RETAINED EARNINGS

Question 1

1. Retained earnings represent
   a. Earned capital
   b. Cash
   c. Assets
   d. Net assets

Answer 1

a. Earned capital

Question 2

2. Retained earnings represent
   a. Undistributed net income
   b. Undistributed net assets
   c. Extra contributed capital
   d. Undistributed cash

Answer 2

a. Undistributed net income

Question 3

3. The total retained earnings balance is not affected by
   a. Net income
   b. A prior period error
   c. Dividends paid
   d. Restrictions

Answer 3

d. Restrictions

Question 4

4. When a property dividend is declared, the dividend payable is measured based on fair value of property on
   a. Record date
   b. Distribution date
   c. Declaration date, reporting date and distribution date
   d. Reporting date

Answer 4

c. Declaration date, reporting date and distribution date

Question 5

5. The declaration and issuance of a share dividend
   a. Has no effect on assets, liabilities and total shareholders’ equity.
   b. Decreases total shareholders’ equity
   c. Decreases assets and total shareholders’ equity.
   d. Does not change retained earnings

Answer 5

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

Question 6

1. Nonshare dividend is recognized as liability on the
   a. Date of declaration
   b. Date of record
   c. Date of payment
   d. Date of issuing check

Answer 6

a. Date of declaration

Question 7

2. When shareholders may receive cash in lieu of share dividend, the amount charged to retained earnings is equal to
   a. Optional cash dividend
   b. Fair value of the shares
   c. Par value of the shares
   d. Book value of the shares

Answer 7

a. Optional cash dividend

Question 8

3. Treasury shares may be reissued as dividends, in which case what amount shall be charged to retained earnings?
   a. Cost of treasury shares
   b. Par value of treasury shares
   c. Fair value of treasury shares on the date of declaration
   d. Fair value of treasury shares on the date of issuance

Answer 8

a. Cost of treasury shares

Question 9

4. 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

Answer 9

b. Fair value of the shares on the date of declaration

Question 10

5. 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

Answer 10

b. Par value

Question 11

1. An entity declared 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

Answer 11

c. Not be affected on the date of payment

Question 12

2. 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

Answer 12

a. Record

Question 13

3. 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

Answer 13

a. Liquidating dividend

Question 14

4. 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 shares at more than cost
   d. Declaration of a cash dividend

Answer 14

a. Issuance of a share dividend

Question 15

5. 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

Answer 15

d. Increase and Increase

Question 16

6. An entity declared a dividend, a portion of which was liquidating. How would this declaration affect contributed capital and retained earnings, respectively?
   a. Decrease and No effect
   b. Decrease and Decrease
   c. No effect and Decrease
   d. No effect and No effect

Answer 16

b. Decrease and Decrease

Question 17

7. How would the declaration of a liquidating dividend affect contributed capital and retained earnings, respectively?
   a. No effect and Decrease
   b. Decrease and No effect
   C. No effect and No effect
   d. Decrease and Decrease

Answer 17

b. Decrease and No effect

Question 18

8. 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

Answer 18

c. Ten percent share dividend

Question 19

9. 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 share dividend
   c. 4 for 1 share split
   d. 2 for 1 share split

Answer 19

a. 1 for 5 share dividend

Question 19

10. 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 split

Answer 19

d. Share dividend but not a share split

Question 20

1. 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

Answer 20

b. Date of record

Question 21

2. Cash dividends are paid based on the number of shares
   a. Authorized
   b. Issued
   c. Outstanding
   d. Outstanding less the number of treasury shares

Answer 21

c. Outstanding

Question 22

4. 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

Answer 22

b. Share split

Question 22

3. 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.

Answer 22

b. An addition to share capital outstanding.

Question 23

5. 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

Answer 23

d. Decrease and No effect

Question 24

6. 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 is based on the carrying amount of the noncash asset. d. All of these statements are true.

Answer 24

c. The accounting for a property dividend is based on the carrying amount of the noncash asset.

Question 25

8. 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

Answer 25

c. Reduce amounts paid in by shareholders

Question 25

7. Which is a capitalization of retained earnings? a. Cash dividend b. Share dividend c. Property dividend d. Liquidating dividend

Answer 25

b. Share dividend

Question 26

9. A share dividend requires a formal journal entry because the share dividend a. Increases the book value of a share. b. Increases shareholders' equity. c. Is a liability on the date of declaration. d. Represents a transfer from retained earnings to share capital.

Answer 26

d. Represents a transfer from retained earnings to share capital.

Question 27

10. When a share dividend is declared a. Total shareholders' equity does not change. b. Total shareholders' equity decreases. c. The current ratio increases. d. The amount of working capital decreases.

Answer 27

a. Total shareholders' equity does not change.

Question 28

1. An entity shall measure a liability to distribute noncash asset as dividend to the owners at a. Carrying amount of the asset distributed b. Fair value of the asset distributed c. Either the carrying amount or fair value of the asset d. Neither the carrying amount nor fair value

Answer 28

b. Fair value of the asset distributed

Question 29

2. An entity shall review and adjust the carrying amount of the dividend payable at the end of each reporting period and at the date of settlement with any changes in the carrying amount of the dividend payable recognized a. In equity as adjustment to the amount of distribution b. In profit or loss c. As adjustment of share premium d. As component of other comprehensive income

Answer 29

a. In equity as adjustment to the amount of distribution

Question 29

3. When an entity settles the property dividend payable, it shall recognize the difference between the carrying amount of the asset distributed and the carrying amount of the dividend payable as a. Gain or loss on distribution of property dividend b. Other comprehensive income c. Equity d. Retained earnings

Answer 29

a. Gain or loss on distribution of property dividend

Question 30

4. An entity shall measure a noncurrent asset classified as held for distribution to owners at a. Carrying amount b. Fair value less cost to distribute c. Lower between carrying amount and fair value less cost to distribute d. Fair value

Answer 30

c. Lower between carrying amount and fair value less cost to distribute

Question 31

5. If the fair value less cost to distribute is lower than carrying amount of the asset at the end of reporting period, the difference is accounted for as a. Impairment loss b. Gain on property dividend c. Adjustment of retained earnings d. Adjustment of dividend payable

Answer 31

a. Impairment loss

Question 31

1. A retained earnings appropriation is used to a. Absorb a fire loss when an entity is self-insured b. Provide for probable and measurable contingent loss C. Smooth periodic income d. Restrict earnings available for dividends

Answer 31

d. Restrict earnings available for dividends

Question 32

2. An appropriation of retained earnings for future plant expansion will result in a. The establishment of a fund to finance plant expansion. b. The setting aside of cash for future plant expansion. c. A decrease in cash with an equal increase in fund. d. The disclosure that management does not intend to distribute dividends equal to the appropriation.

Answer 32

d. The disclosure that management does not intend to distribute dividends equal to the appropriation.

Question 33

3. A restriction of retained earnings is required by a. Purchase of property, plant and equipment b. Purchase of treasury shares c. Payment of last maturing series of a serial bond issue d. Funding of past service cost

Answer 33

b. Purchase of treasury shares

Question 34

4. Retained earnings appropriated account is created for the purpose of a. Earmarking cash to be used for particular purposes b. Insuring the payment of dividends c. Protecting the working capital position d. Preventing losses from contingencies

Answer 34

c. Protecting the working capital position

Question 35

5. Which is incorrect concerning appropriations of retained earnings? a. Appropriations of retained earnings do not change the total amount of shareholders' equity. b. Appropriations of retained earnings reflect funds set aside for a designated purpose, such be made as a as plant expansion. C. Appropriations of retained earnings can result of contractual requirements. d. Appropriations of retained earnings can be made at the discretion of the board of directors.

Answer 35

b. Appropriations of retained earnings reflect funds set aside for a designated purpose, such be made as a as plant expansion.

Question 36

6. For which purpose should an appropriation for possible loss contingencies be established? a. To match applicable costs with current revenue. b. To reduce fluctuations in net income. c. To charge operations in periods of rising prices. d. To inform shareholders that a portion of retained earnings is not available for dividends.

Answer 36

d. To inform shareholders that a portion of retained earnings is not available for dividends.

Question 37

7. Which statement is not true about appropriation? a. Appropriations do not reduce total retained earnings. b. The only proper way to eliminate an appropriation is to revert to the unappropriated retained earnings. c. Retained earnings must be appropriated equal to the par value of the treasury shares. d. An appropriation does not mean that asset is segregated for a specific purpose.

Answer 37

c. Retained earnings must be appropriated equal to the par value of the treasury shares.

Question 38

8. Which is true 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. Legal capital is available for any type of dividend. d. Capital from donated asset is available for dividends.

Answer 38

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

Question 39

9. Whichis not a legal restriction to income distribution? a. The amount distributed must be in compliance with law. b. The amount distributed can never exceed the net income for the current year. c. Income distribution must be approved by board of directors. d. Dividends must be in agreement with preferences.

Answer 39

b. The amount distributed can never exceed the net income for the current year.

Question 40

10. The use of equity reserves under IFRS a. Is strictly voluntary on the part of the management. b. Is based on whether a reserve is part of distributable or nondistributable equity. c. Is primarily for the benefit of shareholders. d. Results in the elimination of retained earnings.

Answer 40

b. Is based on whether a reserve is part of distributable or nondistributable equity.

Question 41

1. The primary purpose of quasi-reorganization is to give an entity the opportunity to a. Obtain relief from creditors b. Revalue understated assets to fair value c. Eliminate a deficit in retained earnings d. Form a new corporation

Answer 41

c. Eliminate a deficit in retained earnings

Question 42

2. When an entity goes through a quasi-reorganization, the carrying amounts are stated at a. Original cost b. Replacement cost c. Fair value d. Original carrying amount

Answer 42

c. Fair value

Question 43

3. Immediately after a quasi-reorganization, the retained earnings account a. Has a zero balance b. Remains the same c. Frozen and dated d. Has a debit balance

Answer 43

a. Has a zero balance

Question 44

4. The accounting for a quasi-reorganization usually includes a. Writeup of assets and writedown of retained earnings b. Writedown of both assets and retained earnings c. Writedown of assets and elimination of a deficit d. Writeup of assets and elimination of a deficit

Answer 44

c. Writedown of assets and elimination of a deficit

Question 45

5. An entity undertakes a **quasi-reorganization**. Certain assets will be written down to fair value. Liabilities will remain the same. How would the quasi-reorganization affect share capital and retained earnings, respectively? a. Increase and Decrease b. Decrease and No effect c. Decrease and Increase d. No effect and Increase

Answer 45

c. Decrease and Increase