CEU – Mendiola Corporation – Formation & Organization G.

Ong

Multiple Choice: Select the best answer for each of the following and write the letter corresponding to your choice.
USE CAPITAL LETTERS ONLY. NO ERASURES ALLOWED (1 point each)
1. The issuance of preference shares for non-cash assets
A. Increases preference shares outstanding.
B. Increases preference shares authorized.
C. Increases investment in preference shares by the issuing corporation.
D. Has no effect on preference shares outstanding.

2. Which of the following statements is true?

A. When par value shares are issued, the share capital account is credited with the par value of the shares issued,
regardless of whether the issuance price is equal to par or more than par or less than par.
B. When par value shares are issued, the share capital account is credited with the par value of the shares issued,
only if the issuance price is equal to par.
C. When par value shares are issued, the share capital account is credited with the par value of the shares issued,
only if the issuance price is less than par.
D. When par value shares are issued, the share capital account is credited with the par value of the shares issued,
only if the issuance price is more than par.

3. All of the statements are true, except:

A. The highest bidder is the one who is willing to pay the entire unpaid subscription plus any expenses incurred in
the delinquency sale and at the same time getting the highest number of shares.
B. The limited liability of a corporation and its stockholders may weaken its credit capacity.
C. Under the journal entry method of recording stock transactions, the amount of share capital issued is
determined by deducting the balance of unissued share capital account from the balance of authorized share
capital account.
D. When stock is sold on a subscription basis and the entire subscription price has been collected, the issuance of
the stock is recorded by a debit to subscribed share capital and a credit to share capital.

4. All of the statements are incorrect, except:

A. Share Capital Subscribed is always credited at par value, regardless of the subscription price.
B. In addition to being paid dividends after to those paid to ordinary shareholders, preference stock shareholders
have the right to receive assets pro-rata with ordinary shareholders in the event of corporate liquidation.
C. If share premium-preference share is P30,000, preference share is P200,000, share premium-ordinary Share is
P20,000, ordinary Share is P525,000, and accumulated profits is P105,000 (deficit), the total stockholders'
equity is P880,000.
D. A certificate of incorporation is issued to the shareholder upon full payment of his subscription.

5. Which of the following statements is correct?

A. No formal journal entry in the general journal is required to record the authorized share capital under the
journal entry method of recording share capital transactions.
B. A certificate of stock is a document that provides evidence of ownership in a stock corporation.
C. The Article of Co-Partnership enumerates the powers and restrictions conferred upon the corporation by the
government.
D. No par value share is a share with a face or nominal value stated in the stock certificate but no in the article of
incorporation.

6. Which of the following statements is true?

A. A shareholder purchasing 10 shares will be given 10 stock certificate.
B. If Tuñing has 10 shares bought for P1,000 and Rossel ahs also 10 shares bought for P2,000, Rossel has twice as
much right as Tuñing.
C. Outstanding shares are shares issued and in the hands of stockholders.
D. Par value shares cannot be issued below P5.00

7. The Corporation Code of the Philippines provides a security to the creditors by requiring the corporation to set
aside a minimum fund of permanent investment which cannot be distributed to the shareholders in its lifetime.
A. Authorized share capital C. Fund theory.
B. Legal capital D. Trust share capital

8. Which of the following statements is incorrect?

A. A corporation can issue more shares than it is authorized in its charter, if the board of directors approves of an
increase in the number of authorized shares.
B. Ordinary Share Subscribed is debited after the final installment is received on an Ordinary Share Subscription.
C. The excess of the issue price over the par value of the ordinary share subscribed be recorded as premium when
the subscription is received.
D. When stock is sold on a subscription basis and the entire subscription price has been collected, the issuance of
the stock is recorded by a debit to subscribed share capital and a credit to share capital.

9. When shares are issued for services, the measure is equal to

A. Book value of the services already rendered. C. Book value of the shares issued.
B. Fair value of the services already rendered. D. Par value of the shares issued.
CEU – Mendiola Corporation – Formation & Organization G. Ong
10. A major difference between a preference share and an ordinary share is that
A. Preference share has controlling interest over the corporation.
B. Preference share has always a fixed amount of profit claim.
C. Ordinary share has a claim on the net assets before the preference shares.
D. To the preference share goes part of the profit after the ordinary shares.

11. Statement 2: Preference shareholders have preferential claims over the creditors in the assets of the corporation.
Statement 1: Preference shareholders have preferential claims over the ordinary shareholders in the distribution of
dividends.
A. Both statements are true. C. Only statement 1 is true.
B. Both statements are false. D. Only statement 2 is true.

12. To incorporate, the law requires that at least

A. The minimum paid up capital is P500,000.
B. 25% of the authorized should have been subscribed.
C. 25% of the authorized should have been paid.
D. 25% of the authorized should have been subscribed and paid

13. When 100 ordinary shares of P100 par are subscribed for P120,
A. Subscribed share capital should be credited for P12,000.
B. Subscription receivable should be credited for P12,000.
C. Subscription receivable should be debited for P12,000.
D. Subscription receivable should be debited for P10,000.

14. Statement 1: Accounts receivable is transferred to the corporation’s books are net realizable value.
Statement 2: In recording the distribution of shares of stock to the partners, the account Shares of New
Corporation is closed to partners’ capital accounts based on their profit and loss ratio.
A. Both statements are true. C. Only statement 1 is true.
B. Both statements are false. D. Only statement 2 is true.

15. Which of the following statement about preference stock is not true?
A. Preference stock usually shares the right to receive assets pro-rata with the ordinary shareholders in case of
corporate liquidation.
B. Preference stock usually carries the right to vote.
C. Preference stock dividends are usually paid prior to payment of ordinary stock dividends.
D. In addition to being paid dividends prior to those paid to ordinary shareholders, preference stock shareholders
have the right to receive assets pro-rata with ordinary shareholders in the event of corporate liquidation.

Test 2: Problem Solving: (2 points each)

Problem: Amazing Corporation is authorized to issue 100,000 shares of P10 par value ordinary stock and 50,000
shares of P20 par value preference stock. During the month of January, the corporation entered into the following
transactions:
01/08 - Issued 30,000 shares of ordinary stock at P17.50 per share and 15,000 shares of preference stock at P25 per
share.
01/12 - Accepted subscription for 15,000 shares of preference stock at P30 per share and received a 30% down
payment.
01/15 - Received full payment on the January 12 subscription and issued the stock certificates.
01/18 - Issued 20,000 shares of ordinary stock at P12.50 for cash.
01/24 - Issued 20,000 shares of ordinary stock in exchange for 500 square meters of land currently appraised at
P312,500.
01/30 - Issued 5,000 shares of ordinary stock in exchange for machinery. The ordinary stock is currently trading in
the stock exchange at P22.50 per share. No appraisal is available on the machinery.
01/31 - Issued 15,000 shares of preference stock at P50 per share for cash.
1. How much Premium on preference stock should be shown in the balance sheet?
2. How much Premium on Ordinary stock should be shown in the balance sheet?

Problem: KJ Corporation was incorporated on June 1, 2014 with an authorized 200,000 shares of no-par ordinary
stock, stated value P10 and 10,000 shares of 9% preference stock, par value P30. Transactions affecting the company’s
capital stock as of July 31, 2014 were as follows:
June 1 – 50,000 shares of ordinary stock P10 issued.
June 5 – Assets with a total appraised value of P600,000 were acquired in exchange of 50,000 shares of ordinary
stock.
July 15 – Subscriptions were received for 100,000 shares of ordinary stocks at P15 and for 5,000 shares of 9%
preference stock at P35.
July 25 – Payments in full of the ordinary stock and preference stock subscribed June 15 were received and the
corresponding shares of stocks were issued.
3. How much is the total stockholders’ equity as of June 30, 2014?
4. How much total premium should be reported as of June 30, 2014?
CEU – Mendiola Corporation – Formation & Organization G. Ong

Problem: Presented is the trial balance of NitWit Company as of July 1, 2014.

Debit Credit
Cash 126,800
Acct. Receivable 88,790
Allow. for Bad Debts 8,800
Supplies on Hand 7,960
Mer. Inventory 325,900
Office Equipment 185,600
Acc. Depreciation - Off. Equipment 50,000
Furniture & Fixtures 124,600
Acc. Depreciation - Fur & Fixtures 22,000
Accounts Payable 84,620
Rev. & Exp. Summary 308,480
Nit, Capital 205,400
Wit, Capital 180,350

The partners, Nit and Wit have decided to expand their business by inviting three more friends and form a corporation.
Nit and Wit shared the profit and loss on a ratio of 6:4 respectively. The incorporators agreed to the following
adjustment: The allowance for bad debts should be decreased to P4,800; Merchandise is understated by P8,300, while
Fur. & Fixtures is overstated by P5,000.
It was also agreed that Nit is to invest additional cash or withdraw cash to bring his capital to P300,000, and that Wit
will invest additional cash or withdraw cash to bring his capital balance to P400,000. This is being done so that Nit
will receive exactly 30,000 shares and Wit will receive exactly 40,000 shares of stocks. Each of the other three
incorporators will subscribe 20,000 shares of ordinary stocks of the new corporation by paying cash.
The new corporation is authorized to issue 500,000 shares of P10 par value ordinary stock.
5. How much cash should Nit invests or withdraw as per required? (Indicate whether invest or withdraw and the
corresponding amount)
6. How much cash could Wit withdraw to meet the requirement? (Indicate whether invest or withdraw and the
corresponding amount)
7. How many shares of stock are issued upon the incorporation of the new company?
8. How much is the Premium on Ordinary Stock per share, after the issuance of all the stocks to its respective
shareholders?

Problem: The stockholders’ equity of Blind Inc. at the end of 2014 and 2013 are as follows:
2014 2013
Preference stock, P100 par, 10% P 2,000,000 P 1,200,000
Ordinary stock, P20 par 4,000,000 3,600,000
Premium – Preference 32,000 -
Premium – Ordinary 8,700,000 7,500,000
Retained Earnings 160,000 360,000
9. How many shares of preference stock were issued in 2014 and at what price?

Problem: GenTeX Corp. records included the following shareholders’ equity accounts:
Preference stock, P15 par, authorized 200,000 shares P 2,550,000
Ordinary stock, P50 par, authorized 100,000 shares 3,000,000
Premium – Preference 340,000
10. Compute the number of shares issued and outstanding shares for ordinary class of stock in GenTex’s statement of
shareholders’ equity.
11. Compute the premium per share for preference class of stock in GenTex’s statement of shareholders’ equity.

Problem: A corporation was organized on January 30 of the current year, with an authorization of 20,000 shares of P4
preferred stock, P12 par, and 100,000 shares of P3 par common stock. The following selected transactions were completed
during the first year of operations:
Jan. 30 Issued 15,000 shares of common stock at P21 per share for cash.
Jan. 31 Issued 1,100 shares of common stock at par to an attorney in payment of legal fees for organizing the
corporation.
Feb. 24 Issued 20,000 shares of common stock in exchange for land, buildings, and equipment with fair market prices of
P55,000 P120,000, and P45,000 respectively.
Mar. 15 Issued 2,000 shares of preferred stock at P54 for cash.
12. How much is the balance of Common stock account in the balance sheet as of March 31?

Problem: Oldies Corporation was incorporated on January 1, 2013, with the following authorized capitalization:

20,000 shares of common stock no par value, stated value P40 per share.

6,000 shares of 5% cumulative preferred stock, par value P10 per share.
During 2013, Oldies issued 10,000 shares of common stock for a total of P600,000 and 5,000 shares of preferred stock
at P24 per share. In addition, on December 20, 2013, subscriptions for 1,000 shares of preferred stock were taken at a
purchase price of P30. These subscribed shares were paid for on January 2, 2014.
13. What should Oldies report as total paid-in capital on its December 31, 2013, balance sheet?
CEU – Mendiola Corporation – Formation & Organization G. Ong
Problem: Lazy Company exchanges a piece of equipment for 400 shares of Lady Corporation’s ordinary stock that has
a P40 par value. The equipment had cost Lazy P15,000 five years ago, and has a fair market value of P21,000. The
equipment has a recorded accumulated depreciation of P8,000 on the books of Lazy.
14. What is the total increase in paid in capital of Lady Corporation as a result of this transaction?

Problem: On December 31, 2014, Dawn Corporation purchased some non-cash assets from Dusk Company by
issuing shares of stocks. On the date of purchase Dusk Company showed the following book value of the assets to be
acquired by Dawn:
Machineries P 1,400,000
Equipment 1,300,000

Fair values at December 31, 2014 are as follows:

Machineries P 1,600,000
Equipment 1,400,000
Dawn Services issued 50,000 shares of P10 par value ordinary stocks to Dusk Company.
15. How much should be credited to premium account?

That’s All Folks ! ! ! ☺

“Plenty of people miss their share of happiness,

not because they never found it,
but because they did not slow down to enjoy it.”
CEU – Mendiola Corporation – Formation & Organization G. Ong

(Detach here)

Name: _____________________________________ Date: ____________ Rating: /45

(Last Name, First Name, MI)

Test 1: (1 point each)

1. 4. 7. 10. 13.
2. 5. 8. 11. 14.
3. 6. 9. 12. 15.

Test 2: (2 points each)

1. 6. 11.
2. 7. 12.
3. 8. 13.
4. 9. 14.
5. 10. 15.
CEU – Mendiola Corporation – Formation & Organization G. Ong

Test 1: (1 point each)

1. A 4. A 7. B 10. B 13. C
2. A 5. B 8. A 11. D 14. C
3. A 6. C 9. B 12. B 15. B

Test 2: (2 points each)

1. P 675,000 6. P 93,338 invest 11. P 2.00 / share
2. P 450,000 7. 130,000 shares 12. P 108,300
3. P 1,100,000 8. None 13. P 720,000
4. P 100,000 9. 8,000 shares @ P104 14. P 21,000
5. P 94,868 withdraw 10. 60,000 shares 15. P 2,500,000
CEU – Mendiola Corporation – Formation & Organization G. Ong
Test 1:
1. A 4. A 7. B 10. B 13. C
2. A 5. B 8. A 11. D 14. C
3. A 6. C 9. B 12. B 15. B

Test 2:
1. Page: 7
P 675,000 2. P 450,000
Ordinary Share Preference Share
Shares issued (P10 par) Shares issued (P20 par)
and Issue price Share Capital Premium and Issue price Share Capital Premium
01/08 30,000 @P17.50 300,000 225,000 15,000 @P25 300,000 75,000
01/12 15,000 @P30 150,000
01/15 From 01/15 300,000
01/18 20,000 @P12.50 200,000 50,000
01/24 20,000 shares 200,000 112,500
01/30 5,000 @P22.50 50,000 62,500
01/31 15,000 @P50 300,000 450,000
750,000 450,000 900,000 675,000

3. P 1,100,000 4. P 100,000
Share Capital Premium Total
June 01 50,000 @P10 P500,000
June 05 50,000 for asset
50,000 @P10 500,000 P 100,000
P 1,000,000 P 100,000 P 1,100,000

5. P 94,868 withdraw by Nit 6. P 93,338 investment by Wit

Nit Capital (6) Wit Capital (4)
Unadjusted capital P 205,400 180,350
Rev. & expense summary (income) 185,088 123,392
Decrease Allowance for bad debt 2,400 1,600
Increase in Merchandise 4,980 3,320
Decrease in Furniture & Fixtures (3,000) (2,000)
Adjusted capital P 394,868 P 306,662
Required capital 300,000 400,000
To be invested (withdrawn) (P 94,868) P 93,338

7. 130,000 shares 8. Zero – since all shares were issued at par value.
Nit 30,000 shares
Wit 40,000 shares
20,000 shares for 3 others 60,000 shares
130,000 shares

9. 8,000 shares @ P104 / share

2014 Preference share capital P 2,000,000
2013 Preference share capital 1,200,000
Increase / Issuance P 800,000
divided by par value P 100 / share
Share issued in 2014 8,000 shares

2014 Premium 32,000

2013 Premium 0
Increase in premium 32,000
divided by shares issued 8,000 shares
Premium per share P 4
Add: Par value 100
Issuance price per share P 104
CEU – Mendiola Corporation – Formation & Organization G. Ong

10. 60,000 share

Ordinary share capital P 3,000,000
Divided by par value P 50 / share
Shares issued 60,000

11. P 2.00 / share

Premium - preference P 340,000
Divided by shares issued 170,000
Premium per share P2.00 / share

12. P 108,300
Ordinary Share
Shares issued (P3 par)
and Issue price Share Capital Premium
01/30 15,000 @P21 P 45,000 P 270,000
01/31 1,100 for attorney's fee 3,300
02/24 20,000 for assets 60,000 160,000
03/15
P 108,300 P 430,000

13. P 720,000
Common share capital paid P 600,000
Preference share capital paid 120,000
Issued and paid up P 720,000

14. P 21,000 – total increase in Stockholders’ Equity

Land 21,000
Ordinary share capital (400 shares @ P40 par value) 16,000
Premium - Ordinary 5,000

15. P 2,500,000
Fair value of Machineries P 1,600,000
Fair value of Equipment 1,400,000
Total fair value of assets received P 3,000,000
Par value of shares issued (50,000 shares @P10) 500,000
Premium of shares issued P 2,500,000