Corporations & Equity – Ch10 Test Bank – 2nd Cdn Edition

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Financial Accounting, 2nd Cdn. Ed. (Waybright)

Chapter 10 Corporations: Share Capital and Retained Earnings

10.1 Review the characteristics of a corporation

1) A corporation is a separate legal entity from its owners.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

2) A corporation in Canada can only incorporate through the federal government.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

3) Limited liability means that the shareholders of a corporation share a personal liability for all debts of the corporation.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

4) A public corporation has its shares listed for trading in a stock market.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

5) Which one of the following is NOT a typical characteristic of a private corporation?

A) Small number of shareholders

B) Shares are not liquid

C) Shares are not easily traded

D) Shares are traded on a stock market

E) Shares are not easily transferred

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

6) Which of the following business types dominates by the amount of business transacted?

A) Partnerships

B) Proprietorships

C) Corporations

D) Government entities

E) Other

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

7) Which of the following is NOT an advantage of a corporation?

A) Double taxation

B) Ease of raising capital

C) Ease of transfer ownership

D) Continuous life

E) Limited liability

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

8) Which of the following is an advantage of a corporation?

A) Double taxation

B) Continuous life

C) Unlimited liability

D) Non-transfer of ownership

E) Government regulation

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

9) When you invest in a corporation, you may call yourself a ________.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

10) The process of becoming a corporation is known as ________.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

11) What are two disadvantages of the corporate form of business?

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

12) What types of businesses are very numerous in Canada?

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

13) What is an organization authorized to sell once it has become a corporation?

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

14) What does an organization's founders need to do to incorporate their business?

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

15) Identify the advantages and disadvantages of the corporate form of business.

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

16) Identify the differences between a private and public corporation.

Diff: 2

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Knowledge

17) Can a creditor make a claim against an individual shareholder for liabilities associated with a corporation? Explain.

Diff: 1

LO: 10-1 Review the characteristics of a corporation

Skill: Concept

Blooms: Comprehension

10.2 Describe the two sources of shareholders' equity and the classes of shares

1) Shareholders' equity consists of contributed capital and paid-in capital.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

2) Retained earnings represent internally generated capital.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

3) A shareholder has three basic rights.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

4) Preferred shares are considered a voting "class" of shares.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

5) Earnings that a shareholder receives from a corporation is an example of which shareholder right?

A) Vote

B) Dividends

C) Liquidation

D) Preemption

E) Retained earnings

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

6) If you own 500 shares (2% of a corporation's stock) and the corporation issues 15,000 new shares, how many of the new shares can you purchase under preemptive right?

A) 500

B) 300

C) 800

D) 0

E) 100

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Application

Blooms: Application

7) If you own 500 shares (2% of a corporation's stock) and the corporation issues 15,000 new shares, how many total shares will you have after exercising your preemptive rights?

A) 500

B) 300

C) 800

D) 0

E) 600

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Application

Blooms: Application

8) Which of the following would NOT be share capital?

A) Capital earned by profitable operations

B) Contributed capital

C) Amounts received from shareholders

D) Common shares

E) Externally generated capital resulting from transactions with outsiders

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

9) What is the minimum number of voting class shares that a company must have?

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

10) When shareholders participate in management, they are demonstrating which shareholder right?

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

11) Maintaining their proportionate share in the ownership of a corporation when new shares are available to be purchased is an example of which shareholder right?

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

12) Which right do preferred stockholders receive before common stockholders?

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

13) Shareholders receiving their proportionate share of any assets left after a company goes out of business is an example of which shareholder right?

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

14) Identify and explain the four basic rights of a shareholder.

Diff: 2

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

15) Describe the two sources of shareholders' equity.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

16) Identify two advantages preferred shareholders have over the owners of common shares.

Diff: 1

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Knowledge

17) Do preferred shareholders take less investment risk than common shareholders? Explain.

Diff: 2

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Concept

Blooms: Comprehension

18) Under the Canada Business Corporations Act (CBCA), explain why shares must be no par value.

Diff: 2

LO: 10-2 Describe the two sources of shareholders' equity and the classes of shares

Skill: Analytic Skills

Blooms: Comprehension

10.3 Journalize the issuance of shares

1) Many companies raise capital by issuing shares directly to shareholders or by using an underwriter.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

2) The price that the corporation receives from issuing shares is called the underwriter price.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

3) All Canadian shares are no-par value.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

4) A corporation may issue shares for other than cash, requiring the recording of the assets at current market value.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

5) Five hundred common shares trading at $25/share were exchanged for a piece of equipment with a current market value of $13,500. The journal entry to record the transaction would include a:

A) credit to Equipment for $12,500.

B) debit to Common Shares for $12,500.

C) credit to Common Shares for $12,500.

D) credit to Common Shares for $13,500.

E) debit to Equipment for $13,500.

Diff: 2

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

6) The Harvester Company issued 40 shares trading at $20/share to its accountant in full payment for her $900 fee for assisting in setting up the new company. The entry to record the issuance of the stock would include a:

A) debit to Common Shares for $800.

B) credit to Common Shares for $900.

C) credit to Common Shares for $800.

D) debit to Accounting Fees for $900.

E) credit to Cash for $900.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

7) Birch is a publicly traded company and issues 200 preferred shares for $12 per share. Which of the following is a part of the journal entry for this transaction?

A) Debiting preferred shares for $2,400

B) Crediting preferred shares for $2,400

C) Crediting cash for $2,400

D) Crediting preferred shares for $200

E) Debiting preferred shares for $200

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

8) An underwriter usually agrees to:

A) buy all the shares it cannot sell to its clients.

B) buy half the shares it cannot sell to its clients.

C) buy none of the shares it cannot sell to its clients.

D) buy a certain percentage of the shares it cannot sell to its clients.

E) sell 100% of the shares.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

9) A company can sell its shares directly to shareholders or it can use the services of an ________.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

10) The price that the corporation receives from issuing shares is called the ________ price.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

11) Non-monetary exchanges can be ________ exchanged for an asset.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

12) If the value of the shares can be reliably measured, for instance when the share price can be easily obtained from the stock market, then the asset exchanged should be recorded at ________.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

13) ABC Co. issues 500 common shares for $10 per share. Identify the entry that would be recorded.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

14) NDP Co. issues 750 preferred shares for $10 per share and 1,000 common shares for $15 per share. Identify the entry that would be recorded.

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

15) When a corporation issues shares for assets other than cash, how does it record the assets received?

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

16) Under IFRS and ASPE, how should non-monetary exchanges be measured?

Diff: 2

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

17) Does a company have to sell its shares directly to shareholders only?

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

18) Why are shares not referred as "no-par shares"?

Diff: 1

LO: 10-3 Journalize the issuance of shares

Skill: Concept

Blooms: Knowledge

19) Record the following transactions that affected the shareholders' equity for Meranda Company:

Jan 1 Issued 400,000 common shares for $11 per share

Jan 2 Issued 200,000 common shares in exchange for a building with a fair market value of $750,000 and inventory valued at $320,000

Jan 3 Issued 15,000 $3 preferred shares for $100 cash per share

Diff: 2

LO: 10-3 Journalize the issuance of shares

Skill: Application

Blooms: Application

10.4 Account for cash dividends

1) Paying dividends causes a decrease in total assets, but an increase in total shareholders' equity.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

2) Corporations declare cash dividends from retained earnings.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

3) The portion of shareholders' equity that can be used for dividends is referred to as legal capital.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

4) If a corporation has both common and preferred shares, the preferred shareholders will receive their dividends first, if the money is available.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

5) Cumulative common shares will pay dividends in arrears.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

6) Which of the following is NOT a date associated with dividends?

A) Date of issuance

B) Date of declaration

C) Date of payment

D) Date of record

E) Date of purchase

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

7) Which of the following dates do NOT require a journal entry?

A) Date of payment

B) Date of record

C) Date of declaration

D) Date of dividend

E) All dividend dates require a journal entry.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

8) The date of declaration creates ________ for the corporation.

A) an asset

B) a liability

C) an expense

D) a revenue

E) no obligation

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

9) The date of record is the date that:

A) the board of directors announces a dividend will be paid.

B) the dividends will be transferred to the shareholders.

C) the shareholders purchased the shares.

D) will determine which shareholders receive the dividends.

E) the company records its obligation.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

10) What entry is required on the date of record?

A) Debit Dividends and credit Retained Earnings

B) Debit Dividends Payable and credit Cash

C) No entry is required

D) Debit Retained Earnings and credit Dividends Payable

E) Debit Cash and credit Dividends Payable

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

11) What journal entry is recorded on the date of declaration to avoid a year-end closing entry of the dividends account?

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

12) What journal entry is recorded on the date of payment?

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

13) A type of share that pays dividends in arrears is called a ________,

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

14) The liability "dividend payable" is recognized on the date of ________.

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

15) What are the two types of preferred shares?

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

16) What is it called when a company does not have enough cash to fund an entire annual preferred dividend?

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

17) ABC Co. declares a $0.50 per share cash dividend on its common shares, of which 100,000 shares are outstanding. Record the journal entry to avoid a year-end closing entry of the dividends account.

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

18) Identify and explain the three dates associated with the declaration and payment of a cash dividend.

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

19) Aztec Industries has 100,000 common shares outstanding and 10,000 $2 cumulative preferred shares. If the company declares a total dividend of $35,000, how much will be distributed to common shareholders?

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

20) Aztec Industries has 100,000 common shares outstanding and 10,000 $2 cumulative preferred shares. If the company does not declare any dividends in Year 1 but declares a total dividend of $45,000 in Year 2, how much will be distributed to preferred and common shareholders?

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

21) Explain the difference between cumulative and non-cumulative preferred shares.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

22) ABC Company declares a $50,000 cash dividend to its shareholders. The company has 40,000 outstanding common shares and 15,000 $3 noncumulative preferred shares. Record the journal entry.

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

23) Are dividends in arrears a liability? Explain.

Diff: 2

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

24) Hancock Enterprise has 30,000 $2 noncumulative preferred shares. It did not pay any dividends for the current year. How much, if any, are the dividends in arrears?

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Concept

Blooms: Knowledge

25) On November 1st, 2015, Dan Inc. declared $850,000 of dividends payable to shareholders on January 15, 2016. Outstanding are 220,000 common shares and 30,000, $4 cumulative preferred shares. No dividends have been declared since 2011. Calculate how much Dan Inc. owes the preferred shareholders. Write the journal entry to record the declaration and subsequent payout of the dividends.

Diff: 1

LO: 10-4 Account for cash dividends

Skill: Application

Blooms: Application

10.5 Account for stock dividends and stock splits

1) A stock dividend affects total shareholders' equity.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

2) A stock dividend increases the shareholder's percentage of stock held.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

3) A corporation may declare stock dividends when there is not enough cash to pay a cash dividend.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

4) The declaration of a stock dividend:

A) creates a liability.

B) creates an asset.

C) creates a revenue.

D) does not create a liability.

E) creates an expense.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

5) A stock split is recorded as a(n):

A) regular journal entry.

B) memorandum entry.

C) adjusting entry.

D) closing entry.

E) correcting entry.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

6) Tammy Corporation has 350,000 common shares outstanding. They have declared a 5% stock dividend. The current market price of the common shares is $7.50/share. The amount that will be debited to retained earnings on the date of declaration is:

A) $52,500.

B) $131,250.

C) $78,750.

D) $183,750.

E) $121,350.

Diff: 2

LO: 10-5 Account for stock dividends and stock splits

Skill: Application

Blooms: Application

7) Cody's Western Wear has 2,000 common shares outstanding. During the current year, the company distributed a 10% stock dividend. The market value of the stock at that time was $16/share. After the distribution, should Cody's total shareholders' equity change? If so, by how much?

Diff: 2

LO: 10-5 Account for stock dividends and stock splits

Skill: Analytic Skills

Blooms: Comprehension

8) A distribution of a corporation's own shares to its shareholders is a called a ________.

Diff: 2

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

9) What are the three dates associated with a stock dividend?

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

10) What accounts are affected by a stock dividend and how?

Diff: 2

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

11) What are the effects and purpose of a stock split?

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

12) ABC Company declares a 2-for-1 stock split of its common shares. The company has 100,000 common shares authorized and 40,000 common shares issued and outstanding. How many shares are authorized and outstanding after the split?

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Analytic Skills

Blooms: Evaluation

13) What is the difference between a stock split and stock dividend?

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

14) Identify the three reasons companies issue stock dividends.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

15) What are the effects of a stock dividend?

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Concept

Blooms: Knowledge

16) Cenation Ltd has 50,000 common shares issued. On January 1st, 2015, the organization declared a 25% share dividend. Prepare the journal entry to record the declaration and distribution (on February 1st, 2015) of the dividend. The current market price per share is $15.

Diff: 1

LO: 10-5 Account for stock dividends and stock splits

Skill: Application

Blooms: Application

10.6 Account for treasury shares

1) A company's shares that it reacquires are termed "treasury shares."

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

2) Treasury shares is a "contra-equity" account and carries a debit balance.

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

3) Treasury shares decreases the number of outstanding shares of stock.

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

4) Which of the following is NOT a reason for a company to purchase treasury shares?

A) To reward valued employees

B) To avoid a takeover by an outside company

C) To buy the shares at a high price to increase total shareholders' equity

D) To support the company's stock price

E) To buy the shares when the price is low and sell when the price is higher

Diff: 2

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

5) Casey Company reacquired 5,000 shares of its common stock for $13/share. The debit to treasury shares will be:

A) $10,000.

B) $65,000.

C) $75,000.

D) $5,000.

E) based on the last treasury stock transaction.

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Application

Blooms: Application

6) What is the normal balance of the treasury shares account?

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

7) Treasury shares are recorded at ________.

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

8) Do treasury shares increase or decrease the company's shares that are outstanding?

Diff: 1

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

9) Explain how the recording of the purchase of treasury shares differs when cash paid is less than or greater than the average cost.

Diff: 2

LO: 10-6 Account for treasury shares

Skill: Concept

Blooms: Knowledge

10.7 Report shareholders' equity

1) Earned Capital includes Retained Earnings and Accumulated Other Comprehensive Income.

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

2) Contributed Capital includes Share Capital and Retained Earnings.

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

3) The components of Shareholders' Equity include the following two major categories:

A) Contributed Capital and Accumulated Other Comprehensive Income

B) Earned Capital and Contributed Surplus

C) Contributed Capital and Earned Capital

D) Share Capital and Retained Earnings

E) Contributed Surplus and Earned Capital

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

4) Under IFRS, which of the following do companies NOT need to present as Other Comprehensive Income (OCI)?

A) Foreign currency transactions

B) Foreign currency translation adjustments

C) Changes in the fair value of a financial instrument in a cash flow hedge

D) Changes in the fair value of available-for-sale financial assets

E) Revaluations of property, plant, and equipment

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

5) Accumulated Other Comprehensive Income is the cumulative change in ________ related to other comprehensive income that bypasses net income.

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

6) What two statements are companies required to prepare under IFRS?

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

7) On which Statement is Accumulated Other Comprehensive Income reported?

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

8) What is the purpose of the Statement of Changes in Equity?

Diff: 1

LO: 10-7 Report shareholders' equity

Skill: Concept

Blooms: Knowledge

10.8 Evaluate return on shareholders' equity and return on common shareholders' equity

1) The formula for return on equity is net income divided by average shareholders' equity.

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Concept

Blooms: Knowledge

2) The denominator in calculating return on common equity is:

A) average common shareholders' equity.

B) average shareholders' equity.

C) net income.

D) total shareholders' equity.

E) net income available to common shareholders.

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Concept

Blooms: Knowledge

3) Return on common equity shows the relationship between ________ and ________.

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Concept

Blooms: Knowledge

4) According to the text, what percentage range is considered to be good returns?

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Concept

Blooms: Knowledge

5) What is the rate of return on shareholders' equity for the year ending 2015 if sales were $200,000, net income was $75,000, total shareholders' equity was $750,000, and total shareholders' equity for 2014 was $675,000 (round to one decimal place)?

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Application

Blooms: Application

6) What is the rate of return on common shareholders' equity if sales are $100,000, net income is $22,700, and average common shareholders' equity is $86,000?

Diff: 1

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Application

Blooms: Application

7) Compute the rate of return on shareholders' equity and the rate of return on common shareholders' equity given the following information:

Return on Shareholders' Equity: ________% (to nearest one-tenth %)

Return on Common Shareholders' Equity: ________% (to nearest one-tenth %)

Return on Common Shareholders' Equity: 7.52%

Calculation:

Shareholders' Equity: $290,000/[($4,100,000 + $4,250,000)/2] = 6.9%

Common Equity: ($290,000 - 25,000)/[$3,450,000 + $3,600,000)/2] = 7.5%

Diff: 3

LO: 10-8 Evaluate return on shareholders' equity and return on common shareholders' equity

Skill: Application

Blooms: Application

10.9 Cumulative Questions

1) Journalize the following transactions for Hammers Inc.

Jan. 1, 2015 Purchased a $100,000 building on a two-year 10% note payable.

The building has a useful life of twenty-five years and is depreciated

on a straight-line basis.

Feb. 15, 2015 Issued 25,000 common shares at $10/share.

Jul. 10, 2015 Issued 15,000 preferred shares at $7/share.

Dec. 31, 2015 Record accrued interest on the note and depreciation on the machine.

Diff: 3

LO: 8-3, 9-2, 10-3

Skill: Application

Blooms: Application

2) On January 1, 2015, Aquarius Corporation had 25,000 common shares issued at $1 per share. Given the following transactions that occurred during the year, prepare the appropriate journal entries.

Apr. 1 Issued 10,000 common shares for $100,000.

June 1 Declared a cash dividend of $2 per share to shareholders.

June 30 Paid the $2 cash dividend.

Dec. 15 Declared a 10% stock dividend to shareholders of record on December 31.

At December 15, the shares were trading at $10.

*Alternatively, it would be acceptable to debit Retained Earnings instead of Cash Dividend - Common.

Diff: 3

LO: 10-3, 10-4, 10-5

Skill: Application

Blooms: Application

3) Where is the Treasury Shares account reported on the Balance Sheet?

Diff: 1

LO: 10-6, 10-7

Skill: Concept

Blooms: Knowledge