Colegio de San Juan de Letran

COLLEGE OF BUSINESS ADMINISTRATION AND ACCOUNTANCY

THEORY OF ACCOUNTS

NAME_____________________________________________SECTION_______________

RETAINED EARNINGS

1. Which of the following statements is true?

a. Retained earnings, if not designated otherwise, represents the unappropriated portion
of retained earnings.
b. Total retained earnings include both appropriated and unappropriated retained
earnings.
c. The existence of a bond sinking fund implies an appropriation of retained earnings
for a bond sinking fund.
d. When retained earnings is restricted, it must be appropriated.

2. Which of the following statements is false?

a. Appropriated retained earnings accounts may be debited for nonrecurring losses.
b. If P100,000 is appropriated for plant expansion, total retained earnings include this
amount.
c. Any assets set aside for special purposes should be clearly segregated in the
accounts and on the financial statements.
d. The date of payment always will follow the date of declaration of property dividend (or
be on the same date).

3. Which of the following statements is false?

a. Property dividends are dividends that the corporation distributes in the form of noncash
asserts.
b. A formal declaration of a cash or property dividends constitutes an enforceable
contract between the corporation and the shareholders.
c. When a company issues to its shareholders some share of other corporation that
currently are held as an investment, the company is issuing a share dividend.
d. A corporation has an enforceable contract with its shareholders on the declaration date
of cash dividend.

4. Which of the following statements is true?

a. Dividends in arrears on cumulative preference shares constitute a liability to the
corporation that should be recorded (accrued).
b. In accounting for dividends, the declaration date is the most important date is the most
important date because dividends are paid to whoever owns the shares on that date.
c. A small share dividend is defined as a dividend which increases the number of
outstanding shares by 10% or less.
d. Courts generally have held that, in the absence of fraud or illegality, formal
announcement of the declaration of a cash, property, or scrip dividends constitutes an
enforceable contract (irrevocable declaration) between the corporation and the
shareholders.

5. Which of the following statements is correct?

a. When a corporation declares a small share dividend, it should capitalize the par value
of the shares.
b. A larger share split should be accounted for by capitalizing the current market value of
the share.

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 c. A share dividend and a share split are identical in all respects for the corporation
issuing the dividend or splitting the share.
d. A share dividend (declared & issued) does not change the total assets, total liabilities,
or total shareholders’ equity of the issuing corporation.

6. Which of the following statements is incorrect?

a. A share split results in the reduction of the par value or stated value per share and a
proportional increase in the number of the shares outstanding.
b. In a share split, only the content of the contributed capital is changed, whereas in a
share dividend the amount of the contributed capital is changed.
c. When rights are issued to current shareholders, it may require more than one such
right to later acquire one additional share covered by the rights.
d. A reverse share split increases the number of the shares outstanding.

7. Which of the following statements is correct?

a. When share rights are issued to existing shareholders, no disclosure of this needs to
be made in the financial statement.
b. Often cash and more than one right issue are required to acquire an additional share
pf the related share at the option price.
c. Share rights seldom have value and, as a consequence, are seldom bought and sold
in the capital markets.
d. Liquidating dividends are similar to share dividends because neither one reduces the
shareholders’ equity.

8. Which of the following statements is correct?

a. Rights issues usually do not have value and cannot be bought and sold in the market.
b. Rights issues, once issued, seldom if ever lapse.
c. When rights are issued to existing shareholders, no disclosure of this needs to be
made in the financial statements.
d. Between the declaration date & the ex-dividend date, the market price of the share
includes the dividends.

9. Which of the following statements is false?

a. A share dividend, but not a cash dividend, usually causes a decrease in retained
earnings and an increase in contributed (permanent) capital of the corporation.
b. Liability dividends arise when the board of directors declares a dividend & issues
promissory notes, bonds, scrip or other long-term indebtedness to the shareholders in
lieu of a cash dividend.
c. The ex-dividend date is the day following the date of record.
d. Liquidating dividends represent a return of income to the shareholders.

10. Which of the following statements is true?

a. A cash dividend, property dividend, or share dividend, but not a liquidating dividend or
a share split, reduces total shareholders’ equity.
b. The accounting treatment for ordinary and liquidating dividends differs. Ordinary
dividends cause a debit to contributed capital and liquidating dividends cause debit to
retained earnings.
c. Restrictions on the purchase of treasury shares are intended to afford some
protection for creditors.
d. A cash dividend and a share dividend, but not a property dividend, decrease both
assets and retained earnings.

11. Identify the missing component (X) in the following equation:

Retained earnings, ending balance = Net income to date + prior period adjustments to
date – cash and property dividends to date – X.

a. Share dividends to date

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 b. Share dividends and split to date.
c. Share split to date.
d. Net unrealized gain or loss on securities available for sale.

12. Companies that carries no insurance against insurable casualty losses sometimes use an
account called reserve for self-insurance. In preparing a statement of financial position,
this account should be reported as a(n):
a. Appropriated retained earnings.
b. Deferred credit.
c. Liability.
d. Unappropriated retained earnings.

13. A reserve for possible future losses om inventory should established to:
a. Charge operations in periods of rising prices for the losses which may otherwise be
absorbed in periods of failing prices.
b. Reduce fluctuations in net income in order to lend stability to the company.
c. Match current revenue with applicable costs.
d. Inform shareholders that a portion of retained earnings should be set aside from
amounts available for dividends because of such contingency.

14. What does an appropriation of retained earnings & a declaration of a cash dividend (for
the same amount) have in common?
a. Both increase the amount of appropriated retained earnings.
b. Both have the same consequences for shareholders.
c. Both permanently reduces future liability to pay dividends.
d. Both result in a decrease in unappropriated retained earnings.

15. Choose the correct statement concerning retained earnings appropriations and
restrictions.
a. All retained earnings restrictions are appropriations.
b. An appropriation for plant explanation must be made for the exact amount of the future
expansion cost.
c. Where bondholders require a restriction on retained earnings, the board of directors
must also set up a sinking fund for the eventual bond retirement.
d. Unrestricted retained earnings are available for dividend declaration.

16. On December 31, 2015 when EC Corporation’s share was selling at P36 per share, its
shareholders’ equity accounts were as follows:

Ordinary shares (par value) 100,000 shares issued and outstanding P2,000,000
Contributed capital in excess of par 800,000
Retained earnings (Credit) 4,550,000

A 100% share dividends was declared & issued. The effect of this dividends.
a. Total retained earnings did not change.
b. Ordinary shares increased to P4,000,000.
c. Ordinary shares increased to P5,600,000.
d. Total shareholders’ equity decreased.

17. Choose the most correct statement regarding 2-for-1 share split & 100% share dividend.
a. Neither affect par value.
b. Both cause the same reduction in retained earnings.
c. Both double the number of shares outstanding
d. Both cause a significant increase in the ordinary shares account.
e. Only one affects the contributed capital in excess of par on ordinary shares.

18. What is the most likely effect of a share split on the par value per share & the number of
shares outstanding?

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 Par Value per Share Number of Shares Outstanding
a. Increase Increase
b. No effect No effect
c. Decrease No effect
d. Decrease Increase

19. EB Company: ordinary shares, par P100; shares outstanding, 10,000; average issue price,
P115; current market price, P140. Shares sold on a share subscription basis are not
issued until the subscription price is collected in full. Recording a declaration of 10% share
dividend in conformity with PFRSs would change retained earnings:
a. On the basis of the market value of shares.
b. By 10% of its balance before the dividend.
c. On the basis of the par value of shares.
d. On the basis of the average paid-in value of the shares.

20. When rights are issued to current shareholders, the number of rights to be issued per
existing share will:
a. Be the number of the rights needed to obtain one additional share multiplied by the
number of shares already held.
b. Vary depending on the number per share already held, as determined & announced by
the corporation.
c. Usually be only one righty per share already held.
d. Depend on the number purchased by existing shareholders.

SHARE-BASED COMPENSATION

21. These are transactions in which the entity receives goods or services as consideration for
equity instruments
a. Equity settled share-based payment transactions
b. Cash settled share-based payment transactions
c. Equity payment transactions
d. Cash payment transactions

22. The total compensation expense in a share option plan normally is measured at
a. Fair value of share options on the date of grant
b. Fair value of share options on the date of exercise
c. Intrinsic value of share options on the date of grant
d. Intrinsic value of share options on the date of exercise

23. When issuing share options, which of the following factors is most relevant in determining
the accounting treatment?
a. The par value of the shares issued
b. The market value of the shares issued
c. The authorized number of shares
d. Whether the share options are issue in lieu of salary

24. Compensation expense from a share option is generally

a. Recognized in the period of exercise
b. Recognized in the period of grant
c. Allocated to the periods benefited by the employee’s required service
d. Allocated over the periods of the employee’s service life to retirement

25. If there is an acceleration of vesting, any payment made to the employees on the
settlement of the grant shall be
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 a. Accounted for as repurchase of equity interest
b. Recognized in retained earnings
c. Recognized as other comprehensive income
d. Accounted for as repurchase of equity interest and any excess payment over the fair
value of share options shall be recognized as expense.

26. How is the compensation expense measured for equity settled share-based payment
transactions?
a. Use the normal hourly rate of employees
b. Measure the intrinsic value of share options
c. Measure the fair value of share options using an option pricing model
d. Measure the difference between the market price and the fair value of share options

27. Which option valuation technique should not be used as a measure of fair value in the first
instance?
a. Black-Scholes model
b. Binomial model
c. Monte-Carlo model
d. Intrinsic value

28. Share options are what type of share-based payment transaction?

a. Asset-settled share-based payment transaction
b. Equity-settled shared-based payment transaction
c. Cash settled share-based payment transaction
d. Liability settled share-based payment transaction

29. Which of the following statements is true in relation to share options?

a. The services received shall be measured at the fair value of the employees’ services
b. Fair value shall be measured at the date of vesting
c. Fair value shall be measured at the date of exercise
d. All of these statements are not true

30. What interest rate is used to discount both the exercise price of option and the future
dividend stream
a. The entity’s known incremental borrowing rate
b. The current market rate in the industry
c. The risk-free interest rate
d. Any rate that entities can justifies as being responsible

31. In accounting for share appreciation rights, compensation expense is generally

a. Not recognized
b. Recognized on the date of grant
c. Allocated over the service period of employee
d. Recognized on the date of exercise

32. Which of the following statements in relation to a cash settled share-based payment
transaction is true?
a. The fair value of the liability shall be remeasured at the end reporting period
b. The fair value of the liability shall be remeasured at the date of settlement
c. The fair value of the liability shall be remeasured at the end of each reporting period
and at the date of settlement
d. The fair value of the liability shall be measured at the date of grant

33. For cash settled share-based payment transactions, until the liability is settled, the entity is

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 required to remeasure the fair value of the liability at each reporting date and at the date of
settlement and any changes in fair value are
a. Included in profit or loss
b. Included in retained earnings
c. Treated as component of other comprehensive income
d. Not recognized

34. If share-based payment transaction provides that the employees have the right to choose
the settlement whether in cash or shares, the entity is deemed to have issued
a. A compound financial instrument
b. An equity instrument
c. A liability instrument
d. Either an equity instrument or a liability instrument but not both
35. For share appreciation rights, the measurement date for computing compensation is the
a. Date the rights mature
b. Date the share reaches a predetermined amount
c. Date of grant
d. Date of exercise

BOOK VALUE PER SHARE, BASIC EARNING PER SHARE

36. Which of the following features of preference share would most likely be opposed by
ordinary shareholders?
a. Convertible
b. Callable
c. Redeemable
d. Participating

37. The features most frequently associated with preference shares include all of the
following, except
a. Callable at the option of the shareholder
b. Convertible into ordinary shares
c. Nonvoting
d. Preference as to assets in the event of liquidation

38. The cumulative feature of preference shares

a. Limits the amount of cumulative dividends to the par value of the preference share
b. Requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to ordinary shareholders
c. Means that the shareholder can accumulate preference shares equal to the par
value of ordinary shares at which time the preference shares can be converted into
ordinary shares
d. Enables a preference shareholder to accumulate dividends equal to the par value of
the shares

39. Noncumulative preference dividends in arrears

a. Are not paid and not disclosed
b. Must be paid before any other cash dividend can be distributed
c. Are disclosed as liability until paid
d. Are paid to preference shareholders if sufficient funds remain after payment of the
current preference dividend

40. How should cumulative preference dividends in arrears be reported?

a. Note disclosure
b. Increase in shareholders’ equity
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 c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year
and increase in noncurrent liabilities for the balance.

41. In computing basic earnings per share, the amount of annual preference dividends on
noncumulative preference shares shall be
a. Deducted from net income whether declared or not
b. Deducted from net income only when declared
c. Added to net income only when declared
d. Ignored

42. In computing basic earnings per share, an entity would include which of the following?
a. Dividend on convertible cumulative preference shares
b. Dividend on ordinary shares
c. Interest on convertible bonds
d. Number of convertible cumulative preference shares

43. In computing basic loss per share, the required annual preference dividend on cumulative
preference share is
a. Ignored
b. Deducted from the net loss whether declared or not
c. Added to the net loss whether declared or not
d. Added to the net loss only when declared

44. Which figure for earnings does EPS information use?

a. Profit attributable to ordinary equity holders and preference shareholders of the parent
b. Profit before taxation
c. Profit from operation
d. Profit attributable to ordinary equity shareholders of the parent

45. When an entity issues a share dividend

a. The previous year’s EPS is not adjusted for the issue
b. The previous years’ EPS is adjusted for the issue
c. Only note of the effect on the previous year’s EPS is made
d. Only the diluted EPS for the previous year is adjusted

46. If a bonus issue occurs between the year end and the date that the financial statements
are authorized
a. The EPS both for the current and previous year are adjusted
b. The EPS for the current year only is adjusted
c. No adjustment is made to EPS
d. Diluted EPS only is adjusted

47. In the computation of weighted average shares outstanding where there is a share split,
the additional shares are
a. Weighted by the number of days outstanding
b. Weighted by the number of months outstanding
c. Considered outstanding at the beginning of the year
d. Considered outstanding at the beginning of the earliest year reported

48. Undeclared preference dividends are deducted from net income in the earnings per share
computation for which type of preference
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 a. Noncumulative
b. Cumulative
c. Neither cumulative nor noncumulative
d. Both cumulative and noncumulative

49. In computing basic earnings per share when there are cumulative preference shares, what
is the amount that should be deducted from net income
a. Preference dividends in arrears
b. Preference dividends paid during the year
c. Annual preference dividend
d. Preference dividends declared during the year

50. What is the correct treatment of a share dividend issued in mid-year when computing the
weighted average number of ordinary shares outstanding?
a. The share dividend should be weighted by the length of time that the additional shares
are outstanding
b. The share dividend should be included in the weighted average number of shares
outstanding only if the additional shares result in a decrease of three percent or more
in earning per share
c. The share dividend should be weighted as if the additional shares were issued at the
beginning of the year
d. The share dividend should be ignored since no additional capital was received

51. What is the inherent justification underlying the concept of potential ordinary shares in an
earnings per share computation?
a. Form over substance
b. Substance over form
c. Form and substance considered equally
d. Substance over form or form over substance depending on the circumstances

52. The “if converted” method of computing diluted earnings per share assumes conversion of
convertible securities as of the
a. Beginning of the earliest period reported or at time of issuance, if later
b. Beginning of the earliest period reported regardless of time of issuance
c. Middle of the earliest period reported regardless of the time of issuance
d. Ending of the earliest period reported regardless of the time of issuance

53. The nature of diluted earnings per share involving adjustment for share options can be
best described as
a. Historical because earnings are historical
b. Historical because it indicates firm’s valuation
c. Proforma because it indicates potential changes in number of shares
d. Proforma because it indicates potential changes in number of earnings

54. An entity already has calculated the basic earnings per share. In determining diluted
earnings per share, the annual dividend on convertible cumulative preference share which
is dilutive should be
a. Added back to the numerator of basic EPS whether declared or not
b. Deducted from the numerator of basic EPS only if declared
c. Added back to the numerator of basic EPS only if declared
d. Deducted from the numerator of basic EPS whether declared or not

55. Antidilutive securities

a. Should be included in the computation of diluted earnings per share but not basic
earnings per share
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 b. Are those whose inclusion in earnings per share computation would cause basic
earnings per share to exceed diluted earnings per share
c. Include share options and warrants whose option price is less than the average
market price
d. Should be disregarded in all EPS computation

-END-

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