Accounting Volume 2 Canadian 9th Edition Horngren Test Bank

Accounting Volume 2 Canadian 9th
Edition Horngren Test Bank

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Accounting, Vol. 2, 9e Cdn. Ed. (Horngren)
Chapter 14 Corporations: Retained Earnings and the Income Statement
Objective 14-1
1) The retained earnings account is a reservoir of cash.

Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-14 Apply basic accounting methods to record and evaluate share transactions, cash and stock
dividends, and stock splits
Skill: Knowledge
Objective: 14-1 Account for stock dividends and stock splits
2) The retained earnings account equals all previous periods' net earnings plus any dividends declared
less prior losses.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
3) Retained earnings can be invested by shareholders.

Answer: FALSE
Diff: 1 Type: TF
Skill: Knowledge
4) All dividends declared by a corporation require a payment of cash.

Answer: FALSE
Diff: 1 Type: TF
Skill: Knowledge
5) Stock dividends are similar to cash dividends in that assets of the corporation are transferred to the
shareholders.
Answer: FALSE
Diff: 1 Type: TF
Skill: Knowledge
230
© 2014 Pearson Canada Inc.
6) One of the main reasons for stock dividends is to continue dividends but to retain cash.
Answer: TRUE
Diff: 1 Type: TF
Skill: Knowledge
7) In a stock dividend equity moves from common shares to retained earnings.

Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
8) The value assigned to a stock dividend is the market value on the declaration of the shares to be
distributed as a stock dividend.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
9) The statement of Retained Earnings will always show an increase for dividends declared in the year.
Answer: FALSE
Diff: 1 Type: TF
Skill: Knowledge
10) Stock dividends decrease total shareholders' equity.

Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
11) The declaration of a stock dividend creates a current liability for the corporation.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
231
12) Common stock dividend distributable is a liability account on the balance sheet.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
13) Common stock dividend distributable is an equity account on the balance sheet.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
14) A stock split reduces the number of outstanding shares.

Answer: FALSE
Diff: 1 Type: TF
Skill: Knowledge
15) In a 3 for 1 stock split, the number of shares outstanding triples.

Answer: TRUE
Diff: 1 Type: TF
Skill: Application
16) A reverse stock split reduces the number of outstanding shares.

Answer: TRUE
Diff: 1 Type: TF
Skill: Knowledge
17) The declaration of a stock dividend has no effect on Retained earnings.

Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
232
18) A share dividend has no effect on assets or liabilities.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
19) Increasing the use of stock dividends will increase the market value of a firm's stock.
Answer: FALSE
Diff: 3 Type: TF
Skill: Comprehension
20) Stock dividends require the use of the company's cash when the shareholders cash them in.
Answer: FALSE
Diff: 3 Type: TF
Skill: Knowledge
21) Kelly Corporation has experienced profits greater than losses in the past four years since
incorporation. Which of the following is true?
A) Retained earnings has a debit balance at the end of the fourth year.
B) Retained earnings has a credit balance at the end of the fourth year.
C) Retained earnings on the balance sheet will cause a reduction in total shareholders' equity.
D) Retained earnings will not appear on the balance sheet
Answer: B
Diff: 2 Type: MC
Learning Outcome: A-03 Analyze and record transactions and their effect on the financial statements
Skill: Knowledge
22) Stock dividends:

A) decrease total shareholders' equity
B) have no effect on total shareholders' equity
C) reduce the total assets of the company
D) increase total liabilities upon declaration
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
233
23) A proportional distribution by a corporation of its own shares to its shareholders is a:
A) liquidating dividend
B) property dividend
C) cash dividend
D) stock dividend
Answer: D
Diff: 2 Type: MC
Skill: Knowledge
24) When a corporation declares a stock dividend:

A) total liabilities decrease
B) shareholders' equity decreases
C) total assets decrease
D) shareholders' equity remains unchanged
Answer: D
Diff: 2 Type: MC
Skill: Knowledge
25) Stock dividends increase ________ and decrease ________.

A) assets, liabilities
B) common shares, assets
C) common shares, retained earnings
D) retained earnings, assets
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
26) A shareholders' ownership percentage in the shares of a corporation ________ upon the distribution
of a stock dividend.
A) increases
B) decreases
C) can increase or decrease depending on the type of stock dividend
D) will stay the same
Answer: D
Diff: 2 Type: MC
234
27) When a corporation declares a 15% stock dividend, retained earnings will be:
A) debited for the new shares times the average issue price of all of the existing shares
B) debited for the new shares times the current market value of the shares
C) credited for the new shares times the book value of the shares
D) credited for the new shares times the current market value of the shares
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
Table 14-1
The board of directors declares a 10% stock dividend. There are 20,000 common shares authorized and
10,000 outstanding common shares. The current market price of the shares is $12 per share; the average
issue price was $10 per share.
28) Refer to Table 14-1. The journal entry will require a debit to retained earnings for:
A) $10,000
B) $12,000
C) $20,000
D) $24,000
Answer: B
Diff: 2 Type: MC
Skill: Application
29) Refer to Table 14-1. The entry to distribute the shares will require a:
A) debit to common shares for $10,000
B) debit to common stock dividend distributable for $10,000
C) debit to common stock dividend distributable for $12,000
D) debit to retained earnings for $24,000
Answer: C
Diff: 2 Type: MC
Skill: Application
235
30) Which of the following will reduce retained earnings?
A) a 3-for-1 stock split
B) declaration of a 15% stock dividend
C) distribution of a 15% stock dividend
D) payment of a $0.50 per share cash dividend
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
31) A stock dividend will:

A) reduce assets
B) reduce shareholders' equity
C) increase liabilities
D) have no effect on total assets, shareholders' equity, or liabilities
Answer: D
Diff: 2 Type: MC
32) Common stock dividend distributable is a:

A) contra liability account
B) shareholders' equity account
C) liability account
D) contra equity account
Answer: B
Diff: 1 Type: MC
Skill: Knowledge
33) The common stock dividend distributable account will appear on the balance sheet:
A) in the shareholders' equity section before common shares
B) as a contra account to common shares
C) in the shareholders' equity section after common shares
D) This account is an income statement account and would not appear on the balance sheet.
Answer: C
Diff: 2 Type: MC
Learning Outcome: A-02 Describe the components of and prepare the four basic financial statements
Skill: Knowledge
236
Table 14-2
Following is the shareholders' equity section of the balance sheet of Thomson Corporation:
Contributed capital
Preferred shares, $8, cumulative, 25,000 shares
authorized, 5,000 shares issued $ 516,000
Common shares, 100,000 shares authorized, 40,000
shares issued 320,000
Total contributed capital 836,000
Retained earnings 290,000
Total shareholders' equity $1,126,000
The preferred shares are currently selling for $102.25 per share and the common shares are currently
selling for $11.50 per share.
34) Refer to Table 14-2. The entry to record the declaration of a 10% common stock dividend includes a:
A) debit to retained earnings for $46,000
B) credit to common shares for $51,125
D) credit to retained earnings for $46,000
Answer: A
Diff: 2 Type: MC
Skill: Application
35) Refer to Table 14-2. The total contributed capital after the declaration of a 10% common stock
dividend is:
A) $862,000
B) $856,000
C) $836,000
D) $882,000
Answer: D
Diff: 3 Type: MC
Skill: Application
237
36) Refer to Table 14-2. The entry to record the distribution of a 10% common stock dividend includes a:
A) debit to dividends payable for $46,000
C) debit to retained earnings for $46,000
D) credit to cash for $46,000
Answer: B
Diff: 2 Type: MC
Skill: Application
37) Refer to Table 14-2. The total shareholders' equity after the distribution of a 10% common stock
dividend is:
A) $1,152,000
B) $1,146,000
C) $1,126,000
D) $1,172,000
Answer: C
Diff: 2 Type: MC
Skill: Application
38) Refer to Table 14-2. The balance in the common shares account after the declaration of a 10% common
stock dividend is:
A) $320,000
B) $836,000
C) $290,000
D) $366,000
Answer: A
Diff: 2 Type: MC
Skill: Application
39) Refer to Table 14-2. The number of common shares issued after the declaration of a 10% common
stock dividend is:
A) 44,000
B) 40,000
C) 100,000
D) 104,000
Answer: B
Diff: 2 Type: MC
Skill: Application
238
40) Refer to Table 14-2. The entry to record the declaration of a 60% common stock dividend when the
shares have a current market price of $15 per share includes a:
D) debit to common shares for $240,000
Answer: A
Diff: 2 Type: MC
Skill: Application
41) Refer to Table 14-2. The total contributed capital after the distribution of a 60% common stock
dividend is:
A) $290,000
B) $1,196,000
C) $1,126,000
D) $836,000
Answer: B
Diff: 2 Type: MC
Skill: Application
42) Refer to Table 14-2. The entry to record the distribution of a 60% common stock dividend when the
shares have a current market price of $15 per share includes a:
A) debit to common dividends payable for $360,000
B) credit to common stock dividend distributable for $360,000
C) debit to retained earnings for $360,000
D) credit to common shares for $360,000
Answer: D
Diff: 2 Type: MC
Skill: Application
dividend is:
A) $1,196,000
B) $1,246,000
C) $1,126,000
D) $836,000
Answer: C
Diff: 2 Type: MC
Skill: Application
239
44) Refer to Table 14-2. The balance in the common shares account after the distribution of a 60% common
stock dividend is:
A) $516,000
B) $680,000
C) $320,000
D) $836,000
Answer: B
Diff: 2 Type: MC
Skill: Application
45) Refer to Table 14-2. The number of common shares issued after the distribution of a 60% common
stock dividend is:
A) 124,000
B) 64,000
C) 40,000
D) 100,000
Answer: B
Diff: 2 Type: MC
Skill: Application
46) Which of the following is needed when declaring a common stock dividend?
A) number of common shares authorized
B) number of preferred shares authorized
C) number of preferred shares issued
D) number of common shares issued
Answer: D
Diff: 1 Type: MC
Skill: Knowledge
47) Helen Randall owns 2,500 common shares in Holister Corporation, for which she paid $8,500. Holister
Corporation declared a 2-for-1 stock split. Her average cost per share after the stock split is:
A) $2.27
B) $3.40
C) $1.70
D) $0.85
Answer: C
Diff: 2 Type: MC
Skill: Application
240
48) A 2-for-1 stock split has the same affect on the number of shares outstanding as a:
A) 20% stock dividend
B) 50% stock dividend
C) 100% stock dividend
D) 200% stock dividend
Answer: C
Diff: 2 Type: MC
Skill: Analysis
49) The board of directors announces a 2-for-1 stock split on 20,000 outstanding common shares, with an
average issue price of $15. Immediately after the stock split, the:
A) book value of the shares increases to $30 per share
B) issued shares decrease to 10,000
C) average issue price of the shares remains the same
D) issued and outstanding shares increase to 40,000
Answer: D
Diff: 1 Type: MC
Skill: Application
50) In a 2-for-1 stock split, the balance in the common shares account:
A) is cut in half
B) remains the same
C) doubles
D) triples
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
51) A 2-for-1 stock split:

A) results in the number of shares issued to remain the same
B) results in a reduction in retained earnings
C) results in an increase in total shareholders' equity
D) increases the number of authorized and outstanding shares
Answer: D
Diff: 2 Type: MC
Skill: Knowledge
241
52) The declaration of a 2-for-1 stock split appears on which financial statement?
A) income statement
B) balance sheet
C) statement of retained earnings
D) does not appear on any financial statement
Answer: D
Diff: 2 Type: MC
Skill: Knowledge
Table 14-6
Contributed capital
Common shares, 1,000,000 shares authorized, 500,000
shares issued 2,500,000
Total contributed capital 3,200,000
53) Refer to Table 14-6. The entry to record the declaration of a 5% common stock dividend includes a:
D) debit to retained earnings for $125,000
Answer: A
Explanation: A) (500,000 shares × 0.05) × $12.50 = $312,500
Diff: 2 Type: MC
Skill: Application
242
54) Refer to Table 14-6. The total contributed capital after the declaration of a 5% common stock dividend
is:
A) $3,075,000
B) $3,325,000
C) $3,200,000
D) $3,512,500
Answer: D
Explanation: D) $3,200,000 + $312,500 = $3,512,500
Diff: 3 Type: MC
Skill: Application
dividend is:
A) $4,315,000
B) $3,877,500
C) $4,190,000
D) $4,502,500
Answer: C
Diff: 2 Type: MC
Skill: Application
stock dividend is:
A) $2,500,000
B) $2,625,000
C) $2,812,500
D) $3,200,000
Answer: A
Diff: 2 Type: MC
Skill: Application
243
Match the following.
A) retained earnings
B) declaration date of dividend
C) stock dividend
D) stock split
E) reverse stock split
F) payment date of dividend
G) record date of dividend
57) An account whose balance is the cumulative, lifetime earnings of a company less its cumulative losses
and dividends
Diff: 1 Type: MA
Skill: Knowledge
58) An increase in the number of outstanding shares coupled with a proportionate reduction in the book
value of the shares
Diff: 1 Type: MA
Skill: Knowledge
59) The date with respect to a cash dividend where the liability is created and the retained earnings are
reduced
Diff: 1 Type: MA
Skill: Knowledge
60) The date with respect to a cash dividend that determines which shareholder will be receiving the
dividend
Diff: 1 Type: MA
Skill: Knowledge
61) The date with respect to a cash dividend where the liability is reduced and the payment is made to
the shareholder
Diff: 1 Type: MA
Skill: Knowledge
244
62) Affects only the accounts within shareholders' equity
Diff: 1 Type: MA
Skill: Knowledge
63) A proportional distribution by a corporation of its own shares to its shareholders

Diff: 1 Type: MA
Skill: Knowledge
64) A stock split where the number of shares outstanding are reduced
Diff: 1 Type: MA
Skill: Knowledge
Answers: 57) A 58) D 59) B 60) G 61) F 62) C 63) C 64) E
245
65) EverClean Corporation reported the following shareholders' equity on January 1, 2014:
Contributed capital
Preferred shares, $2.50, cumulative, 30,000
shares authorized, 7,500 shares issued $ 393,750
Common shares, 200,000 shares
authorized, 135,000 shares issued 607,500
a) On June 15, 2014, the board of directors declared a 10% common stock dividend when the market
price of the shares was $7.00 per share. On July 15, 2014, the stock dividend was distributed to the
shareholders. Prepare the necessary journal entries to record the declaration and distribution of the
common stock dividend.
b) What effect did the declaration of the common stock dividend have on:
1) total assets
2) total liabilities
3) total contributed capital
4) total shareholders' equity
General Journal
Date Accounts Debit Credit
Answer:
a) General Journal
June 15 Retained Earnings 94,500
Common Stock Dividend Distributable 94,500
July 15 Common Stock Dividend Distributable 94,500

Common Shares 94,500
b) 1) no effect
2) no effect
3) increase of $94,500
4) no effect
Diff: 2 Type: SA
Skill: Application
246
66) Following is the shareholders' equity section of the balance sheet of Downing Corporation as of
November 1, 2013:
Preferred shares, $3, noncumulative, 10,000 shares

Common shares, 300,000 shares authorized,
120,000 shares issued 1,620,000
Downing Corporation reported the following transactions during November, 2013:
Nov. 1 Declared the required annual cash dividend on the preferred shares and a $0.50
dividend on the common shares.
15 Paid the dividends declared on November 1.
16 Declared a 10% common stock dividend. The market value of the common shares is $15.00
per share.
26 Distributed the common stock dividend declared on November 16.
30 The board of directors announced a 2-for-1 stock split.
Show the dollar amount of the effect of each transaction on both total contributed capital and total
shareholders' equity.
Date Total Contributed Capital Total Shareholders' Equity

Nov. 1
15
16
26
30
Answer:
Date Total Contributed Capital Total Shareholders' Equity
Nov. 1 no effect decrease of $79,500
15 no effect no effect
16 increase of $180,000 no effect
Diff: 3 Type: SA
247
67) Rice Corporation reported the following shareholders' equity items on December 31, 2014:

authorized, 1,000 shares issued $153,200
Consider each of the following cases independently:
1) How many common shares would be outstanding if Rice Corporation declares a 4-for-1 stock split?
2) Prepare the journal entry if Rice Corporation declared a 15% stock dividend on the common shares
when the market price of common shares was $130 per share.
3) Prepare the journal entry if Rice Corporation declared a 45% stock dividend on the common shares
when the market price of common shares was $130 per share.
4) Give the journal entry to record the sale of 800 common shares for $125 per share.
Answer:
1) 20,000
General Journal
2) Retained Earnings 97,500
3) Retained Earnings 292,500

4) Cash 100,000
Diff: 2 Type: SA
Skill: Application
248
68) Answer each of the following independent questions.
a) Use the words "no effect," "increase," or "decrease" to indicate the effects of stock dividends and
stock splits on the following items:
Stock Split Stock Dividend

Retained earnings account
Total shareholders' equity
Number of shares authorized
Number of shares issued
Total assets and liabilities
Common shares amount
b) Explain how errors from prior accounting periods are reported on a company's financial
statements.
Answer:
a)
Stock Split Stock Dividend
Retained earnings account No effect Decrease
Total shareholders' equity No effect No effect
Number of shares authorized Increase No effect
Number of shares issued Increase Increase
Total assets and liabilities No effect No effect
Common shares $ amount No effect Increase
b) Errors from prior accounting periods are shown as corrections to the beginning balance of retained
earnings .
Diff: 2 Type: SA
Skill: Knowledge
249
Table 14-5
Following is the shareholders' equity section of the balance sheet of Bradson Ltd.:
Contributed capital
dividend is: __________.
Answer: $700,000 + (50,000 × 10% × $12.00) = $760,000
Diff: 2 Type: SA
Skill: Application
Answer: $700,000 + (50,000 × 20% × $12.00) = $820,000
Diff: 2 Type: SA
Skill: Application
71) Refer to Table 14-5. The balance of retained earnings after the declaration of a 10% common stock
Answer: $490,000 - (50,000 × 10% × $12.00) = $430,000
Diff: 2 Type: SA
Skill: Application
72) Refer to Table 14-5. The balance of retained earnings after the declaration of a 20% common stock
Answer: $490,000 - (50,000 × 20% × $12.00) = $370,000
Diff: 2 Type: SA
Skill: Application
250
73) Refer to Table 14-5. The balance of retained earnings after the declaration of a 3-for-1 stock split is:
__________.
Answer: $490,000 (same)
Diff: 2 Type: SA
Skill: Application
74) Refer to Table 14-5. The balance of total shareholders' equity after the declaration of a 10% common
stock dividend is: __________.
Answer: same balance of $1,190,000
Diff: 2 Type: SA
Skill: Application
75) Refer to Table 14-5. The balance of total shareholders' equity after the declaration of a 3-for-1 stock
split is: __________.
Answer: same balance of $1,190,000
Diff: 2 Type: SA
Skill: Application
Answer: same balance of $400,000
Diff: 2 Type: SA
Skill: Application
Answer: same balance of $400,000
Diff: 2 Type: SA
Skill: Application
251
78) Refer to Table 14-5. The balance in the common shares account after the distribution of a 10% common
Answer: $400,000 + (50,000 × 10% × $12.00) = $460,000
Diff: 2 Type: SA
Skill: Application
79) Refer to Table 14-5. The balance in the common shares account after the declaration of a 3-for-1 stock
split is: __________.
Answer: $400,000 same balance
Diff: 2 Type: SA
Skill: Application
Answer: 50,000 × 1.1 = 55,000
Diff: 2 Type: SA
Skill: Application
Answer: 50,000 × 1.2 = 60,000
Diff: 2 Type: SA
Skill: Application
82) Refer to Table 14-5. The number of common shares issued after the distribution of a 3-for-1 stock split
is: __________.
Answer: 50,000 × 3 = 150,000
Diff: 2 Type: SA
Skill: Application
252
83) From an investor's perspective, what is the main difference between a stock split and a stock
dividend.
Answer: Both a stock split and a stock dividend increase the number of common shares held by the
investor with no accompanying change in the cost of the shares owned. Where stock splits and stock
dividends differ is in the way they are treated for tax purposes. A stock split does not create taxable
income to the investor, but a stock dividend does because stock dividends are treated in the same way as
cash dividends. For this reason, stock dividends are less popular than stock splits as investors must pay
income tax on the stock dividend even though no cash has been received.
Diff: 2 Type: ES
253
84) Delilah Corporation reports the following transactions for 2013:
Jan. 11 Sold 6,000 shares of $3.50, noncumulative, preferred shares for $75 per share.
Feb. 20 Sold 30,000 common shares for $11 per share.
Oct. 13 Declared a 10% stock dividend on the common shares. The current
market price of the common shares is $14 per share. Sampson
Corporation has 100,000 common shares outstanding on October 13.
Nov. 16 Distributed the stock dividend declared on October 13.
Dec. 16 Declared the annual dividend required on the preferred shares and a
$0.50 per share dividend on the common shares. Sampson Corporation
currently has 20,000 preferred shares outstanding.
Prepare journal entries for the above transactions.

Answer: General Journal
Jan. 11 Cash 450,000
Preferred Shares 450,000
Feb. 20 Cash 330,000

Oct. 13 Retained Earnings 140,000

Nov. 16 Common Stock Dividend Distributable 140,000

Dec. 16 Retained Earnings 125,000

Dividends Payable-Preferred 70,000
Dividends Payable-Common 55,000
Diff: 2 Type: SA
Skill: Application
254
Objective 14-2
1) The repurchase of share capital from shareholders reduces total shareholders' equity and increases
assets.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
Objective: 14-2 Account for repurchased shares
2) Treasury shares are classified on the balance sheet as a contra liability.

Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
3) Only outstanding common shares have a vote.

Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
4) The difference between unissued shares and treasury shares is that treasury shares have been issued
and bought back.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
5) When repurchased shares are sold, retained earnings could be credited in the journal entry.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
6) A corporation purchases 200 of its common shares for $12 per share. Subsequently, all 200 shares are
resold for $13 per share. The amount of revenue from these transactions is $200.
Answer: FALSE
Diff: 3 Type: TF
Skill: Knowledge
255
7) A corporation purchases 200 of its common shares for $12 per share. The shares had originally been
issued at $11. The 200 shares represent the first time the corporation has engaged in a repurchased shares
transaction. The entry to repurchase the shares will involve a debit to retained earnings for $200.
Answer: TRUE
Diff: 2 Type: TF
Skill: Application
8) The Canada Business Corporations Act and most of the provincial incorporating acts permit a corporation
to acquire its own shares if such reacquisition would result in the corporation's putting itself into
financial jeopardy.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
9) Restrictions on retained earnings involve a debit to share capital from retained earnings.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
10) Under the Canada Business Corporations Act, a company may reissue the shares it previously
repurchased.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
11) When a corporation repurchases its own shares, there is no effect on income.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
256
12) Retained Earnings is credited when the price paid for repurchased company shares is less than their
book value.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
13) When a corporation re-issues treasury shares at a price greater than their cost then the gain is reported
on the income statement under other income and losses.
Answer: FALSE
Diff: 3 Type: TF
14) A corporation repurchases 200 of its common shares initially issued for $6 per share for $7 per share.
The entry to record the reacquisition requires a debit to:
A) contributed surplus-shares repurchase for $200
B) common shares for $1,200
C) common shares for $1,400
D) retained earnings for $1,200
Answer: B
Diff: 2 Type: MC
Skill: Application
15) A corporation repurchases 1,000 of its common shares initially issued for $8 per share for $6 per share.
This transaction will:
A) increase total shareholders' equity by $2,000
B) decrease total common shares by $6,000
C) have no effect on total shareholders' equity
D) decrease common shares by $8,000
Answer: D
Diff: 2 Type: MC
Skill: Application
257
16) A corporation repurchases 2,000 of its common shares initially issued for $10 per share for $12 per
share. This transaction will:
A) decrease total shareholders' equity by $4,000
B) decrease common shares by $24,000
C) decrease total shareholders' equity by $24,000
D) have no effect on total shareholders' equity
Answer: C
Diff: 2 Type: MC
Skill: Application
17) A corporation sells 20 repurchased common shares costing $10 per share for $11 per share. The
journal entry to record the sale requires a credit to:
A) cash for $220
B) retained earnings for $20
C) common shares for $20
D) common shares for $220
Answer: D
Diff: 2 Type: MC
Skill: Application
258
Table 14-3
Following is the shareholders' equity section of the balance sheet of Monty Corporation:
Contributed capital:
Preferred shares, $2.50, cumulative, 35,000 shares
50,000 shares issued 452,500

18) Refer to Table 14-3. The entry to record Monty's purchase of 10,000 of its common shares at $7.50 per
share includes a:
B) debit to common shares for $75,000
C) credit to common shares for $90,500
D) credit to contributed surplus-share repurchase for $15,500
Answer: D
Explanation: D) Common shares 90,500
Cash 75,000
Contributed surplus- share repurchase 15,500
Diff: 3 Type: MC
Skill: Application
19) Refer to Table 14-3. Assume Monty purchased 15,000 of its common shares at $10.00 per share. This
transaction would:
A) increase total shareholders' equity
B) have no effect on total shareholders' equity
C) decrease total shareholders' equity
D) increase assets
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
259
20) Refer to Table 14-3. Assuming Monty purchases 15,000 of its common shares at $9.50 per share, total
shareholders' equity is:
A) increased $142,500
B) decreased $142,500
C) increased $6,750
D) the same as it was before the purchase of the company's own shares
Answer: B
Diff: 2 Type: MC
Skill: Application
21) Refer to Table 14-3. The entry to record the sale of 8,000 repurchased shares that cost $10 per share for
$13 per share includes a:
D) credit to gain on sale of shares for $24,000
Answer: B
Diff: 2 Type: MC
Skill: Application
22) The sale of a corporation's repurchased shares:

A) has no effect on its net income
B) may result in a gain or loss that will affect its net income
C) will increase or decrease the retained earnings account
D) will increase or decrease the contributed surplus account
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
23) The sale of a corporation's repurchased shares:

A) will increase liabilities
B) will increase total shareholders' equity
C) will decrease assets
D) will have no effect on the balance sheet
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
260
Table 14-6
Contributed capital
Common shares, 1,000,000 shares authorized, 500,000
shares issued 2,500,000
24) Refer to Table 14-6. The entry to record Monty's purchase of 10,000 of its common shares at $12.50 per
share includes a:
B) debit to common shares for $125,000
D) credit to contributed surplus-share repurchase for $75,000
Answer: A
Diff: 3 Type: MC
Skill: Application
25) Refer to Table 14-6. Assuming Monty purchases 10,000 of its common shares at $12.50 per share, total
shareholders' equity is:
A) increased $125,000
B) decreased $125,000
C) decreased $75,000
D) the same as it was before the purchase of the company's own shares
Answer: B
Diff: 2 Type: MC
Skill: Application
261
26) Refer to Table 14-6. The entry to record the sale of 8,000 repurchased shares that cost $12.50 per share
for $13.50 per share includes a:
A) credit to retained earnings for $8,000
D) credit to gain on sale of shares for $8,000
Answer: B
Explanation:
B) Cash 108,000
Common shares 108,000
Diff: 2 Type: MC
Skill: Application
27) Boss Corporation reported the following equity section on its current balance sheet:

50,000 shares issued $250,000
Contributed surplus - share repurchase 20,000
Total shareholders' equity $377,000
Which of the following would be included in the entry to record the corporation's purchase of 1,000
common shares for $7.50 per share?
A) Contributed surplus - share purchase would be debited for $2,500
B) Retained earnings would be debited for $2,500
C) Common shares would be debited for $7,500
D) Retained earnings would be credited for $2,500
Answer: A
Explanation:
A) Common shares 5,000
Contributed surplus - share repurchase 2,500
Cash 7,500
Diff: 2 Type: MC
Skill: Application
262
A) treasury shares
B) contributed surplus
C) retained earnings
28) Shares that are repurchased and held by the corporation after repurchase
Diff: 1 Type: MA
Skill: Knowledge
29) The account credited when a company repurchases its' own shares at a price less than book value
Diff: 1 Type: MA
Skill: Knowledge
Answers: 28) A 29) B
263
30) Prepare journal entries for the following transactions for Broadbent Corporation:
Jun. 10 Broadbent Corporation purchased 2,000 of its common shares for $25 per share.
The original issue price was $21 per share
Aug. 15 Broadbent Corporation sold 800 of the repurchased shares for $30 per share.
Oct. 30 Broadbent Corporation sold the remaining repurchased shares for $22 per share.
Jun. 10 Common Shares 42,000
Retained Earnings 8,000
Cash 50,000
Aug. 15 Cash 24,000

Oct. 30 Cash 26,400

Diff: 2 Type: SA
Skill: Application
264
31) Arrow Corporation began 2014 with the following account balances:
Common shares, 100,000 shares authorized, 75,000 issued $2,175,000

In January 2014, Arrow Corporation reported the following transactions:
Jan. 10 Reacquired 5,000 of its own shares for $30 per share.
20 Sold 3,000 of the reacquired shares for $33 per share.
30 Sold the remaining reacquired shares for $22 per share.
Record journal entries for the above transactions.

Jan. 10 Common Shares 145,000
Retained Earnings 5,000
Cash 150,000
20 Cash 99,000
30 Cash 44,000
Diff: 3 Type: SA
Skill: Application
32) Identify three reasons why a corporation might repurchase its own shares.
Answer: 1. The corporation may have issued all its authorized shares and needs to recover shares for
distribution under bonus plans or share purchase plans.
2. The purchase may help support the share's current market price by decreasing the supply of shares
available to the public.
3. Management may gather in the shares to avoid a take over by an outside party.
Diff: 2 Type: ES
265
33) Narrow Corporation began 2014 with the following account balances:
Common shares, 100,000 shares authorized, 50,000 issued $1,200,000

In 2014, Arrow Corporation reported the following transactions:
Jan. 10 Reacquired 5,000 of its own shares for $20 per share.
Mar 20 Reacquired 2,000 of its own shares for $25 per share.
30 Sold 4,000 of the reacquired shares for $22 per share.
Record journal entries for the above transactions.

Jan. 10 Common Shares 120,000
Contributed Surplus - Share Repurchase 20,000
Cash 100,000
Mar. 20 Common Shares 48,000

Contributed Surplus - Share Repurchase 2,000
Cash 50,000
30 Cash 88,000
Diff: 3 Type: SA
Skill: Application
Objective 14-3
1) The first income tax expense that appears on the income statement relates solely to income from
operations.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
Objective: 14-3 Prepare a detailed corporate income statement
2) When a corporation has discontinued operations, it has a separate earnings per share amount for the
discontinued operations.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
266
3) When a corporation has a discontinued operation, the earnings per share amount includes the effect of
the discontinued operation.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
4) Losses due to lawsuits are reported on the income statement net of the tax savings.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
5) Losses due to floods, fire or other forces of nature are reported on the income statement net of the tax
savings.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
6) Discontinued operations is shown net of tax on the income statement.

Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
7) Losses due to employee labour strikes would be shown in the other gains/(losses) section of the income
statement.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
8) Discontinued operations must be separated into two components: operating income or loss from the
segment that is disposed of and operating gain or loss from the segment that will replace the business
being discontinued.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
267
9) Earnings per share is the amount of a company's net income per share of its outstanding preferred
shares.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
10) Earnings per share is a key measure of business success.

Answer: TRUE
Diff: 1 Type: TF
Skill: Knowledge
11) Stock dividends require an adjustment to the beginning of year balance in the number of common
shares outstanding when calculating the weighted average number of shares outstanding for EPS.
Answer: TRUE
Diff: 3 Type: TF
Skill: Knowledge
12) When calculating earnings per share only cumulative preferred dividends need to be taken into
consideration.
Answer: FALSE
Diff: 3 Type: TF
Skill: Knowledge
13) The gain on sale of machinery account would appear on the income statement as a(n):
A) component of income from continuing operations
B) component of income from discontinued operations
C) component of gross margin
D) prior-period adjustment
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
268
14) Components of income from continuing operations are shown:
A) after the tax effect
B) before the tax effect
C) both before and after the tax effect
D) grouped with prior-period adjustments
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
15) If a company shows a loss on discontinued operations of $60,000 and is subject to a 35% tax rate, the
tax effect is:
A) a tax savings of $21,000
B) additional tax liability of $21,000
C) a tax savings of $39,000
D) additional tax liability of $39,000
Answer: A
Diff: 2 Type: MC
Skill: Application
16) If a company shows a gain on discontinued operations of $60,000 and is subject to a 35% tax rate, the
tax effect is:
A) a tax cost of $21,000
B) a reduction of a tax liability of $21,000
C) a tax cost of $39,000
D) additional tax liability of $39,000
Answer: A
Diff: 2 Type: MC
Skill: Application
17) When a company sells a segment of its business, the gain or loss on the disposal is shown as:
A) an extraordinary item
B) part of discontinued operations
C) part of income from continuing operations
D) a prior-period adjustment
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
269
18) When a company sells a piece of equipment used in the business, the gain or loss on the disposal is
shown as:
A) an extraordinary item
B) part of discontinued operations
C) other gains and losses
D) an adjustment to the beginning balance of retained earnings
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
19) Losses due to restructuring costs would be shown as:

A) operating expenses
B) prior-period adjustments
C) other gains and losses
D) extraordinary items
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
270
Table 14-4
Crane Corporation had a loss of $25,000 from a flood and a gain of $8,000 from the sale of a machine the
business owned. You are preparing the 2014 income statement. Crane Corporation is in a 34% tax
bracket.
20) Refer to Table 14-4. How would the gain from the sale of the machine appear on a multiple-step year
end income statement?
A) $8,000, as part of other gains and losses
B) $8,000, as a prior-period adjustment
C) $5,280, as part of other gains and losses
D) $5,280, as part of gross profit
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
21) Refer to Table 14-4. How would the flood loss appear on the year-end income statement?
A) $25,000 loss, as part of other gains and losses
B) $16,500 loss, as an extraordinary item
C) $25,000 loss, as a prior-period adjustment
D) $16,500 loss, as part of income from continuing operations
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
22) A loss from a tornado would probably be classified on an income statement as a(n):
A) adjustment to beginning retained earnings
B) other expense on the income statement
C) prior-period adjustment
D) operating expense
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
23) The correct order for the following income statement items is:
A) income from discontinued operations, income from continuing operations, net income
B) income from continuing operations, net income, income from discontinued operations
C) income from continuing operations, income from discontinued operations, net income
D) net income, income from discontinued operations, income from continuing operations
Answer: C
Diff: 1 Type: MC
Skill: Knowledge
271
24) Net income for a corporation for the current year amounts to $200,000. The corporation currently has
outstanding 5,000 shares of $5, cumulative preferred shares and 20,000 common shares. The numerator to
be used in the earnings per share calculation is:
A) $200,000
B) $175,000
C) $225,000
D) $195,000
Answer: B
Diff: 2 Type: MC
Skill: Application
25) Net income for a corporation for the current year amounts to $100,000. The corporation currently has
outstanding 8,000 shares of $2, cumulative preferred shares and 20,000 common shares. The denominator
to be used in the earnings per share calculation is:
A) 20,000
B) 8,000
C) 100,000
D) 28,000
Answer: A
Diff: 2 Type: MC
Skill: Application
26) On January 1, 2013, Regal Corporation had outstanding 70,000 common shares. On April 1, 2013,
Regal Corporation issued 20,000 common shares in exchange for land. On September 1, 2013, Regal
Corporation reacquired 5,000 of its common shares. No other transactions regarding common shares
occurred in 2013. The denominator to be used in the earnings per share calculation is:
A) 77,500
B) 90,000
C) 83,333
D) 85,000
Answer: C
Explanation: C) 70,000 + (20,000 × 9/12) - (5,000 × 4/12) = 83,333
Diff: 3 Type: MC
Skill: Application
272
27) On January 1, 2014, Oxford Corporation had outstanding 70,000 common shares. On April 1, 2014,
Oxford Corporation issued 20,000 common shares in exchange for land. On June 1, 2014, Oxford
Corporation reacquired 5,000 of its common shares. On November 1, 2014, Oxford reissued 3,000 shares.
No other transactions regarding common shares occurred in 2014. The denominator to be used in the
earnings per share calculation is:
A) 85,000
B) 67,917
C) 82,583
D) 88,000
Answer: C
Explanation: C) 70,000 + (20,000 × 9/12) - (5,000 × 7/12) + (3,000 × 2/12) = 82,583
Diff: 3 Type: MC
Skill: Application
28) Curtis Corporation reports net income for 2014 of $150,000. Curtis Corporation had outstanding for all
of 2014 10,000 shares of cumulative, $5, preferred shares. Curtis Corporation had outstanding for all of
2014 75,000 common shares. Earnings per share is:
A) $15.00
B) $10.00
C) $1.33
D) $2.00
Answer: C
Explanation: C) ($150,000 - $50,000)/75,000 shares = $1.33
Diff: 2 Type: MC
Skill: Application
29) Cardinal Corporation reports net income for 2013 of $100,000. Cardinal Corporation had outstanding
for all of 2013 10,000 shares of cumulative $5 preferred shares. On January 1, 2013, Cardinal had
outstanding 50,000 common shares. On October 1, 2013, Cardinal Corporation issued 20,000 common
shares for cash. Earnings per share is:
A) $1.43
B) $0.71
C) $1.82
D) $0.91
Answer: D
Explanation: D) ($100,000 - $50,000)/[50,000 + (20,000 × 3/12)] = $0.91
Diff: 3 Type: MC
Skill: Application
273
30) The denominator in the earnings per share calculation is the:
A) total number of preferred and common shares outstanding at the end of the period
B) common shares outstanding at the end of the period
C) weighted-average number of common shares outstanding during the period
D) weighted-average number of common and preferred shares outstanding during the period
Answer: C
Diff: 1 Type: MC
Skill: Knowledge
31) Morrison Manufacturing Corporation had 30,000 common shares outstanding at January 1, 2014.
During 2014, Morrison issued an additional 25,000 shares on February 1, and another 20,000 shares on
May 1. If Morrison's net income was $916,800, the company's earnings per share reported on the 2014
income statement will be:
A) $12.22
B) $13.84
C) $17.30
D) $20.00
Answer: B
Explanation: B) $916,800/[30,000 + (25,000 × 11/12) + (20,000 × 8/12)] = $13.84
Diff: 3 Type: MC
Skill: Application
32) Net income for Malt Corporation for 2015 is $426,800. Malt issued 17,000 common shares and 2,000
shares of $2, cumulative preferred shares on January 1 of 2015. On November 1 of 2015, Malt Corporation
reacquired and cancelled 3,100 of its common shares. No other share transactions occurred in 2015. What
is earnings per share for 2015?
A) $24.14
B) $30.42
C) $24.37
D) $25.65
Answer: D
Explanation: D) ($426,800 - $4,000)/[17,000 - (3,100 × 2/12)] = $25.65
Diff: 3 Type: MC
Skill: Application
274
33) Clarke Corporation had net income of $365,000, paid its required preferred dividend of $17,500 and
had no other share transactions during the year. If the weighted-average number of common shares
outstanding during the year is 69,500, the earnings per share is:
A) $5.50
B) $5.00
C) $5.25
D) $10.00
Answer: B
Diff: 3 Type: MC
Skill: Application
34) If there has been a stock split during the the year, which of the following statements is true?
A) When calculating the weighted average number of shares, it is not necessary to restate the number of
shares outstanding as if the stock split had occurred at the beginning of the year.
B) When calculating the weighted average number of shares, it is necessary to restate the number of
shares outstanding as if the stock split had occurred at the beginning of the year.
C) When calculating the weighted average number of shares, it is necessary to ignore the effect of the
stock split.
D) When calculating the weighted average number of shares, it is necessary to restate the number of
shares outstanding as if the stock split had occurred from the day of incorporation.
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
275
Table 14-7 Corporate Income Statement
For the year 2013, Foxmore Company reports the following items as part of its financial results:
Sales revenues from regular business operations $3,000,000

Cost of goods sold 900,000
Operating expenses from regular business operations 600,000
Gain on disposal of several items of property, plant, and
equipment 15,000
Income tax rate 25%
Loss on the termination of a discontinued business
segment 120,000
Losses on damage caused by earthquake 280,000
35) Refer to Table 14-7. Howe much is the total operating income/(loss)?
A) $1,235,000
B) $1,500,000
C) $1,515,000
D) $905,000
Answer: B
Explanation: B) Calculations: $3,000,000 - $900,000 - $600,000 = $1,500,000
Diff: 2 Type: MC
Skill: Application
36) Refer to Table 14-7. How much is the income/(loss) from continuing operations, before tax?
A) $1,235,000
B) $1,500,000
C) $1,515,000
D) $1,220,000
Answer: A
Explanation: A) Calculations: $3,000,000 - $900,000 - $600,000 + $!5,000 - $280,000 = $1,235,000
Diff: 2 Type: MC
Skill: Application
276
37) Refer to Table 14-7. How much of an income/(loss) should be reported for discontinuing operations
net of tax?
A) $ (78,750)
B) $ (105,000)
C) $ (120,000)
D) $ (90,000)
Answer: D
Explanation: D) $120,000 - (0.25 × $120,000) = $90,000 loss
Diff: 2 Type: MC
Skill: Application
38) On January 1, 2013 the Foxmore Company had 80,000 shares of common stock outstanding and no
preferred stock. On July 1, 2013 the company issued 40,000 shares of common stock, then on September 1,
2013 the company announced a 2 for 1 stock split to take effect on October 1. What are the number of
shares that should be used to calculate the earnings per share for 2013?
A) 200,000
B) 120,000
C) 240,000
D) 125,000
Answer: A
Explanation: A) 2 × [80,000 + (6/12 × 40,000)] = 200,000
Diff: 2 Type: MC
Skill: Application
39) On January 1, 2013 the Foxmore Company had 80,000 shares of common stock outstanding and no
preferred stock. On July 1, 2013 the company issued 40,000 shares of common stock, then on September 1,
2013 the company announced a 4 for 1 stock consolidation to take effect on October 1. What are the
number of shares that should be used to calculate the earnings per share for 2013?
A) 25,000
B) 400,000
C) 120,000
D) 300,000
Answer: A
Explanation: A) 0.25 × [80,000 + (6/12 × 40,000)] = 25,000
Diff: 2 Type: MC
Skill: Application
277
A) statement of earnings
B) interest expense
C) preferred dividends
D) segment
E) earnings per share
40) Another term used to mean income statement

Diff: 1 Type: MA
Skill: Knowledge
41) Amount of a company's net income per share of its outstanding common shares
Diff: 1 Type: MA
Skill: Knowledge
42) One of various separate divisions of a company

Diff: 1 Type: MA
Skill: Knowledge
43) A deduction from net income when calculating earnings per share
Diff: 1 Type: MA
Skill: Application
Answers: 40) A 41) E 42) D 43) C
278
44) The following accounts have been taken from Carlton Corporation's general ledger as of December 31,
2013. All data are shown before tax. The income tax rate is 40%.
Sales revenue $195,000

Interest revenue 10,000
Interest expense 8,000
Gain on sale of equipment 22,000
Operating expenses 65,000
Loss on discontinued operations 30,000
Prepare a single-step income statement for the year ended December 31, 2013. Omit earnings per share.
Answer: Carlton Corporation
Income Statement
For the Year Ended December 31, 2013
Revenues and gains:

Total revenues and gains $227,000
Expenses and losses:

Cost of goods sold $85,000
Income tax expense 27,600
Total expenses and losses 185,600
Income from continuing operations $41,400
Loss on discontinued operations, $30,000,
less tax savings, $12,000 (18,000)
Net income $ 23,400
Diff: 2 Type: SA
Skill: Application
279
45) On January 1, 2014, Slater Corporation had outstanding 100,000 common shares. On March 1, 2014,
Slater Corporation issued an additional 15,000 common shares for cash. On May 31, 2014, Slater
Corporation received land with a current market value of $100,000 in exchange for issuing 4,000 common
shares. On August 1, 2014, Slater Corporation reacquired 5,000 of its own shares by paying shareholders
$25 per share. On November 1, 2014, 2,000 of the repurchased shares were resold.
Compute the weighted-average number of shares outstanding to be used in the earnings per share
calculation.
Answer:
Jan. 1 100,000 × 2/12 = 16,667
+ 15,000
Mar. 1 115,000 × 3/12 = 28,750
+ 4,000
May 31 119,000 × 2/12 = 19,833
- 5,000
Aug. 1 114,000 × 3/12 = 28,500
+ 2,000
Nov. 1 116,000 × 2/12 = 19,333
113,083
Diff: 3 Type: SA
Skill: Application
46) Vincent Corporation began operations on January 1, 2013. On January 1, 2013, Vincent Corporation
issued 2,000 shares of $5, cumulative preferred shares. In addition, on January 1, 2013, Vincent
Corporation issued 5,000 common shares at $15 per share. On June 30, 2013, an additional 2,500 common
shares were issued to investors in exchange for land with a current market value of $40,000. On October
1, 2013, Vincent Corporation reacquired 1,000 of its own common shares at $17.50 per share. No
dividends have been declared during 2013 by Vincent Corporation. The net income for the first year of
operations is $550,000.
Compute earnings per share for 2013 for Vincent Corporation.

Answer: $550,000 - ($5 × 2,000) = $550,000 - $10,000 = $540,000
Jan 1 5,000 × 6/12 = 2,500

+ 2,500
Jun 30 7,500 × 3/12 = 1,875
- 1,000
Oct 16 6,500 × 3/12 = 1,625
6,000 weighted-average shares
= $90
Diff: 3 Type: SA
Skill: Application
280
47) London Corporation had 50,000 common shares outstanding and 10,000 shares of $5, cumulative,
preferred shares outstanding on January 1, 2015. On March 31, 2015, London Corporation sold 10,000
common shares for $25 per share. On June 30, 2015, London Corporation sold 5,000 common shares for
$26 per share. London Corporation reacquired 2,000 of its common shares for $27 per share on October 1,
2015. London Corporation reported net income for the year ended December 31, 2015, of $200,000.
a) Calculate the weighted-average number of shares outstanding for 2015.

b) Calculate earnings per share for London Corporation.
Answer:
a) Jan. 1 50,000 × 3/12 = 12,500
+ 10,000
Mar 31 60,000 × 3/12 = 15,000
+ 5,000
Jun. 30 65,000 × 3/12 = 16,250
- 2,000
Oct 1 63,000 × 3/12 = 15,750
59,500
b) $200,000 - ($5 × 10,000) =

$200,000 - $50,000 = $150,000
= $2.52
Diff: 3 Type: SA
Skill: Application
281
48) Addison Corporation reported the following income statement items for the year ended December 31,
2014:
Discontinued operations:
Operating income 15,000
Loss on disposal (65,000)
Prior-period adjustment 40,000
All items above are shown before tax effects. Addison Corporation is subject to a 35% tax rate. Assume
income from continuing operations is $442,000. Show the correct presentation of these items on the
income statement including earnings per share calculations. Assume 20,000 common shares and 5,000, $2
preferred shares were outstanding for the entire year.
Answer: Addison Corporation
Partial Income Statement

Operating income, $15,000, less
income tax, $5,250 $ 9,750
Loss on disposal, $65,000, less
income tax savings, $22,750 (42,250) (32,500)
Net income $409,500
Earnings per share

442,000-10,000/20,000 =$21.60 income per share from continuing operations
(32,500)/20,000 = $(1.62) income per share from discontinued operations
409,500-10,000/20,000 =$19.98 net income per share
Diff: 3 Type: SA
Skill: Application
282
49) Based on the given data, compute the following items for Neff Corporation for 2014:
a) Other gains and revenues

b) Other losses and expenses
c) Discontinued operations
The tax rate in effect for Neff Corporation is 35%.
1) Interest revenue during the year is $30,000.

2) Interest expense during the year is $22,500.
3) Rent revenue during the year is $65,000.
4) Loss on sale of machinery during the year is $35,000.
5) Loss from discontinued operations is $100,000 (pre tax).
6) During the current year, Neff Corporation changed from straight-line to double-declining-balance
amortization. Accumulated amortization under straight-line amortization as of January 1, 2010, was
$200,000; under double-declining-balance, accumulated amortization as of January 1, 2010, would have
been $250,000.
a) __________________________
b) __________________________
c) __________________________
Answer:
a) ($30,000 + $65,000) = $95,000
b) ($22,500 + $35,000) = $(57,500)
c) ($100,000 × 0.35) = $35,000
($100,000 - $35,000) = $(65,000)
Diff: 2 Type: SA
Skill: Application
283
50) The following information was taken from the accounting records of Winnifred Corp. at December 31,
2014. The income tax rate is 40%.
Preferred shares, $1, 50,000 shares authorized,

10,000 shares issued $ 150,000
Retained earnings, balance as of January 1, 2014 287,000
Gain on sale of discontinued segment 80,000
Sales revenue (net) 1,450,000
Selling expenses 215,000
Preferred dividends 10,000
Common dividends 70,000
Administrative expenses 112,000
Operating income, discontinued segment 33,000
Loss on expropriation of land 46,000
Common shares, unlimited number of shares authorized,
There were no share transactions in 2014.
Prepare a single step income statement and a statement of retained earnings for the year ended December
31, 2014.
Answer: Winnifred Corp.
Income Statement
Sales revenue $1,450,000

Expenses
Total expenses 1,364,800
Income before discontinued operations 85,200
Operating income, $33,000, less income tax
of $13,200 19,800
Gain on sale of discontinued operations,
$80,000, less taxes of $32,000 48,000 67,800
Net income $ 153,000
284
Winnifred Corp.
Statement of Retained Earnings
Retained earnings, January 1, 2014 $287,000

Add: net income for the current year 153,000
Less: Preferred dividends $10,000
Common dividends 70,000 (80,000)
Retained earnings, December 31, 2014 $360,000
Diff: 3 Type: SA
Skill: Application
51) The following information was taken from the accounting records of Jamboree Ltd. at December 31,
2014. The company uses a periodic inventory system. The income tax rate is 40%.
Preferred shares, $2.50, 100,000 shares authorized,

4,000 shares issued $ 150,000
Retained earnings, balance as of January 1, 2014 239,000
Purchases 975,000
Loss on sale of discontinued segment 50,000
Sales revenue (net) 1,550,000
Inventory, January 1 2014 71,000
Preferred dividends 10,000
Common dividends 13,500
Purchase returns and allowances 12,000
Operating income, discontinued segment 60,000
Purchase discounts 9,000
Common shares, unlimited number of shares authorized,
There were no share transactions in 2014. The ending inventory count showed a December 31, 2014
balance of $62,000.
Prepare a multi-step income statement and a statement of retained earnings for the year ended December
31, 2014. Present cost of goods sold as a line item with a supporting schedule for the calculation.
285
Answer: Jamboree Ltd.
Income Statement
Sales revenue $1,550,000

Gross margin $ 587,000
Operating expenses:
Selling expenses $ 232,000
Total operating expenses 339,000
Operating income $ 248,000
Other gains and (losses):
Loss on expropriation of land (35,000)
Income from continuing operations before tax $213,000
Operating income, $60,000, less income tax
of $24,000 36,000
Loss on sale of discontinued operations,
$50,000, less tax saving of $20,000 (30,000) 6,000
Net income $ 133,800
Cost of Goods Sold Schedule

Beginning inventory $ 71,000
Purchases $ 975,000
Less: Purchase returns and allowances (12,000)
Purchase discounts (9,000)
Net purchases 954,000
Cost of goods available for sale $ 1,025,000
Less: Ending inventory (62,000)
Jamboree Ltd.
Statement of Retained Earnings
Retained earnings, January 1, 2014 $239,000

Add: net income for the current year 133,800
Less: Preferred dividends $10,000
Common dividends 13,500 (23,500)
Retained earnings, December 31, 2014 $349,300
Diff: 3 Type: SA
Skill: Application
286
52) The following accounts have been taken from Buxton Corporation's general ledger as of December 31,
2014. All data are shown before tax. The income tax rate is 40%.

Loss on discontinued operations 20,000
Prepare a single-step income statement for the year ended December 31, 2014. Omit earnings per share.
Answer: Buxton Corporation
Income Statement
Revenues and gains:

Total revenues and gains $238,000
Expenses and losses:

Total expenses and losses 186,400
Loss on discontinued operations, $20,000,
less tax savings, $8,000 (12,000)
Net income $ 39,600
Diff: 2 Type: SA
Skill: Application
287
53) Lindall Corporation reported the following income statement items for the year ended December 31,
2014:
Operating income 6,000
Loss on disposal (50,000)
Prior-period correction 40,000
All items above are shown before tax effects. Lindall Corporation is subject to a 25% tax rate. Assume
income from continuing operations is $396,000. Show the correct presentation of these items on the
income statement including earnings per share calculations. Assume 50,000 common shares and 5,000, $4.
preferred shares were outstanding for the entire year.
Answer: Lindall Corporation
Partial Income Statement

Operating income, $6,000, less
income tax, $1,500 $ 4,500
Loss on disposal, $50,000, less
income tax savings, $12,500 (37,500) (33,000)
Net income $363,000
Earnings per share

396,000-20,000/50,000 =$7.52 income per share from continuing operations
(32,500)/50,000 = $(0.66) income per share from discontinued operations
363,000-20,000/50,000 =$6.86 net income per share
Diff: 3 Type: SA
Skill: Application
288
54) On January 1, 2014, Bedrock Corporation had outstanding 90,000 common shares. On March 1, 2014,
Bedrock Corporation issued an additional 5,000 common shares for cash. On May 31, 2014, Bedrock
Corporation received equipment with a current market value of $60,000 in exchange for issuing 3,000
common shares. On August 1, 2014, Bedrock Corporation reacquired 5,000 of its own shares by paying
shareholders $25 per share. On November 1, 2014, 1,000 of the repurchased shares were resold.
Compute the weighted-average number of shares outstanding to be used in the earnings per share
calculation.
Answer:
Jan. 1 90,000 × 2/12 = 15,000
+ 5,000
Mar. 1 95,000 × 3/12 = 23,750
+ 3,000
May 31 98,000 × 2/12 = 16,333
- 5,000
Aug. 1 93,000 × 3/12 = 23,250
+ 1,000
Nov. 1 94,000 × 2/12 = 15,667
94,000
Diff: 3 Type: SA
Skill: Application
Objective 14-4
1) Adjustments for errors in prior periods flow through the income statement .
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
Objective: 14-4 Prepare a statement of retained earnings and a statement of shareholders' equity
2) Adjustments for errors in prior periods affect retained earnings and therefore appear on the statement
of retained earnings.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
3) An appropriation of retained earnings involves setting cash aside for a specific purpose.
Answer: FALSE
Diff: 2 Type: TF
Skill: Knowledge
289
4) An appropriation of retained earnings requires a journal entry.
Answer: TRUE
Diff: 2 Type: TF
Skill: Knowledge
5) Under Accounting Standards for Private Enterprises (ASPE) a change in accounting policy should be
applied retrospectively by adjusting period financial statements.
Answer: FALSE
Diff: 2 Type: TF
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Knowledge
6) Changing an estimate, such as the amount of uncollectible accounts receivable, should be applied
prospectively.
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-01 Identify and apply accounting concepts and principles found in the Conceptual Framework
Skill: Knowledge
7) An adjustment for an error in a prior year should be reported in the:

A) statement of income after income from continuing operations
B) statement of income after income from discontinued operations
C) statement of retained earnings as an adjustment to the beginning balance
D) statement of retained earnings as an adjustment to net income
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
8) The entry to appropriate retained earnings for factory expansion includes a:

A) debit to retained earnings
B) credit to retained earnings
C) debit to retained earnings appropriated for factory expansion
D) credit to cash
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
290
9) Restrictions on retained earnings:
A) may take the form of a voluntary appropriation
B) must be disclosed by a journal entry
C) are reported in the liability section of the balance sheet
D) are only used for tax purposes
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
10) An error on the 2012 income statement is discovered in 2014. The adjustment to correct the error will
appear on the:
A) 2014 income statement
B) 2014 statement of retained earnings
C) 2012 income statement
D) 2012 statement of retained earnings
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
11) A change in accounting policy should be:

A) applied prospectively, prior periods should be restated, and the facts should be disclosed in the notes
B) applied retrospectively, prior periods should be restated, and the facts should be disclosed in the notes
C) requires note disclosure only
D) does not require any special treatment
Answer: B
Diff: 2 Type: MC
Skill: Knowledge
12) The payment of a cash dividend to shareholders appears on which financial statement?
A) income statement
B) balance sheet
D) either the balance sheet or the income statement
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
291
13) The declaration of a common stock dividend will appear on which of the following financial
statements?
A) income statement
B) balance sheet
D) either the balance sheet or the income statement
Answer: C
Diff: 2 Type: MC
Skill: Knowledge
14) Which of the following BEST describes the appropriation of retained earnings?
A) Earmarking certain amounts for specific business purposes, such as for growth or expansion projects
B) Restricting cash dividends or treasury stock purchases so that the company maintains adequate levels
of equity
C) Designating certain amounts of retained earnings for cash dividends to be paid out to shareholders
D) Limiting company transactions in order to boost earnings and profits
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
15) Which of the following would be a reason for a company to appropriate a portion of retained
earnings?
A) To ensure that the business does not take on too much debt
B) To increase the amount of earnings available for dividends
C) To help the company control levels of operating expenses
D) To limit the amount of retained earnings available for dividends, in order to retain sufficient funds for
growth
Answer: D
Diff: 2 Type: MC
Skill: Knowledge
16) Which of the following statements is true?

A) Appropriations of retained earnings require journal entries, but restrictions on retained earnings do
not.
B) No journal entries are needed to either appropriate or restrict retained earnings.
C) Both appropriations and restrictions of retained earnings require journal entries.
D) Restrictions on retained earnings must be journalized, but appropriations do not need to be
journalized.
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
292
A) prior-period adjustment
B) appropriation of retained earnings
C) deficit
17) Debit balance in retained earnings

Diff: 1 Type: MA
Skill: Knowledge
18) A correction to retained earnings for an error of an earlier period

Diff: 1 Type: MA
Skill: Knowledge
19) Restriction on retained earnings that is recorded by a formal journal entry

Diff: 1 Type: MA
Skill: Knowledge
Answers: 17) C 18) A 19) B
293
20) The shareholders' equity of Orion Corporation as of December 31, 2013, follows:
Preferred shares, $3, noncumulative 8,000 shares

Common shares, unlimited shares authorized,
80,000 shares issued 1,000,000
Total contributed capital $1,157,500
Orion Corporation completed the following transactions during 2014:
Mar. 5 Declared the required annual cash dividend on preferred shares and a $0.40 per share cash
26 Paid the cash dividend that was declared on March 5.
May 2 Purchased 3,000 of its own common shares for $17.50 per share.
Jul. 5 Distributed a 2-for-1 stock split on the common shares.
Dec. 31 Closed out the income summary account with a credit balance of $287,000.
Prepare the shareholders' equity section of the balance sheet of Orion Corporation as of December 31,
2014. Do not prepare journal entries for the above transactions.
Answer: Orion Corporation
Partial Balance Sheet
December 31, 2014
Shareholders' Equity
Preferred shares $3, noncumulative, 8,000 shares

Explanation: Common shares outstanding = (80,000 - 3,000) × 2 = 154,000
Common shares = $1,000,000 - (3,000 × $12.50) = $962,500
RE = $405,800 - (3,000 × $3) - (80,000 × $0.40) - (3,000 × (17.50 -$12.50)) + $287,000 = $636,800
Diff: 3 Type: SA
Skill: Application
294
21) Qualified Research Inc. ended 2013 with Retained Earnings of $55,000. During 2014, the company
earned net income of $115,000 and declared dividends of $25,000. The company ended 2013 with $25,000
in common shares and $20,000 in $1 preferred shares. Additional common shares were sold in 2014 for
$15,000. Complete Qualified Research Inc's statement of shareholders' equity for the year ended
December 31, 2014.
Qualified Research Inc.

Statement of Shareholders' Equity
Total
Common Preferred Retained Shareholders'
Shares Shares Earnings Equity
Balance,
December 31,
2013
Balance
December 31,
2014
Answer: Qualified Research Inc.

Total
Balance,
December 31,
2013 25,000 20,000 55,000 100,000
Issuance of
shares 15,000 15,000
Net income 115,000 115,000
Cash dividends (25,000) (25,000)
Balance
December 31,
2014 40,000 20,000 145,000 205,000
Diff: 2 Type: SA
Skill: Application
295
22) JenStar Research Inc. ended 2013 with Retained Earnings of $30,000. During 2014, the company
earned net income of $135,000 and declared dividends of $15,000. The company ended 2013 with $80,000
in common shares and $10,000 in $2 preferred shares. Additional common shares were sold in 2014 for
$20,000. Complete JenStar Research Inc's statement of shareholders' equity for the year ended December
31, 2014.
JenStar Research Inc.

Total
Balance,
December 31,
2013
Balance
December 31,
2014
Answer: JenStar Research Inc.

Total
Balance,
December 31,
2013 80,000 10,000 30,000 120,000
Issuance of
shares 20,000 20,000
Net income 135,000 135,000
Cash dividends (15,000) (15,000)
Balance
December 31,
2014 100,000 10,000 150,000 260,000
Diff: 2 Type: SA
Skill: Application
296
23) The shareholders' equity of Saturn Corporation as of December 31, 2013, follows:
Preferred shares, $4, noncumulative 20,000 shares

100,000 shares issued 1,000,000
Saturn Corporation completed the following transactions during 2014:
Feb. 6 Declared the required annual cash dividend on preferred shares and a $0.20 per share cash
26 Paid the cash dividend that was declared on February 6.
Jun. 4 Purchased 4,000 of its own common shares for $15.25 per share.
Jul. 5 Distributed a 2-for-1 stock split on the common shares.
Dec. 31 Closed out the income summary account with a debit balance of 48,000.
Prepare the shareholders' equity section of the balance sheet of Saturn Corporation as of December 31,
2014. Do not prepare journal entries for the above transactions.
Answer: Saturn Corporation
Partial Balance Sheet
December 31, 2014
Shareholders' Equity
Preferred shares $4, noncumulative, 20,000 shares

Explanation: Common shares outstanding = (100,000 - 4,000) × 2 = 192,000
Common shares = $1,000,000 - (4,000 × $10.00) = $960,000
RE = $616,900 - (4,000 × $4.00) - (100,000 × $0.20) - (4,000 × (15.25 -$10.00)) - $48,000 = $511,900
Diff: 3 Type: SA
Skill: Application
297
Objective 14-5
1) Other comprehensive income must be reported under international financial reporting standards
(IFRS).
Answer: TRUE
Diff: 2 Type: TF
Learning Outcome: A-18 Compare and contrast IFRS and ASPE
Skill: Knowledge
Objective: 14-5 Identify the impact on the income statement and the statement of shareholders' equity of IFRS
2) Which of the following is a key difference between income statements prepared under international
financial reporting standards (IFRS) and accounting standards for private enterprises(ASPE)?
A) IFRS requires EPS information to be disclosed on the income statement whereas ASPE does not.
B) IFRS does not require EPS information to be disclosed on the income statement whereas ASPE does.
C) IFRS recommends disclosure of EPS information on the income statement whereas ASPE requires it.
D) IFRS requires more detailed EPS information on the income statement than does ASPE.
Answer: A
Diff: 2 Type: MC
Skill: Knowledge
3) Which of the following is a correct statement with reference to the International Financial Reporting
Standards (IFRS)?
A) Accounting policy changes are not limited to those providing more relevant and reliable information.
B) Earnings per share information may be presented in the notes to the financial statements rather than
on the income statement.
C) The statement of retained earnings is required.
D) To correct an error, financial information does not have to be restated retroactively if it is impractical
to do so.
Answer: D
Diff: 3 Type: MC
Skill: Knowledge
4) Which of the following is an incorrect statement with reference to the International Financial
Reporting Standards (IFRS)?
A) Accounting policy changes are limited to those providing more relevant and reliable information.
B) Earnings per share information must be presented on the income statement.
C) The statement of retained earnings is not required.
D) To correct an error, financial information must be restated retroactively.
Answer: D
Diff: 3 Type: MC
Skill: Knowledge
298
A) relevant and reliable

B) revenue recognition and matching
C) other comprehensive income
5) Income disclosure required by IFRS but not ASPE

Diff: 1 Type: MA
Skill: Knowledge
6) IFRS criteria for allowing changes in accounting policy

Diff: 1 Type: MA
Skill: Knowledge
Answers: 5) C 6) A
7) What is the impact of IFRS on the income statement and statement of shareholders' equity?
Answer: Companies that report under IFRS must present EPS information on their income statement and
must report comprehensive income in a statement of comprehensive income.
Under IFRS, the statement of shareholders' equity is called the statement of changes in equity. No
statement of retained earnings is prepared.
Diff: 2 Type: ES
299
Objective 14-6
1) Sampson Corporation reports the following transactions for 2013:
Jan. 10 Sold 5,000 shares of $4.50, noncumulative, preferred shares for $85 per share.
Feb. 19 Sold 3,000 common shares for $12 per share.
Oct. 12 Declared a 15% stock dividend on the common shares. The current
market price of the common shares is $15 per share. Sampson
Corporation has 100,000 common shares outstanding on October 12.
Nov. 15 Distributed the stock dividend declared on October 12.
Dec. 15 Declared the annual dividend required on the preferred shares and a
$0.50 per share dividend on the common shares. Sampson Corporation
currently has 20,000 preferred shares outstanding.
Prepare journal entries for the above transactions.

Jan. 10 Cash 425,000
Preferred Shares 425,000
Feb. 19 Cash 36,000

Oct. 12 Retained Earnings 225,000

Nov. 15 Common Stock Dividend Distributable 225,000

Dec. 15 Retained Earnings 147,500

Dividends Payable-Preferred 90,000
Dividends Payable-Common 57,500
Diff: 2 Type: SA
Skill: Application
Objective: 14-6 Multiple objectives same chapter
300

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Accounting Volume 2 Canadian 9th Edition Horngren Test Bank

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Accounting Volume 2 Canadian 9th

Edition Horngren Test Bank

1) The retained earnings account is a reservoir of cash.

3) Retained earnings can be invested by shareholders.

4) All dividends declared by a corporation require a payment of cash.

7) In a stock dividend equity moves from common shares to retained earnings.

10) Stock dividends decrease total shareholders' equity.

14) A stock split reduces the number of outstanding shares.

15) In a 3 for 1 stock split, the number of shares outstanding triples.

16) A reverse stock split reduces the number of outstanding shares.

17) The declaration of a stock dividend has no effect on Retained earnings.

22) Stock dividends:

24) When a corporation declares a stock dividend:

25) Stock dividends increase ________ and decrease ________.

31) A stock dividend will:

32) Common stock dividend distributable is a:

51) A 2-for-1 stock split:

63) A proportional distribution by a corporation of its own shares to its shareholders

Answers: 57) A 58) D 59) B 60) G 61) F 62) C 63) C 64) E

July 15 Common Stock Dividend Distributable 94,500

Preferred shares, $3, noncumulative, 10,000 shares

Downing Corporation reported the following transactions during November, 2013:

Date Total Contributed Capital Total Shareholders' Equity

Preferred shares, $5, cumulative, 7,000 shares

Consider each of the following cases independently:

3) Retained Earnings 292,500

Stock Split Stock Dividend

Prepare journal entries for the above transactions.

Feb. 20 Cash 330,000

Oct. 13 Retained Earnings 140,000

Nov. 16 Common Stock Dividend Distributable 140,000

Dec. 16 Retained Earnings 125,000

2) Treasury shares are classified on the balance sheet as a contra liability.

3) Only outstanding common shares have a vote.

Total contributed capital 802,500

22) The sale of a corporation's repurchased shares:

23) The sale of a corporation's repurchased shares:

Common shares, 140,000 shares authorized,

Answers: 28) A 29) B

Aug. 15 Cash 24,000

Oct. 30 Cash 26,400

Common shares, 100,000 shares authorized, 75,000 issued $2,175,000

In January 2014, Arrow Corporation reported the following transactions:

Record journal entries for the above transactions.

Common shares, 100,000 shares authorized, 50,000 issued $1,200,000

In 2014, Arrow Corporation reported the following transactions:

Record journal entries for the above transactions.

Mar. 20 Common Shares 48,000

6) Discontinued operations is shown net of tax on the income statement.

10) Earnings per share is a key measure of business success.

19) Losses due to restructuring costs would be shown as:

Sales revenues from regular business operations $3,000,000

40) Another term used to mean income statement

42) One of various separate divisions of a company

Answers: 40) A 41) E 42) D 43) C

Sales revenue $195,000

Revenues and gains:

Expenses and losses:

Compute earnings per share for 2013 for Vincent Corporation.

Jan 1 5,000 × 6/12 = 2,500

a) Calculate the weighted-average number of shares outstanding for 2015.

b) $200,000 - ($5 × 10,000) =

Income from continuing operations $442,000

25) Stock dividends increase and decrease .