I. True or False (R x 2). Fully shade the box for TRUE if the statement is correct, otherwise shade FALSE.

1. Declaration and issuance of bonus issue will not affect the total shareholders equity. T
2. Non-cumulative preference shares are entitled to dividends that have not been declared in the prior years. F
3. A deficit in retained earnings arises whenever a net loss is reported for an accounting period. F
4. Preference share or preferred stock gives the holder a preference over the holders of ordinary shares with
respect to payment of dividends. T
5. A scrip dividend is a distribution to shareholders representing a return of a portion of contributed capital. F
6. A bonus issue increases contributed capital and retained earnings. F
7. Deficit is the term that is used to indicate a debit balance in the retained earnings account. T
8. A bonus issue requires a transfer of retained earnings to contributed capital. T
9. Dividends, other than bonus issue, reduce total shareholders equity. T

II. Multiple Choice (R x 2). Fully shade the box representing the letter of your answer.

1. Kiara Company provided the following data:

12/31/2015 12/31/2016
Share capital (P100 par value) P 5,000,000 P 5,100,000
Share premium 2,500,000 2,900,000
Retained earnings 5,000,000 ?

During 2016, the entity declared and paid cash dividend of P750,000 and also declared and issued a share
dividends of P500,000. There were no other changes in shares issued and outstanding during 2016. The net
income for 2016 was P1,500,000. What is the balance of retained earnings on December 31, 2016?
a. P 5,250,000
b. P 5,750,000
c. P 6,250,000
d. P 6,500,000

Retained earnings
Beginning 5,000,000.00
Cash dividends (750,000.00)
Share dividends (500,000.00)
Net income 1,500,000.00
Ending 5,250,000.00

2. Which of the following transactions will decrease retained earnings?

a. Declaration of a bonus issue
b. Payment of cash dividend
c. Profit for the period
d. Issuance of share dividend

3. Lauretta Company reported the following shareholders equity on January 1, 2016:

Share capital P 1,500,000

Share premium 3,000,000
Retained earnings 2,000,000

The entity had 400,000 authorized shares of P5 par value of which 300,000 shares were issued and outstanding.
On December 31, 2016, the entity declared and distributed a property dividend of inventory. The inventory had
 a P750,000 carrying amount and a P1,000,000 fair value. The net income for 2016 was P2,500,000. What
amount should be reported as retained earnings on December 31, 2016?
a. P 1,000,000
b. P 1,250,000
c. P 3,500,000
d. P 3,750,000

Retained earnings
Beginning 2,000,000.00
Property dividends (1,000,000.00)
Net income 2,500,000.00
Ending 3,500,000.00

4. What is the effect of the declaration of scrip dividends on total liabilities and shareholders equity, respectively?
a. Increase, decrease
b. Increase, increase
c. Decrease, decrease
d. No effect, decrease

5. On January 1, 2016, Easy Company had ordinary and preference shares outstanding. The incorporators or
original shareholders own ten ordinary shares but no preference shares. On December 31, 2016, the entity
declared dividends on the ordinary shares. The entity decided to give ordinary shareholders a property dividend
in the form of a non-cash asset. The non-cash asset is a standard model from the entitys car fleet. Each car has a
cost of P500,000 and fair market value of P600,000. What is gain on disposal that should be recognized on
December 31, 2016?
a. P 0
b. P 100,000
c. P 500,000
d. P 1,000,000

(No gain or loss to be recognized on the date of DECLARATION (December 31, 2016)

6. How is the balance of the share dividends distributable presented in the statement of financial position?
a. As deduction from retained earnings
b. As part of current liabilities
c. As addition to share capital
d. As addition to retained earnings

7. At the current year-end, Grey Company issued 4,000 ordinary shares of P100 par value in connection with a
share dividend. The market value per share on the date of declaration was P150. The shareholders equity
accounts immediately before the issuance of the stock dividend shares were as follows:

Ordinary share capital, P100 par, 50,000 shares P 2,000,000

authorized, 20,000 shares outstanding
Share premium 3,000,000
Retained earnings 1,500,000

What amount should be reported as retained earnings immediately after the stock dividend?
a. P 900,000
b. P 1,100,000
c. P 1,500,000
 d. P 2,100,000

Share dividend
No. of issued shares in relation to the share dividends 4,000.00
Divided by: Oustanding shares 20,000.00
% of share dividends (to use par value) 20%

No. of issued shares in relation to the share dividends 4,000.00

x Par value 100.00
Amount of share dividends 400,000.00

Retained earnings
Beginning 1,500,000.00
Amount of share dividends (400,000.00)
Ending 1,100,000.00

8. Ray Company declared a 5% share dividend on 100,000 issued and outstanding shares of P20 par value, which
had a fair value of P50 per share before the share dividend was declared. This share dividend was distributed 60
days after the declaration date. What is the increase in current liabilities as a result of the stock dividend
declaration?
a. P 250,000
b. P 100,000
c. P 150,000
d. P 0

Share dividends distributable account is a contra capital account not a liability account.

9. In the process of closing the books of a corporation, any resulting balance of the Income Summary account
representing profit or loss is transferred to:
a. Contributed capital account
b. Cumulative other comprehensive income
c. Retained earnings
d. The shareholders individual drawing accounts

10. The declaration of share dividend or bonus issue will:

a. Decrease total assets
b. Increase total liabilities
c. Decrease in total shareholders equity
d. Not affect total shareholders equity

(Increase iin share dividends distributable and decrease in retained earnings.)

11. The liability for property dividends shall be measured at the reporting date at the:
a. Carrying value of the non-cash asset to be distributed as dividends.
b. Original cost of the non-cash assets to be distributed as dividends.
c. Fair value of the non-cash asset on the date of declaration.
d. Fair value of the non-cash asset at the reporting date.

12. X Corporation declared 15% bonus issue. The fair value of each share exceeds the par value on the date of
declaration. The bonus shall:
a. Be charged to retained earnings at the fair market value of the shares.
 b. Be charged to retained earnings at the par value of the shares.
c. Be credited to a financial liability.
d. Decrease the total shareholders equity.

13. How would the declaration of a 10% bonus issue affect each of the following, when the market price on the
date of declaration exceeds the par value?
Share premium Retained earnings
a. No effect Decrease
b. Decrease Decrease
c. Increase Decrease
d. Decrease Increase

10% share dividends will be computed based on the market value of the shares resulting to an increase in share
premium account.

14. East Company had sufficient retained earnings in 2015 as a basis for dividends but was temporary short of
cash. The entity declared a dividend of P1,000,000 on April 1, 2016, and issued promissory notes to the
shareholders in lieu of cash. The notes, which were dated April 1, 2016, had a maturity date of March 31, 2017
and a 10% interest rate. How should the scrip dividend and related interest be accounted for?
a. Debit retained earnings P1,100,000 on April 1, 2016.
b. Debit retained earnings P1,100,000 on March 31, 2017.
c. Debit retained earnings P1,000,000 on April 1, 2016 and debit interest expense P100,000 on
March 31, 2017.
d. Debit retained earnings P1,000,000 on April 1, 2016 and debit interest expense P75,000 on
December 31, 2016.

Scrip dividends 1,000,000.00

x Interest 10%
x Time 9/12
Interest from Apr 1 - Dec 31 75,000.00

For the next 3 items:

The Eric Corporation was organized early on Year 1. Authorization was obtained to issue 100,000 shares of P10 par
value ordinary share capital and 20,000 shares of P100 par, 10% cumulative preference share capital. All the
preference shares were issued at par and 80,000 ordinary shares were sold for P15 per share. During the first five
years of operations, the corporation earned a total of P3,600,000 and paid annual dividends of P2 per ordinary
share.

15. What amount of total dividends was paid each year?

a. P 160,000
b. P 200,000
c. P 360,000
d. P 400,000

Preference (20,000 shares x P100) 2,000,000.00

x Dividend rate 10%
Preference dividends 200,000.00
Ordinary dividends (P2 x 80,000 shares) 160,000.00
Total dividends per year 360,000.00

16. How much was the retained earnings at the end of the fifth year?
a. P 2,800,000
 b. P 2,600,000
c. P 1,800,000
d. P 1,600,000

Total earnings 3,600,000.00

Dividends paid (P360,000 x 5) (1,800,000.00)
Retained earnings, end 1,800,000.00

17. How much was the total shareholders equity at the end of the fifth year?
a. P 5,000,000
b. P 5,100,000
c. P 6,000,000
d. P 6,100,000

Preference share (20,000 shares x P100) 2,000,000.00

Ordinary share (80,000 shares x P10) 800,000.00
Share premium - ordinary (80,000 shares x P5) 400,000.00
Retained earnings 1,800,000.00
Shareholders' equity 5,000,000.00

III. Distribution between Preference and Ordinary shares. (R x 2). Write your answer on the sheet provided.

The capital structure of San Miguel Corporation (SMC) are as follows (in millions):

8% Preference Share, P500 par P 80

Ordinary Share, P50 par 120
Share premium 99
Retained earnings 150
Total Shareholders' Equity P 449

Cash dividends were declared in 2017. Dividends were declared last 2014.

Determine the dividend per share for both preference and ordinary share under the following independent
scenarios (2 decimal places):
a. Preference share is non-cumulative and non-participating. Dividends declared amounted to P10 million.
b. Preference share is cumulative and non-participating. Dividends declared amounted to P20 million.
c. Preference share is cumulative and participating. Dividends declared amounted to P30 million.
d. Preference share is cumulative and participating. Dividends declared amounted to P15 million.
e. Preference share is cumulative and participating up to an additional 2%. Preference share is cumulative
and participating. Dividends declared amounted to P30 million.