FAR EASTERN UNIVERSITY

Institute of Accounts, Business and Finance

BVS EXERCISES_THEORIES AND PROBLEMS

1. The declaration of dividends by a company

a. Always decreases the balance in Retained Earnings c. Always increases the balance in Retained Earnings
b. Always reduces the Cash balance d. Always increases the balance in Common Stock

2. Dividends in arrears are associated with the

a. Current-dividend preference c. Noncumulative-dividend preference
b. Cumulative-dividend preference d. None of these are correct

3. Dividends declared are reported on the

a. Statement of comprehensive income as an c. Statement of retained earnings
expense d. Statement of comprehensive income as a
b. Balance sheet as an asset revenue

4. Total shareholder’s equity divided by the number of shares outstanding represents the
a. Return on equity c. Book value per share
b. Stated value per share d. Price-earnings ratio

5. The effect of recording a 100% stock dividend is to

a. Decrease the current ratio, decrease working capital and decrease book value per share.
b. Leave inventory turnover unaffected and increase book value per share.
c. Leave working capital unaffected and decrease book value per share.
d. Leave working capital unaffected, decrease book value per share and decrease the debt to equity ratio.

6. Which of the following shareholder rights is most commonly enhanced in an issue of preference shares?
a. The right to vote for the board of directors.
b. The right to maintain one’s proportional interest in the entity.
c. The right to receive a full cash dividend before dividends are paid to other classes of share capital.
d. The right to vote on major corporate issues.

7. Preferences shares participate ratably with the ordinary shareholders in any profit distribution beyond the
prescribed preference rate.
a. Cumulative feature c. Callable feature
b. Participating feature d. Redeemable feature

8. Which of the following features of preference share would most likely be opposed by ordinary shareholders?
a. Convertible b. Callable c. Redeemable d. Participating

9. It is the amount which the preference shareholders normally receive upon liquidation of the entity.
a. Liquidation value c. Book value
b. Par value d. Fair value

10. Which of the following statements is true in relation to “call price” of preference share?
a. The call price is the amount paid to preference shareholders upon redemption of preference share during
the lifetime of the entity.
b. In the absence of liquidation value, the call price is considered in computing book value per share.
c. The call price is the amount paid to ordinary shareholders upon liquidation of the entity.
d. All of these statements are true

11. Which of the following statements is true in relation to preference as to dividends?

a. If dividends are declared, the preference shareholders have the right to receive dividends first before
ordinary shareholders are paid a dividend.
b. The preference shareholders have the right to receive an amount equal to par value or liquidation value of
their shareholders in the event of liquidation in addition to cumulative dividends in arrears.
c. If dividends are declared, the ordinary shareholders have the right to receive dividends first before
preference shareholders are paid a dividend.
d. All of these statements are true.

12. When the right to receive dividend is forfeited in any one year in which dividend is not declared, the preference
share is said to be
a. Cumulative b. Noncumulative c. Participating d. Nonparticipating
13. An entity has outstanding both ordinary shares and nonparticipating, noncumulative preference shares. The
liquidation value of the preference shares is equal to the par value. The book value per ordinary share is
unaffected by
a. The declaration of a share dividend on preference shares payable in preference shares when the market
price of the preference share is equal to the par value.
b. The declaration of a share dividend on ordinary shares payable in ordinary shares when the market price
of the ordinary shares is equal to the par value.
c. The payment of a previously declared cash dividend on the ordinary shares.
d. A 2-for-1 split of the ordinary shares.

14. The cumulative feature of preference shares

a. Limits the amount of cumulative dividends to the par value of the preference shares.
b. Requires that dividends not paid in any year must be made up in a later year before dividends are
distributed to ordinary shareholders.
c. Means that the shareholder can accumulate preference shares equal to the par value of the ordinary
shares at which time the preference shares can be converted into ordinary shares.
d. Enables any preference shareholder to accumulate dividends equal to the par value of the shares.

15. Noncumulative preference dividends in arrears

a. Are not paid and not disclosed.
b. Must be paid before any other cash dividends can be distributed.
c. Are disclosed as liability until paid.
d. Are paid to preference shareholders if sufficient funds remain after payment of the current preference
dividend.

16. How should cumulative preference dividends in arrears be reported?

a. Note disclosure
b. Increase in shareholders’ equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year and increase in
noncurrent liabilities for the balance.

17. Dividends in arrears on preferred stock are classified as

a. A current liability account c. A long-term liability account
b. A stockholder's equity account d. None of these are correct

18. Dividends in arrears on preferred stock are

a. A current liability account d. Disclosed in the notes to the financial
b. A stockholder's equity account statements
c. A long-term liability account

19. The Retained Earnings balance of Mantua Company was P128,700 on January 1, 2018. Net income for 2018 was
P72,820. If Retained Earnings had a credit balance of P57,750 after closing entries were posted on December 31,
2018, and if additional stock of P35,750 was issued during the year, dividends declared during 2018 were
a. P106,700 c. P179,520
b. P143,770 d. P158,125

20. Pelletier Corporation has the following stock outstanding:

Preferred Stock (6 percent, P10 par, 45,000 shares authorized, 10,000

shares issued and outstanding) P100,000
Common Stock (P7 par, 250,000 shares authorized, 120,000 shares issued
and outstanding) 840,000

Given the information above, if Pelletier pays a P9,000 cash dividend, and if the preferred stock is
noncumulative, common stockholders will receive
a. P3,000 b. P9,000 c. P6,000 d. P4,500

21. Given the information above, if Pelletier pays a P64,000 dividend, and if the preferred stock is cumulative and two
years' dividends are in arrears, common stockholders will receive
a. P32,000 b. P52,000 c. P58,000 d. P46,000
22. Given the information above, if Pelletier pays a P64,000 dividend, and if the preferred stock is noncumulative and
the two previous years' dividends have not been paid, common stockholders will receive
a. P32,000 b. P52,000 c. P58,000 d. P46,000

23. Refer to Exhibit 12-1. Given the information above, if Pelletier pays a P108,000 dividend, and if the preferred stock is
cumulative and three years' dividends are in arrears, preferred stock will receive
a. P18,000 b. P24,000 c. P90,000 d. P84,000
24. During the year, Trenton Company purchased 3,000 shares of its P10 par common stock at P50 per share and later
sold it for P40 per share. How much did total equity change because of these treasury stock transactions?
a. P150,000 decrease b. P120,000 increase c. P30,000 decrease d. P20,000 decrease

25. Miro Company provided the following shareholders’ equity on December 31, 2018:

Share capital, P100 5,000,000

Share premium 1,000,000
Retained earnings unappropriated 1,500,000
Retained earnings appropriated for contingencies 500,000
Revaluation surplus 800,000
8,800,000

Required:Compute the book value per share on December 31, 2018.

26. Sunset Company has an authorized share capital of 20,000 P100 par, 8% cumulative preference shares and 40,000
ordinary shares with P100 par value. The entity reported the following shareholders’ equity on December 31, 2018:
Cumulative preference share capital 1,000,000
Ordinary share capital 2,200,000
Share premium 400,000
Retained earnings 520,000
Treasury ordinary shares – 2,000 at cost (300,000)
3,820,000
Dividends preference share are in arrears for 2017 and 2018.
Required:Compute book value per preference share and per ordinary share on December 31, 2018.

27. Villa Company reported the following shareholders’ equity on December 31, 2018:

5%cumulative preference share capital, par value

P100; 25,000 shares issued and outstanding 2,500,000
Ordinary share capital, par value P35, 100,000 shares
issued and outstanding 3,500,000
Share premium 1,250,000
Retained earnings 3,000,000
Dividends in arrears on the preference share amount to P250, 000. If the entity were to be liquidated, the preference
shareholders would receive par value plus a premium of P500, 000.
What is the book value per ordinary share?
a. 77.50 b. 75.00 c. 72.50 d. 70.00