Question 1

Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as
A)a reduction of share capital.
B)an expense of the period in which the shares are issued.
C)an intangible asset.
D)a reduction of retained earnings.

Accepted Answer

Direct incremental costs incurred to sell shares, such as underwriting costs, should be accounted for as a reduction of the proceeds received from the share issue, which effectively reduces share capital.

Question 2

Total shareholders' equity represents
A)a claim to specific assets contributed by the owners.
B)the maximum amount that can be borrowed by the corporation.
C)a claim against a portion of the total assets of the corporation.
D)only the amount of earnings that have been retained in the corporation.

Accepted Answer

Total shareholders' equity represents a claim against a portion of the total assets of the corporation. This represents the residual claim on assets after all liabilities have been paid off. Thus, shareholders' equity represents the value of assets that would be left over if all debts were paid off. It does not represent specific assets contributed by owners or the maximum amount that can be borrowed by the corporation. It also includes earnings that have been retained in the corporation, but not exclusively.

Question 3

When shares are purchased or redeemed and cancelled, guidelines have been established for the sequence of accounts to adjust when allocating the cost.Which of the following is the first account to be adjusted?
A)a Contributed Surplus account created from a previous reacquisition of the same class of
Shares
B)the Share Capital account
C)Retained Earnings
D)Accumulated Other Comprehensive Income

Accepted Answer

The answer of When shares are purchased or redeemed and...

Question 4

Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s)should be debited?
A)the share account for the total cost
B)the share account for the original issue price and contributed surplus for the additional
Amount
C)the share account for the average per share amount and retained earnings for the
Additional amount
D)the share account for the average per share amount and a loss account for the
Additional amount

Accepted Answer

When shares are reacquired at a cost greater than their original issue price and there is no contributed surplus, the share account is debited for the average per share amount, and retained earnings are debited for the additional amount.

Question 5

When all outstanding preferred shares are purchased and retired by the issuing corporation for less than the original issue price, accounting for the retirement increases
A)the amount of dividends available to common shareholders.
B)the contributed capital of the common shareholders.
C)reported income for the period.
D)Accumulated Other Comprehensive Income.

Accepted Answer

The retirement of preferred shares for less than the original issue price constitutes a reduction in the company's contributed capital. It does not affect the amount of dividends available to common shareholders or the reported income for the period, and it is not related to Accumulated Other Comprehensive Income. Therefore, the correct answer is B.

Question 6

The residual interest in a corporation belongs to the
A)management.
B)creditors.
C)common shareholders.
D)preferred shareholders.

Accepted Answer

The residual interest in a corporation belongs to the common shareholders. This means that after all debts and obligations are paid off, any remaining assets or profits belong to the common shareholders. Preferred shareholders and creditors have priority in receiving payment before common shareholders. Management may have ownership or control of the corporation, but they do not necessarily have a direct claim to residual interest.

Question 7

In jurisdictions where par value shares are legally allowed, the only real significance of par value is
A)to enable the shares to be callable or convertible.
B)to require the corporation to pay dividends.
C)to establish the maximum responsibility of a shareholder in the event of insolvency.
D)to establish the maximum price at which the shares can be sold.

Accepted Answer

In jurisdictions where par value shares are legally allowed, the only true significance of par value is to establish the maximum responsibility of a shareholder in the event of insolvency. This means that the shareholder is liable to pay the par value of their shares if the company becomes insolvent and cannot pay its debts. However, in many jurisdictions, including most US states, par value shares are no longer required and have been largely replaced by no-par or low-par value shares.

Question 8

Which statement is correct regarding real estate income or investment trusts?
A)They are often set up as unlimited purpose trust funds.
B)They are considered to be special purpose entities.
C)The unitholders (investors)do not pay tax on the cash received from the trust.
D)The unitholders have unlimited liability.

Accepted Answer

Real estate income or investment trusts are considered to be special purpose entities. They are not typically set up as unlimited purpose trust funds. The tax treatment for unitholders depends on the jurisdiction, but in some cases, they may be subject to taxes on the cash received from the trust. Unitholders do not have unlimited liability, as their liability is limited to the amount of their investment in the trust.

Question 9

A possible result of the reacquisition and cancellation of shares by a corporation is that this may
A)directly increase but not decrease retained earnings.
B)increase net income if a gain is recognized.
C)directly decrease but not increase retained earnings.
D)decrease but not increase net income.
Shareholders' Equity 15- 13

Accepted Answer

When a corporation reacquires and cancels its own shares, it reduces the number of shares outstanding, which directly decreases retained earnings as the cost of reacquisition is deducted from it.

Question 10

Aye Corp.sells common shares on a subscription basis.The Common Shares account should be credited when the
A)shares are subscribed for.
B)first payment is made.
C)last payment is made.
D)last payment is made and the shares are issued.

Accepted Answer

The Common Shares account should be credited when the last payment is made and the shares are actually issued, as this is the point at which ownership of the shares is transferred to the subscriber. Keep in mind that subscribing for shares is different from actually owning and holding them.

Question 11

The cumulative feature of preferred shares
A)limits the amount of cumulative dividends to the par value of the preferred shares.
B)requires that dividends not paid in any year must be made up in a later year before
Dividends are distributed to common shareholders.
C)means that the shareholder can accumulate preferred shares until they are equal to the
Stated value of common shares, at which time they can be converted into common
Shares.
D)enables a preferred shareholder to accumulate dividends until they equal the stated
Value of the shares and receive the shares in place of the cash dividends.

Accepted Answer

The cumulative feature of preferred shares requires that dividends not paid in any year must be made up in a later year before dividends are distributed to common shareholders.

Question 12

The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the classes of securities.One acceptable method of allocation is the
A)pro forma method.
B)relative fair value method.
C)direct method.
D)indirect method.

Accepted Answer

The relative fair value method is the best choice for allocation of proceeds in a lump sum sale of shares. This method allows for the allocation of proceeds to each class of securities in proportion to their relative fair value. This is a widely accepted method and is in accordance with the general principles of accounting. The pro forma method is used for projected financial statements, the direct method is used for cash flow statements, and the indirect method is also used for cash flow statements but adjusts the net income figure.

Question 13

The liability of shareholders is
A)similar to the liability of the owners of a partnership.
B)similar to the liability of the owner of a proprietorship.
C)equal to an amount sufficient to satisfy all creditors.
D)limited to their property or service invested in the corporation.

Accepted Answer

The liability of shareholders in a corporation is limited to the amount of their investment in the company. This means that their personal assets are not at risk if the company goes bankrupt or faces legal action. This is different from partnerships and proprietorships, where the owners' personal assets can be used to pay back debts and losses.

Question 14

Subscriptions Receivable are reported as
A)a noncurrent asset.
B)a current asset.
C)a deduction from shareholders' equity.
D)either a current asset or a deduction from shareholders' equity.

Accepted Answer

The answer of Subscriptions Receivable are reported as
A)a noncurrent asset.
B)a...

Question 15

When shares are reacquired at a cost less than the average per share value, the difference is credited to
A)the appropriate share capital account.
B)Gain on Reacquisition of Shares.
C)Retained Earnings.
D)Contributed Surplus.

Accepted Answer

The answer of When shares are reacquired at a cost...

Question 16

Preferred shares are often issued instead of debt
A)to avoid paying dividends to the common shareholders.
B)because a corporation's debt-to-equity ratio has become too high.
C)to increase the market value of the shares.
D)to decrease the market value of the shares.

Accepted Answer

Preferred shares are a form of equity, not debt. They are often issued instead of debt because they do not increase the corporation's debt-to-equity ratio. This can be beneficial, as a high debt-to-equity ratio can make it difficult for a corporation to obtain additional financing. Additionally, issuing preferred shares can be less expensive than issuing debt, as there are no interest payments to be made.

Question 17

Dividends on cumulative preferred shares
A)must be paid each year.
B)accumulate over the life of the shares and are paid on retirement.
C)must be paid before dividends may be paid on common shares.
D)if in arrears, must be calculated like compound interest.
Shareholders' Equity 15- 11

Accepted Answer

Dividends on cumulative preferred shares must be paid before any dividends can be paid to common shareholders. If dividends are not paid in a given year, they accumulate and must be paid in the future before common dividends.

Question 18

The preemptive right enables a shareholder to
A)share proportionately in any new issues of shares in the same class.
B)receive cash dividends before other classes of shares without the preemptive right.
C)sell shares back to the corporation at the option of the shareholder.
D)receive the same amount of dividends on a percentage basis as the preferred
Shareholders.

Accepted Answer

The preemptive right allows existing shareholders to maintain their proportional ownership in the company by giving them the opportunity to purchase additional shares before the company offers them to the public.

Question 19

Callable preferred shares
A)may be redeemed at any time at the shareholder's option.
B)may be called or redeemed at the option of the issuing corporation.
C)usually have voting rights.
D)have rights to participate in any new share issuance.

Accepted Answer

Callable preferred shares may be called or redeemed at the option of the issuing corporation. This means that the corporation has the right to buy back the shares at a predetermined price and time, typically to reduce debt or restructure their capital. The shareholder does not have the option to redeem the shares.

Question 20

According to the CBCA, when a company purchases its own shares on the market
A)they are recorded with a debit to Repurchased Shares.
B)the amount paid is deducted from the share class to which they belong.
C)they must be cancelled.
D)the excess of purchase price over cost is a loss.

Accepted Answer

When a company purchases its own shares on the market, those shares must be cancelled. This reduces the number of outstanding shares and increases the ownership percentage of existing shareholders. Option A is incorrect because there is no account called "Repurchased Shares" in accounting. Option B is incorrect because the amount paid for the shares is not deducted from the share class but rather from retained earnings or a specific reserve account. Option D is incorrect because the excess of the purchase price over cost is not a loss but rather a reduction in retained earnings or a specific reserve account.

Quiz 2: Intermediate Accounting Volume 2

Direct incremental costs incurred to sell shares such as underwriting costs should be accounted for as

Total shareholders' equity represents

When shares are purchased or redeemed and cancelled, guidelines have been established for the sequence of accounts to adjust when allocating the cost.Which of the following is the first account to be adjusted?

Assuming a corporation has no contributed surplus booked, when shares are reacquired at a cost greater than their original issue price and cancelled, what account(s) should be debited?

When all outstanding preferred shares are purchased and retired by the issuing corporation for less than the original issue price, accounting for the retirement increases

The residual interest in a corporation belongs to the

In jurisdictions where par value shares are legally allowed, the only real significance of par value is

Which statement is correct regarding real estate income or investment trusts?

A possible result of the reacquisition and cancellation of shares by a corporation is that this may

Aye Corp.sells common shares on a subscription basis.The Common Shares account should be credited when the

The cumulative feature of preferred shares

The accounting problem in a lump sum sale of shares is the allocation of the proceeds between the classes of securities.One acceptable method of allocation is the

The liability of shareholders is

Subscriptions Receivable are reported as

When shares are reacquired at a cost less than the average per share value, the difference is credited to

Preferred shares are often issued instead of debt

Dividends on cumulative preferred shares

The preemptive right enables a shareholder to

Callable preferred shares

According to the CBCA, when a company purchases its own shares on the market