34) The retained earnings of a corporation is ________.
A) internally generated equity that is earned by profitable operations that is not distributed to
stockholders
B) externally generated equity that is contributed by shareholders
C) externally generated equity that is acquired from banks and other creditors
D) internally generated equity that is received from employee stock purchases
35) Preferred stock is stock ________.
A) that sells for a high price
B) that is distributed to employees as annual bonuses
C) that is distributed by corporations to avoid liquidation
D) that gives its owners certain advantages over common stockholders
36) Which of the following types of stock has less investment risk?
A) common stock
B) par value stock
C) no-par stock
D) preferred stock
37) Preferred stockholders ________.
A) are guaranteed that they will not have a loss on their investment
B) are guaranteed to receive an annual dividend payment
C) receive a set percentage of corporation net income
D) receive a dividend preference over common stockholders
38) Preferred stockholders ________.
A) receive a dividend preference over common stockholders
B) are guaranteed that they will not have a loss on their investment
C) generally have voting rights
D) have more investment risk compared to common stockholders
39) In the event of a corporate liquidation, preferred stockholders ________.
A) are guaranteed to receive a full refund of the stock purchase price
B) have first claim on remaining corporate assets after debts are paid
C) are guaranteed to receive the par value of the preferred stock
D) may retain their proportionate share of voting rights
40) List the four basic rights of stockholders.
41) Define the following terms:
Term
Definition
Authorized stock
Preferred stock
Stated value stock
corporation to issue.
corporation liquidates.
par value.
42) Define the following terms:
Term
Definition
Outstanding stock
Paid-in capital
Par value
Term
Definition
Outstanding stock
Issued stock in the hands of
stockholders.
Paid-in capital
This represents amounts
received from the stockholders
of a corporation in exchange for
stock.
Par value
An amount assigned by a
company to a share of its stock.
1) The issue price is the price the stock initially sells for the first time it is sold.
2) Usually, the issue price exceeds par value because par value is normally set as a percentage of the issue
price of the stock.
3) An underwriter usually assumes some of the risk of issuing stock by agreeing to buy all of the stock the
firm cannot sell to its clients.
4) Regarding the issuance of stock, which of the following statements is incorrect?
A) Large corporations cannot finance all their operations through borrowing, so they raise capital by
issuing stock.
B) A company can sell its stock directly to stockholders, or it can use the services of the state’s Securities
and Exchange Commission.
C) The issue price is the amount the corporation receives from issuing its stock.
D) Large corporations need huge quantities of money.
5) When a corporation issues stock at par value, the Cash account is debited and the Common Stock
account is credited for an amount equal to the number of shares issued times the par value per share.
6) Bentley Corporation received cash from issuing 17,000 shares of common stock at par on January 1,
2018. The stock has a par value of $0.05 per share. Which is the correct journal entry to record this
transaction?
A) Cash is debited for $850, and Common Stock—$0.05 Par Value is credited for $850.
B) Cash is credited for $17,000 and Common Stock—$0.05 Par Value is debited for $17,000.
C) Paid-In Capital in Excess of Par-Common is debited for $16,150, and Common Stock—$0.05 Par Value
is credited for $16,150.
D) Cash is debited for $17,000, Common Stock—$0.05 Par Value is credited for $850, and Paid-In Capital
in Excess of Par-Common credited for $16,150.
7) When a company issues stock at an amount greater than the par value, a gain is recorded for the
difference between the issue price and the par value.
8) When a corporation sells 9,000 shares of $12 par value common stock for $159,000, Common Stock is
credited for $108,000.
9) Stock issued at amounts in excess of par value results in a gain that is reported on the income
statement.
10) Most corporations set par value low and issue common stock at a premium.
11) A company cannot report a gain or loss when buying or selling its own stock.
12) Which of the following is included in the entry to record the issuance of 14,000 shares of $7 par value
common stock at $21 per share for cash?
A) Cash is debited for $294,000.
B) Common Stock is debited for $98,000.
C) Common Stock is credited for $294,000.
D) Paid-In Capital in Excess of Par—Common is debited for $196,000.
Cash (14,000 × $21)
294,000
Common Stock ($7 × 14,000)
98,000
Paid-In Capital in Excess of Par—Common
(($21 – $7) × 14,000)
196,000
Diff: 1
LO: 13-2
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: Issuing Common Stock at a Premium
13) The following information is from the December 31, 2018 balance sheet of Millner Corporation.
Preferred Stock, $100 par
$560,000
Paid-In Capital in Excess of Par—Preferred
43,000
Common Stock, $1 par
190,000
Paid-In Capital in Excess of Par—Common
510,000
Retained Earnings
191,500
Total Stockholders’ Equity
$1,494,500
What was the average issue price of the common stock shares? (Round your answer to the nearest cent.)
A) $1.88
B) $1.00
C) $2.68
D) $3.68
14) Midtown, Inc. had the following transactions in 2018, its first year of operations:
• Issued 31,000 shares of common stock. Stock has par value of $1.00 per share and was issued at $20.00
per share.
• Earned net income of $70,000.
• Paid no dividends.
At the end of 2018, what is total stockholders’ equity?
A) $31,000
B) $690,000
C) $620,000
D) $70,000
15) Belton, Inc. had the following transactions in 2018, its first year of operations:
• Issued 33,000 shares of common stock. Stock has par value of $1.00 per share and was issued at $24.00
per share.
• Earned net income of $73,000.
• Paid no dividends.
At the end of 2018, what is the total amount of paid-in capital?
A) $33,000
B) $865,000
C) $792,000
D) $73,000
16) Milton, Inc. had the following transactions in 2019, its first year of operations:
• Issued 8000 shares of common stock. Stock has par value of $0.01 per share and was issued at $40.00
per share.
• Earned net income of $200,000.
• Paid dividends of $8.00 per share.
At the end of 2019, what is total stockholders’ equity?
A) $320,000
B) $456,000
C) $136,000
D) $584,000
17) When a corporation issues no-par stock, it debits the asset received and credits the stock account.
18) Paid-in capital in excess of par is recorded when no-par stock is issued.
19) Pumpkin Corporation issued 10,000 shares of common stock on January 1, 2018. The stock has no par
value and was issued at $17 per share. The journal entry for this transaction includes a ________.
A) debit to Cash for $170,000 and a credit to Common Stock—No-Par Value for $170,000
B) debit to Cash for $170,000 and a credit to Paid-In Capital in Excess of Par—Common for $170,000
C) credit to Cash for $170,000 and a debit to Common Stock—No-Par Value for $170,000
D) credit to Cash for $170,000, a debit to Paid-In Capital in Excess of Par—Common for $10,000, and a
debit to Common Stock—No-Par Value for $160,000
20) Which of the following statements, regarding no-par stock, is incorrect?
A) Regardless of the stock’s issue price, Cash is debited and Common Stock is credited for the cash
received.
B) There can be no Paid-In Capital in Excess of Par.
C) There is no par to be in excess of.
D) All of the statements are correct.
21) Accounting for stated value common stock is identical to accounting for par value stock.
22) A corporation issues 16,000 shares of its $3 stated value common shares. The issue price is $9 per
share. The credit to the Common Stock account is $144,000.