FAR EASTERN UNIVERSITY
Institute of Accounts, Business, and Finance
ACCOUNTING FOR CORPORATION
Module 4: Retained Earnings
PART 1: MULTIPLE CHOICE
1.
When dividends are declared in one calendar year and paid in the next calendar year, the liability for the dividend
should be recorded as of the:
A. last day of calendar year
B. Date of declaration
C. Date of record
D. Date of payment
2.
Retained Earnings represents a company’s:
A. Undistributed net assets
B. Undistributed cash
C. Extra paid-in capital
D. Undistributed net income
3.
Which of the following transactions will not affect the total shareholders’ equity?
A. Property Dividend
B. Stock Dividend
C. Cash Dividend
D. Scrip Dividend
4.
When a property divided is declared, the reduction in retained earnings is for:
A. The book value of the property on the date of declaration
B. The book value of the property on the date of distribution
C. The fair value of the property on the date of distribution
D. The fair value of the property on the date of declaration
5.
If the stock dividend is less than 20%, how much of the retained earnings should be capitalized?
A. Par Value of the shares on the date of declaration
B. Par Value of the shares on the date of distribution
C. Fair Market Value of the shares on the date of declaration
D. Fair Market Value of the shares on the date of distribution
6.
Undistributed stock dividends shall be reported as
A. A current liability
B. An addition to share capital outstanding
C. A reduction to share capital outstanding
D. A reduction in total shareholders’ equity
7. Forte Corporation had 40,000 shares issued and outstanding on January 1, 2020. On January 15, Forte Corp.
declared a 1 for 4 shares split when the market fair value of share was P 40. On December 3, the Company
declared a P 10 per share cash dividend. What amount should be reported as dividends?
A. P 100,000
B. P 400,000
C. P 1,600,000
D. P 800,000
8. The company declared 16,000 stock dividends on 250,000 issued and outstanding shares with P5 par value per
share, which had a fair value of P25 per share at the date the stock dividend was declared. This stock dividend
was distributed 60 days after the declaration date. What amount should be charged to retained earnings as a
result of the stock dividend declaration?
A. P 80,000
B. P 300,000
C. P 400,000
D. P 1,250,000
9. Nancy Co. has only one class of share capital. If Nancy Co. will transfer some of its retained earnings going to
share capital measured at fair value of the shares issued, what type of transaction is this?
A. Either a stock dividend or a share split
B. Neither a stock dividend nor a share split
C. A share split but not a stock dividend
D. A stock dividend but not a share split
10. The company has 100,000 authorized shares of P5 par ordinary shares, issued 40,000 shares at P7.
Subsequently, the company declared a 15% share dividend on a date when the market price was P9 per share.
The effect of the declaration and issuance of the share dividend is to:
Retained Earnings
Common Stock
Paid-in Capital
A. Decrease
Increase
Increase
B. Increase
Decrease
Decrease
C. Increase
Decrease
Increase
D. Decrease
Increase
No effect
11. The journal entry to record the declaration of a large bonus issue includes:
A. A debit to retained earnings for the market value of the shares to be distributed
B. A credit to share dividends distributable for the fair market value of the share to be distributed
C. A credit to share premium for the difference between the fair market value and the par value of the share to
be distributed
D. A debit to retained earnings for the par value of the shares to be distributed
12. Statement I: When the proportion of the additional shares is large in relation to the total shares previously
outstanding, generally at least 20%, the amount capitalized is equal to the fair market value of the share capital.
Statement II: A scrip dividend is declared when the corporation has sufficient retained earnings and sufficient
cash balance for the dividends.
A. Statement I is true; Statement II is false
B. Statement I is false; Statement I is true
C. Both statements are true
D. Both statements are false
13. Choose the correct statement in relation to basic earnings per share
A. Earnings per share can never be negative.
B. If the preference share is outstanding, dividend declared on the preference share is always deducted from
the net income in the computation of earnings per share.
C. If the preference share is non-cumulative, the dividend is deducted only when it is declared.
D. All issued ordinary shares should be subject to earnings per share.
14. In the event there is no liquidation value, the preference shares will be based on
A.
B.
C.
D.
Liquidation value
Fair market value
Par Value
Book Value
15. Sundae Company has total shareholder’s equity of P1,350,000 including retained earnings of P350,000. The
company has only 475,000 cash balance. The maximum amount of cash dividend that the company can
declare, and pay is:
A. P 350,000
B. P 475,000
C. P 825,000
D. P1,350,000
16. Manny Inc. declared 15% share dividend on its 10,000 issued and outstanding shares of P10 par value ordinary
share, which had a fair market value of P5 per share before the share dividend was distributed 90 days after the
declaration date. The company’s current liabilities will increase by how much?
A. P
0
B. P 1,500
C. P 7,500
D. P 15,000
17. TLW CO. ‘s outstanding share capital at December 31, 2020 comprised the following:
➢ 30,000 shares of 10% cumulative preference share capital, 5% participating par value of P10 per share
➢ 200,000 shares of ordinary share capital, par value of P1 per share.
On December 31, 2020, TLW Co. declared dividends of P100,000. What is the amount of dividends payable to
the company’s ordinary shareholders?
A. P20,000
B. P35,000
C. P47,500
D. P55,000
18. Assume the following information for MHL CO. at December 31, 2020.
12% Cumulative and Non-participating Preference Share, P10 par, 10,000 shares issued and outstanding
Ordinary Share, P5 par, 40,000 shares issued and outstanding.
The company declared and paid cash dividends amounting to P20,000 for the year. At the beginning of the
year, undeclared dividends amounted to P9,000.
What is the amount of dividends paid to the company’s ordinary shareholders?
A. P0
B. P4,000
C. P9,000
D. P20,000
Bitcoin Company had the following classes of stock outstanding at December 31, 2015
Ordinary Share, P20 par
P 8,000,000
12% Preference Share Capital, P100 par
cumulative and fully participating
4,000,000
10% Preference Share Capital, P100 par
cumulative and non-participating
2,000,000
Dividends on preference shares have been in arrears for 2013 and 2014. On December 31, 2015, total cash dividends
of P6,000,000 was declared.
19. What is the amount of dividends payable to the 12% Preference Shares?
A. 1,360,000
B. 1,960,000
c. 2,360,000
d. 2,440,000
20. What is the amount of dividends payable to the ordinary shares?
A. 2,640,000
B. 2,906,667
c. 2,960,000
d. 3,960,000
Use the following information for the next two questions.
Calgary Corporation has the following data on stock issued and outstanding on December 31, 2020:
10% Preference share, P10 par
300,000
Ordinary share capital, P10 par
200,000
Retained earnings
300,000
Dividends were in arrears for 2 years, excluding the current year. The Board of Directors declared P200,000 cash
dividends.
Assumption: If the Preferred is non-cumulative and participating
21. The ordinary dividend per share is?
A.
B.
C.
D.
1
3
4
2
22. The preferred dividend per share is?
A.
B.
C.
D.
1
3
4
2
The following data are taken from the shareholders’ equity section of the balance sheet of FANCY CORP.
December 31, 2019
December 31, 2020
Ordinary shares (P100 par value)
P625,000
P637,500
Share premium in excess of par
312,500
362,500
Retained earnings
625,000
653,750
During 2020, the company declared and paid cash dividend of P93,750 and also declared and issued a stock
dividend. There were no other changes in stock issued and outstanding during 2020.
23. What is the net income for 2020?
A.
B.
C.
D.
28,750
135,000
122,500
185,000
24. The shareholders’ equity of Valve Corporation is shown below:
Ordinary Share Capital, P 40 par
Additional Paid-in Capital in Excess of Par
Deficit
Total Shareholders’ Equity
P 6,000,000
300,000
( 665,000)
P 5,635,000
What is the book value per share of Valve Corporation?
A. P (56.35)
B. P (44.35)
C. P 37.57
D. P 56.35
25. On January 1, 2019, Dream Corp. has 100,000 shares of P 20 par value ordinary share capital outstanding.
The 2019 Net Income was P 1,964,200. On April 1, 2019, it issued an additional 20,000 shares and another
30,000 shares on September 1, 2019. What is the earnings per share of Dream Corp. for the year 2019?
A. P 15.71
B. P 19.94
C. P 13.09
D. None of the above
PART 2: STRAIGHT PROBLEM
Problem 1 (Cash and Scrip Dividends)
Presented below the capital structure of DBM Corporation as of December 31, 2018:
Ordinary Share Capital, P 50 par, 100,000 issued and 95,000 outstanding shares
Ordinary Share Premium
Retained Earnings
Treasury Shares
5,000,000
1,000,000
8,000,000
120,000
The Corporation declared the following dividends during 2019:
April 1
Declared a cash dividend of P 10 per share of ordinary shares. The corporation issued 6% interest
bearing promissory note in relation to cash dividend declared payable on September 30 to
shareholders of record of April 20.
November 10
Declared a cash dividend of P 6 per share of ordinary shares, payable on December 15 to
shareholders of record of November 20.
Requirement: Record the transactions occurred during 2019.
Problem 2 (Property Dividend)
Goodie Corporation owns 20,000 shares of JFC Corporation recorded as “Investment in JFC Corporation”
amounting to P 1.1 million as of December 31, 2019.
On December 15, 2020, Goodie Corporation declared a property dividend to shareholders of record of December
30, distributable on January 5, 2021. The corporation will distribute three (3) ordinary shares of JFC Corporation for
every share of Goodie Corporation owned by the shareholders. Goodie Corporation has 5,000 issued and
outstanding shares at the time of declaration. The carrying value of JFC as of December 15, 2020 is 60 per share.
The fair market value of JFC Corporation as follows:
December 15 – 65 per share; December 31 – 67 per share; January 5 – 66 per share.
Requirement:
1. Journalize the transactions occurred in relation to property dividends.
2. What will be the gain or loss on January 5, 2021?
Problem 3 (Small and Large Stock Dividends)
On November 7, Lauren Enterprise Company declared a share capital dividend distributable to shareholders of
record of November 15, distributable on December 5. The Lauren Enterprise Company has 250,000 ordinary
shares with 20 par value per share at the date of declaration. The fair market value of Lauren Enterprise as follows:
November 7 – 25 per share; November 15 – 22 per share; December 5 – 24 per share.
Requirement:
Prepare all the necessary entries to record the transaction of share capital dividends using the following
independent assumptions:
1. A 15% share capital dividend
2. A 25% share capital dividend
Problem 4 (Allocation of Cash Dividends to Preference and Ordinary Shareholders)
The Company has the same capital structure (except for retained earnings) for the past five year, see details
below:
6% Preference Share Capital, 80,000 shares issued and outstanding, P 50 par
P4,000,000
Ordinary Share Capital, 200,000 shares issued and outstanding, P 30 par
6,000,000
Retained Earnings
5,000,000
No dividends were paid prior to 2020 for two years. On December 10, 2020, the Company declared P 1,500,000 as
cash dividends to shareholders of record of December 21, 2020, payable on January 5, 2021.
Requirements:
1. Prepare all the necessary journal entries to record the dividend transactions.
2. Allocate the dividends between ordinary shareholders and preference shareholders if:
Case A. Preference share capital is NON-CUMULATIVE and NON-PARTICIPATING
Case B. Preference share capital is CUMULATIVE and NON-PARTICIPATING
Case C. Preference share capital is NON-CUMULATIVE and FULLY PARTICIPATING
Case D. Preference share capital is NON-CUMULATIVE and PARTICIPATING UP TO ADDITIONAL 5%
3. Assuming the dividend declared is P 1,000,000 what will be the allocation of dividends if in case the
preference share is CUMULATIVE and FULLY PARTICIPATING