MCQ----Chapter (14)

1. Each of the following decreases retained earnings except a

a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. Net loss.
Ans: b
2. The date on which a cash dividend becomes a binding legal
obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.
Ans: a
3. The effect of the declaration of a cash dividend by the board of
directors is to

Increase Decrease
a. Equity Assets
b. Assets Liabilities
c. Liabilities Equity
d. Liabilities Assets
Ans: c
4. The cumulative effect of the declaration and payment of a cash
dividend on a company's financial statements is to
a. decrease total liabilities and equity.
b. increase total expenses and total liabilities.
c. increase total assets and equity.
d. decrease total assets and equity.

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Ans: d
5. Seung Company has 2,000 shares of 5%, HK$10 par value,
cumulative preferred shares and 50,000 shares of HK$1 par value
common shares outstanding at December 31, 2020. What is the
annual dividend on the preferred shares?
a. HK$5 per share
b. HK$1,000 in total
c. HK$10,000 in total
d. HK$.05 per share
Ans: b,
Solution: (.05) (HK$10) (2,000) = HK$1,000
(dividends percentage x Par value x number of preferred shares = Ann.
div.)
6. Peabody has 5,000 shares of 7%, €100 par value, cumulative
preferred stock and 50,000 common stock with a €1 par value
outstanding at December 31, 2020. If the board of directors declares
a €30,000 dividend, the
a. preferred shareholders will receive 1/10th of what the common
shareholders will receive.
b. preferred shareholders will receive the entire €30,000.
c. €30,000 will be held as restricted retained earnings and paid out
at some future date.
d. preferred shareholders will receive €15,000 and the common
shareholders will receive €15,000.
Ans: b,
Solution: (5,000) (.07) ($100) = €35,000
(number of shares. x Par value x dividends percentage)
7. Rendezvous has 10,000 shares of 5%, $100 par value,
noncumulative preferred stock and 20,000 common stock with a $1
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 par value outstanding at December 31, 2020. There were no
dividends declared in 2019. The board of directors declares and pays
a $110,000 dividend in 2020. What is the amount of dividends
received by the common shareholders in 2020?
a. $0
b. $50,000
c. $110,000
d. $60,000
Ans: d,
Solution: (10,000) (.05) ($100) = $50,000; $110,000 − $50,000 = $60,000
[(number of shares x dividends percentage x par value) ;
Cash dividends declared – dividends paid to preferred = dividends paid to
common]
8. Bodkin, Inc. has 5,000 shares of 5%, $100 par value, noncumulative
preferred shares and 50,000 common shares with a $1 par value
outstanding at December 31, 2019, and December 31, 2020. The
board of directors declared and paid a $25,000 dividend in 2019. In
2020, $55,000 of dividends are declared and paid. What are the
dividends received by the preferred and common shareholders in
2020?

Preferred Common
a. $0 $55,000
b. $25,000 $30,000
c. $27,500 $27,500
d. $35,000 $20,000
Ans: b,
Solution: (5,000) (.05) ($100) = $25,000; $55,000 − $25,000 = $30,000

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 9. The cumulative effect of the declaration and payment of a cash
dividend on a company's statement of financial position is to
a. decrease current liabilities and equity.
b. increase total assets and equity.
c. increase current liabilities and equity.
d. decrease equity and total assets.
Ans: d,
10.Dividends are normally declared out of
a. Paid in capital.
b. Treasury Shares.
c. Capital stock.
d. Retained Earnings.
Ans: d,
11.On the dividend record date,
a. a dividend becomes a current obligation.
b. no entry is required.
c. an entry may be required if it is a share dividend.
d. Dividends Payable is debited.
Ans: b,
12.Dividends Payable is classified as a
a. Non-current liability.
b. contra equity account to Retained Earnings.
c. current liability.
d. equity account.
Ans: c,
13. Somento Forest Inc. has 10,000 shares of 6%, $100 par value,
cumulative preferred shares and 100,000 common shares with a $1
par value outstanding at December 31, 2020. What is the annual
dividend on the preferred stock?

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 a. $60 per share
b. $60,000 in total
c. $100,000 in total
d. $0.60 per share
Ans: b,
Solution: (.06) ($100) (10,000) = $60,000
14. The declaration of a stock dividend will
a. increase paid in capital.
b. change total equity.
c. increase total liabilities.
d. increase total assets.
Ans: a,
15.Which of the following show the proper effect of a stock split and a
stock dividend?

Item stock Split stock Dividend

a. Total equity Increase Increase
b. Total retained earnings Decrease Decrease
c.Total par value (common) Decrease Increase
d. Par value per share Decrease No change
Ans: d,
16.On January 1, Ecuyer Corporation had 1,600,000 common shares
with a €10 par value outstanding. On March 31, the company
declared a 15% stock dividend. Market value of the shares was
€15/share. As a result of this event,
a. Ecuyer’s paid in capital account increased €1,200,000.
b. Ecuyer’s total equity was unaffected.
c. Ecuyer’s Stock Dividends account increased €3,600,000.
d. All of these answer choices are correct.

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Ans: d,
17. When stock dividends are distributed,
a. Common stock Dividends Distributable is decreased.
b. Retained Earnings is decreased.
c. paid in capital is debited if it is a small share dividend.
d. no entry is necessary if it is a large share dividend.
Ans: a,
18.Common stock Dividends Distributable is classified as a(n)
a. asset account.
b. equity account.
c. expense account.
d. liability account.
Ans: b,
19. If a corporation declares a 10% stock dividend on its common
shares, the account to be debited on the date of declaration is
a. Common stock Dividends Distributable.
b. Capital stock.
c. paid in capital.
d. stock Dividends.
Ans: d,
20. Stock dividends and stock split have the following effects on
retained earnings:

Stock split Stock Dividends

a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change
Ans: b,

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 21. On January 1, Layline Corporation had 160,000 common shares
with a €10 par value outstanding. On June 17, the company declared
a 15% stock dividend to shareholders of record on June 20. Market
value of the shares was €15 on June 17. The shares were distributed
on June 30. The entry to record the transaction of June 30 would
include a
a. credit to common stock for €240,000.
b. debit to common stock Dividends Distributable for €360,000.
c. credit to Paid-in Capital in Excess of Par for €120,000.
d. debit to stock Dividends for €120,000.
Ans: a,
Solution: (160,000) (.15) (€10) = €240,000
22. Weng Company declares a 10% stock dividend when it has 60,000
common shares of HK$10 par value outstanding. If the market value
of HK$24 per share is used, the amounts debited to stock Dividends
and credited to paid in capital are:
Stock Dividends paid in capital
a. HK$60,000 HK$0
b. HK$144,000 HK $84,000
c. HK$144,000 HK $60,000
d. HK$60,000 HK $84,000
Ans: b,
Solution: (60,000) (.10) (HK$24) = HK$144,000; HK$144,000 − (6,000)
(HK$10) = HK$84,000
23. The following selected amounts are available for Chen Company.

Retained earnings (beginning)HK$1,600

Net loss 300
Cash dividends declared 200

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 Stock dividends declared 200

What is its ending retained earnings balance?

a. HK$1,300
b. HK$1,400
c. HK$900
d. HK$1,200
Ans: c,
Solution: HK$1,600 − HK$300 − HK$200 − HK$200 = HK$900
(Beg. RE – Net loss – Cash div. declrd. – sh. div. declrd. = End. RE)
24. Prior period adjustments are reported
a. in the footnotes of the current year's financial statements.
b. on the current year's statement of financial position.
c. on the current year's income statement.
d. on the current year's retained earnings statement.
Ans: d,
25. Retained earnings is increased by each of the following except
a. net income.
b. prior period adjustments.
c. some disposals of treasury shares.
d. All of these increase retained earnings.
Ans: c,
26. A prior period adjustment for understatement of net income will
a. be credited to the Retained Earnings account.
b. be debited to the Retained Earnings account.
c. show as a gain on the current year's Income Statement.
d. show as an asset on the current year's Statement of Financial
Position.
Ans: a,

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 27. The retained earnings statement
a. is the equity statement for a corporation.
b. will show an addition to the beginning retained earnings balance
for an understatement of net income in a prior year.
c. will not reflect net losses.
d. will, in some cases, fail to reconcile the beginning and ending
retained earnings balances.
Ans: b,
28. Ellis Corporation had net income of €500,000 and paid dividends
of €100,000 to common stock and €20,000 to preferred stock in
2020. Ellis Corporation’s common stockholders’ equity at the
beginning and end of 2020 was €1,740,000 and €2,260,000,
respectively. There are 400,000 weighted-average common shares
outstanding.
Ellis Corporation’s earnings per share for 2020 was
a. €6.20.
b. €1.20.
c. €1.25.
d. €5.00.
Ans: b,
Solution: (€500,000 − €20,000)  400,000 = €1.20
29. Assume that all statement of financial position amounts for Hiro
Company represent average balance figures.

Common stock HK$300,000

Total equity 400,000
Sales revenue 200,000
Net income 54,000
Number of common shares 20,000

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 Common stock dividends 20,000
Preferred stock dividends 8,000
What is the return on common stockholders’ equity for Hiro?
a. 18.0%
b. 15.3%
c. 11.3%
d. 8.7%
Ans: b,
Solution: (HK$54,000 − HK$8,000)  HK$300,000 = 15.3%
30. Assume that all statement of financial position amounts for Carolina
Company represent average balance figures.

Common stock €360,000

Total equity 800,000
Sales revenue 400,000
Net income 76,000
Number of common shares 40,000
common stock dividends 24,000
Preferred stock dividends 4,000
What is the earnings per share for Carolina?
a. €1.90
b. €1.80
c. €1.20
d. €2.00
Ans: b,
Solution: (€76,000 − €4,000)  40,000 = €1.80
31. The formula for computing earnings per share is net income
a. divided by the ending common shares outstanding.

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 b. divided by the weighted-average number of common shares
outstanding.
c. less preference dividends divided by the ending common shares
outstanding.
d. less preferred dividends divided by the weighted-average number
of common shares outstanding.
Ans: d,
32. Prior period adjustments
a. may only increase retained earnings.
b. may only decrease retained earnings.
c. may either increase or decrease retained earnings.
d. do not affect retained earnings.
Ans: c,
33. During 2010, Wells Corporation reported a net income of
$1,338,400. On January 1, Wells had 720,000 shares of common
stock outstanding. The company issued an additional 480,000 shares
of common stock on August. In 2010, the company had a simple
capital structure. compute earnings per share for 2010.
Sol: EPS = ($1338400 – zero) / (720000 * 12/12 + 480000 * 5/12)
= $ 1.45 / share.

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