CHAPTER 16: RETAINED EARNINGS AND EARNINGS PER SHARE
1. When a property dividend is declared, fair value is determined on the ex-dividend date.
a.
True
b.
False
False
1
Easy
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2. A small stock dividend is accounted for by transferring from retained earnings to contributed capital an amount equal to
the par value of the additional shares issued.
a.
True
b.
False
False
1
Easy
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3. A board of directors may decide to restrict retained earnings to meet legal requirements or to meet a contractual
restriction.
a.
True
b.
False
True
1
Easy
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4. A prior period adjustment can arise from an error found that occurred in a prior period, a change is accounting entity, or
a change in accounting principle.
a.
True
b.
False
True
1
Easy
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5. Noncontrolling interest reported on the balance sheet represents the amount of the net assets of a company that are
owned by shareholders other than the common shareholders of that company.
a.
True
b.
False
False
1
Challenging
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6. The retained earnings statement is a required separate financial statement that discloses all changes in retained earnings
during the accounting period.
a.
True
b.
False
False
1
Easy
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7. The denominator in the calculation for the price/earnings ratio is basic earnings per share.
a.
True
b.
False
True
1
Easy
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8. A simple capital structure is one that consists of common stock outstanding and possibly convertible preferred stock.
a.
True
b.
False
False
1
Easy
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9. The most common “potential common shares” that may be included in computing DEPS are share options, warrants,
and convertible preferred stock and bonds.
a.
True
b.
False
True
1
Easy
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10. A convertible security may have the appearance of being individually dilutive but in fact be antidilutive when viewed
with combinations of other convertible securities.
a.
True
b.
False
True
1
Easy
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11. A dividend that represents a return of capital rather than a distribution of retained earnings is called a
a.
property dividend.
b.
stock dividend.
c.
capital dividend.
d.
liquidating dividend.
d
1
Easy
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12. When a company is determining its dividend policy, the company must adhere to legal requirements. The legal
requirements are determined by
a.
the Financial Accounting Standards Board (FASB).
b.
the state in which the company was incorporated.
c.
the Securities and Exchange Commission (SEC).
d.
the Federal Trade Commission (FTC).
b
1
Moderate
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13. How will a company’s retained earnings and total stockholders’ equity be affected by the declaration of a stock
dividend to be distributed at a later date?
Retained Earnings
Total Stockholders’ Equity
decrease
decrease
decrease
no effect
no effect
no effect
no effect
decrease
a.
I
b.
II
c.
III
d.
IV
b
1
Moderate
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14. All of the following types of dividends will result in an increase in liabilities as a result of the declaration of the
dividend except a
a.
cash dividend.
b.
property dividend.
c.
scrip dividend.
d.
stock dividend.
d
1
Moderate
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15. The Frank Company has issued 10%, fully participating, cumulative preferred stock with a total par value of $300,000
and common stock with a total par value of $900,000. Dividends for one previous year are in arrears. How much cash
will be paid to the preferred stockholders and the common stockholders, respectively, if cash dividends of $222,000
are distributed at the end of the current year?
a.
$85,500 to preferred and $136,500 to common
b.
$78,000 to preferred and $144,000 to common
c.
$60,000 to preferred and $162,000 to common
d.
$55,500 to preferred and $166,500 to common
b
1
Moderate
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16. The Chester Company has issued 10%, nonparticipating, cumulative preferred stock with a total par value of $400,000
and common stock with a total par value of $800,000. No dividends are in arrears. How much cash will be paid to the
preferred stockholders and the common stockholders, respectively, if cash dividends of $180,000 are distributed?
a.
$80,000 to preferred and $100,000 to common
b.
$60,000 to preferred and $120,000 to common
c.
$55,000 to preferred and $125,000 to common
d.
$40,000 to preferred and $140,000 to common
d
1
Moderate
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17. The Stansbury Company has issued 10%, partially participating, cumulative preferred stock with a total par value of
$200,000 and common stock with a total par value of $800,000. The preferred stock participates up to 15% of its par
value. No dividends are in arrears. How much cash will be paid to the preferred stockholders and the common
stockholders, respectively, if cash dividends of $160,000 are distributed?
a.
$50,000 to preferred and $110,000 to common
b.
$20,000 to preferred and $140,000 to common
c.
$30,000 to preferred and $130,000 to common
d.
$32,000 to preferred and $128,000 to common
c
1
Moderate
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18. Which statement best represents the relationship between date of declaration, date of record and ex-dividend date, and
date of payment, for a cash dividend.
a.
The date of payment results in the biggest decrease in the current ratio.
b.
The date of record establishes the amount to be received.
c.
The ex-dividend date establishes the decrease to cash.
d.
The date of declaration establishes the increase to liabilities.
d
1
Moderate
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19. On November 1, 2016, the Cranberry Construction Company declared a property dividend payable in the form of
bonds held for long-term investment purposes. The bonds will be distributed to the common stockholders on
December 15, 2016. The bonds to be distributed to the common stockholders originally cost Cranberry $210,000. Fair
values of the bonds on various dates are as follows:
December 31, 2015
$220,000
November 1, 2016
235,000
December 15, 2016
225,000
Which one of the following amounts should be used to record the appropriate credit to Property Dividends Payable?
a.
$210,000
b.
$220,000
c.
$235,000
d.
$230,000
c
1
Moderate
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20. On October 1, 2016, White Company declared a property dividend payable in the form of marketable equity securities
classified as “available for sale” for financial accounting purposes. The marketable equity securities will be distributed
to the common stockholders on December 1, 2016. The investment in equity securities originally cost White $510,000
on August 1, 2016. The investment’s fair value on various dates is as follows:
October 1, 2016
$530,000
December 1, 2016
535,000
December 31, 2016
540,000
The amount credited to Gain on Disposal of Investments resulting from this dividend transaction should be
a.
$0.
b.
$20,000.
c.
$25,000.
d.
$30,000.
b
1
Moderate
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21. How will a company’s total current liabilities and total stockholders’ equity be affected by the declaration of a stock
dividend? (Assume the stock dividend is distributed at a later date.)
Total
Total
Current Liabilities
Stockholders’ Equity
increase
decrease
increase
no effect
no effect
decrease
no effect
no effect
a.
I
b.
II
c.
III
d.
d
1
Moderate
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IV
Exhibit 16-1
The Zeller Corporation’s stockholders’ equity accounts have the following balances as of December 31, 2016:
Common stock, $10 par (30,000 shares issued
and outstanding)
$ 300,000
Additional paid-in capital
2,000,000
Retained earnings
5,700,000
Total stockholders’ equity
$8,000,000
22. Refer to Exhibit 16-1. On January 2, 2017, the board of directors of Zeller declared a 30% stock dividend to be
distributed on January 31, 2017. The market price per share of Zeller’s common stock was $30 on January 2 and $32
on January 31. As a result of this stock dividend, the retained earnings account should be decreased by
a.
$ 90,000.
b.
$270,000.
c.
$288,000.
d.
zero; only a memorandum entry is required.
a
1
Moderate
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23. Refer to Exhibit 16-1. On January 2, 2017, the board of directors of Zeller declared a 5% stock dividend to be
distributed on January 31, 2017. The market price per share of Zeller’s common stock was $30 on January 2 and $32
on January 31. As a result of this stock dividend, the retained earnings account should be decreased by
a.
zero; only a memorandum entry is required.
b.
$15,000.
c.
$45,000.
d.
$48,000.
c
1
Moderate
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24. The Michael Company’s stockholders’ equity accounts have the following balances as of December 31, 2016:
Common stock, $20 par (25,000 shares issued of which
2,000 are being held as treasury stock)
$ 500,000
Additional paid-in capital
750,000
Retained earnings
2,250,000
$3,500,000
Less: Treasury stock (2,000 shares at cost)
(120,000)
Total stockholders’ equity
$3,380,000
On January 2, 2017, the board of directors of Michael declared a 10% stock dividend to be distributed on February
15, 2017. The market price of Michael Company’s common stock was $75 per share on January 2, 2017. On the date
of declaration, the retained earnings account should be decreased by
a.
zero; only a memorandum entry is required.
b.
$50,000.
c.
$172,500.
d.
$187,500.
c
1
Moderate
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25. If a company makes a prior period adjustment, which of the following describes how it must be reported?
a.
The adjustment is recorded in retained earnings, and previous years’ financial statements presented for
comparative purposes are not changed.
b.
The adjustment is recorded in retained earnings, and previous years’ financial statements presented for
comparative purposes are adjusted.
c.
The adjustment is reported in the current period’s income statement as a separate item.
d.
The adjustment is recorded as a deferred asset or deferred liability and amortized using the straight-line
method.
b
1
Moderate
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26. If a corporation appropriates retained earnings for treasury stock transactions, the appropriation will affect total
amounts for retained earnings and stockholders’ equity as
Total
Total
Retained Earnings
Stockholders’ Equity
decrease
decrease
decrease
no effect
no effect
no effect
no effect
decrease
a.
I
b.
II
c.
III
d.
IV
c
1
Moderate
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27. Which of the following is not an error that would require a company to record a prior period adjustment? Assume all
are material.
a.
A mathematical mistake is made in the calculation of bad debt expense.
b.
Facts of a bond retirement transaction are misconstrued.
c.
Accounting principles are misapplied in the valuation of inventory.
d.
A correction is made to the estimated useful life of a building.
d
1
Easy
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28. In 2016, Cunningham Company determined that it did not accrue $15,000 of interest expense in 2015, which caused a
material overstatement of income. Assuming a 35% tax rate, which of the following presents the journal entries that
would correct the error?
a.
Retained Earnings 15,000
Interest Payable 15,000
Income Tax Receivable (or Payable) 15,000
Retained Earnings 15,000
b.
Retained Earnings 15,000
Interest Payable 15,000
Income Tax Receivable (or Payable) 5,250
Retained Earnings 5,250
c.
Retained Earnings 9,750
Interest Payable 9,750
Income Tax Receivable (or Payable) 5,250
Retained Earnings 5,250
d.
Retained Earnings 5,250
Interest Payable 5,250
Income Tax Receivable (or Payable) 9,750
Retained Earnings 9,750
1
Easy
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29. Which of the following could be a component of other comprehensive income (loss)?
a.
realized gains or losses from sale of investments in available-for-sale securities
b.
translation adjustments from converting the financial statements of a company’s foreign operations into U.S.
dollars
c.
gains (losses) on extraordinary items
d.
warranty liability adjustments
b
1
Easy
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30. Comprehensive income represents
a.
net income plus “other comprehensive income.”
b.
net income less dividends paid.
c.
retained earnings plus net income.
d.
retained earnings plus “other comprehensive income.”
a
1
Easy
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31. The following information is provided for the Jacob Company:
Deferred compensation payable-stock appreciation rights
$ 10
Bonds payable
120
Additional paid-in capital on common stock
25
Donated capital
16
Treasury stock (at cost)
10
Common stock, $1 par
150
Common stock option warrants
50
Unrealized increase in value of available-for-sale securities
28
Additional paid-in capital from treasury stock
5
Retained earnings
75
What is the total stockholders’ equity of Jacob Company?
a.
$489
b.
$469
c.
$339
d.
$311
c
1
Moderate
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32. On January 1, Christopher’s reported total stockholders’ equity of $1,300. During the year, $50 of dividends were
declared and paid, donated land with a donor book value of $14 and a current fair value of $38 was received,
additional common stock was issued for $300, and treasury stock was acquired for $22. The reported total
stockholders’ equity at December 31 was $1,406. What was the reported net income or loss for the year?
a.
$160 net income
b.
$136 net loss
c.
$160 net loss
d.
$260 net loss
1
Moderate
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33. Which one of the following would least likely result in a negative effect on of stockholders’ equity?
a.
prior period adjustment
b.
valuation changes in available for sale securities
c.
donations
d.
unrealized declines in value of marketable equity securities
c
1
Easy
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34. Under IFRS, a company’s stockholders’ equity consists of which two sections?
a.
contributed capital and retained earnings
b.
share capital and other equity
c.
contributed capital and other equity
d.
share capital and retained earnings
b
1
Easy
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35. Which of the following stockholders’ equity disclosures are required under both GAAP and IFRS?
a.
restrictions on the repayment of capital
b.
reacquired shares and rights
c.
share reserved for future issuances under sales contracts
d.
revaluation reserve
b
1
Easy
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36. Which of the following stockholders’ equity disclosures are required under both GAAP and IFRS?
a.
capital not yet paid in
b.
restrictions on the repayment of capital
c.
dividend preferences
d.
shares reserved for future issuances under sales contracts
c
1
Moderate
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37. When calculating earnings per share, dividends declared on noncumulative preferred stock, but not paid, should be
a.
added to net income in the earnings per share numerator.
b.
accrued in the earnings per share numerator when paid.
c.
deducted from net income in the earnings per share numerator.
d.
deferred from the earnings per share numerator until paid.
c
1
Moderate
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38. Reporting basic earnings per share is required for which type of corporate capital structure?
a.
simple
b.
complex
c.
primary
d.
both simple and complex
d
1
Easy
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39. A simple capital structure consists of
a.
only preferred stock.
b.
common stock outstanding and possibly nonconvertible preferred stock.
c.
common stock and common stock options only.
d.
preferred stock and preferred stock options.
b
1
Easy
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40. Basic earnings per share is computed as
a.
Net Income / Total Number of Common Shares Outstanding.
b.
(Net Income − Preferred Dividends) / Total Number of Common Shares Outstanding.
c.
(Net Income − Preferred Dividends) / Weighted-Average Number of Common Shares Outstanding.
d.
Net Income / Weighted-Average Number of Common Shares Outstanding.
c
1
Easy
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41. Which of the following items would be included in a basic earnings per share calculation?
a.
declared dividends on noncumulative preferred stock
b.
declared dividends on cumulative preferred stock
c.
undeclared dividends on cumulative preferred stock
d.
all of these
d
1
Easy
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42. Which of the following items would not be included in a basic earnings per share calculation?
a.
undeclared dividends on noncumulative preferred stock
b.
declared dividends on noncumulative preferred stock
c.
undeclared dividends on cumulative preferred stock
d.
declared dividends on cumulative preferred stock
a
1
Easy
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43. On January 1, 2016, Wade Corporation had 24,000 shares of common stock outstanding. On April 1, it reacquired
2,400 shares; on July 1, it issued 10,800 shares; on October 1, it issued another 9,600 shares; and on December 1, it
reacquired 900 shares. What was the weighted average number of common shares outstanding for 2016?
a.
26,950
b.
28,900
c.
29,925
d.
41,400
c
1
Moderate
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44. On January 1, 2016, Bennett Corporation had 20,000 shares of common shares outstanding. During the year, it sold
another 2,600 shares on July 1 and reacquired 600 shares on November 1. The corporation earned $337,600 net
income. The company also has 15,000 shares of $10 par value, 6%, cumulative preferred stock on which no dividends
have been declared for the last two years. What is the basic earnings per share for the year?
a.
$15.92
b.
$15.65
c.
$15.50
d.
$15.08
d
1
Moderate
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45. On January 1, 2016, Kiper Corporation had 12,000 shares of common stock outstanding. Kiper reacquired 1,000
shares on May 1, and issued another 5,000 shares on September 1. The company also has 10,000 shares of $20 par,
10%, noncumulative preferred stock outstanding on which no dividends have been declared during the last two years.
The company had a $28,360 loss for the year. What is the basic earnings per share for the year?
a.
($5.03)
b.
($2.95)
c.
($5.26)
d.
($2.18)
d
1
Moderate
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