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Chapter 11
Shareholders’ Equity (Part 2)

NAME: Date:
Professor: Section: Score:

QUIZ
1. The use of equity reserves under PFRSs
a. is strictly voluntary on the part of the management of a company.
b. is based on whether a reserve is part of distributable or non-distributable equity.
c. is primarily for the benefit of shareholders rather than creditors.
d. results in the elimination of the retained earnings category from the total equity of a
company.

2. Which of the following is most likely to be true regarding the 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.

3. When a property dividend is declared and the carrying amount of the property exceeds its fair
value, the dividend is recorded at the
a. fair value of the property at the date of distribution.
b. carrying amount of the property at the date of declaration.
c. carrying amount of the property at the date of distribution if it still exceeds the fair value of
the property at the date of declaration.
d. fair value of the property at the date of declaration.

4. Selected information from the accounts of Row Co. at December 31, 20x1, follows:
Total profit since incorporation ……….…………………….₱420,000
Total cash dividends paid ………………………….……….....130,000
Total value of property dividends distributed ………………..30,000
Excess of proceeds over cost of treasury stock sold,
accounted for using the cost method …………..………….110,000

In its December 31, 20x1, financial statements, what amount should Row report as retained
earnings?
a. 260,000 b. 290,000 c. 370,000 d. 400,000

5. Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at
December 31, 20x1. During 20x2, transactions involving Nest's common stock were as follows:
 May 3 - 1,000 shares of treasury stock were sold.
 August 6 - 10,000 shares of previously unissued stock were sold.
 November 18 - a 2-for-1 stock split took effect.

Laws in Nest's state of incorporation protect treasury stock from dilution. At December 31, 20x2,
how many shares of Nest's common stock were issued and outstanding?

Shares Issued Outstanding Shares Issued Outstanding

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a. 220,000 212,000 c. 222,000 214,000

b. 220,000 216,000 d. 222,000 218,000

6. On June 27, 20x1, Brite Co. distributed to its ordinary shareholders 100,000 shares of Quik, Inc.,
an unrelated party, held as investment in held for trading securities. The carrying amount of the
investment on June 27, 20x1 was ₱1 per share, while the fair value was ₱2 per share. On
distribution date, the fair value of Quik’s stock was ₱2.50 per share. In its income statement for
the year ended June 30, 20x1, what amount should Brite report as gain relating to the disposal of
the stock?
a. 250,000 b. 200,000 c. 50,000 d. 0

7. The Gradison Corporation had the following classes of shares outstanding as of December 31,
2002:
 Ordinary shares, ₱20 par value, 20,000 shares outstanding
 Preference shares, 6 percent, ₱100 par value, cumulative, 2,000 shares outstanding

No dividends were paid on preference shares for 2000 and 2001. On December 31, 2002, a total cash
dividend of ₱200,000 was declared. What amount of dividends is payable to the ordinary
shareholders?
a. 156,000 c. 176,000
b. 167,000 d. 184,000

8. Late Co. has the following shareholders’ equity:

Share capital, ₱100 par, 10,000 shares 1,000,000
Share premium 200,000
Retained earnings 300,000
Total shareholders’ equity 1,500,000

Late Co. recalled the 10,000 outstanding shares and replaced them with 20,000 no-par shares with
stated value of ₱5 per share. How much is the share premium after the recapitalization?
a. 200,000 c. 1,100,000
b. 1,000,000 d. 0

9. During 2002, the following transactions related to the capital stock of the Buffet-Line Corp.
occurred:

Jan. 7 Declared a ₱.75 cash dividend on 150,000 shares of preferred stock.

Feb. 7 Paid dividends on preferred stock.
March 4 Declared a ₱.50 cash dividend on 200,000 shares of common stock with a ₱20 par
value.
Mar. 18 Paid dividends on common stock.
June 30 Split common stock 4-for-1.
July 9 Purchased 12,000 shares of Buffet-Line's own common stock at ₱32 per share;
acquisition recorded at cost.
Sept. 10 Declared a cash dividend of ₱.40 per share on common stock outstanding.
Sept. 18 Paid dividends on common stock.

What total amount is debited to retained earnings for the transactions above?
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a. 432,300 c. 527,700
b. 498,700 d. 614,700

10. The stockholders' equity section of Brown Co.'s December 31, 20x1, balance sheet consisted of
the following:

Ordinary shares, ₱30 par, 10,000 shares authorized and outstanding ₱300,000
Share premium 150,000
Retained earnings (deficit) (210,000)

On January 2, 20x2, Brown put into effect a stockholder-approved quasi-reorganization by reducing

the par value of the stock to ₱5 and eliminating the deficit against share premium. Immediately after
the quasi-reorganization, what amount should Brown report as share premium?
a. (60,000) c. 190,000
b. 150,000 d. 0

"Therefore do not worry about tomorrow, for tomorrow will worry about itself. Each day has enough trouble
of its own." - (Matthew 6:34)

- END -
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ANSWERS:
1. B
2. B
3. D
4. A
Total profit since incorporation 420,000
Total cash dividends paid (130,000)
Total value of property dividends
(30,000)
distributed
Retained earnings to date 260,000

The excess proceeds on the sale of treasury shares are credited to share premium.

5. A
Issued Outstanding
Issued as of Dec. 31, 20x1 100,000 100,000
Treasury shares as of Dec. 31, 20x1 (5,000)
20x2 transactions:
May 3 - reissuance of treasury
shares 1,000
Aug. 6 - issuance of new shares 10,000 10,000
Totals 110,000 106,000
Nov. 18 - 2-for-1 share split 2 2
Ending balances 220,000 212,000

6. C (2.50 – 2) x 100,000 = 50,000

7. C
Total dividends declared 200,000
PS: (6% x 100 x 2,000 x 2 yrs.) (24,000)
Dividend to ordinary shares 176,000

8. C

Date Share capital 1,000,000

Share premium 200,000
Share capital (20,000 x ₱5) 100,000
Share premium – recapitalization 1,100,000

9. C - 112,500 + 100,000 + 315,200 = 527,700

Jan. 7 Retained Earnings (150,000 x ₱.75) .. 112,500

  Cash Dividends Payable--Preferred
Stock ............................ 112,500
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Feb. 7 Cash Dividends Payable--Preferred

Stock .............................. 112,500
  Cash .............................. 112,500

Mar. 4 Retained Earnings (200,000 x ₱.50) .. 100,000

  Cash Dividends Payable--Common
  Stock ............................. 100,000

Mar. 18 Cash Dividends Payable--Common Stock 100,000

  Cash .............................. 100,000

June 30 Memorandum entry ....................

July 9 Treasury Stock--Common .............. 384,000

  Cash .............................. 384,000

Sept. 10 Retained Earnings ................... 315,200

  Cash Dividends Payable--Common
  Stock [(800,000 - 12,000) x ₱.40] . 315,200

Sept. 18 Cash Dividends Payable--Common Stock 315,200

  Cash .............................. 315,200

10. C

Jan. 2, Share capital [(₱30 – ₱5) x 10,000 sh.] 250,000

20x2
Share premium 250,000
to record the reduction of par value
Jan. 2, Share premium 210,000
20x2
Retained earnings
to wipe out the deficit 210,000

Share premium - Dec. 31, 20x1 150,000

Credit (see journal entries above) 250,000
Debit (see journal entries above) (210,000)
Share premium after quasi-reorganization 190,000