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Horngren's Accounting, Vol. 2, Canadian Edition, 11e (Miller-Nobles)
Chapter 14 Corporations: Retained Earnings and the Income Statement
Objective 14-1
1) The retained earnings account is not a reservoir of cash.

Answer: TRUE
Diff: 1 Type: TF
CPA Competency: 1.2.2 Evaluates treatment for routine transactions
Objective: 14-1 Account for stock dividends and stock splits
Knowledge Taxon: Conceptual
Cognitive Taxon: Remember
2) The retained earnings account equals all previous periods' net earnings less any dividends
declared less prior losses.
Answer: TRUE
Diff: 1 Type: TF
3) All dividends declared by a corporation require a payment of cash.

Answer: FALSE
Diff: 1 Type: TF
Knowledge Taxon: Factual
4) Stock dividends are similar to cash dividends in that assets of the corporation are transferred
to the shareholders.
Answer: FALSE
Diff: 1 Type: TF
5) One of the main reasons for stock dividends is to continue dividends while retaining cash.
Answer: TRUE
Diff: 1 Type: TF
1
Copyright © 2020 Pearson Canada Inc.
6) In a stock dividend, equity moves from retained earnings to Retained earnings.
Answer: TRUE
Diff: 2 Type: TF
Knowledge Taxon: Procedural
7) The declaration of a stock dividend has no effect on Retained earnings.

Answer: FALSE
Diff: 2 Type: TF
8) A stock dividend has no effect on assets or liabilities.

Answer: TRUE
Diff: 2 Type: TF
9) The dollar value assigned to a stock dividend is the market value, on the declaration date, of
the shares to be distributed as a stock dividend.
Answer: TRUE
Diff: 2 Type: TF
10) Stock dividends decrease total shareholders' equity.

Answer: FALSE
Diff: 2 Type: TF
2
11) Stock dividends have no impact to total shareholders' equity.
Answer: TRUE
Diff: 2 Type: TF
12) The declaration of a stock dividend creates a current liability for the corporation.
Answer: FALSE
Diff: 2 Type: TF
13) Common stock dividend distributable is a liability account on the balance sheet.
Answer: FALSE
Diff: 2 Type: TF
14) Common stock dividend distributable is an equity account on the balance sheet.
Answer: TRUE
Diff: 2 Type: TF
15) Increasing the use of stock dividends will decrease the market value of a firm's stock.
Answer: TRUE
Diff: 3 Type: TF
16) A stock split reduces the number of outstanding shares.

Answer: FALSE
Diff: 1 Type: TF
3
17) In a 3 for 1 stock split, the number of shares outstanding triples.
Answer: TRUE
Diff: 1 Type: TF
18) A reverse stock split reduces the number of outstanding shares.

Answer: TRUE
Diff: 1 Type: TF
19) Both a stock dividend and a stock split shifts an amount from retained earnings to
contributed capital.
Answer: FALSE
Diff: 1 Type: TF
20) Both a stock dividend and a stock split increases the corporations' number of shares issued
and outstanding.
Answer: TRUE
Diff: 1 Type: TF
21) Kelly Corporation has experienced profits greater than losses in the past four years since
incorporation. Which of the following is TRUE?
A) Retained earnings has a debit balance at the end of the fourth year.
B) Retained earnings has a credit balance at the end of the fourth year.
C) Retained earnings on the balance sheet will cause a reduction in total shareholders' equity.
D) Retained earnings will not appear on the balance sheet.
Answer: B
Diff: 2 Type: MC
Cognitive Taxon: Understand
4
22) Stock dividends:
A) decrease total shareholders' equity
B) have no effect on total shareholders' equity
C) reduce the total assets of the company
D) increase total liabilities upon declaration
Answer: B
Diff: 2 Type: MC
23) A proportional distribution by a corporation of its own shares to its shareholders is a:

A) liquidating dividend
B) property dividend
C) cash dividend
D) stock dividend
Answer: D
Diff: 2 Type: MC
24) When a corporation declares a stock dividend:

A) total liabilities decrease
B) shareholders' equity decreases
C) total assets decrease
D) shareholders' equity remains unchanged
Answer: D
Diff: 2 Type: MC
5
25) Stock dividends increase ________ and decrease ________.
A) assets, liabilities
B) common shares, assets
C) common shares, retained earnings
D) retained earnings, assets
Answer: C
Diff: 2 Type: MC
26) A shareholders' ownership percentage in the shares of a corporation ________ upon the
distribution of a stock dividend.
A) increases
B) decreases
C) can increase or decrease depending on the type of stock dividend
D) will stay the same
Answer: D
Diff: 2 Type: MC
27) When a corporation declares a 15% stock dividend, retained earnings will be:
A) debited for the new shares times the average issue price of all of the existing shares
B) debited for the new shares times the current market value of the shares
C) credited for the new shares times the book value of the shares
D) credited for the new shares times the current market value of the shares
Answer: B
Diff: 2 Type: MC
6
28) When a corporation declares a 5% stock dividend, the journal entry will include:
A) debit retained earnings and credit a liability
B) debit common shares and credit retained earnings
C) debit retained earnings and credit common stock dividend distributable
D) debit retained earnings and credit common shares
Answer: C
Diff: 2 Type: MC
29) When a corporation distributes a 5% stock dividend that was previously declared, the journal
entry will include:
A) debit a liability and credit common shares
B) debit common stock dividend distributable and credit common shares
C) debit retained earnings and credit common shares
D) debit common shares and credit common stock dividend distributable
Answer: B
Diff: 2 Type: MC
30) When a corporation distributes a 10% stock dividend, common shares will be:
A) debited for the new shares times the average issue price of all of the existing shares
B) debited for the new shares times the market value of the shares on the date of declaration
C) credited for the new shares times the book value of the shares
D) credited for the new shares times the market value of the shares on the date of declaration
Answer: D
Diff: 2 Type: MC
7
Table 14-1
The board of directors declares a 10% stock dividend. There are 20,000 common shares
authorized and 10,000 outstanding common shares. The current market price of the shares is $12
per share; the average issue price was $10 per share.
31) Refer to Table 14-1. The journal entry will require a debit to retained earnings for:
A) $10,000
B) $12,000
C) $20,000
D) $24,000
Answer: B
Diff: 1 Type: MC
Cognitive Taxon: Apply
32) Refer to Table 14-1. The entry to distribute the shares will require a:
A) debit to common shares for $10,000
B) debit to common stock dividend distributable for $10,000
C) debit to common stock dividend distributable for $12,000
D) debit to retained earnings for $24,000
Answer: C
Diff: 2 Type: MC
33) Which of the following will reduce retained earnings?

A) a 3-for-1 stock split
B) declaration of a 15% stock dividend
C) distribution of a 15% stock dividend
D) payment of a $0.50 per share cash dividend
Answer: B
Diff: 2 Type: MC
8
34) Common stock dividend distributable is a:
A) contra liability account
B) shareholders' equity account
C) liability account
D) contra equity account
Answer: B
Diff: 1 Type: MC
CPA Competency: 1.3.1 Prepares financial statements
35) The common stock dividend distributable account will appear on the balance sheet:
A) in the shareholders' equity section before common shares
B) as a contra account to common shares
C) in the shareholders' equity section after common shares
D) This account is an income statement account and would not appear on the balance sheet.
Answer: C
Diff: 2 Type: MC
9
Table 14-2
Following is the shareholders' equity section of the balance sheet of Thomson Corporation:
Contributed capital
Preferred shares, $8, cumulative, 25,000 shares
authorized, 5,000 shares issued $516,000
Common shares, 100,000 shares authorized, 40,000
shares issued 320,000
Total contributed capital 836,000
Retained earnings 290,000
Total shareholders' equity $1,126,000
The preferred shares are currently selling for $102.25 per share and the common shares are
currently selling for $11.50 per share.
36) Refer to Table 14-2. The entry to record the declaration of a 10% common stock dividend
includes a:
A) debit to retained earnings for $46,000
B) credit to common shares for $51,125
D) credit to retained earnings for $46,000
Answer: A
Diff: 2 Type: MC
37) Refer to Table 14-2. The total contributed capital after the declaration of a 10% common
stock dividend is:
A) $862,000
B) $856,000
C) $836,000
D) $882,000
Answer: D
Diff: 3 Type: MC
10
38) Refer to Table 14-2. The entry to record the distribution of a 10% common stock dividend
includes a:
A) debit to dividends payable for $46,000
C) debit to retained earnings for $46,000
D) credit to cash for $46,000
Answer: B
Diff: 2 Type: MC
39) Refer to Table 14-2. The total shareholders' equity after the distribution of a 10% common
stock dividend is:
A) $1,152,000
B) $1,146,000
C) $1,126,000
D) $1,172,000
Answer: C
Diff: 2 Type: MC
40) Refer to Table 14-2. The balance in the common shares account immediately after the
declaration of a 10% common stock dividend is:
A) $320,000
B) $836,000
C) $290,000
D) $366,000
Answer: A
Explanation: The common share account is not increased until the distribution.
Diff: 3 Type: MC
11
41) Refer to Table 14-2. What is the number of common shares outstanding after the declaration
and distribution of a 10% common stock dividend is:
A) 44,000
B) 40,000
C) 100,000
D) 104,000
Answer: A
Diff: 2 Type: MC
42) Which of the following is used to calculate and record a common stock dividend?
A) number of common shares authorized
B) number of preferred shares authorized
C) number of preferred shares issued
D) number of common shares issued
Answer: D
Diff: 1 Type: MC
43) Helen Randall owns 2,500 common shares in Holister Corporation, for which she paid
$8,500. Holister Corporation declared a 2-for-1 stock split. Her average cost per share after the
stock split is:
A) $2.27
B) $3.40
C) $1.70
D) $0.85
Answer: C
Diff: 2 Type: MC
12
44) A 2-for-1 stock split has the same effect on the number of shares outstanding as a:
A) 20% stock dividend
B) 50% stock dividend
C) 100% stock dividend
D) 200% stock dividend
Answer: C
Diff: 2 Type: MC
Cognitive Taxon: Analyze
45) The board of directors announces a 2-for-1 stock split on 20,000 outstanding common shares,
with an average issue price of $15. Immediately after the stock split, the:
A) book value of the shares increases to $30 per share
B) issued shares decrease to 10,000
C) average issue price of the shares remains the same
D) issued and outstanding shares increase to 40,000
Answer: D
Diff: 1 Type: MC
46) In a 2-for-1 stock split, the balance in the common shares account:
A) is cut in half
B) remains the same
C) doubles
D) triples
Answer: B
Diff: 2 Type: MC
13
47) A 2-for-1 stock split:
A) results in the number of shares issued to remain the same
B) results in a reduction in retained earnings
C) results in an increase in total shareholders' equity
D) increases the number of authorized and outstanding shares
Answer: D
Diff: 2 Type: MC
48) The declaration of a 2-for-1 stock split appears on which financial statement?
A) income statement
B) balance sheet
C) statement of retained earnings
D) does not appear on any financial statement
Answer: D
Diff: 2 Type: MC
14
Table 14-6
Contributed capital
Common shares, 1,000,000 shares authorized, 500,000
shares issued 2,500,000
Total contributed capital 3,200,000
49) Refer to Table 14-6. The entry to record the declaration of a 5% common stock dividend
includes a:
D) debit to retained earnings for $125,000
Answer: A
Explanation: (500,000 shares × 0.05) × $12.50 = $312,500
Diff: 2 Type: MC
50) Refer to Table 14-6. The total contributed capital after the declaration of a 5% common stock
dividend is:
A) $3,075,000
B) $3,325,000
C) $3,200,000
D) $3,512,500
Answer: D
Explanation: $3,200,000 + $312,500 = $3,512,500
Diff: 3 Type: MC
15
51) Refer to Table 14-6. The total shareholders' equity after the distribution of a 5% common
stock dividend is:
A) $4,315,000
B) $3,877,500
C) $4,190,000
D) $4,502,500
Answer: C
Diff: 2 Type: MC
52) Refer to Table 14-6. The balance in the common shares account immediately after the
declaration of a 5% common stock dividend is:
A) $2,500,000
B) $2,625,000
C) $2,812,500
D) $3,200,000
Answer: A
Explanation: Does not change until it is distributed.
Diff: 3 Type: MC
53) Which of the following is NOT a similarity between stock dividends and stock splits?
A) Both require a journal entry.
B) Both increase the number of shares owned per shareholder.
C) Both do not change the investor's total cost.
D) Both increase the number of shares issued and outstanding.
Answer: A
Diff: 2 Type: MC
16
54) Stock splits are ________ stock dividends due to the way they are treated for tax purposes.
A) less common than
B) more common than
C) equally as common as
D) usually less common than
Answer: B
Diff: 2 Type: MC
17
55) EverClean Corporation reported the following shareholders' equity on January 1, 2020:
Contributed capital
Preferred shares, $2.50, cumulative, 30,000
shares authorized, 7,500 shares issued $393,750
Common shares, 200,000 shares
authorized, 135,000 shares issued 607,500
a) On October 15, 2020, the board of directors declared a 5% common stock dividend when the
market price of the shares was $10.00 per share. On November 15, 2020, the stock dividend was
distributed to the shareholders. Prepare the necessary journal entries to record the declaration and
distribution of the common stock dividend.
b) What effect did the declaration of the common stock dividend have on:
1) total assets
2) total liabilities
3) total contributed capital
4) total retained earnings
5) total shareholders' equity
General Journal
Date Accounts Debit Credit
18
Answer:
a) General Journal
Oct 15 Retained Earnings 67,500
Common Stock Dividend Distributable 67,500
Nov 15 Common Stock Dividend Distributable 67,500

Common Shares 67,500
b)
1) no effect
2) no effect
3) increase of $67,500
4) decrease of $67,500
4) no effect
Diff: 2 Type: SA
19
56) Following is the shareholders' equity section of the balance sheet of Downing Corporation as
of November 1, 2020:
Preferred shares, $3, noncumulative, 10,000 shares

Common shares, 300,000 shares authorized,
120,000 shares issued 1,620,000
Downing Corporation reported the following transactions during November, 2020:
Nov. 1 Declared the required annual cash dividend on the preferred shares
and a $0.50 dividend on the common shares.
15 Paid the dividends declared on November 1.
16 Declared a 10% common stock dividend. The market value
of the common shares is $15.00 per share.
26 Distributed the common stock dividend declared on November 16.
30 The board of directors announced a 2-for-1 stock split.
Show the dollar amount of the effect of each transaction on both total contributed capital and
total shareholders' equity.
Date Total Contributed Capital Total Shareholders' Equity

Nov. 1
15
16
26
30
Answer:
Date Total Contributed Capital Total Shareholders' Equity
Nov. 1 no effect decrease of $79,500
15 no effect no effect
16 increase of $180,000 no effect
Diff: 3 Type: SA
20
57) Rice Corporation reported the following shareholders' equity items on December 31, 2017:

5,000 shares issued 550,000
Consider each of the following cases independently:
1) How many common shares would be outstanding if Rice Corporation declares a 4-for-1
stock split?
2) Prepare the journal entry if Rice Corporation declared a 15% stock dividend on the common
shares when the market price of common shares was $130 per share.
3) Prepare the journal entry if Rice Corporation declared a 45% stock dividend on the common
shares when the market price of common shares was $130 per share.
4) Give the journal entry to record the sale of 800 common shares for $125 per share.
Answer:
1) 20,000
General Journal
2) Retained Earnings 97,500
3) Retained Earnings 292,500

4) Cash 100,000
Diff: 2 Type: SA
21
58) Use the words "no effect," "increase," or "decrease" to indicate the effects of stock dividends
and stock splits on the following items:
Stock Split Stock Dividend

Retained earnings account
Total shareholders' equity
Number of shares authorized
Number of shares issued
Total assets and liabilities
Common shares amount
Answer:
Stock Split Stock Dividend
Retained earnings account No effect Decrease
Total shareholders' equity No effect No effect
Number of shares authorized Increase No effect
Number of shares issued Increase Increase
Total assets and liabilities No effect No effect
Common shares $ amount No effect Increase
Diff: 2 Type: SA
22
Table 14-5
Following is the shareholders' equity section of the balance sheet of Bradson Ltd.:
Contributed capital
59) Refer to Table 14-5. Bradson Ltd. is considering distributing a 10% common stock dividend
to their shareholders. The board would like to see the impact and has asked you to restate the
shareholders' equity section assuming that the stock dividend has taken place.
Answer:
Contributed capital
Diff: 2 Type: SA
23
60) Refer to Table 14-5. Bradson Ltd. is considering distributing a 20% common stock dividend
to their shareholders. The board would like to see the impact and has asked you to restate the
shareholders' equity section assuming that the stock dividend has taken place.
Answer:
Contributed capital
Diff: 2 Type: SA
61) Refer to Table 14-5. The balance of retained earnings after the declaration of a 10% common
stock dividend is: ________.
Answer: $430,000
Explanation: $490,000 - (50,000 × 10% × $12.00) = $430,000
Diff: 2 Type: SA
62) Refer to Table 14-5. The balance of retained earnings after the declaration of a 20% common
stock dividend is: ________.
Answer: $370,000
Explanation: $490,000 - (50,000 × 20% × $12.00) = $370,000
Diff: 2 Type: SA
63) Refer to Table 14-5. The balance in the common shares account after the distribution of a
10% common stock dividend is: ________.
Answer: $460,000
Explanation: $400,000 + (50,000 × 10% × $12.00) = $460,000
Diff: 2 Type: SA
24
64) Refer to Table 14-5. The number of common shares issued after the declaration of a 10%
common stock dividend is: ________.
Answer: 55,000
Explanation: 50,000 × 1.1 = 55,000
Diff: 2 Type: SA
65) Refer to Table 14-5. The number of common shares issued after the declaration of a 20%
common stock dividend is: ________.
Answer: 60,000
Explanation: 50,000 × 1.2 = 60,000
Diff: 2 Type: SA
66) Refer to Table 14-5. The number of common shares issued after the distribution of a 3-for-1
stock split is: ________.
Answer: 150,000
Explanation: 50,000 × 3 = 150,000
Diff: 2 Type: SA
67) From an investor's perspective, what is the main difference between a stock split and a stock
dividend?
Answer: Both a stock split and a stock dividend increase the number of common shares held by
the investor with no accompanying change in the cost of the shares owned. Where stock splits
and stock dividends differ is in the way they are treated for tax purposes. A stock split does not
create taxable income to the investor, but a stock dividend does because stock dividends are
treated in the same way as cash dividends. For this reason, stock dividends are less popular than
stock splits as investors must pay income tax on the stock dividend even though no cash has been
received.
Diff: 2 Type: ES
25
68) List the three key dates for a stock dividend and explain the purpose of each date.
Answer: The three dates are: declaration date, date of record and distribution date. The
declaration date is when the stock dividend is publically announced by the corporation. It does
not create a liability, rather the intention is recorded in an equity account called: Common stock
dividend distributable. The date of record is administrative in nature as it is used to identify
which shareholders will receive the shares. The distribution date is when the shares resulting
from the stock dividend are given to the shareholders identified on the date of record.
Diff: 1 Type: ES
69) List the differences and similarities between stock dividends and stock splits.
Answer:
Similarities: 1) Increase number of shares (owned, issued and outstanding), 2) Investor's cost
remains the same
Differences: 1) stock dividend is a distribution of retained earnings and thus requires a journal
entry to record the allocation of retained earnings to common shares, 2) stock splits receive more
favourable tax treatment for investors, and therefore are more popular
Diff: 2 Type: ES
70) Describe the similarities and differences of stock dividends and cash dividends.
Answer:
Similarities: 1) Both involve a journal entry as the corporation is making a distribution to
shareholders, 2) similar dates are involved — declaration, date of record and
payment/distribution, and 3) both are declared by the board of directors and involve a very
formal process.
Differences: 1) Cash dividend is a distribution of an asset and therefore decreases total
shareholders' equity, whereas stock dividend is a distribution of equity, and therefore there is no
effect on total shareholders' equity, 2) given that the cash dividend is a distribution of an asset,
the declaration creates a legal liability that the corporation must recognize; this is not true for a
stock dividend, and 3) there are restrictions placed on cash dividends in order to protect the
creditors of the corporation.
Diff: 2 Type: ES
26
71) IMHO Incorporated, a management consulting provider, has prospered during the past eight
years, and recently the company's market share price has shot up to $206.00. It currently has
20,000 issued and outstanding common shares with a book value of $200 per share. No preferred
shares exist. IMHO's management want to decrease the share price to the range of $65 to $75,
which will be attractive to more investors. Should the company issue a 100 percent stock
dividend or split the stock? Why? If you propose a stock split, state the split ration that will
accomplish the company's objective. Show your computations.
Answer: A 100% stock dividend or a 2-for-1 stock split will double the number of shares. The
stock dividend will require a decrease in retained earnings. To reach management's goal, the
stock dividend would have to be greater than 100%, which will have a significant impact to the
retained earnings balance. Therefore it is better to issue a stock split as there will be no effect on
retained earnings and due to the tax treatment it will be more popular for the existing
shareholders. Assuming the market share price will drop when the book value drops, then the
book value should be reduced to 1/3 of its current value. A 3-for-1 stock split would increase the
number of shares issued and outstanding to 60,000 and the book value would decrease to $66.67.
((20,000 ∗ 200)/60,000).
Diff: 3 Type: ES
Objective 14-2
1) The repurchase of share capital from shareholders reduces total shareholders' equity and
increases assets.
Answer: FALSE
Diff: 2 Type: TF
Objective: 14-2 Account for repurchased shares
2) The first step n recording a share repurchase is to calculate the average cost per share.
Answer: TRUE
Diff: 2 Type: TF
27
3) The difference between unissued shares and treasury shares is that treasury shares have been
issued, bought back and are being held by the company.
Answer: TRUE
Diff: 2 Type: TF
4) A corporation purchases 200 of its common shares for $12 per share. Subsequently, all 200
shares are resold for $13 per share. The amount of revenue from these transactions is $200.
Answer: FALSE
Diff: 3 Type: TF
5) A corporation purchases 200 of its common shares for $12 per share. The shares had
originally been issued at $11. The 200 shares represent the first time the corporation has engaged
in a repurchased shares transaction. The entry to repurchase the shares will involve a debit to
retained earnings for $200.
Answer: TRUE
Diff: 2 Type: TF
6) The Canada Business Corporations Act requires companies to cancel the shares they are
repurchasing. The repurchased shares are treated as authorized but unissued.
Answer: TRUE
Diff: 2 Type: TF
7) Under the Canada Business Corporations Act, a company may NEVER reissue the shares it
previously repurchased.
Answer: FALSE
Diff: 2 Type: TF
28
8) When a corporation repurchases its own shares, there is no effect on income.
Answer: TRUE
Diff: 2 Type: TF
9) Retained Earnings is credited when the price paid for repurchased company shares is less than
their average issue price.
Answer: FALSE
Diff: 2 Type: TF
10) Contributed Surplus-Share Repurchase is credited when the price paid for repurchased
company shares is less than their average issue price.
Answer: TRUE
Diff: 2 Type: TF
11) A corporation repurchases 200 of its common shares for $7 per share. The shares had been
issued for $6 per share. The entry to record the reacquisition requires a debit to:
A) contributed surplus-shares repurchase for $200
B) common shares for $1,200
C) common shares for $1,400
D) retained earnings for $1,200
Answer: B
Diff: 2 Type: MC
29
12) A corporation repurchases 1,000 of its common shares for $8 per share. They had been
issued for $6 per share. This transaction will:
A) increase total shareholders' equity by $2,000
B) decrease common shares by $8,000
C) have no effect on total shareholders' equity
D) decrease total shareholders' equity by $8,000
Answer: D
Diff: 2 Type: MC
13) A corporation repurchases 2,000 of its common shares for $10 per share. They had been
initially issued for $13 per share. This transaction will:
A) increase total shareholders' equity by $20,000
B) decrease common shares by $20,000
C) decrease total shareholders' equity by $26,000
D) have no effect on total shareholders' equity
Answer: A
Diff: 2 Type: MC
14) A corporation sells 20 repurchased common shares costing $10 per share for $11 per share.
The journal entry to record the sale requires a debit to:
A) cash for $220
B) retained earnings for $20
C) common shares for $20
D) common shares for $220
Answer: A
Diff: 2 Type: MC
30
Table 14-3
Following is the shareholders' equity section of the balance sheet of Monty Corporation:
Contributed capital:
Preferred shares, $2.50, cumulative, 35,000 shares

15) Refer to Table 14-3. The entry to record Monty's purchase of 10,000 of its common shares at
$7.50 per share includes a:
B) debit to common shares for $75,000
C) credit to common shares for $90,500
D) credit to contributed surplus-share repurchase for $15,500
Answer: D
Explanation:
Common shares 90,500
Cash 75,000
Contributed surplus-share repurchase 15,500
Diff: 3 Type: MC
16) Refer to Table 14-3. Assuming Monty purchases 15,000 of its common shares at $9.05 per
share, total shareholders' equity is:
A) increased $135,750
B) decreased $135,750
C) increased $6,750
D) no effect on shareholders' equity
Answer: B
Diff: 1 Type: MC
31
17) Refer to Table 14-3. Assume Monty purchased 15,000 of its common shares at $10.00 per
share. This transaction would:
A) increase total shareholders' equity
B) have no effect on total shareholders' equity
C) decrease total shareholders' equity
D) increase assets
Answer: C
Diff: 2 Type: MC
C) increased $6,750
D) the same as it was before the purchase of the company's own shares
Answer: B
Diff: 2 Type: MC
C) decreased $129,000
D) no effect on shareholders' equity
Answer: C
Diff: 2 Type: MC
32
20) Refer to Table 14-3. The entry to record the sale of 8,000 repurchased shares that cost $10
per share for $13 per share includes a:
D) credit to gain on sale of shares for $24,000
Answer: B
Diff: 2 Type: MC
21) The sale of a corporation's repurchased shares:

A) will increase liabilities
B) will increase total shareholders' equity
C) will decrease assets
D) will have no effect on the balance sheet
Answer: B
Diff: 2 Type: MC
33
Table 14-6
Contributed capital
Common shares, 1,000,000 shares authorized, 500,000
shares issued 2,500,000
22) Refer to Table 14-6. The entry to record Thomson's purchase of 10,000 of its common shares
at $12.50 per share includes a:
Answer: A
Explanation:
Cash 125,000
Diff: 2 Type: MC
34
23) Refer to Table 14-6. The entry to record Thomson's purchase of 10,000 of its common shares
A) credit to retained earnings for $75,000
Answer: B
Explanation:
Cash 125,000
Diff: 2 Type: MC
24) Refer to Table 14-6. Assuming Thomson purchases 10,000 of its common shares at $12.50
per share, total shareholders' equity is:
C) decreased $75,000
D) the same as it was before the purchase of the company's own shares
Answer: B
Diff: 2 Type: MC
25) Refer to Table 14-6. The entry to record the sale of 8,000 repurchased shares that cost $12.50
per share for $13.50 per share includes a:
D) credit to gain on sale of shares for $8,000
Answer: B
Explanation:
Cash 108,000
Diff: 2 Type: MC
35
26) Refer to Table 14-6. The entry to record Thomson's purchase of 5,000 of its preferred shares
B) debit to preferred shares for $447,500
Answer: D
Explanation:
Preferred shares 500,000
Contributed Surplus-PS 52,500
Cash 447,500
Diff: 2 Type: MC
27) Refer to Table 14-6. The entry to record Thomson's purchase of 5,000 of its preferred shares
B) debit to preferred shares for $500,000
D) debit to cash for $447,500
Answer: B
Explanation:
Preferred shares 500,000
Contributed Surplus-PS 52,500
Cash 447,500
Diff: 2 Type: MC
36
28) Boss Corporation reported the following equity section on its current balance sheet:

50,000 shares issued $250,000
Contributed surplus - share repurchase 20,000
Total shareholders' equity $377,000
Which of the following would be included in the entry to record the corporation's purchase of
1,000 common shares for $7.50 per share?
A) Contributed surplus - share purchase would be debited for $2,500.
B) Retained earnings would be debited for $2,500.
C) Common shares would be debited for $7,500.
D) Retained earnings would be credited for $2,500.
Answer: A
Explanation:
Common shares 5,000
Contributed surplus - share repurchase 2,500
Cash 7,500
Diff: 3 Type: MC
37
29) Prepare journal entries for the following transactions for Broadbent Corporation:
Jun. 10 Broadbent Corporation purchased 2,000 of its common shares for $25 per share.
The original issue price was $21 per share
Aug. 15 Broadbent Corporation sold 800 of the repurchased shares for $30 per share.
Oct. 30 Broadbent Corporation sold the remaining repurchased shares for $22 per share.
Answer:
General Journal
Jun. 10 Common Shares 42,000
Retained Earnings 8,000
Cash 50,000
Aug. 15 Cash 24,000

Oct. 30 Cash 26,400

Diff: 2 Type: SA
38
30) Arrow Corporation began 2019 with the following account balances:
Common shares, 100,000 shares authorized, 75,000 issued $2,175,000

In January 2019, Arrow Corporation reported the following transactions:
Jan. 10 Reacquired 5,000 of its own shares for $30 per share.
20 Sold 3,000 of the reacquired shares for $33 per share.
30 Sold the remaining reacquired shares for $22 per share.
Record journal entries for the above transactions.

Answer:
General Journal
Jan. 10 Common Shares 145,000
Cash 150,000
20 Cash 99,000
30 Cash 44,000
Diff: 2 Type: SA
39
31) Narrow Corporation began 2019 with the following account balances:

In 2019, Narrow Corporation reported the following transactions:
Mar 20 Reacquired 2,000 of its own shares for $25 per share.

Answer:
General Journal
Contributed Surplus - Share Repurchase 20,000
Cash 100,000
Mar. 20 Common Shares 48,000

Cash 50,000
30 Cash 88,000
Diff: 2 Type: SA
40
32) Nishimura Corporation began 2019 with the following account balances:

In 2019, Nishimura Corporation reported the following transactions:
Mar 20 Sold 10,000 shares for $23 per share.
Aug 27 Reacquired 2,000 of its own shares for $25 per share.

Answer: This question challenges students to realize that the average cost per share has changed.
General Journal
Cash 100,000
Mar. 20 Cash 230,000

Aug. 27 Common Shares 47,640*

Cash 50,000
*The average cost per share has changed to $23.82 rounded, calculated by
(1,200,000 - 120,000 + 230,000)/(50,000 - 5,000 + 10,000)
Diff: 3 Type: SA
41
33) Fred & Sons Inc. began 2019 with the following account balances:
Common shares, 1,000,000 shares authorized, 225,000 issued $2,250,000

A) In 2019, Fred & Sons Inc. reported the following transactions:

Apr 15 Reacquired 25,000 of its own shares for $11 per share.
May 23 Reacquired 10,000 of its own shares for $13 per share.
B) What is the average issue price as of May 30th?

Answer:
General Journal
Cash 450,000
Apr. 15 Common Shares 250,000

Cash 275,000
May 23 Common Shares 100,000

Cash 130,000
30 Cash 120,000
B) ($2,250,000 - 500,000 - 250,000 - 100,000 + 120,000)/(225,000 - 50,000 - 25,000 - 10,000 +

8,000) = ($1,520,000/148,000) = $10.27
Diff: 3 Type: SA
42
34) Identify three reasons why a corporation might repurchase its own shares.
Answer:
1. The corporation may have issued all its authorized shares and needs to recover shares for
distribution under bonus plans or share purchase plans.
2. The purchase may help support the share's current market price by decreasing the supply of
shares available to the public.
3. Management may gather in the shares to avoid a takeover by an outside party.
Diff: 2 Type: ES
35) Explain the ethical and legal dimension of share repurchase transactions.
Answer: Answers will vary for each student. Management has the stewardship obligation of
buying back the shares at a fair value. If the company holds back critical information that is not
publicly known and would likely increase the market price of their shares with the intention of
repurchasing their shares at the current lower market value, then it is unethical. A shareholder
could sue for breach of duty of care. Due to this issue there are specific legislation protecting the
shareholder from such acts, otherwise known as Insider Trading and it is a criminal offense.
Diff: 3 Type: ES
Objective 14-3
1) Income from continuing operations includes: sales, operating expense, other gains (losses) and
income tax expense.
Answer: TRUE
Diff: 1 Type: TF
Objective: 14-3 Prepare a detailed corporate income statement
2) When a corporation has discontinued operations, it has a separate earnings per share amount
for the discontinued operations.
Answer: TRUE
Diff: 2 Type: TF
43
3) When a corporation has a discontinued operation, the earnings per share amount includes the
effect of the discontinued operation.
Answer: FALSE
Diff: 2 Type: TF
4) Gains or losses from transactions that are outside a company's core business are reported on
the income statement net of the taxes.
Answer: FALSE
Diff: 2 Type: TF
5) Discontinued operations is shown net of tax on the income statement.

Answer: TRUE
Diff: 2 Type: TF
6) Losses due to lawsuits, employee labour strikes and floods, fire, or other forces of nature
would be shown in the other gains/(losses) section of the income statement.
Answer: TRUE
Diff: 2 Type: TF
7) Discontinued operations must be separated into two components: operating income or loss
from the segment that is disposed of and operating gain or loss from the segment that will
replace the business being discontinued.
Answer: FALSE
Diff: 2 Type: TF
44
8) Earnings per share is the amount of a company's net income per outstanding common share.
Answer: TRUE
Diff: 1 Type: TF
CPA Competency: 1.4.4 Interprets financial reporting results for stakeholders (external or
internal)
9) Earnings per share is a key measure of business success.

Answer: TRUE
Diff: 1 Type: TF
internal)
10) To calculate EPS, Net Income less Preferred Dividends is divided by the number of
outstanding common shares at the end of the fiscal year.
Answer: FALSE
Diff: 2 Type: TF
internal)
11) Stock dividends require an adjustment to the beginning of year balance in the number of
common shares outstanding when calculating the weighted average number of shares
outstanding for EPS.
Answer: TRUE
Diff: 3 Type: TF
internal)
45
12) When calculating earnings per share, only cumulative preferred dividends need to be taken
into consideration.
Answer: FALSE
Diff: 3 Type: TF
internal)
13) Components of income from continuing operations are shown:

A) after the tax effect
B) before the tax effect
C) both before and after the tax effect
D) grouped with prior-period adjustments
Answer: B
Diff: 2 Type: MC
14) When a company sells a segment of its business, the gain or loss on the disposal is shown as:
A) an extraordinary item
B) part of discontinued operations
C) part of income from continuing operations
D) a prior-period adjustment
Answer: B
Diff: 2 Type: MC
15) When a company sells a piece of equipment used in the business, the gain or loss on the
disposal is shown as:
A) an extraordinary item
B) part of discontinued operations
C) other gains and losses
D) an adjustment to the beginning balance of retained earnings
Answer: C
Diff: 2 Type: MC
46
16) Losses due to restructuring costs would be shown as:
A) operating expenses
B) prior-period adjustments
C) other gains and losses
D) extraordinary items
Answer: C
Diff: 2 Type: MC
Table 14-4
Crane Corporation had operating income of $185,000, a loss of $25,000 from a flood and a gain
of $8,000 from the sale of a machine the business owned. You are preparing the 2020 income
statement. Crane Corporation is in a 25% tax bracket.
17) Refer to Table 14-4. How would the gain from the sale of the machine appear on a multiple-
step year-end income statement?
A) $8,000, as part of other gains and losses
B) $8,000, as a prior-period adjustment
C) $6,000, as part of other gains and losses
D) $6,000, as part of gross profit
Answer: A
Diff: 1 Type: MC
18) Refer to Table 14-4. How would the flood loss appear on the year-end income statement?
A) $25,000 loss, as part of other gains and losses
B) $18,750 loss, as an extraordinary item
C) $25,000 loss, as a prior-period adjustment
D) $18,750 loss, as part of income from continuing operations
Answer: A
Diff: 1 Type: MC
47
19) Refer to Table 14-4. The Income from continuing operations would be:
A) $168,000
B) $126,000
C) $185,000
D) $110,880
Answer: B
Diff: 2 Type: MC
20) Refer to Table 14-4. The Income tax expense would be:
A) $48,450
B) $57,120
C) $42,000
D) $46,250
Answer: C
Diff: 2 Type: MC
21) A loss from a tornado would probably be classified on an income statement as a(n):
A) adjustment to beginning retained earnings
B) other gains (losses) on the income statement
C) prior-period adjustment
D) operating expense
Answer: B
Diff: 2 Type: MC
22) The correct order for the following income statement items is:
A) income from discontinued operations, income from continuing operations, net income
B) income from continuing operations, net income, income from discontinued operations
C) income from continuing operations, income from discontinued operations, net income
D) net income, income from discontinued operations, income from continuing operations
Answer: C
Diff: 1 Type: MC
48
Table 14-7 Corporate Income Statement
For the year 2020, Rogue Company reports the following items as part of its financial results:
Sales revenues from regular business operations $3,000,000

Cost of goods sold 900,000
Operating expenses from regular business operations 600,000
Gain on disposal of several items of property, plant, and
equipment 15,000
Income tax rate 25%
Loss on the termination of a discontinued business segment 120,000
Losses on damage caused by earthquake 280,000
23) Refer to Table 14-7. How much is the total operating income from continuing operations?
A) $1,235,000
B) $1,500,000
C) $1,515,000
D) $905,000
Answer: B
Explanation: Calculations: $3,000,000 - $900,000 - $600,000 = $1,500,000
Diff: 2 Type: MC
24) Refer to Table 14-7. How much is the income/(loss) from continuing operations, after tax?
A) $1,235,000
B) $922,500
C) $1,350,000
D) $926,250
Answer: D
Explanation:
Calculations: ($3,000,000 - $900,000 - $600,000 + $15,000 - $280,000) ∗ (1 - .25) = $926,250
Diff: 2 Type: MC
49
25) Refer to Table 14-7. How much of an income/(loss) should be reported for discontinuing
operations net of tax?
A) $(78,750)
B) $(105,000)
C) $(120,000)
D) $(90,000)
Answer: D
Explanation: $120,000 - (0.25 × $120,000) = $90,000 loss
Diff: 2 Type: MC
26) Refer to Table 14-7. Assuming the Weighted average number of common shares outstanding
is 500,000 and there are no preferred shares, what is the EPS for continuing operations?
A) $1.88
B) $1.85
C) $2.70
D) $2.47
Answer: B
Explanation: Calculations: ($3,000,000 - $900,000 - $600,000 + $15,000 - $280,000) ∗ (1-.25)
= $926,250 / 500,000
Diff: 2 Type: MC
internal)
50
Table 14-8 Corporate Income Statement
PB&J Company reports the following items as part of its financial results:
Sales revenues from regular business operations $2,800,000

Operating expenses from regular business operations 400,000
Loss on disposal of several items of property, plant, and equipment 15,000
Income tax rate 35%
Gain on the termination of a discontinued business segment 51,000
27) Refer to Table 14-8. How much is the total operating income from continuing operations?
A) $1,686,000
B) $1,500,000
C) $1,650,000
D) $1,095,900
Answer: C
Explanation: Calculations: $2,800,000 - $750,000 - $400,000 = $1,650,000
Diff: 2 Type: MC
28) Refer to Table 14-8. How much is the income/(loss) from continuing operations, after tax?
A) $1,062,750
B) $1,625,000
C) $1,072,500
D) $1,095,900
Answer: A
Explanation: Calculations: ($2,800,000 - $750,000 - $400,000 - $15,000) * (1 - 0.35) =
$1,062,750
Diff: 2 Type: MC
51
29) Refer to Table 14-8. How much of an income/(loss) should be reported for discontinuing
operations net of tax?
A) $51,000
B) $38,250
C) $33,150
D) $36,000
Answer: C
Explanation: $51,000 - (0.35 × $51,000) = $33,150 gain
Diff: 2 Type: MC
is 500,000 and there are no preferred shares, what is EPS for continuing operations?
A) $1.88
B) $1.85
C) $2.35
D) $2.13
Answer: D
Explanation: Calculations: ($2,800,000 - $750,000 - $400,000 - 15,000) ∗ (1 - .35)
= $1,062,750 / 500,000
Diff: 2 Type: MC
internal)
is 500,000 and there are no preferred shares, what is EPS for discontinuing operations? (Round
to the nearest cent.)
A) $0.11
B) $0.07
C) $0.13
D) $0.05
Answer: B
Explanation: Calculations: $33,150 / 500,000 = .0663 or 0.07 rounded
Diff: 2 Type: MC
internal)
52
32) Net income for a corporation for the current year amounts to $200,000. The corporation
currently has outstanding 5,000 shares of $5, cumulative preferred shares and 20,000 common
shares. The numerator to be used in the earnings per share calculation is:
A) $200,000
B) $175,000
C) $225,000
D) $195,000
Answer: B
Diff: 2 Type: MC
internal)
33) Net income for a corporation for the current year amounts to $100,000. The corporation
currently has outstanding 8,000 shares of $2, cumulative preferred shares and 20,000 common
shares. The denominator to be used in the earnings per share calculation is:
A) 20,000
B) 8,000
C) 100,000
D) 28,000
Answer: A
Diff: 2 Type: MC
internal)
34) On January 1, Regal Corporation had outstanding 70,000 common shares. On April 1, Regal
Corporation issued 20,000 common shares in exchange for land. On September 1, Regal
Corporation reacquired 5,000 of its common shares. No other transactions regarding common
shares occurred. The denominator to be used in the earnings per share calculation is:
A) 77,500
B) 90,000
C) 83,333
D) 85,000
Answer: C
Explanation: 70,000 + (20,000 × 9/12) - (5,000 × 4/12) = 83,333
Diff: 3 Type: MC
internal)
53
35) On January 1, Oxford Corporation had outstanding 70,000 common shares. On April 1,
Oxford Corporation issued 20,000 common shares in exchange for land. On June 30, Oxford
Corporation reacquired 5,000 of its common shares. On November 1, Oxford reissued 3,000
shares. No other transactions regarding common shares occurred. The denominator to be used in
the earnings per share calculation is:
A) 83,000
B) 67,917
C) 82,583
D) 88,000
Answer: A
Explanation: 70,000 + (20,000 × 9/12) - (5,000 × 6/12) + (3,000 × 2/12) = 83,000
Diff: 3 Type: MC
internal)
36) Curtis Corporation reports net income for 2017 of $150,000. Curtis Corporation had
outstanding for all of 2017: 10,000 shares of non-cumulative, $5, preferred shares and 75,000
common shares. No dividends were declared in 2017. Earnings per share is:
A) $15.00
B) $10.00
C) $1.33
D) $2.00
Answer: D
Explanation: $150,000 /75,000 shares = $2.00 since preferred shares are non-cumulative only
included when declared
Diff: 3 Type: MC
internal)
54
37) Cardinal Corporation reports net income for 2017 of $100,000. Cardinal Corporation had
outstanding for all of 2017 10,000 shares of cumulative $5 preferred shares. On January 1, 2017,
Cardinal had outstanding 50,000 common shares. On October 1, 2017, Cardinal Corporation
issued 20,000 common shares for cash. Earnings per share is:
A) $1.43
B) $0.71
C) $1.82
D) $0.91
Answer: D
Explanation: ($100,000 - $50,000)/[50,000 + (20,000 × 3/12)] = $0.91
Diff: 3 Type: MC
internal)
38) The denominator in the earnings per share calculation is the:

A) total number of preferred and common shares outstanding at the end of the period
B) common shares outstanding at the end of the period
C) weighted-average number of common shares outstanding during the period
D) weighted-average number of common and preferred shares outstanding during the period
Answer: C
Diff: 1 Type: MC
internal)
39) Morrison Manufacturing Corporation had 30,000 common shares outstanding at January 1,
2017. During 2017, Morrison issued an additional 25,000 shares on February 1, and another
20,000 shares on May 1. If Morrison's net income was $916,800, the company's earnings per
share reported on the 2017 income statement will be:
A) $12.22
B) $13.84
C) $17.30
D) $20.00
Answer: B
Explanation: $916,800/[30,000 + (25,000 × 11/12) + (20,000 × 8/12)] = $13.84
Diff: 3 Type: MC
internal)
55
40) Net income for Malt Corporation for 2017 is $426,800. Malt issued 17,000 common shares
and 2,000 shares of $2, cumulative preferred shares on January 1 of 2017. On November 1 of
2017, Malt Corporation reacquired and cancelled 3,100 of its common shares. No other share
transactions occurred in 2017. What is earnings per share for 2017?
A) $24.14
B) $30.42
C) $24.37
D) $25.65
Answer: D
Explanation: ($426,800 - $4,000)/[17,000 - (3,100 × 2/12)] = $25.65
Diff: 3 Type: MC
internal)
41) Net income for GRK Ltd. for 2017 is $426,800. GRK issued 17,000 common shares and
2,000 shares of $2, non-cumulative preferred shares on January 1 of 2017. On October 1 of 2017,
GRK Ltd issued 5,000 common shares. No other share transactions occurred in 2017. What is
earnings per share for 2017?
A) $24.14
B) $23.39
C) $24.37
D) $23.65
Answer: B
Explanation: $426,800 /[17,000 + (5,000 ∗ 3/12)] = $23.39 (rounded to the nearest cent)
Diff: 3 Type: MC
internal)
56
42) Clarke Corporation had net income of $365,000, paid its required preferred dividend of
$17,500 and had no other share transactions during the year. If the weighted-average number of
common shares outstanding during the year is 69,500, the earnings per share is:
A) $5.50
B) $5.00
C) $5.25
D) $10.00
Answer: B
Diff: 2 Type: MC
internal)
43) If there has been a stock split during the year, which of the following statements is TRUE?
A) When calculating the weighted average number of shares, it is not necessary to restate the
number of shares outstanding as if the stock split had occurred at the beginning of the year.
B) When calculating the weighted average number of shares, it is necessary to restate the number
of shares outstanding as if the stock split had occurred at the beginning of the year.
C) When calculating the weighted average number of shares, it is necessary to ignore the effect
of the stock split.
D) When calculating the weighted average number of shares, it is necessary to restate the number
of shares outstanding as if the stock split had occurred from the day of incorporation.
Answer: B
Diff: 2 Type: MC
57
44) The following accounts have been taken from Carlton Corporation's general ledger as of
December 31, 2020. All data are shown before tax. The income tax rate is 40%.
Sales revenue $195,000

Interest revenue 10,000
Interest expense 8,000
Gain on sale of equipment 22,000
Operating expenses 65,000
Operating income from
discontinued operations 50,000
Loss on disposal of
discontinued operations 30,000
Prepare a single-step income statement for the year ended December 31, 2020. Omit earnings per
share.
Answer:
Carlton Corporation
Income Statement
For the Year Ended December 31, 2020
Revenues and gains:

Total revenues and gains $227,000
Expenses and losses:

Cost of goods sold $85,000
Income tax expense 27,600
Total expenses and losses 185,600
Income from continuing operations $41,400
Discontinued Operations
Operating income, $50,000, less income tax, $20,000 $30,000
Loss on disposal $30,000, less tax savings, $12,000 (18,000) 12,000
Net income $53,400
Diff: 2 Type: SA
58
45) The following accounts have been taken from Poldark Corporation's general ledger as of

share.
Answer:
Poldark Corporation
Income Statement
Revenues and gains:


Total expenses and losses 966,400
Net income $15,600
Diff: 2 Type: SA
59
46) On January 1, 2020, Slater Corporation had outstanding 100,000 common shares. On
March 1, 2020, Slater Corporation issued an additional 15,000 common shares for cash. On
May 31, 2020, Slater Corporation received land with a current market value of $100,000 in
exchange for issuing 4,000 common shares. On August 1, 2020, Slater Corporation reacquired
5,000 of its own shares by paying shareholders $25 per share. On November 1, 2020 2,000 of the
repurchased shares were resold.
Compute the weighted-average number of shares outstanding to be used in the earnings per share
calculation.
Answer:
Jan. 1 100,000 × 2/12 = 16,667
+ 15,000
Mar. 1 115,000 × 3/12 = 28,750
+ 4,000
May 31 119,000 × 2/12 = 19,833
- 5,000
Aug. 1 114,000 × 3/12 = 28,500
+ 2,000
Nov. 1 116,000 × 2/12 = 19,333
113,083
Diff: 3 Type: SA
internal)
60
47) Vincent Corporation began operations on January 1, 2020. On January 1, 2020, Vincent
Corporation issued 2,000 shares of $5, cumulative preferred shares. In addition, on January 1,
2020, Vincent Corporation issued 5,000 common shares at $15 per share. On June 30, 2020, an
additional 2,500 common shares were issued to investors in exchange for land with a current
market value of $40,000. On October 1, 2020, Vincent Corporation reacquired 1,000 of its own
common shares at $17.50 per share. No dividends have been declared during 2020 by Vincent
Corporation. The net income for the first year of operations is $550,000.
Compute earnings per share for 2020 for Vincent Corporation.

Answer: $550,000 - ($5 × 2,000) = $550,000 - $10,000 = $540,000
Jan 1 5,000 × 6/12 = 2,500

+ 2,500
Jun 30 7,500 × 3/12 = 1,875
- 1,000
Oct 16 6,500 × 3/12 = 1,625
6,000 weighted-average shares
= $90
Diff: 3 Type: SA
internal)
61
48) London Corporation had 50,000 common shares outstanding and 10,000 shares of $5,
cumulative, preferred shares outstanding on January 1, 2020. On March 31, 2020, London
Corporation sold 10,000 common shares for $25 per share. On June 30, 2020, London
Corporation sold 5,000 common shares for $26 per share. London Corporation reacquired 2,000
of its common shares for $27 per share on October 1, 2020. London Corporation reported net
income for the year ended December 31, 2020, of $200,000.
a) Calculate the weighted-average number of shares outstanding for 2020.

b) Calculate earnings per share for London Corporation.
Answer:
a) Jan. 1 50,000 × 3/12 = 12,500
+ 10,000
Mar 31 60,000 × 3/12 = 15,000
+ 5,000
Jun. 30 65,000 × 3/12 = 16,250
- 2,000
Oct 1 63,000 × 3/12 = 15,750
59,500
b) $200,000 - ($5 × 10,000) =

$200,000 - $50,000 = $150,000
= $2.52
Diff: 3 Type: SA
internal)
62
49) Addison Corporation reported the following income statement items for the year ended
December 31, 2020:
Discontinued operations:
Operating income 15,000
Loss on disposal (65,000)
All items above are shown before tax effects. Addison Corporation is subject to a 35% tax rate.
Assume income from continuing operations is $442,000 (after tax). Show the correct
presentation of these items on the income statement including earnings per share calculations.
Assume 20,000 common shares and 5,000, $2 cumulative preferred shares were outstanding for
the entire year.
Answer:
Addison Corporation
Partial Income Statement

Operating income, $15,000, less
income tax, $5,250 $9,750
Loss on disposal, $65,000, less
income tax savings, $22,750 (42,250) (32,500)
Net income $409,500
Earnings per share

442,000 - 10,000/20,000 = $21.60 income per share from continuing operations
(32,500)/20,000 = $(1.63) income per share from discontinued operations
409,500 - 10,000/20,000 = $19.98 net income per share
Diff: 2 Type: SA
63
50) Based on the given data, compute the following items for Neff Corporation for 2020:
a) Other gains and revenues

b) Other losses and expenses
c) Discontinued operations
The tax rate in effect for Neff Corporation is 35%.
1) Interest revenue during the year is $30,000.

2) Interest expense during the year is $22,500.
3) Rent revenue during the year is $65,000.
4) Loss on sale of machinery during the year is $35,000.
5) Loss from discontinued operations is $100,000 (pretax).
a) __________________________
b) __________________________
c) __________________________
Answer:
a) ($30,000 + $65,000) = $95,000
b) ($22,500 + $35,000) = $(57,500)
c) ($100,000 × 0.35) = $35,000
($100,000 - $35,000 = $(65,000)

Diff: 2 Type: SA
64
51) The following information was taken from the accounting records of Winnifred Corp. at
December 31, 2020. The income tax rate is 40%.
Preferred shares, $1, 50,000 shares authorized,

Retained earnings, balance as of January 1, 2020 287,000
Gain on sale of discontinued segment 80,000
Sales revenue (net) 1,450,000
Selling expenses 215,000
Preferred dividends 10,000
Common dividends 70,000
Administrative expenses 112,000
Operating income, discontinued segment 33,000
Loss on expropriation of land 46,000
Common shares, unlimited number of shares authorized,
There were no share transactions in 2020.
Prepare a single step income statement and a statement of retained earnings for the year ended
December 31, 2020.
65
Answer:
Winnifred Corp.
Income Statement
Sales revenue $1,450,000

Expenses
Total expenses 1,364,800
Income before discontinued operations 85,200
Operating income, $33,000, less income tax
of $13,200 19,800
Gain on sale of discontinued operations,
$80,000, less taxes of $32,000 48,000 67,800
Net income $153,000
Winnifred Corp.
Statement of Retained Earnings
Retained earnings, January 1, 2020 $287,000

Add: net income for the current year 153,000
Less: Preferred dividends $10,000
Common dividends 70,000 (80,000)
Retained earnings, December 31, 2020 $360,000
Diff: 3 Type: SA
66
52) The following accounts have been taken from Buxton Corporation's general ledger as of

Loss on discontinued operations 20,000
share.
Answer:
Buxton Corporation
Income Statement
Revenues and gains:


Total expenses and losses (186,400)
Loss on discontinued operations, $20,000,
less tax savings, $8,000 (12,000)
Net income $39,600
Diff: 2 Type: SA
67
53) Lindall Corporation reported the following income statement items for the year ended
December 31, 2020:
Operating income 6,000
Loss on disposal (50,000)
All items above are shown before tax effects. Lindall Corporation is subject to a 25% tax rate.
Assume income from continuing operations is $396,000 (after tax). Show the correct
presentation of these items on the income statement including earnings per share calculations.
Assume 50,000 common shares and 5,000, $4 cumulative preferred shares were outstanding for
the entire year.
Answer:
Lindall Corporation
Partial Income Statement

Operating income, $6,000, less
income tax, $1,500 $4,500
Loss on disposal, $50,000, less
income tax savings, $12,500 (37,500) (33,000)
Net income $363,000
Earnings per share

396,000 - 20,000/50,000 = $ 7.52 income per share from continuing operations
(33,000)/50,000 = $(0.66) income per share from discontinued operations
363,000 - 20,000/50,000 = $ 6.86 net income per share
Diff: 2 Type: SA
68
54) On January 1, 2020, Bedrock Corporation had outstanding 90,000 common shares. On
March 1, 2020, Bedrock Corporation issued an additional 5,000 common shares for cash. On
May 31, 2020, Bedrock Corporation received equipment with a current market value of $60,000
in exchange for issuing 3,000 common shares. On August 1, 2020, Bedrock Corporation
reacquired 5,000 of its own shares by paying shareholders $25 per share. On November 1, 2020,
1,000 of the repurchased shares were resold.
Compute the weighted-average number of shares outstanding to be used in the earnings per share
calculation.
Answer:
Jan. 1 90,000 × 2/12 = 15,000
+ 5,000
Mar. 1 95,000 × 3/12 = 23,750
+ 3,000
May 31 98,000 × 2/12 = 16,333
- 5,000
Aug. 1 93,000 × 3/12 = 23,250
+ 1,000
Nov. 1 94,000 × 2/12 = 15,667
94,000
Diff: 3 Type: SA
55) A prudent investor will use the EPS figure on the income statement when considering where
to invest funds. Do you agree with this statement? Explain why or why not.
Answer: Students answers will vary. Although EPS is considered a key financial measurement
of a company's financial profitability, many items go into the calculation of the figure that can
increase or decrease the figure (especially diluted EPS which is a more complex topic). For
example, only the annual cumulative preferred share dividend is deducted from the net income,
when in reality there may be significant amount of dividends in arrears that would greatly impact
the amount of dividend the common shareholder would receive. Plus there is nothing preventing
management from buying back shares to increase the EPS figure. EPS is only one calculation
that can be influenced. Therefore the prudent investor should examine the trend of EPS. Is EPS,
in general, going up or down and what is typical for this industry? In addition to the EPS figure,
a prudent investor will consider many other factors, such as debt to equity ratio, return on equity,
and sales growth, when considering where to invest funds.
Diff: 3 Type: ES
internal)
69
Objective 14-4
1) Some companies report income and retained earnings on a single statement.

Answer: TRUE
Diff: 1 Type: TF
Objective: 14-4 Prepare a statement of retained earnings and a statement of shareholders' equity
2) Dividends are presented as an increase on the Statement of Retained Earnings.

Answer: FALSE
Diff: 1 Type: TF
3) Restrictions on retained earnings involve a debit to share capital from retained earnings.
Answer: FALSE
Diff: 2 Type: TF
4) An appropriation of retained earnings involves setting cash aside for a specific purpose.
Answer: FALSE
Diff: 2 Type: TF
5) An appropriation of retained earnings requires a journal entry.

Answer: TRUE
Diff: 2 Type: TF
70
6) Which of the following is NOT included on the Statement of Retained Earnings?
A) Net Income
B) Dividends
C) Common Share Issuance
D) Retained Earnings, January 1
Answer: C
Diff: 1 Type: MC
7) When preparing a Statement of Shareholders' Equity which column is dividends deducted

from?
A) Common Shares
B) Retained Earnings
C) Contributed Surplus - Share Repurchase
D) Total Shareholders' Equity
Answer: B
Diff: 1 Type: MC
8) The entry to appropriate retained earnings for factory expansion includes a:

A) debit to retained earnings
B) credit to retained earnings
C) debit to retained earnings appropriated for factory expansion
D) credit to cash
Answer: A
Diff: 2 Type: MC
71
9) Restrictions on retained earnings:
A) may take the form of a voluntary appropriation
B) must be disclosed by a journal entry
C) are reported in the liability section of the balance sheet
D) are only used for tax purposes
Answer: A
Diff: 2 Type: MC
10) The payment of a cash dividend to shareholders appears on which financial statement?
A) income statement
B) balance sheet
D) either the balance sheet or the income statement
Answer: C
Diff: 2 Type: MC
11) The declaration of a common stock dividend will appear on which of the following financial
statements?
A) income statement
B) balance sheet
D) either the balance sheet or the income statement
Answer: C
Diff: 2 Type: MC
72
12) Which of the following BEST describes the appropriation of retained earnings?
A) earmarking certain amounts for specific business purposes, such as for growth or expansion
projects
B) restricting cash dividends or treasury stock purchases so that the company maintains adequate
levels of equity
C) designating certain amounts of retained earnings for cash dividends to be paid out to
shareholders
D) limiting company transactions in order to boost earnings and profits
Answer: A
Diff: 2 Type: MC
13) Which of the following would be a reason for a company to appropriate a portion of retained
earnings?
A) to ensure that the business does not take on too much debt
B) to increase the amount of earnings available for dividends
C) to help the company control levels of operating expenses
D) to limit the amount of retained earnings available for dividends, in order to retain sufficient
funds for growth
Answer: D
Diff: 2 Type: MC
14) Which of the following statements is TRUE?

A) Appropriations of retained earnings require journal entries, but restrictions on retained
earnings do not.
B) No journal entries are needed to either appropriate or restrict retained earnings.
C) Both appropriations and restrictions of retained earnings require journal entries.
D) Restrictions on retained earnings must be journalized, but appropriations do not need to be
journalized.
Answer: A
Diff: 2 Type: MC
73
15) Atlantic Motels Ltd. (AML), a mid-size motel chain on Canada's east coast, had Retained
Earnings of $5.7 million at the beginning of 2020. During 2020 AML earned a net income of
$955,000. Given the profitable year AML distributed cash dividends of $500,000 to common
shareholders. Prepare the statement of retained earnings for AML for the year ended December
31, 2020.
Answer:
Atlantic Motels Ltd.
Retained earnings, Jan. 1, 2020 $5,700,000

Net Income for 2020 955,000
Dividends for 2020 (500,000)
Retained earnings, Dec. 31, 2020 $6,155,000
Diff: 1 Type: SA
CPA Competency: 1.2.3 Evaluates treatment for non-routine transactions
74
16)
Preferred shares, $1.00, 25,000
Cost of goods sold $297,500 shares issued & outstanding $95,800
Retained earnings January 1,
Gain on sale of property 17,500 2020 86,000
Interest expense 4,250 Selling expenses 60,750
Common shares, 150,000 shares
General expenses 52,000 issued & outstanding 275,000
Interest revenue 15,000 Sales Revenue 415,000
Dividends 50,000
The information above is taken from the ledger and other records of Duchlorol Inc. at December
31, 2020. Prepare a combined statement of income (single-step format) and retained earnings for
the year ended December 31, 2020. Assume Duchlorol Inc.'s tax rate is 30%.
Answer:
Duchlorol Inc.
Statement of Income and Retained Earnings
Sales Revenue $415,000

Interest Revenue 15,000
Gain on sale of property 17,500
Total Revenues 447,500
Expenses:
Cost of goods 297,500
Selling 60,750
General 52,000
Interest 4,250
Total Expenses 424,400
Net Income 23,100
Retained earnings, Jan. 1, 2020 86,000

Retained earnings, Dec. 31, 2020 $59,100
Diff: 2 Type: SA
75
17) Qualified Research Inc. ended 2019 with Retained Earnings of $55,000. During 2020, the
company earned net income of $115,000 and declared dividends of $25,000. The company ended
2019 with $25,000 in common shares and $20,000 in $1 preferred shares. Additional common
shares were sold in 2020 for $15,000. Complete Qualified Research Inc.'s statement of
shareholders' equity for the year ended December 31, 2020.
Qualified Research Inc.

Statement of Shareholders' Equity
Total
Preferred Common Retained Shareholders'
Shares Shares Earnings Equity
Balance,
December 31,
2019
Balance
December 31,
2020
Answer:
Qualified Research Inc.
Total
Balance,
December 31,
2019 20,000 25,000 55,000 100,000
Issuance of
shares 15,000 15,000
Net income 115,000 115,000
Cash
dividends (25,000) (25,000)
Balance
December 31,
2020 20,000 40,000 145,000 205,000
Diff: 2 Type: SA
76
18) JenStar Research Inc. ended 2019 with Retained Earnings of $30,000. During 2020, the
company earned net income of $135,000 and declared dividends of $15,000. The company ended
2019 with $80,000 in common shares and $10,000 in $2 preferred shares. Additional common
shares were sold in 2020 for $20,000. Complete JenStar Research Inc.'s statement of
shareholders' equity for the year ended December 31, 2020.
JenStar Research Inc.

Total
Balance,
December 31,
2019
Balance
December 31,
2020
Answer:
JenStar Research Inc.
Total
Balance,
December 31,
2019 10,000 80,000 30,000 120,000
Issuance of
shares 20,000 20,000
Net income 135,000 135,000
Cash
dividends (15,000) (15,000)
Balance
December 31,
2020 10,000 100,000 150,000 260,000
Diff: 2 Type: SA
77
19) Explain what the difference is between a Statement of Changes in Equity and the Equity
section on the Balance Sheet.
Answer: As both have the Equity in the title novices often get these two mixed up. The first
informs an external user what has happened to Equity during the year—how did we get from the
opening balances to the closing balances. For a large public corporation this can be a very long
statement. Whereas the later only discloses the closing balances for each year being presented.
Usually two years are presented so the external user can compare the current year to the previous
year. Thus the Equity section on the balance sheet provides the starting point and the ending
point, whereas the statement of changes in equity explains the journey.
Diff: 2 Type: ES
Objective 14-5
1) Adjustments for errors in prior periods flow through the income statement.
Answer: FALSE
Diff: 2 Type: TF
Objective: 14-5 Account for errors and changes in accounting policy and circumstances
2) Adjustments for errors in prior periods affect retained earnings and therefore appear on the
statement of retained earnings.
Answer: TRUE
Diff: 2 Type: TF
3) A change in accounting policy, such as changing from FIFO to Weighted Average, should be
applied retrospectively.
Answer: TRUE
Diff: 2 Type: TF
78
4) Adjustments for errors in prior periods affect retained earnings and therefore appear on the
statement of retained earnings.
Answer: TRUE
Diff: 2 Type: TF
5) Changing an estimate, such as the amount of uncollectible accounts receivable, should be

applied retrospectively.
Answer: TRUE
Diff: 2 Type: TF
6) An adjustment for an error in a prior year should be reported in the:

A) statement of income after income from continuing operations
B) statement of income after income from discontinued operations
C) statement of retained earnings as an adjustment to the beginning balance
D) statement of retained earnings as an adjustment to net income
Answer: C
Diff: 2 Type: MC
7) An error on the 2012 income statement is discovered in 2014. The adjustment to correct the
error will appear on the:
A) 2014 income statement
B) 2014 statement of retained earnings
C) 2012 income statement
D) 2012 statement of retained earnings
Answer: B
Diff: 2 Type: MC
79
8) A change in accounting policy:
A) should be applied prospectively, prior periods should be restated, and the facts should be
disclosed in the notes
B) should be applied retrospectively, prior periods should be restated, and the facts should be
disclosed in the notes
C) requires note disclosure only
D) does not require any special treatment
Answer: B
Diff: 2 Type: MC
9) In 2020 Niklan Plastic Products Ltd. (NPPL) discovered an error made in the year ended
December 31, 2019. An inventory error caused net income of the prior period to be understated
by $35,000. Retained Earnings at January 1, 2020, as previously reported, stood at 567,800. Net
income for the year ended December 31, 2020 was $253,000 and cash dividends were $50,000.
Prepare the statement of retained earnings for NPPL for the year ended December 31, 2020.
Answer:
Niklan Plastic Products Ltd.
Retained earnings, Jan. 1, 2020 $567,800

Adjustment to correct error
in recording closing inventory in 2019 (see Note XX) 35,000
Retained earnings, Jan. 1, 2020, as adjusted 602,800
Diff: 3 Type: SA
80
10) In 2020 RP Limited discovered an error made in the year ended December 31, 2019. A
vehicle, purchased on July 1st, was expensed instead of being recognized as an asset. The vehicle
cost $30,000 and would be amortized over 5 years with no salvage value. RP amortizes their
vehicles using Straight-line. Retained Earnings at January 1, 2020, as previously reported, stood
at 670,000. Net income for the year ended December 31, 2020 was $123,000 and cash dividends
were $25,000. Prepare the statement of retained earnings for RP Limited for the year ended
December 31, 2020 (Ignore taxes).
Answer:
RP Ltd.
Retained earnings, Jan. 1, 2020 $670,000

Adjustment to correct error
in recording vehicle in 2019 (see Note XX) 27,000*
Retained earnings, Jan. 1, 2020, as adjusted 697,000
* Only 3,000 of amortization should have been expensed (30,000/5)*6/12 instead of the full cost
of the vehicle - 30,000. A difference of 27,000.
Diff: 3 Type: SA
Objective 14-6
1) Other comprehensive income must be reported under international financial reporting

standards (IFRS).
Answer: TRUE
Diff: 2 Type: TF
Objective: 14-6 Identify the impact on the income statement and the statement of shareholders'
equity of IFRS
81
2) Which of the following is a key difference between income statements prepared under
international financial reporting standards (IFRS) and accounting standards for private
enterprises(ASPE)?
A) IFRS requires EPS information to be disclosed on the income statement whereas ASPE does
not.
B) IFRS does not require EPS information to be disclosed on the income statement whereas
ASPE does.
C) IFRS recommends disclosure of EPS information on the income statement whereas ASPE
requires it.
D) IFRS requires more detailed EPS information on the income statement than does ASPE.
Answer: A
Diff: 2 Type: MC
equity of IFRS
3) Which of the following is a correct statement with reference to the International Financial
Reporting Standards (IFRS)?
A) Accounting policy changes are not limited to those providing more relevant and reliable
information.
B) Earnings per share information may be presented in the notes to the financial statements
rather than on the income statement.
C) The statement of retained earnings is required.
D) To correct an error, financial information does not have to be restated retroactively if it is
impractical to do so.
Answer: D
Diff: 3 Type: MC
equity of IFRS
82
4) Which of the following is an incorrect statement with reference to the International Financial
Reporting Standards (IFRS)?
A) Accounting policy changes are limited to those providing more relevant and reliable
information.
B) Earnings per share information must be presented on the income statement.
C) The statement of retained earnings is not required.
D) To correct an error, financial information must be restated retroactively.
Answer: D
Diff: 3 Type: MC
equity of IFRS
5) What is the impact of IFRS on the income statement and statement of shareholders' equity?
Answer: Companies that report under IFRS must present EPS information on their income
statement and must report comprehensive income in a statement of comprehensive income.
Under IFRS, the statement of shareholders' equity is called the statement of changes in equity.
No statement of retained earnings is prepared.
Diff: 2 Type: ES
equity of IFRS
83
Matching Question for CH14
Match the following.
A) record date of dividend

B) relevant and reliable
C) segment
D) deficit
E) appropriation of retained earnings
F) retained earnings
G) other comprehensive income
H) earnings per share
I) interest expense
J) preferred dividends
K) declaration date of dividend
L) treasury shares
M) distribution date of dividend
N) statement of earnings
O) prior-period adjustment
P) stock dividend
Q) contributed surplus
R) stock split
S) reverse stock split
T) revenue recognition and matching
1) An account whose balance is the cumulative, lifetime earnings of a company less its
cumulative losses and dividends
Diff: 1 Type: MA
2) An increase in the number of outstanding shares coupled with a proportionate reduction in the
book value of the shares
Diff: 1 Type: MA
84
3) The date with respect to a stock dividend where the counter equity account is created and the
retained earnings are reduced
Diff: 1 Type: MA
4) The date with respect to a stock dividend that determines which shareholder will be receiving
the dividend
Diff: 1 Type: MA
5) The date with respect to a stock dividend where the counter equity account is reduced and the
distribution is made to the shareholder
Diff: 1 Type: MA
6) Affects only the accounts within shareholders' equity

Diff: 1 Type: MA
7) A proportional distribution by a corporation of its own shares to its shareholders

Diff: 1 Type: MA
8) A stock split where the number of shares outstanding are reduced

Diff: 1 Type: MA
85
9) Shares that are repurchased and held by the corporation after repurchase
Diff: 1 Type: MA
10) The account credited when a company repurchases its own shares at a price less than book
value
Diff: 1 Type: MA
11) Another term used to mean income statement

Diff: 1 Type: MA
12) Amount of a company's net income per share of its outstanding common shares
Diff: 1 Type: MA
13) One of various separate divisions of a company

Diff: 1 Type: MA
14) A deduction from net income when calculating earnings per share
Diff: 1 Type: MA
86
15) Debit balance in retained earnings
Diff: 1 Type: MA
16) A correction to retained earnings for an error of an earlier period

Diff: 1 Type: MA
17) Restriction on retained earnings that is recorded by a formal journal entry

Diff: 1 Type: MA
18) Income disclosure required by IFRS but not ASPE

Diff: 1 Type: MA
equity of IFRS
19) IFRS criteria for allowing changes in accounting policy

Diff: 1 Type: MA
equity of IFRS
Answers: 1) F 2) R 3) K 4) A 5) M 6) P 7) P 8) S 9) L 10) Q 11) N 12) H 13) C 14) J 15) D

16) O 17) E 18) G 19) B
87
Multiple Learning Objectives for CH 13 & 14
1) Sampson Corporation reports the following transactions for 2013:
Jan. 10 Sold 5,000 shares of $4.50, noncumulative, preferred shares for $85 per share.
Feb. 19 Sold 3,000 common shares for $12 per share.
Oct. 12 Declared a 15% stock dividend on the common shares. The current
market price of the common shares is $15 per share. Sampson
Corporation has 100,000 common shares outstanding on October 12.
Nov. 15 Distributed the stock dividend declared on October 12.
Dec. 15 Declared the annual dividend required on the preferred shares and a
$0.50 per share dividend on the common shares. Sampson Corporation
currently has 20,000 preferred shares outstanding.
Prepare journal entries for the above transactions.

Answer:
General Journal
Jan. 10 Cash 425,000
Preferred Shares 425,000
Feb. 19 Cash 36,000

Oct. 12 Retained Earnings 225,000

Nov. 15 Common Stock Dividend Distributable 225,000

Dec. 15 Retained Earnings 147,500

Dividends Payable-Preferred 90,000
Dividends Payable-Common 57,500
Diff: 2 Type: SA
Objective: Multiple objectives (CH 13 & 14)
88
2) Delilah Corporation reports the following transactions for 2013:
Jan. 11 Sold 6,000 shares of $3.50, noncumulative, preferred shares for $75 per share.
Feb. 20 Sold 30,000 common shares for $11 per share.
Oct. 13 Declared a 10% stock dividend on the common shares. The current
market price of the common shares is $14 per share. Sampson
Corporation has 100,000 common shares outstanding on October 13.
Nov. 16 Distributed the stock dividend declared on October 13.
Dec. 16 Declared the annual dividend required on the preferred shares and a
$0.50 per share dividend on the common shares. Sampson Corporation
currently has 20,000 preferred shares outstanding.
Prepare journal entries for the above transactions.

Answer:
General Journal
Jan. 11 Cash 450,000
Preferred Shares 450,000
Feb. 20 Cash 330,000

Oct. 13 Retained Earnings 140,000

Nov. 16 Common Stock Dividend Distributable 140,000

Dec. 16 Retained Earnings 125,000

Dividends Payable-Preferred 70,000
Dividends Payable-Common 55,000
Diff: 2 Type: SA
89
3) The following information was taken from the accounting records of Jamboree Ltd. at
December 31, 2020. The company uses a periodic inventory system. The income tax rate is 40%.
Preferred shares, $2.50, 100,000 shares authorized,

Retained earnings, balance as of January 1, 2020 239,000
Purchases 975,000
Loss on sale of discontinued segment 50,000
Sales revenue (net) 1,550,000
Inventory, January 1 2020 71,000
Preferred dividends 10,000
Common dividends 13,500
Purchase returns and allowances 12,000
Operating income, discontinued segment 60,000
Purchase discounts 9,000
Common shares, unlimited number of shares authorized,
There were no share transactions in 2020. The ending inventory count showed a December 31,
2020 balance of $62,000.
Prepare a multi-step income statement and a statement of retained earnings for the year ended
December 31, 2020. Present cost of goods sold as a line item with a supporting schedule for the
calculation.
90
Answer:
Jamboree Ltd.
Income Statement
Sales revenue $1,550,000

Gross margin $ 587,000
Operating expenses:
Selling expenses $232,000
Total operating expenses 339,000
Operating income $248,000
Other gains and (losses):
Loss on expropriation of land (35,000)
Income from continuing operations before tax $213,000
Operating income, $60,000, less income tax
of $24,000 36,000
Loss on sale of discontinued operations,
$50,000, less tax saving of $20,000 (30,000) 6,000
Net income $133,800
Cost of Goods Sold Schedule

Beginning inventory $71,000
Purchases $975,000
Less: Purchase returns and allowances (12,000)
Purchase discounts (9,000)
Net purchases 954,000
Cost of goods available for sale $1,025,000
Less: Ending inventory (62,000)
91
Jamboree Ltd.
Retained earnings, January 1, 2020 $239,000

Add: net income for the current year 133,800
Less: Preferred dividends $10,000
Common dividends 13,500 (23,500)
Retained earnings, December 31, 2020 $349,300
Diff: 3 Type: SA
92
4) The shareholders' equity of Orion Corporation as of December 31, 2020, follows:
Preferred shares, $3, noncumulative 8,000 shares

Common shares, unlimited shares authorized,
80,000 shares issued 1,000,000
Total contributed capital $1,157,500
Orion Corporation completed the following transactions during 2021:
Mar. 5 Declared the required annual cash dividend on preferred shares

and a $0.40 per share cash dividend on the common shares.
26 Paid the cash dividend that was declared on March 5.
May 2 Purchased 3,000 of its own common shares for $17.50 per share.
Jul. 5 Distributed a 2-for-1 stock split on the common shares.
Dec. 31 Closed out the income summary account with a credit balance of $287,000.
Prepare the shareholders' equity section of the balance sheet of Orion Corporation as of
December 31, 2021. Do not prepare journal entries for the above transactions.
Answer:
Orion Corporation
Partial Balance Sheet
December 31, 2021
Shareholders' Equity
Preferred shares $3, noncumulative, 8,000 shares

Explanation:
Common shares outstanding = (80,000 - 3,000) × 2 = 154,000
Common shares = $1,000,000 - (3,000 × $12.50) = $962,500
RE = $405,800 - (3,000 × $3) - (80,000 × $0.40) - (3,000 × (17.50 -$12.50)) + $287,000
= $636,800
Diff: 3 Type: SA
93
Test Bank for Horngrenâ€™s Accounting, Volume 2 11th Canadian Edition Nobles
5) The shareholders' equity of Saturn Corporation as of December 31, 2020, follows:
Preferred shares, $4, noncumulative 20,000 shares

100,000 shares issued 1,000,000
Saturn Corporation completed the following transactions during 2021:
Feb. 6 Declared the required annual cash dividend on preferred shares

and a $0.20 per share cash dividend on the common shares.
26 Paid the cash dividend that was declared on February 6.
Jun. 4 Purchased 4,000 of its own common shares for $15.25 per share.
Jul. 5 Distributed a 2-for-1 stock split on the common shares.
Dec. 31 Closed out the income summary account with a debit balance of 48,000.
Prepare the shareholders' equity section of the balance sheet of Saturn Corporation as of
December 31, 2021. Do not prepare journal entries for the above transactions.
Answer:
Saturn Corporation
Partial Balance Sheet
December 31, 2021
Shareholders' Equity
Preferred shares $4, noncumulative, 20,000 shares

Explanation:
Common shares outstanding = (100,000 - 4,000) × 2 = 192,000
Common shares = $1,000,000 - (4,000 × $10.00) = $960,000
RE = $616,900 - (4,000 × $4.00) - (100,000 × $0.20) - (4,000 × (15.25 -$10.00)) - $48,000
= $511,900
Diff: 3 Type: SA
94
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1) The retained earnings account is not a reservoir of cash.

3) All dividends declared by a corporation require a payment of cash.

7) The declaration of a stock dividend has no effect on Retained earnings.

8) A stock dividend has no effect on assets or liabilities.

10) Stock dividends decrease total shareholders' equity.

16) A stock split reduces the number of outstanding shares.

18) A reverse stock split reduces the number of outstanding shares.

23) A proportional distribution by a corporation of its own shares to its shareholders is a:

24) When a corporation declares a stock dividend:

33) Which of the following will reduce retained earnings?

Nov 15 Common Stock Dividend Distributable 67,500

Preferred shares, $3, noncumulative, 10,000 shares

Downing Corporation reported the following transactions during November, 2020:

Date Total Contributed Capital Total Shareholders' Equity

Preferred shares, $5, cumulative, 7,000 shares

Consider each of the following cases independently:

3) Retained Earnings 292,500

Stock Split Stock Dividend

Total contributed capital 802,500

21) The sale of a corporation's repurchased shares:

Common shares, 140,000 shares authorized,

Aug. 15 Cash 24,000

Oct. 30 Cash 26,400

Common shares, 100,000 shares authorized, 75,000 issued $2,175,000

In January 2019, Arrow Corporation reported the following transactions:

Record journal entries for the above transactions.

Common shares, 100,000 shares authorized, 50,000 issued $1,200,000

In 2019, Narrow Corporation reported the following transactions:

Record journal entries for the above transactions.

Mar. 20 Common Shares 48,000

Common shares, 100,000 shares authorized, 50,000 issued $1,200,000

In 2019, Nishimura Corporation reported the following transactions:

Record journal entries for the above transactions.

Mar. 20 Cash 230,000

Aug. 27 Common Shares 47,640*

Common shares, 1,000,000 shares authorized, 225,000 issued $2,250,000

A) In 2019, Fred & Sons Inc. reported the following transactions:

Jan. 10 Reacquired 50,000 of its own shares for $9 per share.

Record journal entries for the above transactions.

B) What is the average issue price as of May 30th?

Apr. 15 Common Shares 250,000

May 23 Common Shares 100,000

B) ($2,250,000 - 500,000 - 250,000 - 100,000 + 120,000)/(225,000 - 50,000 - 25,000 - 10,000 +

5) Discontinued operations is shown net of tax on the income statement.

9) Earnings per share is a key measure of business success.

13) Components of income from continuing operations are shown:

Sales revenues from regular business operations $3,000,000

Sales revenues from regular business operations $2,800,000

38) The denominator in the earnings per share calculation is the:

Sales revenue $195,000

Revenues and gains:

Expenses and losses:

Sales revenue $950,000

Revenues and gains:

Expenses and losses:

Compute earnings per share for 2020 for Vincent Corporation.

Jan 1 5,000 × 6/12 = 2,500

a) Calculate the weighted-average number of shares outstanding for 2020.

b) $200,000 - ($5 × 10,000) =