SMM THEORIES

1. Which of the following statements incorrectly describes the relationship between a company's book value per
share and its market price per share?
a. If the book value per share is below the market value per share, then shareholders are paying for the future
earnings power of the company.
b. If a company has unrecorded assets or appreciated assets, the market value per share is likely to be greater
than the book value per share.
c. Since the book value per share is based on historical costs, the book value per share can never be greater
than the market price per share.
d. Use of the book value per share can be highly questionable for many companies, since it is based on
balance sheet amounts that in turn are based upon historical costs.
e. If the market value of a company's assets are much greater than their historical costs, then the market price
per share will likely be greater than the book value per share.
ANSWER -C

2. When a company has both ordinary shares and preference shares, the book value per share of ordinary shares is
calculated by dividing
A. the amount in the ordinary shares account by the number of ordinary shares outstanding.
B. the amount in the ordinary shares account by the sum of the number of ordinary shares and preference
shares outstanding.
C. total shareholders' equity less preference equity by the number of ordinary shares outstanding. HHT&S
8E
D. total shareholders' equity by the number of ordinary shares outstanding
ANSWER – C

3. Which of the following best describes the book value of a share of stock?
A. Net assets divided by the number of shares outstanding.
B. The amount at which the stock would sell on the market if sold by a willing and informed seller to a willing
and informed buyer.
C. Total assets of the company, as reported in the accounting records, divided by the number of shares of
stock outstanding.
D. Total stockholders' equity divided by the number of shares authorized.
ANSWER – A

4. If a company makes a prior period adjustment, which of the following describes how it must be reported?
a. The adjustment is recorded in retained earnings, and previous years' financial statements presented for
comparative purposes are not changed.
b. The adjustment is recorded in retained earnings, and previous years' financial statements presented for
comparative purposes are adjusted.
 c. The adjustment is reported in the current period's income statement as a separate item.
d. The adjustment is recorded as a deferred asset or deferred liability and amortized using the straight-line
method
ANSWER – B

5 . A prior period adjustment appears in the financial statements of the current year when:
A. An error was made in computing the net income of the current period.
B. An error was made in measuring the net income of a previous year or years.
C. An extraordinary loss in a prior year was included among normal results of operations in the prior year.
D. Earnings per share figures from prior years are restated to reflect the increased number of shares
outstanding due to a stock split or a stock dividend.
ANSWER - B

CORPO PROBLEM SOLVING

1.Arnold Company was organized on January 1, 2000. After 3 years of profitable operations, the equity section of
Arnold’s balance sheet on December 31, 2002 sheet was as follows:
Contributed capital:
Common stock P50 par, 500,000 share authorized,
200,000 shares issued and outstanding 10,000,000
Additional paid in capital 5,000,000
Retained earnings 6,000,000
On January 15, 2003, Arnold Company reacquired 20,000 shares of common stock at P100 par share. The
treasury stock is recorded at cost. On February 11, 2003, the company issued a 20% stock dividend. The market
value of the common stock is P100 on this date. On July 1, 2003 the company declared a P20 cash dividend per
share payable on August 1, 2003. On December 31, 2003, all treasury stock was sold at P120 per share and the
company reported net income of P5,000,000 for the year ended December 31, 2003. What should be the
balance of retained earnings on December 31, 2003?
A. 4,880,000 C. 5,600,000
B. 3,080,000 D. 5,280,000\
ANSWER - A

SOLUTION:
A Retained earnings – 12/31/02 6,000,000
Net income – 2003 5,000,000
Stock dividend (200,000 – 20,000 x P20% x P50) (1,800,000)
Cash dividend (180,000 + 36,00 x P20) (4,320,000)
 Retained earnings – 12/31/03 4,880,000

2. Rowena Company issued 100,000 shares of P100 par common stock at P150 share. On December 31, 2002 the
retained earnings were P5,000,000. In March 2003, Rowena reacquired 10,000 shares of its common stock at
P120 per share. In June 2003, Rowena sold 6,000 of these shares to its corporate officers for P150 per share.
Rowena uses the cost method to record treasury stock. Net income for the year ended December 31, 2003 was
P6,000,000. At December 31, 2003, Rowena Company paid cash dividend of P50 per share. What should
Rowena report as total retained earnings on December 31, 2003?
A. 6,500,000 C. 6,300,000
B. 6,200,000 D. 5,720,000
ANSWER – B

SOLUTION:
Retained earnings – 12/31/02 5,000,000
Net income for 2003 6,000,000
Total 11,000,000
Dividend paid (100,000 – 4,000 TS x P50) (4,800,000)
Retained earnings – 12/31/03 6,200,000

3. Roanne Company issued all of its outstanding common shares for P150 in 2003. On January 5, 2004, Roanne
acquired 300,000 shares of its stock at P120 per share and retired them. Roanne’s equity accounts as at
December 31, 2003 follow:
Retained earnings 30,000,000
Additional paid-in capital 90,000,000
Common stock, P100 par value, 2,000,000 shares authorized,
1,800,000 shares issued and outstanding 180,000,000
What shall be the balance in the additional paid-in capital account immediately after the retirement of the shares?
A. 90,000,000 C. 75,000,000
B. 84,000,000 D. 99,000,000
ANSWER – B

SOLUTION:
CS (300,000 x 100) 30,000,000
APIC (300,000 x 50) 15,000,000
Cash (300,000 x 120) 36,000,000
APIC – retirement 9,000,000

APIC (90,000,000 – 15,000,000 + 9,000,000) 84,000,000

 4. Poodle Corporation was organized on January 3, 2011. The firm was authorized to issue 100,000 shares of
$5 par common stock. During 2011, Poodle had the following transactions relating to shareholders' equity:

 Issued 30,000 shares of common stock at $7 per share.

 Issued 20,000 shares of common stock at $8 per share.
 Reported a net income of $100,000.
 Paid dividends of $50,000.
What is total Paid-in capital at the end of 2011? (D)
A. $420,000. C. $470,000.
B. $370,000. D. $320,000.
ANSWER – B

SOLUTION:
Answer is (B). (30,000 x $7) + (20,000 x $8) = $370,000

5. Mitchell, a well established law firm, provided 500 hours of its time to Fink Corporation in exchange for 1,000
shares of Fink's $5 par common stock. Mitchell's usual billing rate is $600 per hour, and Fink's stock has a book
value of $250 per share. By what amount will Fink's additional paid-in capital increase for this transaction? (E)
A. $295,000. C. $300,000.
B. $245,000. D. $250,000.
ANSWER -A

SOLUTION
Legal expense (500 x $600) 300,000
Common stock (1,000 x $5) 5,000
Paid-in capital 295,000