BALUCAN, LUIGI E. FALSE15.

A company that reports a discontinued

MODULE 3 operation or an extraordinary item has the option of
Exercises/Assignments reporting per share amounts for these items.
Answer the following Problems.
Problem1. True or False. FALSE16. Dividends declared on common and
Write True if the statement is correct otherwise preferred stock are subtracted from net income in
write false. the computation of earnings per share.

TRUE1. The income statement is useful for helping TRUE17. Prior period adjustments can either be
to assess the risk or uncertainty of achieving future added or subtracted in the Retained Earnings
cash flows. Statement.

FALSE2.A strength of the income statement as FALSE18. Companies only restrict retained
compared to the balance sheet is that items that earnings to comply with contractual requirements or
cannot be measured reliably can be reported in the current necessity.
income statement.
FALSE19. Comprehensive income includes all
FALSE3. Earnings management generally makes changes in equity during a period except those
income statement information more useful for resulting from distributions to owners.
predicting future earnings and cash flows.
TRUE20. The components of other comprehensive
TRUE4. The transaction approach of income income can be reported in a statement of
measurement focuses on the income-related stockholders’ equity.
activities that have occurred during the period.
Problem 2 Multiple Choice. Encircle the letter of
TRUE5. Companies frequently report income tax the correct answer.
expense as the last item before net income on a
singlestep income statement. 1. What is the purpose of reporting comprehensive
income?
TRUE6. Both revenues and gains increase both net a. To report changes in equity due to transactions
income and owners’ equity. with owners.
b. To report a measure of overall enterprise
FALSE7. Use of a multiple-step income statement performance.
will result in the company reporting a higher net c. To replace net income with a better measure.
income than if they used a single-step income d. To combine income from continuing operations
statement. with income from discontinued operations and
extraordinary items.
FALSE 8. The primary advantage of the multiple-
step format lies in the simplicity of presentation and 2. During year 1, the “other revenues and gains”
the absence of any implication that one type of section of Totman Company’s Statement of
revenue or expense item has priority over another. Earnings and Comprehensive Income contains
P5,000 in interest revenue, P15,000 equity in Harpo
TRUE9. Gross profit and income from operations Co. earnings, and P25,000 gain on sale of available-
are reported on a multiple-step but not a single-step for-sale securities. Assuming the sale of the
income statement. securities increased the current portion of income
tax expense by P10,000, determine the amount of
FALSE10. The accounting profession has adopted Totman’s reclassification adjustment to other
a current operating performance approach to income comprehensive income.
reporting. a. $ 5,000 b. $ 2,500 c. $35,000 d. $15,000

TRUE 11. Companies report the results of 3. Which of the following is not an acceptable
operations of a component of a business that will be option of reporting other comprehensive income
disposed of separately from continuing operations. and its components?
I. In a separate statement of comprehensive
FALSE12. Gains or losses from exchange or income.
translation of foreign currencies are reported as II. In a statement of earnings and comprehensive
extraordinary items. income.
III. In a statement of changes in stockholders’
FALSE13. Discontinued operations, extraordinary equity.
items, and unusual gains and losses are all reported a. I only. b. II only. c. III only. d. I and II.
net of tax in the income statement.
4. Accumulated other comprehensive income
TRUE14. Intraperiod tax allocation relates the should be reported on the balance sheet as a
income tax expense of the period to the specific component of Retained earnings
items that give rise to the amount of the tax Additional paid-in capital
provision. a. No Yes
b. Yes Yes
c. Yes No commissions 50,000 Interest revenue
d. No No 25,000 Freight out 15,000 Loss on
early retirement of long-term debt 20,000
Uncollectible accounts expense 15,000 Totals
5. Which of the following changes during a period P420,000 P600,000 Other information Finished
is not a component of other comprehensive income? goods inventory:
January 1, year 2 P400,000 December 31, year 2
a. Unrealized gains or losses as a result of a debt 360,000 Vane’s income tax rate is 30%. In Vane’s
security being transferred from held-tomaturity to year 2 multiple-step income statement, 10. What
available-for- sale. amount should Vane report as the cost of goods
b. Stock dividends issued to shareholders. manufactured?
c. Foreign currency translation adjustments.
d. Pension liability adjustments. a. P200,000 b. P215,000 c. P280,000 d. P295,000

6. A company buys ten shares of securities at 11. What amount should Vane report as income
P1,000 each on January 15, year 1. The securities after income taxes from continuing operations?
are classified as available-for-sale. The fair value of
the securities increases to P1,250 per share as of a. P126,000 b. P129,500 c. P140,000 d. P147,000
December 31, year 1. The company does not elect
to use the fair value option for reporting 12. A material loss should be presented separately
availablefor-sale securities. Assume no dividends as a component of income from continuing
are paid and that the company has a 30% tax rate. operations when it is
What is the amount of the holding gain arising a. An extraordinary item.
during the period that is classified in other b. A discontinued component of the business.
comprehensive income for the period ending c. Unusual in nature and infrequent in occurrence.
December 31, year 1? d. Not unusual in nature but infrequent in
occurrence.
a. 0 b. P1,750 c. P2,500 d. P7,500
13. Which of the following should be included in
7. If (P2,450) net of tax is the reclassification general and administrative expenses? Interest
adjustment included in other comprehensive income Advertising
in the year the securities are sold, what is the gain a. Yes Yes
(loss) that is included in income from continuing b. Yes No
operations before income taxes? Assume a 30% tax c. No Yes
rate. d. No No
a. P(2,450) b. P(3,500) c. P 2,450 d. P3,500
14. An extraordinary item should be reported
8. Which of the following changes during a period separately on the income statement as a component
is not a component of other comprehensive income? of income Net of income taxes Before
a. Pension liability adjustment for funded status of discontinued operations of a component of a
plan. business
b. Treasury stock, at cost. a. Yes Yes
c. Foreign currency translation adjustment. b. Yes No
d. Reclassification adjustment, for securities gain c. No No
included in net income. d. No Yes

9. In Baer Food Co.’s year 1 single-step income 15. Searles does not elect the fair value option for
statement, the section titled “Revenues” consisted of recording financial assets and liabilities. What
the following: Net sales revenue amount of comprehensive income should Searles
P187,000 Results from discontinued operations: Corporation report on its statement of income and
Loss from discontinued component Z including loss comprehensive income given the following net of
on disposal of $1,200 P16,400 Less tax benefit tax figures that represent changes during a period?
4,000 (12,400) Pension liability adjustment recognized in OCI
Interest revenue 10,200 Gain on sale of P (3,000) Unrealized gain on available-for-sale
equipment 4,700 Extraordinary gain securities 15,000 Reclassification adjustment,
1,500 Total revenues P191,000 for securities gain included in net income (2,500)
In the revenues section of the year 1 income Stock warrants outstanding 4,000 Net
statement, Baer Food should have reported total income 77,000
revenues of
a. P216,300 b. P215,400 c. P203,700 d. P201,900 a. P86,500 b. P89,000 c. P89,500 d. P90,500

Items 10 and 11 are based on the following: Vane 16. The following changes in Vel Corp.’s account
Co.’s trial balance of income statement accounts for balances occurred during year 1: Increase Assets
the year ended December 31, year 2, included the P89,000 Liabilities 27,000 Capital stock
following: Debit Credit Sales P575,000 60,000 Additional paid-in capital 6,000 Except
Cost of sales P240,000 Administrative expenses for a $13,000 dividend payment and the year’s
70,000 Loss on sale of equipment 10,000 Sales
earnings, there were no changes in retained earnings Problem 3 For each of the items listed below,
for year 1. What was Vel’s net income for year 1? indicate how it should be treated in the financial
statements. Use the following letter code for your
a. P 4,000 b. P 9,000 c. P13,000 d. P17,000 selections:
a. Ordinary or unusual (but not extraordinary) item
17. A company buys ten shares of securities at on the income statement
P2,000 each on December 31, year 1. The securities b. Discontinued operations
are classified as available for sale. The company c. Extraordinary item on the income statement d.
does not elect to use the fair value option for Prior period adjustment
reporting its available-for-sale securities. The fair
value of the securities increases to P2,500 on A 1. The bad debt rate was increased from 1%
December 31, year 2, and to P2,750 on December to 2%, thus increasing bad debt expense.
31, year 3. On December 31, year 3, the company A 2. Obsolete inventory was written off. This
sells the securities. Assume no dividends are paid was the first loss of this type in the company's
and that the company has a tax rate of 30%. What is history.
the amount of the reclassification adjustment for C 3. An uninsured casualty loss was incurred
other comprehensive income on December 31, year by the company. This was the first loss of this type
3? in the company's 50-year history.
D 4. Recognition of income earned last year
a. P 7,500 b. P (7,500) c. P 5,250 d. P (5,250) which was inadvertently omitted from last year's
income statement.
18. When a component of a business has been A 5. The company sold one of its warehouses
discontinued during the year, the loss on disposal at a loss.
should A 6. Settlement of litigation with federal
a. Include operating losses of the current period. government related to income taxes of three years
b. Exclude operating losses during the period. ago. The company is continually involved in
c. Be an extraordinary item. various adjustments with the federal government
d. Be an operating item. related to its taxes.
C 7. A loss incurred from expropriation (the
19. On January 1, year 2, Shine Co. agreed to sell a company owned resources in South America which
business component on March 1, year 2. The gain were taken over by a dictator unsympathetic to
on the disposal should be American business).
a. Presented as an extraordinary gain. D 8. The company neglected to record its
b. Presented as an adjustment to retained earnings. depreciation in the previous year.
c. Netted with the loss from operations of the A 9. Discontinuance of all production in the
component as a part of discontinued operations. United States. The manufacturing operations were
d. None of the above. relocated in Mexico.
B 10. Loss on sale of investments. The
20. On December 1, year 2, Greer Co. committed to company last sold some of its investments two years
a plan to dispose of its Hart business component’s ago.
assets. The disposal meets the requirements to be
classified as discontinued operations. On that date,
Greer estimated that the loss from the disposition of
the assets would be P700,000 and Hart’s year 2
operating losses were P200,000. Disregarding
income taxes, what net gain (loss) should be
reported for discontinued operations in Greer’s year
2 income statement?

a. P0 b. P(200,000) c. P(700,000) d. P(900,000)

Answer as required.
Problem 1 Presented below is certain information
pertaining to Edson Company.
Assets, January 1 P240,000
Assets, December 31 230,000
Liabilities, January 1 150,000
Common stock, December 31 80,000
Retained earnings, December 31 31,000
Common stock sold during the year 10,000
Dividends declared during the year 13,000

Compute the net income for the year.

(NOTE: problem 1,2 and 4 were separated kay dili

sya paigo sa akong 2 column sir. salamat.)
MODULE 4
Exercises/Assignments Multiple Choice.
Answer the following Problems. Encircle the letter of the correct answer.
Problem 1 True or False.
Write True if the statement is correct otherwise 21. The residual interest in a corporation belongs to
write false. the

TRUE 1. A corporation is incorporated in only one a. management.

state regardless of the number of states in which it b. creditors.
operates. c. common stockholders.
FALSE2. The pre-emptive right allows stockholders d. preferred stockholders.
the right to vote for directors of the company.
TRUE 3. Common stock is the residual corporate 22. The pre-emptive right of a common stockholder
interest that bears the ultimate risks of loss. is the right to
FALSE4. Earned capital consists of additional paid-
in capital and retained earnings. a. share proportionately in corporate assets upon
TRUE 5. True no-par stock should be carried in the liquidation.
accounts at issue price without any additional paidin b. share proportionately in any new issues of stock
capital reported. of the same class.
FALSE6. Companies allocate the proceeds received c. receive cash dividends before they are distributed
from a lump-sum sale of securities based on the to preferred stockholders.
securities’ par values. d. exclude preferred stockholders from voting
TRUE 7. Companies should record stock issued for rights.
services or noncash property at either the fair value
of the stock issued or the fair value of the 23. The pre-emptive right enables a stockholder to
consideration received.
FALSE8. Treasury stock is a company’s own stock a. share proportionately in any new issues of stock
that has been reacquired and retired. of the same class.
FALSE9. The cost method records all transactions b. receive cash dividends before other classes of
in treasury shares at their cost and reports the stock without the pre-emptive right.
treasury stock as a deduction from capital stock. c. sell capital stock back to the corporation at the
TRUE 10. When a corporation sells treasury stock option of the stockholder.
below its cost, it usually debits the difference d. receive the same amount of dividends on a
between cost and selling price to Paid-in Capital percentage basis as the preferred stockholders. S
from Treasury Stock.
FALSE11. Participating preferred stock requires 24. In a corporate form of business organization,
that if a company fails to pay a dividend in any legal capital is best defined as
year, it must make it up in a later year before paying
any common dividends. a. the amount of capital the state of incorporation
TRUE 12. Callable preferred stock permits the allows the company to accumulate over its
corporation at its option to redeem the outstanding existence.
preferred shares at stipulated prices. b. the par value of all capital stock issued.
TRUE 13. The laws of some states require that c. the amount of capital the federal government
corporations restrict their legal capital from allows a corporation to generate.
distribution to stockholders. d. the total capital raised by a corporation within the
FALSE14. The SEC requires companies to disclose limits set by the Securities and Exchange
their dividend policy in their annual report. Commission. S
FALSE15. All dividends, except for liquidating
dividends, reduce the total stockholders’ equity of a 25. Stockholders of a business enterprise are said to
corporation. be the residual owners. The term residual owner
TRUE 16. Dividends payable in assets of the means that shareholders
corporation other than cash are called property
dividends or dividends in kind. a. are entitled to a dividend every year in which the
TRUE 17. When a stock dividend is less than 20-25 business earns a profit.
percent of the common stock outstanding, a ompany b. have the rights to specific assets of the business.
is required to transfer the fair value of the stock c. bear the ultimate risks and uncertainties and
issued from retained earnings. receive the benefits of enterprise ownership.
FALSE 18. Stock splits and large stock dividends d. can negotiate individual contracts on behalf of the
have the same effect on a company’s retained enterprise.
earnings and total stockholders’ equity.
FALSE19. The rate of return on common stock 26. Total stockholders' equity represents
equity is computed by dividing net income by the
average common stockholders’ equity. a. a claim to specific assets contributed by the
TRUE 20. The payout ratio is determined by owners.
dividing cash dividends paid to common b. the maximum amount that can be borrowed by
stockholders by net income available to common the enterprise.
stockholders.
c. a claim against a portion of the total assets of an
enterprise. a. stated value stock.
d. only the amount of earnings that have been b. fixed value stock.
retained in the business. c. uniform value stock.
d. par value stock. S
27. A primary source of stockholders' equity is
35. Which of the following is not a legal restriction
a. income retained by the corporation. related to profit distributions by a corporation?
b. appropriated retained earnings.
c. contributions by stockholders. a. The amount distributed to owners must be in
d. both income retained by the corporation and compliance with the state laws governing
contributions by stockholders. corporations.
b. The amount distributed in any one year can never
28. Stockholders' equity is generally classified into exceed the net income reported for that year.
two major categories: c. Profit distributions must be formally approved by
the board of directors.
a. contributed capital and appropriated capital. d. Dividends must be in full agreement with the
b. appropriated capital and retained earnings. capital stock contracts as to preferences and
c. retained earnings and unappropriated capital. participation. S
d. earned capital and contributed capital.
36. In January 2010, Finley Corporation, a newly
29. The accounting problem in a lump sum issuance formed company, issued 10,000 shares of its P10
is the allocation of proceeds between the classes of par common stock for P15 per share. On July 1,
securities. An acceptable method of allocation is the 2010, Finley Corporation reacquired 1,000 shares of
its outstanding stock for P12 per share. The
a. pro forma method. acquisition of these treasury shares
b. proportional method.
c. incremental method. a. decreased total stockholders' equity.
D. either the proportional method or the b. increased total stockholders' equity.
incremental method. c. did not change total stockholders' equity.
d. decreased the number of issued shares. P
30. When a corporation issues its capital stock in
payment for services, the least appropriate basis for
recording the transaction is the 37. Treasury shares are

a. market value of the services received. a. shares held as an investment by the treasurer of
b. par value of the shares issued. the corporation.
c. market value of the shares issued. b. shares held as an investment of the corporation.
d. Any of these provides an appropriate basis for c. issued and outstanding shares.
recording the transaction. d. issued but not outstanding shares.

31. Direct costs incurred to sell stock such as 38. When treasury stock is purchased for more than
underwriting costs should be accounted for as the par value of the stock and the cost method is
1. a reduction of additional paid-in capital. used to account for treasury stock, what account(s)
2. an expense of the period in which the stock is should be debited?
issued.
3. an intangible asset. a. Treasury stock for the par value and paid-in
a. 1 b. 2 c. 3 d. 1 or 3 capital in excess of par for the excess of the
purchase price over the par value.
32. A "secret reserve" will be created if b. Paid-in capital in excess of par for the purchase
price.
a. inadequate depreciation is charged to income. c. Treasury stock for the purchase price.
b. a capital expenditure is charged to expense. d. Treasury stock for the par value and retained
c. liabilities are understated. earnings for the excess of the purchase price over
d. stockholders' equity is overstated. P the par value.

33. Which of the following represents the total 39. “Gains" on sales of treasury stock (using the
number of shares that a corporation may issue under cost method) should be credited to
the terms of its charter?
a. paid-in capital from treasury stock.
a. authorized shares b. capital stock.
b. issued shares c. retained earnings.
c. unissued shares d. other income.
d. outstanding shares S
40. Porter Corp. purchased its own par value stock
34 Stock that has a fixed per-share amount printed on January 1, 2010 for P20,000 and debited the
on each stock certificate is called treasury stock account for the purchase price. The
stock was subsequently sold for P12,000. The c. excluded from the stockholders’ equity heading.
P8,000 difference between the cost and sales price d. included as a contra item in stockholders' equity.
should be recorded as a deduction from S

a. additional paid-in capital to the extent that 46. Cumulative preferred dividends in arrears
previous net "gains" from sales of the same class of should be shown in a corporation's balance sheet as
stock are included therein; otherwise, from retained
earnings. a. an increase in current liabilities.
b. additional paid-in capital without regard as to b. an increase in stockholders' equity.
whether or not there have been previous net "gains" c. a footnote.
from sales of the same class of stock included d. an increase in current liabilities for the current
therein. portion and long-term liabilities for the long-term
c. retained earnings. portion.
d. net income.
47. At the date of the financial statements, common
41. How should a "gain" from the sale of treasury stock shares issued would exceed common stock
stock be reflected when using the cost method of shares outstanding as a result of the
recording treasury stock transactions?
a. declaration of a stock split.
a. As ordinary earnings shown on the income b. declaration of a stock dividend.
statement. c. purchase of treasury stock.
b. As paid-in capital from treasury stock d. payment in full of subscribed stock.
transactions.
c. As an increase in the amount shown for common 48. An entry is not made on the
stock.
d. As an extraordinary item shown on the income a. date of declaration.
statement. b. date of record.
42. Which of the following best describes a possible c. date of payment.
result of treasury stock transactions by a d. An entry is made on all of these dates.
corporation?
49. Cash dividends are paid on the basis of the
a. May increase but not decrease retained earnings. number of shares
b. May increase net income if the cost method is
used. a. authorized.
c. May decrease but not increase retained earnings. b. issued.
d. May decrease but not increase net income. c. outstanding.
d. outstanding less the number of treasury shares.
43. Which of the following features of preferred
stock makes the security more like debt than an 50. Which of the following statements about
equity instrument? property dividends is not true?

a. Participating a. A property dividend is usually in the form of

b. Voting securities of other companies.
c. Redeemable b. A property dividend is also called a dividend in
d. Noncumulative kind.
c. The accounting for a property dividend should be
44. The cumulative feature of preferred stock based on the carrying value (book value) of the
nonmonetary assets transferred.
a. limits the amount of cumulative dividends to the d. All of these statements are true.
par value of the preferred stock.
b. requires that dividends not paid in any year must 51. Pierson Corporation owned 10,000 shares of
be made up in a later year before dividends are Hunter Corporation. These shares were purchased in
distributed to common shareholders. 2016 for P90,000. On November 15, 2020, Pierson
c. means that the shareholder can accumulate declared a property dividend of one share of Hunter
preferred stock until it is equal to the par value of for every ten shares of Pierson held by a
common stock at which time it can be converted stockholder. On that date, when the market price of
into common stock. Hunter was P14 per share, there were 90,000 shares
d. enables a preferred stockholder to accumulate of Pierson outstanding. What gain and net reduction
dividends until they equal the par value of the stock in retained earnings would result from this property
and receive the stock in place of the cash dividends. dividend?
P
Gain Net Reduction in Retained Earnings
45. According to the FASB, redeemable preferred a. P0 P126,000
stock should be b. P0 P 81,000
c. P45,000 P 81,000
a. included with common stock. d. P45,000 P 36,000
b. included as a liability.
52. Stinson Corporation owned 30,000 shares of share. Four months later Hernandez declared a P.50
Matile Corporation. These shares were purchased in per share cash dividend. As a result of the dividends
2016 for P270,000. On November 15, 2020, Stinson declared during the year, retained earnings
declared a property dividend of one share of Matile decreased by
for every ten shares of Stinson held by a a. P1,242,500. b. P525,000. c. P192,500.
stockholder. On that date, when the market price of d. P175,000.
Matile was P14 per share, there were 270,000
shares of Stinson outstanding. What gain and net 57. On June 30, 2020, when Ermler Co.'s stock was
reduction in retained earnings would result from this selling at P65 per share, its capital accounts were as
property dividend? follows: Capital stock (par value P50; 60,000 shares
issued) P3,000,000 Premium on capital stock
Gain Net Reduction in Retained Earnings 600,000 Retained earnings 4,200,000 If a 100%
a. P0 P243,000 stock dividend were declared and distributed,
b. P0 P378,000 capital stock would be
c. P135,000 P108,000
d. P135,000 P243,000 a. P3,000,000. b. P3,600,000. c.
P6,000,000. d. P7,800,000.
53. Winger Corporation owned 900,000 shares of
Fegan Corporation stock. On December 31, 2020, 58. The stockholders' equity section of Gunkel
when Winger's account "Investment in Common Corporation as of December 31, 2020, was as
Stock of Fegan Corporation" had a carrying value of follows:
P5 per share, Winger distributed these shares to its Common stock, par value P2; authorized 20,000
stockholders as a dividend. Winger originally paid shares;
P8 for each share. Fegan has 3,000,000 shares issued and outstanding 10,000 shares
issued and outstanding, which are traded on a P 20,000
national stock exchange. The quoted market price Paid-in capital in excess of par
for a Fegan share was P7 on the declaration date 30,000
and P9 on the distribution date. What would be the Retained earnings 75,000
reduction in Winger's stockholders' equity as a P125,000
result of the above transactions? On March 1, 2021, the board of directors declared a
15% stock dividend, and accordingly 1,500
a. P3,600,000. b. P4,500,000. c. additional shares were issued. On March 1, 2021,
P7,200,000. d. P8,100,000. the fair market value of the stock was P6 per share.
For the two months ended February 28, 2021,
54. Gibbs Corporation owned 20,000 shares of Gunkel sustained a net loss of P10,000. What
Oliver Corporation’s P5 par value common stock. amount should Gunkel report as retained earnings as
These shares were purchased in 2016 for P180,000. of March 1, 2021?
On September 15, 2020, Gibbs declared a property
dividend of one share of Oliver for every ten shares a. P56,000. b. P62,000. c. P66,000. d.
of Gibbs held by a stockholder. On that date, when P72,000.
the market price of Oliver was P14 per share, there
were 180,000 shares of Gibbs outstanding. What 59. The stockholders' equity of Howell Company at
NET reduction in retained earnings would result July 31, 2020 is presented below:
from this property dividend? Common stock, par value P20, authorized 400,000
shares;
a. P90,000 b. P252,000 c. P72,000 d. issued and outstanding 160,000 shares
P162,000 P3,200,000
Paid-in capital in excess of par
55. Melvern’s Corporation has an investment in 160,000
5,000 shares of Wallace Company common stock Retained earnings
with a cost of P218,000. These shares are used in a 650,000
property dividend to stockholders of Melvern’s. The P4,010,000
property dividend is declared on May 25 and On August 1, 2020, the board of directors of Howell
scheduled to be distributed on July 31 to declared a 15% stock dividend on common stock, to
stockholders of record on June 15. The market value be distributed on September 15th. The market
per share of Wallace stock is P63 on May 25, P66 pric..e of Howell's common stock was P35 on
on June 15, and P68 on July 31. The net effect of August 1, 2020, and P38 on September 15, 2020.
this property dividend on retained earnings is a What is the amount of the debit to retained earnings
reduction of as a result of the declaration and distribution of this
stock dividend?
a. P340,000. b. P330,000. c. P315,000. d.
P218,000. a. P800,000. b. P840,000. c. P912,000. d.
P600,000.
56. Hernandez Company has 350,000 shares of P10
par value common stock outstanding. During the 60. On January 1, 2020, Dodd, Inc., declared a 10%
year, Hernandez declared a 10% stock dividend stock dividend on its common stock when the
when the market price of the stock was P30 per market value of the common stock was P20 per
share. Stockholders' equity before the stock issued and outstanding 9,000 shares P 90,000
dividend was declared consisted of: Additional paid-in capital 116,000
Common stock, P10 par value, authorized 200,000 Retained earnings 174,000
shares; Total stockholders' equity P380,000
issued and outstanding 120,000 shares On March 31, 2020, Arndt declared a 10% stock
P1,200,000 dividend, and accordingly 900 additional shares
Additional paid-in capital on common stock were issued, when the fair market value of the stock
150,000 was P18 per share. For the three months ended
March 31, 2020, Arndt sustained a net loss of
Retained earnings P32,000. The balance of Arndt’s retained earnings
700,000 as of March 31, 2020, should be
Total stockholders' equity
P2,050,000 a. P125,800. b. P133,000. c. P134,800. d.
What was the effect on Dodd’s retained earnings as P142,000.
a result of the above transaction?  

a. P120,000 decrease
b. P240,000 decrease
c. P400,000 decrease
d. P200,000 decrease

61. On January 1, 2020, Culver Corporation had

110,000 shares of its P5 par value common stock
outstanding. On June 1, the corporation acquired
10,000 shares of stock to be held in the treasury. On
December 1, when the market price of the stock was
P8, the corporation declared a 10% stock dividend
to be issued to stockholders of record on December
16, 2020. What was the impact of the 10% stock
dividend on the balance of the retained earnings
account?

a. P50,000 decrease
b. P80,000 decrease
c. P88,000 decrease
d. No effect

62. At the beginning of 2020, Flaherty Company

had retained earnings of P200,000. During the year
Flaherty reported net income of P100,000, sold
treasury stock at a “gain” of P36,000, declared a
cash dividend of P60,000, and declared and issued a
small stock dividend of 3,000 shares (P10 par value)
when the market value of the stock was P20 per
share. The amount of retained earnings available for
dividends at the end of 2020 was

a. P180,000. b. P210,000. c. P216,000. d.

P246,000.

63. Masterson Company has 420,000 shares of P10

par value common stock outstanding. During the
year Masterson declared a 5% stock dividend when
the market price of the stock was P36 per share.
Three months later Masterson declared a P.60 per
share cash dividend. As a result of the dividends
declared during the year, retained earnings
decreased by

a. P1,020,600 b. P756,000 c. P264,600 d.

P252,000

64. On December 31, 2019, the stockholders' equity MODULE 5

section of Arndt, Inc., was as follows:
Exercises/Assignments Answer the following
Common stock, par value P10; authorized 30,000 Problems.
shares; Problem 1 True or False.
Write True if the statement is correct otherwise
write false. Multiple Choices

1. The primary purpose of the statement of cash 21. It is an objective of the statement of cash flows
flows is to provide cash-basis information about the to
company’s operating, investing, and financing a. disclose changes during the period in all asset and
activities. all equity accounts.
2. The statement of cash flows provides information b. disclose the change in working capital during the
to help investors and creditors assess the cash and period.
noncash investing and financing transactions during c. provide information about the operating,
the period. investing, and financing activities of an entity
3. Companies classify some cash flows relating to during a period.
investing or financing activities as operating d. none of these.
activities.
4. The first step in the preparation of the statement 22. The primary purpose of the statement of cash
of cash flows is to determine the net cash flow from flows is to provide information
operating activities.
5. The net increase (decrease) in cash reported on a. about the operating, investing, and financing
the statement of cash flows should reconcile the activities of an entity during a period.
beginning and ending cash balances reported in the b. that is useful in assessing cash flow prospects.
comparative balance sheets. c. about the cash receipts and cash payments of an
6. Under the accrual basis of accounting, net income entity during a period.
is usually the same as net cash flow from operating d. about the entity's ability to meet its obligations,
activities. its ability to pay dividends, and its needs for
7. A company can convert net income to net cash external financing.
flow from operating activities through either the
direct method or the indirect method. 23. Of the following questions, which one would
8. The direct method, also called the reconciliation not be answered by the statement of cash flows?
method, reports cash receipts and cash a. Where did the cash come from during the period?
disbursements from operating activities. b. What was the cash used for during the period?
9. The indirect method adjusts net income for items c. Were all the cash expenditures of benefit to the
that affected reported net income but did not affect company during the period?
cash. d. What was the change in the cash balance during
10. The FASB encourages the use of the indirect the period?
method over the direct method.
11. When accounts receivable decrease during a 24. The first step in the preparation of the statement
period, cash-basis revenues are higher than revenues of cash flows requires the use of information
reported on an accrual basis. included in which comparative financial statements?
12. When prepaid expenses decrease during a a. Statements of cash flows
period, expenses on the accrual-basis are lower than b. Balance sheets
they are on a cash-basis. c. Income statements
13. Income from an investment in common stock d. Statements of retained earnings
using the equity method is added to net income in
computing net cash provided from operating 25. Cash equivalents are
activities. a. treasury bills, commercial paper, and money
14. Cash receipts from customers are computed by market funds purchased with excess cash.
adding a decrease in accounts receivable to revenue b. investments with original maturities of three
from sales. months or less.
15. Cash payments for operating expenses are c. readily convertible into known amounts of cash.
computed by subtracting an increase in prepaid d. all of these.
expenses and a decrease in accrued expenses
payable from operating expenses. 26. A company borrows $10,000 and signs a 90-
16. A company should add back bond premium day nontrade note payable. In preparing a statement
amortization to net income to arrive at net cash flow of cash flows (indirect method), this event would be
from operating activities. reflected as a(n)
17. Companies report the cash flows from purchases a. addition adjustment to net income in the cash
and sales of trading securities as cash flows from flows from operating activities section.
operating activities. b. cash outflow from investing activities.
18. Noncash investing and financing activities are c. cash inflow from investing activities.
disclosed either in a separate schedule or in a d. cash inflow from financing activities.
separate note to the financial statements. 27. To arrive at net cash provided by operating
19. When numerous adjustments are necessary, activities, it is necessary to report revenues and
companies often use a cash flow worksheet instead expenses on a cash basis. This is done by
of preparing a statement of cash flows. a. re-recording all income statement transactions
20. The issuance of stock dividends is entered on that directly affect cash in a separate cash flow
the cash flow worksheet, but is not reported in the journal.
statement of cash flows.
b. estimating the percentage of income statement investing activities on a statement of cash flows for
transactions that were originally reported on a cash the current year?
basis and projecting this amount to the entire array a. Five items
of income statement transactions. b. Four items
c. eliminating the effects of income statement c. Three items
transactions that did not result in a corresponding d. Two items
increase or decrease in cash.
d. eliminating all transactions that have no current 34. Which of the following would be classified as a
or future effect on cash, such as depreciation, from financing activity on a statement of cash flows?
the net income computation. a. Declaration and distribution of a stock dividend
b. Deposit to a bond sinking fund
28. An increase in inventory balance would be c. Sale of a loan receivable
reported in a statement of cash flows using the d. Payment of interest to a creditor
indirect method (reconciliation method) as a(n)
a. addition to net income in arriving at net cash flow 35. The amortization of bond premium on long-term
from operating activities. debt should be presented in a statement of cash
b. deduction from net income in arriving at net cash flows (using the indirect method for operating
flow from operating activities. activities) as a(n)
c. cash outflow from investing activities. a. addition to net income.
d. cash outflow from financing activities. b. deduction from net income.
c. investing activity.
29. A statement of cash flows typically would not d. financing activity.
disclose the effects of
a. capital stock issued at an amount greater than par 36. Crabbe Company reported $80,000 of selling
value. and administrative expenses on its income statement
b. stock dividends declared. for the past year. The company had depreciation
c. cash dividends paid. expense and an increase in prepaid expenses
d. a purchase and immediate retirement of treasury associated with the selling and administrative
stock. expenses for the year. Assuming use of the direct
method, how would these items be handled in
30. When preparing a statement of cash flows converting the accrual based selling and
(indirect method), which of the following is not an administrative expenses to the cash basis? Increase
adjustment to reconcile net income to net cash in Depreciation Prepaid Expenses
provided by operating activities?
a. A change in interest payable a. Deducted From Deducted From
b. A change in dividends payable b. Added To Added To
c. A change in income taxes payable c. Deducted From Added To
d. All of these are adjustments. d. Added To Deducted From

31. Declaration of a cash dividend on common 37. When preparing a statement of cash flows
stock affects cash flows from operating activities (indirect method), an increase in ending inventory
under the direct and indirect methods as follows: over beginning inventory will result in an
Direct Method Indirect Method adjustment to reported net earnings because
a. Outflow Inflow a. cash was increased while cost of goods sold was
b. Inflow Inflow decreased.
c. Outflow Outflow b. cost of goods sold on an accrual basis is lower
d. No effect No effect than on a cash basis.
c. acquisition of inventory is an investment activity.
32. In a statement of cash flows, the cash flows d. inventory purchased during the period was less
from investing activities section should report than inventory sold resulting in a net cash increase.
a. the issuance of common stock in exchange for a
factory building. 38. When preparing a statement of cash flows, a
b. stock dividends received. decrease in accounts receivable during a period
c. a major repair to machinery charged to would cause which one of the following
accumulated depreciation. adjustments in determining cash flow from
d. the assignment of accounts receivable. operating activities? Direct Method Indirect
Method
33. Xanthe Corporation had the following a. Increase Decrease
transactions occur in the current year: b. Decrease Increase
1. Cash sale of merchandise inventory. c. Increase Increase
2. Sale of delivery truck at book value. d. Decrease Decrease
3. Sale of Xanthe common stock for cash. 39. In determining net cash flow from operating
4. Issuance of a note payable to a bank for cash. activities, a decrease in accounts payable during a
5. Sale of a security held as an available-for-sale period
investment. a. means that income on an accrual basis is less than
6. Collection of loan receivable. How many of the income on a cash basis.
above items will appear as a cash inflow from
b. requires an addition adjustment to net income 46. Which of the following is false concerning the
under the indirect method. statement of cash flows?
c. requires an increase adjustment to cost of goods a. When pension expense exceeds cash funding, the
sold under the direct method. difference is deducted from investing activities on
d. requires a decrease adjustment to cost of goods the statement of cash flows.
sold under the direct method. b. The FASB requires companies to classify all
income taxes paid as operating cash outflows.
40. When preparing a statement of cash flows, an c. Under U.S. GAAP, the purchase of land by
increase in accounts payable during a period would issuing stock will be shown as a cash outflow under
require which of the following adjustments in investing activities and a cash inflow under
determining cash flows from operating activities? financing activities.
Indirect Method Direct Method d. All of the above are true concerning the statement
a. Increase Decrease of cash flows.
b. Decrease Increase
c. Increase Increase 47. Dolan Company reports its income from
d. Decrease Decrease investments under the equity method and
recognized income of $25,000 from its investment
41.When preparing a statement of cash flows, a in Moss Co. during the current year, even though no
decrease in prepaid insurance during a period would dividends were declared or paid by Moss during the
require which of the following adjustments in year. On Dolan's statement of cash flows (indirect
determining cash flows from operating activities? method), the $25,000 should
Indirect Method Direct Method a. not be shown.
a. Increase Decrease b. be shown as cash inflow from investing activities.
b. Decrease Increase c. be shown as cash outflow from financing
c. Increase Increase activities.
d. Decrease Decrease d. be shown as a deduction from net income in the
cash flows from operating activities section.
42. When preparing a statement of cash flows, the
following are used for which method in determining 48. In reporting extraordinary transactions on a
cash flows from operating activities? Gross statement of cash flows (indirect method), the
Accounts Receivable Net Accounts Receivable a. gross amount of an extraordinary gain should be
a. Indirect Direct deducted from net income.
b. Direct Indirect b. net of tax amount of an extraordinary gain should
c. Direct Direct be added to net income.
d. Neither Indirect c. net of tax amount of an extraordinary gain should
be deducted from net income.
43. Which of the following statements is correct? d. gross amount of an extraordinary gain should be
a. The indirect method starts with income before added to net income.
extraordinary items.
b. The direct method is known as the reconciliation 49. Which of the following is shown on a statement
method. of cash flows?
c. The direct method is more consistent with the a. A stock dividend
primary purpose of the statement of cash flows. b. A stock split
d. All of these. c. An appropriation of retained earnings
d. None of these
44. When using the indirect method to prepare the
operating section of a statement of cash flows, 50. How should significant noncash transactions be
which of the following is added to net income to reported in the statement of cash flows according to
compute cash provided by/used by operating FASB Statement No. 95?
activities? a. They should be incorporated in the statement of
a. Increase in accounts receivable. cash flows in a section labeled, "Significant
b. Gain on sale of land. Noncash Transactions."
c. Amortization of patent. b. Such transactions should be incorporated in the
d. All of the above are added to net income to arrive section (operating, financing, or investing) that is
at cash flow from operating activities. most representative of the major component of the
transaction.
45. When using the indirect method to prepare the c. These noncash transactions are not to be
operating section of a statement of cash flows, incorporated in the statement of cash flows. They
which of the following is deducted from net income may be summarized in a separate schedule at the
to compute cash provided by/used by operating bottom of the statement or appear in a separate
activities? supplementary schedule to the financials.
a. Decrease in accounts receivable. d. They should be handled in a manner consistent
b. Gain on sale of land. with the transactions that affect cash flows.
c. Amortization of patent.
d. All of the above are deducted from net income to Cash flow from operating activities – Indirect
arrive at cash flow from operating activities. method
51. BLUFF DECEIVE Co. has the following
information as of December 31, 20x2: Jan. 1 Dec.
31 Accounts receivable 16,000 20,000 Allowance
for bad debts (400) (1,000) Prepaid rent 3,840
3,200 Accounts payable 6,800 8,800

BLUFF reported profit of ₱8,800 for the year, after

depreciation expense of ₱200, gain on sale of
equipment of ₱240, and restructuring and other
provisions of ₱400. None of the provisions
recognized during the period affected cash.

How much is the cash flows from operating

activities? a. 4,800 b. 5,600 c. 8,800 d. 8,400

Cash flow from investing and financing activities

Use the following information for the next two
questions: INORDINATE EXCESSIVE Co. had the
following information for 20x2:
• Acquired 3-month treasury bills for ₱200,000.
• Acquired equipment with a purchase price of
₱4,000,000 by paying 20% in cash and issuing a
note payable for the balance. There were no
payments made on the note during the year.
• Acquired land with fair value of ₱3,200,000 by
issuing shares with aggregate par value of
₱2,400,000. The excess is credited to share
premium.
• Extended a ₱1,600,000 loan to a director.
• Borrowed ₱1,280,000 from a bank. Used the cash
proceeds as follows: ₱800,000 for additional
working capital and ₱480,000 to settle scrip
dividends declared in 20x1.
• Settled an outstanding note payable by issuing
shares with aggregate par value of ₱800,000. Share
premium resulted from the transaction amounted to
₱280,000.

52. How much is the net cash flows from (used in)
investing activities? a. (2,400,000) b. 2,400,000 c.
800,000 d. (800,000)

53. How much is the net cash flows from (used in)
financing activities? a. (800,000) b. 800,000 c.
(2,400,000) d. 2,400,000