BA

99.2 A. Y. 2016-2017


Problem Set: Corporations

Part 1: Theory. Choose the letter of the best answer.
1. A corporation has the following account balances: Common stock, $1 par value, $60,000; Paid-in Capital in Excess
of Par, $1,300,000. Based on this information, the
a. legal capital is $1,360,000.
b. number of shares issued are 60,000.
c. number of shares outstanding are 1,360,000.
d. average price per share issued is $22.50.

2. The term residual claim refers to a stockholders’ right to
a. receive dividends.
b. share in assets upon liquidation.
c. acquire additional shares when offered.
d. exercise a proxy vote.

3. If Vickers Company issues 4,000 shares of $5 par value common stock for $140,000,
a. Common Stock will be credited for $140,000.
b. Paid-In Capital in Excess of Par will be credited for $20,000.
c. Paid-In Capital in Excess of Par will be credited for $120,000.
d. Cash will be debited for $120,000.

4. Barton Company is a publicly held corporation whose $1 par value stock is actively traded at $32 per share. The
company issued 3,000 shares of stock to acquire land recently advertised at $100,000. When recording this
transaction, Barton Company will
a. debit Land for $100,000.
b. credit Common Stock for $96,000.
c. debit Land for $96,000.
d. credit Paid-In Capital in Excess of Par for $98,000.

5. Crain Company issued 2,000 shares of its $5 par value common stock in payment of its attorney's bill of $40,000.
The bill was for services performed in helping the company incorporate. Crain should record this transaction by
debiting
a. Legal Expense for $10,000.
b. Legal Expense for $40,000.
c. Organization Expense for $10,000.
d. Organization Expense for $40,000.

6. Carson Packaging Corporation began business in 2012 by issuing 25,000 shares of $3 par common stock for $8 per
share and 10,000 shares of 6%, $10 par preferred stock for par. At year end, the common stock had a market value
of $12. On its December 31, 2012 balance sheet, Carson Packaging would report
a. Common Stock of $300,000.
b. Common Stock of $75,000.
c. Common Stock of $200,000.
d. Paid-In Capital of $75,000.
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7. Hsu, Inc. issued 7,500 shares of stock at a stated value of $8/share. The total issue of stock sold for $15 per share.
The journal entry to record this transaction would include a
a. debit to Cash for $60,000.
b. credit to Common Stock for $60,000.
c. credit to Paid-in Capital in Excess of Par for $112,500.
d. credit to Common Stock for $112,500.

8. The acquisition of treasury stock by a corporation
a. increases its total assets and total stockholders' equity.
b. decreases its total assets and total stockholders' equity.
c. has no effect on total assets and total stockholders' equity.
d. requires that a gain or loss be recognized on the income statement.

9. A company would not acquire treasury stock
a. in order to reissue shares to officers.
b. as an asset investment.
c. in order to increase trading of the company's stock.
d. to have additional shares available to use in acquisitions of other companies.

10. Which of the following is not a right or preference associated with preferred stock?
a. The right to vote
b. First claim to dividends
c. Preference to corporate assets in case of liquidation
d. To receive dividends in arrears before common stockholders receive dividends

11. 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.

12. If management wishes to "capitalize" part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.

13. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.

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14. Pryor Corporation issued a 2-for-1 stock split of its common stock which had a par value of P10 before and after the
split. At what amount should retained earnings be capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings
b. Par value
c. Market value on the declaration date
d. Market value on the payment date

15. The issuer of a 5% common stock dividend to common stockholders preferably should transfer from retained earnings
to contributed capital an amount equal to the
a. market value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.

16. The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.

17. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

18. What effect does the issuance of a 2-for-1 stock split have on each of the following?
Par Value per Share Retained Earnings
a. No effect No effect
b. Increase No effect
c. Decrease No effect
d. Decrease Decrease

19. The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.

20. Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.




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Part 2: Short Problems. Provide the correct answer.

1. The accounts below appear in the December 31, 2015 trial balance of Gabay Company:
Authorized share capital 5,000,000
Unissued share capital 2,000,000
Subscribed share capital 1,000,000
Subscription receivable 400,000
Share premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost 1,00,000
In the December 31, 2015 statement of financial position, what amount should be reported as shareholder’s
equity?

2. The accounts shown below appear in the December 31, 2015 trial balance of Halo-halo Corporation:
Preference share authorized, P50 par P10,000,000
Unissued preference share 3,600,000
Ordinary share authorized, P20 par 4,000,000
Unissued ordinary share 2,000,000
Subscription receivable, preference share 380,000
Subscription receivable, ordinary share 360,000
Subscribed preference share 600,000
Subscribed ordinary share 440,000
Treasury share, preference, at cost 1,360,000
Share premium 1,700,000
Accumulated profits and losses 2,000,000
How much is the total shareholder’s equity of Halo-halo Corp?

3. The shareholders’ equity section of Maria Rosa Company revealed the following information on December 31,
2015.
Preference share capital, P100 par 2,300,000
Share premium, preference share 805,000
Ordinary share capital, P10 par 5,250,000
Share premium, ordinary share 2,750,000
Subscribed ordinary share capital 50,000
Retained earnings 1,900,000
Note payable 4,000,000
Subscription receivable- ordinary share 400,000
What is the amount of legal capital?

4. Joy Company issued 20,000 shares of its P10 par value ordinary share and 40,000 shares of its P10 par value
convertible preference share for a total of P1,800,000. At this date, Joy’s ordinary share was selling P20 per share
and the convertible preference share was selling for P30 per share. What amount of the proceeds should be
allocated to the ordinary share?

5. Samantha Company issued 6,000 shares of its P100 par ordinary share to Jake V. as compensation for 1,000 hours
of legal services performed. Jake V. usually bills P500 per hour for legal services. On this date of issuance, the

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 share was selling at a public trading at P150 per share. By what amount should the share premium account of
Corridor Company increase as a result of the issuance of those shares?

6. The Max Corporation is authorized to issue 100,000 shares at P20 par ordinary share. At the beginning of 2014,
18,000 ordinary shares were issued and outstanding. These shares had been issued at P27 per share. During
2014, the company entered into the ff transactions:
January 2 Issued 1,300 ordinary shares at P28 per share
Mar 19 Exchanged 12,000 ordinary shares for a machine

The ordinary share was selling at P30 per share.

May 8 Reacquired 500 ordinary shares at P29 per share
July 19 Accepted subscriptions for 1,000 ordinary shares at P31 per share. The contract called for
10% down payment with the balance due on December 1.
September 1 Sold 500 of treasury share at P32 per share
December 1 Collected the balance due on July 1 subscriptions and issued the stock certificate.
How much is the total contributed capital for December 31, 2014?

7. Royce Corporation purchased 10,000 shares of its P10 par value ordinary shares as treasury share for P120,000
on March 2, 2014. On December 19, 2014, Royce issued all 10,000 treasury shares for P190,000. Under the cost
method of accounting for treasury share, the reissuance would result in a credit to:
a. Share Capital of P100,000
b. Accumulated Profits and Losses of P70,000
c. Gain on sale of investment of P70,000
d. Share premium of P70,000

8. The following capital accounts are shown in the balance sheet of Tappa Corp.
Ordinary share, 10,000 shares, par value P100 P1,000,000
Premium on ordinary share 20,000
Share premium – treasury share 30,000
Accumulated profits and losses 750,000
Treasury share, 2000 shares at cost 250,000
The entire 2,000 treasury shares were sold for P200,000.
What would be the balance of the Accumulated Profits and Losses account after this sale?

9. Avis Company was organized on January 2, 2009 at which date it issued 200,000 shares of P10 par ordinary shares
at P15 per share. During the period January 2, 2012 to December 31, 2014, Avis reported cumulative net income
of P900,000 and paid cash dividends of P460,000. On January 2, 2014, Avis purchased 12,000 of its ordinary share
at P12 per share. On December 31, 2014, Avis sold 8,000 treasury shares at P8 per share. What is the total of
shareholders’ equity at December 31, 2014?

10. Lovelyn Company issued 200,000 ordinary shares when it began operations in 2010 and issued an additional
100,000 shares in 2011. Lovelyn also issued 100,000 preference shares. In 2011, Lovelyn purchased 75,000
ordinary shares to be held in treasury. On December 31, 2011, how many ordinary shares were outstanding?

11. Effective December 31, 2011, the shareholders of Rap Company approved a two-for-one split of the entity’s share
capital, and an increase in entity’s share capital and an increase in authorized shares from 100,000 shares (par
value P20) to 200,000 shares (par value P10). Rap’s shareholders’ accounts immediately before issuance of the
split shares were as follows:
Share capital, par value P20; 100,000 shares authorized; 50,000 shares outstanding P1,000,000
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 Share premium P150,000
Retained Earnings P1,350,000
What should be the balances in the share premium and retained earnings immediately after the share spit is
effected?

12. Iana Company had 10,000 shares issued and outstanding on January 1, 2015. During 2015, Iana took the following
actions:
March 15 Declared a 2-for-a share split, when the fair value of the share was P80 per share.
December 15 Declared a P5 per share cash dividend.
In the statement of changes in equity for 2011, what amount should be reported as dividends?

13. Ken, Inc. had net income for 2004 of P6,360,000 and earnings per share on common stock of P5. Included in the
net income was P900,000 of bond interest expense related to its long-term debt. The income tax rate for 2004
was 30%. Dividends on preferred stock were P1,200,000. 25% of net income is to be paid out as dividends. What
were the dividends on common stock in 2004?

14. Ninabea, Inc. has outstanding 200,000 shares of P2 par common stock and 40,000 shares of no-par 8% preferred
stock with a stated value of P5. The preferred stock is cumulative. Dividends have been paid in every year except
the past two years and the current year.

a. Assuming that P100,000 will be distributed as a dividend in the current year, how much will the common
stockholders receive?
b. Assuming that P42,000 will be distributed as a dividend in the current year, how much will the preferred
stockholders receive?

15. At December 31, 2004 and 2005, Louisa Corp. had outstanding 9,000 shares of P100 par value 8% cumulative
preferred stock and 30,000 shares of P10 par value common stock. At December 31, 2004, dividends in arrears on
the preferred stock were P36,000. Cash dividends declared in 2005 totalled P135,000. What amounts were
payable on each class of stock?

16. The stockholders' equity section of Irish Corporation as of December 31, 2003, was as follows:
On March 1, 2004, the board of directors declared a 10% stock dividend. On March 1, 2004, the fair market value
of the stock was P6 per share. For the two months ended February 28, 2004, Irish sustained a net loss of
P10,000. What amount should Irish report as retained earnings as of March 1, 2004?


17. On January 1, 2004, Shyrr Corporation had 110,000 shares of its P5 par value common stock outstanding. On
June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the
market price of the stock was P8, the corporation declared a 15% stock dividend to be issued to stockholders of
record on December 16, 2004. What was the impact of the 15% stock dividend on the balance of the retained
earnings account?

18. Presented below is information related to Paolo, Inc.:
December 31,
2004 2003
Common stock P 75,000 P 60,000
6% Preferred stock 350,000 350,000
Retained earnings (includes net income for current year) 90,000 75,000
Net income for year 45,000 32,000
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 What is Paolo’s rate of return on common stock equity for 2004?

19. On November 1, 2015, Jude Company declared a property dividend of equipment payable on March 1, 2016.
The carrying amount of the equipment is P3,000,000 and the fair value is P2,500,000 on November 1, 2015.
However, the fair value less cost to distribute the equipment is P2,200,000 on December 31, 2011 and
P2,000,000 on March 1, 2012.
a. What is the dividend payable on December 31, 2015? 2,200,000
b. What is the measurement of equipment on December 31, 2015? 2,200,000

20. Below is the shareholders’’ equity section of Nelson Company on December 31, 2014:
Preference share, 7%, P100 par value, 30,000 shares issued;
total liquidation value, P3.2 M P3,000,000
Ordinary share, no par, 50,000 shares issued 1,500,000
Donated capital 500,000
Accumulated profits 4,500,000
All preference dividends have been fully paid.
How much is the book value per share of ordinary share?

21. The shareholders’ equity of Aira Company shows the following balances on December 31, 2014:
10% Preference share, cumulative and P2,000,000
nonparticipating, P100 par with a liquidation value of
P110, 20,000 shares
Ordinary share, P100 par, 30,000 shares 3,000,000
Subscribed ordinary shares 1,000,000
Subscription receivable 600,000
Treasury shares, 5,000 ordinary shares at cost 400,000
Share premium 660,000
Accumulated profits and losses 1,580,000
What is the book value per share of ordinary shares, assuming preference dividends are in arrears since 2012?

22. The following share capital transactions pertain to Gino Corporation for the year 2014:
January 1 Shares outstanding 44,000
February 1 Shares issued for cash 56,000
May 1 Shares reacquired 25,000
August 1 Receipt of 25% share dividends
September 1 Resold part of treasury share 10,000
November 1 Issued 2 for 1 share split
What is the weighted average ordinary shares outstanding?

23. On January 1, 2014, Tiny Corporation whose shares are publicly traded, had 100,000 shares of ordinary shares
issued and outstanding. On April 1, 2014, the company issued 10% share dividends. On September 1, 2014,
additional 9,000 shares were issued for cash and on November 1, 2014, the shares were split for a 2 for 1 basis.
What is the number of shares to be used in computing earnings per share on December 31, 2014?

24. Angel Company’s capital structure at December 31, 2014, is shown below:
Shares issued and outstanding:
Ordinary shares 200,000
Preference shares 50,000
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 On October 1, 2015, Angel issued a 10% share dividend on its ordinary shares, and paid 200,000 cash dividends
on the preference shares. Net income for the year ended December 31, 2015 was P1, 920,000. How much should
be the 2014 earnings per share of Angel Company?

25. Edrada Company had 500,000 ordinary shares issued and outstanding at December 31, 2013. During 2014, no
additional ordinary share was issued. On January 1, 2014, Edrada issued 400,000 preference shares. During 2014,
Edrada declared and paid P180,000 cash dividends on the ordinary shares and P150,000 on the preference
shares. Net income for the year ended December 31, 2014 was P960,000. What should be the earnings per
ordinary share of Edrada Company?

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