1.

On the date of declaration, the liability to distribute property dividends is measured at the fair value
of the asset to be distributed.
- True

2. The declaration of a stock dividend increase retained earnings and decreases share capital.

- False

3. In the distribution of property dividends, under IFRIC 17, a gain or loss is recognized.

- True

4. A debit balance in the retained earnings account is a deficit.

- True

5. The liquidation value of a preference share is always equal to its par value.

- False

6. Earnings per share is the amount earned for each ordinary share during a given period.

- True

7. Book value per share is the amount that would be paid on each share of stock in case of corporate
liquidation.

- True

8. Unappropriated retained earnings represents amount of cash available for dividend distribution.

- True

9. Appropriation of retained earnings is required when the corporation reacquire its own stock.

- True

10. It is the payment of dividends, rather than its declaration, that reduces retained earnings.

- False

11. The accounting cycle of a corporation is basically the same as that of a single proprietorship and a
partnership.

- True

12. Preference shareholders have absolute right to dividends.

- False
13. Dividends are distribution of earnings and capital to shareholders in proportion to their
shareholdings.

- True

14. Stock dividends of less than 20% is considered large stock dividends.

- False

15. When preferred as to assets, preference shareholders are entitled to payment not only of the
liquidation value but also of the dividends in arrears.

- True
1. It represents total par or stated value of the shares issued
- Share capital
2. It represents capital contributed in excess of par or stated value.
- Share premium
3. It shows the results of operations of a corporation
- Statement of comprehensive income
4. A deferred cash dividend
- Liability Dividend
5. Unpaid dividends of prior years
- Arrears
6. Retained earnings set aside for a specific purpose
- Appropriated Retained Earnings
7. Dividends in the form on non-cash assets or properties
- Property Dividends
8. It represents accumulated balance of periodic earnings
- Retained earnings
9. Dividends in the form of the company’s own shares of stock
- Stock dividends
10. Preference share that participate in the excess dividends after paying both preference and
ordinary shareholders their regular dividends
- Participating Preference share
1. The Retained Earnings account:

A. has a credit balance if earnings have been greater than losses and dividends and is reported as part
of shareholders’ equity on the statement of financial position.

B. is a special fund for paying shareholders’ dividends on the basis of income.

C. has a debit balance if losses have exceeded earnings, and is reported as part of assets on the
statement of financial position.

D. represents the amount of cash available for payment of dividends if there have been profitable
operations.

2. Which of the following will reduce retained earnings?

A. Declaration of a stock dividend.

B. Payment of a cash dividend.

C. Net income for the period.

D. None of these.

3. When a corporation pays dividends, the three relevant dates for dividends occur in this order:

A. date of record, date of declaration, date of payment.

B. date of payment, date of declaration, date of record.

C. date of declaration, date of payment, date of record.

D. date of declaration, date of record, date of payment.

4. When a small stock dividend is declared, retained earnings is debited for the –

A. fair market value of the stock on the date of record.

B. fair market value of the stock on the date of declaration.

C. fair market value of the stock on the date of distribution.

D. par value of the stock.

5. Cash dividends declared but not paid as of the statement of financial position date are reported as:

A. current liability.

B. deduction from cash.

C. addition to share capital.

D. addition to additional paid-in capital.

6. The total shareholders’ equity after the declaration of stock dividend

A. is the same as the total shareholders’ equity before the declaration.

B. is greater than the total shareholders’ equity before the declaration.

C. is less than the total shareholders’ equity before the declaration.

D. may be more than or less than the total shareholders’ equity before the declaration depending on
whether the stock dividend declared is small or large.

7. When a property dividend is declared and the fair value of the property on the date of settlement
exceeds the carrying amount of the property, the excess is credited to –

A. Gain on distribution of property dividends.

B. Retained earnings.

C. Share premium.

D. The related asset account.

8. During the current year, Moon Company purchased 500,000 shares of Sun Company. At year-end,
Moon distributed 250,000 shares of Sun as a dividend to its shareholders. This is an example of

A. Liquidating dividend.

B. Investment dividend.

C. Property dividend.

D. Stock dividend.
9. A retained earnings appropriation is used to

A. Absorb a fire loss when an entity is self-insured.

B. Provide for a contingent loss that is probable and measurable.

C. Smooth periodic income.

D. Restrict earnings available for dividends.

10. Which of the following is most likely to be found in corporate laws regarding payment of dividends?

A. Dividends may be paid from legal capital.

B. Retained earnings are available for dividends unless restricted by contract or by statute.

C. Unrealized capital is available for any type of dividend.

D. Capital from donated assets is available for dividends

Exercise 8-1 (Shareholders’ Equity section of the Statement of Financial Position)

Preference Share Capital 600,000

Ordinary Share Capital 1,600,000
Share Premium - preference 240,000
Share Premium - ordinary 300,000
Subscribed Ordinary Share 400,000
Retained Earnings 600,000
Subscription Receivable -
Ordinary (200,000)

Total Shareholders' Equity 3,540,000

Exercise 8-2 (Cash Dividends)

200,00
1 Retained Earnings 0
200,00
Cash Dividends Payable 0

2 No Entry

200,00
3 Cash Dividends Payable 0
200,00
Cash 0 Exercise 8-3 (Cash Dividends)

1 Retained Earnings 450,000

Cash Dividends Payable 450,000
(80,000 - 5,000) x 6% x
P100

2 No Entry

3 Cash Dividends Payable 450,000

Cash 450,000
Exercise 8-4 (Property Dividends)

31-Oct Retained Earnings 1,100,000

Dividends Payable 1,100,000
10,000 x P110

31-Dec Retained Earnings 200,000

Dividends Payable 200,000
10,000 x P20

31-Mar Dividends Payable 300,000

Retained Earnings 300,000
10,000 x (P30)

31-Mar Dividends Payable

Investment in Equity Securities
Gain on Distribution of Property
Dividend

Dividends Payable
October 31 - P110 x 10,000 1,100,000
December 31 - P130 x 10,000 1,300,000
March 31 - P100 x 10,000 1,000,000

Gain on Distribution
Dividends Payable (March 31) 1,000,000
Carrying value of Equity (900,000)
Gain on Distribution 100,000
Exercise 8-5 (Scrip Dividends)

1 Retained Earnings 250,000

Scrip Dividends Payable 250,000
P5 x 50,000

2 Interest Expense 1,668

Interest Payable 1,668
250,000 x 8% x 1/12

3 Interest Payable 1,668

Interest Expense 1,668

4 Scrip Dividends Payable 250,000

Interest Expense (250,000 x 8% x
6/12) 10,000
Cash 260,000
Exercise 8-6 (Bond Dividends)

1 Retained Earnings 500,000

Bonds Dividends
Payable 500,000

Bonds Dividends
2 Payable 500,000
Bonds Payable 500,000

3 Interest Expense 15,000

Cash 15,000
500,000 x 6% x 6/12

4 Bonds Payable 500,000

Cash 500,000
Exercise 8-7 (Small and Large Stock Dividends)

Declaration
1,500,00
1 Retained Earnings 0
1,500,00
Stock Dividends Payable 0
50,000 x 30% x 100

Payment/Issuance
1,500,00
1.2 Stock Dividends Payable 0
1,500,00
Ordinary Share Capital 0

Declaration
2 Retained Earnings (50,000 x 10%) x 104 520,000
Stock Dividends Payable (5,000 x 100) 500,000
Share Premium - stock dividends (5,000 x
4) 20,000

Payment
2.2 Stock Dividends Payable 500,00
Ordinary Share Capital 500,000
Exercise 8-8 (Fractional Stock Dividends)

600,00
1 Retained Earnings 0
600,00
Stock Dividends Payable 0
40,000 x 30% x P50

600,00
2 Stock Dividends Payable 0
600,00
Ordinary Share Capital 0

100,00
3 Fractional Warrants Outstanding (2,000 x P50) 0
Ordinary Share Capital (1,500 x P50) 75,000
Share Premium - Expired Fractional Warrant (500 x
P50) 25,000

100,00
4 Fractional Warrants Outstanding (2,000 x P50) 0
Ordinary Share Capital (1,200 x P50) 60,000
Cash (800 x P50) 40,000
Exercise 8-9 (Dividends on Preference Share)

Preferenc
1 Total e Ordinary
Total Dividends declared 1,000,000
Regular (6% x 16,000 x
P100) (96,000) 96,000
Balance to Ordinary 904,000 904,000
Total 96,000 904,000
Shares outstanding 16,000 16,000
Dividends per share 6 56.5

Retained Earnings 1,000,000

Cash Dividends Payable - Preference (P6 x
16,000) 96,000
Cash Dividends Payable - Ordinary (P56.5 x
16,000) 904,000
 Preferenc Ordinar
2 Total e y
1,000,00
Total Dividends declared 0
Regular (6% x 16,000 x
P100) (96,000) 96,000
Arrears (6% x 16,000 x P100) (192,000
x2 ) 192,000
Balance to Ordinary 712,000 712,000
Total 288,000 712,000
Shares outstanding 16,000 16,000
Dividends per share 18 44.5

Retained Earnings 1,000,000

Cash Dividends Payable - Preference (P18 x 16,000) 288,000
Cash Dividends Payable - Ordinary (P44.5 x 16,000) 712,000

3 Total Preference Ordinary

1,000,00
Total Dividends declared 0
Regular (6% x 16,000 x
P100) (96,000) 96,000
Pro-rata (6% x 16,000 x
P200) (192,000) 192,000
Balance for participation 712,000
Preference (1/3 x 712,000) (237,333) 237,333
Ordinary (2/3 x 712,000) (474,667) 474,667
Total 333,333 666,667
Shares outstanding 16,000 16,000
Dividends per share 20.8333 41.67
1,000,00
Retained Earnings 0
Cash Dividends Payable - Preference (P20.8333 x
16,000) 333,333
Cash Dividends Payable - Ordinary (P41.66668 x
16,000) 666,667
4 Total Preference Ordinary
Total Dividends declared 1,000,000
Regular (6% x 16,000 x P100) (96,000) 96,000
Arrears (6% x 16,000 x P100) x
2 (192,000) 192,000
Pro-rata (6% x 16,000 x P200) (192,000) 192,000
Balance for participation 520,000
Preference (1/3 x 520,000) (173,333) 173,333
Ordinary (2/3 x 520,000) (346,667) 346,667
Total 461,333 538,667
Shares outstanding 16,000 16,000
Dividends per share 28.83331 33.66668

1,000,00
Retained Earnings 0
Cash Dividends Payable - Preference (P28.83331 x 461,33
16,000) 3
538,66
Cash Dividends Payable - Ordinary (P33.66668 x 16,000) 7

5 Total Preference Ordinary

Total Dividends declared 1,000,000
Regular (6% x 16,000 x P100) (96,000) 96,000
Arrears (6% x 16,000 x P100)
x2 (192,000) 192,000
Pro-rata (6% x 16,000 x P200) (192,000) 192,000
Balance for participation 520,000
Preference (2% x 16,000 x
P100) (32,000) 32,000
Balance to ordinary (488,000) 488,000
Total 320,000 680,000
Shares outstanding 16,000 16,000
Dividends per share 20 42.5

8% participation on preference so 6% has been already claimed,

only 2% will be used for participation

Retained Earnings 1,000,000

Cash Dividends Payable - Preference (P20 x 16,000) 320,000
Cash Dividends Payable - Ordinary (P42.5 x 16,000) 680,000
Exercise 8-10 (Earnings Per Share)

a P400,000 / 100,000 P4 per share

(400,000 - 100,000) /
b.a 100,000 P3 per share

(400,000 - 100,000) /
b.b 100,000 P3 per share

b.c 400,000 / 100,000 P4 per share

 1-Jan 50,000 4/12 16666.67
1-May 80,000 3/12 20,000
1-Aug 105,000 3/12 26,250
1-Nov 145,000 2/12 24166.67
87,083

c.a (400,000 - 100,000) / 87,083 P3.44 per share

c.b (400,000 - 100,000) / 87,083 P3.44 per share

c.c 400,000 / 87,083 P4.59 per share

Exercise 8-11 (Book Value Per Share)

a Total Shareholders’ Equity 4,250,000

Less: Equity identified with preference
shares
Liquidation Value (10,000 x P60) 600,000
Current Dividend (10% x P50 x 10,000) 50,000 (650,000)
Equity for ordinary shares 3,600,000

Book values per share

Preference (650,000 / 10,000) P65
Ordinary (3,600,000 / 100,000) P36

b Total Shareholders’ Equity 3,250,000

Less: Equity identified with preference
shares
Liquidation Value (10,000 x P50) 500,000
Current Dividend (10% x P50 x 10,000) x 4 200,000 (700,000)
Equity for ordinary shares 2,550,000

Book values per share

Preference (700,000 / 10,000) P70
Ordinary (2,550,000 / 100,000) P25.5
Exercise 8-12 (Book Value Per Share)

a Total Shareholders’ Equity 1,200,000

Less: Equity identified with preference
shares
Liquidation Value (10,000 x P50) 500,000
Current Dividend (10% x P50 x 10,000) x 4 200,000 (700,000)
Equity for ordinary shares 500,000

Book values per share

Preference (700,000 / 10,000) P70
Ordinary (500,000 / 100,000) P50

b Total Shareholders’ Equity 1,200,000

Less: Equity identified with preference
shares
Liquidation Value (10,000 x P50) 500,000
Share in deficit (1/3 x P300,000) (100,000) (400,000)
Equity for ordinary shares 800,000

Book values per share

Preference (400,000 / 10,000) P40
Ordinary (800,000 / 100,000) P80
 Exercise 8-13 (Appropriation of Retained Earnings)

Selected transactions of Narra Corporation are as follows:

1. The company suffered a net loss of P100,000.

Retained Earnings 100,000

Income Summary 100,000

2. Established a restriction on retained earnings for contingencies of P30,000 to cover a lawsuit

filed by a customer against the company.

Retained Earnings 30,000

Retained Earnings appropriated for contingencies 30,000

3. The court directed the company to pay the injured customer P25,000. The company paid the
amount (debit Lawsuit Damage Expense).

4. The Board of Directors ordered the restriction for contingencies closed.

Retained Earnings appropriated for contingencies 30,000

Retained Earnings 30,000

5. The Board of Directors approved the appropriation of retained earnings to cover possible
loss of P90,000 from the price decline in inventories.

90,00
Retained Earnings 0
Retained Earnings appropriated for price decline in inventory 90,000

6. To support the retirement of preference shares, the Board of Directors restricted the
retained earnings equal to the par value of the preference shares, P120,000.

Retained Earnings 120,000

Retained Earnings appropriated for preference redemption 120,000

7. The anticipated price decline in inventories did not materialize. Eliminated the restriction of
retained earnings for this. Required: Prepare journal entries to record the above
transactions.

90,00
Retained Earnings appropriated for price decline in inventory 0
 Retained Earnings 90,000

1. Cattleya Company provided the following data at year-end:

Authorized share capital 5,000,000

Unissued share capital (2,000,000)
Subscribed share capital 1,000,000
Subscription receivable (400,000)
Share premium 500,000
Retained earnings unappropriated 600,000
Retained earnings appropriated 300,000
Revaluation surplus 200,000
Treasury shares, at cost (100,000)

What total amount should be reported as shareholders’ equity?

a. 5,100,000
b. 5,500,000
c. 4,900,000
d. 4,800,000

2. Rose Company provided the following information on December 31, 2020:

Preference share capital, P100 par 2,300,000

Share premium – preference share 805,000
Ordinary share capital, P10 par 5,250,000
Share premium – ordinary share 2,750,000
Subscribed ordinary share capital 50,000
Retained earnings 1,900,000
Note Payable 4,000,000
Subscription receivable – ordinary share (400,000)

What is the amount of legal capital?

A. 7,550,000
B. 7,600,000
C. 13,055,000
D. 11,150,000

3. The Orchids Company was organized on January 2, 2020, and issued the following shares:
 100,000 shares of P10 par ordinary share, at P24 per share
25,000 shares of P20 par, 4% cumulative preference share, at P50 per share

The net income for 2020 was P420,000 and cash dividends of P72,000 were declared and paid in
2020. What were the dividends paid on the preference share and ordinary share, respectively?
A. P20,000 and P52,000
B. P24,000 and P48,000
C. P46,000 and P26,000
D. P72,000 and P0

72,00
Retained Earnings 0
Cash Dividends Payable - Preference 20,000
Cash Dividends Payable - Ordinary 50,000
20,00
Ordinary - (25,000 x 4% x P20) 0
50,00
Preference - (72,000 - 20,000) 0

4. The shareholders’ equity section of the Yellow Bell Company as of December 31, 2020 was as
follows:

Ordinary Share, P10 par, 20,000 shares authorized. 10,000 shares issued and outstanding……
P100,000
Share Premium………30,000
Retained Earnings……….90,000
P220,000

On February 1, 2021, the Board of Directors declared a 10% stock dividend. On this date, the
market value of the ordinary share was P15 per share. For the three months ended March 31,
2021, Yellow Bell sustained a net loss of P20,000.

15,00
Retained Earnings (10,000 x 10% x P15) 0
Stock Dividends Payable (1,000 x P10) 10,000
Share Premium - Stock Dividends 5,000

A. How much is the retained earnings balance on March 31, 2021?

A. P60,000
B. P55,000
C. P70,000
D. P75,000
(15,000 + 20,000) - 90,000 55,000

B. How much is the total shareholders’ equity on March 31, 2021?

A. P220,000

B. P190,000

C. P200,000

D. P185,000

(100,000 + 30,000 + 90,000) - 20,000 200,000

Or 55,000 + 30,000 + 100,000 = 185,000

5. Sampaguita Company had 60,000 ordinary shares issued and outstanding on December 31,
2019. During 2020, no additional ordinary share was issued. On January 1, 2020, Sampaguita
issued 40,000 non-convertible preference shares. During 2020, Sampaguita declared and paid
P210,000 cash dividend on the ordinary shares and P120,000 on the preference shares. Net
income for 2020 was P750,000. What should be the 2020 earnings per share?

A. P10.50
B. P12.50
C. P7.50
D. P3.50

(750,000 - 120,000) / 60,000 10.5

6. The shareholders’ equity of Ilang-Ilang Company on December 31, 2020 follows:

10% Preference Share Capital, P50 par, 5,000 shares issued and outstanding 250,000
Ordinary Share Capital, P30 par, 50,000 shares issued and outstanding 1,500,000
Share Premium - Preference 25,000
Share Premium - Ordinary 125,000
Retained Earnings 150,000
Total Shareholders’ Equity P2,050,000

Preference share is cumulative with dividend in arrears for 5 years at the beginning of 2020, and
with liquidation value of P60 per share.
 Book values per share on preference share and ordinary share, respectively are:
A. P60 and P35
B. P50 and P30
C. P90 and P32
D. P85 and P32.50

2,050,00
Total Shareholders' Equity 0
Less: Equity Identified with Preference
300,00
Liquidation Value (P60 x 5,000) 0
150,00
Dividends (5,000 x 10% x P50) x 6 0 450,000
1,600,00
Ordinary Shares Equity 0

Book Values
Preference Share (450,000 / 5,000) 90
Ordinary Share (1,600,000 / 50,000) 32

7. The shareholders’ equity of Calachuchi, Inc. on December 31, 2020, follows:

12% Preference Share Capital, P100 par, 20,000 shares issued and outstanding 2,000,000
Ordinary Share Capital, P25 par, 200,000 shares issued and outstanding 5,000,000
Share Premium 500,000
Retained Earnings 750,000
Total Shareholders’ Equity P8,250,000

Preference shares have a liquidation value of P110, cumulative, with dividends in arrears for
three years including the current year and fully payable in the event of liquidation.

Book values per share on preference share and ordinary share, respectively are:
A. P124 and P28.85
B. P134 and P25.35
C. P146 and P26.65
D. P158 and P22.90

8,250,00
Total Shareholders' Equity 0
Less: Equity Identified with
Preference
 2,200,00
Liquidation Value (P110 x 20,000) 0
2,920,00
Dividend ( 20,000 x 12% x P100) 720,000 0
5,330,00
Ordinary Share Equity 0

Book Values
Preference Share (2,920,000 /
20,000) 146
Ordinary Share (5,330,000 / 200,000) 26.65

8. Black Company, a calendar year entity, had sufficient retained earnings in 2020 as a basis for
dividends but was temporarily short of cash. Black 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 Black account for the scrip dividend and related interest?
A. Debit retained earnings for P110,000 on April 1, 2020.
B. Debit retained earnings for P110,000 on March 31, 2021.
C. Debit retained earnings for P100,000 on April 1, 2020 and debit interest expense for P10,000
on March 31, 2021.
D. Debit retained earnings for P100,000 on April 1, 2020 and debit interest expense for P7,500
on December 31, 2020.

9. On May 31, 2019, Star Company’s board of directors declared a 10% stock dividend. The market
price of Star’s 30,000 outstanding shares of P20 par value was P90 per share on that date. The
stock dividend was distributed on July 31, 2019, when the stock’s market price was P100 per
share.

What amount should Star credit to share premium for this stock dividend?
A. P210,000
B. P240,000
C. P270,000
D. P300,000

270,00
Retained Earnings (30,000 x 10% x P90) 0
Stocks Dividends Payable (3,000 x P20) 60,000
Share Premium - Stock Dividends 210,000

10. Rain Corporation declared a 5% stock dividend on 100,000 issued and outstanding shares of P20
par value, which had a fair value of P50 per share before the stock dividend was declared. This
 stock dividend was distributed 60 days after the declaration date. What is the increase in
current liabilities as a result of the stock dividend declaration?
A. P250,000
B. P100,000
C. P150,000
D. P0

11. On September 30, 2020, Green Company issued 4,000 shares of its P100 par share capital in
connection with a stock dividend. The market value per share on the date of declaration was
P150. Green’s shareholders’ equity accounts immediately before the issuance of the stock
dividend shares were as follows:

Share Capital, P100 par, 50,000 shares authorized, 20,000 shares outstanding 2,000,000
Share Premium 3,000,000
Retained Earnings 1,500,000

What should be the retained earnings balance immediately after the stock dividend?
A. P1,100,000
B. P1,500,000
C. P2,100,000
D. P900,000

Retained Earnings (4,000 x P100) 400,000

(1,500,000 - 400,000) 1,100,000

Items 12 - 14 are based on the following:

Profriends, Inc., a real estate developer, is owned by five founding shareholders. On December
1, 2020, the entity declared a property dividend of a “one-bedroom flat” for each shareholder.
The property dividend is payable on January 31, 2021.

On December 1, 2020, the carrying amount of a one-bedroom flat is P1,000,000 and the fair
value is P1,500,000. However, the fair value is P1,800,000 on December 31, 2020 and
P1,900,000 on January 31, 2021.

12. What is the dividend payable on December 1, 2020?

A. P5,000,000
B. P7,500,000
C. P9,000,000
D. P0
 7,500,00
1,500,000 x 5 0

13. What is the dividend payable on December 31, 2020?

A. P5,000,000
B. P7,500,000
C. P9,000,000
D. P0

1,500,00
300,000 x 5 0
9,000,00
1,500,000 + 7,500,000 0

14. What amount of gain is included in profit or loss as a result of the settlement of the property
dividend on January 31, 2021?
A. P2,500,000
B. P4,000,000
C. P2,000,000
D. P4,500,000

100,000 x 5 500,000
500,000 + 9,500,00
9,000,000 0

9,500,00
Dividends Payable 0
5,000,00
Investment in Equity Security 0
Gain on Distribution of Property 4,500,00
Dividend 0

15. The directors of Toy Company whose P50 par value share capital is currently selling at P60
per share have decided to issue a stock dividend. The selling price is not expected to be affected
by the stock dividend. Toy Company, which has an authorization for 1,000,000 shares, had
issued 500,000 shares, of which 100,000 shares are now held as treasury.

In order to capitalize P2,400,000 of the retained earnings balance, what percentage should be
declared as a stock dividend by the directors?
A. 10%
 B. 8%
C. 6%
D . 4%

500,000 - 100,000 400,000

400,000 x 10% x 2,400,00
60 0