Reviewer: Shareholders Equity (SHE)

1. Shareholders’ equity is?

a) The financial obligations of the company
b) The rights to the assets of the business once the liabilities have been
met
c) Assets plus liabilities
d) All of these answers
2. Treasury share is
a) ordinary share issued by the government
b) preference share issued by the government
c) ordinary share that has been repurchased and is being held by the
issuing company
d) a corporation's ordinary share outstanding
3. The authorized capitalization of a corporation may be accounted for in two
ways. The existence of an “Unissued share capital” account in the books
of a corporation provides evidence that the entity uses the
a) memorandum method
b) journal entry method
c) a or b
d) indeterminable
4. Basically, a corporation’s share capital may be classified into two, namely
– ordinary share capital (common stock) and preference share capital
(preferred stock). If an entity has only one class of share capital, it
necessarily is a(an
a) ordinary share capital
b) preference share capita
c) Class A ordinary
d) Class A preference
5. Which of the following best describes the distinction between par value
shares and no-par value shares?
a) Par value shares are for preference share capital while No-par value
shares are for ordinary share capital
b) Par value shares are included as legal capital while No-par value
shares do not form part of the corporation’s legal capital
c) Par value shares have a value per share stated on the share
certificate while No-par value shares do not have a value per share
stated on the share certificate
d) Par value shares are for corporations whose top management plays
golf, but not so well.
6. Which of the following statements is incorrect?
a) Stated value is similar to par value of stock
b) Issued shares of stocks include those that have at one time been
sold to the public and which have not been subsequently retired
c) Treasury shares may be reissued as dividends, in which case the
cost of the shares should be charged to retained earnings
 Reviewer: Shareholders Equity (SHE)

d) If an entity’s capital stock is retired, the “share capital” account is

reduced by its par value, the number of shares is reduced by the
stock retired and the treasury stock is credited at cost
7. Which is false concerning balance sheet presentation and classification of
certain stockholders’ equity items?
a) When more than one class of capital exist, the various classes are
usually listed separately in the order of their respective preferences
in liquidation
b) The par value of subscribe capital stock should be reported as part
of the related capital stock account
c) When deficit exceeds the total of the other capital balances, there is
a “capital deficiency”
d) A deficit in retained earnings should be presented as an asset
8. This exists in a corporation’s balance sheet when assets are understated
with an accompanying understatement of capital
a) treasury stock
b) watered stock
c) secret reserve
d) capital deficit
9. The Share premium in excess of par account normally arises in the
accounting records when
a) the fair value of the shares rises above par value
b) share capital is issued at an amount greater than par value
c) the stated value of share capital is greater than the par value
d) the number of shares issued equals the number authorized
10. If a corporation sells some of its treasury stock at a price that exceeds its
cost, this excess should be
a) Reported as a gain in the income statement
b) Treated as a reduction in the carrying amount of remaining treasury
stock.
c) Credited to share premium or additional paid-in capital
d) Credited to retained earnings
11. What is the accounting for treasury share transactions?
a) On repurchase of treasury shares, a gain or loss is recognized equal
to the difference between the amount at which the shares were
issued and the repurchase price for the shares.
b) On reissuance of treasury shares, a gain or loss is recognized equal
to the difference between the previous repurchase price and the
reissuance price
c) No gain or loss is recognized on the reacquisition and subsequent
reissuance of an entity’s own shares.
d) Treasury shares are accounted for as financial assets in accordance
with PFRS 9
 Reviewer: Shareholders Equity (SHE)

12. Which of the following statements is correct regarding the accounting for
treasury shares?
a) Retained earnings may be increased in some circumstances when
accounting for treasury share transactions
b) When treasury shares are reissued below par, a gain on sale shall
arise
c) When treasury shares are reissued below par, a loss on sale shall
arise
d) An appropriation of retained earnings or reversal thereof should be
made every time an entity records a treasury share transaction
13. The retirement of shares at a “gain” may be recorded as
a) Share capital (Dr.);
Share premium – original issuance (Dr.);
Treasury shares or Cash in bank (Cr.)
Gain on sale (Cr. for the excess
b) Share capital (Dr.);
Share premium – original issuance (Dr.);
Treasury shares or Cash in bank (Cr.)
Share premium - retirement (Cr. for the excess)
c) Share capital (Dr.);
Share premium – original issuance (Dr.);
Share premium – TS (Dr.); Retained earnings (Dr.);
Treasury shares or Cash in bank (Cr.)
d) Share capital (Dr.);
Share premium – original issuance (Dr.);
Loss on sale (Dr.);
Treasury shares or Cash in bank (Cr.)
14. Donated capital in the form of cash and non-cash assets received
from shareholders is
a) is recorded through memo entry
b) is credited to share premium
c) does not affect equity
d) recognized in profit or loss
15. Donated shares received from shareholders are
a) initially recorded through memo entry
b) credited to share premium when received
c) increases the number of shares outstanding
d) recognized in profit or loss for their fair value
16. Which of the following could increase outstanding share capital
a) Conversion of bonds
b) The exercise of stock options
c) The payment of stock dividends.
d) The exercise of warrants.
e) All of these answers.
 Reviewer: Shareholders Equity (SHE)

17. The detachable warrants issued together with preference shares

a) are accounted for separately
b) are not accounted for separately
c) are credited to a contra-equity account
d) are accounted for only when detached
18. The amount earmarked for distribution to the shareholders is known
as
a)
Profit after tax
b)
Dividends
c)
Profit before tax.
d)
Retained earnings
19. If a corporation declares and pays cash dividend, the net effect of
these transactions is a(n)
a) increase in liabilities.
b) decrease in profit
c) no effect on total assets.
d) reduction in shareholders’ equity.
20. Holders of cumulative preference shares “preferred as to assets”
enjoy preferential treatment over ordinary shareholders with regard to
a) Priority in payment of dividend
b) Return of capital
c) Voting rights
d) Accumulation of dividends
e) (a), (b) and (d) above.
21. Preferred and common stock differ in that
a) failure to pay dividends on common stock will not force the firm
into bankruptcy, while failure to pay dividends on preferred stock
will force the firm into bankruptcy.
b) common stock dividends are a fixed amount, while preferred
stock dividends are not.
c) preferred stock dividends are deductible as an expense for tax
purposes, while common stock dividends are not.
d) preferred stock has a higher priority than common stock with
regard to earnings and/or assets in the event of bankruptcy.
22. The effect of a share dividend is to transfer

a) equity from contributed capital to retained earnings.

b) equity from retained earnings to contributed capital.

c) assets to the stockholders.

d) assets to contributed capital.
23. A restriction on retained earnings will
a) ensure that a company has sufficient cash for a specific purpose.
b) increase total stockholders' equity.
c) communicate to readers of the financial statements that dividend
payments are being restricted.
 Reviewer: Shareholders Equity (SHE)

d) decrease total stockholders' equity.

24. The exact amount to be distributed on a dividend declaration is
finally determined on the
a) date of declaration
b) date of record
c) date of distribution
d) ex-dividends date
25. Share splits (choose the incorrect statement)
a) does not affect contributed capital and retained earnings
b) require an amendment of the entity’s authorized capitalization
c) require disclosures in the notes that reflect the additional
outstanding shares and the revised par value per share
d) are recorded through memo entries only
26. Which of the following statements is correct?
a) The balance in the Share premium in excess of par account must be
added to the balance of the Ordinary share capital account to
compute for the amount of legal capital for a corporation with a par
value ordinary share.
b) Shareholders who own preference shares usually have voting rights,
whereas shareholders who own ordinary shares usually do not have
voting rights.
c) Cash dividends become a liability of a corporation on the ex-
dividend date.
d) Total retained earnings includes both appropriated and
unappropriated retained earnings.
27. Which of the following statements is correct?
a) Convertible preference share is share that may be exchanged for
cash at the option of the shareholder.
b) In the absence of any restriction on retained earnings, the user of
the financial statements may validly conclude that the retained
earnings is available for distribution as dividends.
c) The proceeds from the issuance of no-par shares are credited to
share capital accounts, but are not considered part of the
corporation's legal capital.
d) Treasury share is usually recorded at par value when purchased.

28. A company’s assets and shareholders’ equity are most likely to be

reduced by:
a) stock splits.
b) cash dividends.
c) share dividends
d) reverse share splits.
29. Which of the following statements is correct?
a) Share dividends distributable (stock dividends payable) is presented
as a contra account to share capital and not liability.
 Reviewer: Shareholders Equity (SHE)

b) Cash dividends payable is normally presented as a noncurrent

liability.
c) Scrip dividends are normally long-term and always bear interest.
d) Only outstanding shares are entitled to dividends.
30. Which of the following statements is incorrect?
a) In accounting, outstanding shares refer to shares which are entitled
to dividends.
b) Treasury shares are not entitled to dividends and are therefore not
considered as outstanding shares.
c) Subscribed shares are considered outstanding up to the extent that
they are entitled to dividends.
d) Outstanding shares refer to shares that are issued.

Key Answers:

1. 13. 25. 37.

2. 14. 26. 38.

3. 15. 27. 39.

4. 16. 28. 40.

5. 17. 29. 41.

6. 18. 30. 42.

7. 19. 31. 43.

8. 20. 32. 44.

9. 21. 33.

10. 22. 34.

11. 23. 35.

12. 24. 36.