Deck 8: Shareholders Equity

Question 1

What effect does an investment of cash in a corporation have on the corporation's balance sheet?

A) It increases assets and increases liabilities.
B) It increases assets and increases shareholders' equity.
C) It increases assets and decreases liabilities.
D) It increases assets and decreases shareholders' equity.

Answer 1

B

Question 2

The issuance of common shares requires a:

A) debit to Retained Earnings
B) credit to Common Shares
C) debit to Common Shares
D) credit to Retained Earnings

Answer 2

B

Question 3

Before a company can pay dividends to the common shareholders, the owners of cumulative preferred shares must receive:

A) all dividends in arrears plus the current year's dividend
B) the current year's dividend, but not dividends in arrears
C) dividends in arrears, but not the current year's dividends
D) neither the current year's dividends nor dividends in arrears

Answer 3

A

Question 4

The number of shares currently in the hands of shareholders is the same as the number of shares:

A) proposed by the board of directors
B) authorized
C) issued
D) outstanding

Question 5

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation:
$\begin{array}{lc}\text { Share capital: }\\\text { Preferred shares, } 420,000 \text { shares authorized, }\\4,000 \text { shares of } \$ 1.50 \text { preferred issued }&\$400,000\\\text { Common shares, } 100,000 \text { shares authorized, }\\30,000 \text { shares issued } & \underline{150,000} \\\text { Total share capital } & \$ 550,000 \\\text { Retained earnings } & \underline{267,000} \\\text { Total shareholders' equity } & \underline{\$ 817,000} \\\end{array}$

The preferred shares are currently selling for $102.25 per share and the common shares are currently selling for $11.50 per share.

The total share capital after the distribution of a $66,000 dividend is:

A) $400,000
B) $550,000
C) $150,000
D) $817,000

Question 6

Following is the shareholders' equity section of the balance sheet of the Optimum Corporation:

$\begin{array} { l }\text { Share capital: }\\ \text { Common shares, } 100,000 \text { shares authorized, }\\65,000 \text { shares issued } & \underline{\$ 650,000} \\\text { Total share capital } & \$ 650,000 \\\text { Retained earnings } & \underline{349,000} \\\text { Total shareholders' equity } & \underline{\$ 999,000} \\\end{array}$

The common shares are currently selling for $15.50 per share.

The entry to record the declaration of a $0.75 per share cash dividend includes:

A) debit to Dividends Payable for $48,750
B) credit to Common shares for $48,750
C) debit to Retained Earnings for $75,000
D) debit to Retained Earnings for $48,750

Question 7

A cash dividend becomes a legal liability of the corporation on the:

A) date of record
B) date of distribution
C) date of declaration
D) date of payment

Question 8

A company may repurchase their own shares for the following reasons except:

A) management wants to avoid a takeover by an outside party
B) the company needs the repurchased shares to fulfill future share issuance commitments
C) the purchase may help support the share's current market price by decreasing the supply of shares available to the public
D) the company needs more financing

Question 9

A stock dividend is issued for the following reasons except:

A) to reduce the per-share market price of the shares
B) to increase the shares account and decrease Retained Earnings
C) to reduce total shareholders' equity
D) to continue dividends but conserve cash

Question 10

The financial statement that reports the changes in all categories of equity during the period iscalled the:

A) statement of changes in financial position
B) statement of retained earnings
C) statement of changes in shareholders' equity
D) statement of income

Question 11

The entry to record the issuance of 12,500 common shares at $2.50 per share includes a:

A) credit to Common Shares for $31,250
B) debit to Retained Earnings for $31,250
C) credit to Contributed Surplus for $31,250
D) credit to Retained Earnings for $31,250

Question 12

All of the following are basic rights of a shareholder except:

A) the right to receive a proportionate part of any dividend
B) the right to maintain one's proportionate ownership in the corporation
C) the right to vote
D) the right to receive a proportionate share of any assets remaining before the corporation pays its liabilities in the event of liquidation

Question 13

When 1,000 common shares are sold at $3.75 per share, Share Capital will:

A) increase $1,000
B) increase $3,750
C) increase $2,750
D) not be affected

Question 14

If a corporation issues only one class of shares, it must be:

A) par value
B) common
C) preferred
D) common or preferred

Question 15

The balance in the Common Shares account after the distribution of a $0.75 per share cash dividend is:

$\begin{array} { l }\text { Share capital: }\\ \text { Common shares, } 100,000 \text { shares authorized, }\\65,000 \text { shares issued } & \underline{\$ 650,000} \\\text { Total share capital } & \$ 650,000 \\\text { Retained earnings } & \underline{349,000} \\\text { Total shareholders' equity } & \underline{\$ 999,000} \\\end{array}$

The common shares are currently selling for $15.50 per share.

The balance in the Common Shares account after the distribution of a $0.75 per share cash dividend is:

A) $976,500
B) $650,000
C) $627,500
D) $575,000

Question 16

Passed dividends on cumulative preferred shares:

A) must be paid by January 1 of the following year by law
B) are lost forever by the preferred shareholders
C) are a liability until paid and may turn into a long-term liability with the passage of time
D) are referred to as dividends in arrears

Question 17

Which of the following types of business organizations terminates when its ownership structurechanges?

A) partnerships and proprietorships
B) only corporations
C) partnerships and corporations
D) proprietorships and corporations

Question 18

January 1, 2020, Assembly System Corporation's Retained Earnings account had a balance of$675,000. During 2020, cash dividends of $25,000 and stock dividends with a market value of $55,000 were declared and distributed. Assembly System Corporation had a net loss of $5,000 in
2020. What is the balance in Retained Earnings that would appear on Assembly System
Corporation's statement of shareholders' equity on December 31, 2020?

A) $590,000
B) $595,000
C) $615,000
D) $670,000

Question 19

For a company that has only common shares outstanding, dividing total shareholders' equity by the number of shares outstanding determines the:

A) market price per share
B) liquidation value per share
C) earnings per share
D) book value per share

Question 20

The payment of a cash dividend previously recorded:

A) reduces liabilities and reduces assets
B) increases shareholders' equity and reduces liabilities
C) increases liabilities and increases assets
D) reduces shareholders' equity and reduces assets

Question 21

Prevage Corporation has 10,000 shares of $10 cumulative preferred shares outstanding and 50,000 common shares outstanding. As of the beginning of this fiscal year, there were 2 years' dividends in arrears on the preferred shares. The board of directors wants to give the common shareholders a $1.50 dividend per share at the end of this fiscal year. The total dividends to be declared by the
Prevage Corporation are:

A) $375,000
B) $105,000
C) $120,000
D) $175,000

Question 22

Which of the following is not an advantage of owning preferred shares?

A) typically are non-voting
B) receive assets before the common shareholders if the corporation liquidates
C) pay a fixed dividend amount
D) receive dividends before the common shareholders

Question 23

Which of the following would not be reported on the statement of changes in shareholders' equity?

A) interest expense
B) cash dividends declared but not paid
C) repurchased share transactions
D) net income

Question 24

Which of the following shows the relationship between net income and average common shareholders' equity?

A) acid-test ratio
B) return on equity
C) return on assets
D) current ratio

Question 25

Return on equity is a ratio that:

A) is calculated by dividing net income plus preferred dividends by average common shareholders' equity
B) shows the relationship between net income available for common shareholders and average common shareholders' equity
C) is calculated by dividing net income plus preferred dividends by average common shareholders' equity and shows the relationship between net income available for common shareholders and average common shareholders' equity
D) cannot be calculated if the company has preferred shares in addition to common shares

Question 26

Book value is calculated by:

A) dividing total preferred equity less dividends in arrears by the number of preferred shares outstanding
B) dividing total shareholders' equity less preferred shareholders' equity by the number of common shares outstanding
C) dividing total preferred equity plus dividends in arrears by the number of common shares outstanding
D) dividing total shareholders' equity by the number of common shares outstanding

Question 27

Which statement below regarding a share repurchase is true?

A) Repurchasing shares increases retained earnings.
B) The company repurchasing shares is not entitled to vote.
C) Repurchasing shares decreases assets and equity.
D) A share repurchase grows a company's assets and equity.

Question 28

Before a company can pay dividends to the common shareholders, the owners of non-cumulative preferred shares must receive:

A) dividends in arrears, but not the current year's dividends
B) the current year's dividend, but not dividends in arrears
C) all dividends in arrears plus the current year's dividend
D) neither the current year's dividends nor dividends in arrears

Question 29

The entry to record the payment of a cash dividend previously declared includes a:

A) credit to Dividends Payable
B) credit to Retained Earnings
C) debit to Retained Earnings
D) debit to Dividends Payable

Question 30

All of the following are basic rights of shareholders except:

A) the right to collect dividends
B) the right to vote
C) the right to sell the shares
D) the right to declare dividends

Question 31

On January 1, 2020, Balises Corporation's Retained Earnings account has a balance of $300,000. During 2020, cash dividends of $20,000 were declared and stock dividends with a market value of
$40,000 were declared. Net income for 2020 amounted to $90,000. On June 30, 2020, Balises Corporation issued 5,000 shares of common shares at $10 per share. What is the balance in Retained Earnings appearing on the statement of shareholders' equity on December 31, 2020?

A) $440,000
B) $420,000
C) $380,000
D) $330,000

Question 32

Which of the following statements regarding stock splits is incorrect?

A) A stock split involves a reduction in the share's issue value.
B) A stock split is an increase in the number of issued, and outstanding shares.
C) A stock split increases total owners' equity.
D) A stock split decreases the market price of the shares.

Question 33

The market price of a share of Omega 3 Corporation's common shares is $110. If Omega 3 Corporation declares and issues a 30% stock dividend, the market price will, in theory, adjust to
Approximately:

A) $85
B) $70
C) $33
D) $143

Question 34

On January 1, 2020, Bogie Corporation had 40,000 common shares outstanding issued at $16 each during 2020. On June 1, 2020, Bogie Corporation issued 5,000 shares of its common shares at $15 per share. On September 30, 2020, Bogie Corporation repurchased 3,000 shares of its common shares for $17 per share. On November 30, 2020, Bogie Corporation reissued 2,000 shares of repurchased shares at $18 per share. The balance in Share Capital on December 31, 2020, as shown on the statement of shareholders' equity, is:

A) $703,333
B) $700,000
C) $640,000
D) $756,000

Question 35

When a company has both common shares and preferred shares, the book value per common share is calculated by:

A) dividing total shareholders' equity by the number of common shares outstanding
B) dividing the amount in the common shares account by the number of common shares outstanding
C) dividing total shareholders' equity less preferred equity by the number of common shares outstanding
D) dividing the amount in the common shares account by the sum of the number of common shares and preferred shares outstanding

Question 36

Which of the following is the best measure as to whether a company is successful in using its assets to earn income for the individuals who finance the business?

A) acid-test ratio
B) return on assets
C) return on equity
D) current ratio

Question 37

On January 1, 2020, Automatic Train Corporation had 30,000 common shares outstanding issued at $10 each. On June 1, 2020, Automatic Train Corporation issued 12,000 shares of its common shares at $15 per share. On November 30, 2020, Automatic Train Corporation repurchased 3,000 shares of its common shares for $17 per share. The balance in Common shares on December 31, 2020, as shown on the statement of shareholders' equity, is:

A) $445,714
B) $480,000
C) $429,000
D) $445,200

Question 38

Assets received in exchange for the issuance of stock should be recorded at:

A) book value prior to the issuance
B) fair value as determined by a good-faith estimate from independent appraisers
C) historical cost
D) historical cost less accumulated depreciation taken to date

Question 39

The declaration of a cash dividend:

A) increases liabilities and increases shareholders' equity
B) reduces assets and increases liabilities
C) increases liabilities and decreases shareholders' equity
D) increases shareholders' equity and reduces liabilities

Question 40

When a cash dividend is declared:

A) the Retained Earnings account is credited
B) the Cash account is credited
C) the Retained Earnings account is debited
D) the Cash account is debited

Question 41

Glow Corporation has 50,000 shares of preferred shares outstanding, with annual dividends paid at the rate of $1.50 per share. Glow also has 100,000 shares of common shares outstanding. If Glow declares a $250,000 dividend in 2020, each outstanding share of common shares would receive:

A) $1.50
B) $1.75
C) $1.17
D) $2.50

Question 42

The following information is available for Aerius Corporation for the current year:

$\begin{array} { l r } \text { Net income } & \$ 160,000 \\\text { Preferred dividends } & 30,000 \\\text { Interest expense } & 18,000 \\& \\\text { Beginning of year: } & \\\text { Total assets } & 900,000 \\\text { Total liabilities } & 300,000 \\\text { Total common shareholders' equity } & 375,000 \\& \\\text { End of year: } & \\\text { Total assets } & 950,000 \\\text { Total liabilities } & 350,000 \\\text { Total common shareholders' equity } & 400,000\end{array}$
The return on assets for Aerius Corporation is:

A) 18.7%
B) 17.3%
C) 19.8%
D) 19.2%

Question 43

On January 1, 2020, Proven Technology Corporation's common shares account had a balance of $250,000, representing 25,000 shares issued at $10 per share. On May 15, 2020, 12,000 shares were
Issued for $150,000 cash. On August 31, 2020, a 10% stock dividend was declared and distributed. What is the balance in Common Shares appearing on the statement of shareholders' equity on December 31, 2020?

A) $440,000
B) $415,000
C) $300,000
D) $400,000

Question 44

Suppose 100 common shares are issued for $12.50 per share. The entry to record this issuance includes a:

A) credit to Retained Earnings for $1,250
B) credit to Common shares for $1,250
C) debit to Preferred Shares for $1,000
D) credit to Contributed Surplus for $250

Question 45

On January 1, 2020, Guided Light Corporation's Retained Earnings account had a balance of $275,000. During 2020, cash dividends of $50,000 were declared and stock dividends with a
Market value of $40,000 were declared. Net income for 2020 amounted to $120,000. What is the balance in Retained Earnings appearing on the statement of shareholders' equity on December 31,
2020?

A) $305,000
B) $345,000
C) $185,000
D) $395,000

Question 46

Which of the following is not a characteristic that distinguishes corporations from proprietorships and partnerships?

A) Corporations are separate legal entities apart from the owners.
B) Corporations have continuous lives regardless of changes in ownership.
C) Shareholders of a corporation are not permitted to transfer shares as they wish.
D) Corporate earnings are subject to double taxation.

Question 47

Quo Corporation issues 100 common shares for $12 per share. This transaction will include a:

A) debit to Common Shares for $1,200
B) credit to Contributed Surplus for $1,200
C) credit to Retained Earnings for $1,200
D) credit to Common Shares for $1,200

Question 48

Share capital is also known as:

A) retained earnings
B) contributed capital
C) total shareholders' equity
D) common shareholders' equity

Question 49

When accounting for a stock dividend, Retained Earnings should be debited for:

A) par value times the number of shares to be issued
B) liquidation value times the number of shares to be issued
C) current market price times the number of shares to be issued
D) book value times the number of shares to be issued

Question 50

The ultimate control of the corporation rests with the:

A) shareholders
B) chief executive officer
C) employees
D) federal and provincial governments

Question 51

Following is the shareholders' equity section of the balance sheet of the Optimum Corporation:
$\begin{array} { l }\text { Share capital: }\\ \text { Common shares, } 100,000 \text { shares authorized, }\\65,000 \text { shares issued } & \underline{\$ 650,000} \\\text { Total share capital } & \$ 650,000 \\\text { Retained earnings } & \underline{349,000} \\\text { Total shareholders' equity } & \underline{\$ 999,000} \\\end{array}$

The common shares are currently selling for $15.50 per share.

The total shareholders' equity after the distribution of a $0.75 per share cash dividend is:

A) $575,000
B) $950,250
C) $627,500
D) $326,500

Question 52

Share capital is:

A) the amount of shareholders' equity that the shareholders have contributed to the corporation plus the amount of shareholders' equity that the corporation has earned through
Profitable operations
B) the amount of shareholders' equity that the shareholders have contributed to the corporation
C) the amount of shareholders' equity that the corporation has earned through profitable operations
D) the amount of shareholder's equity that the shareholders have contributed to the corporation less the amount of shareholders' equity that the corporation has given back to the shareholders (dividends)

Question 53

Health & Wellness Corporation has had 7,500 shares of $3.00 cumulative preferred shares outstanding as well as 28,000 common shares issued at $10 outstanding since it was incorporated. During the first, second, and third years of operations, $15,000, $18,000, and $50,000 in dividends, respectively, were paid. The dividends paid to the common shareholders of Health & Wellness Corporation in year three amounted to:

A) $0
B) $27,500
C) $15,500
D) cannot be determined from the given information

Question 54

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation:

$\begin{array} { l }\text { Share capital: }\\ \text { Common shares, } 100,000 \text { shares authorized, }\\65,000 \text { shares issued } & \underline{\$ 650,000} \\\text { Total share capital } & \$ 650,000 \\\text { Retained earnings } & \underline{349,000} \\\text { Total shareholders' equity } & \underline{\$ 999,000} \\\end{array}$


The common shares are currently selling for $15.50 per share.

The number of common shares authorized and issued after the distribution of a 15% common stock dividend is:

A) 100,000 and 65,000
B) 100,000 and 74,750
C) 115,000 and 65,000
D) 115,000 and 74,750

Question 55

All of the following might be found on a statement of changes in shareholders' equity except:

A) cash dividends
B) earnings-per-share information
C) net income
D) repurchased share purchases

Question 56

The issuance of preferred shares requires a:

A) debit to Share Capital, Preferred
B) credit to Share Capital, Preferred
C) debit to Retained Earnings
D) credit to Retained Earnings

Question 57

The shareholders' equity section of the balance sheet for Vivitas Stevia Corporation is shown below:

$\begin{array}{lr}\text { Share capital: }\\\text { Preferred shares, } 10,000 \text { shares authorized, }\\7,000 \text { shares issued of } \$ 3.50 \text { preferred }&\$350,000\\\text { Common shares, } 50,000 \text { shares authorized, }\\\text { 18,000 shares issued } & \underline{180,000} \\\text { Total share capital } & \$ 530,000 \\\text { Retained earnings } & \underline{300,000} \\\text { Total share capital } & \underline{\$ 830,000} \\\end{array}$
Assume there are 2 years' dividends in arrears on the preferred shares, including the current year. The book value per share for Vivitas Stevia common shares is:

A) $26.67
B) $23.94
C) $22.58
D) $26.47

Question 58

Which of the following is a disadvantage of the corporate form of business organization?

A) ease of transferring ownership
B) difficulty in transferring ownership
C) limited liability
D) governmental regulation at both the federal and provincial levels

Question 59

All of the following are advantages of the corporate form of business except:

A) limited liability of shareholders
B) ease of transferring ownership
C) continuous life
D) corporate taxation

Question 60

Repurchased share transactions are reported on the:

A) statement of retained earnings
B) statement of changes in shareholders' equity
C) income statement
D) income statement as a part of continuing operations

Question 61

Investors commonly use two share values to assist with investment decisions-fair value and book value.

Question 62

Preferred shares are a hybrid between common shares and long-term debt.

Question 63

The fair value (or market price) of a share of a company's stock is the price that a willing buyer would pay a willing seller to acquire the share.

Question 64

The fair values of the shares of companies that are traded on public stock exchanges are easily determined.

Question 65

When shares are issued, their are assigned a stated value.

Question 66

Contributed capital as shown on a corporate balance sheet includes the share accounts and any contributed surplus as well as retained earnings.

Question 67

Common shareholders, due to their increased risk, have first rights upon the organization's liquidation.

Question 68

One reason a company will repurchase its own shares is to help avoid a takeover of the company by an outside party.

Question 69

Once a share is sold, it is consider issued.

Question 70

In a corporation, the two basic sources of shareholders' equity are:

A) donated capital and retained earnings
B) share capital and operating capital
C) share capital and retained earnings
D) donated capital and share capital

Question 71

The entry to record the declaration of a cash dividend includes a credit to retained earnings.

Question 72

The president of the corporation can declare dividends.

Question 73

Under the Canada Business Corporation Act corporations can issue an unlimited number of shares.

Question 74

Blu Corporation issued 1,000 common shares in exchange for a new commercial band saw. At the time of this transaction the shares were trading at $10 and the fair value of the saw was at $12,000. This transaction would be recorded at $10,000.

Question 75

The board of directors elects the chairperson of a corporation.

Question 76

A retirement of common shares:

A) increases share capital and total shareholders' equity
B) increases the number of common shares outstanding
C) decreases the number of shares authorized
D) decreases share capital and total shareholders' equity

Question 77

The rate of return on total assets is calculated by dividing net income plus interest expense by average total assets.

Question 78

Assets other than cash should be recorded at their current fair values when received from the issuance of shares.

Question 79

The term outstanding shares refers to the maximum number of shares a corporation is allowed to distribute to shareholders.

Question 80

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation:

A) debit to Common Shares for $66,000
B) credit to Dividends Payable, Preferred for $66,000
C) credit to Dividends Payable, Preferred for $6,000
D) debit to Common Shares for $6,000