Practice Drills - Accounting for Corporation Part I

Note: Answer key and suggested solutions are shown in the succeeding part of this questionnaire for your guidance.

1. If shares are issued below par or issued value, the deficiency of the consideration received is recorded as
“discount on share capital.” The discount is presented in the statement of financial position
a. under current assets as a receivable from the shareholder concerned.
b. as a deduction in shareholders’ equity.
c. as an addition in shareholders’ equity.
d. a and b

2. Legal capital is the portion of contributed capital that cannot be distributed to the owners during the lifetime
of the corporation unless the corporation is dissolved and all of its liabilities are settled first. For no-par value
shares, legal capital is
a. the aggregate par value of shares issued and subscribed.
b. the total consideration received or receivable from shares issued or subscribed.
c. the aggregate stated value of shares issued and subscribed.
d. the aggregate market value of shares issued and subscribed.

3. How should the excess of the subscription price over the par value of ordinary subscribed be recorded?
a. As share premium when the subscription is received.
b. As share premium when the subscription is collected.
c. As retained earnings when the subscription is received.
d. As share premium when the capital stock is issued.

4. Share issuance costs are recognized directly in equity. If the related share premium is insufficient to offset
any share issuance costs, the issuance costs are
a. recognized as expense in profit or loss
b. charged directly to retained earnings
c. charged directly to share capital
d. a or b

5. Zinc Co.'s adjusted trial balance at December 31, 20x1, includes the following account balances:
Ordinary shares, ₱3 par ₱600,000
Share premium 800,000
Treasury stock, at cost 50,000
Accumulated other comprehensive income (Debit) 20,000
Retained earnings appropriated for uninsured earthquake losses 150,000
Retained earnings - unappropriated 200,000

What amount should Zinc report as total stockholders' equity in its December 31, 20x1, balance sheet?
a. 1,680,000 b. 1,720,000 c. 1,780,000 d. 1,820,000

6. The stockholders' equity section of Peter Corporation's balance sheet at December 31, 20x2 was as follows:
Ordinary shares (₱10 par, authorized 1M sh., issued and outst. 900K sh.) ₱ 9,000,000
Share premium 2,700,000
Retained earnings 1,300,000

On January 2, 20x3, Peter purchased and retired 100,000 shares of its stock for ₱1,800,000. Immediately after
retirement of these 100,000 shares, the balances in the share premium and retained earnings accounts should
be
Share premium Retained earnings Share premium Retained earnings
a. ₱ 900,000 ₱1,300,000 c. ₱1,900,000 ₱1,300,000
b. ₱1,400,000 ₱ 800,000 d. ₱2,400,000 ₱ 800,000
7. On April 1, 20x9, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
• Ordinary shares, ₱1 par value, 20,000 shares originally issued for ₱30 per share.
• Preference shares, ₱10 par value, 6,000 shares originally issued for ₱50 per share.

Hyde’s April 1, 20x9, statement of shareholders’ equity should report

Ordinary shares Preference shares Share premium
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

8. Asp Co. was organized on January 2, 20x1, with 30,000 authorized shares of ₱10 par ordinary shares. During
20x1 the corporation had the following capital transactions:
Jan. 5 Issued 20,000 shares at ₱15 per share.
July 14 Purchased 5,000 shares at ₱17 per share.
Dec. 27 Reissued the 5,000 shares held in treasury at ₱20 per share.

Asp used the cost method to record the purchase and reissuance of the treasury shares. In its December 31,
20x1, balance sheet, what amount should Asp report as additional paid-in capital in excess of par?
a. 100,000 b. 125,000 c. 140,000 d. 115,000

9. On March 1, 20x1, Rya Corp. issued 1,000 shares of its ₱20 par value ordinary shares and 2,000 shares of
its ₱20 par value convertible preference shares for a total of ₱80,000. At this date, Rya’s ordinary share was
selling for ₱36 per share, and the convertible preference share was selling for ₱27 per share. What amount
of the proceeds should be allocated to Rya’s convertible preference share?
a. 60,000 b. 54,000 c. 48,000 d. 44,000

10. In 20x1, Fogg, Inc., issued ₱10 par value ordinary share for ₱25 per share. No other share transactions
occurred until March 31, 20x1, when Fogg acquired some of the issued shares for ₱20 per share and retired
them. Which of the following statements correctly states an effect of this acquisition and retirement?
a. 20x1 profit is decreased. c. Share premium is decreased.
b. 20x1 profit is increased. d. Retained earnings is increased
ANSWERS:
1. B
2. B
3. A
4. B
5. A
Ordinary shares, ₱3 par 600,000
Share premium 800,000
Treasury stock, at cost (50,000)
Accumulated other comprehensive income (Debit) (20,000)
Retained earnings appropriated for uninsured
earthquake losses 150,000
Retained earnings - unappropriated 200,000
Total shareholders' equity 1,680,000

6. D
Solution:
Jan. 2, Share capital (100,000 x ₱10) 1,000,000
 20x3 Sh. premium – orig. issuance (2.7M x 100K/900K) 300,000
Retained earnings 500,000
Cash 1,800,000

Share premium Retained earnings

Dec. 31, 20x2 2,700,000 1,300,000
Debit (300,000) (500,000)
Jan. 2, 20x3 2,400,000 800,000

7. A
Ordinary Preference
Total issue price 600,000 300,000
Par value 20,000 60,000
Share premium 580,000 240,000 820,000

8. D
Solution:
Jan. 5, Cash (20,000 x 15) 300,000
20x1 Ordinary share (20,000 x 10) 200,000
Share premium 100,000
July 14, Treasury shares (5,000 x 17) 85,000
20x1 Cash 85,000
Dec. Cash (5,000 x 20) 100,000
27, Treasury shares (5,000 x 17) 85,000
20x1 Share premium – Treasury shares 15,000

9. C
No. of sh. Fair value Totals Allocation
Ordinary sh. 1,000 36.00 36,000 32,000
Preference sh. 2,000 27.00 54,000 48,000
90,000 80,000

10. C
Practice Drills - Accounting for Corporation Part II
Note: Answer key and suggested solutions are shown in the succeeding part of this questionnaire for your guidance.

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

2. Which of the following is most likely to be true regarding the payment of dividends?
a. Dividends may be paid from legal capital.
b. Retained earnings are available for dividends unless restricted by contract or by statute.
c. Unrealized capital is available for any type of dividend.
d. Capital from donated assets is available for dividends.

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

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

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

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

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

Shares Issued Outstanding Shares Issued Outstanding

a. 220,000 212,000 c. 222,000 214,000
b. 220,000 216,000 d. 222,000 218,000

6. On June 27, 20x1, Brite Co. distributed to its ordinary shareholders 100,000 shares of Quik, Inc., an unrelated
party, held as investment in held for trading securities. The carrying amount of the investment on June 27,
20x1 was ₱1 per share, while the fair value was ₱2 per share. On distribution date, the fair value of Quik’s
stock was ₱2.50 per share. In its income statement for the year ended June 30, 20x1, what amount should
Brite report as gain relating to the disposal of the stock?
a. 250,000 b. 200,000 c. 50,000 d. 0
7. The Gradison Corporation had the following classes of shares outstanding as of December 31, 2002:
• Ordinary shares, ₱20 par value, 20,000 shares outstanding
• Preference shares, 6 percent, ₱100 par value, cumulative, 2,000 shares outstanding

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

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

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

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

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

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

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

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

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

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

On January 2, 20x2, Brown put into effect a stockholder-approved quasi-reorganization by reducing the par
value of the stock to ₱5 and eliminating the deficit against share premium. Immediately after the quasi-
reorganization, what amount should Brown report as share premium?
a. (60,000) c. 190,000
b. 150,000 d. 0
ANSWERS:
1. B
2. B
3. D
4. A
Total profit since incorporation 420,000
Total cash dividends paid (130,000)
Total value of property dividends distributed (30,000)
Retained earnings to date 260,000
The excess proceeds on the sale of treasury shares are credited to share premium.
5. A
Issued Outstanding
Issued as of Dec. 31, 20x1 100,000 100,000
Treasury shares as of Dec. 31, 20x1 (5,000)
20x2 transactions:
May 3 - reissuance of treasury shares 1,000
Aug. 6 - issuance of new shares 10,000 10,000
Totals 110,000 106,000
Nov. 18 - 2-for-1 share split 2 2
Ending balances 220,000 212,000

6. C (2.50 – 2) x 100,000 = 50,000

7. C
Total dividends declared 200,000
PS: (6% x 100 x 2,000 x 2 yrs.) (24,000)
Dividend to ordinary shares 176,000
8. C
Date Share capital 1,000,000
Share premium 200,000
Share capital (20,000 x ₱5) 100,000
Share premium – recapitalization 1,100,000
9. C - 112,500 + 100,000 + 315,200 = 527,700
Jan. 7 Retained Earnings (150,000 x ₱.75) .. 112,500
Cash Dividends Payable--Preferred
Stock ............................ 112,500

Feb. 7 Cash Dividends Payable--Preferred

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

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

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

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

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

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

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

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

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

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

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

10. C

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

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

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

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