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PRACTICAL ACCOUNTING 1 – REVIEW

SHAREHOLDERS' EQUITY

PROF. U.C. VALLADOLID

Multiple Choice
Identify the letter of the choice that best completes the statement or answers the question.

1. On January 1, 2017, Ritter Company granted share options to officers and key employees for the
purchase of 10,000 ordinary shares of the company's 1 par at 20 per share as additional
compensation for services to be rendered over the next three years. The options are exercisable
during a five-year period beginning January 1, 2019 by grantees still employed by Ritter. The Black-
Scholes option pricing model determines total compensation expense to be 90,000. The market
price of ordinary shares was 26 per share at the date of grant. The journal entry to record the
compensation expense related to these options for 2017 would include a credit to the Share
Premium—Share Options account for
a. 0.
b. 18,000.
c. 20,000.
d. 30,000.

2. On January 1, year 1, JP Corp. granted an employee an option to purchase 3,000 shares of JP’s 5
par value ordinary share at 20 per share. The option became exercisable on December 31, year 2,
after the employee completed two years of service. The option was exercised on January 10, year
3. The market prices of JP’s stock and stock options were as follows:
Date Market price of stock Market price of similar stock option January 1, year 1 30 8 December 31,
year 2 50 9 January 10, year 3 45 11 For year 1, JP should recognize compensation expense of
a. 45,000
b. 30,000
c. 15,000
d. 12,000

3. Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-
purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary
shares (par value 1 per share) at a 20 percent discount. The purchase price must be paid
immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each
employee purchases on average 80 shares at 22 share (market price 27.50). Under IFRS, Anazazi
Co. will record
a. No compensation since the plan is used to raise capital, not compensate employees.
b. Compensation expense of 5,500,000.
c. Compensation expense of 18,700,000.
d. Compensation expense of 3,740,000.

4. On January 2, 2017, for past services, Rosen Corp. granted Nenn Pine, its president, 16,000
share appreciation rights that are exercisable immediately and expire on January 2, 2018. On
exercise, Nenn is entitled to receive cash for the excess of the market price of the shares on the
exercise date over the market price on the grant date. Nenn did not exercise any of the rights during
2017. The market price of Rosen's shares was 30 on January 2, 2017, and 45 on December 31,
2017. As a result of the share appreciation rights, Rosen should recognize compensation expense
for 2017 of
a. 0.
b. 80,000.
c. 240,000.
d. 480,000.

5. Berry Corporation has 50,000 shares of 10 par ordinary shares authorized. The following
transactions took place during 2017, the first year of the corporation’s existence:
Sold 5,000 ordinary shares for 18 per share.
Issued 5,000 ordinary shares in exchange for a patent valued at 100,000.
At the end of the Berry’s first year, total contributed capital amounted to
a. 40,000.
b. 90,000.
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c. 100,000.
d. 190,000.

6. Hiro Corp. issues 1,000 5 par value ordinary shares and 1,000 20 par value preference shares for a
lump sum of 60,000. At the issue date, the ordinary shares were selling for 36 and the preference
shares were selling for 28. The Share Premium—Ordinary account will be credited for
a. 31,000
b. 36,000
c. 26,250
d. 28,750

7. Percy Corporation was organized on January 1, 2017, with an authorization of 1,200,000 ordinary
shares with a par value of 6 per share. During 2017, the corporation had the following capital
transactions:
January 5 issued 675,000 shares @ 10 per share
July 28 purchased 90,000 shares @ 11 per share
December 31 sold the 90,000 shares held in treasury @ 18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares. What is
the total amount of share premium as of December 31, 2017?
a. -0-.
b. 2,070,000.
c. 2,700,000.
d. 3,330,000.

8. On December 1, 2017, Abel Corporation exchanged 20,000 shares of its 10 par value ordinary
shares held in treasury for a used machine. The treasury shares were acquired by Abel at a cost of
40 per share, and are accounted for under the cost method. On the date of the exchange, the
ordinary shares had a fair value of 55 per share (the shares were originally issued at 30 per
share). As a result of this exchange, Abel's total equity will increase by
a. 200,000.
b. 800,000.
c. 1,100,000.
d. 900,000.

9. Everwood Co. issues 10,000 shares of 10 par value convertible preference shares for 12 cash per
share. Each share is convertible into 4 ordinary shares. On this date the 1 par value ordinary shares
are selling for 3 per share. Approximately 2 years later, Everwood’s shareholders convert their
preference shares into ordinary shares. On the date of conversion the preference shares are selling
for 16 and the ordinary shares are selling for 5 per share. The journal entry on the date of
conversion will include which of the following?
a. Credit Share Capital—Preference 20,000.
b. Credit Share Premium—Ordinary 80,000.
c. Credit Share Capital—Ordinary 100,000.
d. Credit Share Premium—Ordinary 160,000.

10. Janae Corporation has outstanding 10,000 shares of 10 par value ordinary shares and retained
earnings of 500,000. If Janae declares a 2-for-1 share split when the fair value of the shares is 85
per share, the entry includes:
a. A debit to Retained Earnings for 10,000.
b. A credit to Share Premium—Ordinary for 75,000.
c. A debit to cash for 85,000.
d. No entry is required for a share split.

11. The December 31, 2016 balance sheet of Jerome Company reported total assets of P 1,050,000
and total liabilities of P 680,000. The following information relates to the year 2017:

Jerome Company issued an additional 5,000 ordinary shares at P25 per share on
July 1, 2017
Jerome Company paid dividends totaling P80,000.
Net income for 2017 was P 110,000.
No other changes occurred in shareholders’ equity during 2017.
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The shareholders’ equity section of the December 31, 2017 balance sheet would report a balance
of
a. 400,000
b. 525,000
c. 685,000
d. 835,000

12. On December 1, 2017, Joshtin Company received a donation of 2,000 shares of its P50 par value
ordinary share from a stockholder. On that date, the stock’s market value was P350 per share.
The stock was originally issued for P250 per share.
By what amount would this donation cause total stockholders’ equity to decrease?
a. 700,000 c. 200,000
b. 500,000 d. 0

13. In 2016, Rose Corporation issued 50,000 shares of P10 par value ordinary share for P100 per
share. In 2017, Rose acquired 2,000 of its shares at P150 per share and immediately canceled
these 2,000 shares.
In connection with the retirement of these 2,000 shares, Rose should debit
Share premium Retained earnings
A 20,000 280,000
B 100,000 180,000
C 180,000 100,000
D 280,000 0

14. On July 1, 2017, Kristine Company issued rights to stockholders to subscribe to additional shares of
its ordinary share. One right was issued for each share owned. A stockholder could purchase one
additional share for 10 rights plus P30 cash. The rights expired on December 31, 2017. On July 1,
2017, the market price of a share with the right attached was P40 while the market price of one right
alone was P2. All stock rights were exercised on December 31, 2017. Kristine’s stockholders’
equity on June 30, 2017 comprised the following:
Ordinary share, P25 par value, 40,000 shares issued and
outstanding 1,000,000
Share premium 600,000
Retained earnings 800,000
What is the contributed capital on December 31, 2017?
a. 2,400,000
b. 1,600,000
c. 1,100,000
d. 1,720,000

15. East Co. issued 1,000 shares of its 5 par ordinary share to Howe as compensation for 1,000 hours
of legal services performed. Howe usually bills 160 per hour for legal services. On the date of
issuance, the stock was trading on a public exchange at 140 per share. By what amount should the
Share Premium account increase as a result of this transaction?
a. 135,000
b. 140,000
c. 155,000
d. 160,000

16. On July 1, year 1, Cove Corp., a closely held corporation, issued 6% bonds with a maturity value of
60,000, together with 1,000 shares of its 5 par value ordinary share, for a combined cash amount of
110,000. The market value of Cove’s stock cannot be ascertained. If the bonds were issued
separately, they would have sold for 40,000 on an 8% yield to maturity basis. What amount should
Cove report for share premium on the issuance of the stock?
a. 75,000
b. 65,000
c. 55,000
d. 45,000
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17. During year 1, Brad Co. issued 5,000 shares of 100 par convertible preferred stock for 110 per
share. One share of preferred stock can be converted into three shares of Brad’s 25 par ordinary
share at the option of the preferred shareholder. On December 31, year 3, when the market value of
the ordinary share was 40 per share, all of the preferred stock was converted. What amount should
Brad credit to ordinary share and to share premium—ordinary share as a result of the conversion?
ordinary share Share premium
a. 375,000 175,000
b. 375,000 225,000
c. 500,000 50,000
d. 600,000 0

18. At December 31, year 1, Rama Corp. had 20,000 shares of 1 par value treasury stock that had
been acquired in year 1 at 12 per share. In May year 2, Rama issued 15,000 of these treasury
shares at 10 per share. The cost method is used to record treasury stock transactions. Rama is
located in a state where laws relating to acquisition of treasury stock restrict the availability of
retained earnings for declaration of dividends. At December 31, year 2, what amount should Rama
show in notes to financial statements as a restriction of retained earnings as a result of its treasury
stock transactions?
a. 5,000
b. 10,000
c. 60,000
d. 90,000

19. Cyan Corp. issued 20,000 shares of 5 par ordinary share at 10 per share. On
December 31, year 1, Cyan’s retained earnings were 300,000. In March year 2, Cyan reacquired
5,000 shares of its ordinary share at 20 per share. In June year 2, Cyan sold 1,000 of these shares
to its corporate officers for 25 per share. Cyan uses the cost method to record treasury stock. Net
income for the year ended December 31, year 2, was 60,000. At December 31, year 2, what
amount should Cyan report as retained earnings?
a. 360,000
b. 365,000
c. 375,000
d. 380,000

20. In year 1, Rona Corp. issued 5,000 shares of 10 par value ordinary share for 100 per share. In year
3, Rona reacquired 2,000 of its shares at 150 per share from the estate of one of its deceased
officers and immediately canceled these 2,000 shares. Rona uses the cost method in accounting for
its treasury stock transactions. In connection with the retirement of these 2,000 shares, Rona
should debit
Share premium Retained earnings
a. 20,000 280,000
b. 100,000 180,000
c. 180,000 100,000
d. 280,000 0

21. On December 1, year 1, Nilo Corp. declared a property dividend of marketable securities to be
distributed on December 31, year 1, to stockholders of record on December 15, year 1. On
December 1, year 1, the trading securities had a carrying amount of 60,000 and a fair value of
78,000. What is the effect of this property dividend on Nilo’s year 1 retained earnings, after all
nominal accounts are closed?
a. 0.
b. 18,000 increase.
c. 60,000 decrease.
d. 78,000 decrease.

22. On January 2, year 1, Kine Co. granted Morgan, its president, compensatory stock options to buy
1,000 shares of Kine’s 10 par ordinary share. The options call for a price of 20 per share and are
exercisable for three years following the grant date. Morgan exercised the options on December 31,
year 1. The market price of the stock was 50 on January 2, year 1, and 70 on December 31, year 1.
The fair value of a similar stock option with the same terms was 28 on the grant date.

Q1. What is compensation expense for year 1 for the share-based payments?
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a. 9,333
b. 10,000
c. 20,000
d. 28,000

Q2. By what net amount should stockholders’ equity increase as a result of the grant and exercise
of the options?
a. 48,000
b. 30,000
c. 20,000
d. 70,000

23. On January 1, 2014, Jerome Company granted 60,000 share options to employees. The share
options will vest at the end of three years provided the employees remain in service until then. The
option price is 60 and the par value is 50. At the date of grant the company concluded that the fair
value of the share options cannot be measured reliably. The share options can be exercise within
one year after the vesting period.

The share prices are 62 on December 31, 2014, 66 on December 31, 2015, 75 on December 31,
2016 and 85 on December 31, 2017. All share options were exercise on December 31, 2017.

What is the compensation expense for the year 2014?

a. 200,000
b. 600,000
c. 660,000
d. 40,000

What is the compensation expense for the year 2015?

a. 900,000
b. 600,000
c. 660,000
d. 200,000

What is the compensation expense for the year 2016?

a. 900,000
b. 600,000
c. 660,000
d. 200,000

What is the compensation expense for the year 2017?

a. 900,000
b. 600,000
c. 660,000
d. 0

24. On January 1, 2015, Jerome Company granted 100 share options each, to 500 employees,
conditional upon the employee’s remaining in the company during the vesting period. The share
options vest at the end of the three-year period. On grant date, each share option has a fair value
of 30. The par value is 100 and the option price is 120.

On December 31, 2016, 30 employees have left and it is expected that on the basis of weighted
average probability, a further 30 employees will leave before the end of the three year period. On
December 31, 2017, only 20 employees actually left and all the share options are exercise on that
date.

How much is the compensation expense that should be recognized for the year 2015?
a. 500,000
b. 880,000
c. 380,000
d. 470,000

How much is the compensation expense that should be recognized for the year 2016?
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a. 500,000
b. 880,000
c. 380,000
d. 470,000

How much is the compensation expense that should be recognized for the year 2017?
a. 500,000
b. 880,000
c. 380,000
d. 470,000

25. In September year 1, West Corp. made a dividend distribution of one right for each of its 120,000
shares of outstanding ordinary share. Each right was exercisable for the purchase of 1/100 of a
share of West’s 50 variable rate preferred stock at an exercise price of 80 per share. On March 20,
year 3, none of the rights had been exercised, and
West redeemed them by paying each stockholder 0.10 per right. As a result of this redemption,
West’s stockholders’ equity was reduced by
a. 120
b. 2,400
c. 12,000
d. 36,000

26. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of 2 par value
common stock, which had a fair value of 5 per share before the stock dividend was declared. This
stock dividend was distributed sixty days after the declaration date. By what amount did Ray’s
current liabilities increase as a result of the stock dividend declaration?
a. 0
b. 500
c. 1,000
d. 2,500

27. The following information pertains to Meg Corp.:

Dividends on its 1,000 shares of 6%, 10 par value cumulative preferred stock
have not been declared or paid for three years.
Treasury stock that cost 15,000 was reissued for 8,000.
What amount of retained earnings should be appropriated as a result of these items?
a. 0
b. 1,800
c. 7,000
d. 8,800

28. The stockholders’ equity section of Brown Co.’s December 31, year 1 balance sheet consisted of
the following:
Common stock, 30 par, 10,000 shares authorized and outstanding 300,000 Additional paid-in
capital 150,000 Retained earnings (deficit) (210,000) On January 2, year 2, Brown put into effect a
stockholder-approved quasi reorganization by reducing the par value of the stock to 5 and
eliminating the deficit against additional paid-in capital. Immediately after the quasi reorganization,
what amount should Brown report as additional paid-in capital?
a. (60,000)
b. 150,000
c. 190,000
d. 400,000

29. New Orleans co. had the following classes of shares outstanding as of December 31,2016:

Ordinary shares, P20 par value, 20,000 outstanding; Preference shares, 6% P100 par value,
cumulative and fully participating, 1,000 shares were outstanding.

The last payment of preference dividend was on December 31,2012. On December

31,2016, a total cash dividend of P90,000 was declared.
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What are the amounts of dividends payable on both the ordinary and preference shares,
respectively?
a. 57,600 and 32,400
b. 62,400 and 27,600
c. 67,200 and 22,000
d. 72,000 and 18,000

30. On January 2, 2016, Regina Co. declared and distributed its only investment in available for sale
security as dividend. At the time of declaration, the available for sale security has a carrying value of
P500,000 and a related unrealized loss of P100,000.

By what amount should Regina Co. charge its Accumulated Profits and Losses as a result of the
property dividend declaration?
a. 100,000
b. 400,000
c. 500,000
d. 600,000

31. The shareholder’s equity of Dixie Co. on January 1, 2016 is as follows:

Ordinary shares, P20 par, 60,000 shares authorized,

30,000 shares issued and outstanding 600,000
Share premium 100,000
Accumulated profits 325,000

On June 1, 2016 the company declared and issued a 15% share dividend. The market value of the
share on June 1 is P26 per share. No additional shares of ordinary were issued between January 1
and June 1, 2016.

How much is the total contributed capital after the share dividend?
a. 780,000
b. 790,000
c. 817,000
d. 924,000

32. On December 31, 2015, Dayrit Co. reported a P3,500,000 of appropriated accumulated profits for
the construction of a new building, which was completed in 2016 at a total cost of P3,000,000. In
2016, the company appropriated P2,400,000 of accumulated profits for the construction of a new
plant. The company also restricted P4,000,000 of cash for the retirement of bonds due in 2018.

In its 2016 balance sheet, what amount of appropriated accumulated profits and losses should
Dayrit Co. report?
a. 2,400,000
b. 2,900,000
c. 5,900,000
d. 6,400,000

33. The following information pertains to Martial Law corp.:

Dividends on its 1,000 shares of 6%, P10 par value cumulative preference shares
have not been declared or paid for 3 years.
Treasury shares that cost P15,000 were reissued for P8,000
What amount of accumulated profits should be appropriated as a result of these items?
a. 0
b. 1,800
c. 7,000
d. 8,800

34. Selected information from the accounts of Ian Co. at December 31, 2016 follows:

Total income since incorporation P420,000

Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
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Excess of proceeds over cost of treasury shares

sold, accounted for using the cost method 110,000

In its December 31, 2016 financial statements, what amount should Ian report as Accumulated
Profits?
a. 260,000
b. 290,000
c. 370,000
d. 400,000

35. Vic Co. paid dividends of P200,000 and P300,000 at the end of 2015 and 2016, respectively. The
corporation has not paid any other dividends since its organization on January 4,2015. The
outstanding shares are 20,000, 12% preference shares, par P100 and 30,000 ordinary shares, par
P100.

If a preference share is non-cumulative and nonparticipating, how much would be received in 2015
by the preference and ordinary shareholders, respectively?
a. 100,000 and 100,000
b. 150,000 and 50,000
c. 160,000 and 40,000
d. 200,000 and 0

If preference shares were cumulative and nonparticipating, how much would the preference and
ordi bnary shareholders, respectively, receive in 2016?
a. 150,000 and 150,000
b. 240,000 and 60,000
c. 280,000 and 20,000
d. 300,000 and 0

36. X-Men corp. has incurred losses from operations for many years. At the recommendation of the
newly hired president, the board of directors voted to implement quasi-reorganization, subject to
stockholders’ and creditors’ approval. Immediately, prior to the quasi-reorganization, on June 30,
2016, X-Men’s balance sheet was as follows:
Assets
Current assets P1,375,000
Property, plant and Equipment 3,375,000
Other non current assets 500,000
Total assets P5,250,000

Liabilities & Stockholders’ Equity

Total liabilities 1,500,000
Ordinary share, P10 par 4,000,000
Share premium 750,000
Retained earnings (1,000,000)
Total liabilities & stockholders’ equity 5,250,000

The stockholders and the creditor approved the quasi-reorganization effective July 1, 2016, to be
accomplished by a reduction in property, plant, and equipment (net) of P875,000, a reduction in
other non current assets of P375,000, and a reduction in par value from P10 t oP5.

1. X-Men’s July 1, 2016, balance sheet after the quasi-reorganization should show a total assets of
a. 4,000,000
b. 2,500,000
c. 4,375,000
d. 3,875,000

2. The balance in the Share premium account after the quasi-reorganization on July 1, 2016 should
be
a. 750,000
b. 2,000,000
c. 500,000
d. 0
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3. X-Men’s deficit after the quasi-reorganization on July 1, 2016 should be

a. 1,000,000
b. 250,000
c. 500,000
d. 0

37. The following are the stockholders’ equity accounts of Jostine o. at December 31, 2016:
Common stock, P10 par; authorized 200,000 shares;
issued 90,000 shares P900,000
Preferred stock, 12% P25 par; authorized 100,000
shares; issued 15,000 shares; cumulative 375,000
Additional paid in capital 2,500,000
Retained earnings 4,750,000
Treasury stock (7,500 common shares) 371,250

The preferred stock is participating in distribution in excess of a 15% dividend rate on the common
stock. No dividends have been paid in 2014 or 2015. On December 31, 2016, Jostine wants to pay
a cash dividend of P2 a share to common shareholders.

What is the amount to be paid to preferred stockholders?

a. 153,750
b. 90,000
c. 108,750
d. 135,000

What is the amount to be paid to common stockholders?

a. 105,750
b. 123,750
c. 99,000
d. 165,000

38. On January 1, 2016 Grrr Company granted an officer 25,000 share appreciation rights for past
services. The rights are exercisable immediately and expire on December 31, 2017. On exercise,
the officer is entitled to receive cash for the excess of the share market price on exercise date over
the market price on grant date. Such officer exercise no rights in 2016. The market price of each
share was 50 on January 1, 2016 and 55 on December 31, 2016. The officer exercise the rights
when the market value of each share was 53.

What amount should be recognized as gain on reversal of share appreciation rights in 2017?
a. 25,000
b. 50,000
c. 75,000
d.100,000

39. On January 1, 2015, Ana Company offered its chief executive officer, stock appreciation rights with
the following terms:
Predetermined price P100 per share
Number of shares 10,000 shares
Service period – 3 years 2015,2016 and 2017
Exercise date December 31, 2017
The stock appreciation rights are exercised on December 31, 2017. The quoted price of the Ana
stock is as follows: P118 on December 31, 2015, P112 on December 31, 2016, and P124 on
December 31, 2017.
Ana Company should record 2017 compensation expense at
a. 160,000
b. 60,000
c. 80,000
d. 20,000