Intermediate Accounting Vol 2 Canadian 2Nd Edition Lo Test Bank Full Chapter PDF

Intermediate Accounting, Volume 2, 2e
Chapter 13 - Equities
Solution Manual for Intermediate Accounting Vol 2

Canadian 2nd Edition Lo Fisher 0132965879
9780132965873
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Intermediate Accounting, Vol. 2, 2e (Lo/Fisher)

Chapter 13 Equities
13.1 Learning Objective 1
1) What does "priority" mean?

A) Higher priority confers preferential payout before lower priority claimants.
B) Refers to the amount of payment that will be made upon bankruptcy.
C) Lower priority confers preferential payout before higher priority claimants.
D) Debtors will be paid after the equity holders if there is a bankruptcy.
Answer: A
Diff: 2
Skill: Concept
Objective: 13.1 Describe the characteristics of different types of share equity and identify the characteristics that are
relevant for accounting purposes.
2) Which statement is correct?

A) Equity holders are concerned more about the debt accounts in the financial statements.
B) Equity holders are concerned about the debt and equity accounts in the financial statements.
C) Debt holders are concerned about the debt and equity accounts in the financial statements.
D) Debt holders are concerned more about the equity accounts in the financial statements.
Answer: B
Diff: 2
Skill: Concept
3) What is the meaning of "contributed capital"?

A) This is the amount received from the debt holders of the company.
B) This is the repayment of capital to owners of the company.
C) This is the dividends received from the owners of the company.
D) This is the amount received from the equity holders of the company.
Answer: D
Diff: 1
13-1
Copyright © 2014 Pearson Canada, Inc.
Skill: Concept
13-2
4) Which statement is correct?

A) Dividends are never discretionary payments.
B) A corporation need only pay dividends when it declares them to be payable.
C) A company can avoid a cumulative dividend on preferred shares if it declares dividends on common
shares.
D) Companies must pay the shareholders interest to compensate for the time value of money lost on the
deferral of dividend payments.
Answer: B
Diff: 1
Skill: Concept
5) What is the primary difference between common and preferred shares?

Answer: The primary difference between common and preferred shares is that common shares represent
the residual interest in the company while preferred shares do not.
Diff: 2
Skill: Concept
6) When is a corporation legally obligated (liable) to pay dividends?

Answer: A corporation is legally obligated to pay cash dividends when it declares them to be payable.
Diff: 1
Skill: Concept
7) Outline the difference between cumulative and non-cumulative dividends.

Answer: The difference between cumulative and non-cumulative dividends is that for cumulative
dividends, the company must pay any past dividend payments it has missed (i.e., dividends scheduled
but not declared) prior to paying any dividends to common shares. This differs from shares with non-
cumulative dividends, which do not have any rights to missed dividend payments.
Diff: 1
Skill: Concept
8) Briefly describe the difference between issued and outstanding shares.

Answer: Issued shares are the net number of shares that the corporation has issued; outstanding shares
are issued shares that are not held by the company as treasury shares.
Diff: 1
Skill: Concept
13-3
9) Supply Company Ltd. issues a $60 million bond due in 10 years, and the bond indenture specifies that
the company must set aside $6 million per year in a sinking fund so that the company will have funds to
repay the bondholders at the end of 10 years. Assuming that the company complies with the contractual
requirements, what would the journal entry be for each of the next 10 years?
Answer:
Account Name DR CR
Retained earnings 6,000,000

Sinking fund reserve 6,000,000
Restricted cash 6,000,000
Cash 6,000,000
Diff: 1
Skill: Comp
10) Where is accumulated other comprehensive income reported and what does it represent?
Answer: AOCI is reported as a component of equity in the balance sheet. AOCI represents the
accumulation of OCI from all prior periods.
Diff: 1
Skill: Concept
11) Briefly describe recycling as it pertains to other comprehensive income.

Answer: Recycling of OCI refers to the process of recognizing amounts through OCI, accumulating that
OCI in reserves, and later recognizing those amounts through net income and retained earnings.
Diff: 1
Skill: Concept
12) If a company issues 2,000 shares for $55 and then repurchases 50 shares at $55, how much is the
contributed capital?
A) $ 0
B) $ 2,750
C) $107,250
D) $110,000
Answer: C
Explanation: C) (2000 -50) × $55 = $107,250
Diff: 1
Skill: Comp
13-4
13) Golf Is for Nerds Inc. sells 20,000 no-par value common shares for $8.00 each on a subscription basis.
Terms of the sale require the purchaser to pay $3.00 per share when the contract is signed and the balance
in three months' time.
Required: Prepare the journal entries at (a) the date of signing the contract; (b) the date that the remaining
payment is made; (c) the date the shares are transferred.
Answer:
DR CR
At Date of Contract
Cash 60,000
Subscriptions receivable 100,000
Common shares subscribed 160,000
Remaining Payment
Cash 100,000
Subscriptions receivable 100,000
To record issuance of shares
Common shares subscribed 160,000
Common shares 160,000
Diff: 2
Skill: Comp
14) Which statement about "common shares" is correct?

A) Common shares have the lowest claim to residual ownership interest of all shares.
B) Common shares have the lowest priority of all shares issued by a company.
C) Common shares have the highest priority of all shares issued by a company.
D) Common shares have no claim to residual ownership interest of all shares.
Answer: B
Diff: 2
Skill: Concept
13-5
15) Who uses information about "equity" and what information about equity is useful to financial
statement users?
Answer: As equity has legal priority below that of liabilities in general—meaning that available funds go
toward paying off liabilities prior to paying equity claims should the enterprise be liquidated—equity
holders are more concerned about the equity accounts than creditors.
Equity holders who do have residual claims on the enterprise are concerned about the size of their claims,
and they need to be aware of changes to their share of profits. Consequently, accounting reports need to
provide detailed information about the composition of equity and changes in equity that can result in the
dilution of owners' stakes in the business.
Equity holders are interested in distinguishing (i) changes in equity due to direct contributions or
withdrawals of capital from (ii) changes in equity derived from return on equity capital (i.e., income).
This categorization is natural because it separates capital transactions with owners from the entity's
income generating transactions with non-owners such as customers, employees, and suppliers.
Diff: 2
Skill: Concept
16) Explain the meaning of "contributed capital" and "common share." What distinguishes a common
share from a preferred share?
Answer:
common share: An equity interest that has the lowest priority and represents the residual ownership
interest in the company.
contributed capital: The component of equity that reflects amounts received by the reporting entity from
transactions with its owners, net of any repayments from capital.
Any share that does not represent the residual interest in the company is a preferred share. Preferred
shares have priority over the common shares.
Diff: 2
Skill: Concept
13-6
13.2 Learning Objective 2
1) Which statement is correct about "par value"?

A) Par value refers to the price at which a common share is sold to the equity holders.
B) The dividend rate can be specified as a percentage of the par value for common shares.
C) The dividend rate can be specified as a percentage of the par value for preferred shares.
D) Par value refers to the price at which a preferred share is sold to the equity holders.
Answer: C
Diff: 2
Skill: Concept
Objective: 13.2 Identify the different components of equity for accounting purposes that apply to a transaction and
analyze the effect of the transaction on those equity components.
2) If 1,000 preferred shares with a par value of $50/share, a dividend rate of 10% and redeemable for
$80/share, are sold for $75/share, how much dividend may the preferred equity holders expect to receive?
A) $3,000
B) $5,000
C) $7,500
D) $8,000
Answer: B
Explanation: B) $50/share × 10% = $5/share × 1,000 shares = $5,000
Diff: 2
Skill: Comp
3) Explain the meaning of "par value," "contributed surplus," and "preferred shares."
Answer:
par value shares: Shares with a dollar value stated in the articles of incorporation; for preferred shares,
the dividend rate may be stated as a percentage of the par value.
preferred shares: Any shares that are not common shares.
contributed surplus: The component of contributed capital other than par value.
Diff: 2
Skill: Concept
4) If 700 preferred shares with a par value of $35/share, a dividend rate of 5% and redeemable for
$50/share, are sold for $45/share how much dividend may the preferred equity holders expect to receive?
A) $525
B) $1,225
C) $1,575
D) $1,750
Answer: B
Explanation: B) $35/share × 5% × 700 shares = $1,225
Diff: 2
Skill: Comp
13-7
5) Which statement about dividends is correct?

A) Dividends on cumulative preferred shares are not discretionary payments.
B) Dividends are mandatory payments required for both common and preferred shares.
C) Dividends are discretionary payments that can be made for common and preferred shares.
D) Dividends must be paid on common shares before dividends can be paid on preferred shares.
Answer: C
Diff: 2
Skill: Concept
6) What is the meaning of "shares authorized," "shares issued," and "shares outstanding"?
Answer:
shares authorized: The number of shares that are allowed to be issued by a company's articles of
incorporation.
shares issued: The number of shares issued by the corporation, whether held by outsiders or by the
corporation itself.
shares outstanding: Those shares held by outsiders.
Diff: 2
Skill: Concept
7) Which is an example of "contributed capital"?

A) Retained earnings.
B) Preferred shares.
C) Other comprehensive income.
D) Accumulated other comprehensive income.
Answer: B
Diff: 2
Skill: Concept
8) Which is an example of "contributed capital"?

A) Appropriated reserves.
B) Unappropriated retained earnings.
C) Common shares.
Answer: C
Diff: 2
Skill: Concept
13-8
9) In which account would "transactions with owners" be reported?

B) Unappropriated retained earnings.
C) Contributed surplus.
Answer: C
Diff: 2
Skill: Concept
10) In which account would "transactions with non-owners" be reported?

B) Common shares.
C) Contributed surplus.
D) Par value of preferred shares.
Answer: A
Diff: 2
Skill: Concept
11) What kind of transaction is "appropriated reserves"?

A) An example of "contributed surplus."
B) An example of a transaction with owners.
C) An example of a "contributed capital."
D) An example of a transaction with non-owners.
Answer: D
Diff: 2
Skill: Concept
12) What kind of transaction is "appropriated reserves"?

A) An example of "par value" preferred shares.
B) An example of a transaction with owners.
C) An example of a "retained earnings."
D) An example of a "other comprehensive income."
Answer: C
Diff: 2
Skill: Concept
13-9
13) Here is an extract of a trial balance for Soorya Inc. Indicate which accounts would be reported under
the "equity" section of the balance sheet of Soorya Inc.
Investment in common shares of XPedious Corp 104,560

Preferred shares 135,000
Treasury shares 10,000
Other comprehensive income 45,000
Accumulated other comprehensive income 67,500
Bonds payable 101,400
Unappropriated retained earnings 90,000
Provision for doubtful accounts 35,500
Appropriated retained earnings 8,500
Answer:
Preferred shares 135,000 135,000
Treasury shares 10,000 10,000
Accumulated other comprehensive income 67,500 67,500
Unappropriated retained earnings 90,000 90,000
Appropriated retained earnings 8,500 8,500
Diff: 2
Skill: Concept
13-10
14) Here is an extract of a trial balance for Lipika Inc. Indicate which accounts would be reported under
the "retained earnings" section of the balance sheet.

Answer:
Diff: 2
Skill: Concept
13-11
15) Here is an extract of a trial balance for Zoe and Zia Inc. Indicate which accounts would be under the
"contributed capital" section of the balance sheet.

Contributed surplus—preferred shares 5,000
Answer:
Preferred shares 135,000 135,000
Common shares 100,000 100,000
Treasury shares 10,000 10,000
Contributed surplus—preferred shares 5,000 5,000
Diff: 2
Skill: Concept
13-12
16) Here is an extract of a trial balance for Masterious Ltd. Indicate which are examples of transactions
with non-owners.

Answer:
Investment in common shares of XPedious Corp 104,560 104,560
Other comprehensive income 45,000 45,000
Bonds payable 101,400 101,400
Provision for doubtful accounts 35,500 35,500
Diff: 2
Skill: Concept
13-13
17) Here is an extract of a trial balance for Masters Ltd. Indicate which item(s) are "assets."

Answer:
Investment in common shares of XPedious Corp 104,560 104,560
Other comprehensive income 45,000 45,000
Diff: 2
Skill: Concept
18) Which transaction would affect retained earnings?
Issue preferred shares 1,500,500

Issue common shares 2,300,000
Declare dividends on common shares 100,500
Stock split 400,000
Skipping dividend payment on preferred shares 200,000
Answer:
Declare dividends on common shares 100,500 100,500
Stock split 400,000 400,000
Skipping dividend payment on preferred shares 200,000 200,000
Diff: 2
Skill: Concept
13-14
19) When shares are repurchased at an amount different from their original issue price, then held in
treasury or cancelled, will the journal entry affect the following components?
Share capital
Contributed surplus
Treasury stock
Loss/gain on share retirement
Accumulated other comprehensive income
Appropriated reserves
Unappropriated retained earnings
Answer:
Share capital Yes
Contributed surplus Yes
Treasury stock Yes
Loss/gain on share retirement No
Accumulated other comprehensive income No
Appropriated reserves No
Unappropriated retained earnings Yes
Other comprehensive income No
Diff: 2
Skill: Concept
13-15
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Intermediate Accounting, Volume 2, 2e

Solution Manual for Intermediate Accounting Vol 2

Solution manual: https://testbankpack.com/p/solution-manual-for-intermediate-

Test bank: https://testbankpack.com/p/test-bank-for-intermediate-accounting-

Intermediate Accounting, Vol. 2, 2e (Lo/Fisher)

13.1 Learning Objective 1

1) What does "priority" mean?

2) Which statement is correct?

3) What is the meaning of "contributed capital"?

4) Which statement is correct?

5) What is the primary difference between common and preferred shares?

6) When is a corporation legally obligated (liable) to pay dividends?

7) Outline the difference between cumulative and non-cumulative dividends.

8) Briefly describe the difference between issued and outstanding shares.

Retained earnings 6,000,000

11) Briefly describe recycling as it pertains to other comprehensive income.

14) Which statement about "common shares" is correct?

13.2 Learning Objective 2

1) Which statement is correct about "par value"?

5) Which statement about dividends is correct?

7) Which is an example of "contributed capital"?

8) Which is an example of "contributed capital"?

9) In which account would "transactions with owners" be reported?

10) In which account would "transactions with non-owners" be reported?

11) What kind of transaction is "appropriated reserves"?

12) What kind of transaction is "appropriated reserves"?

Investment in common shares of XPedious Corp 104,560

Investment in common shares of XPedious Corp 104,560

Investment in common shares of XPedious Corp 104,560

Investment in common shares of XPedious Corp 104,560

Investment in common shares of XPedious Corp 104,560

18) Which transaction would affect retained earnings?

Issue preferred shares 1,500,500

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