978-1337276337 Test Bank Chapter 11 Part 1

Chapter 11

Page 1

1. Under IFRS, an item such as a convertible bond must be separated into two parts, showing one part in the Liability

category and the other part in the Stockholders’ Equity category.

a. True

b. False

2. All issued stock is outstanding.

a. True

b. False

3. Stockholders’ equity is composed of three parts: contributed capital, earnings retained in the business, and dividends

paid.

a. True

b. False

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4. The participating feature of stock allows stockholders to sell stock back to the company.

a. True

b. False

5. Preferred stock receives first preference on voting rights.

a. True

b. False

6. The cumulative feature of stock allows the firm to eliminate a class of stock by paying the stockholders a specified

amount.

a. True

b. False

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7. When stock is issued for cash, only the par value of the stock should be reported in the Stock account.

a. True

b. False

8. When stock is issued for a noncash asset, the par value of the stock is the best indicator of the value of the asset.

a. True

b. False

9. Treasury stock is stock that has been issued, but not currently outstanding.

a. True

b. False

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10. When treasury stock is reissued and the cost is less than the reissue price, the difference increases additional paid-in

capital.

a. True

b. False

11. Treasury stock is reported as a reduction in stockholders’ equity.

a. True

b. False

12. The Treasury Stock account should be considered an asset account.

a. True

b. False

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13. When treasury stock is resold for an amount less than its cost, the difference between the sales price and the cost is

deducted from the Additional Paid-In Capital—Treasury Stock account or the Retained Earnings account (if the

Additional Paid-In Capital—Treasury Stock account does not exist).

a. True

b. False

14. If 20,000 shares are authorized, 15,000 shares are issued, and 500 shares are held as treasury stock, a cash dividend of

$1 per share would amount to $15,000.

a. True

b. False

15. Cash dividends become a liability to a corporation on the date of record.

a. True

b. False

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16. When the board of director’s declares a cash or stock dividend, this action decreases Retained Earnings.

a. True

b. False

17. Stock dividends involve the issuance of additional shares of stock.

a. True

b. False

18. Stock dividends reduce the par value of the stock.

a. True

b. False

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19. A 15% stock dividend will increase the number of shares outstanding but the book value per share will decrease.

a. True

b. False

20. A stock split is similar to a stock dividend in that it results in additional shares of stock outstanding and is nontaxable.

a. True

b. False

21. Stock dividends affect the par value per share of the stock.

a. True

b. False

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22. A 2-for-1 stock split increases the par value per share.

a. True

b. False

23. An accounting transaction is not recorded when a corporation declares and executes a stock split.

a. True

b. False

24. None of the Stockholders’ Equity accounts are affected by the stock split.

a. True

b. False

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25. All changes in all stockholders’ equity accounts must be shown in the Stockholders’ Equity section of the balance

sheet.

a. True

b. False

26. The statement of stockholders’ equity is useful in evaluating a company’s liquidity.

a. True

b. False

27. The all-inclusive approach requires that all events and transactions that affect income should be reported on the

income statement to help prevent the manipulation of income.

a. True

b. False

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28. The FASB has allowed certain items to be reported directly to stockholders’ equity in an effort to mitigate the

possibility of income fluctuating widely from period to period.

a. True

b. False

29. Comprehensive income is the increase in net assets resulting from all transactions occurring during an accounting

period except stockholders’ investments and dividends.

a. True

b. False

30. A company may prepare a statement of retained earnings instead of a statement of stockholders’ equity if the only

changes in the stockholders’ equity accounts that occurred during the year are earnings and dividends.

a. True

b. False

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31. Book value is a measure of the market value of the stock.

a. True

b. False

32. Book value indicates the rights that stockholders have, based on recorded values, to the net assets in the event of

liquidation.

a. True

b. False

33. The issuance of stock is reported as a financing activity.

a. True

b. False

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34. The payment of dividends is a financing activity.

a. True

b. False

35. [APPENDIX] A partnership can be owned by one or more entities or individuals.

a. True

b. False

36. [APPENDIX] A balance sheet of a sole proprietorship includes only the business assets and liabilities, not the

personal assets of the owner.

a. True

b. False

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37. [APPENDIX] A sole proprietorship is a separate entity for legal purposes.

a. True

b. False

38. Use the incomplete Stockholders’ Equity section of Wilmerding Company’s balance sheet as of December 31, 2017, to

answer the following question.

Common stock, $7 par, 100,000 shares authorized $ 700,000

Additional paid-in capital—common 160,000

Retained earnings ?

Treasury stock (2,000 shares at cost) (16,000)

Total stockholders’ equity 974,000

What is the amount of Wilmerding’s retained earnings?

a. $130,000

b. $98,000

c. $860,000

d. $114,000

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39. Which of the following is false regarding the issue of stock versus the issue of bonds to raise capital?

a. The payment of dividends is at the discretion of the board of directors.

b. The payment of interest on bonds payable is required by law.

c. Interest accrues, whereas dividends do not accrue.

d. The declaration of dividends reduces the amount of income taxes the corporation must pay.

40. Which of the following is false regarding the issue of stock versus the issue of bonds to raise capital?

a. The issuance of stock decreases several important financial ratios.

b. Issuing bonds dilutes the voting power of the stockholders.

c. Corporations are not required to return the investment to the stockholders.

d. Investors expect to earn a higher rate of return on stocks than bonds.

41. If Idaho Company has paid out more in dividends than it has had in net income, over the lifetime of the company, then

there should be a

a. credit balance in the Common Stock account.

b. credit balance in the Retained Earnings account.

c. debit balance in the Common Stock account.

d. debit balance in the Retained Earnings account.

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42. Dali Company has 15,000 shares of stock authorized at January 1. Dali issues 4,500 shares to the stockholders during

the year and then the company repurchases 1,500 shares as treasury stock. Based on this information, how many shares

are outstanding at December 31?

a. 15,000

b. 18,000

c. 4,500

d. 3,000

43. Venture Enterprises’ accountant determined the following:

Common stock, $0.01 par value $50,000

Where would this item be reported on Venture’s financial statements?

a. In the Stockholders’ Equity section of the balance sheet

b. In the Treasury Stock section of the balance sheet

c. On the statement of retained earnings

d. On both the balance sheet and statement of retained earnings

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44. Which of the following is an account in stockholders’ equity?

a. Dividends Payable

b. Loss on Sale of Equipment

c. Retained Earnings

d. Net Income

45. Which of the following statements is true with regard to contributed capital?

a. Preferred stock is stock that has been retired.

b. It is very unlikely corporations may have more than one class of stock outstanding.

c. The outstanding number of shares is the maximum number of shares that can be issued by a corporation.

d. The shares that are in the hands of the stockholders are said to be outstanding.

46. Authorized stock represents the

a. maximum number of shares that can be issued.

b. number of shares that have been sold.

c. number of shares that are currently held by stockholders.

d. number of shares that have been repurchased by the corporation.

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47. With regard to a corporation’s stock, par value is

a. the current market price of the stock.

b. an arbitrary amount that exists to fulfill legal requirements.

c. the amount at which the stock has been repurchased.

d. the amount at which treasury stock can be sold.

48. Mendes Charters reported the following information at December 31, 2017:

Preferred stock, $100 par, 500 shares authorized, and outstanding; cumulative; nonparticipating; callable at par value

$ 50,000

Common stock, $12 par, 50,000 shares authorized and outstanding 600,000

Additional paid-in capital—common 25,000

Retained earnings 825,000

Mendes’ total contributed capital is

a. $650,000.

b. $675,000.

c. $1,500,000.

d. $625,000.

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49. Use the incomplete Stockholders’ Equity section of Box Company’s balance sheet as of December 31, 2017, to answer

the following question.

Common stock, $7 par, 100,000 shares authorized $ 700,000

Additional paid-in capital—common 160,000

Retained earnings ?

Treasury stock (2,000 shares at cost) (16,000)

Total stockholders’ equity 974,000

How many shares of common stock are outstanding?

a. 100,000

b. 98,000

c. 78,000

d. 68,000

50. Walton Corporation shows the following in the Stockholders’ Equity section of its balance sheet: The stated value of

its common stock is $0.50, and the total balance in the Common Stock account is $37,500. Also noted is that 5,000 shares

are currently designated as treasury stock. The number of shares outstanding is

a. 80,000.

b. 75,000.

c. 72,500.

d. 70,000.

51. Winslow Corporation reported the following in the Stockholders’ Equity section of its balance sheet at December 31,

2017:

Common stock, $1 stated value $10,000

Additional paid-in capital—common 40,000

Retained earnings 25,000

Chapter 11

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Total contributed capital and retained earnings $75,000

Less: Treasury stock (at cost $20 per share) (2,000)

Total stockholders’ equity $73,000

How many shares of stock are issued?

a. 9,000

b. 10,000

c. 10,100

d. Not enough information to determine

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52. Zelienople Co. reported the following information at December 31, 2017:

Preferred stock, $10 par, 5,000 shares authorized, cumulative $ 50,000

Common stock, $1 par, 500,000 shares authorized 200,000

Additional paid-in capital—common 25,000

Retained earnings 75,000

Total contributed capital and retained earnings $350,000

Less: Treasury stock (400 shares at cost) 5,000

Total stockholders’ equity $345,000

The number of shares of common stock issued is

a. 5,000.

b. 200,000.

c. 500,000.

d. 550,000.

53. The Retained Earnings account balance for a large corporation is $10,000,000. This amount represents

a. earnings that have not been distributed to shareholders.

b. cash in the bank.

c. the amount of cash available for dividends.

d. revenues for all past years of operations.