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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鈥� 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鈥檚 equity. This statement includes retained earnings, net income, and a cash dividend.

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Most popular questions from this chapter

Use the information from BE15-13, but assume Green Day Corporation declared a 100% stock dividend rather than a 5% stock dividend. Prepare the journal entries for both the date of declaration and the date of distribution.

Wilco Corporation has the following account balances at December 31, 2017.

Common stock, \(5 par value \) 510,000

Treasury stock 90,000

Retained earnings 2,340,000

Paid-in capital in excess of par鈥攃ommon stock 1,320,000

Prepare Wilco鈥檚 December 31, 2017, stockholders鈥� equity section.

What factors influence the dividend policy of a company?

Why is the distinction between paid-in capital and retained earnings important?

(Stock and Cash Dividends) Earnhart Corporation has outstanding 3,000,000 shares of common stock with a par value of \(10 each. The balance in its Retained Earnings account at January 1, 2017, was \)24,000,000, and it then had Paid-in Capital in Excess of Par鈥擟ommon Stock of \(5,000,000. During 2017, the company鈥檚 net income was \)4,700,000. A cash dividend of \(0.60 a share was declared on May 5, 2017, and was paid June 30, 2017, and a 6% stock dividend was declared on November 30, 2017, and distributed to stockholders of record at the close of business on December 31, 2017. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

October 31, 2017 \)31

November 30, 2017 \(34

December 31, 2017 \)38

Instructions

  1. Prepare the journal entry to record the declaration and payment of the cash dividend.
  2. Prepare the journal entry to record the declaration and distribution of the stock dividend.
  3. Prepare the stockholders鈥� equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2017 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.
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