Ia Shareholder's Equity Practice Problems

16-1. Which is the order in which the dates related to cash dividends occur?
a. declaration, record, payment

b. payment, declaration, record
c. payment, record, declaration
d. record, declaration, payment
You answered correctly! The dates are: (1) date of declaration, (2), date of
record, and (3) date of payment. Journal entries are required on the dates of
declaration and payment.
16-2. The Common Stock Dividend Distributable account is classified as a/an:
a. current liability account

b. shareholders' equity account
c. long-term liability account
d. intangible asset account
You answered correctly! The account is a shareholders' equity account and

is found on the shareholders' equity section of the balance sheet. It represents
the value of the shares of stock that have been declared as a stock dividend
and that will be issued to shareholders.
16-3. Which of the following is true about the effects of a stock dividend?
a. Shareholders' Equity: Decreases, Retained Earnings: No Change

b. Shareholders' Equity: Decreases, Retained Earnings: Decreases
c. Shareholders' Equity: No Change, Retained Earnings: Decreases
d. Shareholders' Equity: No Change, Retained Earnings: No Change
You answered correctly! The declaration of a stock dividend decreases

retained earnings, but increases contributed capital by the same dollar
amount; therefore total shareholders' equity remains unchanged.
16-4. A stock split will
a. increase the number of shares outstanding

b. decrease the amount of contributed capital
c. increase the amount of contributed capital
d. decrease retained earnings
You answered correctly! A stock split involves the calling in of outstanding
shares and the distribution of more than one share for each share called in,
with each new share having a proportionate reduction in the market or the
book value of each share called in.
16-5. Which of the following is not a reason for a corporation to acquire its
own shares of stock?
a. To use them as compensation to employees.

b. To avoid a hostile takeover by investors seeking control.
c. To help shareholders get a better price for outstanding shares.
d. To increase the assets of the corporation.
The correct answer is "d". Your choice of "a" was incorrect. When a

corporation acquires its own shares of stock, known as treasury shares, there
is no increase in assets. There is a decrease in assets (cash) and a decrease
in shareholders' equity through the increase in a contra-equity account titled
Treasury Shares.
16-6. Which of the following accounts would not be classified as a contributed

capital account?
a. Contributed Capital, Common Shares

b. Treasury Shares, Common
c. Stock Dividends Distributable
d. Contributed Capital, Preferred Shares
The correct answer is "b". Your choice of "d" was incorrect. The

Treasury Shares, Common account is the only account in the group that is not
reported as Contributed Capital on the balance sheet. The Treasury Shares
are subtracted from the total for Contributed Capital and Retained Earnings to
arrive at total shareholders' equity.
16-7. Which of the following is true?
a. Treasury shares receive cash dividends.

b. Treasury shares must be sold for more than its cost.
c. Treasury shares are unissued shares of the corporation.
d. The purchase of treasury shares reduces shareholders' equity.
The correct answer is "d". Your choice of "a" was incorrect. The
purchase of treasury shares reduces cash and shareholders' equity. Treasury
Shares (a contra contributed capital account) is debited and Cash is credited.
16-8. Jute Enterprises issues 10,000 shares of common stock on January 1,

2002 at $12 per share. On June 30, 2002, a 10% stock dividend is declared.
The market value of the stock on this date is $15. The journal entry to record
the stock dividend declared would include a:
a. debit to retained earnings for $120,000

b. debit to retained earnings for $12,000
c. debit to retained earnings for $150,000
d. debit to retained earnings for $15,000
You answered correctly! The stock dividend amount is determined by

multiplying the common stock outstanding by the stock dividend rate and the
fair market value of the stock. Therefore, on June 30, 10,000 shares x 10% x
$15 = $15,000.
16-9. Which of the following events might be considered as extraordinary?
a. Gains and losses from retiring debt.

b. Gains or losses from exchanging foreign currencies.
c. Gains or losses from disposing of a business segment.
d. Effects of a labour action against a major supplier of materials.
The correct answer is "a". Your choice of "b" was incorrect. To be an

extraordinary event, the event must be both unusual and infrequent. While
gains and losses from retiring debt may not be both unusual and infrequent,
they are treated as extraordinary gains or losses.
16-10. Company A has a simple capital structure of 100,000 shares of $10 par
common shares, no preferred shares, and retained earnings of $750,000. The
company made no sales or purchases of its common shares. The earnings
per share was $.75. What was the amount of net income?
a. $750,000
b. $75,000
c. $100,000
d. $50,000
You answered correctly! Earnings per share is determined by dividing net
income by the number of shares outstanding throughout the entire year.
Inversely, the net income can be calculated by multiplying the earnings per
share by the number of shares outstanding throughout the entire year.
16-11. Net income for the period totaled $55,000, preferred dividends paid
totaled $10,000, and common dividends paid totaled $30,000. If there were
100,000 common shares outstanding throughout the year, what was the
earnings per common share?
a. $4.50
b. $44.50
c. $.45
d. $.30
The correct answer is "c". Your choice of "d" was incorrect. Earnings per
share is determined by dividing the net income less the preferred dividends by
the total weighted-average common shares outstanding. $45,000 / 100,000
shares = $.45 earnings per common share.
16-12. From January 1 to May 31, Company A had 7,000 shares outstanding.
From June 1 to October 31, the company had 8,000 shares outstanding. From
November 1 to December 31, the company had 7,500 shares outstanding.
What is the denominator for determining the earnings per share for this simple
capital structure company?
a. 7,500 shares
b. 7,000 shares
c. 7,459 shares
d. 8,042 shares
You answered correctly! The weighted average number of shares

outstanding must be used: 7,000 shares x 5/12 = 2,917, plus 8,000 shares x
5/12 = 3,333, plus 7,500 shares x 2/12 = 1,250. Total weighted average
shares: 2,917 + 3,333+ 1,250 = 7,500.
16-13. From January 1 to May 31, Company A had 4,800 shares outstanding.
From June 1 to October 31, the company had 5,220 shares outstanding. From
November 1 to December 31, the company had 6,000 shares outstanding. If
the company had declared a two-for-one stock split on December 1, how
many shares are outstanding after the stock split?
a. 3,000
b. 6,000
c. 12,000
d. 32,040
The correct answer is "c". Your choice of "a" was incorrect. The stock
splits two-for-one, therefore, there are twice as many shares outstanding after
the split as there were before the split. 6,000 x 2 = 12,000.
16-14. Which of the following is NOT true with regard to appropriations of

retained earnings?
a. They will restrict the amount of possible cash dividends.

b. They may be required because of contractual obligations.
c. They may be made at the discretion of the board of directors.
d. They require setting aside a reserve of cash for the appropriations.
You answered correctly! While appropriations of retained earnings restricts

dividends, the appropriations do not represent cash. Their purpose is merely
to disclose restrictions to dividends.

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16-1. Which is the order in which the dates related to cash dividends occur?

a. declaration, record, payment

16-2. The Common Stock Dividend Distributable account is classified as a/an:

a. current liability account

You answered correctly! The account is a shareholders' equity account and

a. Shareholders' Equity: Decreases, Retained Earnings: No Change

You answered correctly! The declaration of a stock dividend decreases

16-4. A stock split will

a. increase the number of shares outstanding

a. To use them as compensation to employees.

The correct answer is "d". Your choice of "a" was incorrect. When a

16-6. Which of the following accounts would not be classified as a contributed

a. Contributed Capital, Common Shares

The correct answer is "b". Your choice of "d" was incorrect. The

16-7. Which of the following is true?

a. Treasury shares receive cash dividends.

16-8. Jute Enterprises issues 10,000 shares of common stock on January 1,

a. debit to retained earnings for $120,000

You answered correctly! The stock dividend amount is determined by

16-9. Which of the following events might be considered as extraordinary?

a. Gains and losses from retiring debt.

The correct answer is "a". Your choice of "b" was incorrect. To be an

You answered correctly! The weighted average number of shares

16-14. Which of the following is NOT true with regard to appropriations of

a. They will restrict the amount of possible cash dividends.

You answered correctly! While appropriations of retained earnings restricts

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