UM Digos College

Department of Accounting Education

ACC 221-Intermediate Accounting 3
FIRST EXAMANATION- POST EMPLOYMENT EMPLOYEE BENEFITS
GENERAL INSTRUCTIONS: Choose the best answer. Erasures in shading are not allowed.
PART I- Theory
1. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
2. The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
3. The pre-emptive right enables a stockholder to
a. share proportionately in any new issues of stock of the same class.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
4. In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities
and Exchange Commission.
5. Stockholders of a business enterprise are said to be the residual owners. The term
residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
6. Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by the enterprise.
c. a claim against a portion of the total assets of an enterprise.
d. only the amount of earnings that have been retained in the business.
7. A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
8. Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
9. The accounting problem in a lump sum issuance is the allocation of proceeds between
the classes of securities. An acceptable method of allocation is the
a. pro forma method.
b. proportional method.
c. incremental method.
d. either the proportional method or the incremental method.
10. When a corporation issues its capital stock in payment for services, the least
appropriate basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
 d. Any of these provides an appropriate basis for recording the transaction.
11. Direct costs incurred to sell stock such as underwriting costs should be accounted
for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a. 1 b. 2 c. 3 d. 1 or 3
12. A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
13. Which of the following represents the total number of shares that a corporation
may issue under the terms of its charter?
a. authorized shares
b. issued shares
c. unissued shares
d. outstanding shares
14. Stock that has a fixed per-share amount printed on each stock certificate is
called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
15. Which of the following is not a legal restriction related to profit
distributions by a corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported
for that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to
preferences and participation.
16. In January 2012, Finley Corporation, a newly formed company, issued 10,000
shares of its $10 par common stock for $15 per share. On July 1, 2012, Finley
Corporation reacquired 1,000 shares of its outstanding stock for $12 per share. The
acquisition of these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
17. Treasury shares are
a. shares held as an investment by the treasurer of the corporation.
b. shares held as an investment of the corporation.
c. issued and outstanding shares.
d. issued but not outstanding shares.
18. When treasury stock is purchased for more than the par value of the stock and the
cost method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the
excess of the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the
purchase price over the par value.
19. “Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
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 20. Porter Corp. purchased its own par value stock on January 1, 2012 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of
the same class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been
previous net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
21. How should a "gain" from the sale of treasury stock be reflected when using the
cost method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
22. Which of the following best describes a possible result of treasury stock
transactions by a corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
23. Which of the following features of preferred stock makes the security more like
debt than an equity instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
24. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the
par value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par
value of the stock and receive the stock in place of the cash dividends.
25. According to the IFRS, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders' equity.

PART 2- Problems

Prepare the pertinent journal entries

(10 points) Resolve Corporation began operations on January 1, 2005. The company was
authorized to issue 60,000 shares of P10 par value common stock and 120,000 shares of
10%, P100 par value convertible preferred stock. In connection with your audit of the
company’s financial statements, you noted the following transactions involving
stockholders’ equity during 2005:
Jan. 1 Issued 1,500 shares of common stock to the corporation promoters in exchange
for property valued at P510,000 and services valued at P210,000. The property
costs P270,000 3 years ago and was carried on the promoters’ books at
P150,000.
Jan. 31 Issued 30,000 shares of convertible preferred stock at P150 per share. Each
share can be converted to five shares of common stock. The corporation paid

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 P225,000 to an agent for selling the shares.
Feb. 15 Sold 9,000 shares of common stock at P390 per share. The corporation paid
issue costs of P75,000.
May 30 Received subscriptions for 12,000 shares of common stock at P450 per share.
Aug. 30 Issued 2,100 shares of common stock and 4,200 shares of preferred stock in
exchanged for a building with a fair market value of P1,530,000. The building
was originally purchased for P1,140,000 by the investors and has a book value
of P660,000. In addition, 1,800 shares of common stock were sold for P720,000
cash.
Nov. 15 Payments in full for half of the subscriptions and partial payments for the
rest of the subscriptions were received. Total cash received was P4,200,000.
Shares of stock were issued for the fully paid subscriptions.

(8 points) The stockholders equity of Willpower Corporation showed the following data on
December 31, 2004:
12% preferred stock, P30 par, 135,000 shares issued and outstanding 4,050,000
Common stock, P50 par, 180,000 shares issued and outstanding 9,000,000
Premium on preferred stock 1,080,000 Premium on common stock 3,240,000
Retained earnings 1,395,000

The 2005 transactions of the company affecting its stockholders’ equity are summarized
chronologically as follows:
1. Issued 27,000 shares of preferred stock at P40.
2. Issued 94,500 shares of common stock at P70.
3. Retired 5,400 shares of preferred stock at P45.
4. Purchased 13,500 shares of its common stock at P80.
5. Split common stock two for one (par value reduce to P25).
6. Reissued 13,500 shares of treasury stock – common at P50.
7. Stockholders donated to the company 9,000 shares of common stock when shares had a
market price of P52. One half of these shares were subsequently issued for P54.
(7 points) Grit Corp., organized on June 1, 2004, was authorized to issue stock as
follows:
• 800,000 shares of 9% preferred stock, convertible, P100 par
• 2,500,000 shares of common stock, P2.50 stated value
During the remainder of the fiscal year ended May 31, 2005, the following transactions
were completed in the order given:
• 300,000 shares of preferred stock were subscribed for at P105, and 900,000 shares
of common stock were subscribed for at P26. Both subscriptions were payable 30%
upon subscription, the balance in one payment.
• The second subscription payment was received, except one subscriber for 60,000
shares of common stock defaulted on payment. The full amount paid by this
subscriber was returned, and all of the fully paid stock was issued.
• 150,000 shares of common stock were reacquired by purchase at P28.
• Each share of preferred was converted into four shares of common stock.
• The treasury stock was exchanged for machinery with a fair market value of
P4,300,000.
• There was a 2-for-1 stock split, and the stated value of the new common stock is
P1.25.

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