CHAPTER 22: RETAINED EARNINGS (DIVIDENDS)

1. East Company had sufficient retained earnings in 2020 as a basis for dividends but
was temporarily short of cash.

The entity declared a dividend of P100,000 on April 1, 2020 and issued promissory
notes to its shareholders in lieu of cash.

The notes, which were dated April 1, 2020, had a maturity date of March 31, 2021 and a
10% interest rate.

How should the scrip dividend and related interest be accounted for?

A. Debit retained earnings P110, 000 on April 1, 2020.

B. Debit retained earnings P110, 000 on March 31, 2021.
C. Debit retained earnings P100, 000 on April 1, 2020 and debit interest expense
P10, 000 on March 31, 2021.
D. Debit retained earnings P100, 000 on April 1, 2020 and debit interest expense
P7,500 on December 31,2020

2. In 2020, Elm Company bought 10,000 shares of Oil Company at a cost of P200, 000.

On December 1, 2020, Elm Company declared a property dividend of the Oil Company
shares to shareholders of record on February 1, 2021, payable on February 15, 2021.

The Oil Company shares had the following market value:

December 1, 2020 250,000

December 31, 2020 260,000

February 15, 2021 240,000

What is the net charge of the property dividend against retained earnings during 2020?

A. 200,000
B. 240,000
C. 250,000
D. 260,000

For questions number 3-5

During 2020, Ray Company reported the following cash dividends on the P10 par value
share capital:
1st quarter 800,000

2nd quarter 900,000

3rd quarter 1,000,000

4th quarter 1,100,000

The 4th quarter cash dividend was declared on December 20,2020 to shareholders of
record December 31, 2020 payable on January 31, 2021.

In addition, the entity declared a 10% share dividend on December 1,2020 when there
were 300,000 share issued and outstanding and the market value was P25 per share
on declaration date and P30 distribution date.

3. What total amount was charged against retained earnings for the dividends?

A. 3,800,000
B. 4,550,000
C. 4,700,000
D. 4,100,000

4. What amount was credited to share capital for the share dividend?

A. 300,000
B. 750,000
C. 450,000
D. 0

5. What amount was credited to share premium for the share dividend?

A. 600,000
B. 450,000
C. 300,000
D. 0

6. Solace Company declared and distributed 10% share dividend with fair value of P1,
500, 000 and par value of P1, 000,000, and 25% share dividend with fair value of P4,
000,000 and par value of P3,500,000.

What aggregate amount should be debited to retained earnings for the share dividends?

A. 4,500,000
B. 3,500,000
C. 5,000,000
D. 5,500,000
7. Sol Company declared a 10% share dividend. The market price of the 30,000
outstanding shares of P20 par value was P90 per share on declaration date.

When the share dividend was distributed, the share market price was P100.

What amount should be credited to share premium for the share dividend?

A. 210,000
B. 240,000
C. 270,000
D. 300,000

8. During the year, Grey Company issued 4,000 shares with P100 par value in
connection with a share dividend. The market value per share on the date of declaration
was P150.

The shareholders’ equity before issuance of the share dividend was as follows:

Share Capital, P100 par, 20,000 shares outstanding 2,000,000

Share premium 3,000,000

Retained earnings 1,500,000

What is the retained earnings balance immediately after the share dividend?

A. 1,100,000
B. 1,500,000
C. 2,100,000
D. 900,000

9. Sydney Company reported the following capital accounts at year-end:

Share capital, par P25, authorized 150,000 shares,

55,000 shares issued of which 5,000 shares are in treasury 1,375,000

Retained earnings 2,000,000

Treasury shares, at cost 150,000

The share was selling at P40 at this time. A 100% share dividend was declared and that
all the treasury shares were issued as share dividends and the balance from the
unissued shares.

A. 1,250,000
B. 1,800,000
 C. 1,275,000
D. 1,125,000

10. The directors of Ontario Company whose P50 par value share capital is currently
selling at P60 per share have decided to issue a share dividend. The selling price is not
expected to be affected by the share dividend.

The entity, which has an authorization for 1,000,000 shares, had issued 500,000
shares, of which 100,000 shares are now held as treasury

The entity capitalized P2,400,000 of the retained earnings balance.

What percentage was declared as a share dividend by the directors?

A. 10%
B. 8%
C. 6%
D. 4%

11. At the beginning of current year, Coleen Company had 220,000 P5 par value shares
outstanding. On June 1, the entity acquired 20,000 shares to be held in the treasury.

On December 1, when the market price of the share was P20, the entity declared a 10%
share dividend to be issued to shareholders of record on December 15.

What was the impact of the share dividend on retained earning?

A. 100,000 decrease
B. 400,000 decrease
C. 440,000 decrease
D. No effect

12. At the beginning of current year, Flash Company had retained earnings of
P4,000,000.

During the year, the entity reported net income of P2,000,000, sold treasury shares at a
“gain” of P720,000, declared a cash dividend of P1,200,000, and declared and issued a
small share dividend of 60,000 shares with P10 par value when the fair value of the
share was P20.

What is the amount of retained earnings available for dividend at the end of current
year?

A. 3,600,000
B. 4,200,000
 C. 4,320,000
D. 4,920,000

13. Kremlin Company reported the following shareholders’ at year-end:

Share Capital, P50 par value 3,000,000

Share Premium 600,000

Retained earnings 4,200,000

A 15% share dividend was declared and distributed at year-end when entity’s share was
selling P65.

What amount should be reported as share capital outstanding?

A. 3,450,000
B. 3,585,000
C. 3,615,000
D. 4,185,000

14. Dayron Company had 80,000 ordinary shares outstanding in January of current
year. The entity distributed a 15% share dividend in March and a 10% share dividend in
June. After acquiring 10,000 shares of treasury in July, the entity split the share 4 for 1
in December.

How many ordinary shares are outstanding at year-end?

A. 364,800
B. 488,000
C. 498,000
D. 451,500

15. Rudd Company had 700,000 ordinary shares authrorized and 300,000 shares
outstanding at the beginning of current year.

January 31 Declared 10% share dividend

June 30 Purchased 100,000 shares

August 1 Reissued 50,000 shares

November 30 Declared 2-for-1 share split

How many ordinary shares are outstanding at year end?

A. 560,000
 B. 600,000
C. 630,000
D. 660,000

16. Rey Company declared a 5% share dividend on 100,000 issued and outstanding
shares of P20 par value, which had a fair value of P50 per share before the share
dividend was declared. This share dividend was distributed 60 days after the declaration
date.

What is the increase in current liabilities as a result of the share dividend declaration?

A. 250,000
B. 100,000
C. 150,000
D. 0

For questions number 17-20

At the beginning of current year, Franta Company was authorized to issue share capital
of 100,000 shares with P50 par value. The entity had the following share capital
transactions during the year:

Jan 1 Sold 80,000 shares at P60 per share.

May 1 Reacquired 4,000 treasury shares at P65 per share.

Jul. 1 Approved a share split of 5 for 1.

Oct. 1 Declared and issued a 10% share dividend when the market value of a
share is P25

Dec. 31 Reissued all of the treasury shares at P30

Dec. 31 Net income for the year was P3,000,000

17. What is the number of shares outstanding at year-end?

A. 418,000
B. 438,000
C. 440,000
D. 422,000

18. What is the amount should be reported as share capital at year-end?

A. 4,000,000
B. 4,380,000
 C. 3,800,000
D. 3,760,000

19. What total amount should be reported as share premium at year-end?

A. 1,370,000
B. 1,710,00
C. 1,400,000
D. 1,970,000

20. What is the total shareholders’ equity at year-end?

A. 8,140,000
B. 7,800,000
C. 7,560,000
D. 8,400,000

21. Retained earnings represent?

A. Earned capital
B. Cash
C. Asset
D. Net assets

22. Retained earnings represent?

A. Undistributed net income

B. Undistributed net assets
C. Extra contributed capital
D. Undistributed cash

23. The total retained earnings balance typically is not affected by

A. Net income
B. A prior period error
C. Dividends paid
D. Restrictions

24. When a property dividend is declared, the dividend payable should be measured
based on the fair value of property on

A. Record date
B. Distribution date
C. Declaration date, reporting date and distribution date
D. Reporting date
25. The declaration and issuance of a share dividend on ordinary shares

A. Has no effect on assets, liabilities and total shareholders’ equity.

B. Decreases total shareholders’ equity and increases ordinary shares.
C. Decreases assets and total shareholders’ equity.
D. Does not change retained earnings on ordinary shares.

26. Nonstock dividends shall be recognized as liabilities on the

A. Date of declaration
B. Date of record
C. Date of payment
D. Date of issuing check

27. When shareholders may elect receive cash in lieu of share dividend, the amount to
be charged to retained earnings is equal to the

A. Optional cash dividend

B. Fair value of the shares
C. Par value of the shares
D. Book value of the shares

28. Treasury shares may be reissued as dividends, in which case what amount shall be
charged to retained earnings?

A. Cost of the treasury shares

B. Par value of the treasury shares
C. Fair value of the treasury shares on the date of declaration
D. Fair value of the treasury shares on the date of issuance

29. If the share dividend is less than 20%, how much of the retained earnings shall 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

30. At what amount should retained earnings be reduced if the share dividend is 20% or
more?

A. Zero
B. Par value
C. Market value at the declaration
D. Market value at the date of issuance
31. An entity declares 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

32. The actual total amount of a cash dividend to be paid is determined on the date of

A. Record
B. Declaration
C. Declaration or record, whichever is earlier
D. Payment

33. A dividend which is a return to shareholders of a portion of their original investment

is

A. Liquidating dividend
B. Patronage dividend
C. Liability dividend
D. Participating dividend

34. Total shareholders’ equity is not affected by the

A. Issuance of a share dividend

B. Conversion of bonds payable into share capital
C. Sale of treasury share at more than cost
D. Declaration of a cash dividend

35. How would the declaration and subsequent issuance of a 10% share dividend affect
share capital and share premium, respectively, when the fair value of the shares
exceeds par value?

A. No effect and No effect

B. No effect and Increase
C. Increase and No effect
D. Increase and Increase

36. An entity declared a dividend, a portion of which was liquidating. How would this
declaration affect each of the following?

Contributed Capital Retained earnings

A. Decrease No effect
 B. Decrease Decrease
C. No effect Decrease
D. No effect No effect

37. How would the declaration of a liquidating dividend affect each of the following?

Contributed Capital Retained earnings

E. No effect Decrease
F. Decrease No effect
G. No effect No effect
H. Decrease Decrease

38. The issuer shall directly charge retained earnings for the fair value of the shares
issued in

A. Two for one share split

B. Share options
C. Ten percent share dividend
D. Share appreciation right

39. The issuer shall directly charge retained earnings for the par value of shares issued
in

A. 1 for 5 share dividend

B. 1 for 8 shares dividend
C. 4 for 1 share split
D. 2 for 1 share split

40. If the issuing entity has only one class of share capital, a transfer from retained
earnings to share capital equal to the fair value of the shares issued is ordinarily a
characteristic of

A. Either a share dividend or share split

B. Neither a share dividend nor share split
C. Share split but not a share dividend
D. Share dividend but not a share spilt

41. An entry is not made on the

A. Date of declaration
B. Date of record
C. Date of payment
D. An entry is made on all of these dates
42. Cash dividends are paid on the basis of the number of shares

A. Authorized
B. Issued
C. Outstanding
D. Outstanding less the number of treasury shares

43. Undistributed share dividends shall be reported as

A. A current liability
B. An addition to share capital outstanding
C. A reduction in total shareholders’ equity
D. A note to the financial statements

44. Which of the following would not affect retained earnings?

A. Conversion of preference share into ordinary share

B. Share split
C. Treasury share transaction
D. Share dividend

45. How would retained earnings be affected by the declaration of share dividend and
share split, respectively?

A. Decrease and Decrease

B. No effect and Decrease
C. No effect and No effect
D. Decrease and No effect

46. Which statement about property dividend is not true?

A. A property dividend is usually in the form of securities of other entities.

B. A property dividend is also called a dividend in kind.
C. The accounting for a property dividend should be based on the carrying amount
of the noncash asset transferred.
D. All of these statements are true.

47. Which of the following is a capitalization of retained earnings?

A. Cash dividend
B. Share dividend
C. Property dividend
D. Liquidating dividend

48. Liquidating dividends

 A. Are prohibited under IFRS
B. Require a credit to share capital
C. Reduce amounts paid in by shareholders
D. All of the choices are correct

49. Unlike a share split, a share dividend requires a formal journal entry because

A. Share dividends increase the relative book value of share capital.

B. Share dividends increase shareholders’ equity.
C. Share dividends are payable on the date of declaration.
D. Share dividends represent a transfer from retained earnings to share capital.

50. When a share dividend is declared

A. Total shareholders’ equity does not change

B. Total shareholders’ equity decreases
C. The current ration increases
D. The amount of working capital decreases