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Chapter 15: Q15-4ISTQ (page 831)

Which of the following is false?

(a) Under GAAP, companies cannot record gains on transactions involving their own shares.

(b) Under IFRS, companies cannot record gains on transactions involving their own shares.

(c) Under IFRS, the statement of stockholders’ equity is a required statement.

(d) Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock.

Short Answer

Expert verified

Answer

The correct option is(d). Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock.

Step by step solution

01

Step-by-Step SolutionStep 1: Definition of Revaluation Surplus

Any equity account maintained by a business entity that reports an increase in the value of the assets of the business entity having a capital nature is known as revaluation surplus.

02

Explanation for the correct option

Option (d) Under IFRS, a company records a revaluation surplus when it experiences an increase in the price of its common stock, is correct.

Reason: It is the correct option because an increase in the price of shares of a business entity is not reported as a revaluation surplus by the business entity. Instead, a revaluation surplus includes an increase in the price of the business entity's assets.

03

Explanation for the incorrect options

The explanation for options (a) and (b): Business entities reporting under IFRS or GAAP are not allowed to recognize and record profit from any transaction that involves their shares. Therefore, the statements in (a) and (b) are true.

(c) Yes, a business entity reporting financial information under IFRS is required to prepare the statement of stockholder’s equity. This statement includes retained earnings, net income, and a cash dividend.

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Most popular questions from this chapter

Describe the accounting for the issuance for cash of no-par value common stock at a price in excess of the stated value of the common stock.

Hatch Company has two classes of capital stock outstanding: 8%, \(20 par preferred and \)5 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.

Preferred Stock, 150,000 shares \( 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred Stock 200,000

Paid-in Capital in Excess of Par—Common Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2018.

Jan.1 30,000 shares of preferred stock issued at \)22 per share.

Feb.1 50,000 shares of common stock issued at \(20 per share.

June 1 2-for-1 stock split (par value reduced to \)2.50).

July 1 30,000 shares of common treasury stock purchased at \(10 per

share. Hatch uses the cost method.

Sept.15 10,000 shares of treasury stock reissued at \)11 per share.

Dec.31 The preferred dividend is declared, and a common dividend of 50¢

per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2018. Show all supporting computations.

(Dividends and Splits) Myers Company provides you with the following condensed balance sheet information.

Asset

Current assets \(40,000

Equipment (net) 250,000

Intangibles 60,000

Total assets \)410,000

Liabilities and Stockholders’ Equity

Current and long-term liabilities \(100,000

Stockholders’ equity

Common stock (\)5 par) \( 20,000

Paid-in capital in excess of par 110,000

Retained earnings 180,000 310,000

Total liabilities and stockholders’ equity \)410,000

Instructions

For each of the following transactions, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.)

  1. Myers declares and pays a \(0.50 per share cash dividend.
  2. Myers declares and issues a 10% stock dividend when the market price of the stock is \)14 per share.
  3. Myers declares and issues a 30% stock dividend when the market price of the stock is \(15 per share.
  4. Myers declares and distributes a property dividend. Myers gives one share of its equity investment (ABC stock) for every two shares of Myers Company stock held. Myers owns 10,000 shares of ABC. ABC is selling for \)10 per share on the date the property dividend is declared.
  5. Myers declares a 2-for-1 stock split and issues new shares.

Twenty-five thousand shares reacquired by Elixir Corporation for \(53 per share were exchanged for undeveloped land that has an appraised value of \)1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.

Instructions

a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.

(Preferred Stock Entries and Dividends) Otis Thorpe Corporation has 10,000 shares of \(100 par value, 8%, preferred stock and 50,000 shares of \)10 par value common stock outstanding at December 31, 2017.

Instructions

Answer the questions in each of the following independent situations.

  1. If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2014, what are the dividends in arrears that should be reported on the December 31, 2017, balance sheet? How should these dividends be reported?
  2. If the preferred stock is convertible into seven shares of \(10 par value common stock and 4,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?
  3. If the preferred stock was issued at \)107 per share, how should the preferred stock be reported in the stockholders’ equity section?
See all solutions

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