financial accounting, 1e - cleanfields.com accounting 1e...10.3-15 the entry to record midtown.net...

Financial Accounting, 1e Chapter 10: Corporations: Paid-in Capital and Retained Earnings

Test Item File

10-1.1 A corporation is a separate legal entity from its owners.

Answer: True LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10-1.2 A corporation must incorporate through the local government of any state it chooses.

Answer: False LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.1-3 A corporate charter describes the purpose, place of business, and other details of the business being incorporated.


10.1-4 A corporation must incorporate in every state in which it does business.


Copyright 2010 Pearson Education Inc. Publishing as Prentice Hall.

10.1-5 Limited liability means that the stockholders of a corporation share a personal liability for all debts of the corporation.


10.1-6 Changes in ownership through transfer of shares of stock have no effect on the life of a corporation.


10.1-7 A business wanting to incorporate must file articles of incorporation with:

A. the federal government. B. the state office dealing with incorporation. C. the local government. D. any state in which they will do business.

Answer: B LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.1-8 The number of shares of stock that a corporation is given the right to sell is called:

A. issued stock. B. authorized stock. C. outstanding stock. D. capital stock.



10.1-9 The basic unit of stock is called a(n): A. authorization. B. certificate. C. share. D. ownership record.

Answer: C LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.1-10 Stockholders will be issued ________________ physically or electronically.

A. charters B. articles of incorporation C. authorized stock D. stock certificates

Answer: D LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.1-11 Stock that is held by stockholders is called:

A. issued stock. B. authorized stock. C. outstanding stock. D. open stock.



10.1-12 Which of the following business types is largest by number? A. Partnerships B. Proprietorships C. Corporations D. Government entities


10.1-13 Which of the following business types dominates by the amount of business transacted?

A. Partnerships B. Proprietorships C. Corporations D. Government entities


10.1-14 Which of the following is NOT an advantage of a corporation?

A. Unlimited liability B. Ease of raising capital C. Ease of transfer ownership D. Continuous life

Answer: A LO: 10-1 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.1-15 Which of the following is NOT an advantage of a corporation? A. Ease of raising capital B. Government regulation C. Limited liability D. Transfer of ownership


10.1-16 Which of the following is an advantage of a corporation?

A. Double taxation B. Continuous life C. Unlimited liability D. Non-transfer of ownership


10.1-17 Which of the following are considered to be legal entities that exist separate and distinct from their owners?

A. Sole proprietorships B. Partnerships C. Corporations D. Organizations with more than 100 partners



10.1-18 Authorized capital stock is shares: A. listed in the charter. B. issued to the corporation’s officers. C. sold and in stockholder possession. D. that pay dividends.


10.2-1 Stockholders’ equity consists of contributed capital and paid-in capital.


10.2-2 Retained earnings represent internally generated capital.


10.2-3 There are three basic rights a stockholder may have.



10.2-4 For most companies, preemptive rights are the exception, rather than the rule.


10.2-5 Preferred stock is considered a voting “class” of stock.


10.2-6 Preferred stockholders generally have the same basic rights as common stockholders except for:

A. voting. B. dividends. C. liquidation. D. preemption.


10.2-7 When stockholders participate in management, they are demonstrating which stockholder right?

A. Vote B. Dividends C. Liquidation D. Preemption



10.2-8 Maintaining their proportionate share in the ownership of a corporation when new stock is available to be purchased is an example of which stockholder right?



10.2-9 Stockholders receiving their proportionate share of any assets left after a company goes out of business is an example of which stockholder right?



10.2-10 Earnings that a stockholder receives from a corporation is an example of which stockholder right?




10.2-11 If you own 500 shares (2% of a corporation’s stock) and the corporation issues 15,000 new shares, how many of the new shares can you purchase under preemptive right?

A. 500 B. 300 C. 800 D. 0

Answer: B Calculation: 15,000 x .02 = 300 LO: 10-2 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.2-12 If you own 500 shares (2% of a corporation’s stock) and the corporation issues 15,000 new shares, how many total shares will you have after exercising your preemptive rights?

A. 500 B. 300 C. 800 D. 0

Answer: C Calculation: (15,000 x .02) + 500 = 800 LO: 10-2 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.2-13 At least one “class” of stock MUST have:

A. preemptive rights. B. dividend rights. C. liquidation rights. D. voting rights.



10.2-14 Which right do preferred stockholders receive before common stockholders? A. Selling rights B. Dividend rights C. Voting rights D. Preemptive rights


10.2-15 Which is NOT a value placed on a certificate for a share of the company’s stock?

A. Par B. Stated value C. No par D. Market value


10.2-16 Values such as par, stated value, and no-par are assigned based upon:

A. federal regulation. B. choice of the organizers of the corporation. C. tax law.

D. market values of the stock. Answer: B LO: 10-2 Difficulty: 1 EOC Ref: S10-1 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.2-17 Stated value is assigned: A. when the corporate charter is filed. B. at a later date, when the company decides to issue the stock. C. after the stock has been issued. D. at the first meeting of the organizers of the corporation.


10.2-18 If there is only one class of stock outstanding, such stock would be classified as: A. authorized stock.

B. common stock. C. preferred stock. D. issued stock.


10.3-1 Many companies raise capital by issuing stock directly to stockholders or by using an underwriter to buy the stock that the underwriter cannot sell to its clients.


10.3-2 The issue price of the stock usually is equal to the par value of the stock.



10.3-3 Brandon Corporation issues 2,000 shares of $40 par common stock for $43 per share. The amount credited to paid-in capital in excess of par is:

A. $80,000. B. $86,000. C. $ 6,000. D. $ 0.

Answer: C Calculation: ($43 - $40) x 2,000 = $6,000 LO: 10-3 Difficulty: 1 EOC Ref: S10-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.3-4 A company can have a profit or loss when buying or selling its own stock.


10.3-5 The total paid-in capital should equal the amount of cash received.


10.3-6 A corporation may issue stock for other than cash, requiring the recording of the assets at

fair market value.



10.3-7 A journal entry for the sale of $10 par-common stock for $18 per share would include a: A. credit to Cash. B. debit to Common Stock. C. credit to Paid-In Capital in Excess of Par—Common Stock. D. debit to Paid-In Capital in Excess of Par—Common Stock.

Answer. C LO: 10-3 Difficulty: 1 EOC Ref: S10-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.3-8 If shares of stock are sold for more than par value, the stock is sold at a:

A. discount. B. gain. C. premium. D. loss.


10.3-9 If shares of stock are sold for less than par value, the stock is sold at a:

A. discount. B. gain. C. premium. D. loss.



10.3-10 If shares of preferred stock are sold at par value for cash, the transaction would be entered by:

A. debiting Cash and crediting Preferred Stock. B. debiting Preferred Stock and crediting Cash. C. debiting Cash and crediting Paid-in Capital in Excess of Par. D. debiting Paid-In Capital in Excess of Par and crediting Preferred Stock.


10.3-11 The type of stock that does NOT carry paid-in capital in excess of par is called:

A. par stock. B. no-par stock. C. stated value stock. D. outstanding stock.


10.3-12 Accounting for stock at a stated value is almost identical to recording:

A. outstanding stock. B. no-par stock. C. issued stock. D. par stock.



10.3-13 A company issues 15,000 shares of its $25 par common stock for $29. The amount to be debited to cash is:

A. $ 60,000. B. $435,000. C. $375,000. D. $405,000.

Answer: B Calculation: 15,000 x $29 = $435,000 LO: 10-3 Difficulty: 1 EOC Ref: S10-2 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.3-14 The formula needed to compute “additional paid-in capital in excess of par” is:

A. number of shares of stock times par value per share of stock. B. number of shares of stock times selling price per share of stock. C. number of shares of stock times (selling price per share – par value per share). D. number of shares of stock times (selling price per share + par value per share).



10.3-15 The entry to record MidTown.net selling 800 shares of $6 par common stock at $8 would be to:

A. debit Cash $6,400; credit Common Stock $4,800; credit Paid-In Capital in Excess of Par—Common Stock $1,600. B. debit Cash $4,800; credit Common Stock $4,800. C. debit Cash $6,400; debit Paid-In Capital in Excess of Par—Common $1,600; credit Common Stock $8,000. D. debit Cash $6,400; credit Common Stock $6,400.


10.3-16 The entry to record selling 300 shares of stated value $60 common stock for $70 would be:

A. debit Cash $21,000; credit Common Stock $21,000. B. debit Cash $18,000; credit Common Stock $18,000. C. debit Cash $21,000; credit Common Stock $18,000; debit Paid-in Capital in Excess of Stated Value—$3,000. D. debit Cash $21,000; credit Common Stock $18,000; credit Paid-in Capital in Excess of Stated Value—$3,000.


10.3-17 The entry to record selling 150 shares of $30 stated value common stock for $40 would include:

A. debiting Common Stock for $6,000. B. crediting Cash for $6,000. C. crediting Paid-in Capital in Excess of Stated Value for $1,500. D. debiting Paid-in Capital in Excess of Stated Value for $1,500.



10.3-18 Five hundred shares of $25 par common stock were exchanged for a piece of equipment with a current market value of $13,500. The journal entry to record the transaction would include a:

A. debit to Equipment for $12,500. B. debit to Common Stock for $12,500. C. credit to Paid-In Capital in Excess of Par—Common for $1,000. D. credit to Common Stock for $13,500.


10.3-19 The Harvester Company issued 40 shares of $20 par value stock to its accountant in full payment for her $900 fee for assisting in setting up the new company. The entry to record the issuance of the stock would include a:

A. debit to Common Stock for $800. B. credit to Common Stock for $900. C. credit to Common Stock for $800. D. debit to Paid-in Capital in Excess of Par—Common for $100.


10.3-20 Birch issued 200 shares of $12 par common stock in exchange for a piece of equipment with a current market value of $3,000. Which of the following is NOT part of the journal entry for this transaction?

A. Debiting equipment for $3,000 B. Crediting common stock for $3,000 C. Crediting paid-in capital in excess of par-common for $600 D. Crediting common stock for $2,400



10.3-21 Journalize the following stock transactions:

Jan 10 Issued 20,000 shares of $10 par common stock at par. Jan 31 Issued 20,000 shares of $10 par common stock in exchange for land with a current market value of $225,000. Feb 24 Issued 2,000 shares of $50-par preferred stock for $54.

Answer:

Date Description P.R. Debit Credit Jan 10 Cash 200,000 Common Stock 200,000 Jan 31 Land 225,000 Common Stock 200,000 Paid-in Capital in Excess of Par-Common 25,000 Feb 24 Cash 108,000 Preferred Stock 100,000 Paid-in Capital in Excess of Par-Preferred 8,000

LO: 10-3 Difficulty: 2 EOC Ref: S10-6 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting



June 1 Issued 3,000 shares of $25-par preferred stock at $26/share. June 4 Issued 4,000 shares of $10-par common stock for $14/share. June 9 Issued 6,000 shares of $25-par preferred stock at par. Answer:

Date Description P.R. Debit Credit June 1 Cash 78,000 Preferred Stock 75,000 Paid-in Capital in Excess of Par-Preferred 3,000 June 4 Cash 56,000 Common Stock 40,000 Paid-in Capital in Excess of Par-Common 16,000 June 9 Cash 150,000 Preferred Stock 150,000




A. Issued 3,500 shares of $10 par common stock for $12.50/share. B. Issued 2,000 shares of $20 par common stock in exchange for a truck with a current market value of $43,500. C. Issued 4,000 shares of no-par stock for $38,000. D. Issued 1,500 shares of $15 par, 7% preferred stock for $28,500.

Answer:

Date Description P.R. Debit Credit A Cash 43,750 Common Stock 35,000 Paid-in Capital in Excess off Par—

Common Stock 8,750

B Truck 43,500 Common Stock 40,000 Paid-in Capital in Excess of Par—

Common Stock 3,500

C Cash 38,000 Common Stock 38,000 D Cash 28,500 Preferred Stock 22,500 Paid-in Capital in Excess of Par—

Preferred Stock 6,000

LO: 10-3 Calculation A: 3,500 x $10 = $35,000; 3,500 x $2.50 = $8,750 Calculation D: 1,500 x $15 = $22,500; $28,500 - $22,500 = $6,000 Difficulty: 2 EOC Ref: S10-6 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.3-24 Journalize the following stock transactions: A. Issued 10,000 shares of $22 par value common stock for $22/share. B. Issued 4,000 shares of $8 stated value common stock for $11/share. C. Issued 7,000 shares of $4 par value common stock in exchange for a delivery van with a current market value of $29,200. D. Issued 12,000 shares of $25 par, 5% preferred stock at $29/share. Answer:

Date Description P.R. Debit Credit A Cash 220,000 Common Stock 220,000 B Cash 44,000 Common Stock 32,000 Paid-in Capital in Excess of Stated

Value—Common Stock 12,000

C Delivery Van 29,200 Common Stock 28,000 Paid-in Capital in Excess of Par—

Common Stock 1,200

D Cash 348,000 Preferred Stock 300,000 Paid-in Capital in Excess of Par—

Preferred Stock 48,000

LO: 10-3 Calculation B: 4,000 x $8 = $32,000; 4,000 ($11-$8) = $12,000 Calculation C: 7,000 x $4 = $28,000; $29,200 - $28,000 = $1,200 Calculation D: 12,000 x $25 = $300,000; 12,000 x $4 = $48,000 Difficulty: 2 EOC Ref: S10-6 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-1 Paying dividends causes a decrease in total assets, but an increase in total stockholders’ equity.


10.4-2 Corporations declare cash dividends from retained earnings.


10.4-3 The portion of stockholders’ equity that can be used for dividends is referred to as legal capital.


10.4-4 Preferred stock may have its dividend rate listed as a percentage of par value per share or as a flat stated amount.



10.4-5 If a corporation has both common and preferred stock, the preferred stockholders will receive their dividends first, if the money is available.


10.4-6 Cumulative common stock will pay dividends in arrears.


10.4-7 A company has 25,000 shares of $12 par, 8% preferred stock. The 8% refers to the stock’s:

A. market rate. B. dividend rate. C. paid-in capital rate. D. interest rate.

Answer: B LO: 10-4 Difficulty: 1 EOC Ref: E10-19A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-8 Which of the following is NOT a date associated with dividends?

A. Date of issuance B. Date of declaration C. Date of payment D. Date of record



10.4-9 Which of the following dates do NOT require a journal entry? A. Date of payment B. Date of record C. Date of declaration D. All dividend dates require a journal entry.


10.4-10 The date of declaration creates a(n)___________ for the corporation.

A. asset B. liability C. expense D. revenue


10.4-11 The date of record is the date that:

A. the board of directors announces a dividend will be paid. B. the dividends will be transferred to the shareholders. C. the shareholders purchased the stock. D. will determine which shareholders receive the dividends.



10.4-12 On the date of declaration,: A. debit dividends and credit retained earnings. B. debit dividends payable and credit cash. C. debit retained earnings and credit cash. D. debit retained earnings and credit dividends payable.


10.4-13 On the date of record,:

A. debit dividends and credit retained earnings. B. debit dividends payable and credit cash. C. no entry is required. D. debit retained earnings and credit dividends payable.


10.4-14 On the date of payment,:

A. debit dividends and credit retained earnings. B. debit dividends payable and credit cash. C. debit cash and credit dividends payable. D. debit retained earnings and credit dividends payable.



10.4-15 Rick Company has declared a $40,000 cash dividend to shareholders. The company has 5,000 shares of $20-par, 6% preferred stock and 10,000 shares of $15-par common stock. The preferred stock is non-cumulative. How much will be distributed to the preferred and common stockholders on the date of payment?

A. $40,000 preferred, $0 common B. $0 preferred, $40,000 common C. $34,000 preferred, $6,000 common D. $6,000 preferred, $34,000 common

Answer: D Calculation: $40,000 – ($20 x .06 x 5,000) = $34,000 to common LO: 10-4 Difficulty: 2 EOC Ref: E10-20A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-16 Rick Company has declared a $40,000 cash dividend to shareholders. The company has 5,000 shares of $20-par, 6% preferred stock and 10,000 shares of $15-par common stock. The preferred stock is cumulative. How much will be distributed to the preferred and common stockholders on the date of payment if the preferred stock is $12,000 in arrears?

A. $40,000 preferred, $0 common B. $6,000 preferred, $34,000 common C. $18,000 preferred, $22,000 common D. $20,000 preferred, $20,000 common

Answer: C Calculation: $12,000 + (5,000 x .06 x $20) = $18,000 preferred $40,000 – $18,000 = $22,000 LO: 10-4 Difficulty: 2 EOC Ref: E10-20A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-17 A type of stock that pays dividends in arrears is: A. cumulative common stock. B. cumulative preferred stock. C. non-cumulative common stock. D. non-cumulative preferred stock.


10.4-18 Cherry Corporation’s outstanding stock is 100 shares of $100 par, 11% cumulative

preferred stock and 2,000 shares of $12 par common stock. Cherry paid $1,600 in cash dividends during the year. No dividends are in arrears. Common stockholders received:

A. $ 0. B. $ 500. C. $2,500 D. $1,100.

Answer: B Calculation: 100 x $100 x .11 = $1,100 preferred dividends; $1,600 - $1,100 = $500 LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-19 Antiques.com Corporation’s outstanding stock is 75 shares of $60-par, 8% non- cumulative preferred stock and 2,000 shares of $10-par common stock. Antiques paid $2,400 in dividends during the year. Common stockholders received:

A. $2,400. B. $2,040. C. $ 360. D. $ 0.

Answer: B Calculation: $2,400 – (75 x $60 x .08) = $2,040 LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-20 Brandon Company’s outstanding stock is 100 shares of $100, 6% cumulative preferred stock and 2,000 shares of $10 par common stock. Brandon paid $2,000 in cash dividends including one-year dividends in arrears to preferred stockholders. Common stockholders received:

A. $1,818. B. $ 800. C. $ 600. D. $ 0.

Answer: B Calculation: $2,000 – (100 x $100 x .06 x 2) = $800 LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-21 To determine dividends on par-value preferred stock, calculate the:

A. number of outstanding shares times dividend rate. B. dividend rate times par value. C. par value times number of outstanding shares times dividend rate. D. number of outstanding shares divided by the dividend rate

Answer: C LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-22 What are the annual dividends on $20 par preferred 5% stock, if 2,000 shares are authorized and 700 shares have been issued?

A. $700 B. $200 C. $ 70 D. $ 20

Answer: A Calculation: $20 x 700 x 5% = $700 LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-23 The liability “dividend payable” is recognized on the date of: A. stock issue. B. payment. C. record. D. declaration.

Answer: D LO: 10-4 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-24 Payment of a cash dividend causes a(n):

A. increase in liabilities. B. decrease in an asset. C. increase in stockholders’ equity. D. increase in revenue.


10.4-25 A company has 25,000 shares of $12 par, 8% preferred stock. Compute the total value of dividends to be paid.

Total dividends to be paid: $_______________ Answer: $24,000 Calculation: 25,000 shares x $12 x .08 = $24,000 LO: 10-4 Difficulty: 2 EOC Ref: E10-19A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-26 A company has 17,000 shares of $16 par, 11% preferred stock. Compute the total value of dividends to be paid per share.

Total value of dividends per share: $______________ Answer: $1.76 Calculation: $16 x .11 = $1.76 LO: 10-4 Difficulty: 2 EOC Ref: E10-19A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.4-27 Rick Company has declared a $40,000 cash dividend to shareholders. The company has 5,000 shares of $20-par, 6% preferred stock and 10,000 shares of $15-par common stock. The preferred stock is non-cumulative. Journalize the:

• Date of declaration—April 2 • Date of record—April 29 • Date of payment—May 8

Answer:

Date Description P.R. Debit Credit Apr 2 Retained Earnings 40,000 Common Stock Dividends Payable 34,000 Preferred Stock Dividends Payable 6,000 Apr 29 No entry required May 8 Common Stock Dividends Payable 34,000 Preferred Stock Dividends Payable 6,000 Cash 40,000

LO: 10-4 Difficulty: 2 EOC Ref: E10-20A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.4-28 Meranda Company has 25,000 shares of 8%, $30 par cumulative preferred stock. The company also has 75,000 shares of common stock. Dividends declared are as follows.

(2010 was the first year dividends were declared.) 2010 $50,000 2011 $75,000 2012 $68,000

Compute the distribution of dividends for all three years. Answer:

Year Preferred Dividends Common Dividends 2010 $50,000 $0 2011 $70,000 $5,000 2012 $60,000 $8,000

Calculation: 2010 25,000 x .08 x $30 = $60,000, which is $10,000 short 2011 25,000 x .08 x $30 = $60,000; + $10,000 = $70,000 2012 25,000 x .08 x $30 = $60,000; common gets balance


10.5-1 A stock dividend affects total stockholders’ equity.


10.5-2 A stock dividend increases the stockholder’s percent of stock held.



10.5-3 A stock dividend may be given to reduce the market price of the stock.


10.5-4 A corporation may declare stock dividends when there is not enough cash to pay a cash dividend.


10.5-5 A stock dividend will increase total assets.


10.5-8 The declaration of a stock dividend:

A. creates a liability. B. creates an asset. C. creates a revenue. D. does not create a liability.



10.5-9 A stock dividend affects the debiting and crediting of the following accounts: A. debit retained earnings, debit common stock; credit paid-in capital in excess of par. B. credit retained earnings; debit common stock; credit paid-in capital in excess par. C. debit retained earnings; credit common stock, credit paid-in capital in excess of par. D. credit retained earnings, credit common stock and credit paid-in capital in excess of par.


10.5-10 A 2-for-1 stock split will:

A. double the number of shares of stock and double the par value per share. B. double the number of shares of stock and halve the par value per share. C. halve the number of shares of stock and halve the par value per share. D. halve the number of shares of stock and double the par value per share.


10.5-11 A stock split is recorded as a(n):

A. regular journal entry. B. memorandum entry. C. adjusting entry. D. closing entry.



10.5-12 Tammy Corporation has 350,000 shares of $3-par common stock outstanding. They have declared a 5% stock dividend. The current market price of the common stock is $7.50/share. The amount that will be debited to retained earnings on the date of

declaration is: A. $ 52,500. B. $131,250. C. $ 78,750. D. $183,750.

Answer: B Calculation: 350,000 x .05 x $7.50 = $131,250. LO: 10-5 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.5-13 Tammy Corporation has 350,000 shares of $3-par common stock outstanding. They have declared a 5% stock dividend. The current market price of the common stock is $7.50/share. The amount that will be credited to common stock on the date of declaration

is: A. $ 52,500.

B. $131,250. C. $ 78,750. D. $183,750.

Answer: A Calculation: 350,000 x .05 x $3.00 = $52,500. LO: 10-5 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.5-14 Which of the following would be used to decrease the par value of a company’s stock? A. Cash dividend B. Stock split C. Stock dividend D. Sale of additional stock


10.5-15 Isaiah Corporation has 250,000 shares of $7-par common stock outstanding. They have declared a 7% stock dividend. The current market price of the common stock is $11/share. The amount that will be credited to paid-in capital in excess of par common stock on the date of declaration is:

A. $122,500. B. $192,500. C. $ 70,000. D. $315,000.

Answer: C Calculation: 250,000 x .07 x ($11.00 - $7.00) = $70,000. LO: 10-5 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.5-16 Cody’s Western Wear has 2,000 shares of $10 par common stock outstanding. During the current year, the company distributed a 10% stock dividend. The market value of the

stock at that time was $16/share. After the distribution, Cody’s total stockholders’ equity should increase or decrease by:

A. ($3,200). B. $2,000. C. $1,200. D. $ 0.

Answer: D LO: 10-5 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.5-17 Before a 3-for-1 stock split, the shares outstanding were 5,000 shares at $12 par. After the split, what was the par value and number of shares?

A. 15,000 shares and $12/share B. 20,000 shares and $6/share C. 15,000 shares and $4/share D. 5,000 shares and $48/share

Answer: C Calculation: 5,000 x 3 = 15,000; $12/3 = $4 LO: 10-5 Difficulty: 2 EOC Ref: E10-21A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.5-18 You currently own 650 shares of a company’s common stock. The company has declared a 6% stock dividend. Compute how many additional shares and how many total shares you will have after the stock dividend has been received?

Additional Shares: ________________ Total Shares: ___________________ Answer: 39 additional shares; 689 total shares Calculation: 650 x .06 = 39 additional shares; 650 + 39 = 689 LO: 10-5 Difficulty: 1 EOC Ref: S10-11 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.5-19 What effect will each of the following events have on the following accounts—increase, decrease or no effect?

A. Common stock B. Paid-in capital in excess of par C. Retained earnings D. Total stockholders’ equity

Event Common Stock Paid-in Capital

in Excess of Par Retained Earnings

Total Stockholders’ Equity

Cash Dividend Stock Dividend Stock Split

Answer:

Event Common Stock Paid-in Capital in Excess of Par

Retained Earnings

Total Stockholders’ Equity

Cash Dividend No effect No effect Decrease Decrease Stock Dividend Increase Increase Decrease No effect Stock Split No effect No effect No effect No effect



10.5-20 You currently own 900 shares of a company’s common stock. The company has declared an 8% stock dividend. Compute how many additional shares and how many total shares you will have after the stock dividend has been received?

Additional Shares: ________________ Total Shares: ___________________ Answer: 72 additional shares; 972 total shares Calculation: 900 x .08 = 72 additional shares; 900 + 72 = 972 LO: 10-5 Difficulty: 1 EOC Ref: S10-11 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.6-1 A company’s stock that it reacquires is termed “treasury stock.”


10.6-2 Treasury stock transactions are uncommon among larger corporations.


10.6-3 Treasury stock is a “contra-equity” account and carries a debit balance.



10.6-4 Treasury stock decreases the number of outstanding shares of stock.


10.6-5 Treasury stock is recorded at par value.


10.6-6 Treasury stock receives neither voting rights nor dividends.


10.6-7 Which of the following is NOT a reason for a company to purchase treasury stock?

A. To reward valued employees B. To avoid a takeover by an outside company C. To buy the stock at a high price to increase total stockholders’ equity D. To support the company’s stock price



10.6-8 Casey Company reacquired 5,000 shares of its $15-par common stock for $13/share. The debit to treasury stock will be:

A. $10,000. B. $65,000. C. $75,000. D. based on the last treasury stock transaction.

Answer: B Calculation: 5,000 x $13/share = $65,000 LO: 10-6 Difficulty: 1 EOC Ref: S10-12 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.6-9 Casey Company has 5,000 shares of treasury cost which it purchased for $13/share. It later resold 2,000 of those shares for $17/share. The amount to be credited to paid-in capital—treasury stock is:

A. $30,000. B. $26,000. C. $34,000. D. $ 8,000.

Answer: D Calculation: 2,000 x ($17 - $13) = $8,000 LO: 10-6 Difficulty: 1 EOC Ref: S10-12 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.6-10 Casey Company has a $2,400 credit balance in Paid-In Capital— Treasury Stock. It sells 500 shares of treasury stock which the company reacquired at $21/share, for $18/share. After the transaction, what will the balance be in the Paid-In Capital in Excess of Par— Treasury account?

A. $3,900 credit B. $1,500 debit C. $ 900 credit D. $ 900 debit

Answer: C Calculation: ($18 - $21) x 500 = debit of $1,500; $2,400 credit - $1,500 debit = $900 credit LO: 10-6 Difficulty: 1 EOC Ref: S10-12 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.6-11 If a company resells treasury stock for less than it was acquired, the company would first:

A. debit Retained earnings. B. debit Paid-in capital—Treasury stock for the necessary amount, provided there is a

sufficient credit in that account. C. credit Paid-in capital—Treasury stock. D. credit Retained earnings.



10.6-12 Journalize the following treasury stock transactions:

June 3 Reacquired 350 shares of $12 par common stock at $10 per share. June 7 Sold 180 shares of treasury stock for $16 per share. June 8 Sold 150 shares of treasury stock for $9 per share.

Answer:

Date Description P.R. Debit Credit June 3 Treasury Stock 3,500 Cash 3,500 June 7 Cash 2,880 Treasury Stock 1,800 Paid-in Capital -Treasury 1,080 June 8 Cash 1,350 Paid-in Capital -Treasury 150 Treasury Stock 1,500



10.6-13 Journalize the following treasury stock transactions: May 1 Reacquired 800 shares of $15 par common stock for $13 per share. May 7 Sold 400 shares at $11 per share. May 9 Sold 250 shares at $17 per share. Answer:

Date Description P.R. Debit Credit May 1 Treasury Stock 10,400 Cash 10,400 May 7 Cash 4,400 Retained Earnings 800 Treasury Stock 5,200 May 9 Cash 4,250 Paid-in Capital -Treasury 1,000 Treasury Stock 3,250


10.7-1 In addition to the regular financial statements, a company may issue a separate Statement of Stockholders’ Equity.


10.7-2 Common stock is most often listed after Additional paid-in capital in the stockholders’ equity section of the balance sheet.



10.7-3 Which is NOT included in paid-in capital? A. Preferred stock B. Common stock C. Cash D. Additional paid-in capital


10.7-4 The major parts of the Stockholders’ Equity section of the balance sheet are:

A. Paid-In Capital and Retained Earnings. B. Stock and Retained Earnings. C. Stock, Paid-In Capital and Retained Earnings. D. Authorized Stock and Preferred Stock.


10.7-5 Stockholders’ stake in stock appears in:

A. Paid-In Capital. B. Owner’s Equity. C. Retained Earnings. D. Cash.



10.7-6 RH Corporation Stockholders’ Equity section includes the following information: Preferred Stock $11,000 Paid-in Capital in Excess of Par—Preferred 17,000 Common Stock 16,000 Paid-in Capital in Excess of Par—Common 4,000 Retained Earnings 7,000 Total paid-in capital is:

A. $48,000. B. $55,000. C. $27,000. D. $21,000.

Answer: A Calculation: $11,000 + $17,000 + $16,000 + $4,000 = $48,000 LO: 10-7 Difficulty: 1 EOC Ref: S10-14 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.7-7 The Isaiah Corporation Stockholders’ Equity section includes the following information:

Preferred Stock $22,000 Paid-in Capital in Excess of Par—Preferred 2,980 Common Stock 48,000 Paid-in Capital in Excess of Par—Common 3,400 Retained Earnings 7,350 Total par value of the preferred and common stock is:

A. $70,000. B. $83,730. C. $76,380. D. $77,350.

Answer: A Calculation: $22,000 + $48,000 = $70,000 LO: 10-7 Difficulty: 1 EOC Ref: S10-14 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.7-8 The Amanda Corporation Stockholders’ Equity section includes the following information:

Preferred Stock $12,000 Paid-in Capital in Excess of Par—Preferred 2,700 Common Stock 15,000 Paid-in Capital in Excess of Par—Common 4,100 Retained Earnings 8,200 What was the total selling price of the preferred stock?

A. $12,000 B. $14,700. C. $16,100. D. $20,200.

Answer: B Calculation: $12,000 + $2,700 = $14,700 LO: 10-7 Difficulty: 1 EOC Ref: S10-14 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.7-9 In the stockholders’ equity section of a balance sheet:

A. common stock goes first. B. preferred stock goes first. C. retained earnings goes first. D. assets are listed first.



10.7-10 Given the following information, complete the Stockholders’ Equity section of the balance sheet for Tammy Industries for December 31, 2011.

Tammy Industries Stockholders’ Equity Section of the Balance Sheet

December 31, 2011 Paid-in Capital Preferred Stock, 8%, $10 par, 100,000 shares authorized, 20,000 shares issued and outstanding

Common Stock, $0.50 par, 500,000 shares authorized, 300,000 shares issued and outstanding

Paid-in Capital in Excess of Par—Common 600,000 Total Paid-in Capital Retained Earnings 150,000Total Stockholders’ Equity Answer:

Tammy Industries Stockholders’ Equity Section of the Balance Sheet


$200,000


150,000

Paid-in Capital in Excess of Par—Common 600,000 Total Paid-in Capital $950,000 Retained Earnings 150,000Total Stockholders’ Equity $1,100,000

LO: 10-7 Difficulty: 2 EOC Ref: S10-14 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and


10.7-11 Given the following information, complete the Stockholders’ Equity section of the balance sheet for Rick Industries for December 31, 2011.

Rick Industries Stockholders’ Equity Section of the Balance Sheet



Paid-in Capital in Excess of Par—Common 200,000 Total Paid-in Capital Retained Earnings 420,000Total Stockholders’ Equity Answer:

Rick Industries Stockholders’ Equity Section of the Balance Sheet


$1,800,000


$1,137,500

Paid-in Capital in Excess of Par—Common 200,000 Total Paid-in Capital $3,137,500 Retained Earnings 420,000Total Stockholders’ Equity $3,557,500

LO: 10-7 Difficulty: 2 EOC Ref: S10-14 AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and


10.8-1 Return on common equity shows the relationship between net income available to common stockholders and ending stockholders’ equity.

Answer: False LO: 10-8 Difficulty: 1 EOC Ref: E10-30A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.8-2 The numerator for the return on common equity formula is net income minus preferred dividends.

Answer: True LO: 10-8 Difficulty: 1 EOC Ref: E10-30A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting

10.8-3 The formula for return on equity is net income divided by average stockholders’ equity.


10.8-4 According to the text, returns on equity of between 8% and 10% are considered to be good returns.

Answer: False LO: 10-8 Difficulty: 1 EOC Ref: E10-30A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.8-5 The denominator in calculating return on common equity is average common stockholders’ equity.


10.8-6 What is the rate of return on common stockholders’ equity if sales are $100,000, net income is $22,700 and average common stockholders’ equity is $86,000?

A. 22.7% B. 26.4% C. 86.0% D. Cannot be determined from information given

Answer: B Calculation: $22,700/$86,000 = 26.4% (26.3953%) LO: 10-8 Difficulty: 1 EOC Ref: E10-30A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.8-7 Compute the rate of return on stockholders’ equity and the rate of return on common stockholders’ equity given the following information: Net Income $350,000 Preferred Dividends 20,000 Common Stockholders’ Equity 1/1/2011 4,230,000 Common Stockholders’ Equity 12/31/2011 4,400,000 Total Stockholders’ Equity 1/1/2011 5,300,000 Total Stock holders’ Equity 12/31/2011 5,500,000

Return on Stockholders’ Equity: _______________% (to nearest one-tenth %) Return on Common Stockholders’ Equity: ___________% (to nearest one-tenth %) Answer: Return on Stockholders’ Equity: 6.5% Return on Common Stockholders’ Equity: 7.6% Calculation: Stockholders’ Equity—$350,000/[($5,300,000 + $5,500,000)/2] = 6.5% Common Equity—($350,000 - $20,000)/[$4,230,000 + $4,400,000)/2] = 7.6% LO: 10-8 Difficulty: 2 EOC Ref: E10-30A AACSB: Analytical Skills AICPA Business Perspective Competencies: Strategic/Critical Thinking AICPA Functional Competencies: Measurement and Reporting


10.8-8 Compute the rate of return on stockholders’ equity and the rate of return on common stockholders’ equity given the following information:

Net Income $880,000 Preferred Dividends 50,000 Common Stockholders’ Equity 1/1/2011 7,150,000 Common Stockholders’ Equity 12/31/2011 7,680,000 Total Stockholders’ Equity 1/1/2011 9,400,000 Total Stock holders’ Equity 12/31/2011 9,960,000



10.8-9 Compute the rate of return on stockholders’ equity and the rate of return on common stockholders’ equity given the following information: Net Income $ 290,000 Preferred Dividends 25,000 Common Stockholders’ Equity 1/1/2011 3,450,000 Common Stockholders’ Equity 12/31/2011 3,600,000 Total Stockholders’ Equity 1/1/2011 4,100,000 Total Stock holders’ Equity 12/31/2011 4,250,000



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