RETAINED EARNINGS

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. The Gradison Corporation had the following classes of stock outstanding as of December 31, 2022:
Common stock, 20 par value, 20,000 shares outstanding
Preferred stock, 6 percent, 100 par value, cumulative, 2,000 shares outstanding

No dividends were paid on preferred stock for 2020 and 2021. On December 31, 2022, a total cash
dividend of 200,000 was declared. What are the amounts of dividends payable on both the common and
preferred stock, respectively?
a. 0 and 200,000
b. 164,000 and 36,000
c. 176,000 and 24,000
d. 188,000 and 12,000

2. Cash dividends on the 10 par value common stock of Sackville Company were as follows:

1st quarter of 2022 400,000

2nd quarter of 2022 450,000
3rd quarter of 2022 500,000
4th quarter of 2022 550,000

• The 4th quarter cash dividend was declared on December 20, 2022, to
stockholders of record on December 31, 2022. Payment of the 4th quarter
dividend was made on January 9, 2023.
• In addition, Sackville declared a 5 percent stock dividend on its 10 par value
common stock on December 1, 2022, when there were 150,000 shares
issued and outstanding and the market value of the common stock was 20
per share. The shares were issued on December 1, 2022.

What was the effect on Sackville's stockholders' equity accounts as a result of the 2022 dividend
transactions?

Additional
Common Stock Paid-In Capital Retained Earnings

a. 75,000 credit 0 1,975,000 debit

b. 75,000 credit 75,000 credit 2,050,000 debit
c. 150,000 credit 150,000 credit 1,900,000 debit
d. 150,000 credit 75,000 credit 2,050,000 debit

3. Alfie Company, a calendar year company, had sufficient retained earnings in 2020 as a basis for
dividends but was temporarily short of cash. Alfie declared a dividend of P1,000,000 on April 1, 2020,
and issued promissory notes to its stockholders in lieu of cash. The notes, which were dated April 1,
2020, had a maturity data of March 31, 2021 and a 10% interest rate. How should Alfie account for the
scrip dividend and related interest?
a. Debit retained earnings for P1,100,000 on April 1, 2020
b. Debit retained earnings for P1,100,000 on March 31, 2021.
c. Debit retained earnings for P1,000,000 on April 1, 2020 and debit interest expense for P100,000
on March 31, 2021.
d. Debit retained earnings for P1,000,000 on April 1, 2020 and debit interest expense for P75,000
on December 31, 2020.

4. Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of 2 par value
common stock, which had a fair value of 5 per share before the stock dividend was declared. This stock
dividend was distributed sixty days after the declaration date. By what amount did Ray’s current
liabilities increase as a result of the stock dividend declaration?
 a. 0
b. 500
c. 1,000
d. 2,500

5. Jeffrey Company’s stockholders’ equity is comprised of 100,000 shares of P20 par ordinary share,
P4,000,000 of Share premium on ordinary share, and retained earnings of P6,000,000. If a 40% stock
dividend is declared when the stock is selling for P50 per share. What amount should be transferred
from the retained earnings account to Share premium account?
a. 2,000,000
b. 1,200,000
c. 800,000
d. 0

6. Global Company, a real estate developer, is owned by five founding shareholders.

On December 1, 2019, the entity declared a property dividend of a “one-bedroom flat” for each
shareholder. The property dividend is payable on January 31, 2020.

On December 1, 2019, the carrying amount of a one-bedroom flat is P1,000,000 and the fair value is
P1,5000,000.

However, the fair value is P1,800,000 on December 31,2019 and P1,900,000 on January 31,2020
1. What is the dividend payable on December 1, 2019?
a. 5,000,000
b. 7,500,000
c. 9,000,000
d. d. 0

2. What is the dividend payable on December 31, 2019?

a. 5,000,000
b. 7,500,000
c. 9,000,000
d. 0

3. What amount of gain is included in profit or loss as a result of the settlement of the property dividend
on January 31, 2020?
a. 2,500,000
b. 4,000,000
c. 2,000,000
d. 4,500,000

7. On December 1, year 1, Nilo Corp. declared a property dividend of marketable securities to be

distributed on December 31, year 1, to stockholders of record on December 15, year 1. On December 1,
year 1, the trading securities had a carrying amount of 60,000 and a fair value of 78,000. What is the
effect of this property dividend on Nilo’s year 1 retained earnings, after all nominal accounts are closed?
a. 0.
b. 18,000 increase.
c. 60,000 decrease.
d. 78,000 decrease.

8. On December 31, 2020, Dayrit Co. reported a P3,500,000 of appropriated accumulated profits for the
construction of a new building, which was completed in 2021 at a total cost of P3,000,000. In 2021, the
company appropriated P2,400,000 of accumulated profits for the construction of a new plant. The
company also restricted P4,000,000 of cash for the retirement of bonds due in 2021.

In its 2021 balance sheet, what amount of appropriated accumulated profits and losses should Dayrit
Co. report?
a. 2,400,000
b. 2,900,000
c. 5,900,000
d. 6,400,000
 9. At December 31, year 1, Rama Corp. had 20,000 shares of 1 par value treasury stock that had been
acquired in year 1 at 12 per share. In May year 2, Rama issued 15,000 of these treasury shares at 10
per share. The cost method is used to record treasury stock transactions. Rama is located in a state
where laws relating to acquisition of treasury stock restrict the availability of retained earnings for
declaration of dividends. At December 31, year 2, what amount should Rama show in notes to financial
statements as a restriction of retained earnings as a result of its treasury stock transactions?
a. 5,000
b. 10,000
c. 60,000
d. 90,000

10. The shareholders’ equity of Bayan Corporation’s December 31, 2020 balance sheet consisted of the
following account balances:

Ordinary shares, 50 par value, 100,000 shares

Authorized and outstanding 5,000,000
Share premium 3,000,000
Accumulated profits and losses (deficit) (2,000,000)

On January 2, 2021, the company put into effect a shareholder –approved quasi-reorganization by
reducing the par value of the stock to 25 and eliminating the deficit against share premium.

Immediately after the quasi-reorganization, what amount should the company report as share premium
in its statement of financial position?
a. none
b. 3,000,00
c. 3,500,000
d. 5,500,00

11. Lani Company has sustained heavy losses over a period of time and conditions warrant that Lani
undergo a quasi-reorganization at December 31, 2021. Selected balance sheet items prior to the quasi-
reorganization are as follows:
 Inventory was recorded in the accounting records at December 31, 2021, at its
market value of P6,000,000. Cost was P6,500,000.
 Property, plant and equipment were recorded in the accounting records at
December 31, 2021, at P12,000,000, net of accumulated depreciation. The
sound value was P8,000,000.
 Stockholders’ equity on December 31, 2021 was as follows:
Ordinary share, par value P10 per share;
Authorized, issued and outstanding, 700,000 shares 7,000,000
Share premium 1,600,000
Retained earnings (deficit) ( 900,000)
7,700,000
 Under the terms of the quasi-reorganization, the par value of the ordinary share
is to be reduced from P10 per share to P5 per share.
Immediately after the quasi-reorganization has been accomplished, the total stockholders’ equity should
be
a. 3,300,000
b. 3,500,000
c. 3,700,000
d. 4,200,000

12. Shawn financial and operating circumstances warrant that Solid Company undergo a quasi-
reorganization at December 31, 2010. The following information may be relevant in accounting for the
quasi-organization.
 Inventory with a fair value of P2,000,000 is currently recorded in the accounts at its
cost of P2,500,000.
 Plant assets with a fair value of P7,000,000 are currently recorded at P8,500,000
net of accumulated depreciation.
 Individual stockholders contribute P4,000,000 to create share premium to facilitate
the reorganization. No new shares of stock are issued, although control of a
majority of the company’s outstanding stock passes to the company’s creditors.
  The par value of the ordinary share is reduced from P25 to P5
Immediately before those events, the stockholders’ equity section appears as follows:
Ordinary share (P25 par value, 100,000
shares authorized and outstanding 2,500,000
Share premium 1,750,000
Retained earnings (deficit) (3,000,000)
1,250,000
After the quasi-organization, the Share premium should have a balance of
a. 2,750,000
b. 3,250,000
c. 3,750,000
d. 1,750,000

13. Maple Tree Mall, Inc., has 2,500 shares of 2%, P25 par cumulative preferred stock and 125,000 shares
of P2 par common stock outstanding. At the beginning of the current year, preferred dividends were four
years in arrears. Maple Trees board of directors wants to pay a P2.50 cash dividend on each share of
outstanding common stock in the current year. To accomplish this, what total amount of dividends must
Maple Tree declare?
a. P250,000
b. P255,000
c. P256,250
d P318,750

14. At December 31, year 2 and year 3, Alex Company had 3,000 shares of P100 par, 5% cumulative
preferred stock outstanding. No dividends were in arrears as of December 31, year 1. Alex did not
declare a dividend during year 2. During year 3, Alex paid a cash dividend of P10,000 on its preferred
stock. Alex should report dividends in arrears in its year 3 financial statements as:

a. Accrued liability of P15,000.

b. Disclosure of P15,000.
c. Accrued liability of P20,000.
d. Disclosure of P20,000.

15. Selected information from the accounts of Charing Co. at December 31, 2021 follows:

Total income since incorporation P420,000

Total cash dividends paid 130,000
Total value of property dividends distributed 30,000
Excess of proceeds over cost of treasury shares
sold, accounted for using the cost method 110,000

In its December 31,2021 financial statements, what amount should Charing report as Accumulated
Profits?
a. 260,000
b. 290,000
c. 370,000
d. 400,000

16. 1.On January 1, 2019, Dolan Corporation had 60,000 shares of P1 par value common stock issued and
outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 20,000 shares of common stock for P400,000.
June 1 Declared a cash dividend of P2.00 per share to stockholders of record on June 15.
June 30 Paid the P2.00 cash dividend.
Dec. 1 Purchased 4,000 shares of common stock for the treasury for P22 per share.
Dec. 15 Declared a cash dividend on outstanding shares of P2.25 per share to stockholders of
record on December 31.

Q1How much is charged to retained earnings as the result of above transactions?

a. P321000
b. P331000
c. P341000
d. P351000
 Q2What is the balance of dividends payable as the result of above transactions?
a. P0
b. P160000
c. P171000
d. P220200

17. On November 1, 2019, Kathryn Company declared a property dividend of equipment payable on March
1, 2020.

The carrying amount of the equipment is 3,000,000 and the fair value is 2,500,000 on November 1,
2019.

However, the fair value less costs to distribute the equipment is 2,200,000 on December 31, 2019 and
2,000,000 on March 1, 2020.

Q1) What is the dividend payable on December 31, 2019?

a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 0

Q2) What is the measurement of the equipment on December 31, 2019?

a. 2,500,000
b. 2,200,000
c. 3,000,000
d. 2,000,000

Q3) What amount of loss in distribution of property dividend is recognized on March 1, 2020?
a. 300,000
b. 200,000
c. 500,000
d. 0