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COMPREHENSIVE EXAMINATION -CORPORATION ACCOUNTING

MULTIPLE CHOICE - Conceptual


The first twenty number should be answered using the following:

A. Only the first statement is true.


B. Only the second statement is true.
C. Both statements are true.
D. Both statements are false.

1. A corporation is a separate entity for accounting purposes but not for legal purposes. F
The financial loss that each shareholder can incur is usually limited to the investment made by
the shareholder. T

2. The initial owners of stock of a newly formed corporation are called directors. F
By-laws are part of the articles of incorporation. F

3. Organizational expenses are classified as intangible assets on the Statement of Financial


Position. F
Retained earnings represents past net incomes less past dividends, the balance of this account
is presented in the income statement. F

4. The number of outstanding shares of stock is equal to the number of shares authorized minus
the number of shares issued. F
The amount of capital paid in by the shareholders is called legal capital. F

5. A corporation acts under its own name rather than in the name of its shareholders. T
A shareholder has the right to vote in the election of the board of directors. T

6. As soon as a corporation is authorized to sell stock, under the journal entry method, an entry
should be made recording the total value of the shares authorized. T
When no-par value stock does not have a stated value, the entire proceeds from the issuance of
the stock becomes legal capital. T

7. Each shareholder has a separate capital account in the shareholders' equity section of the
Statement of Financial Position. F
The number of ordinary shares outstanding can never be greater than the number of shares
issued. T
8. If the dividend amount of preferred stock, P50 par value, is quoted as 8%, then the dividends
per share would be P4. T
Preferred stock with a preferential right to dividends in arrears is referred to as participating
preference share. F

9. Although preferred shareholders have a greater chance of receiving a regular dividend,


common shareholders have a greater chance of receiving large dividends. T
When the Board of Directors declares a cash or stock dividend, this action decreases assets
and retained earnings. F

10. A corporation is a legal entity separate from its owners. T


Corporations are subject to substantially fewer regulations and laws than are proprietorships
and partnerships. F

11. Organizational expenses of a corporation often include legal fees and promoter fees. T
Ordinary shareholders always share equally with all other shareholders in all dividends. F

12. Shares of stock are attractive to investors because these are easily transferable and
shareholders are not liable for the corporation's actions and debts. T
The price at which a share of stock is bought or sold is called par value. F

13. Paid-in capital is the total amount of cash and other assets the corporation receives from its
stockholders in exchange for common stock. T
Authorized stock is the total number of shares outstanding. F

14. If a corporation is authorized to issue 1,000 shares of P50 ordinary stock, it is said to have
P50,000 of stock outstanding. F
Minimum legal capital requirements are intended to protect creditors by requiring a minimum
level of net assets. T

15. Stated value stock is par stock that is assigned a value per share by the corporation's Board
of Directors. F
A corporation can issue two kinds of stock – ordinary and preferred. T

16. Special rights often granted to preference shares include a preference for receiving dividends
and for the distribution of assets if the corporation is liquidated. T
Another key preference rights for preferred stock is the right to vote. F

17. Cumulative preferred stock carries the right to be paid both current and all prior periods' unpaid
dividends before any dividends are paid to ordinary shareholders. T
Retained earnings generally consist of a company's cumulative net income less any net losses
and dividends declared since its inception. T
18. The term restricted retained earnings refers to both statutory and contractual restrictions. T
Appropriating retained earnings reduces total shareholders’ equity. F

19. Dividends may be declared and paid in cash, property, or stock. T


Cash dividends are not a liability of the corporation until they are declared by the Board of
Directors.T

20. The amount of a cash dividend liability is recorded on the date of record because it is on that
date that the persons or entities who will receive the dividend are identified. F
A 10% stock dividend will increase the number of shares outstanding but the book value per
share will decrease.T

21. The residual interest in a corporation belongs to the

A. management
B. creditors
C. preferred shareholders
D. ordinary stockholders

22. The pre-emptive right enables a shareholder to

A. share proportionately in any new issues of stock of the same class.


B. receive cash dividends before other classes of stock without the pre-emptive right.
C. sell capital stock back to the corporation at the option of the shareholder.
D. receive the same amount of dividends on a percentage basis as the preferred
shareholders.

23. Total shareholders' equity represents

A. a claim to specific assets contributed by the owners.


B. the maximum amount that can be borrowed by the enterprise.
C. a claim against a portion of the total assets of an enterprise.
D. only the amount of earnings that have been retained in the business.

24. Creditors have no right over the personal assets of the investor(s) of a/an

A. sole proprietorship
B. general partnership
C. limited partnership
D. corporation

25. Primary source(s) of shareholders' equity is

A. income retained by the corporation.


B. appropriated retained earnings.
C. contributions by stockholders.
D. both A and c
26. Shareholders' equity is generally classified into two major categories:

A. contributed capital and appropriated capital.


B. appropriated capital and retained earnings.
C. retained earnings and unappropriated capital.
D. contributed capital and earned capital.

27. The investor receives a proportionate share in the profits earned by the business except for the

A. proprietor
B. capitalist partner
C. industrial partner
D. shareholder

28. When a corporation issues its capital stock in payment for services, the best appropriate basis
for recording the transaction is the

A. market value of the services received.


B. par value of the shares issued.
C. . market value of the shares issued if market value of services received is not known.
D. Any of these provides an appropriate basis for recording the transaction.

29. The amount of equity distributed to shareholders out of its profitable operations is called

A. share capital
B. subscribed capital
C. retained earnings
D. dividends

30. When treasury share is purchased for more than the par value of the stock and the cost method
is used to account for treasury share, what account(s) should be debited?

A. Treasury share for the par value and paid-in capital in excess of par for the excess of the
purchase price over the par value.
B. Paid-in capital in excess of par for the purchase price.
C. Treasury share for the purchase price.
D. Treasury share for the par value and retained earnings for the excess of the purchase
price over the par value.

31. Two financial requirements that the Board of Directors must consider when declaring cash
dividends are

A. sufficient retained earnings and no treasury shares


B. sufficient cash and sufficient retained earnings
C. sufficient cash and sufficient additional paid in capital
D. sufficient retained earnings and sufficient premium on stock

32. Cash dividends are paid on the basis of the number of shares
A. authorized.
B. outstanding.
C issued.
D. outstanding less the number of treasury shares.

33. Fame Corporation owns 4,000,000 shares of stock in BPI Corporation. On December 31, 2013,
Fame distributed these shares of stock as a dividend to its stockholders. This is an example of a

A. property dividend.
B. liquidating dividend.
C. stock dividend.
D. cash dividend.

34. A dividend which is a return to stockholders of a portion of their original investments is a

A. scrip dividend.
B. liability dividend.
C. property dividend.
D. liquidating dividend.

35. If management wishes to "capitalize" part of the earnings, it may issue a

A. cash dividend.
B. property dividend.
C. stock dividend.
D. liquidating dividend.

36. Which dividends do not reduce shareholders' equity?

A. Cash dividends
B. Property dividends
C. Stock dividends
D. Liquidating dividends

37. The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding

A. increases ordinary shares outstanding and increases total shareholders' equity.


B. decreases retained earnings but does not change total shareholders' equity.
C. may increase or decrease paid-in capital in excess of par but does not change total
shareholders' equity.
D. increases retained earnings as well as total shareholders' equity.

38. At the date of declaration of a small ordinary share dividend, the entry should not include

A. credit to Ordinary Share Dividend Payable.


B. a credit to Paid-in Capital in Excess of Par.
C. a debit to Retained Earnings.
D. All of these are acceptable.

39. The balance in Ordinary Share Dividend Payable should be reported as a(n)

A. reduction from ordinary shares issued.


B. addition to ordinary share capital.
C. . current liability.
D. contra current asset.

40. The rate of return on common stock equity is calculated by dividing

A. net income less preferred dividends by average ordinary shareholders’ equity.


B. net income by average ordinary shareholders’ equity, if there are no preference shares.
C. net income less preferred dividends by ending ordinary shareholders’ equity.
D. a and b are acceptable.

41. Dividends are not paid on

A. noncumulative preferred stock.


B. treasury shares.
C. nonparticipating preferred stock.
D. Dividends are paid on all of these.

42. Noncumulative preferred dividends in arrears

A. are not paid or disclosed.


B. must be paid before any other cash dividends can be distributed.
C. are disclosed as a liability until paid.
D. are paid to preferred stockholders if sufficient funds remain after payment of the current
preferred dividend.

43. How should a "gain" from the sale of treasury stock be reflected when using the cost method of
recording treasury stock transactions?

A. As paid-in capital from treasury stock transactions.


B. As ordinary earnings shown on the income statement.
C. As an increase in the amount shown for common stock.
D. As an extraordinary item shown on the income statement.

44. Which of the following best describes a possible effect of treasury stock transaction by a
corporation?

A. May increase but not decrease retained earnings.


B. May increase net income if the cost method is used.
C. May decrease but not increase retained earnings.
D. May decrease but not increase net income.
45. The corporation may bids and pay for the delinquent subscription if there are no bidders. The
entry will require a debit to

A. treasury shares at the delinquent amount.


B. subscribed share capital at the delinquent subscription price.
C. paid in capital at the premium price.
D.. debited to share capital at the par value.

46. At the date of the financial statements, ordinary shares issued would exceed outstanding
common stock shares because of the

A. subscription price being higher than the par value


B. declaration of a stock dividend.
C. purchase of treasury shares.
D. payment in full of subscribed stock.

47. If Victory Corporation issues 2,000 ordinary shares of P5 par value stock for P140,000,

A. Common Stock will be credited for P140,000.


B. Paid-In Capital in Excess of Par Value will be credited for P10,000.
C. Paid-In Capital in Excess of Par Value will be credited for P130,000.
D. Cash will be debited for P130,000
.
48 Which of the following represents the largest number of ordinary shares?

A Treasury shares
B. Issued shares
C. Outstanding shares
D. Authorized shares

49. When preferred stock is cumulative, preferred dividends not declared in a period are

A. considered a liability.
B. called dividends in arrears.
C. distributions of earnings.
D. never paid.

50. Which of the following is not a right or preference associated with preferred stock?

A. The right to vote


b. First claim to dividends
C. Preference to corporate assets in case of liquidation
D. To receive dividends in arrears before common stockholders receive dividends
MULTIPLE CHOICE—Problem Solving
51. Sun Corporation was organized on January 1, 2013, with an authorization of 400,000 ordinary
shares of stock with a par value of P6 per share. During 2013, the corporation had the
following capital transactions:

January 5 issued 225,000 shares @ P10 per share


July 28 issued 30,000 shares for land acquired with an appraised value of P250,000

August 15 issued 10,000 shares for consultancy services rendered by Trias A- 1 Consultancy
Services for a bill received by Sun Corporation for P120,000.

What is the total amount of additional paid-in capital as of December 31, 2014?

A. P900,000
B. P1,030,000
C. P70,000
D. P60,000

52. A corporation has the following account balances: Ordinary share capital, P10 par value,
P300,000; Paid-in Capital in Excess of Par Value, P1,350,000; Retained earnings deficit of
P100,000. Based on this information, the

A. legal capital is P300,000.


B. number of shares issued and outstanding are 20,000.
C. contributed capital is P1,350,000
D. total shareholders’ equity is P1,750,000

Use the following information for questions 53–54.

Starbright Corporation’s December 31, 2013 statement of Financial Position showed the
following:

8% preferred stock, P20 par value, cumulative, 20,000 shares


authorized; 10,000 shares issued P 200,000
Ordinary stock, P10 par value, 2,000,000 shares authorized;
1,300,000 shares issued, 1,280,000 shares outstanding 13,000,000
Paid-in capital in excess of par value – preferred shares 40,000
Paid-in capital in excess of par value – ordinary shares 18,000,000
Retained earnings 5,100,000
Treasury stock (20,000 shares) 420,000

53. Total paid-in capital was

A. P31,240,000.
B. P31,660,000.
C. P30,820,000.
D. P18,040,000.

54. Total shareholders’ equity was

A. P36,760,000.
B. P31,240,000.
C. P36,340,000.
D. P35,920,000.

55. Moon Inc. has 5,000 shares of 6%, P100 par value, cumulative preferred stock and 50,000
shares of P1 par value common stock outstanding at December 31, 2013. What is the annual
dividend on the preferred stock?

A. P60 per share


B. P30,000 in total
C. P3,000 in total
D. P0.60 per share

56. Franco Company acquired 16,000 shares of its own ordinary shares at P20 per share on
February 5, 2013, and sold 8,000 of these shares at P27 per share on August 9, 2014. The
market value of Franco's stock was P24 per share at December 31, 2013, and P25 per share
at December 31, 2014. The cost method is used to record treasury stock transactions. What
account(s) should Franco credit in 2014 to record the sale of 8,000 shares?

A. Treasury Stock for P216,000.


B. Treasury Stock for P160,000 and Paid-in Capital from Treasury Stock for P56,000.
C. Treasury Stock for P160,000 and Retained Earnings for P56,000.
D. Treasury Stock for P192,000 and Retained Earnings for P24,000.

57. An analysis of shareholders' equity of Knowledge Corporation as of January 1, 2014, is as


follows:

Ordinary share capital, par value P20; authorized 200,000 shares;


issued and outstanding 180,000 shares P3,600,000
Paid-in capital in excess of par 1,800,000
Retained earnings 1,520,000
Total P6,920,000

Knowledge uses the cost method of accounting for treasury stock and during 2014 entered into
the following transactions:

Acquired 5,000 shares of its stock for P150,000.


Sold 4,000 treasury shares at P35 per share.
Sold the remaining treasury shares at P20 per share.

Assuming no other equity transactions occurred during 2014, what should Knowledge
report at December 31, 2014, as total additional paid-in capital?

A. P1,790,000
B. P1,800,000
C. P1,810,000
D. P1,830,000

58. Ten thousand shares of P10 par, 8% cumulative, participating preferred stock are outstanding.
If dividends have been passed for the preceding 2 years and no dividend has been paid in the
current year, how much should the preferred shareholders receive as dividends before a
dividend can be declared on ordinary shares for the current year?

A. P32,000
B. P24,000
C. P80,000
D. ordinary shares should first receive dividends

59. On June 30, 2014, when Vida Corporation’s stock was selling at P65 per share, its
equity accounts were as follows:

Share Capital (par value P25; 40,000 shares issued P1,000,000


Premium on share capital 600,000
Retained earnings 4,200,000
If a 100% stock dividend were declared and distributed, share capital will become

A. P1,000,000.
B. P2,600,000.
C. P2,000,000.
D. P3,200,000.

60. The shareholders' equity section of Melrose Corporation as of December 31, 2013, was as
follows:

Ordinary share capital, par value P2; authorized 20,000 shares;


issued and outstanding 10,000 shares P 20,000
Paid-in capital in excess of par 30,000
Retained earnings 90,000
$140,000
On March 1, 2014, the board of directors declared a 10% stock dividend, and accordingly
1,000 additional shares were issued. On March 1, 2014, the fair market value of the stock
was P6 per share. For the two months ended February 28, 2014, Melrose sustained a net
loss of P10,000.
What amount should Melrose report as retained earnings as of March 1, 2014?

A. P74,000.
B. P78,000.
C. P84,000.
D. P88,000.

61 .Presented below is information related to Rio Grande, Inc.:

December 31,
2014 2013
Ordinary Share Capital P 75,000 $ 60,000
6% Preference Shares 350,000 350,000
Retained earnings (includes net income for current year) 90,000 75,000
Net income for year 45,000 32,000
What is Rio Grande’s rate of return on ordinary shares equity for 2014?
A. 30.0%
B. 16%
C. 15.4%
D. 13.8%

Use the following information for questions 62 and 63.

The following data are provided:

December 31,
2014 2013
10% Cumulative preferred shares, P50 par P200,000 P200,000
Ordinary shares, P5 par 240,000 180,000
Additional paid-in capital 160,000 130,000
Retained earnings 480,000 430,000
Net income 150,000

Additional information:

On May 1, 2014, 12,000 ordinary shares of stock were issued. The preferred dividends were not
declared during 2014. The market price of the ordinary stock was P100 at December 31, 2014.

62. The rate of return on ordinary shares of stock for 2014 is

A. 150 ÷ 800.
B. 150 ÷ 880.
C. 130 ÷ 800.
D. 130 ÷ 880.

63. The book value per share of common stock at 12/31/14 is

A. 860 ÷ 48.
B. 400 ÷ 48.
C. 660 ÷ 48.
D. 880 ÷ 44.

Use the following information for questions 61 through 63.

Tommy, Inc. has outstanding 200,000 shares of P2 par ordinary shares and 40,000 shares of
no-par 8% preferred stock with a stated value of P5. The preferred stock is cumulative and
nonparticipating. Dividends have been paid yearly except for the past two years and the current
year.

64. Assuming that P100,000 will be distributed as a dividend in the current year, how much will the
ordinary shareholders receive?

A. Zero.
B. P52,000.
C. P68,000.
D. P84,000.

65. Assuming that P42,000 will be distributed as a dividend in the current year, how much will the
preferred sharehollders receive?

A. P14,000.
B. P16,000.
C. P32,000.
D. P42,000.

66. Assuming that P122,000 will be distributed, and the preferred stock is also participating, how
much will the ordinary shareholders receive?

A. P74,000.
B. P60,000.
C. P62,000.
D. P32,000.

67. In 2013, Good Corp. acquired 15,000 shares of its own P10 par value ordinary share at P18 per
share. In 2014, David issued 10,000 of these shares at P25 per share. David uses the cost
method to account for its treasury stock transactions. What accounts and what amounts should
David credit in 2014 to record the issuance of the 10,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
A. . P180,000 P70,000
B. P180,000 P 70,000
C. P240,000 P10,000
D. P170,000 P70,000 $10,000

68. Pearson Corp. owned 20,000 shares of Dixieland Corp. purchased in 2010 for P420,000. On
December 15, 2014, Pearson declared a property dividend of all of its Dixieland shares on the
basis of one share of Dixieland for every 10 shares of Pearson ordinary shares held by its
stockholders. The property dividend was distributed on January 15, 2015. On the declaration
date, the aggregate market price of the Dixieland shares held by Pearson was P700,000. The
entry to record the declaration of the dividend would include a debit to Retained Earnings of

A. P0.
B. P280,000.
C. P420,000.
D. P700,000.

69. At December 31, 2013 and 2014, Slane Corp. had outstanding 9,000 shares of P100 par
value 8% cumulative preferred stock and 30,000 shares of P10 par value ordinary shares of
stock. At December 31, 2013, dividends in arrears on the preferred stock were P36,000. Cash
dividends declared in 2014 totaled P135,000. What amounts were payable on each class of
stock?

Preference Shares Ordinary shares


A. P72,000 P63,000
B. P99,000 P36,000
C. P108,000 P27,000
D. P135,000 P0

70. At December 31, 2013 the shareholders’ equity section showed the following:

Ordinary share capital, P5 par value; 1,320,000 shares issued


and 1,200,000 shares outstanding ............................... P6,600,000
Additional paid-in capital ...................................................... 1,400,000
Retained earnings.................................................................. 500,000
Treasury stock, (120,000 shares) …………………………… . 700,000
The book value per share is

a. P5.91.
b. P6.50.
c. P7.08.
d. P6.44.