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Chapter 14 – Exercises & Cases

Multiple Choice Questions​

  1. Share capital represents: a) Loans from banks b) Investment by owners c) Retained earnings d) Current liabilities Answer: b) Share capital is investment by owners.

  2. Which PCN account is used for share capital? a) 400000 b) 101000 c) 104000 d) 510000

    Answer: b) 101000 is Share Capital (Capital Social).

  3. Cash dividends: a) Increase retained earnings b) Decrease retained earnings c) Increase share capital d) Decrease share capital Answer: b) Cash dividends decrease retained earnings.

  4. EPS is calculated as: a) Net Income ÷ Total Assets b) Net Income ÷ Shares Outstanding c) Revenue ÷ Shares Outstanding d) Equity ÷ Shares Outstanding Answer: b) EPS = Net Income ÷ Weighted Average Shares Outstanding.

  5. The most common corporate form for Luxembourg SMEs is: a) SA b) SARL c) SCS d) SNC

    Answer: b) SARL is most common for SMEs.

Questions​

  1. Explain the difference between equity financing and debt financing.

  2. How is share capital recorded when shares are issued above par value?

  3. What is the difference between cash dividends and stock dividends?

  4. How is earnings per share calculated? Why is it useful?

  5. What are the main corporate forms in Luxembourg? How do they differ?

Problems Set A​

Problem A-1: Share Issuance

A Luxembourg SARL issues shares: a) Issue 1,000 shares at €10 per share (par value €1) b) Issue 500 shares at €15 per share (par value €1) c) Record both with proper PCN accounts

Problem A-2: Cash Dividend

A corporation declares and pays dividends: a) Declare €5,000 cash dividend b) Pay €5,000 cash dividend c) Show effect on retained earnings

Problem A-3: EPS Calculation

Calculate earnings per share:

  • Net Income: €50,000
  • Shares Outstanding: 10,000
  • Weighted Average: 10,000

Problem A-4: Stock Dividend

A corporation declares 10% stock dividend:

  • Shares Outstanding: 10,000
  • Par Value: €1
  • Market Value: €10
  • Record stock dividend

Problem A-5: Share Repurchase

A corporation repurchases 200 shares at €12 per share:

  • Original issue price: €10
  • Record repurchase as treasury stock

Problems Set B​

Problem B-1: Complete Share Transactions

A Luxembourg SARL has the following transactions:

  1. Issue 2,000 shares at €20 (par €10)
  2. Issue 1,000 shares at €25 (par €10)
  3. Repurchase 300 shares at €22
  4. Declare €15,000 cash dividend
  5. Pay cash dividend

Record all transactions with proper PCN accounts.

Problem B-2: Dividend Analysis

A corporation has:

  • Share Capital: €100,000
  • Retained Earnings: €50,000
  • Net Income: €30,000
  • Declares €20,000 dividend

Calculate: a) Retained earnings after dividend b) Effect on equity c) Dividend per share (10,000 shares)

Problem B-3: EPS with Changes

A corporation has:

  • Beginning shares: 10,000
  • Issue 2,000 shares July 1
  • Net Income: €60,000

Calculate weighted average shares and EPS.

Problem B-4: Corporate Equity Structure

Prepare equity section of balance sheet:

  • Share Capital: €200,000
  • Share Premium: €50,000
  • Retained Earnings: €75,000
  • Treasury Stock: €10,000

Comprehensive Problem​

Comprehensive Problem 14: Complete Corporation Accounting

Mode Luxembourg SARL is incorporated and needs to properly account for all equity transactions.

Formation (January 1, 2024):

  • Issue 10,000 shares at €20 per share (par value €10)
  • Receive €200,000 cash

Year 2024 Operations:

  • Net Income: €80,000
  • Declare cash dividend: €30,000
  • Pay cash dividend: €30,000

Year 2025:

  • Issue additional 2,000 shares at €25 (par €10)
  • Net Income: €100,000
  • Declare 5% stock dividend (on 12,000 shares)
  • Declare cash dividend: €40,000

Required:

  1. Record all share issuances with proper PCN accounts.

  2. Record dividend declarations and payments.

  3. Record stock dividend (calculate properly).

  4. Prepare statement of owner's equity for 2024 and 2025.

  5. Calculate earnings per share: a) 2024 (10,000 shares) b) 2025 (weighted average with new shares and stock dividend)

  6. Show equity section of balance sheet: a) December 31, 2024 b) December 31, 2025

  7. Explain Luxembourg requirements: a) SARL capital requirements b) Dividend distribution rules c) PCN Class 1 account classifications d) RCS filing requirements

Cases​

Case 14-1: Choosing Corporate Form

Marie is deciding whether to incorporate her restaurant. She's considering:

  • SARL (most common for SMEs)
  • SA (if she wants to go public later)
  • Staying as sole proprietorship

Questions for Analysis:

  1. What are the advantages and disadvantages of each form?

  2. What are the capital requirements for SARL vs. SA?

  3. How does accounting differ for each form?

  4. What are the compliance requirements?

  5. Which form would you recommend for Marie? Why?

  6. What are the tax implications of each form?

Case 14-2: Dividend Policy

A profitable Luxembourg SARL is deciding on dividend policy. The business has:

  • Strong profits
  • Growth opportunities
  • Shareholders expecting returns

Questions for Analysis:

  1. Should the business pay dividends? Why or why not?

  2. How much should be paid?

  3. What are the legal restrictions on dividends?

  4. How do dividends affect the business?

  5. What are the tax implications?

  6. How should dividend policy be communicated?

Solutions are published in supplementary/instructor/solutions/chapter_14_solutions.md.