FINANCIAL ACCOUNTING & REPORTING ACCT. JONATHAN B.

DE VEYRA, MBA

SHAREHOLDERS’ EQUITY /RETAINED EARNINGS

THEORY
1. If preference share is noncumulative, then:
a. The preference shareholders are entitled to current dividends before ordinary shareholders can receive dividends.
b. Cash dividends not declared in prior years are lost permanently.
c. The preference shareholders are only entitled to a specific percent of the cash dividends.
d. Prior years’ cash dividend may be paid to the ordinary shareholders.

2. If shares are issued for a consideration other than cash, the proceeds should be measured by the:
a. Fair value of the shares issued. c. Fair value of the consideration received.
b. Par value of the shares issued. d. Book value of the consideration received.

3. When shares are issued for services received, the measure should be the:
a. Fair value of such services. c. Book value of the shares issued.
b. Par value of the shares issued. d. Fair value of the shares issued.

4. When shares with par value are sold, the proceeds shall be credited to the:
a. Share capital account.
b. Share premium.
c. Retained earnings.
d. Share capital account to the extent of the par of the shares issued with any excess being reflected in share premium.

5. When shares without par value are sold, the excess proceeds over stated value shall be credited to:
a. Income. c. Share premium.
b. Retained earnings. d. Share capital.

6. If treasury shares are reissued for noncash consideration the proceeds shall be measured by:
a. Fair value of the treasury shares.
b. Fair value of the noncash consideration received.
c. Book value of the noncash consideration received.
d. Book value of the treasury shares.

7. Treasury shares shall be recorded at cost irrespective of whether these are acquired below or above par value. The cost of treasury shares
acquired for noncash consideration is usually measured by:
a. Fair value of the noncash consideration given.
b. Carrying amount of the noncash asset surrendered.
c. Par value of the shares.
d. Book value of the shares.

8. “Loss” from sale of treasury stock should be charged to:

a. Loss on sale of treasury stock to be shown as other expense.
b. Retained earnings and then additional paid in capital from treasury stock.
c. APIC from treasury stock and then retained earnings.
d. APIC from original issuance, APIC from treasury and then retained earnings.

9. Gains and losses on retirement of treasury stock should not be included in determining income. If the retirement results in a gain, such gain
shall be credited to:
a. Additional paid in capital. c. Capital stock.
b. Retained earnings. d. Income.

10. Which statement is incorrect concerning treasury shares?

a. Treasury shares shall be recorded at cost irrespective of whether acquired below or above par value.
b. The total cost of treasury shares shall be deducted from equity.
c. Treasury shares may be recognized as financial asset.
d. Gain or loss on sale of treasury shares shall not be included in profit or loss.

11. Loss on retirement of treasury stock should be debited to:

a. Retained earnings.
b. APIC from treasury stock and then to retained earnings.
c. APIC from treasury stock, APIC from original issuance and then to retained earnings.
d. APIC from original issuance, APIC from treasury stock and then retained retained earnings.

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12. Contributed capital does not include:

a. Share premium on ordinary and preference shares.
b. Preference share capital.
c. Capital resulting from reissuance of treasury shares at a price above acquisition price.
d. Capital accumulated by retention of earnings.

13. Share warrants outstanding shall be reported as:

a. Liability c. Share capital
b. Reduction of share premium d. Share premium

14. Subscriptions receivable and other receivables from sale of stock which are not collectible currently should be reflected as:
a. Deduction from the related subscribed capital stock in the stockholders’ equity section.
b. Current asset.
c. Long-term investment.
d. Other asset.

15. When stock rights are exercised, how much should be treated as total proceeds from the issuance of shares?
a. Only the consideration received.
b. The total of the consideration received and the amount previously recorded for the stock rights.
c. The amount previously recorded for the stocks rights.
d. The total par value of the shares.

16. A company issued rights to its existing shareholders to purchase, for P 30 per share, unissued shares of P 15 par value common
stock. Additional paid in capital will be credited when the:
Rights are issued Rights lapse
a. Yes No.
b. No No.
c. No Yes.
d. Yes Yes.

17. Choose the most correct statement regarding a 2 for 1 share split and a 100% share dividend:
a. Neither affect par value.
b. Both cause the same reduction in retained earnings.
c. Both double the number of shares outstanding.
d. Both cause a significant increase in the ordinary shares account.

18. Discount on capital stock:

a. May be recorded as either an asset or an expense.
b. Should be closed to income summary account.
c. May be offset against premium on the same class of stock.
d. None of the above.

19. When a property dividend is declared and the book value of the property exceeds its market value, the dividend is recorded at the:
a. Market value of the property at the date of distribution.
b. Market value of the property at the date of declaration.
c. Book value of the property at the date of declaration.
d. Book value of the property at the date of distribution if it still exceeds the market value of the property at the date of declaration.

20. Treasury shares may be reissued as dividends, in which case what amount should be charged to retained earnings?
a. Cost of the treasury stock.
b. Par value of the treasury stock.
c. Fair value of the treasury on the date of declaration.
d. Fair value of the treasury stock on the date of issuance.

21. If the stock dividend is less than 20%, how much of the retained earnings should be capitalized?
a. Par value of the shares.
b. Fair value of the shares on the date of declaration.
c. Fair value of the shares on the date of record.
d. Fair value of the shares on the date of issuance.

22. 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 dividend. c. Par value of the shares.
b. Fair value of the shares. d. Book value of the shares.

23. As a general rule, cash dividends distributed in lieu of stock dividends should be charged to retained earnings:
a. Equivalent to the fair value of the stocks that should have been distributed.
b. Equivalent to the optional cash dividend.
c. Equivalent to the fair value of the stocks that should have been distributed or equivalent to the optional cash dividend, whichever is
lower.
d. Equivalent to the fair value of the stocks that should have been distributed or equivalent o the optional cash dividend, whichever is
higher.

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24. For which of the following purposes should an appropriation for possible loss contingencies be established?
a. To match applicable costs with current revenue.
b. To reduce fluctuations in net income in order to lend stability of the entity.
c. To charge operations in periods of rising prices for the losses which may otherwise be absorbed, in periods of falling prices.
d. To inform shareholders that a portion of retained earnings should be set aside from amounts available for dividends because of such
contingencies.

25. The primary purpose of quasi-reorganization is to give a company the opportunity to:
a. Obtain relief from creditors. c. Eliminate a deficit in r/e.
b. Revalue understated assets to fair value. d. Form a new corporation.

26. The accounting for quasi-reorganization usually involves:

a. Write up of assets and writedown of retained earnings.
b. Writedown of both assets and retained earnings.
c. Writedown of assets and elimination of deficits.
d. Write up of assets and elimination of deficits.

27. Changes in the par value of capital stock are charged or credited to additional paid in capital. Any increases in capital stock that
exceed additional paid in capital shall be charged to:
a. Retained earnings c. Deferred charge
b. Income d. Other capital stock account

28. At the date of the financial statements, common shares issued would exceed common shares outstanding as a result of:
a. Declaration of stock split. c. Purchase of treasury stock
b. Declaration of a stock dividend d. Payment in full of subscribed stock

29. Assuming the issuing company has only one class of stock, a transfer from retained earnings to capital stock equal to the market
value of the shares issued is ordinarily a characteristic of:
a. Either a stock dividend or a stock split. c. A stock split but not a stock dividend.
b. Neither a stock dividend nor a stock split. d. A stock dividend but not a stock split.

30. Payment of a dividend in stock:

a. Increases the current ratio. c. Increases total stockholders’ equity.
b. Decreases the amount of working capital. d. Decreases book value per share of stock outstanding.

31. When a corporation redeems all of its preferred stock for more than the original issue price, the excess paid above the original
issue price should be:
a. Accounted for as loss on exchange in the income statement. c. Charged to a discount preferred stock account.
b. Charged against paid in capital of common stock. d. Charged against retained earnings.

32. An entity issued common stock with par value. If there is a change in the par value of the common stock, it is charged or credited
to additional paid in capital. If the increase in common stock exceeds additional paid in capital, the entity shall charge the excess
to:
a. Retained earnings c. Other capital stock
b. Deferred charges d. Income

33. Which is incorrect concerning retained earnings?

a. Appropriated retained earnings should be clearly distinguished from unappropriated retained earnings.
b. A deficit is a debit balance in retained earnings.
c. a deficit in retained earnings should be presented as an asset.
d. When the deficit exceeds the total of the other capital account balances, the excess is a capital deficiency.

34. At the beginning of the current year, Sumo Company purchased 500,000 shares of Saturn Company. At year-end, Sumo
distributed 250,000 shares of Saturn as a dividend to Sumo’s shareholders. This is an example of:
a. Liquidating dividend c. Property dividend
b. Investment dividend d. Stock dividend

35. Which of the following is most likely to be found in corporate laws regarding payment of dividends?
a. Dividends may be paid from legal capital
b. Retained earnings are available for dividends unless restricted by contract or by statute.
c. Unrealized capital is available for any type of dividend
d. Capital from donated assets is available for dividends.

36. Which statement is correct concerning appropriations of retained earnings?

a. Appropriations reduce total retained earnings.
b. The only proper way to eliminate an appropriation of retained earnings after it has served its purpose it to revert to the unappropriated
retained earnings.
c. An appropriation of retained earnings means that assets are segregated for a specific purpose.
d. When treasury shares are purchased, retained earnings must be appropriated equal to the par or stated value of the treasury shares.

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37. An entity issued what is called a “20% stock dividend” on its share capital. At what amount per share, if any, should retained earnings
be reduced for this transaction?
a. Zero because no entry is made. c. Market value at the declaration.
b. Par value. d. Market value at the date of issuance.

38. Assuming that issuing entity has only one class of share capital, a transfer from retained earnings to share capital equal to the
market value of the shares issued is ordinarily a characteristic of:
a. Either a stock dividend or a share split. c. A share split but not a stock dividend.
b. Neither a stock dividend nor a share split. d. A stock dividend but not a share split.

PROBLEMS
1. The accounts shown below appear in the December 31, 2006 trial balance of Hogan Corporation:
Preference share, authorized, P 50 par 10,000,000
Unissued preference share 3,600,000
Ordinary share, authorized, P 20 par 4,000,000
Unissued ordinary share 2,000,000
Subscription receivable, preference share 380,000
Subscription receivable, ordinary share 360,000
Subscribed preference share 600,000
Subscribed ordinary share 440,000
Treasury share, preference, at cost 1,360,000
Share premium 1,700,000
Accumulated profits and losses 2,000,000
All subscription receivables are due in year 2007.
How much is the total shareholders’ equity of Hogan Corporation?
a. 11,040,000 c. 12,400,000
b. 11,780,000 d. 13,760,000

2. Stem Company disclosed the following information for the year ended December 31, 2011:
Bonds payable 300,000
Share premium on ordinary share 50,000
Donated capital 40,000
Treasury share at cost 20,000
Ordinary share capital, par P 100 500,000
Ordinary share option warrants 100,000
Investments in Available for sale securities 70,000
Share premium from treasury share 15,000
Accumulated profits and losses 135,000
What is the total shareholders’ equity of Stem Company for the year ended December 31, 2011?
a. 720,000 c. 820,000
b. 760,000 d. 860,000

3. The shareholders’ equity section of Funny Company revealed the following information on December 31, 2008:
Preference share (P 100 par), P 2,300,000; share premium in excess of par-preference, P 805,000; ordinary share (P 15 par), P
5,250,000; share premium in excess of par- ordinary, P 2,750,000; subscribed ordinary share, P 50,000; Accumulated profits and
losses, P 1,900,000; and Subscriptions receivable-ordinary, P 400,000. How much is the legal capital?
a. 7,550,000 c. 11,150,000
b. 7,600,000 d. 13,055,000

4. The Gudo Corporation is authorized to issue 100,000 shares at P 20 par ordinary share. At the beginning of 2008, 18,000 ordinary
shares were issued and outstanding. These shares had been issued at P 27 per share. During 2008, the company entered into the
following transactions:
January 04 Issued 1,300 ordinary shares at P 28 per share
March 19 Exchanged 12,000 ordinary shares for a machine.
The ordinary share was selling at P 30 per share.
May 09 Reacquired 500 ordinary shares at P 29 per share.
July 19 Accepted subscriptions for 1,000 ordinary shares at P 31 per share. The contract called for 10%
down payment with the balance due on December 01.
Sept 04 Sold 500 of treasury share at P 32 per share.
Dec. 01 Collected the balance due on July 01 subscriptions and issued the stock certificate.
How much is the total contributed capital for December 31, 2008?
a. 846,000 c. 929,400
b. 914,900 d. 943,900

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5. Ning Company was incorporated on January 01, 2010 with the following authorized capitalization:
Ordinary share capital, 200,000 shares, no par, P 100 stated value 20,000,000
Preference share capital, 200,000 shares, 10% fixed rate, P 50 par value 10,000,000
During 2010, Ning issued 150,000 ordinary shares for a total of P 18,000,000 and 50,000 preference shares at P 60 per share. In
addition, on December 15, 2010, subscriptions for 20,000 preference shares were taken at a purchase price of P 100. These subscribed
shares were paid for on January 15, 2011. Net income for 2010 was P 5,000,000. What should be reported as total contributed capital
on December 31, 2010?
a. 28,000,000 c. 23,000,000
b. 21,000,000 d. 26,000,000

6. The company’s shareholders’ equity on June 30, 2011 consists of the following:
Ordinary share, P 100 par, 4,000 shares issued and outstanding 400,000
Share premium 240,000
Accumulated profits and losses 320,000
On August 01, 2011, Ompong Company issued rights to shareholders to subscribe to additional shares of its ordinary share. One right
was issued for each share owned. A shareholder could purchase one additional share for 10 rights plus P 60 cash. The rights expire on
November 30, 2011. On August 01, 2011, the market value of the share with the right attached was P 160, while the market price of
the right alone was P 8. How much should the Ompong’s Accumulated profits and losses account decrease as a result of the issuance
of the share rights on August 01, 2011?
a. None c. 32,000
b. 20,000 d. 40,000

7. On March 01, 2010, Rey Company issued 10,000 ordinary shares of P 20 par value and 20,000 convertible preference shares of P
20 par value for a total of P 800,000. At this date, the ordinary share was selling for P 36 and the convertible preference share was
selling for P 27. What amount of the proceeds should be allocated to the convertible preference shares?
a. 600,000 c. 480,000
b. 540,000 d. 440,000

8. In 2005, Senglot Corporation acquired 6,000 shares of its P 1 par value common stock at P 36 per share. During 2006, Senglot
issued 3,000 of these shares at P 50 per share. Senglot uses the cost method to account for its treasury stock transactions. What
accounts and amounts should Senglot credit in 2006 to record the issuance of the 3,000 shares?
Additional
Treasury paid in Retained Common
Stock capital earnings stock
a. 0 102,000 42,000 6,000
b. 0 144,000 0 6,000
c. 108,000 42,000 0 0
d. 108,000 0 42,000 0

9. The shareholders’ equity section of Betty Corporation’s balance sheet at December 31, 2005 was as follows:
Ordinary share (P 10 par value, authorized 1,000,000
Shares issued and outstanding 900,000 shares) 9,000,000
Share premium 2,700,000
Accumulated profits and losses 1,300,000
--------------------
Total Shareholders’ Equity 13,000,000
============
On January 02, 2006, Betty purchased and retired 100,000 shares of its stock for P 1,800,000. Immediately after retirement of these
100,000 shares, the balance in the Share Premium and Accumulated Profits should be:
Share Premium Accumulated Profits
a. 900,000 1,300,000
b. 1,400,000 800,000
c. 1,900,000 1,300,000
d. 2,400,000 800,000

10. On December 01, Lito Company received a donation of 2,000 shares with P 50 par value from a shareholder. On that date, the
share market value was P 350. The shares were originally issued for P 250 per share. By what amount would this donation cause
total shareholders’ equity to decrease?
a. 700,000 c. 200,000
b. 500,000 d. 0

11. On May 01, Kuto Corporation issued P 1,000,000, 20-year 10% bonds for P 1,320,000. Each P 1,000 bond had two detachable
warrants eligible for the purchase of one share each of Kuto’s P 50 par value common stock for P 60. Immediately after the bonds
were issued, Kuto’s securities had the following market values:
10% bond without warrant 1,050
Warrant 25
Common stock, P 50 par value 65
What amount of the bond issue proceeds should Kuto record as an increase in stockholders’ equity?
a. 270,000 c. 50,000
b. 60,000 d. 10,000

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12. Con Inc. had 60,000 shares of treasury share (P 10 par value) at December 31, 2005, which it acquired at P 11 per share. On June
01, 2006, Con issued 30,000 treasury shares to employees who exercised options under Con’s employee stock option plan. The
market value per share was P 13 at December 31, 2005, P 15 at June 01, 2006, and P 18 at December 31, 2006. The stock options
had been granted for P 12 per share. The cost method is used.
What is the balance of the treasury shares on Con’s balance sheet at December 31, 2006?
a. 210,000 c. 330,000
b. 270,000 d. 360,000

13. The analysis of shareholders’ equity of P Company at January 01, 2008 showed the following:
Ordinary share, par value P 20, authorized 200,000 shares,
Issued and outstanding, 120,000 shares 2,400,000
Share premium 480,000
Accumulated profits and losses 1,540,000
The company uses the cost method of accounting for treasury share and the following transactions took place:
Acquired 2,000 shares of its shares for P 70,000. Sold 1,200 treasury shares at P 40 per share. Retired the remaining treasury
shares. What is the amount of the Share Premium at the end of the accounting period?
a. 462,000 c. 476,800
b. 474,000 d. 480,000

14. During 2007, Larry Company issued 10,000 shares of P 100 par value convertible preference share for P 110 per share. One preference share
can be converted into 3 shares of Larry’s P 25 ordinary share at the option of the preference shareholder. On December 31, 2008, when the
market value of the ordinary share was P 40, the entire preference share was converted.
How much should Larry credit to Share Premium as a result of the conversion?
a. None c. 350,000
b. 100,000 d. 450,000

15. Salve Corporatin had two (2) issues of securities outstanding – ordinary share and an 8% convertible bond issue with a face amount of P
16,000,000. Interest payment dates of the bond issue are June 30 and December 31. The conversion clause in the bond indenture entitles the
bondholders to receive forty (40) shares of P 20 par value ordinary share in exchange for each P 1,000 bond. On June 30, 2008, the holders of P
2,400,000 face value bonds exercised the conversion privilege. The equity component of the convertible debt at the time of issue is P 950,000.
The market price of the bonds on that date was P 1,100 and the market price of the ordinary share was P 35. The total unamortized bond
discount at the date of conversion was P 1,000,000. In applying the book value method, what amount should Salve credit to the “Share Premium
in Excess of Par” account as a result of this conversion?
a. 160,000 c. 472,500
b. 330,000 d. 1,440,000

16. The stockholders’ equity section of Brown Company’s December 31, 2004 balance sheet consisted of the following:
Common stock, P 30 par, 100,000 shares
authorized and outstanding 3,000,000
Additional paid in capital 1,500,000
Retained earnings (deficit) ( 2,100,000 )
On January 02, 2005, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par value of the stock to P 5 and
eliminating the deficit against additional paid in capital. Immediately after quasi-reorganization, what amount should Brown report as
additional paid in capital?
a. 1,500,000 c. 4,000,000
b. 1,900,000 d. 600,000

17. Lolo Company’s shareholders’ equity at January 01, 2008 is as follows:

Share capital 1,500,000
Share premium 3,000,000
Retained earnings 2,000,000
Lolo had 400,000 authorized shares of P 5 par value, of which 300,000 shares were issued and outstanding. On March 05, 2008, Lolo
acquired 50,000 shares for P 10 per share to be held as treasury. The shares were originally issued at P 8 per share. Lolo used the cost
method to account for treasury shares. On July 15, 2008, Lolo declared and distributed a property dividend of inventory. The inventory had
a P 750,000 carrying value and a P 600,000 fair market value. The net income for 2008 was P 2,500,000. What should be reported as
unapprropriated retained earnings on December 31, 2008?
a. 3,750,000 c. 3,350,000
b. 3,250,000 d. 3,900,000

18. The following information pertains to Mega Company:

 Dividends on its 10,000 cumulative preference shares of 6%, P 100 par value have not been declared or paid for 3 years.
 Treasury shares were acquired at a cost of P 1,500,000. The treasury shares 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 c. 180,000
b. 1,680,000 d. 0

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19. Elong Company was organized on January 01, 2006. After 2 years of profitable operations, the equity section of the statement of
financial position was as follows:
Contributed capital:
Share capital, P 5 par, 600,000 shares authorized,
200,000 shares issued and outstanding 1,000,000
Share premium 6,000,000
Retained earnings 2,800,000
Total shareholders’ equity 9,800,000
===========
During 2008, the following chronological transactions affected shareholders’ equity:
 Reacquired 10,000 shares at P 30 per share to be held as treasury.
 Declared and issued a 30% stock dividend.
 Declared and paid cash dividend of P 10 per share.
 Net income for 2008 amounted to P 3,000,000.
What is the unappropriated balance of retained earnings on December 31, 2008?
a. 2,745,000 c. 2,700,000
b. 3,045,000 d. 2,600,000

20. On May 01 of the current year, Soyong Company’s board of directors declared a 10% stock dividend. The market price of Soyong’s
30,000 outstanding shares of P 20 par value was P 90 per share on that date. The stock dividend was distributed on July 01, when the
market price was P 100 per share. What amount should Soyong credit to share premium for this stock dividend?
a. 210,000 c. 270,000
b. 240,000 d. 300,000

21. On September 30 of the current year, Gudo Company issued 4,000 ordinary shares of P 100 par value in connection with a stock
dividend. The market value per share on the date of declaration was P 150. Gudo’s shareholders’ equity accounts immediately before
issuance of the stock dividend shares were as follows:
Ordinary share capital P 100 par, 50,000 shares authorized, 20,000 shares outstanding 2,000,000
Share premium 3,000,000
Retained earnings 1,500,000
What should be the retained earnings balance immediately after the stock dividend?
a. 1,100,000 c. 2,100,000
b. 1,500,000 d. 900,000

22. Cel Company began operations on January 01, 2005. During its first three years of operations, Cel reported net income and
declared dividends as follows:
Net income Dividends declared
2005 800,0000
2006 2,500,000 1,000,000
2007 3,000,000 1,000,000
The following data relate to 2008:
Income before income tax 4,800,000
Prior period adjustment – understatement of 2006 depreciation before tax 400,000
Cumulative decrease in income from change in inventory method before tax 700,000
Dividend declared (of this amount, P 500,000 will be paid on January 15, 2009) 2,000,000
Income tax rate 35%
The retained earnings of Cel Company on December 31, 2008 should be:
a. 4,705,000 c. 6,000,000
b. 5,405,000 d. 5,360,000

Use the following information for questions 23 to 25:

On November 01, 2009, Grant Company declared a property dividend of equipment payable on March 01, 2010. The carrying amount of
the equipment is P 3,000,000 and the fair value is P 2,500,000 on November 01, 2009. However, the fair value less cost to distribute the
equipment is P 2,200,000 on December 31, 2009 and P 2,000,000 on March 01, 2010.
23. What is the dividend payable on December 31, 2009?
a. 2,500,000 c. 3,000,000
b. 2,200,000 d. 0

24. The equipment shall be measured on December 31, 2009 at:

a. 2,500,000 c. 3,000,000
b. 2,200,000 d. 2,000,000

25. What amount of loss is recognized in profit or loss on March 01, 2010?
a. 300,000 c. 500,000
b. 200,000 d. 0

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26. On December 31, 2009, the records of Multi Company showed the following balances:
Share capital authorized, P 100 par 5,000,000
Share capital unissued 2,000,000
Subscribed share capital 1,000,000
Treasury shares, 5,000 at cost 600,000
Share premium 500,000
Retained earnings 1,500,000
On December 31, 2009, the board of directors declared and issued a dividend from the treasury shares of one share for each ten
shares held. The market value of the share on same date is P 150. The stock dividend will decrease retained earnings by:
a. 480,000 c. 350,000
b. 525,000 d. 420,000

27. On January 01, 2010, the board of directors of Binoy Company declared a cash dividend of P 800,000 to shareholders of record on
January 15, 2010 and payable on February 15, 2010. Selected data on December 31, 2009 are as follows:
Accumulated depletion 200,000
Share capital 1,000,000
Share premium 300,000
Retained earnings 600,000
The P 800,000 dividend includes a liquidating dividend of:
a. 600,000 c. 200,000
b. 300,000 d. 50,000

28. On January 02, 2011, Martin Company declared and distributed its only investment in available for sale security as dividend. At the
time of declaration, the available for sale security has a carrying value of P 500,000 and a fair value of P 600,000. By what amount
should Martin charge its Accumulated profits and losses as a result of the property dividend declaration?
a. 100,000 c. 500,000
b. 400,000 d. 600,000

29. Nanding Company reported the following shareholders’ equity on January 01, 2015:
Preference share capital (P 150 par value, 20,000 shares) 3,000,000
Ordinary share capital (P 50 par value, 100,000 shares) 5,000,000
Share premium 6,000,000
Retained earnings 4,500,000
On January 01, 2015, the entity sold 20,000 additional ordinary shares for P 90 per share. Late in 2015, it was learned that
because of mathematical error, an overstatement of depreciation expense by P 500,000 had occurred in 2014. The entity
reported net income of P 4,000,000 for 2015. The entity declared cash dividend of P 1,000,000 on preference shares and P
2,000,000 on ordinary shares during 2015. The income tax rate is 30%. What is the balance of retained earnings on December 31,
2015?
a. 5,850,000 c. 5,150,000
b. 6,000,000 d. 5,000,000

30. Bong Company provided the following information:

Number of shares Amount
Preference share capital, P 500 par value 2,200 1,100,000
Treasury preference shares, at cost 100 110,000
Ordinary share capital without par value
(at issue price) 3,000 600,000
Retained earnings 2,500,000
Due to the substantial amount of retained earnings, the Board of Directors resolved to pay a 100% stock dividend on all shares
outstanding, capitalizing amounts of retained earnings equal to the par value and the issue price of the preference and ordinary
shares outstanding, respectively, and thereafter to pay a cash dividend of 10% on preference share and a cash dividend of P 10 per
ordinary share. What amount should be reported as retained earnings after effecting the dividend transactions?
a. 2,230,000 c. 580,000
b. 530,000 d. 850,000

31. On December 31, 2015, Bing Mining Company declared a cash dividend of P 800,000 to shareholders of record on January 15
2016 and payable on February 15, 2016. The entity reported the following information on December 31, 2015:
Accumulated depletion 200,000
Share capital 1,000,000
Share premium 300,000
Retained earnings 600,000
How much is the liquidating dividend?
a. 600,000 c. 200,000
b. 300,000 d. 50,000
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 ARTS CPA Review
3rd Floor, Ala Moana Commercial Complex, Santiago City
0917-5723900

e-mail address: [email protected]

30TH BATCH
FINANCIAL ACCOUNTING & REPORTING ACCT. JONATHAN B. DE VEYRA, MBA

BOOK VALUE & EARNINGS PER SHARE (PAS 33) FAR – 31

THEORY
1. The effect of recording a 100% stock dividend would be to:
a. Decrease the current ratio, decrease working capital and decrease book value per share.
b. Leave inventory, turnover unaffected, increase earnings per share and increase book value per share.
c. Leave working capital unaffected, decrease earnings per share and decrease book value per share.
d. Leave working capital unaffected, decrease earnings per share and decrease the debt to equity ratio.

2. An entity has not declared or paid dividends on its cumulative preference shares in the last three years. These dividends shall be
reported:
a. In a note to the financial statements. c. As a current liability
b. As a reduction in shareholders’ equity. d. As a noncurrent liability.

3. Which statement is incorrect concerning presentation of earnings per share?

I. An entity shall present on the face of the income statement basic and diluted earnings per share for income or loss from
continuing operations.
II. 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.
a. I only. c. Both I and II.
b. II only. d. Neither I nor II.

4. EPS disclosures are:

a. Required for all public and nonpublic enterprises.
b. Required for public enterprises and encouraged for nonpublic enterprises.
c. Encouraged for public enterprises and required for nonpublic enterprises.
d. Encouraged for all enterprises.

5. Earnings per share should be computed on the basis of:

a. Common shares outstanding at the end of the year.
b. Common shares outstanding at the beginning of the year.
c. Common shares outstanding at the middle of the year.
d. Average common shares outstanding during the year.

6. In computing basic earnings per share, the amount of preferred dividends on noncumulative preferred stock should be:
a. Deducted from net income whether declared or not.
b. Deducted from net income only when declared.
c. Added to net income only when declared.
d. Ignored.

7. In computing basic earnings per share, the full amount of the required preferred dividends on cumulative preferred stock for the
period should be:
a. Ignored.
b. Deducted from net income only when declared.
c. Deducted from net income whether declared or not.
d. Added to net income whether declared or not.

8. In computing basic loss per share, the required annual preferred dividend on cumulative preferred stock should be:
a. Ignored. c. Added to the net loss whether declared or not.
b. Deducted from the net loss whether declared or not. d. Added to the net loss only when declared.

9. In computing diluted EPS, interest expense on convertible bond payable should be:
a. Added back to net income at gross. c. Deducted from net income net of tax.
b. Added back to net income net of tax . d. Ignored.

10. In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be:
a. Disregarded. c. Deducted from net income only if declared.
b. Added back to net income whether declared or not. d. Deducted from net income whether declared or not.

11. It is reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible instruments
are converted, that options or warrants are exercised, or that common shares are issued upon the satisfaction of specified
conditions.
a. Dilution c. Either dilution or antidilution
b. Antidilution d. Neither dilution or antidilution

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BOOK VALUE & EARNINGS PER SHARE page 02

12. Options and warrants are dilutive if:

a. The exercise price is lower than the average market price.
b. The exercise price is higher 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.

13. The “if converted” method of computing earnings per share assumes conversion of convertible securities as of the:
a. Beginning of the earliest period reported or at the time of issuance, if later.
b. Beginning of the earliest period reported regardless of time of issuance.
c. Middle of the earliest period reported regardless of the time issuance.
d. Ending of the earliest period reported regardless of the time of issuance.

14. Under the treasury stock method, the number of incremental shares is equal to:
a. Option shares.
b. Option shares minus assumed treasury shares acquired.
c. Assumed treasury shares acquired.
d. Option shares actually issued during the year.

15. In the computation of the basic earnings per share, ordinary shares issued as consideration for the acquisition of an asset other
than cash are included as of the:
a. Date on which the acquisition is recognized. c. Date on which the disposal is recognized.
b. Date on which the acquisition is derecognized. d. Date on which the disposal is derecognized.

16. In the computation of the basic earnings per share, ordinary shares issued on the voluntary reinvestment of dividends on ordinary
or preference shares are included when:
a. Dividends are not reinvested. c. Dividends are not declared.
b. Dividends are reinvested. d. Dividends are declared.

17. A company with a simple capital structure for purposes of computing earnings per share would include which of the following in
the computation of basic earnings per share?
a. Dividends on nonconvertible cumulative preferred stock.
b. Dividends on common stock.
c. Potential common shares.
d. Number of shares of nonconvertible cumulative preferred stock.

18. For employee stock options, the exercise price shall include:
a. Fair value of the stock options c. Carrying amount of the stock options
b. Intrinsic value of the stock options d. Par value of the stock options

19. An entity has an ordinary “A” class, nonvoting shares, which is entitled to a fixed dividend of 6% per annum. The “A” class ordinary
share shall:
a. Be included in the “per share” calculation after adjustment for the fixed dividend.
b. Be included in the “per share” calculation for EPS without adjustment for the fixed dividend.
c. Not be included in the “per share” calculation for EPS.
d. Be included in the calculation of diluted EPS.

20. If a new issue of shares for cash is made between the year-end and the date that the financial statements are authorized:
a. The EPS for both the current and the previous year are adjusted.
b. The EPS for the current year only is adjusted.
c. No adjustment is made to EPS.
d. Diluted EPS only is adjusted.

21. Under PAS 33, all of the following items must be disclosed, except:
a. Forecast earnings per share for the following financial year.
b. Instruments that could potentially dilute basic earnings per share in the future but were not included in the diluted EPS
because they are antidilutive in the current period.
c. The weighted average number of ordinary shares used to calculate earnings per share.
d. The earnings figures used in calculating basic and diluted earnings per share.

22. For an entity having several different issues of convertible securities, 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 earnings per share figure midway between the lowest possible and the highest possible earnings per share.
d. Any earnings per share figure between the lowest possible and the highest possible earnings per share.

23. An entity that reports a discontinued operation shall present basic and diluted earnings per share amounts for such lime item:
a. Only on the face of the income statement.
b. Only in the notes to the financial statements.
c. Either on the face of the income statement or in the notes to the financial statements.
d. Only if management chooses to do so as these amounts are not required to be disclosed either on the face of the
income statement or in the notes.

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BOOK VALUE & EARNINGS PER SHARE page 03

24. The main purpose of reporting diluted earnings per share is to:
a. Provide a comparison figure for debt holders.
b. Indicate earnings shareholders shall receive in future periods.
c. Distinguish between entities with a complex capital structure and entities with a simple capital structure.
d. Show the maximum possible dilution of earnings.
7
PROBLEMS
1. Hoyt Corporation’s current balance sheet reports the following stockholders’ equity:
5% cumulative preference share, par value
P100 per share; 5,000 shares issued and
Outstanding 500,000
Ordinary share, par value P 10 per share,
50,000 shares issued and outstanding 500,000
Share premium 300,000
Accumulated profits 700,000
Dividends in arrears on the preferred stock amount to P 50,000. If Hoyt were to be liquidated, the preferred stockholders would
receive par value plus a premium of P 10 per share. The book value per share of common stock is:
a. 24.00 c. 29.50
b. 28.00 d. 30.00

2. Novo Company has an authorized capital of 10,000 8% cumulative preference shares of P 100 par value and 20,000 ordinary shares
of P 100 par value. The equity account balances at December 31, 2008 are as follows:
Cumulative preference share capital 500,000
Ordinary share capital 1,100,000
Share premium 200,000
Retained earnings 260,000
Treasury ordinary shares – 1,000 at cost ( 150,000 )
1,910,000
============
Dividends on preference share are in arrears for 2007 and 2008. The book value of an ordinary share at December 31, 2008
should be:
a. 125 c. 133
b. 191 d. 141

3. Ben Company had 5,000 ordinary shares of P 500 par value outstanding and 500 preference shares of P 1,000 par value outstanding. The
current market price of the ordinary share is P 1,200 and total equity amounts to P 3,600,000. The preference shareholders have a
liquidation preference of P 1,400 per share and no dividends are in arrears. What is the book value per ordinary share?
a. 510 c. 580
b. 520 d. 818

4. Boe Corporation’s stockholders’ equity at December 31, 2006 was as follows:

6% noncumulative preferred stock, P 100 par
(liquidation value P 105 per share) 1,000,000
Common stock, P 100 par 3,000,000
Retained earnings 950,000
Preferred dividends have been paid up to December 31, 2006. At December 31, 2006, Boe’s book value per common share was:
a. 131.70 c. 129.70
b. 130.00 d. 128.00

5. Below is the shareholders’ equity section of Felix Company on December 31, 2008:
Preference share, 7%, P 100 par value, 30,000 shares issued,
Total liquidation value, P 3.2M 3,000,000
Ordinary share, no par, 50,000 shares, issued 1,500,000
Donated capital 500,000
Accumulated profits 4,500,000
All preference dividends have been fully paid.
How much is the book value per share of ordinary shares?
a. 125.80 c. 130.00
b. 126.00 d. 300.00

6. The shareholders’ equity of Joy Corporation on December 31, 2006 shows the following account balances:
10% Preference share, 5,000 shares, P 100 par 500,000
12% Preference share, 6,000 shares, P 100 par 600,000
Ordinary share, 10,000 shares, P 40 par 400,000
Share premium 320,000
Accumulated profits 480,000
The 10% preference share is cumulative and fully participating, while the 12% preference share is non-cumulative and fully
participating. The last payment of dividends was on December 31, 2004. What is the book value per share of ordinary shares?
a. 44.00 c. 60.27
b. 59.68 d. 102.80

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BOOK VALUE & EARNINGS PER SHARE page 04

7. Tokong Company’s shareholders’ equity at December 31, 2008 consisted of the following:
Preference share capital – 12%, P 50 par, 20,000 shares issued 1,000,000
Ordinary share capital, P 25 par, 100,000 shares issued 2,500,000
Share premium 200,000
Retained earnings 400,000
Retained earnings appropriated 100,000
Revaluation surplus 300,000
Dividends on preference share have not been paid since 2006. The preference share has a liquidating value of P 55 and a call price of P
58. What is the book value per preference share?
a. 61 c. 55
b. 56 d. 58

3. Con Company had the following classes of share capital outstanding as of December 31, 2008:
Ordinary share capital, P 20 par value, 200,000
Shares outstanding 4,000,000
Preference share capital, 6% P 100 par value, cumulative
& fully participating, 10,000 shares outstanding 1,000,000
Preference dividends have been in arrears for 2006 and 2007. On December 31, 2008, a total cash dividend of P 900,000 was
declared. What are the amounts of dividends payable on both the preference and ordinary share capital, respectively?
a. 324,000 and 576,000 c. 276,000 and 624,000
b. 220,000 and 672,000 d. 180,000 and 720,000

4. On December 31, 2009 and 2010, Apo Company had 30,000 shares of P 100 par value 5% cumulative preference share capital
outstanding. No dividends were in arrears on December 31, 2008. Apo did not declare a dividend during 2009. During 2010, Apo
paid a cash dividend of P 100,000 on its preference share. How is the preference dividend in arrears reported in the 2010 financial
statements?
a. Accrued liability of P 150,000 c. Accrued liability of P 200,000
b. Disclosure of P 150,000 d. Disclosure of P 200,000

5. Winter Company had the following capital structure on January 01, 2006:
Common stock, P 100, 200,000 shares authorized, 100,000 shares issued 10,000,000
On January 01, 2006, the company had also stock options outstanding to purchase 50,000 common shares at P 120 per share. On April 01,
2006, all of the stock options were exercised. On this date, the market price of common was P 400. The company reported net income of P
5,500,000 for the year 2006.
Compute the basic earnings per share and diluted earnings per share:
Basic Diluted
a. 40.00 37.61
b. 35.00 38.00
c. 42.00 20.00
d. 41.00 28.25

11. Roger Company’s capital structure at January 01, 2008 was as follows:
Shares issued and outstanding
Ordinary share capital 200,000
Preference share capital 50,000
On October 01, 2008, Roger issued a 10% stock dividend on its ordinary share, and paid the annual cash dividend of P 200,000 on its
preference share. The preference share capital is noncumulative, nonparticipating and noncovertible. Net income for the year ended
December 31, 2008 was P 1,920,000. What should be the basic earnings per share?
a. 8.20 c. 9.36
b. 8.72 d. 7.82

12. Sing Company is an entity listed on a recognized stock exchange. Below is an extract from its statement of comprehensive income for
the year ended December 31, 2010:
Profit before tax 5,800,000
Income tax expense 1,500,000
Profit after tax 4,300,000
In addition, the entity paid during the year an ordinary dividend of P 400,000 and a preference dividend of P 500,000 on its redeemable
preference shares. The entity had P 1,000,000 of P 5 par value ordinary shares in issue throughout the year and authorized share capital of
500,000 ordinary shares. What amount should be reported as basic earnings per share for the year?
a. 21.50 c. 8.60
b. 19.00 d. 7.60

13. During 2007, Ino Company had outstanding 200,000 ordinary shares and 20,000 shares of P 10 cumulative preference share capital.
Each preference share is convertible into 5 ordinary shares. For 2007, Ino had a P 3,000,000 net loss. No dividends were paid or declared.
What is the amount of basic loss per share?
a. 15.00 c. 10.00
b. 16.00 d. 10.67

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BOOK VALUE & EARNINGS PER SHARE page 05

14. The income statement of Lolo Company for the year ended December 31, 2007 showed net income of P 15,000,000. The net
income for 2007 reflects an income tax rate of 35%. Included in the net income is a casualty loss of P 5,000,000 before income tax.
The equity of Lolo Company on December 31, 2007 showed the following details:
Preference share capital 10% cumulative, P 50
Par value, 100,000 shares 5,000,000
Ordinary share capital, P 100 par value 30,000,000
Share premium 10,000,000
Retained earnings 18,000,000
Treasury ordinary shares, 50,000 at cost 4,000,000
Lolo Company should report basic earnings per share at:
a. 58.00 c. 73.60
b. 60.00 d. 48.33

15. Cinto Company provides the following data for the entire year:
Net income 15,000,000
Common stock, P 100 par, 500,000 shares 50,000,000
Employee stock options outstanding during the entire year:
Option shares 50,000
Fair value of each stock option 20
Exercise price 180
Average market price 250
Ending market price 400
Diluted earnings per share should be:
a. 30.00 c. 29.41
b. 29.18 d. 28.57

16. Alice Company had 100,000 ordinary shares outstanding on January 01. In addition, as of January 01, the company had issued
share options that allowed employees to purchase 40,000 ordinary shares. The option exercise price is P 10 per share. The options
were exercised on April 01. The average share price for the year was P 20. The share price on the option exercise date on April 01 was
P 16. The company has no other potentially dilutive securities. Net income for the year was P 2,000,000.
(1) What is the amount of basic earnings per share?
a. 20.00 c. 14.28
b. 15.38 d. 16.67

(2) What is the amount of diluted earnings per share?

a. 14.95 c. 14.28
b. 13.70 d. 12.90

17. Fort Company had 200,000 ordinary shares outstanding on January 01. In addition, as of January 01, the company had issued 4,000
convertible 10% bonds with P 1,000 face value. The company has no other potentially dilutive securities. The bonds were converted
on October 01 and 40 ordinary shares were issued in exchange for each bond. Accrued interest on the bonds was recognized and paid
on that date. Net income for the year was P 5,000,000. The income tax rate is 35%.
(1) What is the amount of basic earnings per share?
a. 25.00 c. 20.83
b. 13.80 d. 15.62
(2) What is the amount of diluted earnings per share?
a. 14.43 c. 14.72
b. 21.65 d. 14.61

18. Accent Company had made a net profit attributable to ordinary shareholders of P 2,000,000 for the year ended December 31,
2009. There are 100,000 ordinary shares outstanding during the entire year. Since January 01, 2009, there has been P 800,000 of 5%
convertible loan in issue. The terms of conversion are for every P 10,000 nominal amount as follows:
June 30, 2009 120 ordinary shares
June 30, 2010 150 ordinary shares
June 30, 2011 140 ordinary shares
No conversion has taken place during the current year. The interest on the convertible loan is allowable for a tax relief of 30%. What
should be reported as diluted earnings per share for the year ended December 31, 2009?
a. 18.11 c. 18.21
b. 17.86 d. 18.24

19. Turko Company had the following ordinary share transactions during the current year:
1/1 Ordinary shares outstanding 300,000
2/1 Issued a 10% stock dividend 30,000
3/1 Issued ordinary shares in a “purchase” combination 90,000
7/1 Issued ordinary shares for cash 80,000
12/31 Ordinary shares outstanding 500,000
=========
What was the weighted average number of shares outstanding?
a. 400,000 c. 445,000
b. 442,500 d. 460,000

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BOOK VALUE & EARNINGS PER SHARE page 06

Use the following information for questions 20 & 21:

Willy Company had 250,000 ordinary shares outstanding at the end of 2007. During 2008 and 2009, the following transactions took place:
2008 March 01 Sold 24,000 shares
July 01 Issued a 20% stock dividend
Oct 01 Sold 16,000 shares
Dec 01 Purchased 15,000 shares to be held in treasury
2009 June 01 3 for 1 share split
Sept 01 Sold 60,000 shares

20. What is the weighted average number of shares for 2008 to be used in the earnings per share computation for comparative financial
statements at the end of 2009?
a. 980,250 c. 984,000
b. 329,800 d. 969,000

21. What is the weighted number of shares for 2009 to be used in the earnings per share computation for comparative statements at the
end of 2009?
a. 1,009,400 c. 1,169,400
b. 1,049,400 d. 989,400

22. At December 31, 2007, Prof Company had 450,000 shares of ordinary shares outstanding. On September 01, 2008, an additional
150,000 shares of ordinary shares were issued. In addition, Prof had P 10,000,000 of 6% convertible bonds outstanding at December 31,
2007 which are convertible into 300,000 ordinary shares. The carrying value of the bonds as of December 31, 2007 and based on a rate of
8% is P 9,205, 800. No bonds were converted into ordinary shares in 2008. The net income for the year ended December 31, 2008 was P
3,750,000.
Assuming the income tax rate was 32%, what should be the diluted earnings per share for the year ended December 31, 2008 of Prof
Company?
a. 5.20 c. 5.44
b. 5.31 d. 7.50

23. Neon Company has 110,000 ordinary shares outstanding, 10,000, 6% cumulative, P 100 par convertible preference share that are
convertible into 20,000 ordinary shares and an 8%, 4-years convertible bonds with a face value of P 1,000,000, convertible into 30,000
ordinary shares. The bonds were issued on January 01 when the prevailing interest rate was 10%. The liability component of the bonds at
the time of issue is P 936,600. Net income for the year is P 850,000. Income tax rate is 32%. How much is the diluted earnings per share
for the year?
a. 5.71 c. 6.09
b. 5.65 d. 7.18

24. Information relating to the capital structure of Cameo Company at December 31, 2008 is as follows:
Ordinary share capital 110,000 shares
Convertible noncumulative preference share capital 20,000 shares
10% convertible bonds payable P 2,000,000
Share options to purchase 20,000 shares at P 15 were outstanding. Market price of Cameo share was P 22 at December 31, 2008 and
averaged P 20 during the year. No value was assigned to the share options. Cameo paid the annual dividend of P 5 on its preference share.
The preference shares are convertible into 40,000 ordinary shares. The 10% bonds are convertible into 30,000 ordinary shares. The net
income for the year ended December 31, 2008 is P 650,000. The income tax rate is 35%.
The income statement should report diluted earnings per share at:
a. 5.00 c. 4.19
b. 4.78 d. 4.22

25. Fame Company had earnings per share of P 150 for 2008 before taking any dilutive securities into consideration. No conversion or
exercise of dilutive securities took place in 2008. However, possible conversion of convertible preference share would have reduced
earnings per share to P 130. The effect of possible exercise of ordinary share warrants would have reduced earnings per share by an
additional P 10. What is the maximum amount that Fame may report as a single presentation of earnings per share for 2008?
a. 120 c. 140
b. 130 d. 150

26. On December 31, 2007, Rey Company had 200,000 ordinary shares outstanding with a par value of P 100 per share. In addition, the
company had 40,000 shares of 10% convertible preference shares with a par value of P 50 per share. The preference shares are convertible
into 40,000 ordinary shares. On December 31, 2008, Rey Company reported an after tax income of P 800,000 and paid P 200,000 and P
250,000 dividends to preference and ordinary, respectively.
What amount of earnings per share Rey Company should report in its December 31, 2008 financial statements?
a. Basic earnings per share of P 3 only.
b. Basic earnings per share of P 4 only.
c. Basic earnings per share of P 3 and Diluted earnings per share of P 3.33
d. Basic earnings per share of P 4 and Diluted earnings per share of P 3.33

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