Financial Accounting: Liabilities & Equities (FA3) Exam Review

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FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc. Part 3: Module 3 – Shareholders’ Equity Blueprint: 9-12% a. JMN Company had opening retained earnings of $100,000. Net income for the year was $23,000. During the current year, an error in the prior year was discovered resulting in a credit to retained earnings for $5,000, and 1,000 shares were retired at $2 above their book value. There was no contributed capital account prior to the retirement of the shares. Ending retained earnings was $102,000. What was the amount of dividend declared for the year? 1) $14,000 2) $24,000 3) $26,000 4) $28,000 b. When a property dividend is declared, the book value of the property and the market value are not the same. How should the dividend be recorded? 1) It should be recorded at the book value of the property at the date of declaration. 2) It should be recorded at the market value of the property at the date of declaration. 3) It should be recorded at the market value of the property at the date of distribution. 4) It should be recorded at the book value or market value, whichever is higher at the date of declaration. c. What is a dividend called when a portion of the shareholders’ original investment is returned? 1) Equity dividend 2) Special dividend 3) Liquidating dividend 4) Compensating dividend d. Which of the following type of dividends does not reduce retained earnings? 1) Cash dividend 2) Stock dividend 3) Property dividend 4) Liquidating dividend e. DKM Co. previously issued cumulative non-convertible preferred shares with an annual dividend payable on December 31. Dividends were last paid on December 31, 2002, and no dividends were declared in 2005. In DKM’s December 31, 2005 financial statements, how will DKM report these dividends in arrears? 1) Subtract 3 years of dividends on preferred shares from earnings when computing 2005 basic earnings per share 2) Report a liability equal to 2 years of dividends on the preferred shares 3) Disclose in a footnote that the dividends on preferred shares are 2 years in arrears 4) Disclose in a footnote that the dividends on preferred shares are 3 years in arrears 8
FA3 Exam Review notes Barbara Wyntjes, CGA, MBA, B.Sc. f. On July 1, 2006, XZC Co. issued (sold) 2,000 of its no-par-value common shares and 4,000 of its no-par-value convertible preferred shares for a lump sum of $60,000. At the date of issue, XZC’s common shares were trading at $17 per share and the convertible preferred shares at $7 per share. What should the amount of the proceeds allocated to XZC’s common share account be? 1) $32,000 2) $32,903 3) $34,000 4) $35,133 Multiple Choice solutions: a. 2 [100,000 + 23,000 + 5,000 – (1,000 × 2) – 102,000] = $24,000 b. 2 c. 3 d. 4) e. 4) f. 2) (2,000 × $17) = 34,000, (4,000 x $7) = 28,000. Total $62,000 (34,000/62,000) x $60,000 = $32,903 Part 4: Module 4 – Complex Debt and Equity Instruments Blueprint: 11-18% a. XQL Inc. sells $1,000,000 of 6%, 5-year bonds with detachable share purchase warrants for $1,040,000. Each $1,000 bond carries a warrant that entitles the investor to purchase 1 common share for $200. Shortly after the issuance, the warrants trade for $50 each and the bonds are quoted at 103 ex-warrants. Assuming that XQL used the proportional method to record this transaction, what was the net amount allocated to the bonds? 1) $ 950,000 2) $ 990,000 3) $ 991,850 4) $1,000,000 b. Zil Co. has $4,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 no-par-value common shares. The bonds pay interest on January 31 and July 31. On July 31, 2006, the holders of $3,000,000 of the bonds exercised the conversion privilege (converted their bonds into common shares). At the conversion date, the market price of the bonds was $1,050 each, the market price of the common shares was $36 each, and the balance in the contributed capital, common stock conversion rights account was $120,000. 9
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Financial Accounting: Liabilities & Equities (FA3) Exam Review

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