Melanie T.

Canete
RETAINED EARNINGS

1. A retained earnings appropriation is used to

a. Absorb a fire loss when an entity is self-insured
b. Provide for a contingent loss that is probable and measurable
c. Smooth periodic income
d. Restrict earnings available for dividends
2. The use of equity reserves under international accounting standards
a. Is strictly voluntary on the part of the management of an entity
b. Is based on whether a reserve is part of distributable or nondistributable equity.
c. Is primarily for the benefit of shareholders rather than creditors.
d. Results in the elimination of retained earnings from the total shareholder’s equity.
3. When an entity goes through a quasi-organization, the carrying amount are stated at
a. Original cost
b. Replacement cost
c. Fair value
d. Original carrying amount
4. The total retained earnings balance typically is not affected by
a. Net income
b. A prior period error
c. Dividend paid
d. Restriction
5. If the issuing entity has only one class of share capital, a transfer from retained earnings to share
capital equal to the fair value of the shares issued is ordinarily a characteristic of
a. Either a share dividend or a share split
b. Neither a share dividend or a share split
c. Share split but not a share dividend
d. Share dividend but not a share split
6. How would the declaration and subsequent issuance of a 10% share dividend affect share capital
and share premium, respectively, when the fair value of the shares exceeds par value?
a. No effect and No effect
b. No effect and Increase
c. Increase and No effect
d. Increase and Increase
7. An entity with a substantial deficit undertakes a quasi-reorganization. Certain assts will be written
down to fair value. Liabilities will remain the same. How would he entries to record the quasi-
reorganization affect share capital and retained earnings, respectively?
a. Increase and Decrease
b. Decrease and No effect
c. Decrease and Increase
d. No effect and Increase
8. For which of the following purposes should an appropriation for possible loss contingencies be
established?
a. To match applicable costs with current revenue
b. To reduce fluctuation in net income in order to lend stability of the entity
c. To charge operations in periods of rising prices for the losses which may be otherwise be
absorbed in periods of failing prices
d. To inform shareholders that a portion of retained earnings should be set aside from amounts
available for dividends because of such contingencies.
9. Which of the following is most likely to be found in corporate laws regarding payment of
dividends?
a. Dividends may be paid from legal capital
b. Retained earnings are available for dividends unless restricted by contract or by statue
c. Unrealized capital is available for any type of dividend
d. Capital from donated asses is available for dividends
10. Which of the following would not affect retained earnings?
a. Conversion of preference share into ordinary share
b. Share split
c. Treasury share transaction
d. Share dividend.

11. At the beginning of current year, Coleen Company had 220,000 P5 par value shares
outstanding. On June 1, the entity acquired 20,000 shares to be held in the treasury.

On December 1, when the market price of the share was P20, the entity declared a 10%
share dividend to be issued to shareholders of record on December 15.

What was the impact of the share dividend on retained earnings?

a. 100,000 decrease
b. 400,000 decrease
c. 440,000 decrease
d. No effect

12. Gem Company reported the following shareholders' equity at the beginning of current year,

Share capital, P20 par, authorized 200,000 shares,

issued and outstanding 100,000 shares 2,000,000
Share premium 3,000,000
Retained Earnings 7,500,000

On March 1, the board of directors declared a 15% share dividend, and accordingly 15,000
additional shares were issued.

On March 1, the fair value of the share was P60. The entity sustained a net loss of
P1,000,000 for the current year.
 What amount should be reported as retained earnings at year end?

a. 5,600,000
b. 6,200,000
c. 6,600,000
d. 7,000,000

13. Solace Company declared and distributed 10% share dividend with fair value of P1,500,000
and par value of P1,000,000, and 25% share dividend with fair value of P4,000,000 and par
value of P3,500,000.

What aggregate amount should be debited to retained earnings for the share dividends?

a. 4,500,000
b. 3,500,000
c. 5,500,000
d. 5,000,000

14. Ray Company declared a 5% share dividend on 100,000 issued and outstanding shares of
P20 par value, which had a fair value of P50 per share before the share dividend was
declared. This share dividend was distributed 60 days after the declaration date.

What is the increase in current liabilities as a result of the share dividend declaration?

a. 200,000
b. 100,000
c. 300,000
d. 0

15. On December 31, 2020, the board of directors of Blake Company declared a cash dividend
of P800,000 to shareholders of record on January 15, 2021, and payable on February 15,
2021.

The entity reported the following data on December 31, 2020 before declaration of dividend:

Accumulated depletion 500,000

Share capital 9,000,000
Share premium 300,000
Retained earnings - December 31, 2020 600,000
Net income for 2020 150,000
What amount should be reported as liquidating dividend?

a. 600,000
b. 300,000
c. 200,000
d. 50,000
 16. Beauty Company provided the following information:

Preference share capital, P500 par value, 2,200 shares 1,100,000

Treasury preference shares, 100 shares at cost 110,000
Ordinary share capital, no par, 3,000 shares at issue price 600,000
Retained earnings 2,500,00

The Board of Directors resolved to pay a 100% share dividend on all shares outstanding capitalizing
amounts of retained earnings equal to the par value and the issue price of the preference and
ordinary shares outstanding, respectively.

Subsequently, the Board of Directors resolved to pay a cash dividend of 10% on preference share
and a cash dividend of P10 per ordinary share.

What is the shareholders' equity after effecting the dividend transactions?

a. 4,090,000
b. 3,810,000
c. 3,820,000
d. 3,955,000

17-20.
During 2020, Ray Company reported the following cash dividends on the P10 par value share
capital:

1st quarter 800,000

2nd quarter 900,000
3rd quarter 1,000,000
4th quarter 1,100,000

The 4th quarter cash dividend was declared on December 20, 2020 to shareholders of record
December 31, 2020 payable on January 31, 2021.

In addition, the entity declared a 10% share dividend on December 1, 2020 when there were
300,000 shares issued and outstanding and the market value was P25 per share on declaration date
and P30 distribution date.

1. What total amount was charged against retained earnings for the dividends?

a. 3,800,000
b. 4,550,000
c. 4,700,000
d. 4,100,000

2. What amount was credited to share capital for the share dividend?

a.. 300,000
b. 750,000
c. 450,000
d. 0
3. What amount was credited to share premium for the share dividend?

a. 600,000
b. 450,000
c. 300,000
d. 0