UNIVERSITY OF SANTO TOMAS
UST - ALFREDO M. VELAYO COLLEGE OF ACCOUNTANCY
MA5128 Financial Reporting, Planning, Performance, and Control
Handout #2.2 Changes in Equity
1. Candela Company has retained earnings of $500,000, common stock of $400,000, and
total common stockholders’ equity of $1,200,000. It has 200,000 shares of $2 par value
common stock outstanding, which is currently selling for $5 per share. If Candela
Company declares a 2-for-1 stock split on its common stock, which of the following will
occur?
a. Net income will increase by $1,000,000.
b. Retained earnings will decrease by $1,000,000.
c. Total paid-in capital will increase by $1,000,000.
d. There will be no effect on total common stockholders’ equity.
2. A publicly-traded corporation issues 10,000 shares of new common stock for $50 per
share. The common stock has a par value of $5 per share. Which one of the following
statements is correct?
a. Cash increases by $500,000, and common stock increases by $500,000.
b. Additional paid-in capital increases by $500,000; no other accounts are affected.
c. Cash increases by $500,000; common stock increases by $50,000; and additional
paid-in capital increase by $450,000.
d. Cash increases by $450,000; common stock increases by $50,000, and additional
paid-in capital increases by $500,000.
3. A publicly-traded corporation issues 10,000 shares of new common stock for $50 per
share. The common stock has a par value of $5 per share. Which one of the following
statements is correct?
a. Cash increases by $500,000, and common stock increases by $500,000.
b. Additional paid-in capital increases by $500,000; no other accounts are affected.
c. Cash increases by $500,000; common stock increases by $50,000; and additional
paid-in capital increase by $450,000.
d. Cash increases by $450,000; common stock increases by $50,000, and additional
paid-in capital increases by $500,000.
4. How does a corporation recognize a deficit in retained earnings?
a. As a reduction in paid-in capital
b. As a reduction in stockholders’ equity on the balance sheet
c. As a net loss on the income statement
d. As a decrease in treasury stock
5. How would the declaration of a 10% stock dividend by a corporation affect each of the
following on its books? Retained earnings (RE) ;Total stockholders' equity (SE)
a. Decrease; No effect
b. Decrease; Decrease
c. No effect; Decrease
d. No effect; No effect
6. A publicly-traded corporation that prepares financial statements using U.S. GAAP issues
a 5% stock dividend on its 100,000 shares outstanding of $10 par value stock. The
current market price is $18 per share. The company has retained earnings of $2,650,000.
What is the impact on retained earnings?
a. Decrease of $40,000.
b. Decrease of $50,000.
c. Decrease of $90,000.
d. No impact.
7. A publicly traded company has 100,000 outstanding shares of common stock, with a par
value of $5. The company uses U.S. GAAP to prepare its financial statements. The
company recently declared a 5% stock dividend. On the date the stock dividend was
declared, the company's stock was trading at $25 per share. On the date of declaration,
the company's
a. additional paid-in capital will increase.
b. retained earnings will increase.
c. total shareholders' equity will decrease.
d. outstanding shares will decrease.
8. What is the result of stock dividends?
a. Retained earnings increase while total paid-in capital decreases.
b. Both retained earnings and total paid-in capital increase.
c. Both retained earnings and total paid-in capital decrease.
d. Retained earnings decrease while total paid-in capital increases.
9. Which of the following is a likely reason for a stock split?
a. A company wishes to increase paid-in capital to have resources for more growth.
b. A company wishes to increase par value of its stock to increase its capital assets.
c. A company wishes to lower the stockholders’ equity.
d. A company wishes to lower the market price of its stock to increase marketability.
10. On February 1, Year 1, Kew Corp., a newly formed company, had the following stock
issued and outstanding:
• Common stock, $1 par value, 10,000 shares originally issued for $15 per share.
• Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share.
• Kew’s February 1, Year 1, statement of stockholders’ equity should report.
How much is the company’s Common stock; Preferred stock; Additional paid-in capital?
a. $ 150,000; $30,000; $ 45,000
b. $ 150,000; $75,000; $ 0
c. $ 10,000; $75,000; $ 140,000
d. $ 10,000; $30,000; $ 185,000
11. What is one major difference between a stock split and a stock dividend?
a. The total paid-in capital increases with a stock split but has no change with a
stock dividend.
b. The par value per share decreases with a stock split but has no change with a
stock dividend.
c. The total retained earnings has no change with a stock split but increases with a
stock dividend.
d. The total par value of the stock increases with a stock split but has no change with
a stock dividend.
12. Washington Rare Coins reported the following stockholders’ equity on December 31,
20X6:
Common stock, 15,000 shares at $25 par value
$375,000
Paid-in capital in excess of par
Retained earnings
$92,000
$68,000
Total stockholders' equity
$535,000
On August 14, 20X7, Washington declared a 2-for-1 stock split. At the time of
declaration, shares were selling for $114 per share. Through the first two quarters of the
fiscal year, Washington recorded a net loss of $6,500. How will Washington's
stockholders’ equity section change as a result of this information?
a. Number of shares will increase to 30,000, par value will remain at $25 per share,
and stockholders’ equity will increase to $750,000.
b. Number of shares will remain at 15,000, par value will increase to $50, and
stockholders’ equity will increase to $750,000.
c. Number of shares will remain at 15,000, par value will decrease to $12.50/share,
and stockholders’ equity will decrease to $341,000.
d. Number of shares will increase to 30,000, par value will decrease to $12.50 per
share, and stockholders’ equity will decrease to $528,500.
13. Brendan Bishop Scientific is considering acquiring a new plant and paying for it with
common stock at par value. However, the CFO is not in favor of the acquisition. Which
of the following is the most likely reason for the CFO's disagreement?
a. The company will have fewer long-term assets.
b. The company's stock is most likely overpriced.
c. It is difficult to estimate the net realizable value of the plant and, hence, difficult
to estimate the annual depreciation expenses.
d. The true cost of the plant would be much higher than necessary as the stock's
trading value should be considered.
14. Stock dividends ________ retained earnings and ________ total paid-in capital.
a. increase, decrease
b. increase, increase
c. decrease, increase
d. decrease, decrease
15. Mike's Ice Cream Shop has 500 shares of stock outstanding at $1 par value per share. As
a reward for a great year, Mike (the majority owner and CEO) is issuing a stock dividend
of 300 shares to the shareholders. Current market value of the stock is $20/share. What
are the appropriate accounting entries to record this stock dividend?
a. Dr. Retained earnings $6,000, Cr. Par value distributable $300 Cr. Paid-in Capital
$5,700
b. Dr. Retained earnings $6,000, Cr. Paid-in capital $6,000
c. Dr. Retained earnings $6,000, Cr. Par value distributable $6,000
d. Dr. Retained earnings $300, Cr. Par value distributable $300
16. A corporation’s common stock has a market price that is greater than its par value. The
corporation is considering one of the following: a small stock dividend, a large stock
dividend, or a stock split. Which of the following transactions would change additional
paid-in-capital on the balance sheet?
a. The stock split only.
b. The small stock dividend and the large stock dividend.
c. The large stock dividend and the stock split only.
d. The small stock dividend only.
This problem has 2 items: Pugh Co. reported the following in its statement of stockholders’
equity on January 1, 1990:
Common stock, $5 par value, authorized 200,000
shares, issued 100,000 shares
$ 500,000
Additional paid-in capital
1,500,000
Retained earnings
516,000
2,516,000
Less treasury stock, at cost, 5,000 shares
40,000
Total stockholders’ equity
$2,476,000
The following events occurred in 1990:
May 1 – 1,000 shares of treasury stock were sold for $10,000.
July 9 – 10,000 shares of previously unissued common stock were sold for $12 per share.
October 1 –
The distribution of a 2-for-1 stock split resulted in the common stock’s per
share par value being halved.
Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh’s
incorporation protect shares held in treasury from dilution when stock dividends or stock
splits are declared.
17. The number of outstanding common shares at December 31, 1990, should be
a. 220,000
b. 222,000
c. 216,000
d. 212,000
18. In Pugh’s December 31, 1990, statement of stockholders’ equity, the par value of the
issued common stock should be
a. 550,000
b. 518,000
c. 291,000
d. 275,000