SHAREHOLDER’S EQUITY

MULTIPLE CHOICE QUESTIONS

1. The par value of ordinary share capital represents

a. The liquidation value of the share capital
b. The book value of the share capital
c. The legal nominal value assigned to the share capital
d. The amount received by the corporation when the share was originally issued.
2. The entry to record the issuance of ordinary share fully paid subscription is
a. A memorandum entry
b. Ordinary Share Subscribed
Ordinary Share Capital
Share Premium – Ordinary
c. Ordinary Share Subscribed
Subscription receivable
d. Ordinary Share Subscribed
Ordinary Share Capital
3. How should a share split affect each of the following?
Assets Total SHE APIC
a. Increase Increase No effect
b. No effect No effect No effect
c. No effect No effect Increase
d. Decrease Decrease Decrease
4. Treasury share is appropriately presented on the statement of financial position as a
a. trading security or available for sale security.
b. deduction at cost from total shareholders’ equity.
c. deduction at cost from total contingent liabilities.
d. deduction at par from total shareholders’ equity.
5. Gains or losses on the purchase and resale of treasury share is reflected in
a. paid-in capital accounts only.
b. paid-in capital accounts and retained earnings accounts.
c. income, paid-in capital accounts, and retained earnings accounts.
d. income and paid-in capital accounts.
6. At the date of the financial statements, ordinary shares issued would exceed ordinary
shares outstanding as a result of the
a. a declaration of a share split.
b. declaration of a bonus issue.
c. purchase of treasury shares.
d. payment in full of subscribed shares.
7. On February 1, authorized ordinary share capita; was sold on a subscription basis at a
price in excess of par value, and 20% of the subscription price was collected. On May 1,
the remaining 80% of the subscription price was collected. Additional paid in capital
would increase on
February 1 May 1
a. No Yes
b. No No
c. Yes No
d. Yes Yes
8. A company declared a cash dividend on its ordinary shares in December 2012, payable
in January 2013. Retained earnings would
a. increase on the date of declaration
b. not be affected on the date of declaration.
c. not be affected on the date of payment.
d. decrease on the date of payment.
9. Preference share split that has a claim on any prior year dividends that may have
passed is
a. cumulative c. non-cumulative
b. participating d. non-participating
10. Treasury shares (TS) were acquired for cash at a price in excess of its par value. The
treasury shares were subsequently reissued for cash at a price in excess of its
acquisition price. What is the effect on retained earnings of the acquisition of treasury
shares and of the reissuance of treasury shares?
Acquisition of TS Reissuance of TS
a. No effect Increase
b. Increase No effect
c. No effect No effect
d. Increase Decrease
11. A company issued rights to its existing shareholders to purchase for P30 per share,
unissued shares of P15 par value ordinary share capital. Additional paid-in capital will
be credited when the
Rights are issued Rights are exercises Rights lapse
a. Yes No No
b. No No Yes
c. No Yes No
d. Yes Yes Yes
12. A company issued rights to its existing shareholders to purchase ordinary shares. When
the rights are exercised, additional paid in capital would be credited if the purchase
price-
a. exceeded the par value.
b. was the same as the par value.
c. was the same as the par value, but less than the market value at the date of
exercise.
d. was less than the par value.
13. Fully participating preference share means
a. ordinary shareholders receive a dividend rate per share equal to the preference
share and all excess dividends are given to the ordinary shareholders.
b. ordinary shareholders receive a dividend rate per share equal to the preference
share and all excess dividends go to the preference shareholders.
c. ordinary shareholders receive a dividend rate per share equal to the preference
share and all excess dividends are shared proportionately between the two
classes.
d. preference shareholders receive their full dividend and any excess is given to the
ordinary shareholders.
14. Under IFRS 2, Share Based Payment, the value of the options that lapse after vesting
shall
a. be credited to expense during the period the option lapse.
b. be credited to income during the period that the options lapse.
c. remain in equity.
d. be converted into a liability.
15. A company issued rights to its existing shareholders to purchase for P30 per share,
unissued ordinary shares of P15 par value. When the rights lapse,
a. no entry will be made.
b. additional paid-capital will be debited.
c. additional paid-in capital will be credited.
d. stock rights outstanding will be debited.
16. Assuming that the issuing company has only one class of share capital, a transfer from
retained earnings to contributed capital equal to the market value of the shares issued is
ordinarily a characteristic of
a. either a bonus or a share split.
b. neither a bonus issue nor a share split.
c. a share split but not a bonus issue.
d. a bonus issue but not a share split.
17. Select the statement that is incorrect concerning the appropriations of retained earnings.
a. Appropriations of retained earnings do not change the total amount of
shareholders’ equity.
b. Appropriation of retained earnings reflect funds set aside for a designated
purpose, such as plant expansion.
c. Appropriations of retained earnings can be made as a result of contractual
requirements.
d. Appropriations of retained earnings can be made at the discretion of the board of
directors.
18. Dividends in arrears are shown on the financial statements as
a. current liabilities. c. contra-assets accounts.
b. contra-equity accounts. d. note disclosures only.
19. When should the compensation expense be recorded as a result of share options
granted by the enterprise to its employees?
a. during the year of grant.
b. during the year that the options ultimately vest.
c. during the years when services are required to be rendered by the employees.
d. during the year when the option first becomes exercisable.
20. Ownership of shares of share capital entitles the holders to all of the following rights
except:
a. to elect the board of directors of the corporation.
b. to share in the profits of the corporation.
c. to purchase new shares of stock when they are offered for sale.
d. to participate in the daily operations of the corporation.
21. In 2012, Inna Corporation acquired 6,000 shares of its P10 par value ordinary share
capital at P36 per share. During 2012, Inna issued 3,000 of these shares at P50 per
share. Inna uses the cost method to account for its treasury share transactions. What
accounts and amounts should Inna credit in 2012 to record the issuance of the 3,000
shares?
Treasury Share APIC Retained Earnings Ordinary Shares
a. - P102,000 P42,000 P6,000
b. - 144,000 - 6,000
c. P108,000 42,000 - -
d. 108,000 - 42,000 -
22. A holder of a redeemable preference share can
a. purchase treasury shares any time at the shareholders’ option.
b. purchase additional shares offered in order to maintain the same fractional
interest in the corporation.
c. turn in the preference shares for a specified cash price at a specified date or
during a specified period.
d. convert the preference shares for ordinary shares.
Short Problems.

1. The shareholders’ equity of May Co. revealed the following on June 30, 2019:
Preference share, P100 par value P 230,000
Share premium-Preference 80,500
Ordinary share, P15 par value 525,000
Share premium-Ordinary 275,000
Subscribed ordinary share 5,000
Retained earnings 190,000
Notes payable 400,000
Subscription receivable-ordinary 40,000

How much is the legal capital of the company?

2. On March 2, 2019, Nanette Corporation issued 4,000 shares of 6% cumulative P100

par value preference share for P480,000. Each preference share carried one detachable
share warrant which entitles the holder to acquire at P35, one share of nenette’s P10 par
ordinary share capital.

On march 2, 2019, the market price of the preference share without the warrants was
P110 per share and the market price of the share warrants was P10 per warrant.

What is the amount credited to Share Premium- Preference by Nanette on the issuance
of the securities?

3. The following accounts are shown on the statement of financial position of Pay
Company:
Share capital, P100 par, 1,000 shares P 100,000
Share premium 2,000
Paid-in capital from treasury shares 3,000
Retained earnings 75,000
Treasury shares, 200 shares at cost 25,000

All the 200 treasury shares were sold for P20,000. How would the resale of the treasury
shares be recorded?

4. Queenie Corporation was incorporated on January 2, 2019. The following information

pertaining to Queenie’s ordinary share transactions:
01/02/19 number of shares authorized P 80,000
02/01/19 number of shares issued 60,000
07/01/19 number of shares reacquired but not canceled 5,000
12/01/19 two-for-one share split

What is the number of Queenie Corporation’s ordinary share outstanding at December

31, 2019?
5. Of the 125,000 ordinary shares issued by Lay Company, 25,000 were held as treasury
shares on December 31, 2018. During 2019, transactions involving Lay’s ordinary
shares were as follows:

January 1 through October 31, - 13,000 treasury shares were distributed to officers as
part of share compensation plan.

November 1- A 3-for-1 share split took effect.

December 1- Lay purchased 5,000 of its own shares to discourage an unfriendly

takeover. These shares were not retired.

At December 31, 2019 how many shares of Lay’ Company’s ordinary share capital were
issued?

6. Use the same information given in No. 5. How many shares of Lay Company ordinary
share capital were outstanding?

7. On May 1, 2019, Maine Company issued P2 million, 20-year, 10% bonds for
P2,120,000. Each P1,000 bond had a detachable warrant eligible for the purchase of
one share of Maine’s P50 par ordinary share for P60. Immediately after the bonds were
issued, Maine’s securities had the following market values: 10% bonds without warrants-
P1,040; warrants – P20; Ordinary share P50 par-P56.

What amount should Maine record as additional paid-in capital?

8. The directors of Pete Corporation, whose P50 par value ordinary share is currently
selling at P70 per share, have decided to declare a bonus issue. Pete has an
authorization fro 250,000 ordinary shares, has issued 100,000 shares of which 10,000
shares are now held as treasury, and desires to capitalize P945,000 of the retained
balance. To accomplish this, the percentage of bonus issue that the directors should
declare is ________________.

9. Way Company reported the following in its statement of shareholders’ equity on January
1, 2019:

Ordinary share capital, P5 par value, 200,000

shares authorized; 100,000 shares issued P 500,000
Additional paid-in capital 1,500,000
Retained earnings 516,000
----------------------
2,516,000
Less: Treasury shares, 5,000 shares at cost 40,000
-----------------------
Total Stockholders’ Equity 2,476,000
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 The following events occurred in 2019:

May 1 1,000 treasury shares were sold for P10,000.

July 9 10,000 shares of previously unissued ordinary share were sold for P12
per share.
Oct. 1 The distribution of a 2-for-1 split resulted in the ordinary share’s par value
being halved.

How many shares are issued and outstanding at December 31, 2019?

10. On December 10, Pia Company split its share capital 5-for-2 when the market value was
P65 per share. Prior to the split, Pia had 200,000 shares of P15 par value share capital.
What is the par value of each share after the split?