FAR 2841 - Equity-summary-DIY
FAR 2841 - Equity-summary-DIY
FAR 2841 - Equity-summary-DIY
FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2841 – Equity Summary (DIY) MAY 2020
1. A contract that will be settled by the entity receiving or c. Shares held by members of a co-operative entity
delivering a fixed number of its own shares for no whose charter states that redemptions are made at
future consideration, or exchanging a fixed number of the sole discretion of the entity. However, the
its own shares for a fixed amount of cash or another charter further states that approval of a
financial asset, is redemption request is automatic unless the entity
a. A financial asset is unable to make payments without violating local
b. A financial liability regulations regarding liquidity or reserves.
c. An equity instrument d. None of these.
d. A compound financial instrument
8. Which of the following will be most likely classified as
2. Company A, a listed company, issues a share option to equity instrument?
Company B to buy 10,000 shares in Company A at P10 a. A preference share that provides for mandatory
each in three months time. Company A’s financial redemption by the issuer for a fixed amount at a
instrument will be classified as fixed future date
a. Financial asset. b. A preference share gives the holder the right to
b. Financial liability. require the issuer to redeem the instrument after a
c. Equity instrument. particular date for a determinable amount
d. Compound financial instrument. c. A financial instrument that gives the holder the
right to put it back to the issuer for cash or
3. An entity that purchased call option that gives it the another financial asset.
right to reacquire a fixed number of its own equity d. A financial instrument that impose on the entity an
instruments in exchange for delivering a fixed amount obligation to deliver to another party a pro rata
of cash should be classified as share of the net assets of the entity only on
a. A financial asset liquidation and that is subordinate to all other
b. A financial liability classes of instruments.
c. An equity deduction
d. An equity addition 9. Which of the following will be most likely classified as
equity instrument?
4. Company A issues preference shares to Company B. a. A contract to deliver as many of the entity’s own
The terms of which entitle Company B to redeem the equity instruments as are equal in value to P10
preference shares for cash if Company A’s revenues million
fall below P100 million. Company A’s financial b. A contract to deliver as many of the entity’s own
instrument should be classified as equity instruments as are equal in value to the
a. Financial asset. value of 100 sacks of rice.
b. Financial liability. c. Both a and b.
c. Equity instrument. d. Neither a nor b.
d. Compound financial instrument.
10. On 1 February 20X2, Entity A enters into a contract
5. A contract that requires settlement in cash or a with Entity B to receive the fair value of 1,000 of Entity
variable number of the entity’s own shares only on the A’s own outstanding ordinary shares as of 31 January
occurrence of an event that is extremely rare, highly 20X3 in exchange for a payment of P104,000 in cash
abnormal and very unlikely to occur, is (ie P104 per share) on 31 January 20X3. The contract
a. A financial asset will be settled net in cash. The contract should be
b. A financial liability classified as
c. An equity instrument a. A financial asset
d. A compound financial instrument b. A financial liability
c. An equity instrument
6. The classification of a preference share as an equity d. Either a or b
instrument or a financial liability is affected by
a. A possible negative impact on the price of ordinary 11. On 1 February 20X2, Entity A enters into a contract
shares of the issuer if distributions are not made with Entity B to receive the fair value of 1,000 of Entity
b. The amount of the issuer’s reserves A’s own outstanding ordinary shares as of 31 January
c. An ability or inability of the issuer to influence the 20X3 in exchange for a payment of P104,000 in cash
amount of its profit or loss for the period (ie P104 per share) on 31 January 20X3. The contract
d. None of the above will be settled net in shares. The contract should be
classified as
7. Which of the following should be classified as equity a. A financial asset
instruments? b. A financial liability
a. Contracts requiring Entity A, a listed company, to c. An equity instrument
deliver to another entity as many of Entity A’s own d. Either a or b
ordinary shares as will equal P10 million.
b. Preference shares that entitle the holders to
redeem the preference shares for cash if the
issuer’s revenues fall below P100 million.
12. On 1 February 20X2, Entity A enters into a contract 17. What is the accounting for treasury share transactions?
with Entity B to receive the fair value of 1,000 of Entity a. On repurchase of treasury shares, a gain or loss is
A’s own outstanding ordinary shares as of 31 January recognized equal to the difference between the
20X3 in exchange for a payment of P104,000 in cash amount at which the shares were issued and the
(ie P104 per share) on 31 January 20X3. The contract repurchase price for the shares.
will be settled by delivering a fixed amount of cash and b. On reissuance of treasury shares, a gain or loss is
receiving a fixed number of Entity A’s shares. The recognized equal to the difference between the
contract should be initially recorded as previous repurchase price and the reissuance
a. A financial asset price.
b. A financial liability c. On repurchase or reissuance of previously
c. An equity deduction repurchased own shares, no gain or loss is
d. Both b and c recognized.
d. Treasury shares are accounted for as financial
13. On 1 February 20X2, Entity A enters into a contract assets in accordance with PAS 39.
with Entity B to receive the fair value of 1,000 of Entity
A’s own outstanding ordinary shares as of 31 January 18. Gains and losses on the purchase and resale of
20X3 in exchange for a payment of P104,000 in cash treasury shares may be reflected only in
(ie P104 per share) on 31 January 20X3. The contract a. Paid-in capital accounts.
will be settled net in cash, net in shares or by an b. Paid-in capital and retained earnings accounts.
exchange of cash and shares. The contract should be c. Income, paid-in capital, and retaining earnings
classified as accounts.
a. A financial asset d. Income and paid-in capital accounts.
b. A financial liability
c. An equity instrument 19. Which of the following best describes a possible result
d. Either a or b of treasury share transactions by a corporation?
a. May decrease but not increase retained earnings
14. Which statement is incorrect regarding accounting for b. May increase but not decrease retained earnings
costs of a Public Offering that involves issuing new c. May interest net income if the cost method is used
shares and a listing with the stock exchange? d. May decrease but not increase net income
a. Transaction costs that are directly attributable to
issuing new shares are deducted from equity, net 20. Five thousand (5,000) shares of ordinary share with a
of any related income tax benefit. par value of P10 per share were issued initially at P12
b. Costs that relate to the stock market listing, or per share. Subsequently, one thousand (1,000) of
otherwise are not incremental costs directly these shares were acquired as treasury share at P15
attributable to issuing new shares, should be per share. Assuming that the cost method of
recorded as an expense in the income statement. accounting for treasury share transactions is used,
c. Incremental costs that relate jointly to more than what is the effect of the acquisition of the treasury
one transaction are allocated to those transactions share on each of the following?
according to the facts and circumstances using a Additional-paid- Retained
basis that is rational and consistent with similar in-capital earnings
transactions. a. No effect No effect
d. In accordance with PAS 32, incremental costs that b. Increase Decrease
relate jointly to more than one transaction should c. Decrease Increase
be allocated based on the proportion of the d. Decrease Decrease
number of new shares sold compared to the total
number of outstanding shares immediately after 21. Which of the following is least likely to affect the
the new share issuance. retained earnings balance?
a. Conversion of preference shares into ordinary.
15. In accordance with PIC Q&A No. 2011-04, the following b. Share splits.
are generally treated as deduction to equity, except c. Treasury share transactions.
a. Underwriting fees d. Share dividends.
b. Newspaper publication fees
c. SEC registration fees for new shares 22. How would a share split affect each of the following?
d. Stock exchange listing fees Total Additional
shareholders’ paid-in
16. When treasury shares are purchased for more than the Assets equity capital
per value of the shares and the cost method is used to a. Increase Increase No effect
account for treasury shares, what account(s) should be b. No effect No effect No effect
debited c. No effect No effect Increase
a. Treasury shares for the purchase price d. Decrease Decrease Decrease
b. Treasury shares for the par value and share
premium for the excess of the purchase price over 23. Retained earnings are a component of:
the par value a. Reserves c. Contributed equity
c. Share premium for the purchase price b. Other equity d. Comprehensive income
d. Treasury shares for the par value and retained
earnings for the excess of the purchase price over 24. Whether a dividend is paid by a company depends on
the par value the decisions made by the:
a. Directors of the company
b. Auditors of the company
c. Creditors of the company
d. Shareholders of the company
25. The liability to pay a dividend shall be recognized when c. At the end of each reporting period and at the date
the dividend is appropriately authorized and is no of settlement, the entity shall review and adjust
longer at the discretion of the entity, which is the date: the carrying amount of the dividend payable, with
a. When declaration of the dividend, eg by any changes in the carrying amount of the
management or the board of directors, is approved dividend payable recognized in profit or loss.
by the relevant authority, eg the shareholders, if d. None of the above.
the jurisdiction requires such approval.
b. When the dividend is declared, eg by management 31. When an entity settles the dividend payable, it shall
or the board of directors, if the jurisdiction does present the difference, if any, between the carrying
not require further approval. amount of the assets distributed and the carrying
c. Either a or b. amount of the dividend payable as
d. Neither a nor b. a. A separate line item in profit or loss
b. Other income or expense in profit or loss
26. How would retained earnings be affected by the c. A separate component of other comprehensive
declaration of each of the following: income
Stock Dividend Share Split d. A separate component of equity
a. Decrease Decrease
b. No effect Decrease 32. A company declared a cash dividend on its ordinary
c. No effect No effect share in December 2019 payable in January 2020.
d. Decrease No effect Retained earnings would
a. Increase on the date of declaration
27. The cumulative feature of preference shares: b. Not be affected on the date of declaration
a. Requires that preference dividends not paid in any c. Not be affected on the date of payment
year must be made up in a later year before d. Decrease on the date of payment
dividends are distributed to ordinary shareholders
b. Limits the amount of cumulative dividends to the 33. Which of the following may increase ‘retained
par value of the preference shares earnings’?
c. Means that the shareholder can accumulate a. Re-issuance of treasury shares at more than cost.
preference shares until it is equal to the par value b. Retirement of preference shares at less than the
of ordinary shares at which time it can be issue price.
converted into ordinary shares c. Revaluation decrease.
d. Enables a preference shareholder to accumulate d. Change in accounting policy.
dividends until they equal the par value of the
shares and receive the shares in place of the cash 34. The primary purpose of a quasi reorganization is to
dividends give a corporation the opportunity to
a. Obtain relief from its creditors.
28. Cumulative preference dividends in arrears should be b. Revalue understated assets to their fair values.
shown in a corporation’s statement of financial position c. Distribute the stock of a newly created subsidiary
as: to its stockholders in exchange for part of their
a. A footnote stock in the corporation.
b. An increase in current liabilities d. Eliminate a deficit in retained earnings.
c. An increase in equity
d. An increase in current liabilities for the current 35. Are the following statements true or false, according to
portion and non-current liabilities for the long-term PAS33 Earnings per share?
portion (1) Potential ordinary shares issued by a subsidiary
should be included in the diluted EPS calculation as
29. IFRIC 17 Distributions of Non-cash Assets to Owners they could potentially have an impact on the net
addresses which of the following issues? profit for the period and the number of shares to
a. When should the entity recognize the dividend be included in the calculation.
payable? (2) An enterprise needs to disclose diluted EPS only if
b. How should an entity measure the dividend it differs from basic EPS by a material amount.
payable? Statement (1) Statement (2)
c. When an entity settles the dividend payable, how a. False False
should it account for any difference between the b. False True
carrying amount of the assets distributed and the c. True False
carrying amount of the dividend payable? d. True True
d. All of the above.
36. The weighted-average number of shares outstanding
30. Which statement is incorrect regarding measurement during the period for all periods (other than the
of a liability to distribute non-cash assets as dividend conversion of potential ordinary shares) shall be
to the entity’s owners? adjusted for
a. An entity shall measure a liability to distribute non- a. Any change in the number of ordinary shares
cash assets as a dividend to its owners at the fair without a change in resources.
value of the assets to be distributed. b. Any prior-year adjustment.
b. If an entity gives its owners a choice of receiving c. Any new issue of shares for cash.
either a non-cash asset or a cash alternative, the d. Any convertible instruments settled in cash.
entity shall estimate the dividend payable by
considering both the fair value of each alternative 37. When an enterprise makes a bonus issue/stock
and the associated probability of owners selecting split/stock dividend or a rights issue, then
each alternative. a. The previous year's EPS is not adjusted for the
issue.
b. The previous year's EPS is adjusted for the issue.
c. Only a note of the effect on the previous year's 42. Which of the following is not an example of potential
EPS is made. ordinary shares?
d. Only the diluted EPS for the previous year is a. Financial liabilities that are convertible into
adjusted. ordinary shares.
b. Share options.
38. If a new issue of shares for cash is made between the c. Contingently issuable shares.
year-end and the date that the financial statements d. Cancelled treasury shares.
are authorized, then
a. EPS for both the current and the previous year are 43. Which of the following best describes how convertible
adjusted. financial instruments affect earnings per share (EPS)
b. EPS for the current year only is adjusted calculations?
c. No adjustment is made to EPS. a. Convertible financial instruments have the
d. Diluted EPS only is adjusted. potential to dilute earnings per share, and should
be taken into account in calculating diluted EPS.
39. Ordinary shares issued as part of a business b. Convertible financial instruments have the
combination are included in the EPS calculation in the potential to dilute earnings per share, and should
case of the "purchase" method from be taken into account in calculating basic EPS.
a. The beginning of the accounting period. c. Convertible financial instruments may be anti-
b. The date of acquisition dilutive or dilutive, and should be taken into
c. The end of the accounting period. account in calculating basic EPS.
d. The midpoint of the accounting year. d. Convertible financial instruments should be
separated into their components, and reported
40. If a stock option is converted on March 31, then according to their separate components.
a. The potential ordinary shares (stock option) are
included in diluted EPS up to March 31 and in basic 44. In determining earnings per share, interest expense,
EPS from the date converted to the year-end (both net of applicable income taxes, on convertible debt
weighted accordingly). which is dilutive should be
b. The ordinary shares are not included in the diluted a. Ignored for diluted earnings per share.
EPS calculation but are included in basic EPS. b. Added back to net income for diluted earnings per
c. The ordinary shares are not included in the basic share.
EPS but are included in diluted EPS. c. Deducted from net income for diluted earnings per
d. The effects of the stock option are included only in share.
previous year's EPS calculation. d. None of the above.
41. For the purpose of calculating diluted earnings per 45. The conversion of preference shares into ordinary
share, which of the following will not require an after- shares requires that any excess of the par value of the
tax adjustment: ordinary shares issued over the carrying amount of the
a. Any dividends relating to dilutive potential shares, preference shares being converted should be:
deducted in arriving at profit. a. Treated as a direct reduction of retained earnings
b. Any interest recognized in the period, related to b. Reflected currently in income
dilutive potential shares. c. Reflected currently in other comprehensive income
c. Any other changes in income (or expense) that d. Treated as a prior period adjustment
would result from the conversion of the dilutive
potential shares.
d. Any dividends, which are proposed on existing
shares after the period end. J - end of FAR.2841 - J
SUGGESTED ANSWERS
1. C 11. D 21. B 31. A 41. D
2. C 12. D 22. B 32. C 42. D
3. C 13. D 23. A 33. D 43. A
4. B 14. D 24. A 34. D 44. B
5. C 15. D 25. C 35. C 45. A
6. D 16. A 26. D 36. A
7. D 17. C 27. A 37. B
8. D 18. B 28. A 38. C
9. D 19. A 29. D 39. B
10. D 20. A 30. C 40. A
1.