Question 1

Net losses reduce the balance of Share Capital.

Accepted Answer

Net losses reduce the balance of Retained Earnings, not Share Capital. Share Capital represents the amount invested by shareholders and is not directly affected by net losses.

Question 2

Preference shares have contractual preference over ordinary shares in certain areas.

Accepted Answer

Preference shares have contractual preference over ordinary shares in areas such as receiving fixed dividends and receiving repayment of capital in case of liquidation.

Question 3

A debit balance in the Retained Earnings account is identified as a deficit.

Accepted Answer

A debit balance in the Retained Earnings account indicates that the company has accumulated losses over time, resulting in a deficit.

Question 4

When treasury shares are purchased, the cost is debited to Share Capital - Ordinary.

Accepted Answer

When treasury shares are purchased, the cost is debited to Treasury Stock account and reduce the shareholder's equity. It is not debited to Share Capital - Ordinary.

Question 5

Preference shareholders have the right to receive assets in the event of liquidation before the ordinary shareholders.

Accepted Answer

This is the basic characteristic of preference shareholders. They have a priority right to receive assets in the event of liquidation before the ordinary shareholders.

Question 6

Unpaid dividends on non-cumulative preference shares are called dividends in arrears.

Accepted Answer

The answer of Unpaid dividends on non-cumulative preference shares are...

Question 7

Cash dividends are not a liability of the corporation until they are declared by the board of directors.

Accepted Answer

Cash dividends are not considered a liability until they are declared by the board of directors. Prior to declaration, they are simply a potential use of funds in the future. Once declared, they become a liability and must be recorded on the balance sheet.

Question 8

A 3-for-1 ordinary share split will increase total equity but reduce the par or stated value per share.

Accepted Answer

The answer of A 3-for-1 ordinary share split will increase...

Question 9

The number of ordinary shares outstanding can never be greater than the number of shares issued.

Accepted Answer

This statement is true because every ordinary share that is issued becomes outstanding, but not every outstanding share has necessarily been issued. Therefore, the number of outstanding shares cannot be greater than the number of issued shares.

Question 10

The priorities associated with preference shares include the right to vote before the ordinary shareholders.

Accepted Answer

Preference shareholders do not have the right to vote before ordinary shareholders. In fact, they may not have any voting rights at all, or only limited voting rights. The main priority associated with preference shares is the right to receive fixed dividend payments before any dividends are paid to ordinary shareholders.

Question 11

Prior period adjustments to income are reported in the current year's income statement.

Accepted Answer

Prior period adjustments are typically reported in the retained earnings statement, not in the current year's income statement. They correct errors from previous periods.

Question 12

Retained earnings that are restricted are unavailable for dividends.

Accepted Answer

Restricted retained earnings are funds that have been set aside for specific purposes and cannot be distributed as dividends to shareholders.

Question 13

Net income of a corporation should be closed to retained earnings and net losses should be closed to the share premium account.

Accepted Answer

Net losses should be closed to retained earnings and share premium account is not affected by net losses.

Question 14

A correction in income of a prior period involves either a debit or credit to the Retained Earnings account.

Accepted Answer

Correction in income of a prior period will affect the Retained Earnings account, either by increasing it (credit) or decreasing it (debit).

Question 15

Treasury Shares is a contra equity account.

Accepted Answer

Treasury shares represent the company's own stock that has been repurchased and is being held in its treasury. Since these shares are no longer outstanding, they are considered a reduction in the company's equity and are recorded as a contra equity account on the balance sheet, reducing the total shareholders' equity.

Question 16

The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.

Accepted Answer

The amount of a cash dividend liability is recorded on the date of declaration, not the date of record. The date of record is simply the date on which the company identifies the shareholders who are entitled to receive the dividend.

Question 17

Dividends in arrears on cumulative preference shares are considered a liability.

Accepted Answer

The answer of Dividends in arrears on cumulative preference shares...

Question 18

Dividends may be declared and paid in cash or shares.

Accepted Answer

Dividends can be paid in cash or shares, or a combination of both, at the discretion of the company's board of directors.

Question 19

Retained earnings represents the amount of cash available for dividends.

Accepted Answer

Retained earnings are the portion of a company's net income that is kept by the company instead of being distributed as dividends to shareholders. Therefore, retained earnings do not represent the amount of cash available for dividends.

Question 20

Preference shareholders generally do not have the right to vote for the board of directors.

Accepted Answer

This is because preference shareholders usually have priority in receiving dividends and do not have a say in the management of the company.

Quiz 11: Corporations: Organization, Share Transactions, Dividends,and Retained Earnings