Acctg6 Exam March 6, 2009

Answer the following with speed and accuracy. Solutions must be disclosed.

The stockholders’ equity section of the Adamya Inc. showed the following data on December 31, 2004:
Common stock, P3 par, 450,000 shares authorized, 375,000 shares issued and outstanding, P1,125,000;
Paid-in capital in excess of par, P10,575,000; Additional paid-in capital from stock options, P225,000;
Retained earnings, P720,000. The stock options were granted to key executives and provided them the right
to acquire 45,000 shares of common stock at P35 per share. The stock was selling at P40 at the time the
options were granted.

The following transactions occurred during 2005:

Feb. 1 Key executives exercised 6,750 options outstanding at December 31, 2004. The market price per
share was P44 at this time.

Apr. 1 The company issued bonds of P3,000,000 at par4, giving ach P1,000 bond a detachable warrant
enabling the holder to purchase two shares of stock at P40 each for a 1-year period. The bonds
would sell at P996 per P1,000 bond without the warrant.

July 1 The company issued rights to stockholders (one right on each share, exercisable within a 30-day
period) permitting holders to acquire one share at P40 with every 10 rights submitted. All but
9,000 rights were exercised on July 31, and the additional stock was issued.

Oct. 1 All warrants issued in connection with the bonds on April 1 were exercised.

Dec. 1 The market price per share dropped to P33 and options came due. Because the market price was
below the option price, no remaining options were exercised.

Dec. 31 Net income for 2005 was P375,750.

QUESTIONS:

Based on the above transactions, determine the following as of December 31, 2005:

1. Common stock
a. P1,165,950 b. P1,250,775 c. P1,275,075 d. P1,273,050

2. Total additional paid-in capital

3. Retained earnings
a. P870,750 b. P1,095,750 c. P1,287,000 d. P981,225

4. Total stockholders’ equity

Harry Co. issued share appreciation rights (SARs) to 20 of its employees. The SARs will vest at the end of 3
years, provided the employees remain with the company and provided the average revenue growth over the
period will exceed 5%. If the average growth in revenue is between 5 and 10 percent, each employee will
receive 1,000 SARs. If the average growth in revenue is between 11 and 15 percent, each will receive 2,000
SARs. If the average growth in revenue is more than 15 percent, the employees will each receive 3,000 SARs.
On the grant date, each SAR is determined to have a fair value of P60. Harry Co. expects average revenue
growth rate of 8 percent during the 3-year vesting period, and that 8 of its employees will leave before the
vesting period ends.

5. Assuming the estimates do not change during Year 1, what amount of compensation expense should
be included in Harry Co.’s income statement in Year 1?
a. P400,000 b. P160,000 c. P480,000 d. P240,000

6. At the end of the Year 2, revenue growth projection is 11 percent and 16 employees are expected to
remain in the entity’s employ. Also, the fair value of each SAR is P70. What amount of compensation
expense should be reported in Harry Co.’s income statement in Year 2?
a. P1,253,333 b. P1,093,333 c. P720,000 d. P1,493,333

7. At the end of Year 3, revenue growth was 13 percent and 18 employees did not leave the company.
Further, the fair value of each SAR is P80. What amount of compensation expense should be reported in
Harry Co.’s income statement in Year 3?
a. P1,386,667 b. P2,880,000 c. P1,706,667 d. P1,493,333

8. When the accumulated profits account has a debit balance, it is known as:
a. net loss c. capital deficiency
b. deficit d. net asset
 9.Which statement is incorrect concerning treasury share?
a. Treasury share shall be recorded at cost irrespective of whether acquired below or above par
value.
b. The total cost of treasury share shall be deducted from equity.
c. Treasury share may be recognized as a financial asset.
d. Gains or losses on sales of treasury share shall not be included in profit or loss.

10. These are transactions in which the entity receives goods or services as consideration for equity
instruments of the entity, including shares and share options.
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

11. These are transactions in which the entity acquires goods or services by incurring liabilities to the
supplier of those goods or services for amounts that are based on the price of the entity’s shares and
other equity instruments.
a. Equity transactions
b. Cash payment transactions
c. Purchase transactions
d. Cash settled share-based payment transactions
12. For equity share-based payment transactions, the entity shall measure the goods or services received
and the corresponding increase in equity:
I. Directly, at the fair value of the goods or services received.
II. Indirectly, by reference to the fair value of the equity instruments granted, if the fair value of the
goods or services received cannot be estimated reliably.
a. I only c. both I and II
b. II only d. neither I nor II

13. Share capital is said to be “watered” when:

14. The share options or share warrants outstanding account should be reduced at the:
a. date of grant c. adoption date of the plan
b. measurement date d. exercise date

15. Ram Corporation purchased 4,000 shares of Clam Corporation when the stock was selling at P50 per
share. Several months later, Clam distributed a 25% stock dividend when its stock was selling at P70 per
share. As a result of the stock dividend, Ram’s shares of Clam’s stock are now carried at:
a. P40 per share b. P50 per share c. P54 per share d. P70 per share

16. A clearly identified appropriation of retained earnings for reasonably possible loss contingencies should
be:
a. charged with all losses related to that contingency.
b. transferred to income as losses are realized.
c. classified in the liability section of the balance sheet.
d. shown within the stockholders’ equity section of the balance sheet.

17. A preference share that provides for mandatory redemption on a specific date or at the option of the
holder is:
a. a financial asset c. an equity instrument
b. a financial liability d. neither a financial liability nor an equity instrument

18. How should the excess of the subscription price over the par value of common stock subscribed be
recorded?
a. as APIC when the subscription is received
b. as APIC when the subscription is collected
c. as retained earnings when the subscription is received
d. as APIC when the capital stock is issued

19. A Corporation obtains from Prime Products a subscription to 2,000 shares of P10 par common capital
stock at a price of P15 a share. The entry to record the event is:
Subscriptions receivable – common P20,000
Common stock subscribed P20,000
Memorandum entry showing the reservation of 2,000 common shares for the subscriber.
Subscriptions receivable – common P30,000
Common stock subscribed P30,000
Subscriptions receivable – common P30,000
Common stock subscribed P20,000
APIC 10,000
 20. How should a corporation reflect treasury stock on its balance sheet?
a. as part of its assets
b. as a deduction in the stockholders’ equity section
c. as additional paid in capital
d. as additional shares of capital stock

21. How is an increase in the number of shares as a result of a stock split recorded?
a. The transaction may be recorded by a memorandum notation in the general journal.
b. The transaction may be recorded by a memorandum notation in the common stock
account
c. The transaction may be recorded by a memorandum notation in the general journal
and in the common stock account.
d. There will be a transfer from the retained earnings account to the common stock
account, the amount of which is equal to the par value of the new number of shares resulting from the
stock split.
22. Share capital is said to be “watered” when:
a. it is sold at a price in excess of book value c. assets are overstated
b. liabilities are overstated d. it is issued for assets other than
cash

23. P800,000 to shareholders of record on January 18, 2006, and payable on February 10, 2006. The
selected data from Blake’s December 31, 2005 balance sheet are as follows:
Accumulated depletion 500,000
Share capital 9,000,000
Additional paid- in capital 300,000
Accumulated profits – December 31, 2005 600,000
Net income for 2005 150,000
The P800,000 dividend including a liquidating dividend of:
a. 600,000 b. 300,000 c. 200,000 d. 50,000

24. Park Corporation’s shareholders’ equity accounts at December 31, 2005 were as follows:
Ordinary share, P20 par 8,000,000
Share premium 2,550,000
Accumulated profits 1,275,000
All shares of ordinary share outstanding at December 31, 2005 were issued in 2002 for P26 a share. On
January 4, 2006, Park reacquired 20,000 shares of its ordinary share at P24 a share and retired them.
Immediately after the shares were retired, the balance in share premium would be
a. 2,430,000 b. 2,470,000 c. 2,510,000 d. 2,590,000

25. Gal Company’s shareholders’ equity comprised of 8,000 shares of P200 par ordinary share, P400,000
of share premium and accumulated profits of P900,000. Share dividend of 6% was declared when the
share is selling for P500per share. What amount should be transferred from Gal’s accumulated profits
account?
a. 920,000 b. 4,800,000 c. 240,000 d. 96,000

26. Ray Corporation declared a 5% share dividend on its 100,000 issued and outstanding shares of P20
par value ordinary share, 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. By what amount did Ray’s current
liabilities increase as a result of the share dividend declaration?
a. 250,000 b. 100,000 c. 150,000 d. 0

27. Marion Company issued P5,000,000 face value 12% convertible bonds at 110 on January 1, 2007,
maturing on January 1, 2012 and paying interest semiannually on January 1 and July 1. It is estimated
that the bonds would sell only at 103 without the conversion feature. Each P1,000 bond is convertible into
10 shares of P100 par value ordinary share.
How much is the increase in shareholders’ equity arising from the issuance of the convertible bonds on
January 1, 2007?
a. P350,000 b. P500,000 c. P150,000 d. P0

28. Miami Corporation is authorized to issue 1,600,000 shares of its P10 par ordinary share. It
has issued half of the share for P14 per share, recorded net income of P5,000,000, has declared (but has
not yet paid) cash dividends of P144,000, and has split its share 2:1 all during its first year of operations.
What is Miami’s total shareholders’ equity at the end of its first year of operations?
a. 32,400,000 b. 16,200,000 c. 16,056,000 d. 32,122,000

29. On January 2, 2007, Kine Company granted Morgan, its president, compensatory share options to buy
10,000 shares of Kine’s P10 par ordinary share. The options call for a price of P20 per share and are
exercisable for 3 years following the grant date. Morgan exercised the options on December 31, 2007.
The market price of the share was P60 on January 2, 2007, and P70 on December 31, 2007. The fair
value of the share option is P30 on the date of grant. By what net amount should shareholders’ equity
increase as a result of the grant and exercise of the options?
 a. 200,000 b. 300,000 c. 500,000 d. 700,000

30. An entity declared a cash dividend on May 1, to shareholders of record on May 13, payable June 30.
As a result of this cash dividend, working capital:
a. Was not affected c. Decreased on May 31
b. Decreased on June 30 d. Decreased on May 1