Test Bank, Chapter 11
442
Chapter 11
Stockholders’ Equity: Paid-in Capital
True/False Questions
For each of the following, circle the T or the F to indicate whether the statement is true or false.
T F 1. When a stockholder sends in a proxy statement to a corporation he or she owns stock in,
they relinquish their voting rights to the officers of the corporation.
Answer: False
T F 2. A stockholders’ subsidiary ledger will have entries made for each stockholder showing
the number of shares held rather than the amounts paid for the shares.
Answer: True
T F 3. The number of shares a corporation may issue is specified in the articles of Incorporation
and approved by the Securities and Exchange Commission.
Answer: False
T F 4. The par value of a stock is the minimum amount of capital of the corporation existing for
the protection of creditors.
Answer: True
T F 5. When a state authorizes the sale of stock to stockholders, the Corporation will debit cash
for the par value of the stock.
Answer: False
T F 6. When a corporation fails to pay a dividend one year on its common stock it is said to be
“in arrears”.
Answer: False
T F 7. A stock split will normally decrease the market price of the stock and increase the
number of shares on the market.
Answer: True
T F 8. Treasury stock is stock that is authorized and issued but not outstanding.
Answer: True
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T F 9. The purchase of treasury stock creates an asset for the corporation and is recorded at the
cost of the shares purchased not par value.
Answer: False
T F 10. Contributed capital is equivalent to paid-in capital.
Answer: True
T F 11. The par value of a stock is considered the legal capital of the corporation.
Answer: True
T F 12. Cumulative preferred stock means the stock is entitled to its regular dividend plus an
additional share of the total amount of declared dividends.
Answer: False
T F 13. A corporation is a legal entity separate from its owners; it may sue and be sued, and it
may own property in its own name.
Answer: True
T F 14. A corporation is dissolved whenever a stockholder dies or withdraws from the
organization.
Answer: False
T F 15. Treasury stock is stock of a corporation that has been issued and then reacquired and then
cancelled.
Answer: False
T F 16. A stock split will increase the total par value of the stock.
Answer: False
T F 17. Stockholders of a corporation have no personal liability for the debts of the corporation
even when all shares of stock are owned by the officers of the corporation.
Answer: True
T F 18. It is illegal for the government to double tax corporate earnings.
Answer: False
T F 19. All stock of a corporation must have a par value.
Answer: False
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T F 20. The declaration of a cash dividend by the board of directors causes a decrease in a
corporation’s retained earnings and an increase in its current liabilities.
Answer: True
T F 21. The declaration of a cash dividend causes stockholders’ equity to decrease but has no
immediate effect upon corporate assets.
Answer: True
T F 22. If capital stock is issued by a corporation at a price higher than par value, the excess
amount represents income in the period in which the shares of stock are issued.
Answer: False
T F 23. When par value capital stock is issued, Capital Stock is credited with the par value of the
shares issued, regardless of whether the issuance price is equal to par, more than par, or
less than par.
Answer: True
T F 24. Preferred stockholders are owners of the corporation and have rights upon liquidation, to
receive dividends, and to vote.
Answer: False
T F 25. Paid-in–capital includes donated capital.
Answer: True
T F 26. In the event of the liquidation of a corporation, preferred stock ordinarily has preference
as to liabilities and common stock has preference as to assets.
Answer: False
T F 27. Preferred stockholders generally do not have the same voting rights as do common
stockholders in a corporation.
Answer: True
T F 28. Dividends declared and paid to both common and preferred stockholders reduce retained
earnings.
Answer: True
T F 29. When assets are donated to a corporation, a revenue account should be credited for the
fair market value of the assets received.
Answer: False
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T F 30. A corporation may never have more than one class of stock.
Answer: False
T F 31. The purchase of treasury stock for cash causes no change in total assets.
Answer: False
T F 32. The sale of treasury stock at a price in excess of its cost results in a realized gain which
should be presented as a nonoperating item in the income statement.
Answer: False
Multiple Choice Questions
Choose the best answer for each of the following questions and insert the identifying letter in the space
provided.
Conceptual Questions
33. The ownership of common stock in a corporation usually carries the following rights:
A) To vote for directors
B) To declare dividends
C) To share in a distribution of assets if the corporation is to be liquidated.
D) Both a and c.
Answer: D
34. The board of directors primary functions include all of the following except:
A) Hiring corporate officers
B) Setting officers’ salaries
C) Declaring dividends
D) Protecting the interests of the officers
Answer: D
35. Shares that have been sold and are in the hands of stockholders are called
A) Outstanding
B) Issued
C) Treasury
D) Underwritten
Answer: A
36. Book value per share of common stock is derived by which of the following
A) Stockholders equity divided by the number of shares authorized
B) Stockholders equity divided by the number of shares outstanding
C) Net income divided by the number of shares outstanding
D) Net income divided by the number of shares authorized
Answer: B
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37. The net assets of a corporation is equal to:
A) Total assets – total liabilities
B) Total assets – retained earnings
C) Total assets + total liabilities
D) Total assets + retained earnings
Answer: A
38. Cash dividends paid to stockholders will appear in which section of the statement of cash flows:
A) Operating
B) Investing
C) Financing
D) Discontinued
Answer: C
39. When shares of stock are sold from one investor to another they will trade at:
A) Par value
B) Book value
C) Market value
D) Stated Value
Answer: C
40. The market price of a preferred stock will be affected by:
A) The dividend rate
B) The chance that the company will not operate profitable
C) The level of interest rates
D) All of the above
Answer: D
41. Hasbrooke Corporation has 50,000 shares of $1 par value common stock and 20,000 shares of
cumulative 8%, $100 par preferred stock outstanding. Hasbrooke has not paid a dividend for the
prior year. If Hasbrooke declares a $1.50 per share dividend this year, what will be the total
amount they must pay their shareholders?
A) $30,000
B) $320,000
C) $395,000
D) $75,000
Answer: C
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42. Which of the following is not a characteristic of the corporate form of organization?
A) The owners of a corporation cannot lose more than the amount of their investment.
B) Shares of stock in a corporation are more readily transferable than is an interest in a
partnership.
C) Stockholders have authority to decide by majority vote the amount of dividends to be paid.
D) The corporation is a very efficient vehicle for obtaining large amounts of capital required for
large-scale production.
Answer: C
43. Most preferred stocks have the following characteristics, except:
A) To receive dividends on a preferred basis.
B) Cumulative dividends.
C) Voting.
D) Callable at the option of the corporation.
Answer: C
44. Which of the following are not part of total paid-in–capital?
A) Retained earnings.
B) Treasury stock.
C) Neither retained earnings nor treasury stock.
D) Both retained earnings and treasury stock.
Answer: D
45. A primary disadvantage of the corporate form of organization is:
A) Unlimited personal liability for business debts.
B) Ownership is difficult to transfer.
C) Corporate earnings are subject to double taxation.
D) Management is separated from ownership.
Answer: C
46. Public corporations are required by law or regulation to perform all of the following except:
A) Submit much of their financial information to the SEC for review.
B) Make regularly scheduled dividend payments to all stockholders.
C) Have their annual financial statements audited by an independent CPA.
D) Disclose their financial information to the public.
Answer: B
47. Which of the following is not a right of stockholders?
A) To vote for directors and on key issues.
B) To participate in dividends declared.
C) To share in the distribution of assets if the corporation is liquidated.
D) All three of the above are rights of the stockholders.
Answer: D
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48. The rights of a common stockholder do not include the right:
A) To vote for directors.
B) To withdraw a share of corporate net assets proportionate to the person’s stockholdings.
C) To receive a proportionate share of corporate assets upon liquidation, after creditors have
been paid.
D) To share in profits when the board of directors declares a dividend.
Answer: B
49. The directors of a corporation:
A) Are hired by the officers to run the business on a day-to-day basis.
B) May not own stock in the same corporation or be officers of the same corporation.
C) Are responsible for formulating corporate policy and for hiring corporate officers.
D) Are elected by the shareholders to run day-to-day operations.
Answer: C
50. Which of the following individuals has the most power to influence corporate policy on a long–
term basis?
A) A shareholder owning 60% of the outstanding common stock.
B) A shareholder owning 80% of the outstanding preferred stock.
C) The treasurer of the corporation.
D) The controller of the corporation.
Answer: A
51. The term paid-in capital me
A) All assets other than retained earnings.
B) Legal capital plus retained earnings.
C) Total stockholders’ equity minus retained earnings.
D) Legal capital minus retained earnings.
Answer: C
52. If a corporation has issued a single class of stock, it must be:
A) Common.
B) Preferred.
C) Par-value.
D) Cumulative preferred.
Answer: A
53. Retained earnings represents:
A) Cash available for dividends.
B) The amount initially invested in the business by stockholders.
C) Cash available for expansion and growth.
D) Income that has been reinvested in the business rather than distributed as dividends to
stockholders.
Answer: D
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54. A deficit appears in a corporation’s financial statements:
A) Among the operating expenses.
B) Among the liabilities.
C) As an element of total paid-in capital.
D) As a deduction from total paid-in capital.
Answer: D
55. Which of the following would usually be the greatest amount?
A) The number of shares authorized.
B) The number of shares issued.
C) The number of shares outstanding.
D) They must all be the same amount.
Answer: A
56. In a corporation’s organization chart, which is the highest position?
A) Stockholders.
B) Board of directors.
C) CEO.
D) President.
Answer: A
57. Which of the following best describes the relationship between revenue and retained earnings?
A) Revenue increases net income, which in turn increases retained earnings.
B) Revenue represents a cash receipt; retained earnings is an element of stockholders’ equity.
C) Revenue represents the price of goods sold or services rendered; retained earnings represents
cash available for paying dividends.
D) Retained earnings is equal to revenue minus expenses.
Answer: A
58. The overall effect of declaring and distributing a cash dividend includes each of the following
except:
A) Reducing total assets.
B) Reducing stockholders’ equity.
C) Reducing the balance of the Retained Earnings account.
D) Reducing net income for the period.
Answer: D
59. If preferred stock is convertible, it is so at the option of the:
A) Board of directors.
B) CEO.
C) CFO.
D) Stockholders.
Answer: D
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60. If a corporation has only common stock outstanding, which of the following constitutes legal
capital at a particular date?
A) The amount in the Common Stock account.
B) The sum of the Common Stock account and any additional paid-in capital.
C) The total amount of stockholders’ equity.
D) The sum of the Common Stock account and retained earnings.
Answer: A
61. The par value of the common stock of a large listed corporation:
A) Tends to establish a ceiling for the market price of the stock.
B) Tends to establish a floor for the market price of the stock.
C) Represents legal capital and is not related to the market price of the stock.
D) Is increased by net income and decreased by dividends.
Answer: C
62. A 2-for-1 stock split will:
A) Increase the total par value of the stock and increase the number of shares outstanding.
B) Decrease the total par value of the stock and increase the number of shares outstanding.
C) Not change the total par value of the stock and increase the number of shares outstanding.
D) Increase total stockholders’ equity.
Answer: C
63. The entry to record the issuance of common stock at a price above its par value includes:
A) A credit to Cash.
B) A credit to a liability account for the difference between the price paid by the stockholders
and the par value of the stock.
C) A credit to Additional Paid-in Capital: Common Stock.
D) A debit to Common Stock.
Answer: C
64. When a corporation issues capital stock at a price higher than the par value:
A) The amount received over par value increases retained earnings.
B) The entire issue price is credited to the Capital Stock account.
C) The amount received in excess of par value constitutes profit to the issuing corporation.
D) The amount received in excess of par value becomes part of paid-in capital.
Answer: D
65. When no-par stock is issued:
A) The entire amount received is credited to the Additional Paid-in Capital account.
B) The issue price is credited to the Capital Stock account.
C) There is no legal capital created because there is no par or stated value.
D) The transaction usually involves only an exchange for noncash assets or services, since the
stock has no value on the stock exchanges.
Answer: B
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66. Which statement is true about a stock split?
A) Total shareholders’ equity increases.
B) Total shareholders’ equity decreases.
C) Total shareholders’ equity remains the same.
D) A change in total stockholders’ equity depends upon whether it is a 2-for-1 split or a 1-for-2
split.
Answer: C
67. Which of the following is not a characteristic of most preferred stock?
A) Participating clause.
B) Preference as to dividends.
C) Preference as to assets in the event of liquidation of the company.
D) No voting power.
Answer: A
68. The financial statements of a corporation that failed during the current year to pay any dividends
on its cumulative preferred stock should:
A) Include the amount of the omitted dividends among its current liabilities.
B) Include a footnote disclosing the amount of the dividends in arrears.
C) Show the amount of the omitted dividends as a deduction from retained earnings.
D) List the omitted dividends as a long-term liability.
Answer: B
69. If the preferred stock of a corporation is cumulative:
A) Dividends on preferred stock are guaranteed.
B) Dividends cannot be declared in an amount less than that stated on the stock certificate.
C) Preferred stockholders participate in dividends paid in excess of a stated amount on the
common shares.
D) Dividends in arrears must be paid on preferred stock before any dividend can be paid on
common stock.
Answer: D
70. Treasury stock:
A) Is an asset.
B) Increases total stockholders’ equity.
C) Decreases total stockholders’ equity.
D) Does not change total stockholders’ equity.
Answer: C
71. The purchase of treasury stock for cash will:
A) Increase stockholders’ equity.
B) Not increase nor decrease stockholders’ equity.
C) Decrease stockholders’ equity.
D) Not change total assets.
Answer: C
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72. Treasury stock should most often be recorded:
A) At cost.
B) Par value.
C) Fair market value at year end.
D) Face value.
Answer: A
73. Which of the following best describes the book value of a share of stock?
A) Net assets divided by the number of shares outstanding.
B) The amount at which the stock would sell on the market if sold by a willing and informed
seller to a willing and informed buyer.
C) Total assets of the company, as reported in the accounting records, divided by the number of
shares of stock outstanding.
D) Total stockholders’ equity divided by the number of shares authorized.
Answer: A
74. A 2-for-1 stock split:
A) Is accounted for in the same way as a 100% stock dividend.
B) Increases the number of outstanding shares of common stock, but par value per share remains
the same as before the split.
C) Is recorded by transferring the par value of additional shares from retained earnings to the
common stock account.
D) Should logically cause the market price per share to drop by approximately 50%.
Answer: D
75. Treasury stock represents:
A) Shares of ownership in the United States Treasury Department.
B) A current asset.
C) Authorized shares that have never been issued.
D) Previously outstanding shares that have been repurchased by the issuing company.
Answer: D
76. Stock that had been issued by a corporation and later reacquired is classified as:
A) Treasury stock.
B) Non-participating preferred stock.
C) Restricted stock.
D) Issued shares.
Answer: A
77. The purchase of treasury stock for cash will have which effect upon the following items?
A)
B)
C)
D)
Answer: D
78. Which of the following does not appear in a corporate income statement?
A) Gains and losses from treasury stock transactions.
B) Income tax expense.
C) The income or loss from a segment of the business that has been discontinued during the
current year.
D) Gains and losses not expected to recur in the foreseeable future.
Answer: A
79. When treasury stock is reissued at a price above cost:
A) The corporation recognizes a gain to be recorded on the income statement.
B) Total paid-in capital is increased.
C) The reissuance is treated as an extraordinary item in the corporation’s income statement.
Total assets Total stockholders’ Shares issued Shares outstanding
Equity
Decrease Decrease Decrease Decrease
None Increase None Decrease
Increase Decrease Increase Decrease
Decrease Decrease None Decrease
Total assets Total stockholders’ Shares issued Shares outstanding
Equity
Increase Decrease Increase Decrease
