CHAPTER 17 – RETAINED EARNINGS

ASSIGNMENT

1. Cerritos Corporation began operations on January 1, d. P 4,500,000

2011. During its first three years of operations, Cerritos
reported net income and declared dividends as follows: 4. East Corp., a calendar-year company, had sufficient
retained earnings in 2012 as a basis for dividends, but
Net Income Dividends Declared was temporarily short of cash. East declared a dividend
2011 P 80,000 P 0 of P100,000 on April 1, 2014, and issued promissory
2012 250,000 100,000 notes to its shareholders in lieu of cash. The notes,
2013 300,000 100,000 which were dated April 1, 2014, had a maturity date of
March 31, 2015, and a 10% interest rate. How should
The following information relates to 2014: East account for the scrip dividend and related interest?
Prior period adjustment:
Understatement of 2012 depreciation a. Debit retained earnings for P110,000 on April 1,
expense (before taxes) P 40,000 2014
Cumulative decrease in income from b. Debit retained earnings for P110,000 on March 31,
Change in inventory methods 2015.
(before taxes) 70,000 c. Debit retained earnings for P100,000 on April 1,
Income before income tax 480,000 2014, and debit interest expense for P10,000 on
Dividends declared (of this amount, March 31, 2015
P50,000 will be paid on January 15, d. Debit retained earnings for P100,000 on April 1,
2015) 200,000 2014 and debit interest expense for P7,500 on
Effective Tax rate 35% December 31, 2014.

As at December 31, 2014, the retained earnings of 5. On May 1, 2014 Lett Corp, a closely-held corporation
Cerritos Corporation is declared and issued a 15% share dividend. Prior to this
a. P 520,500 dividend, Lett had 100,000, P1 par value, ordinary
b. P 484,500 shares issued and outstanding. The fair value of Lett’s
c. P 430,000 ordinary share was P20 per share on May 1, 2014. As
d. P 470,500 a result of this share dividend, Lett’s retained earnings
a. increased by P300,000.
2. On December 31, 2014, the balance sheet of Legend b. decreased by P300,000
Corporation shows a total equity of P1,260,000. During c. decreased by P15,000
2014, the shareholder’s equity was affected by: d. did not change

Adjustment to retained earnings for the 6. The directors of Reno Corp., whose P50 par value
overstatement of 2013 net income P 17,500 ordinary share is currently selling at P70 per share,
Cash dividend declared and paid in 2014 10% have decided to issue a share dividend. Reno has an
Net income of 2014 P 65,000 authorization for 250,000 ordinary shares, has issued
100,000 shares of which 10,000 shares are now held in
The share capital of P1,000,000 remain unchanged treasury, and desires to capitalize P630,000 of the
during the year. Retained Earnings balance. To accomplish this, the
percentage of share dividend that the directors should
What is the balance of retained earnings on January 1, declare is
2014? a. 14 %
a. P 360,000 b. 10%
b. P 312,500 c. 8%
c. P 295,000 d. 6%
d. P 260,000
7. Allentown Company distributed to its ordinary
3. At December 31, 2014, the equity accounts of Batch shareholders 100,000 outstanding ordinary shares of its
Corporation were as follows: investment in Ocean, Inc., an unrelated party. The
carrying amount in Allentown’s books of Ocean’s P2 par
Preference share capital (P100 par, ordinary share was P4 per share. Immediately after the
12% participating and cumulative, distribution, the market price of Ocean’s share was P5
100,000 shares) P 10,000,000 per share.
Preference share capital (P100 par,
10% nonparticipating, What amount should Allentown report as gain before
Noncumulative, 50,000 shares) 5,000,000 income taxes on disposal of the shares?
Ordinary share capital (P10 par, a. P 500,000
1,000,000 shares) 10,000,000 b. P 100,000
Retained earnings 9,500,000 c. P 400,000
d. P 0
Batch has never paid cash or share dividend. The
capital accounts have not changed since Batch began 8. In September 2012, West Corp. made a dividend
operations on January 1, 2010. If the maximum amount distribution of one right for each of its 120,000 ordinary
available for cash dividend is declared on December 31, shares outstanding. Each right was exercisable for the
2014, how much dividend is payable to the ordinary purchase of 1/100 of a share of West’s P50 variable rate
shareholders? preference shares at an exercise price of P80 per
a. P 2,100,000 share. On March 20, 2014, none of the rights had been
b. P 1,920,000 exercised, and West redeemed them by paying each
This study
c. source was downloaded by 100000829049290 from CourseHero.com on 12-12-2021
P 1,200,000 19:11:20 GMT -06:00
shareholder P0.10 per right. As a result of this

https://www.coursehero.com/file/25267769/CHAPTER-17-Retained-Earnings-Answer-Keypdf/
 redemption, West’s shareholders’ equity was reduced  Immediately before these events, the shareholder’s
by equity section appears as follows.
a. P 120
b. P 2,400 Share capital, P100 par value,
c. P 12,000 500,000 shares P 50,000,000
d. P 36,000 Share Premium 5,000,000
Retained Earnings (15,000,000)
9. On January 2, 2014, Simpson Co.’s board of directors
declared a cash dividend of P400,000 to shareholders Compute the balance of share premium after the
of record on January 18, 2014, payable on February 10, quasi-reorganization.
2014. Selected data from Simpson’s December 31, a. P11,000,000
2013 balance sheet are as follows: b. P 6,000,000
c. P 5,000,000
Accumulated depletion P 100,000 d. P 0
Share Capital 500,000
Share Premium 150,000 13. Leyte Corporation has incurred losses from
Retained Earnings 300,000 operations for several years. At the
recommendation of the newly hired president, the
The 400,000 dividend includes a liquidating dividend of board of directors voted to implement a quasi-
a. P 0 reorganization, subject to shareholder approval.
b. P 100,000 Immediately prior to the restatement, on June 30,
c. P 150,000 Leyte’s balance sheet was as follows:
d. P 300,000
Current assets P 550,000
10. The following information pertains to Imperial Corp. PPE (net) 1,350,000
 No dividend declaration or payment for 3 years on Other Assets 200,000
its 2,000 shares of 6%, P30 par value cumulative P 2,100,000
preference shares
 Gain on disposal of Imperial’s Cebu Division of Total liabilities P 600,000
P90,000 Share Capital 1,600,000
 Treasury shares costing P100,000 reissued for Share Premium 300,000
P30,000 Retained Earnings (deficit) (400,000)
P 2,100,000
What amount of retained earnings should be restricted
as a result of these items? The shareholders approved the quasi-
a. P 70,000 reorganization effective July 1, to be accomplished
b. P 10,000 by a reduction in other assets of P150,000; a
c. P 90,000 reduction in property, plant, and equipment (net) of
d. P 0 P350,000; and appropriate adjustment to the
capital structure. To implement the quasi-
11. At December 31, 2013, Afro Corp. reported P1,750,000 reorganization, Leyte should reduce the share
of appropriated retained earnings for the construction of capital account in the amount of
a new office building, which was completed in 2014 at a. P 0
a total cost of P1,500,000. In 2014, Afro appropriated b. P 100,000
P1,200,000 of retained earnings for the construction of c. P 400,000
a new plant. Also, P2,000,000 of cash was restricted for d. P 600,000
the retirement of bonds due in 2015. In its 2014 balance
sheet, Afro should report what amount of appropriated
retained earnings? 14. Balances in shareholders’ equity accounts before
a. P 1,200,000 reorganization are:
b. P 1,450,000 Share capital, P30 par, 50,000
c. P 2,950,000 authorized, 40,000 outstanding P1,200,000
d. P 3,200,000 Share premium 100,000
Retained earnings (deficit) (364,000)
12. Adverse financial and operating circumstances warrant
that Hikahos Company undergo a quasi-reorganization A quasi-reorganization was approved. Par value is
at the end of the current year. The following information to be P20 per share, equipment written down
may be relevant in accounting for the quasi P101,800, and inventory increased P5,800.
reorganization.
 Inventory with a net realizable value of P5,000,000 How much share premium from reorganization
is currently recorded in the accounts at its cost of should initially be recorded?
P7,000,000. a. P 364,000
 Plant assets with a recoverable amount of b. P 400,000
P20,000,000 are currently recorded at P24,000,000 c. P 460,000
net of accumulated depreciation. d. P 1,000,000
 Unrecorded accounts payable amount to
P3,000,000.
 Individual shareholders contribute P5,000,000 to
create share premium to facilitate the
reorganization. No new outstanding shares pass to
the company’s shareholders.
 The par value of the ordinary share is reduced from
P100 to P50
This study source was downloaded by 100000829049290 from CourseHero.com on 12-12-2021 19:11:20 GMT -06:00

https://www.coursehero.com/file/25267769/CHAPTER-17-Retained-Earnings-Answer-Keypdf/

Powered by TCPDF (www.tcpdf.org)