Deck 10: Owners Equity

Question 1

Which of the following represents the residual interest in a company?

A)Preferred shares
B)Contributed surplus
C)Convertible bonds
D)Common shares

Answer 1

D

Question 2

What is a security that has the characteristics of both debt and equity called?

A)A preferred security
B)A common security
C)A hybrid security
D)A participating security

Answer 2

C

Question 3

Which of the following is an example of a hybrid security?

A)A common share
B)A non-voting common share
C)A convertible preferred share
D)A bond.

Answer 3

C

Question 4

In which form of organization would the bottom line on the statement of operations be referred to as "excess of revenues over expenses"?

A)General partnership
B)Not-for-profit organization
C)Proprietorship
D)Corporation

Question 5

Which of the following accounts would appear on a partnership's financial statements, but not on a corporation's financial statement?

A)Drawings
B)Cost of goods sold
C)Wage expense
D)Income tax expense

Question 6

Four individuals are interested in forming a business.Three of the individuals will be actively involved in the daily operations of the business, while the fourth person is going to invest some capital but not be involved in the daily running of the business.Which of the following forms of organization would be the best choice for this business?

A)Not-for-profit organization
B)Limited partnership
C)Corporation
D)Proprietorship

Question 7

Which of the following statements best describes the owner's equity in an entity?

A)The owner's direct investments in the company.
B)The owner's indirect investments in the company.
C)The market value of the company.
D)The residual interest in the assets.

Question 8

Which of the following preferred share characteristics allow the shareholder to have increases in their dividends above the stated amount?

A)Convertible
B)Redeemable
C)Participating
D)Cumulative

Question 9

Shareholders invest in companies directly and indirectly.Which of the following represent those investments?
$$\begin{array} { l l } &\text { Direct } & \text { Indirect } \\A.&\text { Capital stock } & \text { Preferred shares } \\B.&\text { Capital stock } & \text { Retained earnings } \\C.&\text { Retained earnings } & \text { Contributed surplus } \\D.&\text { Retained earnings } & \text { Capital stock }\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D

Question 10

Which of the following statements concerning equity is correct?

A)A shareholder is entitled to a regular dividend.
B)The rights of the shareholder come before those of debt holders.
C)A shareholder can require the company to buy back his common shares at any time.
D)If a corporation goes bankrupt, shareholders will only receive a return on their investment after all debt holders have been paid.

Question 11

From the company's point of view, which of the following is an advantage of financing with equity as opposed to debt?

A)Dividends are not an expense.
B)Equity does not have committed payments.
C)Shareholders have the right to vote.
D)The cost of equity is not tax deductible.

Question 12

Which of the following preferred share characteristics allow the issuer to repurchase the preferred shares from the shareholder?

A)Convertible
B)Redeemable
C)Retractable
D)Cumulative

Question 13

Which of the following actions does a company undertake if they want to distribute money to shareholders from the profits earned?

A)Pay a dividend from retained earnings.
B)Pay a dividend from capital stock.
C)Buy back shares in the market.
D)Declare a stock dividend.

Question 14

Which form of organization offers unlimited liability to owners?

A)Limited partnership
B)Not-for-profit organization
C)Proprietorship
D)Corporation

Question 15

All of the following are characteristics of a corporation except?

A)It is a taxable entity.
B)It offers owners limited liability.
C)It is easy to establish.
D)It has access to more sources of funds.

Question 16

Which of the following expenses would appear on a corporation's income statement, but not on a partnership's income statement?

A)Drawings
B)Cost of goods sold
C)Wage expense
D)Income tax expense

Question 17

Which of the following is the maximum number of shares that can be issued by the corporation as per the articles of incorporation?

A)Authorized capital stock
B)Issued shares
C)Outstanding shares
D)Treasury shares

Question 18

Which of the following preferred share characteristics give the shareholders the right to force the issuer to purchase the shares from them?

A)Convertible
B)Redeemable
C)Retractable
D)Cumulative

Question 19

Which of the following preferred share characteristics allow the issuer to exchange their preferred shares for common shares?

A)Convertible
B)Redeemable
C)Retractable
D)Cumulative

Question 20

Which of the following best distinguishes preferred shares from common shares?

A)Preferred shares do not vote but do receive priority on dividends.
B)Preferred shares do not receive dividends but have priority on liquidation.
C)Preferred shares have the same dividends as common but receive priority on liquidation.
D)Preferred shares vote and receive priority on dividends and liquidation.

Question 21

A company had a beginning balance in retained earnings of $50,000.During the year, the company earned net income of $85,000 and paid a $15,000 cash dividend.The company also declared a 2:1 stock split, which resulted in the issue of 10,000 new shares.At the time of the stock split, the shares were selling at a market price of $12.What is the balance in retained earnings at the end of the year?

A)$0
B)$70,000
C)$120,000
D)$135,000

Question 22

When property is distributed as a dividend, when should the assets be re-valued to their market value?

A)The payment date
B)The last day of the accounting period
C)The declaration date
D)The record date

Question 23

Which of the following best describes non-participating preferred shares?

A)Preferred shareholders are not entitled to vote.
B)Preferred dividends for the year are limited to a specific amount or rate.
C)Preferred shareholders are not entitled to a prior year's dividend once that year has passed.
D)Preferred shareholders may receive dividends in excess of a specific rate if common shareholders have received their share of all dividends declared.

Question 24

When a cash dividend is declared, what accounts on the financial statements are affected?

A)Dividend expense and retained earnings
B)Dividend expense and dividends payable
C)Cash and retained earnings
D)Dividends payable and retained earnings

Question 25

Brooks Inc.has 750,000 common shares outstanding with a recorded book value of $15,000,000.On December 1st, when their shares were trading at $30 they declared 2-for-1 stock split.Which of the following journal entries would Brooks Inc.use to record the event? $\begin{array}{lc}\text { A) Dr. Retained earnings } & 22,500,000 \\\text { Cr. Common shares } & {22,550,000} \\\text { B) Dr. Retained earnings } & 15,000,000 \\\text { Cr. Common shares } &{15,000,000} \\\text { C) Dr. Retained earnings } & 7,500,000 \\\text { Cr. Common shares } & 7,500,000 \\\text { D) No journal entry is required. } &\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 26

If a company declares a stock split, what is the effect on their retained earnings and earnings per share?

$\begin{array}{ll}&\text { Retained } & \text { Earnings } \\&\text { Earnings } & \text { per Share }\\\hlineA.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Decreased } \\C.&\text { Decreased } & \text { Unchanged } \\D.&\text { Decreased } & \text { Decreased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 27

Brooks Inc.has 750,000 common shares outstanding with a recorded book value of $15,000,000.On December 1st when their shares were trading at $30 they declared and distributed a 10% stock dividend.Which of the following journal entries would Brooks Inc.use to record the event?

A. Dr. Retained earnings $\quad 2,250,000$
Cr. Common shares $\quad 2,250,000$

B. Dr. Retained earnings $\quad 1,500,000$
Cr. Common shares $\quad 1,500,000$

C. Dr. Retained earnings $\quad 750,000$
Cr. Common shares $\quad 750,000$

D. No journal entry is required

A)Option A
B)Option B
C)Option C
D)Option D

Question 28

During 2014, Airdrie Company discovered that in 2013 they had forgotten to record depreciation expense of $12,500 on office equipment.What journal entry would they make in 2014? (You may ignore any income tax effects.)

A. Dr. Office equipment $\quad 12,500$
Cr. Accumulated depreciation $\quad 12,500$

B. Dr. Retained earnings 12,500
Cr. Accumulated depreciation $\quad 12,500$

C. Dr. Depreciation expense $\quad 12,500$
Cr. Accumulated depreciation $\quad 12,500$

D. Dr. Accumulated depreciation $\quad 12,500$
Cr. Retained earnings $\quad 12,500$

A)Option A
B)Option B
C)Option C
D)Option D

Question 29

A company had a beginning balance in retained earnings of $50,000.During the year the company earned net income of $85,000 and paid a $15,000 cash dividend.The company also declared a 2% stock dividend, which resulted in the issue of 10,000 new shares.At the time of the stock dividend, the shares were selling at a market price of $3.What is the balance in retained earnings at the end of the year?

A)$40,000
B)$90,000
C)$120,000
D)$135,000

Question 30

Fort Saskatchewan Ltd.is choosing between paying out a stock dividend or a cash dividend.What will be the effect on their current ratio of the two choices?

$\begin{array}{ll}&\text { Stock } & \text { Cash } \\&\text { Dividend } & \text { Dividend }\\\hline A.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Decreased } \\C.&\text { Decreased } & \text { Unchanged } \\D.&\text { Decreased } & \text { Decreased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 31

At what amount is property dividend always recorded?

A)Net book value
B)Original cost
C)Fair market value
D)Replacement cost

Question 32

When should cash dividends be recorded?

A)On the payment date only.
B)The last day of the accounting period.
C)On the declaration date.
D)On the date of record.

Question 33

Which feature is common to both stock splits and stock dividends?

A)A reduction in total stockholders' equity.
B)A reduction in retained earnings.
C)An increase in the value of common shareholders' equity.
D)An increase in the number of shares outstanding.

Question 34

Fort Saskatchewan Ltd.is choosing between paying out a stock dividend or a cash dividend.What will be the effect on their debt-to-equity ratio of the two choices?

$\begin{array}{ll}&\text { Stock } & \text { Cash } \\&\text { Dividend } & \text { Dividend }\\\hlineA.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Increased } \\C.&\text { Increased } & \text { Unchanged } \\D.&\text { Increased } & \text { Increased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 35

When a cash dividend is paid, what accounts on the financial statements are affected?

A)Dividend expense and retained earnings
B)Cash and dividends payable
C)Cash and retained earnings
D)Dividends payable and retained earnings

Question 36

If a company declares a stock dividend, what is the effect on their retained earnings and earnings per share?

$\begin{array}{ll}&\text { Retained } & \text { Earnings } \\&\text { Earnings } & \text { per Share }\\\hlineA.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Decreased } \\C.&\text { Decreased } & \text { Unchanged } \\D.&\text { Decreased } & \text { Decreased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 37

All of the following are reasons a company might repurchase its own shares except:

A)to distribute excess cash to the shareholders.
B)as the first step in establishing a dividend policy.
C)to increase the earnings per share.
D)as a signal that management thinks the shares are undervalued on the market.

Question 38

Fort Saskatchewan Ltd.is choosing between paying out a stock dividend or a cash dividend.What will be the effect on their return on equity ratio of the two choices?
$\begin{array}{ll}&\text { Stock } & \text { Cash } \\&\text { Dividend } & \text { Dividend }\\\hlineA.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Increased } \\C.&\text { Increased } & \text { Unchanged } \\D.&\text { Increased } & \text { Increased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 39

Fort Saskatchewan Ltd.is choosing between paying out a stock dividend or a cash dividend.What will be the effect on their total assets of the two choices?
$\begin{array}{ll}&\text { Stock } & \text { Cash } \\&\text { Dividend } & \text { Dividend }\\\hline A.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Decreased } \\C.&\text { Decreased } & \text { Unchanged } \\D.&\text { Decreased } & \text { Decreased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 40

If a company declares a stock dividend, what is the effect on the shareholders' equity section and the ownership position of an individual shareholder?
$\begin{array}{ll}&\text { Shareholder's } & \text { Individual } \\&\text { Equity Section } & \text { Ownership Position }\\\hline A.&\text { Unchanged } & \text { Unchanged } \\B.&\text { Unchanged } & \text { Increased } \\C.&\text { Decreased } & \text { Unchanged } \\D.&\text { Decreased } & \text { Increased }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 41

All of the following statements regarding comprehensive income are true, except:

A)comprehensive income was created to be an all-inclusive measure of performance.
B)comprehensive income is not a requirement for public companies under IFRS.
C)comprehensive income captures all transactions and events, even those excluded from net income.
D)comprehensive income equals the sum of net income and other comprehensive income.

Question 42

Retained earnings would require adjustment for each of the following except:

A)a change in depreciation method from declining balance to straight-line.
B)a decrease in the estimated useful life of an asset.
C)discovering that an estimate for bad debt expense was not made last year.
D)changing from the direct write-off method of accounting for bad debts to the allowance.method.

Question 43

If a company borrows money to finance an investment and the return on the investment turns out to be lower than the cost of borrowing, which of the following statements is true?

A)The shareholders will earn a lower rate of return than if they hadn't borrowed money.
B)The shareholders will earn a higher rate or return than if they hadn't borrowed money.
C)The venture will break even, but not earn a return.
D)The investment will lose more money than if it had not been financed by debt.

Question 44

The use of debt to attempt to increase the return earned on owner's equity is referred to as:

A)debt financing.
B)equity manipulation.
C)leverage.
D)return on debt.

Question 45

If a company is using leverage successfully, which of the following will result?

A)Their ROE will increase.
B)Their ROE will decrease.
C)Their cost of borrowing will increase.
D)Their net income will decrease.

Question 46

What is the right granted to an employee to purchase shares at a specific price over a specific period of time?

A)A stock bonus plan
B)A stock dividend plan
C)An employee dividend option
D)An employee stock option

Question 47

Colborne Co.requires a $500,000 investment on which the partners expect to earn $50,000 before considering the cost of financing.The after-tax cost of debt is 6%.If the company decides to finance one-half of the investment with debt, how much greater will the returns to the shareholders be?

A)- 6%
B)4%
C)10%
D)14%

Question 48

A company has a tax rate of 40%.Leverage would be beneficial for the company for each of the following combinations of interest rates and ROA except: $\begin{array}{lll}&\text { Interest rate }&ROA\\\text { A) } & 4 \% & 6 \% \\\text { B) } & 7 \% & 6 \% \\\text { C) } & 14 \% & 10 \% \\\text { D) } & 16 \% & 10 \%\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 49

Spruce Grove Ltd.has total assets of $5 million and is currently financed entirely with equity.Spruce Grove Ltd.estimates that it could borrow money at a rate of 8%, and their current tax rate is 25%.Last year they earned net income of $200,000.What would their return on equity be if they financed their operations with 40% debt?

A)1.33%
B)2.67%
C)4.00%
D)8.00%

Question 50

The initial recording of employee stock options requires a debit to compensation expense and a credit to:

A)cash.
B)common shares.
C)contributed surplus.
D)retained earnings.

Question 51

Financial leverage occurs when the after-tax cost of borrowed funds is:

A)less than the after-tax return on assets.
B)greater than the after-tax return on assets.
C)equal to the after-tax return on assets.
D)greater than the after-tax return on equity.

Question 52

When is a stock option said to be in-the-money?

A)When the exercise price is greater than the average issue price of the shares.
B)When the exercise price is greater than the market price of the shares.
C)When the option is able to be exercised.
D)When the exercise price is less than the market price of the shares.

Question 53

Grand Prairie Company had an unrealized gain on their available-for-sale assets from changes in the market price of the securities.This gain was not included in their net income for the year.Where would it be included in the shareholders' equity section?

A)In retained earnings
B)In accumulated comprehensive income
C)In contributed surplus
D)It is not included in the shareholders' equity section.

Question 54

In 2014, Jericho Limited issued 10,000 stock options to its senior employees.At the time the options were granted, the shares were selling at $30, and the options allowed the owners to purchase shares in the company for $28.Assuming that Jericho decides to record all compensation related to employee stock options, what compensation expense should the company report in its 2014 financial statements?

A)$0
B)$20,000
C)$28,000
D)$30,000

Question 55

When a company issues shares for more than the par value, the excess is recorded as a:

A)separate line item in statement of retained earnings.
B)negative amount in accumulated other comprehensive income.
C)gain on share issuance in the income statement.
D)contributed surplus in the shareholders' equity section of the balance sheet.

Question 56

How are changes in accounting policies and accounting estimates accounted for?
$\begin{array}{ll}&\text { Accounting } & \text { Accounting } \\&\text { Policies } & \text { Estimates }\\\hline A.&\text { Retroactively } & \text { Retroactively } \\B.&\text { Retroactively } & \text { Prospectively } \\C.&\text { Prospectively } & \text { Retroactively } \\D.&\text { Prospectively } & \text { Prospectively }\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 57

Accumulated other comprehensive income is reported in the:

A)cash flow statement.
B)income statement.
C)statement of shareholders' equity.
D)notes to the financial statements.

Question 58

For which of the following changes would retained earnings be restated?

A)Changing from FIFO to average cost inventory valuation.
B)Lengthening the estimated useful life of an asset.
C)Changing the percentages used in calculating the allowance for doubtful accounts.
D)Changing the structure of the bonus plan of senior management.

Question 59

Colborne Co.requires a $500,000 investment on which the partners expect to earn $25,000 before considering the cost of financing.The after-tax cost of debt is 6%.If the company decides to finance one-half of the investment with debt, how much greater will the returns to the shareholders be?

A)-1%
B)1%
C)4%
D)5%

Question 60

All of the following events would be recorded in other comprehensive income except:

A)gains and losses on cash flow hedges.
B)unrealized gains and losses on available for sale securities.
C)gains from writing up property plant and equipment to market value.
D)unrealized gains only on trading securities.

Question 61

Which of the following statements about employee stock options is true?

A)The options are usually out-of-the money when issued.
B)The options are usually out-of-the money when exercised.
C)An out-of-the money option has no value.
D)When options are exercised, the value of existing shareholders' shares is diluted.

Question 62

Kantimo Corporation has 120,000 shares of common stock outstanding throughout the year.It also had 20,000 shares of $2 preferred stock, cumulative and non-participating, outstanding throughout the year.During the year, the company met all required dividend payments.If the company's net income were $95,000, what would be the earnings per share?

A)$0.46
B)$0.39
C)$0.68
D)$0.79

Question 63

Which of the following provides a measure of return earned by resources invested only by the common shareholders?

A)ROE
B)EPS
C)D/E
D)ROA

Question 64

Lloydminster Ltd.issued 1,000 stock options to its president when their shares were trading in the market at $20.The exercise price was $22, and the market price when they were exercised was $25.What was the cost borne by the other shareholders when the options were issued?

A)$0
B)$3,000
C)$22,000
D)$25,000

Question 65

For which of the following organizations would the market value of the entity be readily available?

A)A public company
B)A private company
C)A partnership
D)A not-for-profit organization

Question 66

Earnings per share is computed using which of the following measures?

A)The weighted average of the number of common shares outstanding during the year.
B)The weighted average of the number of preferred and common shares outstanding during the year.
C)The number of common shares outstanding at the end of the year.
D)The number of common and preferred shares outstanding at the end of the year.

Question 67

Which of the following could describe the book value of an entity?

A)The amount the shareholders paid for the shares.
B)The amount the shares are worth in the market.
C)The minimum amount an entity is worth.
D)The maximum amount that a shareholder will receive on the liquidation of the entity.

Question 68

Which of the following must be deducted from net income to calculate the return on common shareholders' equity?

A)Dividends paid to common shareholders
B)Dividends paid to preferred shareholders
C)Interest expense
D)Income tax expense

Question 69

Some people argue that since employee stock options are usually issued at an exercise price that is less than or equal to market value when they are granted, they have no value.However IFRS requires recording them as compensation expense.The primary reason for this is:

A)to achieve proper matching.
B)they are accepted by employees as compensation.
C)the time value in the options creates economic value.
D)the entity must use employee stock options in order to compete for talent.

Question 70

Lloydminster Ltd.issued 1,000 stock options to its president when their shares were trading in the market at $20.The exercise price was $22, and the market price when they were exercised was $25.The estimated market value of the options at the date of issue was $1.25 each.Which of the following is the correct journal entry to record the issue of the options? $\begin{array}{lc}\text { A) Dr. Cash } & 22,000 \\\text { Cr. Common shares } &&{22,000} \\\text { B) Dr. Cash } & 22,000 \\\text { Dr. Compensation expense } & 3,000 \\\text { Cr. Common shares } && {25,000}\\\text { C) Dr. Compensation expense } & 1,250 & \\\text { Cr. Common shares } & & 1,250 \\\text { D) Dr. Compensation expense } & 1,250 & \\\quad \text { Cr. Contributed surplus } & & 1,250\end{array}$

A)Option A
B)Option B
C)Option C
D)Option D

Question 71

Even with the oversight of IFRS, managers have the ability to make accounting choices that will impact their economic consequences.The term 'economic consequences' refers to:

A)the impact on the underlying economic activity.
B)the wealth of the entity's stakeholders is affected.
C)the controversies surrounding many of the choices.
D)they can finds ways to make the rules work for them.

Question 72

From the company's point of view all of the following are reasons to use employee stock options except:

A)they do not require any cash.
B)they align employee motivation to the shareholders' objectives.
C)they have no cost to the company.
D)they increase the equity base of the company.

Question 73

Which of the following represents the amount of net income attributable to each individual share of common stock?

A)ROE
B)EPS
C)DPS
D)ROA

Question 74

Allcan Limited has 20,000 common shares issued and outstanding at January 1, 2014.On July 1 the company sold an additional 10,000 common shares for proceeds of $100,000.Net income for the year was $30,000.What would the earnings per share be?

A)$1.00
B)$1.20
C)$1.50
D)$4.00

Question 75

BioPlus is a firm in the biotech industry.They have 2 million shares outstanding with a recent market price of $15.00.Their total assets are $18 million and total liabilities are $8 million.The average price-to-book (PB) ratio for the biotech industry is 5.Which of the following statements about BioPlus is true?

A)Their PB ratio is below the industry average and that indicates that the shares are an attractive investment.
B)Their PB ratio is below the industry average and that indicates that the shares are an unattractive investment.
C)Their PB ratio is above the industry average and that indicates that the shares are an attractive investment.
D)Their PB ratio is above the industry average and that indicates that the shares are an unattractive investment.

Question 76

Which of the following examples is an accounting policy choice that an entity can make which will impact the economic consequences of its stakeholders?

A)Bad debt expense
B)The amount of tax the company pays
C)Warranty expense
D)Depreciation policy

Question 77

All of the following examples suggest that the accounting policy choices available to managers under IFRS results in economic consequences for the entity's stakeholders, except:

A)management bonuses.
B)debt covenants.
C)depreciation policy.
D)tax minimization.

Question 78

Which of the following must be deducted from net income to calculate earnings per share?

A)Dividends paid to common shareholders
B)Dividends paid to preferred shareholders
C)Interest expense
D)Income tax expense

Question 79

Lloydminster Ltd.issued 1,000 stock options to its president when their shares were trading in the market at $20.The exercise price was $22, and the market price when they were exercised was $25.How much money did the company receive from the transaction?

A)$0
B)$20,000
C)$22,000
D)$25,000

Question 80

For which of the following organizations would the book value be a useful proxy for the worth of the organization?

A)A tool and die manufacturer
B)A computer software developer
C)An accounting firm
D)A pharmaceutical company