Deck 16: Retained Earnings and Earnings Per Share

Question 1

A prior period adjustment can arise from an error found that occurred in a prior period, a change is accounting entity, or a change in accounting principle.

Answer 1

True

Question 2

A dividend that represents a return of capital rather than a distribution of retained earnings is called a

A) property dividend
B) stock dividend
C) capital dividend
D) liquidating dividend

Answer 2

D

Question 3

How will a company's retained earnings and total stockholders' equity be affected by the recording of the declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.)

A) I
B) II
C) III
D) IV

Answer 3

B

Question 4

A convertible security may have the appearance of being individually dilutive but in fact be antidilutive when viewed with combinations of other convertible securities.

Question 5

When a company is determining its dividend policy, the company must adhere to legal requirements. The legal requirements are determined by the

A) Financial Accounting Standards Board (FASB)
B) state in which the company was incorporated
C) Securities and Exchange Commission (SEC)
D) Federal Trade Commission (FTC)

Question 6

A small stock dividend is accounted for by transferring from retained earnings to contributed capital an amount equal to the par value of the additional shares issued.

Question 7

The most common "potential common shares" that may be included in computing DEPS are share options, warrants, and convertible preferred stock and bonds.

Question 8

Which statement best represents the relationship between date of declaration, date of record and ex-dividend date, and date of payment, for a cash dividend.

A) The date of payment results in the biggest decrease in the current ratio.
B) The date of record establishes the amount to be received.
C) The ex-dividend date establishes the decrease to cash.
D) The date of declaration establishes the increase to liabilities.

Question 9

The Chester Company has issued 10%, nonparticipating, cumulative preferred stock with a total par value of $500,000 and common stock with a total par value of $800,000. No dividends are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $131,000 are distributed?

A) $ 50,000 and $80,000
B) $104,000 and $27,000
C) $ 51,000 and $80,000
D) $ 50,000 and $81,000

Question 10

All of the following types of dividends will result in an increase in liabilities as a result of recording the declaration of a dividend except a (Assume the dividends are paid or distributed on a later date.)

A) cash dividend
B) property dividend
C) scrip dividend
D) stock dividend

Question 11

A retained earnings statement usually includes only adjustments to retained earning for net income, dividends, and restrictions of retained earnings.

Question 12

The Stansbury Company has issued 10%, partially participating, cumulative preferred stock with a total par value of $200,000 and common stock with a total par value of $800,000. The preferred stock participates up to 15% of its par value. No dividends are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $160,000 are distributed?

A) $50,000 and $110,000
B) $20,000 and $140,000
C) $30,000 and $130,000
D) $32,000 and $128,000

Question 13

On October 1, 2014, White Company declared a property dividend payable in the form of marketable equity securities classified as "available for sale" for financial accounting purposes. The marketable equity securities will be distributed to the common stockholders on December 1, 2014. The investment in equity securities originally cost White $510,000 on August 1, 2014. The investment's fair value on various dates is as follows:
The amount credited to Gain on Disposal of Investments resulting from this dividend transaction should be

A) $ 0
B) $20,000
C) $25,000
D) $30,000

Question 14

A board of directors may decide to restrict retained earnings to meet legal requirements or to meet a contractual restriction.

Question 15

"Disclosure of changes in the separate accounts comprising stockholders' equity and the changes in the number of shares of equity securities during at least the most recent annual fiscal period is required to make the financial statements sufficiently informative." is a requirement of FASB's Statement of Financial Accounting Concepts No. 6 to inform external users of financial statements.

Question 16

A simple capital structure is one that consists of common stock outstanding and possibly convertible preferred stock.

Question 17

On November 1, 2014, the Cranberry Construction Company declared a property dividend payable in the form of bonds held for long-term investment purposes. The bonds will be distributed to the common stockholders on December 15, 2014. The bonds to be distributed to the common stockholders originally cost Cranberry $210,000. Fair value of the bonds on various dates is as follows:
Which one of the following amounts should be used to record the appropriate credit to Property Dividends Payable?

A) $210,000
B) $220,000
C) $235,000
D) $230,000

Question 18

The denominator in the calculation for basic earnings per share is net income less preferred dividends.

Question 19

When a property dividend is declared, fair value is determined on the ex-dividend date.

Question 20

The Frank Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000 and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000 are distributed at the end of the current year?

A) $85,500 and $136,500
B) $78,000 and $144,000
C) $60,000 and $162,000
D) $55,500 and $166,500

Question 21

When calculating earnings per share, dividends declared on noncumulative preferred stock, but not paid, should be

A) added to net income in the earnings per share numerator
B) accrued in the earnings per share numerator when paid
C) deducted from net income in the earnings per share numerator
D) deferred from the earnings per share numerator until paid

Question 22

Under IFRS, a company's stockholders' equity consists of which two sections?

A) contributed capital and retained earnings
B) share capital and other equity
C) contributed capital and other equity
D) share capital and retained earnings

Question 23

A simple capital structure consists of

A) only preferred stock
B) common stock outstanding and possibly nonconvertible preferred stock
C) common stock and common stock options only
D) preferred stock and preferred stock options

Question 24

The following information is provided for the Jacob Company:
What is the total stockholders' equity of Jacob Company?

A) $489
B) $479
C) $339
D) $311

Question 25

Reporting basic earnings per share is required for which type of corporate capital structure?

A) simple
B) complex
C) primary
D) both simple and complex

Question 26

Basic earnings per share is computed as

A) Net Income / Total Number of Common Shares Outstanding
B) (Net Income - Preferred Dividends) / Total Number of Common Shares Outstanding
C) (Net Income - Preferred Dividends) / Weighted-Average Number of Common Shares Outstanding
D) Net Income / Weighted-Average Number of Common Shares Outstanding

Question 27

Which of the following stockholders' equity disclosures are required under both GAAP and IFRS?

A) capital not yet paid in
B) restrictions on the repayment of capital
C) dividend preferences
D) shares reserved for future issuances under sales contracts

Question 28

Which of the following is an error that would require a company to record a prior period adjustment?

A) a mathematical error
B) facts of the transaction are misconstrued
C) misapplication of accounting principles
D) All of these choices

Question 29

If a company makes a prior period adjustment, which of the following describes how it must be reported?

A) The adjustment is recorded in retained earnings, and previous years' financial statements presented for comparative purposes are not changed.
B) The adjustment is recorded in retained earnings, and previous years' financial statements presented for comparative purposes are adjusted.
C) The adjustment is reported in the current period's income statement as a separate item.
D) The adjustment is recorded as a deferred asset or deferred liability and amortized using the straight-line method.

Question 30

The Michael Company's stockholders' equity accounts have the following balances as of December 31, 2014:
On January 2, 2015, the board of directors of Michael declared a 10% stock dividend to be distributed on February 15, 2015. The market price of Michael Company's common stock was $75 per share on January 2, 2015. On the date of declaration, the retained earnings account should be decreased by

A) zero; only a memorandum entry is required
B) $ 50,000
C) $172,500
D) $187,500

Question 31

If a corporation appropriates retained earnings for treasury stock transactions, the appropriation will affect total amounts for retained earnings and stockholders' equity as

A) I
B) II
C) III
D) IV

Question 32

In 2014, Cunningham Company determined that it did not accrue $15,000 of interest expense in 2013, which caused a material overstatement of income. Assuming a 35% tax rate, which of the following is the entries would be correct to fix the error?

A) Retained Earnings $\quad$$\quad$ 15,000
Interest Payable $\quad$$\quad$$\quad$ 15,000
Income Tax Refund Receivable (or Payable) $\quad$ 15,000
Retained Earnings $\quad$$\quad$$\quad$ 15,000

B) Retained Earnings $\quad$$\quad$ 15,000
Interest Payable $\quad$$\quad$$\quad$ 15,000
Income Tax Refund Receivable (or Payable) $\quad$ 5,250
Retained Earnings $\quad$$\quad$ 5,250

C) Retained Earnings $\quad$$\quad$$\quad$ 9,750
Interest Payable $\quad$$\quad$$\quad$ 9,750
Income Tax Refund Receivable (or Payable) $\quad$$\quad$ 5,250
Retained Earnings $\quad$$\quad$ 5,250

D) Retained Earnings $\quad$$\quad$ 5,250
Interest Payable $\quad$$\quad$$\quad$ 5,250
Income Tax Refund Receivable (or Payable) $\quad$$\quad$ 9,750
Retained Earnings $\quad$$\quad$$\quad$$\quad$ 9,750

Question 33

On January 1, Christopher's reported total stockholders' equity of $1,300. During the year, $50 of dividends were declared and paid, donated land with a donor book value of $14 and a current fair value of $38 was received, additional common stock was issued for $300, and treasury stock was acquired for $22. The reported total stockholders' equity at December 31 was $1,406. What was the reported net income or loss for the year?

A) $160 net income
B) $204 net loss
C) $160 net loss
D) $228 net income
E) none of these

Question 34

Which of the following stockholders' equity disclosures are required under both GAAP and IFRS?

A) restrictions on the repayment of capital
B) reacquired shares and rights
C) share reserved for future issuances under sales contracts
D) capital not yet paid in

Question 35

Exhibit 16-1 The Zeller Corporation's stockholders' equity accounts have the following balances as of December 31, 2014: Refer to Exhibit 16-1. On January 2, 2015, the board of directors of Zeller declared a 5% stock dividend to be distributed on January 31, 2015. The market price per share of Zeller's common stock was $30 on January 2 and $32 on January 31. As a result of this stock dividend, the retained earnings account should be decreased by

A) zero; only a memorandum entry is required
B) $15,000
C) $45,000
D) $48,000

Question 36

Exhibit 16-1 The Zeller Corporation's stockholders' equity accounts have the following balances as of December 31, 2014: Refer to Exhibit 16-1. On January 2, 2015, the board of directors of Zeller declared a 25% stock dividend to be distributed on January 31, 2015. The market price per share of Zeller's common stock was $30 on January 2 and $32 on January 31. As a result of this stock dividend, the retained earnings account should be decreased by

A) $ 75,000
B) $300,000
C) $288,000
D) zero; only a memorandum entry is required

Question 37

Comprehensive income represents

A) net income plus "other comprehensive income"
B) net income less dividends paid
C) retained earnings plus net income
D) retained earnings plus "other comprehensive income"

Question 38

Which of the following could be a component of other comprehensive income (loss)?

A) realized gains or losses from sale of investments in available-for-sale securities
B) translation adjustments from converting the financial statements of a company's foreign operations into U.S. dollars
C) gains (losses) on extraordinary items
D) warranty liability adjustments

Question 39

How will a company's total current liabilities and total stockholders' equity be affected by the declaration of a stock dividend? (Assume the stock dividend is distributed at a later date.)

A) I
B) II
C) III
D) IV

Question 40

Which one of the following would least likely result in a negative component of stockholders' equity?

A) prior period adjustment
B) valuation changes in available for sale securities
C) donations
D) unrealized declines in value of marketable equity securities

Question 41

Which one of the following statements concerning earnings per share amounts is true?

A) Earnings per share related to discontinued operations must be reported on the income statement.
B) Earnings per share related to extraordinary items must be reported on the income statement.
C) Earnings per share related to continuing operations must be reported on the income statement.
D) Earnings per share related to the cumulative effect of a change in accounting principle must be reported on the income statement.

Question 42

For which one of the following components is earnings per share information required to be presented on the income statement?

A) discontinued operations
B) extraordinary items
C) income from continuing operations
D) cumulative effect of a change in accounting principle

Question 43

The potential dilutive effect of the exercise of share options or warrants will affect which of the following when calculating diluted earnings per share?

A) the earnings per share numerator
B) the earnings per share denominator
C) both the numerator and the denominator
D) neither the numerator nor the denominator

Question 44

Which statement best reflects the issues associated with the computation of diluted earnings per share?

A) Diluted earnings per share represent the potential impact of all shares of common stock.
B) When presenting comparative financial statements, the impact of convertible bonds must be included for both years.
C) Common stock options are considered dilutive when the average market price is greater than the option price.
D) The impact on the denominator is always the determinate of whether or not to use diluted earnings per share.

Question 45

Which of the following items would be included in a basic earnings per share calculation?

A) declared dividends on noncumulative preferred stock
B) declared dividends on cumulative preferred stock
C) undeclared dividends on cumulative preferred stock
D) all of these

Question 46

On January 1, 2014, a corporation had 10,380 shares of common stock outstanding, and on June 1, it reacquired 6,000 shares. Despite a net loss for the year of $180,000, the company declared and paid cash dividends of $24,000 and $28,000 on common and preferred stock, respectively. The earnings per share for 2014 was

A) ($33.72)
B) ($30.23)
C) ($22.10)
D) ($18.60)

Question 47

Which of the following items would not be included in a basic earnings per share calculation?

A) undeclared dividends on noncumulative preferred stock
B) declared dividends on noncumulative preferred stock
C) undeclared dividends on cumulative preferred stock
D) declared dividends on cumulative preferred stock

Question 48

On January 1, a corporation had 15,380 shares of common stock outstanding. On August 1, it sold an additional 5,000 shares. During the year, dividends of $4,800 and $56,000 were declared and paid on the common and preferred stock, respectively. Net income for the year was $250,000. The basic earnings per share for the year was (round to the nearest whole dollar)

A) $16.26
B) $14.32
C) $11.11
D) $10.83

Question 49

Common shares outstanding are increased as a result of a stock dividend or stock split. For purposes of calculating the earnings per share, when is the stock dividend or stock split considered to have occurred?

A) at the beginning of the earliest comparative period for which earnings per share information is presented
B) at the end of the earliest comparative period for which earnings per share information is presented
C) at the beginning of the year declared
D) as of the date of declaration

Question 50

When a corporation has a loss from continuing operations, the basic earnings per share is

A) greater than the diluted earnings per share
B) less than the diluted earnings per share
C) equal to the diluted earnings per share
D) not reported

Question 51

On January 1, Buchanan corporation had 50,000 shares of common stock outstanding. On April 1, the company declared a 20% stock dividend, and on August 1, the company had a 3-for-1 stock split. On December 1, the company issued an additional 6,000 shares. The denominator in the earnings per share calculation would be

A) 186,000
B) 180,500
C) 180,000
D) 173,000

Question 52

On January 1, a corporation had 25,000 shares of common stock outstanding. An additional 10,000 shares were issued on July 1, and on November 1, the company declared a 2-for-1 stock split. The denominator in the earnings per share calculation would be

A) 35,000
B) 56,000
C) 60,000
D) 50,000

Question 53

On January 1, 2014, Samuel Company had 21,000 shares of common stock outstanding and issued an additional 4,500 shares on May 1. The company declared and paid a cash dividend of $45,000 and earned $375,000 net income. The earnings per share for the year was

A) $15.63
B) $13.75
C) $17.86
D) $12.50

Question 54

On January 1, 2014, Wade Corporation had 24,000 shares of common stock outstanding. On April 1, it reacquired 2,400 shares; on July 1, it issued 10,800 shares; on October 1, it issued another 9,600 shares; and on December 1, it reacquired 900 shares. The weighted average number of common shares outstanding for 2014 was

A) 26,950
B) 28,900
C) 29,925
D) 41,400

Question 55

On January 1, 2014, Laura Corporation had 18,000 shares of common stock outstanding, and reacquired 2,000 shares on July 1. The company earned net income of $110,800 and paid a cash dividend on its preferred stock of $36,000. The earnings per share for the year was

A) $4.40
B) $5.54
C) $3.74
D) $4.68

Question 56

On January 1, James corporation had 60,000 shares of common stock outstanding. On March 1, the company reacquired 12,000 shares, and it declared a 10% stock dividend on October 1. The denominator in the earnings per share calculation would be

A) 44,200
B) 40,800
C) 55,000
D) 60,000

Question 57

On January 1, 2014, Bennett Corporation had 20,000 shares of common shares outstanding. During the year, it sold another 2,600 shares on July 1 and reacquired 600 shares on November 1. The corporation earned $337,600 net income. The company also has 15,000 shares of $10 par value, 6%, cumulative preferred stock on which no dividends have been declared for the last two years. The basic earnings per share for the year is

A) $15.92
B) $15.65
C) $15.50
D) $15.08

Question 58

When a corporation has contingently issuable common stock for which the conditions have not been met for issuance, the shares are included in

A) basic earnings per share
B) diluted earnings per share
C) both basic and diluted earnings per share calculations
D) neither basic nor diluted earnings per share calculations

Question 59

In calculating earnings per share, a company uses the treasury stock method when

A) it needs to value the cash received for a convertible bond
B) it recognizes the assumed impact of exercising outstanding warrants
C) it develops a methodology to handle the premium paid on exercised share options
D) it needs to value treasury stock repurchased during the year

Question 60

On January 1, 2014, Kiper Corporation had 12,000 shares of common stock outstanding. Kiper reacquired 1,000 shares on May 1, and issued another 5,000 shares on September 1. The company also has 10,000 shares of $20 par, 10%, noncumulative preferred stock outstanding on which no dividends have been declared during the last two years. The company had a $28,360 loss for the year. The earnings per share for the year is

A) ($5.03)
B) ($2.95)
C) ($5.26)
D) ($2.18)

Question 61

During 2014, Oddie Corp. had net income of $300,000. Included in net income was after-tax interest expense of $20,000 on convertible bonds. The $200,000 face value of convertible bonds can be converted into common stock at the rate of 200 shares per $1,000 bond. Prior to the conversion, there were 400,000 shares of common stock outstanding. The fully diluted earnings per share is

A) $0.636
B) $0.727
C) $0.750
D) not determinable because the bonds are not dilutive

Question 62

Specific EPS disclosure is regularly reported for extraordinary items under

A) I
B) II
C) III
D) IV

Question 63

The Mark Company has $250,000 to pay dividends. The company has 25,000 shares of 8%, $50 par, preferred stock and 100,000 shares of $5 par common stock outstanding. The common stock is currently selling for $43 per share and the preferred stock is selling for $95 per share on the stock market.
Required:
Determine the amount of dividends to be paid for each class of stock in each of the independent situations.
1) Preferred stock is nonparticipating and cumulative; dividends are in the arrears for 1 year at the beginning of the year.
2) Preferred stock is fully participating and cumulative.
3) Preferred stock is nonparticipating and noncumulative.
4) Compute the dividend yield on the preferred stock and common stock for number 3.

Question 64

During 2014, Penny Co. had net income of $200,000 including after-tax interest expense of $30,000 on convertible bonds. The $300,000 face value of convertible bonds can be converted into common stock at the rate of 300 shares per $1,000 bond. Prior to the conversion, there were 400,000 shares of common stock outstanding. The fully diluted earnings per share is

A) $0.50
B) $0.469
C) $0.408
D) not determinable because the bonds are not dilutive

Question 65

The two defined sections of stockholders' equity under IFRS are

A) conditional capital and other equity
B) earned capital and retained earnings
C) contributed capital and retained earnings
D) share capital and other equity

Question 66

The assumed conversion of convertible debt and preferred stock in diluted earnings per share calculations affects

A) the numerator only
B) the denominator only
C) both the numerator and denominator
D) neither the numerator nor the denominator

Question 67

Reporting diluted earnings per share is required for which type of corporate capital structure?

A) simple
B) complex
C) diluted
D) complicated

Question 68

Smith Corporation had 30,000 shares of common stock outstanding during the year. In addition, there were compensatory share options to purchase 3,000 shares of common stock at $20 a share outstanding the entire year. The average market price for the common stock during the year was $36 a share. The unrecognized compensation cost (net of tax) relating to these options was $4 a share. The denominator to compute the diluted earnings per share is

A) 31,000
B) 31,333
C) 31,667
D) 33,000

Question 69

Below is a list of key terms: Required:
Match the appropriate key term with the correct definition below.

Question 70

Differences exist between IFRS and GAAP in the reporting of EPS. Which of the following areas is not an area of difference?

A) adjustment in options calculations for unrecognized compensation cost
B) treatment of unvested contingently issued shares
C) treatment of dividends in arrears for convertible preferred stock
D) treatment of contracts that may be settled in shares or for cash

Question 71

Which one of the following indicators is intended to show the potential impacts of possible future events on a corporation's performance?

A) basic earnings per share
B) dividend yield
C) diluted earnings per share
D) price/earnings ratio

Question 72

Given the following convertible securities, determine the appropriate ranking to determine their impact on diluted earnings per share calculations:

A) 1, 2, 3
B) 3, 1, 2
C) 2, 1, 3
D) 1, 3, 2

Question 73

Under the treasury stock method, the number of shares of common stock assumed to be reacquired is determined by using the

A) ending market price of the stock
B) average market price of the stock
C) beginning market price of the stock
D) par value of the stock

Question 74

In the determination of the diluted earnings per share, convertible securities are

A) included if they are dilutive
B) included whether they are dilutive or not
C) included if they are antidilutive
D) not included

Question 75

The Annapolis Corporation's stockholders' equity accounts have the following balances as of January 1, 2014:
Annapolis engaged in the following dividend transactions during 2014, 2015, and 2016: 2014: Dividends are in arrears for 2012 and 2013. On December 1, 2014, the annual cash dividend plus the dividends in arrears were declared on the preferred stock. In addition, a $1.50 per share dividend was declared on the common stock. The dividends were paid on December 31, 2014.
2015:On December 1, 2015, the annual cash dividend on the preferred stock was declared. The dividend was paid on December 31, 2015.
On December 10, a 30% stock dividend was declared on the common stock, distributable on January 25, 2016. The market price per share for the common stock on December 10, 2015, was $28.
2016:On January 25, 2016, the stock dividend declared on December 10, 2015, was issued.
On December 1, the annual cash dividend on the preferred stock was declared; it is payable on January 15, 2017.
In addition, on December 1, a 10% stock dividend was declared on the common stock, distributable on January 20, 2017. The market price per share for the common stock on December 1, 2016, was $23.
No other stock transactions took place during 2014, 2015, or 2016.
Required:
Prepare the entries to record the dividend transactions for 2014, 2015, and 2016. (Do not record any transactions for 2017.)

Question 76

As of December 31, 2015, the Russell Corporation has 10,000 shares of 10% preferred stock issued and outstanding with a total par value of $250,000. In addition, as of this date, Russell has 75,000 shares of common stock issued and outstanding with a total par value of $750,000. Dividends for 2013 and 2014 have not been paid. As of December 31, 2015, the Russell Corporation declared total cash dividends of $290,000 to be paid to both the preferred stockholders and the common stockholders.
Required:
How much cash will be distributed to both the preferred stockholders and the common stockholders, respectively, on December 31, 2015, under each of the following independent situations?

Question 77

Tulip Corp. has $1,000,000, 6%, nonconvertible bonds due in 2015 and $1,500,000, 3%, convertible bonds due in 2016. The basic earnings per share are $1.25 and the diluted earnings per share are $1.18. Based upon this information, Tulip must disclose

A) basic earnings per share because the convertible bonds are not dilutive
B) basic earnings per share and dilutive earnings per share because the convertible bonds are dilutive
C) basic earnings per share, and the convertible bonds must be disclosed in the stockholders' equity section of the balance sheet
D) basic earnings per share and dilutive earnings per share, and the convertible bonds must be disclosed in the stockholders' equity section of the balance sheet

Question 78

Interest expense on convertible bonds that are dilutive is included in the numerator of the diluted earnings per share calculation at an amount equal to

A) interest expense
B) interest payable
C) interest expense times the tax rate
D) interest expense times one minus the tax rate

Question 79

Dual presentation of the basic and diluted earnings per share amounts is

A) required for corporations with simple capital structures
B) optional for corporations with simple capital structures
C) optional for corporations of any structure
D) required for corporations with complex capital structures

Question 80

Under the if-converted method, the impact of various convertible securities on the diluted earnings per share calculation are ranked from

A) the least dilutive impact to the most dilutivet impact
B) the most dilutive impact to the least dilutive impact
C) the least number of assumed shares issued to the most
D) the most number of assumed shares issued to the least