Intermediate Accounting 3

Quiz 3
Block 2

Provide the correct answer.

1. The following information was abstracted from the accounts of the Oar Corporation at
December 31, 2020:
Total income since incorporation including 2020 P840,000
Total cash dividends declared 260,000
Proceeds from sale of donated stock (FV on date of donation was P30,000) 90,000
Total value of stock dividends distributed 60,000
Excess of proceeds over cost of treasury stock sold 140,000

The donated stock did not allow the company to exercise significant influence over the
investee. What should be the current balance of retained earnings?

2. Cash dividends on the P10 par value common stock of Ray Company were as follows:
1st quarter of 2020 P800,000
2nd quarter of 2020 900,000
3rd quarter of 2020 1,000,000
4th quarter of 2020 1,100,000
The 4th-quarter cash dividend was declared on December 20, 2020, to stockholders of
record on December 31, 2020. Payment of the 4th-quarter cash dividend was made on
January 9, 2021. In addition, Ray declared a 5% stock dividend on its P10 par value
common stock on December 1, 2020, when there were 300,000 shares issued and
outstanding and the market value of the common stock was P20 per share. The shares
were issued on December 21, 2021. As a result of the above transactions, what was the
increase on Ray's common stock?

3. Music Makers, a record label company, paid dividends of P560,000 to its shareholders,
reducing its dividends payable to P350,000. The balance in dividends payable at the
beginning of the year was P230,000. The balance in retained earnings at the beginning of
the year was P1,990,000 and is now P2,430,000. If only cash dividends were declared
during the year, what was Music Makers’ net income for the year?

Solution:
1. Retained earnings is increased by income and decreased by dividends. Donated assets
are recorded at FV upon receipt and recognized as equity in the period of donation.
Equity securities are measured at fair value at the end of each year, and the gain or
loss is included in net income:
Income − Cash dividends − Stock dividends = Retained earnings
P840,000 − P260,000 − P60,000 = P520,000
The excess of proceeds over cost of treasury stock sold would be credited to paid-in
capital.

2. Make the entry for the issuance of a 15,000-share (300,000 shares × 5%) stock
dividend when the market price is P20/share and par value is P10/share. Because the
stock dividend is a small stock dividend, the fair value of the stock is used to
calculate the dividend (15,000 shares × P20 = $300,000), and retained earnings is
reduced by that amount. The par value of the stock is added to common stock (15,000
× P10 = P150,000)

3. First, calculate the balance in retained earnings before the dividends were paid of
P910,000 (P350,000 + P560,000). Then, calculate the amount of dividends issued this
year of P680,000 (P910,000 − P230,000). Next, calculate net income of P1,120,000
(P2,430,000 + P680,000 − P1,990,000).