FINANCIAL ACCOUNTING 3 – Midterm

1. Red Corporation had net income for the year of P507,520 and a simple capital
structure consisting of the following common shares outstanding:
Months Outstanding Number of Shares
January – February 120,000
March – June 147,000
July – November 180,000
December 175,000
Total 622,200
Red Corporation’s basic earnings per share (rounded to the nearest centavo) were
(a) P2.90 (b) P3.20 (c) P3.26 (d) P3.45

2. Delta Company had 100,000 shares of common stock issued and outstanding at
December 31, 2001. On July 1, 2002, Delta issued a 10% stock dividend. Unexecised
call options to purchase 20,000 shares of Delta’s common stock (adjusted for the
2002 stock dividend) at P20 per share were outstanding at the beginning and end of
2002. The average market price of Delta’s common stock (which was not affected by
the stock dividend) was P25 per share during 2002. Net income for the year ended
December 31, 2002 was P550,000. What should be Delta’s 2002 diluted earnings per
share, rounded to the nearest centavo?
(a) P4.82 (b) P5.00 (c) P5.05 (d) P5.24

3. On June 30, 2001 , Ligo, Inc. issued twenty P10,000, 7% bonds at par. Each bond
was convertible into 200 shares of common stock. On January 1, 2002, 10,000
shares of common stock were outstanding. The bondholders converted all the bonds
on July 1, 2002. The following amounts were reported in Ligo’s income statement for
the year ended December 31, 2002:
Revenues P978,471
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 51,471
Income tax at 32% 16,471
Net income P 35,000
What amount should Ligo report as its 2002 diluted earnings per share?
(a) P2.50 (b) P2.84 (c) P3.00 (d) P3.50

4. During all of 2002, Solar Company had outstanding 100,000 shares of common stock
and 5,000 shares of noncumulative, 7% preferred stock. Each share of the latter is
convertible into three shares of common. For 2002, Solar had P230,000 income from
continuing operations and P575,000 of extraordinary losses; no dividends were paid
or declared. Solar should report 2002 diluted earnings (loss) per share for income
from continuing operations and for net income (loss), respectively, of
(a) P2.30 and (P3.45) (c) P2.19 and (P3.29)
(b) P2.00 and (P3.00) (d) P2.26 and (P3.29)

Items 5 to 7 are based on the following information. Orient’s Corp.’s capital structure
was as follows:
December 31 .
2001 2002
Outstanding shares of stock:
Common 100,000 100,000
Convertible preferred 10,000 10,000
9% convertible bonds P1,000,000 P1,000,000
 During 2002, Orient paid dividends of P3.00 per share on its preferred stock. The
preferred shares are convertible into 20,000 shares of common stock, and the 9%
bonds are convertible into 30,000 shares of common stock. Assume that the income
tax rate is 32%.
5. If the net income for 2002 is P350,000, Orient should report diluted earnings per
share (DEPS) as
(a) P3.20 (b) P2.93 (c) P2.92 (d) P2.74

6. If the net income for 2002 is P265,000, Orient should report DEPS as
(a) P2.15 (b) P2.12 (c) P2.05 (d) P2.04

7. If net income is P170,000, Orient should report as DEPS as

8. Rexson, Inc, had the following common stock balances and transactions during
2002:
01/01/02 Common stock outstanding 30,000
02/01/02 Issued a 10% common stock dividend 3,000
03/01/02 Issued common stock in a pooling of interest 9,000
07/01/02 Issued common stock for cash 8,000
12/31/02 Common stock outstanding 50,000
What was Rexson’s 2002 weighted-average shares outstanding?
(a) 40,000 (b) 44,250 (c) 44,500 (d) 46,000

9. Royal Co. had the following structure during 2001 and 2002:
Preferred stock, P10 par, 4% cumulative, 25,000 shares
issued and outstanding P250,000
Common stock, P5 par, 200,000 shares issued
and outstanding 1,000,000
Royal reported net income of P500,000 for the year ended December 31, 2002.
Royal paid no preferred dividends during 2001 and paid P16,000 preferred dividends
during 2002. In its December 31, 2002 income statement, what amount should
Royal report as basic earnings per share?
(a) P2.42 (b) P2.45 (c) P2.48 (d) P2.50

10. Alpha Co. has one class of common stock outstanding and no other securities that
are potentially convertible into common stock. During 2001, 100,000 shares of
common stock were outstanding. In 2002, two distributions of additional common
shares occurred. On April 1, 20,000 shares of treasury stock were sold and on July 1,
a 2-for-1 stock split was issued. Net income was P410,000 in 2002 and P350,000 in
2001. What amounts should Alpha report as basic earnings per share in its 2002 and
2001 comparative income statements?
2002 2001
(a) P1.78 P3.50
(b) P1.78 P1.75
(c) P2.34 P1.75
(d) P2.34 P3.50

11. The December 31, 1995 trial balance of Model Corporation shows the following
balances, among others:
Retained earnings appropriated for plant expansion 210,000
Retained earnings unappropriated 216,000
Donated capital 100,000
Treasury common stock, 2,000 shares, at cost 80,000
Excess over par – preferred 15,000
 Excess over par – common 84,000
Retained earnings appropriated for treasury stock 80,000
Preferred stock, P100 par 300,000
Common stock, P10 par 400,000
Common stock dividend payable 20,000
Dividends payable – cash 25,000
Retained earnings appropriated for retirement of preferred stock 30,000
What is the amount of stockholders’ equity on December 31, 1995?
(a) 1,455,000 (b) 1,375,000 (c) 1,350,000 (d) 1,425,000

12. The stockholders equity of Swan Corporation at the end of 1995 and 1994 is as
follows:
1995 1994
Preferred stock, P100 par, 12% 1,000,000 600,000
Common stock, P20 par 2,000,000 1,800,000
Paid in capital in excess of par
Preferred 16,000 -
Common 4,350,000 3,750,000
Retained earnings 80,000 180,000
How many shares of preferred stock were issued in 1995 and at what price?
(a) 10,000 shares at 104 (c) 4,000 shares at 104
(b) 10,000 shares at 100 (d) 4,000 shares at 100

13. On April 1, 1995, Hyde Corporation, a newly formed company, had the following
stock issued and outstanding:
Common stock, no par, P1 stated value, 20,000 shares originally issued for P30
per share.
Preferred stock, P10 par value, 6,000 shares originally issued for P50 per share.
Hyde’s April 1, 1995, statement of stockholders’ equity should report:
Additional
Common Preferred paid-in
stock stock ____ _capital___
(a) 20,000 60,000 820,000
(b) 20,000 300,000 580,000
(c) 600,000 300,000 0
(d) 600,000 60,000 240,000

14. On September 30, 1995, Grey Company issued 4,000 shares of its P100 par value
common stock dividend. The market value per share on the date of declaration was
P150. The Grey’s stockholders’ equity accounts immediately before issuance of the
stock dividend shares were as follows:
Common stock, P100 par; 50,000 shares
authorized; 20,000 shares outstanding 2,000,000
Additional paid-in capital 3,000,000
Retained earnings 1,500,000
What should be the retained earnings balance immediately after stock dividend?
(a) 1,100,000 (b) 1,500,000 (c) 900,000 (d) 2,100,000

15. Red Corporation had 700,000 shares of common stock authorized and 300,000
shares outstanding at December 31, 1994. The following events occurred during
1995:
January 31 Declared 10% stock dividend
June 30 Purchased 100,000 shares
August 1 Reissued 50,000 shares
November 30 Declared 2-for-1 stock split
At December 31, 1995, how many shares of common stock are outstanding?
(a) 560,000 (b) 600,000 (c) 630,000 (d) 660,000