) At its date of incorporation, Vanson Ltd
issued 100,000 ordinary shares at $11 per share. During the current year,
Vanson acquired 20,000 shares of its ordinary shares at a price of $16 per
share and accounted for them by the cost method. Subsequently, these shares
were reissued at a price of $12 per share. There have been no other issues or
acquisitions of its own ordinary shares. What effect does the reissue of the
shares have on the following accounts?
Retained
Earnings Share capital
from sale
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
ANS: b
Feedback:
The reissue resulted in a loss which reduces the previous gain recorded in
Share capital from sale of Treasury shares account.
55) Randle Ltd owned 20,000 shares of Carl Ltd
purchased in 1999 for $300,000. On 15 December 2007, Randle declared a property
dividend for all of its Carl Ltd shares on the basis of one share that Carl for
every 10 shares of Randle ordinary shares is held by its shareholders. The
property dividend was distributed on 15 January 2008. On the declaration date,
the aggregate market price of the Carl shares held by Randle was $500,000. The
entry to record the declaration of the dividend would include a debit to
Retained Earnings of
a. $0.
b. $200,000.
c. $300,000.
d. $500,000.
ANS: d
Feedback:
Property dividends are measured at fair value.
56) A company declared a dividend, a portion of
which was liquidating. How would this
distribution affect each of the following?
Share
Capital Retained Earnings
a. Decrease No
effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No
effect
ANS: b
Feedback:
The part of dividend not liquidating would affect retained earnings and the
liquidating portion is considered a return of capital.
57) On 1 May 2007 Lett Ltd declared and issued
a 15% ordinary share dividend. Prior to this dividend, Lett had 100,000 of $1
issue price ordinary shares issued. The fair value of Lett's ordinary shares
was $20 per share on 1 May 2007. As a result of this share dividend, Lett's total
equity
a. increased by $300,000.
b. decreased by $300,000.
c. decreased by $150,000.
d. no effect
ANS: d
Feedback:
A share dividend only reclassifies
equity items.
58) How would the declaration and subsequent issue
of a 10% share dividend by the issuer affect each of the following when the
market value of the shares exceeds the issue price of the shares?
Ordinary
Shares Total equity
a. No effect No effect
b. No effect Increase
c. Increase No effect
d. Increase Increase
ANS: c
Feedback:
Share dividend does not alter the total equity, it reclassifies items in Equity.
59) On 31 December 2007, the equity section of
Beeman Ltd was as follows:
Ordinary shares, issue price $10, 9,000 shares issued $
90,000
Reserves 116,000
Retained earnings 261,000
Total equity $467,000
On 31
March 2008, Beeman declared a 10% shares dividend, and accordingly 900
additional shares were issued, when the fair market value of the shares was $27
per share. For the three months period ending 31 March 2008, Beeman sustained a
net loss of $48,000. The balance of Beeman’s retained earnings as of 31 March 2008,
should be
a. $188,700.
b. $199,500.
c. $202,200.
d. $213,000.
ANS: a
Feedback:
The share dividend reduced retained earnings by 900 multiplied by $27 plus the
net loss.
Exercises
Ex. 14.60—Lump sum issue
of shares.
Landon
Ltd has issued 2,000 ordinary shares and 400 preference shares for a lump sum
of $72,000 cash.
Instructions
(a) Give the entry for the issue
assuming the issue price of the ordinary was $30, and the issue price of the
preference was $50. (Each valuation is
on a per share basis and there are ready markets for each type of share.)
(b) Give the entry
for the issue assuming the same facts as (a) above except the preference shares
have no ready market and the ordinary shares have a market value of $24 per
share.
Solution
14.60
(a) Cash ............................................................................................ 72,000
Ordinary Shares .................................................................. 54,000
Preference Shares ............................................................... 18,000
(ordinary $30 × 2,000 $60,000
preference $50 × 400 20,000
$80,000 market
value
60/80 × $72,000 = $54,000 ordinary
20/80 × $72,000 = 18,000 preference
$72,000)
(b) Cash 72,000
Ordinary Shares ................................................................... 48,000
Preference Shares ................................................................. 26,000
Ex. 14.61—Treasury
shares.
For
numerous reasons, a company may reacquire its own share capital. When a company
purchases treasury shares, it usually accounts for the shares using the cost
method.
Instructions
Explain how a company would account for each of the
following:
1. Purchase of shares at a price
less than issue price.
2. Subsequent resale of treasury
shares at a price less than purchase price, but more than issue price.
3. Subsequent resale of treasury
shares at a price greater than both purchase price and issue price.
4. Effect on net Income.
Solution
14.61
1. Treasury
Shares is debited for the purchase price of the shares even though the purchase
price is less than issue price.
2. Treasury Shares is credited for
the original cost (purchase price) of the shares, and the excess of the
original cost (purchase price) over the sales price first is debited to Share
Capital from Sale of Treasury shares from earlier sales of treasury shares and
any remainder is debited to Retained Earnings.
3. Treasury Shares is credited for
the original cost (purchase price) of the shares, and the excess of the sales
price over the original cost (purchase price) is credited to Share Capital from
Sale of Treasury Shares.
4. There is no effect on net income
as a result of treasury share transactions.
Ex. 14-.2—Treasury
shares.
Camby Ltd's
balance sheet reported the following:
Share capital outstanding, 5,000
shares, issue price $30 per share $150,000
Reserves 80,000
Retained earnings 100,000
The following transactions occurred this year:
(a) Purchased 40
shares to be held as treasury shares, paying $60 per share
(b) Sold 30 of
the treasury shares at $65 per share
(c) Sold the
remaining treasury shares at $50 per share
Instructions
Prepare the journal entry for these transactions under
the cost method of accounting for treasury shares.
Solution
14.62
(a) Treasury Shares ............................................................................... 2,400
Cash ........................................................................................ 2,400
(b) Cash ................................................................................................. 1,950
Treasury Shares......................................................................... 1,800
Share Capital from sale of
Treasury Shares............................... 150
(c) Cash .................................................................................................. 500
Share Capital from Sale
Treasury Shares......................................................................... 600
Ex. 14.63—Treasury
shares.
Gagne Ltd's balance sheet shows:
Ordinary shares, $20 issue price $3,000,000
Reserves 1,050,000
Retained earnings 750,000
Instructions
Record the following transactions by the cost method.
(a) Bought 3,000
ordinary shares at $29 a share.
(b) Sold 1,500
treasury shares at $30 a share.
(c) Sold 600
shares of treasury shares at $26 a share.
Solution
14.63
(a) Treasury Shares .............................................................................. 87,000
Cash ................................................................................... 87,000
(b) Cash................................................................................................ 45,000
Treasury Shares .................................................................. 43,500
Share Capital from Sale
(c) Cash................................................................................................ 15,600
Share Capital from Sale
Retained Earnings............................................................................ 300
Treasury Shares .................................................................. 17,400
Ex. 14.64—Treasury
shares.
In
2007, Hoffman Ltd issued 200,000 of its 500,000 $10 issue price ordinary shares at $35 per
share. In January 2008, Hoffman repurchased 6,000 shares at $30 per share.
Assume these are the only share transactions the company has ever had.
Instructions
(a) What are the two methods of accounting for
treasury shares?
(b) Prepare the journal entry to record
the purchase of treasury shares by the cost method.
(c) 2,000 shares of treasury shares
are reissued at $33 per share. Prepare the journal entry to record the reissue
by the cost method.
Solution
14.64
(a) The two methods of accounting for treasury
shares are the cost method and the issue price method.
(b) Treasury Shares .............................................................................. 180,000
Cash ................................................................................... 180,000
(c) Cash
........................................................................................... 66,000
Share Capital from Sale
Treasury Shares .................................................................. 60,000
Ex. 14.65—Equity.
Indicate the effect of each of the following
transactions on total equity by placing an "X" in the
appropriate column.
Increase Decrease No Effect
1. Treasury shares are resold at more than cost _________ _________ _________
2. Operating loss for the period _________ _________ _________
3. Retirement of bonds payable at more than
book value _________ _________ _________
4. Declaration of a share dividend _________ _________ _________
5. Acquisition of machinery for ordinary shares _________ _________ _________
6. Conversion of bonds payable into ordinary
shares _________ _________ _________
7. Not declaring a dividend on cumulative
preference shares _________ _________ _________
8. Declaration of cash dividend _________ _________ _________
9. Payment of cash dividend _________ _________ _________
Solution 14.65
Increase Decrease No Effect
1. Treasury shares are resold at more than cost X
2. Operating loss for the period X
3. Retirement of bonds payable at more than
book value X
4. Declaration of a share dividend
X
5. Acquisition of machinery for ordinary shares
X
6. Conversion of bonds payable into ordinary
shares X
7. Not declaring a dividend on cumulative
preference shares X
8. Declaration of cash dividend X
9. Payment of cash dividend
X
Ex. 14.66—Shares dividends.
Describe the journal entry for a share dividend on
ordinary shares.
Solution 14.66
A share dividend results in the transfer from retained
earnings to paid-in capital of an amount equal to the market value of each
share. Retained Earnings is debited for
the total amount transferred, and
Ordinary Share Dividend
Distributable is credited. When the
shares are issued Ordinary Share Dividend Distributable is Debited and Ordinary
share capital is credited.
Ex. 14.67—Shares dividends and shares splits.
Indicate the principal effects of a shares dividend
versus a shares split as they affect the issuing company. Respond in the spaces as follows: "C" for change; "NC" for no change.
Shares
Dividend Shares Split
Number of
Shares issued _________ _________
Issue price
per Share _________ _________
Retained
Earnings _________ _________
Total Equity _________ _________
Composition
of Equity _________ _________
Solution 14.67
Shares
Dividend Shares Split
Number of
Shares Outstanding C C
Issue price
per Share NC C
Retained
Earnings C NC
Total Equity NC NC
Composition
of Equity C NC
Ex. 14.68—calculation of selected financial ratios.
The following information pertains to Nyland & Co.:
Preference shares, cumulative:
Price per share $100
Liquidation value per share $105
Dividend rate 8%
Shares issued 5,000
Dividends in arrears none
Ordinary shares:
Price per share $10
Shares issued 60,000
Dividends paid per share $1.60
Market price per share $36.00
Reserves $200,000
Unappropriated retained earnings (after
closing) $135,000
Retained earnings appropriated for contingencies $40,000
Ordinary treasury shares:
Number of shares 5,000
Total cost $125,000
Net Income $260,000
Instructions
Calculate (assume no changes in balances during the past
year):
(a) Total
amount of equity in the balance sheet
(b) Earnings
per share of ordinary shares
(c) Book value
per share of ordinary shares
(d) Payout
ratio of ordinary shares
(e) Return on
ordinary share equity
Solution 14.68
(a) (5,000 ×
$100) + (60,000 × $10) + $200,000 + $135,000 + $40,000 – $125,000
=
$1,350,000.
(b) [$260,000 –
(5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = 220,000 ÷ 55,000
= $4.00
per share.
(c) ($1,350,000
– $525,000) ÷ (60,000 – 5,000) = $825,000 ÷ 55,000 = $15 per share.
(d) $1.60 ÷ $4
= 40% or
[($1.60 × 55,000) ÷ ($260,000 – $40,000)].
(e) ($260,000 –
$40,000) ÷ ($1,350,000 – $500,000) = 25.9%.
PROBLEMS
Pr. 14.69—Equity
transactions.
Presented below is information related to Rollins Ltd:
1. The company
is granted a charter that authorises issue of 15,000 shares of $100 issue price
preference shares and 40,000 ordinary shares.
2. 10,000
ordinary shares are issued to the founders of the company for land valued by
the board of directors at $300,000.
3. 3,000 preference shares are sold for cash at
$120 per share.
4. The company issues 100 ordinary shares to its
attorneys for costs associated with starting the company. At that time, the ordinary shares were
selling at $60 per share.
Instructions
Prepare the general journal entries necessary to record
these transactions.
Solution
14.69
1. No entry necessary.
2. Land ................................................................................................. 300,000
Ordinary Shares ..................................................................... 300,000
3. Cash ................................................................................................. 360,000
Preference Shares .................................................................. 360,000
4. Organisation Expense ........................................................................ 6,000
Ordinary Shares ..................................................................... 6,000
Pr. 14.70—Treasury
shares transactions.
The
original sale of the $50 issue price ordinary shares of Eddy Ltd was recorded
as follows:
Cash ........................................................................................... 290,000
Ordinary Shares ............................................................... 290,000
Instructions
Record the treasury share transactions (given below)
under the cost method:
Transactions:
(a) Bought 300
ordinary shares as treasury shares at $62
(b) Sold 80
treasury shares at $60
(c) Sold 40
treasury shares at $68
Solution
14-.70
(a) Treasury Shares..................................................................................... 18,600
Cash............................................................................................. 18,600
(b) Cash...................................................................................................... 4,800
Retained Earnings.................................................................................. 160
Treasury Share Capital.................................................................. 4,960
(c) Cash...................................................................................................... 2,720
Share Capital from Sale
Treasury Share Capital.................................................................. 2,480
