RETAINED EARNINGS

1. This represents the portion retained earnings which has been restricted and therefore is not
available for any dividend declaration.
a. Appropriated Retained Earnings
b. Unappropriated Retained Earnings
c. Either A or B
d. Neither A nor B

2. Statement I: The retained earnings account has a credit balance, it is called a deficit.
Statement II: A deficit is not an asset but a deduction from shareholders' equity.
a. Only I is true
b. Only II is true
c. Both I and II are true
d. Neither I nor II is true

3. Statement I: Legally, dividends can be declared only from retained earnings. If the entity has
deficit, it is illegal to pay dividends in excess of the retained earnings balance, the excess is a
return of capital.
Statement II: The Securities and Exchange Commission, however, has ruled that stock
dividends may be declared from premium on par value share.
a. Only I is true
b. Only II is true
c. Both I and II are true
d. Neither I nor II is true

4. Share dividends or bonus issue are distributions of the earnings in the form of entity's own
shares. Share dividends create only a change in the components of the shareholders equity--
a. decrease in retained earnings but increase in share capital
b. increase in retained earnings and increase in share capital
c. decrease in retained earnings and decrease in share capital
d. none

5. Appropriations of retained earnings should be reported as

a. Component of equity as part of share premium
b. Component of equity as part as total retained earnings
c. Component of total liabilities as current liability
d. When the deficit exceeds the total of the other capital account balances, the excess is a capital
deficiency

6. An entity declared a cash dividend on a certain date payable on another date. Retained
earnings would
a. Increase on the date of declaration
b. Not be affected on the date of declaration
c. Not be affected on the date of payment
d. Decrease on the date of payment
7. If the share dividend is less than 20%, what amount of the retained earnings should be
capitalized?
a. Par value of the shares
b. Fair value of the shares on the date of declaration
c. Fair value of the shares on the date of record
d. Fair value of the shares on the date of issuance

8. An entity issued what is called a "20% share dividend": At what amount per share should
retained earnings be reduced for the transaction?
a. Zero
b. Par value
c. Fair value at the declaration
d. Fair value at the date of issuance

9. Which of the following statements is incorrect concerning retained earnings?

a. Appropriated retained earnings shall be clearly distinguished from appropriated retained
earnings
b. A deficit is a debit balance in retained earnings
c. A deficit in retained earnings shall be presented as an asset
d. When the deficit exceeds the total of the other capital account balances, the excess is a capital
deficiency

10. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change